However, the recent rise in share values on the New York Stock Exchange presents a ray of hope. The Reserve Bank of India's standard regulation and meticulous supervision have been successful in maintaining capital adequacy requirements by prohibiting financial institutions from exceeding the given limits of exposure to the stock market.
In Nepal, the banking sector has made impressive progress. The interest rate spread is comparable to that in neighbouring countries. Banks are holding more funds than they are required to. The foreign exchange reserve presently stands at Rs. 177 billion, and the cash reserve of the commercial banks with Nepal Rastra Bank amounts to Rs. 24 billion.
Nepal is not directly connected to the troubled financial institutions abroad. From this perspective, there is no immediate threat to Nepal's financial regime. The closer the link, the greater the possibility of being affected. In terms of merchandise trade, about 80 percent of Nepal's readymade garments are exported to the US. Germany is the largest market for Nepal's carpets. This means that delayed financial recovery in these countries can have a negative impact on Nepal's export trade.
The crisis will also have a significant impact on the country's tourism sector. The US accounts for 5.9 percent and Europe for 25.7 percent of the total tourist arrivals in Nepal. The credit crunch inthese countries will also affect Nepal's export trade, foreign investment and overseas development assistance.
Because of shrinking demand, there has been a massive slide in commodity prices on the global market. This translates into easy and cost effective access to industrial raw materials which can support the manufacturing sector and control inflation. The depreciation of the Nepali rupee against the US dollar should have a positive impact on exports, remittances and also tourism. But depreciation is also expected to increase the budget deficit by Rs. 1.9 billion in additional debt servicing burdens.
There is no record of the level of investments made by Nepali investors in India's capital markets with money borrowed from Nepal's financial institutions. India's share market index declined by six thousand points between October 2007 and October 2008. The losers, if there are any, could default on repayments to Nepali banks.
Countries have different priorities. Victims of the global crisis are now working on limiting the damage than investigating its cause. Nepal's policymakers should now get ready to assess the loan portfolios of commercial banks. A rough estimate shows that real estate lending makes up about 10 percent of total lending. However, it is frightening to see that some banks with adequate liquidity have lent a significant portion of their money to real estate businesses.
Remittances have increased by 42.5 percent this year and reached approximately Rs. 142 billion. It contributes 17.4 per cent of the GDP. The government should design and establish a special support fund to rescue overseas workers who could be displaced if there is a crisis in the countries where they are employed. This should be the approach in an inclusive democracy.
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