The government of K P Sharma Oli has not been able to do much about improving Nepal’s economic indicators. Where did it go wrong? What is the state of our economy at the moment and what are the areas the government must focus on through the upcoming budget? Economist Biswo Poudel provided specific answers to these questions in an interview with Mahabir Paudyal and Sagar Ghimire.
Recent Nepal Rastra Bank data portrays rather bleak picture of our economy. Where did the government go wrong?
I think this government has not done worse than any previous governments of the last one decade. The regret about this government is that they are not being able to capitalize on the opportunities they have. This government came at a time when we did not have any political problems left. Economy was already in a good shape with consecutive growth rate of more than six percent. This was unprecedented in the last 30 years. So the expectation was that in the first year the government would be able to excite industrialists into investing more in the country. This did not happen. There was 27 percent growth in loans going to the industries but overall we did not see the perceptible change in the trend.
We did not get more foreign direct investment (FDI), may be because the government is led by communists and they are not able to inspire foreign investors. But communism alone is not the convincing excuse, for many communist countries in Asia have been able to convince investors. The government was not tactful in some cases, for example in their handling of Venezuela issue. Despite having two thirds majority they were not very efficient in delivering in terms of new bills. Many foreigners were expecting important economic bills would be passed by the parliament well before the investment summit. This did not happen either. The government initially did not really talk to our own industrialists for which both finance minister and industry minister are responsible. Finance Minister tried to fill some gaps but industry minister left these gaps unfulfilled.
Land acquisition act and industry enterprise development act are yet to be passed. Yes, three major acts were passed just before the investment summit but they should have passed them at least two/three months before the summit. The government had one long year before the summit. They could have done many of these things much earlier.
How exactly should this government have started on economy then?
The government should have established good rapport with domestic investors because they are the ones who can immediately invest more in their industries. They could spread good words with their partners because many of our industrialists are also traders who buy things from India and China. Unfortunately, this did not happen. Two, we should have given the message that the government wants to cut regular expenditure so that the industries can expect a lower tax in the future. We should have decreased the corporate tax, even if by two or three percent. This would send a good message. There were some outstanding issues with existing investors such as hydro power producers. The government promised them certain concessions but did not deliver on those promises. In the first year, the government should have worked to establish the credibility and given the message that it is business-friendly. Like I said, the government should have properly communicated its message with our own industries and foreigners. Instead, in its early days, it tried to be radically different from its predecessors and spread the suspicion all around including among diplomatic missions and foreign investors. Foreign workers here are facing issues like visa renewal, which could have been solved really quickly and which would have sent a very good message. The government could have set up one-stop service center, which does not take much time to set up, earlier on. This would also have generated some optimism and confidence.
Failing to spend
Some argue financial obligation in federal set up has increased multiple-fold and therefore the government could not do much. How credible do you find this explanation?
This is a good excuse and it might sound fair too but it is not convincing. We cannot always resort to excuses. We have had many years of excuses already. With federalism, the expectation was it would instead stimulate economy everywhere from the provinces to the local levels. We thought the provinces would formulate their own pro-business acts and would be pressured to deliver. This did not happen. We have not been able to spend money for the last 60 years since the budget system started. And we have found fair excuses for this too. The first year under this government was no different from all those years and the second fiscal year, it seems, won’t be any different either.
What would be the ideal time for a stable government to bring economy on track? This government has been in place for only year now.
We should not also forget that in the last 10 years, these same ruling parties were in the government. They should have drawn from their experiences as well. The standard story on performance of all projects is ‘We had to write acts and prepare directive and that’s why we could not spend the money.’ But there are around 100 ex-ministers in the ruling party and may be two third of the ex-secretaries are somehow associated with the ruling party. They could have given the government the suggestion on how the projects should have been taken forward and what the realistic expenditure target could have been. May be the experienced people are not getting the opportunities or may be the ruling party does not talk to experienced people within its own rank. Every government has the luxury of drawing on the experiences of past rulers. Every government has to do that. This government does not seem to be doing so.
Question arises: are we judging the government too early? Yes, judging the government based on its performance of only one year is not a good idea but we should also look at what the government said it would do and what it actually did, its own stated purposes and promises for the one year and how it fared. The government made some errors. For example, it set the target to increase the revenue by 37 percent within a year. That was a mistake. Our annual increase in tax was already more than 20 percent. Problem was not about raising more tax, the problem was in not being able to spend the money. They could have set the target of 25 percent, which is significantly higher than 20 percent and yet wouldn’t have sounded too bad. The government gave wrong message to the business community. And initially, it generated chaotic environment for ordinary people also. They were also made to pay excess taxes. The good news is that the growth rate last year was still above six. Thus there still is the possibility for making the situation better for future.
But how can we be sure that the six percent growth will be sustainable?
We may not be able to sustain this growth rate because the major driver of this growth was good weather and weather is always unpredictable. But there are four major irrigation projects under construction and if the government can complete those irrigation projects on time that can provide a good foundation for sustainable growth in agriculture. We may need to borrow initially a lot for our infrastructure projects from international agencies. But we should do that. When you invest in infrastructure it stimulates further growth. There are many Nepalis abroad. We did a back-of-the-envelope calculation when we were in Planning Commission. We thought may be up to five billion dollars is saved by Nepalis living abroad. Getting twenty percent of that can be a very good goal for us. If we can attract them and also start building the infrastructure and if we have a good business environment in the country, sooner or later investment will come and growth will happen. But we should avoid instability of any kind, avoid offending the investors and formulate good laws. Then we will be in right path.
But our export rate has not increased, FDI is falling and remittance is reaching the point of saturation.
On remittance, the number of people who go abroad has dropped but many of our people who went abroad were unskilled. There is a space for them to increase their income by acquiring some skills. There is a lot of demand for Nepali workers abroad and that demand is not going to fall anytime soon. So we don’t really need to worry about it for the next 10 years unless there is a major war or the destination counties face abrupt economic slowdown. Besides, our destination countries are also scattered across the world. Even if our export is not increasing may be total production within the country is increasing because we are importing a lot of machineries and equipments. As long as our total foreign loan does not increase, I don’t become very nervous about our economy. What is worrisome is the number of industries is not growing radically. We have imported equipments but the number of industries is not growing in the same proportion. Employment is not being generated either. That is worrisome.
The government is presenting budget next week and its policies and programs indicate the budget is going to be distributive. What should be the priorities of the budget?
Distributing more money cannot be the long-term strategy for country’s development. There are two things the government should do. First, they should reduce the total administrative expenditure for which we spend 85 percent of total revenue we raise. This is not good. They should try to cut administrative costs. May be some of that can be given for social protection and the rest can be used to reduce corporate tax rate. But for now raising salary of civil servants can be justifiable for their salary has not been raised for the last two years. They deserve some raise in proportion to inflation rate. Our challenge is on capital expenditure. Our problem is we cannot borrow money and we cannot spend money. Something has to be done on this front because for years, the same story is playing out. We cannot run projects on time, which is a serious problem. Countries elsewhere have been able to solve capital spending problem, we need to be able to do that as well.
One of the recurrent problems of our economy has been our inability to expedite national pride projects. Why does this happen?
That’s because we lack project management capacities to run big projects. We do not hire the best of available human resources for running the projects. We need to bring in the people who are experienced but we don’t do that. And there is lack of coordination among government agencies. Sometimes, it takes months to purchase a set of computer for office. Our bureaucratic set up is so lethargic. Bureaucrats run the government projects and they have not been efficient in doing that. We need to strengthen the capacity of our bureaucracy and make it work. Elsewhere, they bring in the best of human resources from the universities and recruit them in bureaucracy. We are not doing that. And even if we do, we cannot retain them.
Can you specifically point out which areas must the budget address? And what must not it touch on?
First, like I said earlier, the government should start reducing the recurrent expenditure and second it should try to increase the capital expenditure. It should start some signature projects such as airport and express ways. It has to give good message to the business communities. We should tell them that it’s good to invest in this country. A lot of Nepalis invest abroad. They should be encouraged to invest in Nepal. We should also strengthen our economic diplomacy with China, India and other countries.
There are things which the government should not do. It should not increase tax. If the government increases old age allowance by more than Rs 1000 it would be a disaster because the additional cost will run up to 15 billion rupees. If they increase allowance for old age people, they will have to do so for the disabled and single women as well. And the next thing the government must not do is increase the amount for constituency development program. This is not needed when provincial and local governments are functioning.
You follow international economy as well. Many say the ongoing trade-war between China and the US will lead to global recession. How will it impact Nepali economy?
Any kind of trade war is bad news not because it will necessarily lead to full-blown recession but because it will affect the people. You cannot sell goods, your purchasing power gets restricted and there will be job loss. I believe US-China trade war won’t drag on for long. They are big countries and they will eventually negotiate. But assuming that the trade war persists, since China won’t be able to export to America, China might try to dump their cheap products in Nepal. In short-term consumers will benefit for things will be cheaper but in the long run, our own industries will feel the pressure. Then the government will have to resist the dumping strategy. That said, I still believe the trade war won’t go on for very long.
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