Global Financial Fall-out Assessing impact on Nepalese economy Professor Bishwambher Pyakuryal Central Department of Economics Tribhuvan University Kathmandu Wednesday, 30 September, 2009, UN/ESCAP Outline Outline � � Context Context � The crisis of late 2007 � The crisis of late 2007 � Mortgage � Mortgage- -backed securities: Priority business in backed securities: Priority business in the US the US � How long and how deep? � How long and how deep? � Two approaches for combating crisis � Two approaches for combating crisis � Nepal & global economic crisis � Nepal & global economic crisis � � Linking crisis with agriculture Linking crisis with agriculture � Conclusion � Conclusion 1
Context � Once � Once- -in in- -a a- -lifetime crisis lifetime crisis � Linked with � Linked with recession recession (a business (a business cycle contraction- -reduction in GDP at reduction in GDP at cycle contraction least for two consecutive quarters); least for two consecutive quarters); inflation (higher prices & fall in inflation (higher prices & fall in depression purchasing power); and depression purchasing power); and (high unemployment rate & loss of (high unemployment rate & loss of trade) trade) The Crisis of late 2007 The Crisis of late 2007 � In USA it is � In USA it is sub prime loan sub prime loan and in and in UK, fall in output fall in output UK, � There was a dramatic decline in the � There was a dramatic decline in the US house prices for the first time US house prices for the first time since 1930s since 1930s � � Big lenders were dangerously Big lenders were dangerously exposed to the high risk loans exposed to the high risk loans market market 2
Mortgage - -backed securities: backed securities: Mortgage Priority business in the US? Priority business in the US? � US Census Bureau states a person who � US Census Bureau states a person who bought a new home in Jan 1996 for bought a new home in Jan 1996 for $155,000 made a profit of $100,000 after $155,000 made a profit of $100,000 after selling in August 2006. selling in August 2006. � A safe mortgage is a maximum of 3 times � A safe mortgage is a maximum of 3 times the buyer’ ’s yearly income, but it happened s yearly income, but it happened the buyer between 5 to 10 times. between 5 to 10 times. � There is a limit to excess demand � There is a limit to excess demand – – as a as a result, excess property lost its value, result, excess property lost its value, refinancing stopped & borrowers became refinancing stopped & borrowers became defaulter. defaulter. Mortgage - Mortgage -backed securities: backed securities: Priority business in the US Priority business in the US Contd. Contd. � The value of occupied property by the bank � The value of occupied property by the bank was less than the value of loan amount (the was less than the value of loan amount (the global bank have written- -off $1 trillion in sub off $1 trillion in sub- - global bank have written prime loans. prime loans. � As mortgage � As mortgage- -backed assets lost their value, the backed assets lost their value, the global financial institutions are expected to global financial institutions are expected to have already lost $2.8 trillion from the credit have already lost $2.8 trillion from the credit crunch. crunch. � The US has established � The US has established Troubled Asset Troubled Asset Relief Program for purchasing and ensuring for purchasing and ensuring Relief Program troubled assets. troubled assets. 3
How long and how deep? � � It was believed, usually recession lasts from 6 to 18 months provided vided It was believed, usually recession lasts from 6 to 18 months pro monetary stimulus plan is put on place to offer cheap rates to is put on place to offer cheap rates to monetary stimulus plan borrow. borrow. � � Great Depression Great Depression lasted for 43 months beginning August 1929 to lasted for 43 months beginning August 1929 to March 1933 (unemployment surged to 25% & GDP contracted by March 1933 (unemployment surged to 25% & GDP contracted by 28%). 28%). � � Recession during 1980- -81 stayed for 16 months. 81 stayed for 16 months. Recession during 1980 � � During 1990 During 1990- -91 and & 2001 it was famously mild & short 91 and & 2001 it was famously mild & short- -lived. The lived. The average of 10 recessions since WW II lasted for 10.4 months. average of 10 recessions since WW II lasted for 10.4 months. � � In the US, National Bureau of Economic Research acknowledges that t In the US, National Bureau of Economic Research acknowledges tha recession began since December 2007, which indicates that it has recession began since December 2007, which indicates that it has already lasted for 21 months. already lasted for 21 months. � � Current length & level of contraction indicates that the recessi Current length & level of contraction indicates that the recession will on will continue for foreseeable future. continue for foreseeable future. How long and how deep How long and how deep contd. contd. � � The economists believe there is a sluggish recovery. The economists believe there is a sluggish recovery. However, the question remains unanswered w/regards to However, the question remains unanswered w/regards to the size of global economy and amount of stimulus the size of global economy and amount of stimulus packages? packages? � � How stimulus can be justified when the profit of FIs FIs has has How stimulus can be justified when the profit of increased from US$65 billion to $232 billion in 2007, within 5 increased from US$65 billion to $232 billion in 2007, within 5 years? years? � � The uncertainty is justified based on (a) contradictory The uncertainty is justified based on (a) contradictory remarks by the individuals from the same country w/regards remarks by the individuals from the same country w/regards to recovery & stimulus during Sept 4 meet of G20 & (b) to recovery & stimulus during Sept 4 meet of G20 & (b) IMF IMF’ ’s frequently changed projection on business cycle s frequently changed projection on business cycle contraction for 2010 – – (from 1.9% contraction in April to (from 1.9% contraction in April to contraction for 2010 2.5%; the latest projection is 1.4 against previous 1.3%). 2.5%; the latest projection is 1.4 against previous 1.3%). 4
Tw o approaches for combating Tw o approaches for combating crisis crisis � Two school of thoughts � Two school of thoughts – – (a) (a) stimulating stimulating economy through tax and spending policies economy through tax and spending policies (the US), (the US), � (b) � (b) financial regulation financial regulation by recommending by recommending more control over markets (The Europeans) more control over markets (The Europeans) � Under the second approach, it is � Under the second approach, it is recommended that international regulators recommended that international regulators can even reach across national borders. can even reach across national borders. Nepal and Global Economic Crisis � The greater the integration, the higher is the possibility � The greater the integration, the higher is the possibility of being victimized by speculative factors. of being victimized by speculative factors. � In Nepal, banks have more funds than they are � In Nepal, banks have more funds than they are required to (in mid- required to (in mid -June 2009, the gross foreign June 2009, the gross foreign exchange reserves stood at Rs Rs. 271.68 b, an increment . 271.68 b, an increment exchange reserves stood at of 27% compared to the level as at mid- of 27% compared to the level as at mid -July 2008). July 2008). � Gross foreign exchange reserves went up by 15.8% � Gross foreign exchange reserves went up by 15.8% (US$3.59 b). However, the decline in the aggregate (US$3.59 b). However, the decline in the aggregate demand in the real sector and in the real sector and weakening consumer weakening consumer demand spending is a sign to justify the vulnerability of such spending is a sign to justify the vulnerability of such reserves. reserves. � To cushion the impact, � To cushion the impact, contingency plan contingency plan needs to be needs to be initiated. initiated. 5
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