Blockade crippling Nepal's economy

In a televised address on Tuesday, November 24, Nepali Finance Minister Bishnu Prasad Paudel indicated that the heavy shrinking of economic activities in the country was linked to an India-imposed blockade of key border points, as well as prolonged strikes and protests in the country's southern plains, which have claimed at least 50 lives since August.

At the heart of the unrest lies the adoption of a new national constitution following years of political deadlock and violent protests. Two months ago, Nepal's parliament approved the new charter which divides the Himalayan nation into seven federal states, each with three levels of government: federal, provincial and local.

But some of the country's ethnic groups are angry as they claim that the nation's first complete political framework since the monarchy was abolished in 2008 curtails their rights. Given that the new constitution doesn't foresee the creation of an exclusive federal state in the plains, they are fearful that the new boundaries will leave them politically marginalized, and hence not fairly represented in local and central government.

The demands of the protesting groups hence include not only the redrawing of federal boundaries, but also a proportionate inclusion in parliament and public employment.

Escalating violence

As a result of the months-long deadlock, violence has been escalating. In fact, some members of the Madhesi ethnic minority were recently killed in clashes with the security forces, prompting the United Nations to call for an investigation into allegations of excessive use of force by the police.

"According to a September 9 report of on-the-ground interviews by the NGO Terai Human Rights Defenders Alliance, police have progressed from using batons to live fire, without using teargas or water cannons," writes Alison Evans, a Nepal expert at global analytics firm IHS.

Evans says the rapid escalation to live fire in police tactics was facilitated by a 30 June regulation allowing the use of "optimum force" and impunity in the case of death or injury. The violent demonstrations have continued despite a recently imposed curfew in the Terai region bordering India.

Although Nepal's political parties have reportedly agreed to consider amending the new constitutional boundaries of states as result of the mounting tensions, they have thus far failed to decide on the way forward.

Industry operating 'at fourth of capacity'

The deadly unrest comes as the Himalayan country of 29 million people is reeling from a devastating 7.8-magnitude earthquake in April-May, which killed more than 8,000 people and destroyed around half a million homes. The worsening economic situation is also bad news for the survivors of the disaster, with Finance Minister Paudel saying the number of people pushed to poverty due to the earthquake damage is estimated at 700,000.

Kenichi Yokoyama, the Asian Development Bank's Country Director for Nepal, explains that the continuing protests have obstructed trade and transit of imported goods coming from India, resulting in a serious disruption of the transport of major commodities such as petroleum products, cooking gas, construction and industrial raw materials, and other essentials.

But it is the acute shortage of petroleum products that has had the deepest impact on the daily life of people in Nepal."Due to the indefinite strike in the southern part of the country, industrial sector is operating at a fourth of its capacity. Local hotel occupancy rate has fallen to about 20 percent against the norm of 80 percent or more thus affecting tourism sector," Yokoyama told DW.

Moreover, the lack of fuel and construction materials have virtually stalled all development and earthquake reconstruction activities in the impoverished country, causing growing concern about the humanitarian impact the arrival of winter could have on quake-affected areas, the economist added.

Sharp trade drop

The Kathmandu Post reports that the country's exports and imports have fallen sharply due to the ongoing unofficial Indian blockade. Citing a report by Nepal's central bank, the newspaper said exports plunged 25.4 percent during the first three months of the current fiscal year while merchandise imports also plummeted 31.9 percent.

"Nepal's total exports fell due to a drop in shipments to India, China and other countries because of the unrest in the southern plains and disruption in transportation. The decrease in the import of petroleum products from India was the biggest contributor to the decline in imports," the paper quoted the central bank as saying.

Analyst Evans explains that as a landlocked country, Nepal - and particularly its capital Kathmandu - relies heavily on imports, specifically food and fuel, from India, its largest trade partner and source of foreign investment. Nepal's total trade with India accounted for 66 percent of the country's total external trade by the end of July 2013, according to government data.

New Delhi's security concerns

But why has India decided to effectively close the border? Evans explains that when the protests involved just road blocks and curfews, Nepali security forces provided armed escorts for cargo vehicles from India through the Terai region to Kathmandu.

"However, since September 23, there have been reports of Indian border officials stopping road cargo at customs check-points - and rail cargo in Kolkata from 24 September - citing concerns over the security of its freight carriers and other vehicles," Evans added.

The analyst argues that New Delhi's motivations to support an effective blockade of cargo are likely to include concerns over the protests or violence spreading over the border into India. "Madhesi people also live in India and cross-border marriage or temporary economic migration is common," she said.

The China factor

But security issues might not be the only reason behind the move. Evans argues that since India's ruling BJP party no longer has close ties with the Nepali Congress party, it may be seeking to influence Nepalese politics through Madhesi parties. Moreover, she argues that New Delhi may want to persuade Kathmandu to maintain closer ties with India rather than China, similar to the 15-month-long blockade starting in 1989 when Nepal imported weapons from China.

According to IHS, Nepal's ruling coalition has sought increasing Chinese investment, including in the telecoms sector, contributing to Indian fears of espionage.

"On September 24 Nepalese authorities started to clear the Chinese border-crossing points of Tatopani and Rasuwagadhi for the first time since the earthquake in April. Also on October 20 Prime Minister KP Oli called for the Nepal Oil Corporation (NOC) to prepare to import liquefied petroleum gas (LPG) from China because of the effective blockade on cargo from India," Evans explains.

However, the expert is of the view that overland China-Nepal trade is unlikely to be able to supplant India-Nepal trade in the three-to-five year outlook, especially given that roads connecting the two countries have been blocked since the April earthquake and their development is unlikely to be a priority for China. "This means that India can effectively blockade cargo temporarily, knowing that China cannot replace it as a main provider or transit point for cargo in the medium-term."

Dire prospects

ADB's Yokoyama believes that if the problems can be resolved shortly, annual economic growth rate will decelerate to about 1.8 percent - from an earlier ADB projection of 4.5 percent - and that the affected sectors will gradually recover during the second half of the fiscal year, along with initiation and pick up of the post-quake reconstruction.

However, if the stalemate prolongs to a substantial part of the current fiscal year, the growth rate may turn negative to around -0.7 percent, said the expert. Similarly, inflation could increase to about 9.8 - 10.5 percent from an earlier projection at 8.5 - 9.0 percent. "The budget utilization, particularly capital expenditure, could also fall to very low figure and revenue collection will also be hit hard," he added.

Evans believes that the effective blockade is unlikely to end before the administration makes some concessions. And in this regard, she stresses, the nature of this agreement is key.

"District-level Madhesi party leaders quit their party forum in June because they perceived central leaders in Kathmandu to be colluding with other political parties, prioritizing individual gains over those for their communities. If the agreement reached is not perceived to concede sufficiently to the communities' demands, then protests are unlikely to abate."