Nepali economy that witnessed a high growth trajectory for consecutive three years until the outbreak of COVID-19 pandemic in 2020 has seen an unexpected downfall of as low as -1.9 per cent in 2019/20 and could not take a leap again until now. The expected Gross Domestic Product (GDP) growth for fiscal year 2020/21 is below 4 per cent. The current fiscal year 2021/22 was supposed to witness business revival and economic rehabilitation after COVID-19. So, the government has set a target of 7 per cent economic growth, but growing liquidity crisis, sluggish progress of large infrastructure construction and poor capital spending could hinder the target. The Asian Development Bank and the World Bank have estimated the growth of 4.1 per cent and 3.9 per cent, respectively, this year.
Meanwhile, the government has revised the annual budget spending to 95 per cent – Rs. 1546 billion -- while capital budget is lowered to 90 per cent of the total allocation of Rs. 378 billion. Likewise, entrepreneurs are struggling to manage financing for their business ventures amidst deepening liquidity crunch. It is hard for them to get the financing while interest rates are continuously going up. Remittance inflow is dwindling and foreign exchange reserves have been depleting. Although the pandemic had pushed the hard-earned economic achievements to the back seat, there are hopes for better economic strides as foundations have been laid in multiple sectors of development.
Hydroelectricity
Hydroelectricity has the potential to be the single largest export of Nepal in the future. With the possibility of generation of more than 50,000-MW hydroelectricity as well as thousands of MWs of solar and wind energy, Nepal could become a supplier of energy to the power-hungry markets in India and Bangladesh. The latter has not only promised to purchase electricity from Nepal but also has expressed commitment to investing in energy projects here. India is developing large hydel projects like Upper Karnali and Arun III. Currently, Nepal has the installed capacity of 1924.2-MW hydroelectricity from 108 projects with more than 1 MW capacity.
Nepal must increase the household and industrial consumption of energy. It enhances the efficiency of people in domestic works like cooking, heating, using gadgets while business use of electricity speeds up the business process and production, and reduces the cost of production. According to the private sector reports, about two-thirds of the businesses and industries are still relying on alternative energy management like generator and inverter.
Export
Export trade could be another game changer in case of Nepal as the country sits between the two global economic giants. On top of that, Nepal borders with Bihar and Uttar Pradesh – two Indian states with combined population of 300 million. Nepal enjoys favourable market entry in developed markets including the United States of America and European Union. However, it has failed to utilise the facilities and incentives offered by them. Goods, including handicraft, natural fibre, herbs and garment, services, and energy, could be exported to India and third countries.
Export could be promoted by attracting contract manufacturing from Indian and Chinese companies while, at the same time, it would generate jobs in the country. Nepal-India Chamber of Commerce and Industry has suggested the Department of Industry (DoI) to think about creating policy framework for the same. Current efforts to improve trade infrastructure such as roads, dry ports, Integrated Check Posts, cross-border railway and transport facilities will help in the international trade and reduce the cost of business as well. Not relying on the sporadic trade boost of products such as soybean oil and palm oil which are based on imported raw materials and market is ensured until India's current import policies are intact, Nepal should plan for the sustained growth of some selected indigenous products.
To reduce the ever-growing trade deficit, entrepreneurs have suggested amending the Nepal Trade Integration Strategy, establishing internationally accredited laboratory, creating online payment infrastructure and textile processing factory, and allocating space at Kolkata Dry Port for Nepali exporters. They also asked for export credit, customs reform and support in the promotion of collective trademark of Nepali products.
Foreign Direct Investment (FDI)
Nepal in recent years is implementing various policy and process reforms to attract Foreign Direct Investment (FDI). Establishment of the Investment Board of Nepal (IBN), organising investment summits and creation of business-friendly laws has positive impacts on domestic as well as foreign investors. As a result, in the second Nepal Investment Summit held in 2019, the country could secure the commitment for the investment of about US$12 billion.
The IBN is putting its efforts to materialise the pledges expressed by the investors in the Investment Summit. Development of 900-MW Arun III Hydroelectricity Project, Hongsi Shivam Cement, Venture Waste to Energy, Private Freight Terminal, and many others is the result of IBN efforts. It is working to create new investment-friendly laws and amend the existing ones in order to reduce the process, documents and time needed to register and operate a business. Meanwhile, one-window service to the investors is launched at the IBN and DoI.
Nepal is graduating from the Least Developed Country (LDC) to a developing nation in 2026 and aims to become a middle-income country by 2030. But graduation from the LDC would mean losing the trade incentives the country is enjoying currently in the developed nations, and international grants for development. However, economists say that it would do good for the country in the long-run as it would force to enhance the quality of goods, reduce the production cost and increase trade competitiveness. Becoming competitive in the international market in terms of quality and price, low-cost labour can be a comparative advantage.
To neutralise impacts of the graduation on the national economy, Nepal should launch initiative to sustain the facilities it currently getting in the developed nation and sign bilateral trade agreement with the USA, EU and China.
Project Bank
Meanwhile, the National Project Bank (NPB) created by the National Planning Commission (NPC) some years ago has included 7,128 projects by the end of 2021. The bank aims at offering the development agencies, including the ministries, the required tools to make better strategic development decisions on the basis of evidences based on assessment, prioritization and planning.
It is expected that the NPB would check the current practice to include project in the budget at the whim or suggestions of certain political leader or a minister without any feasibility study and other necessary preparations which mostly results in either projects not taking off at all or lingering for many years. For example, Babai Irrigation Project is running in the 34th year of its implementation and Melamchi Water Supply Project is under construction for about two decades while West Seti Hydropower Project has not taken off since its inception about 23 years ago and Budhi Gandaki Hydropower Project is yet to complete land acquisition in about a decade.
The project banks categorises the projects in five different sectors – physical infrastructure, urban development, energy and water resources, water supply and home affairs, and provides readily and thoroughly analysed projects for execution. If the government and leaders could stick up to the policy of project preparedness before its inclusion in the budget statement and further processing, it would be a great leap in terms of project discipline and timely execution.
Private sector growth
Promotion of private sector investment is key to the national development since more than three-fourth of the jobs are created in the sector. Thus, the government should facilitate investors through business-friendly policies and incentives to exports. Liberal economic policies will support in the flourishment of private sector businesses which will support in job creation, export trade, import substitution, competitive markets and stronger economy. The private sector needs quality supply of energy, fast business process, and cash and policy incentives. Liberal economic policies can solidify the foundations for the health of private sector development and the country can achieve high economic growth in the years to come.
Published in The Rising Nepal daily on 19 February 2022.
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