Nepal risks becoming a banana republic, says Prof. Dahal

Professor Dr. Madan Kumar Dahal is a renowned economist. Dahal, who served as the founding chairman of the Board of Directors at Mega Bank Limited, is a member of the Revenue Board at the Ministry of Finance, and is affiliated with the Institute of Strategic Studies and Research (ISSR).

“Nepal is a high cost economy, marred by prolonged economic stagnation and political instability,” says Dahal, who has command over the macro-economic situation of the country. He talked to Ritu Raj Subedi and Modnath Dhakal of The Rising Nepal on the burning issues of Nepal’s economy. Excerpts. 

How do you assess the current economic situation of Nepal?

The economy is passing through a critical phase of low level equilibrium trap circumscribed by poverty and stagnation. The economy is suffering from a very sluggish growth rate confined to an average of 3.5 per cent for the last five-six years. The devastating earthquake, prolonged agitation and economic blockade downed the growth rate to a humiliating 0.77 per cent. For the current year, there is an estimate that the country can achieve above 6 per cent growth rate. The Asian Development Bank (ADB) has also recently projected the growth rate for the current fiscal at 5.2 per cent. Provided everything moves smoothly, the growth may reach 6.2 per cent. However, I think it would be extremely difficult to achieve. If we examine the overall economy, gaining even 5.2 per cent growth seems improbable. The country has miserably failed to expedite the post-quake reconstruction and spend the capital budget. Reconstruction activities are moving at a snail's pace.

Data of the last seven months for this fiscal year show that the government could spend only 15 per cent of the total capital budget. Last year, the International Monetary Fund (IMF) had said that even by 2021 Nepal would remain the poorest country in the South Asia region. Even Afghanistan will surpass us. Of the 25 poorest countries in the world, Nepal's position ranks in 17^th. But there has been little effort to improve the situation.

I would like to supplement more examples in this regard. Take an example of the import and export scenario. Our export business is just 8 per cent while import is 92 per cent. Last year, the country had a trade deficit of Rs. 700 billion, which will be around Rs. 850 billion this year. The trend of the trade deficit has been the same for many years. We are having a dismal economic scenario. On the other hand, corruption is rapidly increasing. According to the Transparency International report, Nepal is the second most-corrupt country in South Asia.

For the last many years, the country has been unable to spend the capital budget, which has affected capital formation, employment generation and economic growth. Where do the problems lie?

We are passing through the 'under-spending syndrome'. This syndrome is the reflection of inefficiency, mounting corruption and poor governance. The government and ministers are giving data but never try to explain or address the reasons behind the problem. This phenomenon has been there for many years. There should be a national discipline day to promote fiscal discipline, and whenever there is a problem in spending, the government must explain it to the people. The government should be accountable for the entire economic scenario. Sometimes budget authorisation and disbursement are delayed while sometimes the implementing agencies, including the ministries, departments, district offices and local government, can't perform well. At other times, the contractors do not work properly or natural disasters hit the projects. Whatever the reason, the people have the right to know about it.

Do you see chances of economic growth from reconstruction activities and the local election?

Election-related expenditure is for consumption. Our assumption is that to increase the growth rate, we have to integrate our economy into the regional and global economy. Another way is to increase the budget for infrastructure projects like hydroelectricity, highways, tunnels and ports.

What are the major challenges for the national economy?

The first problem is that we are a high cost economy. We lack adequate transit facility. We are landlocked and don't have access to the sea. Likewise, not only luxury items but also basic facilities, such as health and education, are very costly here. Nepal is one of the countries having a high level of inflation. We are reeling from high inflation that hovers around 9.5 per cent.

Second is subsistence agriculture. This is the major contributor to the Gross Domestic Product of the country, a major employer and means of livelihood for many, but unfortunately both government and private sector investment in agriculture is very low. Therefore, we are importing many agricultural products, from rice to vegetables, from abroad. The agriculture sector needs a huge subsidy as India is offering the same on electricity, chemical fertiliser, machinery and tractors, and farmers should be provided concessional loans. This is needed in order to compete with the Indian products, too. As agriculture is not very rewarding in Nepal, the private sector is hesitating to make an impressive investment in the sector.

The third reason is poor and inadequate infrastructure development. The shortage of electricity has barred the industrialist from setting up large-scale manufacturing plants. It has affected small and medium-scale industries equally and discouraged foreign direct investment. Nepal is a country that can export energy, but ironically we are importing about 500 megawatts from India. We were unable to force India to implement the agreements to develop projects such as the Pancheshwor. It couldn't be activated even in two decades, which is proof that the southern neighbour is indifferent towards Nepal's economic development. Nepal-India relation is at the lowest ebb after the blockade last year while China is promoting a rather ideal type of relation. China has not shown much interest in opening the Tatopani customs point, citing various reasons while infrastructure development at the other border entry points is moving very slowly.

The fourth constraint to the economy is widespread corruption. Political and bureaucratic sectors are the most corrupt areas. Politics has become a business here. In an economy of Rs. 2.2 trillion, there are about 170 political parties. A briefcase culture has flourished in politics. The fifth problem is inefficiency and poor governance. High government officials are frequently transferred. Every time a minister is changed, s/he makes changes in the bureaucracy, as a result, many government officers have no chance of developing expertise in any area of their work. We are like a banana republic where the political transition is prolonged and export is declining continuously. Until and unless we address these five problems, there is a fear if we will ultimately become a banana republic.

Various national and international studies have shown that political instability is the major reason behind most of the problems facing the economy today.

I have not seen any leader or party coming forward to accept that mistakes have been commited in the past, and make promises to improve the economic situation of the country. Ensuring economic prosperity and an economically secure Nepal for future generations should be the major agenda of the parties.

Do you see any genetic ethnic flaws in the dominant ethnic groups behind the low economic development, lack of innovation and progress?

Every ethnic group in Nepal has its own characteristic of economic activities and progress. I don't think ethnicity or ethnic values caused the under development of our society. Most of the castes and ethnic groups are in harmony though there is a regional problem in the eastern Terai, which I would say is instigated by India to meet its own vested interest. It is not the elements of ethnicity that creates stunted economic growth but lack of skills and insufficiency that has led to the current condition.

What will help the Nepalese economy to take off?

Reconstruction and rehabilitation, export promotion and investment are the important issues of our economy. If concluded in time, it will have a positive impact not only on the national economy, but also on the local economy and public psychology. For the economy to take off and bring major changes to it, we need to move towards becoming self-reliant in the areas that have comparative and competitive advantage. Potential sectors for economic development have already been identified. They are agriculture, hydropower, tourism, remittance and foreign employment and export. Inflation is out of our control because we are an import-based economy. The country has made a plan to graduate itself from a least developed country to a developing country. But we need to have a growth rate of around 9 per cent for many years, which has been a distant dream for the last couple of decades. Similarly, Nepal aspires to become a middle income country by 2030.

In the absence of a concrete plan for the sectoral development of infrastructure, tourism and many others, do you see chances of Nepal becoming a middle income country by 2030?

If we continue to move like this, it is next to impossible to achieve the per capita income at par with the middle income countries. Therefore, I suggest that the government develop a new economic policy to address the changing economic circumstances. After the devastating earthquake and economic blockade, we are passing through a difficult economic situation. Therefore, we have to move accordingly to come back to normalcy within 2 to 3 years. If a system can be developed which can save the economic activities from the political wrangling, it will be the best remedy. Leaders do not have a vision for national development. The vice-chairman of the ADB last month said that Nepal had no vision for economic development. It is the reason why we are lagging behind in terms of economic development even though we are rich in bio-diversity and natural resources.

To have a high growth rate, we need to integrate our economy with that of China and India and promote sectors such as biodiversity, water resources, tourism and agriculture and attract foreign investment to them.

How much has Nepal been affected by the Indian economic policy? A section of the people argue that India pursues policies that never allow us to rise.

We are not only landlocked, but also India-locked. However, we need to change the situation to become a 'land-linked' country. We need to create a linkage to the sea via China also. It will give us a new momentum. India has been trying to have control over the resources here. Take an example of power trading. India has devised a policy to import electricity only from those projects or companies which has more than 51 per cent Indian stake. It is applying the same policy to other products, too. If we allow India to have a 51 per cent stake in any project, other foreign investors will not step into Nepal. So a high-level dialogue between the two countries is a must.


(Published in The Rising Nepal Daily on Monday, Apr. 3, 2017)