With the 16-point ascend in the global Doing Business Index
published by the World Bank last week and positive symptoms in export trade,
balance of payment, realising Foreign Direct Investment (FDI), economy of the
country is set on the higher growth trajectory. The first year after the
adoption of federalism was rather chaotic with all levels of governments trying
to create the legal basis for their operations, secure the sources of revenue
to manage much needed fund for the development and learn the nitty-gritty of
the budget making and resource mobilisation. It was the foundation year for the
new political system which was successfully manged by the federal as well as
the sub-national governments, said Finance Minister Dr. Yuba Raj Khatiwada. He is
confident that the economy would be further propelled by the increased
investment, business opportunities, execution of development project and social
security policies. Responding to the questions of the journalists at the weekly
Gorkhapatra Sambad, Dr. Khatiwada talked about the overall scenario of the
economy and prospects. Excerpts:
The government has been saying
that the first year was the foundation year for federalism. How do you assess
the current economic situation in the pretext that many processes and policy
strings are yet to be fixed and certain groups are still critical about the
recent economic policies?
Development and good
governance are the primary agenda of this government. When this government
came to power, a legal instrument related to election and a couple of them for
federalism were activated. Political transition was almost concluded, but
constitutional and economic transition had just begun so we had a
responsibility to set the tone of the country's future. Rest is created by this
government. Dozens of laws were promulgated.
But the main task in institutionalising the federalism was
to execute the fiscal federalism and that is the responsibility of the Ministry
of Finance. Shared and individual rights and the responsibilities of the
governments have been defined. Balanced and just distribution of resources has
been practiced. Revenue and budget distribution system has addressed the
geographical and demographic dynamics in the new political set up. At the same
time, we successfully mitigated the chances of conflicts among various levels
of the government.
Policy for the distribution of the revenue from the natural
resources is in the pipeline and will be implemented soon. Required laws will
be developed within this fiscal year and go into implementation from next year.
The problems in managing the projects have also been addressed through policies
and action plans. However, we need to increase our project management capacity
to get the desired results.
The Doing Business Report of the World Bank showed an
impressive progress in terms of creating investment climate. What has made the
country climb up in the index?
Doing business index is the indicator of the work we did in
the foundation year.
Various laws to
facilitate the private sector with the business-friendly environment have been
created and more such laws like the Intellectual Property Act will be
promulgated soon. The government should never compete with the private sector,
but it should facilitate the investment of the government and private sector.
The recent Social Security policy has
improved the labour relations and we hope that it will also increase the
productivity of the workers.
One-door service centre at the Department of Industry has
come into operation and another at the Investment Board of Nepal will start
soon after the creation of procedures and bylaws. The intent of investment made
at the Investment Summit earlier this year are being realised and the
government has signed agreements for large infrastructure projects while
private sector is collaborating with foreign investors in various projects. We
recently witnessed the financial closure of the Upper Trishuli 'A' Hydropower
project. The Upper Karnali which was stuck for years due to inability of
financial closure is set to begin the work soon. Arun III has also been moved
ahead while multilateral donors are interested in Dudhkoshi Hydel Project.
To create infrastructure for electricity infrastructure and
promote energy trade through the cross-border transmission lines will be
developed with the support of the Millennium Challenge Corporation. Since hydroelectricity
is instrumental for Nepal's economic growth, we must work to increase the
production, transmission and consumption of renewable energy. To increase the
electricity consumption, we are promoting electronic appliances and vehicles.
Electricity export will balance the
country's trade. It will also replace the electricity import from India.
The past year has also been a foundation year in terms of road,
aviation and railway sector development. The Gautam Buddha International
Airport in Bhairahawa will go into test operation in January next year, runway
and parking space at the Tribhuvan International Airport will be expanded and
Detailed Project Report of the Kakarvitta to Banbasa Railway Project will be
completed soon. In terms of road expansion, it has reached almost every corner
of the country though there are questions about the engineering and quality of
such infrastructure. The government is communicating with the Japanese, Swiss
and Chinese governments for the support in tunnel construction.
The country needs transformation in agriculture with greater
mechanisation, access to land and better land use policy. We need to do more in
this regard.
Tourism is another area of
priority. We are celebrating Visit Nepal year 2020 which has created demands of
more tourism destinations, hotels, transport services and aviation companies.
But the reform in public procurement policies and laws is
needed to make the government expenditure more effective and result oriented. Tax
evasion has drastically reduced. We are trying to make the entire system
transparent.
Hydropower service sector is leading the growth in recent
years. But public sector spending has long been pathetic with maximum budget
utilisation at the last month of the fiscal year. What is the government doing
to improve the situation?
Though the service sector has witnessed an impressive growth
in recent years, the government is promoting all three – primary, secondary and
tertiary – sectors of economy. All these areas had 5 to 10 per cent growth in
an average last year. Additional efforts and investment are needed to make
energy and tourism primary instruments for the growth. We need supplementary
investments and roles from the government and private sectors in developing
these areas.
I agree with the fact that the government is more process
oriented. It happens in all democratic societies since they have to follow the
legal provisions. The land acquisition, Environmental Impact Assessment and
public hearing also delay the projects. Therefore, we are set to shorten the
process making amendments to the Public Procurement Act. To address the
maladies of the EIA and Initial Environment Examination, the government has
decided to set up a fund where the developer can deposit the money and the
government will plant the trees instead of the developer. Industrial zones are
in offing in all seven provinces to facilitate the private sector and attract
investment.
Both the process and government mechanism are cumbersome
while the decision-making process has also delayed many projects. At the same
time, I must say that the classification of the government expenditure is not
scientific. It does not show the actual capital expenditure. The capital budget
that makes only about one-third of the total expenditure is not the only
development budget. The grant mobilised to infrastructure projects like
Melamchi Water Supply Project, Pushpa Lal Highway, and grant sent to the
sub-national governments is also the capital budget.
Similarly, some payments of major projects are made at the
end of the fiscal year. Further, we are trying to practice the budget surrender
by mid-April at the latest so that the surrendered budget can be properly
utilised in key projects. I urge journalists to look at the capital expenditure
from this new dimension.
The Doing Business Report has pointed towards the
exhaustive business registration process and complex taxation system, while
saying that the new Social Security Act has added additional burden to the
enterprises. What kinds of interventions are you planning to attract more
private sector investment?
The issue of complex taxation system, which is raised by the
Doing Business Report, has been addressed. We are amending the foreign exchange
act as well. The report is an instrument for foreign investors, so the
government has been giving enough attention to improve the situation.
Doing Business Report is based on the perception survey and
when the situation is asked to a businessman who has been evading taxes, he
would criticise the government moves. We are trying to make the economy more
transparent and bring more areas under the tax net which is not easily taken by
some section of the business.
Similarly, the report is based on the data till May 2019
while the government has made many reforms, including simplifying the social
security provisions after that. Online taxation system has been implemented.
Compulsory Permanent Account Number (PAN) is introduced. Insolvency Act will be
brought soon. Bank deposits and lending have increased significantly,
investment has been mobilised in the key sectors, therefore, the statement
about investment climate is not justified. Be assured there is no despair in
the economy. Revenue Board will also be constituted soon. However, bringing all
social security instruments under a single net is the demand of the time.
This is the government that has initiated some steps to
socialism with the social security for almost one third of people in the
country. The social security will ultimately increase the productivity if the
companies provide the workers with latest technology and skills-training. The
workers also should be serious about increasing the productivity of the company
since only the higher productivity results in higher payments. Meanwhile, the
government will give attention to minimising side effects of the social
security policy so that the business community should not hire foreign workers.
You said that the government had accorded high priority
to the hydroelectricity development and mentioned many projects in the pipeline
and development phase. But reservoir based Budhigandaki Hydroelectricity
Project is stuck for many years. Has it become ping-pong between the two large
neighbours?
Past governments misbehaved with the Budhi Gandaki. However,
the present government is completing the land acquisition this year which will
make the site clear for any investors. It will be an attractive project. The
discussion on the alternative of reducing the capacity of the project to 800 MW
has delayed Budhi Gandaki as the reduction would demand another DPR. But it
would save a large area of land and some settlements.
The Chinese company was awarded the project as it was ready
to develop it but it slowed down the development process, so the government had
decided to develop it on its own. But the company said later that it had
completed the internal works to develop the project, and it was retransferred
to the company. There are complications at the local level as well as the
people are demanding higher compensation for their houses and land.
The government has given high priority to agriculture.
The sector is enjoying increasing investment, grant, bank lending and other facilities.
But neither has the sector seen increment in products nor in entrepreneurship.
Why?
Only those people who know about the agricultural grant are
being benefitting from it. They know how to manage it and many farmers who
should have got the facility have not been able to avail from it. Therefore, we
are revising the entire grant procedure to make sure that the fund goes to the
right people.
What made the sudden changes in the pattern of trade in
the first two months of the current fiscal? It is also seen that the products
that are not indigenous to Nepal are in the rise in export trade while import
of consumer goods has increased.
Industrial raw materials and construction materials like
wood, clinker and cement, steel bars, electricity and rice import is on a
declining trend. Steel industries imported more raw materials last year which
resulted in decrease in import. The government has consciously restricted or
discouraged the import of sugar, energy drinks, luxury appliances and vehicles.
There is a growth in industrial product, registration of
industries and their operation. About 5000 companies have been added in the
last couple of years. There is 40 per cent increment in industrial sector
lending. So far as the export goods are concerned, goods that have more than 30
per cent value addition will support the economy. Palm oil, pashmina and
handcraft items are the examples.
The government will give more focus on the products listed
in the National Trade Integration Strategy and will promote their export. I
would like to remind you that the export growth is also the result of the
Valued Added Tax refund facility. The refund will be made only after the
export.
Besides the government's claim that the economy has set
on the right track, common people are complaining about the increased tax
burden such as the tax in ancestral properties and micro entrepreneurs. What do
you say to them?
There is not a single solution to
all the problems in an economy. If you say don't increase the tax and expand
its net, don't borrow money but implement development, this is impossible. In a
developing country like Nepal, there is a need to import capital intensive
goods and raw materials for industrial development to achieve economic growth. Likewise,
achieving high economic growth and decreasing import while increasing revenue
is another challenge. impossible.
This is a great challenge for the finance minister to keep
balance among balance of payment, inflation, import and export and tax rates. Local
bodies cannot raise export tax, it will be discouraged.
On the backdrop of the Millennium Challenge Account
controversy, do you see any geo-political competition in large infrastructure
projects in the country?
Neighbourhood first is our policy. But we don't ignore the
development concepts from the economic powers like the USA and EU. MCC has
extended support in the national priority areas so we accepted it. It is not
the grant under any strategic move. The next session of the parliament will
ratify the MCC project at the earliest. We will exercise economic diplomacy to
mobilise the external sector support in development and other areas in the
country. Large projects sometimes become the matter of political concerns as
well. This is not unconventional.
