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Despite improvements in the fiscal indicators of late, the economic growth for the current fiscal is expected to be tempered as a result of import restrictions on certain items last year along with internal and external challenges. Sangay Sherpa from The Himalayan Times caught up with World Bank's Regional Vice-President for South Asia, Martin Raiser to gain his insights into the country's current economic situation, GRID implementation in projects, and recommendations for the country in terms of forming and restructuring existing policies on its path to economic recovery and resilient growth. Excerpts:
While the World Bank had projected Nepal's economic growth of 4.1 per cent for the current fiscal in April, the National Statistic Office's estimate is sharply lower at 2.16 per cent. Can you share the WB's views on the sharp contrast and the factors for the economic slowdown seen at present? Also please share your views on the country's current economic situation.
The downgrade of the growth forecast perhaps gives the wrong impression that the economy is doing badly. Actually, I think we will see the economy recovering quite soon. What we see in the short-term indicators is an increase in tourism revenue and remittance inflows, which is going to stimulate domestic demands. The higher-than-anticipated negative impact on the economy because of credit deceleration and import restriction of specific items are reasons for the contrast between the projection of the NSO and the WB. But at the same time, tightening monetary policy was hugely successful in addressing the balance of payments (BoP) problems that Nepal was facing and managed a 10 percentage point GDP swing in the current account last year.
Last year, we were worried that Nepal was going to follow other countries in the region in a loss of reserves, increasing use of exchange rate controls, and other interventionist mechanisms. However, we are happy to say that while Nepal did use some import restrictions, which had a negative impact on growth and probably did not do much for the BoP, the country had the courage to tighten monetary policy which was not seen in other countries in the region. While the growth rate in other countries in the region may look better, Nepal has better stability and room to grow again whereas the other countries are still dealing with problems of a year ago. So I think on the whole, the situation is not bad for Nepal.
Nepal adopted the Green Resilient and Inclusive Development (GRID) approach as a national long-term vision in 2021. Can you give a brief overview of the projects the WB is working on within the country and share the achievements since?
What we are really trying to do is have the GRID approach be mainstream across everything that we do. In Nepal, the WB is working on the development of the country's hydropower potential. But at the same time, we want to do that in a way that is resilient by taking into account the impact of seismic activity and climatic events. So, the infrastructure needs to be designed in a way that is resilient and a key aspect of successful implementation in Nepal has to do with convincing the local communities that the projects are for them. To do that, we need to have an inclusive approach. The green development part cannot be done without doing the resilient and inclusive part.
The WB, in terms of road construction, tries to work with the local engineers to make sure that we take natural and environmental aspects into account which sometimes can take longer planning and also become expensive but is a critical aspect to ensure resilient infrastructure. Some of these elements can also be seen in the development of the East-West Highway connection. We are also trying to pilot a hybrid annuity model which is basically an idea that you just don't build a road but also maintain it. So what we mean by the GRID approach is trying to build something that lasts, provides local benefits and is resilient to climatic shocks.
We also need to recognise that Rome was not built in a day. The GRID approach was adopted by all the development partners as part of the Kathmandu Declaration two years ago and now the government has led in developing a strategic action plan that is supposed to help implement it.
The big challenge is the implementation and so there are five criteria in that action plan to look for and make sure that projects are ready. Multisectoral coordination and immediate readiness are some concrete examples of filters that we want to apply alongside prioritising projects that create positive synergies and activities.
As the country looks to further expand its hydro potential, what do you think are the key factors that power producers need to keep in mind for the development of sustainable projects?
So far, Nepal has been exporting over 400 MW a year to India but under an annual agreement. Of the country's capacity to produce 45,000 MW of energy, only six per cent of that potential has been fully developed so far. If Nepal wants to get that number up, people need to know where the power is going to be sold. It will need to raise some project finance and commercial finance, which will come if there is a certainty of an offtake.
Another surprising thing is that two-thirds of the total energy consumption in Nepal is biomass and the rest 20 per cent is fossil fuel. Now, here is a country that has the largest hydropower potential but it accounts for less than 10 per cent of its domestic energy consumption today and that's a huge opportunity. But, these large-scale projects will not be built only on the prospect of the domestic market but on the joint prospect of exports and the domestic market. Ultimately, the integration into a full regional power pool will be a great benefit for downstream countries because they will receive green energy from Nepal which will be pretty cheap, and competitive.
What are the WB's recommendations for Nepal in terms of forming and restructuring existing policies, and prioritising certain sectors on its path to economic recovery and resilient growth?
There are many policies that we are looking at together with the authorities. Also, we have a GRID Development Policy Credit (DPC) series that has been working towards solid waste management, environmental permitting, the use of fertilisers in agriculture, and the move towards more sustainable agricultural practices, among others. There are also several transitions that we identified in the climate change development report. Possibly one of the important ones is to move towards more resilient agriculture. Also, Nepal being one of the fastest urbanising countries in South Asia needs to have a more sustainable model of urbanisation, more disaster risk management, and better planning. If the government can provide a framework, the private sector will ultimately have to work under that framework so that activities can get in a more resilient direction. I think it is going to be a long-term endeavour but still, Nepal is the first country in South Asia to have a CCDR, the first to adopt the GRID approach in development policy, and the only country in the region where all the development partners have rallied around one development vision under the Kathmandu Declaration. While there is a lot of work to do, I am happy to see that convergence of interests.
What can Nepal do to weatherproof its economy in the fact of protracted global shocks?
On the macroeconomic side, Nepal did a reasonably good job of tightening monetary policy, which in my view was an appropriate reaction to the external shocks. However, the coordination could be improved alongside liquidity management in the financial sector, and on the fiscal policy side. As revenues are still reliant on imports, diversifying or broadening the base will make sure that fiscal policy becomes more resilient.
On the structural level, there are quite a few areas where Nepal could become more resilient. One is the financial sector which is relatively large with credit-to-GDP at 100 per cent or higher if you add the microfinance institutions. Still, Nepal has credit concentrated in already existing sectors of the economy while SMEs, small entrepreneurs, new digital entrepreneurs, and activities that could diversify economic opportunities in the country are having a hard time getting access to credit. Creating more competition in the banking sector, and encouraging the digital banking could help the economy to diversify, create more opportunities for small businesses to grow, create more employment domestically and as a result, make the economy more resilient.
Likewise, other countries have shown that when you simplify the process for investors to operate, it leads to more employment opportunities and economic growth and I am pleased to see that there is already some movement in that direction in the announced budget for the upcoming fiscal year.
Furthermore, the federalism model that Nepal has implemented is the right approach, but the resources are still concentrated in Kathmandu and the capacity of the local government to deliver to their people is very low. So, obviously, the local people don't feel that they have enough say and that their voices are being efficiently represented. I think the development partners can help by making sure that our projects are implemented in a way that takes local needs into account. Inclusion in my view is a critical aspect of strengthening the resilience of Nepal and making sure that development can happen.
