Nepal | July 16, 2020

‘Contradictory policies impede business growth and investment’

The Himalayan Times
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The government is hosting the Nepal Investment Summit on March 29 and 30 with an aim to lure foreign investors into the country. Though similar summits were held in the past and the country received investment pledges worth billions of dollars, the government failed to materialise those commitments. Against this backdrop, Sujan Dhungana of The Himalayan Times caught up with Ram Sharan Mahat, former finance minister and Nepali Congress leader, to learn about the current business and investment scenario in the country. Excerpts:

Nepali Congress leader and former finance minister Ram Sharan Mahat gives insight into current business and investment scenario in the country in a face-to-face interview in Kathmandu, on Sunday, March 10, 2019. Photo: Balkrishna Thapa Chhetri/THT

The government is hosting an investment summit at the end of this month to lure foreign investors. What is your view on the current investment environment in the country?

The investment climate in Nepal at present seems to be a bit unfavourable due to a few negative elements. A few incidents in the recent past including the bomb explosion at the project site of Arun III Hydropower Project, explosions on different towers of Ncell and a recent explosion at the residence of the president of Nepal Association of Foreign Employment Agencies, among others have raised serious concerns regarding security among the business community. Similarly, extortion activities, especially by the Netra Bikram Chand-led Communist Party of Nepal, have gripped the country while the government has not been able to control them. In fact, the government is in a dilemma on whether to take extortions as a political problem or a security problem. This shows that ‘law of the land’ is not prevailing in Nepal which will certainly discourage the business community and potential investors. Along with such security issues, corruption is increasing in the country. The quality of administrative works has declined while other administrative and procedural hassles for business have not been resolved. All these setbacks have been deteriorating the investment environment in the country. The government, instead of resolving such setbacks, is merely focused on publicity programmes and activities.

The government is introducing different new economy-related policies and is also amending existing ones targeting business growth and the investment summit. Will these steps not help lure investments?

Refinement in policies and different laws that guide businesses and investments is necessary along with the changing time and context. Nepal has policies that are favourable to investment and businesses and a high rate of foreign direct investment that the country received during the 90s’ is ample proof of that fact. However, Nepal’s inability to draw adequate foreign investments today is the result of the country’s failure to effectively implement existing policies, our failure to enhance administrative quality and lack of friendliness of the government towards investors, among others. Introducing new policies can be appropriate in some cases like opening different sectors for investment, among others. However, there are reports of contradictory provisions in different drafts of business related policies and laws that the government is formulating today. Contradictory policies impede business growth and investment. Similarly, the draft of different policies that the government is planning to formulate has excessive concentration of power at the office of the prime minister. Similarly, excessive power has been given to the Investment Board Nepal, which is chaired by the prime minister, in terms of project approval and investment approval. Likewise, haphazard taxation system introduced through the budget does not reflect an investment-friendly attitude of the government. Moreover, excessive interference of the government in the banking and financial sector has further depleted the business environment.

Despite favourable policies in hand and the government’s emphasis on making existing policies business friendly, Nepal has not been able to materialise investment pledges made in the past. Why is it so?

As I mentioned earlier, it is not the policies that are impeding adequate investments in Nepal. Before deciding to host another investment summit, the government should have undertaken an exercise to follow up on investment pledges made in the previous investment summits. The government should have first analysed why the country could not materialise commitments worth billions made by foreigners in the past and addressed such problems first. A few incidents in the
recent past including the court’s decision to seek necessary capital gains tax on the Ncell buyout deal from Ncell itself though the law clearly states that such taxes have to be paid by the seller and withdrawal of the contract by the contractor of the Melamchi Water Supply Project can leave a lasting negative impact on business, especially foreign investment. The government should have properly analysed the aforementioned cases and their impact on the business sector. Effective implementation of policies, proper spending and business friendly attitude of the government are crucial for business growth.

Low budget spending has remained a historical problem in the country. This has not only hampered the development process of various projects but is also affecting the entire economy. What is the crux of this problem?

There are a few reasons behind low capital spending in Nepal. Talking about this year in particular, a large number of projects which were approved and started in the past have been halted by the government. Hundreds of new irrigation projects, infrastructure projects and road projects remain halted at present, especially after the promulgation of the Constitution. The government should have completed all such projects initiated in the past and handed them to the sub-national (provincial and local) governments. However, the central government today has neither handed these projects to the sub-national governments as per their capacity, nor has it taken the ownership of such projects. As the government has failed to hand over such projects along with the required budget, government spending is bound to be low. Specifically, this is the major problem behind low spending of the capital budget this year. In addition to that, the country has followed the trend of announcing projects which are not ready for implementation. We started allocating budget for projects like railways and waterways whose preparatory works have not been carried out. The trend of announcing politically driven short-term populist projects without necessary preparation has also affected the capital budget spending of the country. Similarly, different projects that have been completed are also awaiting payment from the government. This is basically due to ineffective administrative system of the government. Along with this, unstable
administration with frequent changes and transfer of staffs have been hindering the project development and the capital budget spending.

Private sector has been citing the interest rate volatility as one of the major factors hindering business growth. What is your take on this?

I take interest rate volatility as a natural phenomenon. Interest rate is completely determined by the market. Interest rates come down when liquidity is high in the market while shortage of liquidity results in higher interest rate. However, the central bank should use appropriate banking tools to address the liquidity problem and ensure that interest rate does not fluctuate too much. I have heard that there is excessive intervention in the banking and financial sector and this is not a good trend. Especially, the Ministry of Finance has been interfering in the banking system by announcing that it will provide various collateral-free loans and directing banks to disburse such loans. There must be proper project appraisal for any loan to be disbursed without collateral. Such interference will increase instances of loan defaults and will not help the economy grow.

The government has recently launched two major programmes — the Social Security Scheme and the Prime Minister Employment Programme. What impact will such programmes have on the economy?

The social security programme of the government is good in principle. However, its effective implementation is subject to various problems which the government has not analysed. It is challenging to implement such programmes among small and micro-level industries. As a result, investors can be discouraged towards small and medium scale enterprises. Similarly, management of the social security fund is another challenge as we do not have any history of effective management of government-run enterprises. Most of the existing funds and enterprises run by the government are inefficiently administered and poorly managed. Likewise, the Prime Minister Employment Programme looks more like a distributive programme than a productive one. It is a populist programme. I think almost one million foreign workers are working in different sectors including the construction and manufacturing sectors in Nepal today. Against this backdrop, the government should be focused on generating skills among Nepali youths and attracting them towards manufacturing and construction sectors. Job opportunities in Nepal have been filled up by foreign workers. This is where the government should work. The government’s policy should be to substitute foreign workers. The government should understand that publicity sans performance is futile. All such programmes of the government lack substance.

Finally, how optimistic are you about the country being able to achieve eight per cent economic growth target set by the government?

Owing to some positive factors like effective power supply, good monsoon and ongoing post-earthquake reconstruction, I see the possibility of growth of up to six per cent. It is because of the same factor that the economy has been growing to this extent in recent years. However, this growth is not because of the government’s policies. However, other indicators like declining foreign investment and falling business competitiveness of the country, which are reflected in increasing trade imbalance, show that the country cannot achieve any unusual high growth rate. By stating that it will achieve eight per cent economic growth this year, the government is merely trying to influence data.

A version of this article appears in print on March 02, 2019 of The Himalayan Times.

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