KATHMANDU, Nov 4: The government has been mobilizing foreign loans and grants to finance development projects, expand infrastructure and stimulate economic activity. Banks and financial institutions also have sufficient liquidity available for lending.
Interest rates on loans have fallen compared to previous years. Yet, despite these positive indicators, the private sector remains reluctant to make new investments. Businesspeople are more concerned about protecting their existing businesses and reducing risks than expanding their investments. Confidence in the private sector has fallen sharply.
Businesspeople are increasingly worried about who might be taken into police custody next and whether existing policies and regulations could suddenly change. The private sector has become even more apprehensive following the disaster caused by floods in the Bhotekoshi River on August 26. Business confidence remains low. Although the government continues to increase foreign borrowing from development partners to finance infrastructure projects, the domestic investment climate has failed to improve.
What has brought the country to this situation? Why has private investment failed to pick up even as the government continues borrowing and spending?
According to the latest report of the Public Debt Management Office, Nepal's total external debt reached Rs 1.598 trillion by the end of Ashoj (mid October), the first quarter of the current fiscal year 2083/84. This accounts for 53.13 percent of the country's total public debt.
Domestic debt has reached Rs 1.410 trillion, accounting for 46.87 percent of the total. Nepal's overall public debt has consequently climbed to Rs 3.009 trillion, crossing the Rs 3 trillion mark for the first time in the country's history.
Public debt now stands at 45.59 percent of gross domestic product (GDP). External debt alone accounts for 24.22 percent of GDP. The government has reached a point where it is borrowing new money to repay old loans.
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At the end of the previous fiscal year in mid-July, the government's total public debt stood at Rs 2.981 trillion. In the first three months of the current fiscal year, the government borrowed an additional Rs 123.32 billion and repaid Rs 77.75 billion in principal.
Although the difference between new borrowing and principal repayments should have increased the overall debt burden, fluctuations in foreign exchange rates have slightly reduced the value of external debt.
The government has set a target of mobilising Rs 658.28 billion in public debt during the current fiscal year 2083/84. This includes Rs 410 billion in domestic borrowing and Rs 248.28 billion in external loans.
By the end of Ashoj ( mid-October), the government had borrowed Rs 123.32 billion, equivalent to around 18.73 percent of its annual target.
Of this amount, Rs 100 billion came from domestic borrowing, representing 24.39 percent of the annual target. External borrowing amounted to Rs 23.32 billion, just 9.39 percent of the target.
Anjan Kumar Shrestha, president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said the deteriorating investment climate has made it difficult for businesses to sustain even their existing operations and industries. He said business confidence has been declining for a long time.
According to Shrestha, businesspeople are now more worried about protecting existing enterprises and reducing risks than making fresh investments. He said he had never seen private sector confidence at such a low level in his 36 years in business.
He said a growing tendency to immediately treat businesspeople as criminals and take them into custody over allegations of minor financial or policy-related irregularities has created fear in the business community. Mistakes should be investigated and financial penalties imposed where necessary, he said, but arrests and raids have spread anxiety among investors.
"With market demand failing to grow, industries have been forced to cut production," Shrestha said. "Both large companies and small and medium-sized businesses are struggling to survive and reduce their exposure to risk."
Shrestha urged the government to ensure policy stability, protect investments and create a favourable business environment to revive economic activity. He also called for increased public investment in infrastructure to inject money into the market and for policies that encourage businesses rather than subjecting their owners to detention.
He said the private sector remained ready to engage in dialogue and cooperation with the government, but expected a more positive approach from the state.
Former Nepal Chamber of Commerce (NCC) president Rajendra Malla also said businesspeople were struggling to protect their existing investments, let alone expand them.
He said rumours spread by middlemen had created fear in the private sector.
"Instead of arresting and detaining businesspeople based solely on allegations, the government should listen to their side," Malla said. "The government's efforts to end the middleman system are welcome, but it must also consider investment security and practical business concerns."
The weak investment climate has also affected the country's stock market. On Monday, the first trading day of the week, the Nepal Stock Exchange (NEPSE) index fell by 32.65 points. The benchmark index has recently remained around the 2,600-point level.
Why are investors becoming increasingly worried?
Political instability, uncertainty over government policies, administrative hurdles, weak market demand and regulatory risks are among the main reasons behind declining private sector investment in Nepal.
Following the recent floods and landslides, businesspeople have become more focused on protecting their existing investments and assets than expanding operations.
Sluggish economic activity, weak consumer demand, disputes involving industrial zones and electricity tariffs, and increased regulatory scrutiny over asset declarations and money laundering have further weakened business confidence.
Investors are increasingly concerned that businesses they establish today could face risks tomorrow because of changes in government policies, administrative decisions or legal disputes.
