PESTEL – Critical effects of the external environment on organisations

ONE OF THE BEST MODELS FOR MACRO-ECONOMIC ANALYSIS IS PESTEL.


PESTEL – POLITICAL

The political environment directly impacts any business under which it operates. E.g., Nepal was mired in a Maoist Insurgency for a decade from 1996-2006.

Consequently, our country’s economic development was adversely affected, and the business community were afraid to invest more. “GDP Annual Growth Rate in Nepal averaged 4.48% from 1993 until 2017, reaching a record low of 0.10% in 2001”. Source: TRADING ECONOMICS, 2020, https://tradingeconomics.com/nepal/gdp-growth-annual/.

Impact of External Environment on Organisations - Nepal-GDP-Annual
Source: TRADING ECONOMICS, 2020

PESTEL – ECONOMIC

The devastating earthquakes of April 2015 caused damages of around US$ 7 billion as per the estimates. GDP growth rate was just 0.6% in 2015. Moreover, Nepal’s private sector suffered losses around US$ 1.96 billion due to the blockade at the trade entry points with India amidst agitations in the Southern Tarai plains following the new constitution.

It caused a severe shortage of essentials, especially fuel, shooting inflation rates near 10% in 2016. Source1: Nepal: Inflation rate from 1984 to 2021, Statista, 2020. https://www.statista.com/statistics/422594/inflation-rate-in-nepal/Source2: Hemant Ojha, The India-Nepal Crisis, THE DIPLOMAT, published on 27/11//2015, https://thediplomat.com/2015/11/the-india-nepal-crisis/.

Businesses were facing grave economic pressures due to the sharp decline in consumer spending, including that from tourism and the shortage of fuel and raw materials due to the blockade. The Economic outlook improved in FY 2017 after the easing of trade with India, reconstruction efforts and good monsoon with GDP growth at 7.5% as per The World Bank. Tourism arrivals touched near a million providing a welcome relief to businesses.

For 2020, the GDP growth rate is forecast at around 2% or could be even less due to the current COVID – 2019 pandemic. The travel and tourism sector, one of the pillars of our economy, is already hit hard.

Furthermore, foreign exchange remittances from the migrant workers, especially in the GULF countries, are sure to decline since these countries are also hit hard by the pandemic, and many workers are losing their jobs.

Remittances account for nearly 28% of the country’s GDP. Hence, if this situation prolongs for long, the long-term economic growth outlook will get affected, and the economy will go into a deep recession. The inflation rate is already moving towards a 7% mark, from a low of around 4.5% in 2018-19.

Impact of External Environment on Organisations - Nepal-Inflation
Source: Statista, 2020

PESTEL – SOCIAL

Nepal is a ‘young’ country with 51.93% at or under 24 years and 36.58% between 25-54 years with a Median age of 24.1 years. The population growth rate is 1.16% (2017 est.) with a life expectancy of 71 years, indicating the trend towards an ‘Ageing’ society. Source: Nepal Demographics Profile 2019, Index Mundi, last updated on December 7, 2019. URL: https://www.indexmundi.com/nepal/demographics_profile.html/.

Despite having a young population, the labour market in Nepal is facing shortages especially in labour-intensive sectors like agriculture, infrastructure and even the tourism & hospitality sectors due to the current trend of people seeking employment abroad. It also means new opportunities in ‘Old-Age Health Care’ and ‘Old –Age Homes’, since our country lacks government support programs as is the case in the developed economies.

PESTEL – TECHNOLOGICAL

Businesses all over the world are taking advantage of a rapidly growing e-commerce. In our country’s case as well, the mobile phone is currently used by about 85.8% of households in Nepal. However, with a handful of local e-commerce operators, online e-commerce is still quite negligible primarily due to the lack of secure Payment Gateway infrastructure and also a restriction on Forex transactions by our Central Bank. However, there is an opportunity in the future, with better internet penetration and consumer awareness.

PESTEL – ENVIRONMENTAL 

Businesses need to reduce their environmental impact for the sake of future generations. E.g., by discouraging Plastic carry bags in stores and using renewable energy sources such as solar power where possible. Additionally, factories must control pollution and install pollution control technology to save the environment and also to ensure their long-term survival and success since this would reflect positively in their brand image.

pestel-effect-of-external-environment
Critical effects of the external environment on organisations – Eco Friendly Windmill

PESTEL – LEGAL

There are positive as well as negative implications and challenges to businesses from various government laws and regulations, e.g., the introduction of Goods and Services Tax (GST) in India, which accounted for 58% of all our country’s imports in 2017. It would increase the cost of imports due to the increase in transportation, insurance and other service charges while transiting from India for an FMCG supplier, for instance.

The government and the private sector of Nepal continually lobbied for the removal of GST on these services, arguing that these are the “Service Exports” of India. Finally, Ministry of Finance, India announced on 30th September 2017 removal of GST on the supply of services to Nepal and Bhutan against payments made in the Indian currency as was the practice earlier, and not only for the payments made in convertible foreign currency.

RECOMMENDATION

Businesses, must thus try to analyse the external environment, PESTEL factors, and formulate strategies to take advantage of opportunities and try to mitigate potential risks to the extent possible.

Author Anup Narsingh Amatya   

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