3.

Make the trend analysis of the balance of trade(BoT) and balance of payment(BoP)
of at least 12 recent years. Analyze the result and suggest the appropriate measures to
correct the deficit balance of trade of Nepal.

Nepal recorded a trade deficit of RS 694257 million in 2017/18. The average trade
deficit of Nepal from 20006 to 2018 is Rs 457405 million. The highest trade deficit is
in the year of 2016/17 that is RS 895818 million. Nepal recorded the lowest trade
deficit in the year 2006/7 of Rs 135311.5 million.

In
ten million

Year 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
BoT -13531.15 -15599.2 -20932.1 -30351.5 -31967 -37314.13 -46130.45 -59541.27 -66349.67 -68162.18 -89581.8 -69425.7
BOP -590.43 -1224.93 -1465.09 -1724.49 -1962.88 -1058.22 -1769.9 -1971.16 -3235.02 -3059.74 -3968.53 -2904.58
*Source: economic survery, ministry of finance(2018)

The trend of balance of payment and balance of trade can be depicted through the
following graph

0
-10000
-20000
-30000
-40000
BoT
-50000
BOP
-60000
-70000
-80000
-90000
-100000

It is clear from the above graph that the line of balance of payment is horizontally
extending in twelve year that it is negative but It lies under the line of ten thousand
million not crossing it. But the line of balance of payment reveals that trade is heavily
imbalance and it is in increasing trend. Balance of trade of Nepal is continuously
deficit and this deficit is growing in every year from 2006 to 2018. It is clear that our
balance of trade is much worse than the balance of payment.

Nepal lack of infrastructure and geographic constraints have led to chronic trade
deficits. Nepal mainly exports agro-based items to the foreign country such as knotted
carpet, tea, coffee, and other agro-based raw material. In return Nepal import oil, gas,
gold iron, steel. automobile and electronic appliances and mobile phone. The import
of Nepal is higher than export caused the trade deficit.

To correct the deficit trade and balance of payment Nepal need to take the following
measures:

1. Adjustment through exchange depreciation(price effect)

The depreciation of currency value is the best way of correcting deficit BoP.
Under this strategy the value of currency is depreciated in relation to the value
of foreign currency which make the domestic currency cheaper. Consequently,
the export increases and import decreases.
2. Expenditure switching policy or devaluation
Devaluation raises the price of domestic import and reduces the price of
foreign export in relation to another country. Devaluation is regarded as
expenditure switching policy because when a country devaluates its currency
the value of another country’s currency increase which make the import dearer
and export cheaper. This causes the expenditure to switch from foreign to
domestic country. The people of country start to purchase the goods in their
own nation and reduce the import significantly. As the domestic demand
increases the production also increase which in turn balance the deficit BoP
and BoT.
3. Trade policy; increasing the export and reducing the import.
The government may adopt the following technique to support this trade
policy
- Reducing the export duties and lowering the interest rate on loan used to
finance the export
- Granting the subsidies to manufacturer and exporter
- Reducing the tax rate on the export income
- Import can be restricted with the help quota and license distribution to the
importer and taking permit from the government.
4. Expenditure reducing policy by both central bank and government
To reduce the BoP deficit the monetary and fiscal policies can be taken to
fight against the trade imbalance. The falls in aggregate demand curbs the
import and solve the trade problem.
- Tight monetary policy
Increase the rate of interest and CRR and SLR
- Tight fiscal policy
Increase the tax rate on imported goods.
Cutting the unnecessary expenditure of government

Lower price of product stimulate the export and people will consume more
domestic product.

5. Adjustment through capital imports

 As the country import capital by rising the interest rate so the FDI increase
which helps to increase the production of goods. A deficit can be financed by
capital inflows. When capital is perfectly mobile within countries, a small rise
in the domestic rate of interest brings a large inflow of capital. The balance of
payments is said to be in equilibrium when the domestic interest rate equals
the world rate. If the domestic interest rate is higher than the world rate, there
will be capital inflows and the balance of payments deficit is corrected.

4. Discuss the history of privatization, liberalization and globalization in Nepal. How

do you analyze the impact of liberalization, privatization, and globalization in
Nepal. State your opinion highlighting their pros and cons. Explain

Nepal formally adopted the policy of liberalization, privatization, and globalization

after the restoration of multiparty democracy in the early 1990s as the forerunner of
globalization in the south Asian region. Globalization got a real boost with the general
agreement on tariff and trade(GATT) in the 1940s. the modern agent of globalization
are world bank(WB) and international monetary fund(IMF) through structural
adjustment policy (SAP) and liberalization and privatization recommendation policy.
Nepal joined the IMF and become the member of world Bank in September 1961. The
accession of Nepal to the WTO in 2004 accelerated the process of globalization.
However in past two decades or so, Nepal has experienced few success and failure of
globalization. Nepal has gain some genuine benefit and opportunity of globalization.

Privatization means leaving the economy from the government control to market,
production is carried out by private sectors and NGOs. The one basic objective of
privatization is to make the industry competitive by transferring the ownership from
government to private sectors. It is the global phenomena that occurred in Nepal also
since the Panchayet system. In six year plan various public enterprises were privatized
some of them are Nepal Cheuri ghee plant, chandeshowri textile. After the restoration
of democracy in 1990 the concept of privatization is included in the constitution. In
the following year 1991 the bills was issued by the Girija Prasad Koirala government.
In the same year three public enterprises were privatized namely bhirkuti paper mills,
harishiddhi brick and tile factory, bashbari leather and shoes factory by indian
company at cheaper price.

The privatization helps to reduce the administrative and financial burden of the
government of Nepal. The positive impacts of privatizations are as follows

1. Privatization encourage industrializations

2. Generate employment opportunity in public sectors
 3. Capable and competent person or firm can involve in economic activities that
just contribute to the distribution of wealth
4. The operating efficiency and quality of government remaining activities
increases.

Disadvantage of privatization

1. The abuse of public interest by focusing on profit motives only

2. The transformation of government owned natural monopoly may be
transferred to private sector which ensures the competition less monopoly for
the private sector. As the private sector is profit oriented they may make the
basic service unavailable to large segment of population for example poor
people will have no reach on basic education and health care facilities.
3. Some privatized enterprise ignores the environmental concern in their
operation thus pollution increases.
4. Consumers have to pay high price due to the Increased price of goods As
government reduce the subsidies the cost of goods increase in initial time of
privatization.

Lifting of all the rules and control from government and free economic activities
from state control is called the liberalization. Not directives and order is issued to
the company and firms. Nepal has practiced the liberalization policy since the
restoration of democracy in 1990.It is direction of moving toward free market
economy.This normally include the reduction of direct control on both national
and international transaction. In such a case less requirements are made in terms
of license and permit.

Advantages of liberalization in Nepal are as follow

1. Increase the investment in domestic sectors.

2. Reduced the role of command economy
3. The quality of life and living standard of Nepalese by getting the chance of
generating income in different way.
4. Most multinational company and foreign direct investment increases in Nepal.
5. It contribute to the utilization of existing resources of the country.
6. Increase of employment opportunity
7. Most financial and sevice firm established

Disadvantages of liberalizations are as follows

1. Competition rises in domestic economy

2. Chances of exploitation of workers they may not be treated well and get
the basic remuneration as there is not specified rules and directives issued
by government
3. Chances of environmental pollution
4. Chances of political intervention by foreign country.
 5. Threaten to the existing domestic industry and investment start to drops
which lead to economic crises.

Globalization is a process of interdependence, integration, and interaction among

economies driven by increased international trade and investment and facilitated by
the fast growth in international communication technology and multinational
corporations.

Pros of globalization

1. Modernization of Nepalese economy: Nepal has shifted from the agro based
economy to the service based economy. The door of investment opportunity
emerge thus foreign investment increases in Nepal
2. Nepal has increases chance to increase market to international level by exports
3. Inflow of foreign direct investment
4. Consumer is benefited by reduced price and better quality
5. Access to global financial institution such IMF and world Bank
6. Access to international labor market for Nepalese worker

Cons of globalization

1. Liberal trade policy displace the existing domestic industry

2. Dominance of multinational companies and capital flight out of the nation
3. Nation might become Dumping sites of outdated and obsolete product as it
increase imports.
4. Create the excessive reliance on foreign aids
5. Brain drain of active labor force of country by rising foreign employement
6. Globalization has threaten the native cultures.