Investment inefficiency can lead to ‘debt trap'

Kathmandu, July 25

Nepal should enhance its investment efficiency first before obtaining the foreign debt for mega infrastructure projects, otherwise the country could be pushed towards ‘debt trap' due to escalated cost of mega infrastructure projects, according to economist Satis Devkota.

Talking to the journalists during his visit, Devkota, who is assistant professor of economics at University of Minnesota, stated that investment inefficiency is a serious challenge facing Nepal. Nepal must invest in game-changer infrastructure projects but lacks sufficient resources. The option of obtaining debt for mega projects could be a risky strategy for Nepal, where projects are hardly ever completed on scheduled time and at estimated cost.

He cited an example of 50-megawatt Middle Marsyangdi Hydropower Project, for which the German government had provided support of 75 per cent of the estimated project cost of Rs 13 billion. However, the cost of the project overshot the estimated target to hover around Rs 54 billion. Nepal Electricity Authority (NEA), which was initially agreed to inject 25 per cent of the stake, had borne all the additional costs to develop the hydel project.

There has been a debate in the public sphere regarding availing credit from China to develop the railway connection between China and Nepal. It is a critical project to bring about paradigm shift in unilateral economic dependency with India. However, such decisions should not be taken emotionally, according to Devkota.

Nepal should bring better technologies, reform governance, introduce innovative policies, develop working culture and enhance diplomatic relations, he said.

“With same level of labour force and capital, production in Nepal would stand at 46 per cent compared to the output in India and 42.9 per cent compared to China,” said Devkota. “This means our competitiveness is low.”

Devkota suggested investing in agriculture commercialisation linking agro production and processing with tourism industry to spur growth. Contribution of the agro output in the economy is 34 per cent. Currently, agriculture sector growth is 3.12 per cent. If the agriculture sector growth is increased by 5.12 per cent, the sector will create multiplier effects in non-agriculture sector, he said.

Devkota also stressed on inclusive and broad-based development to move towards the road to prosperity as envisioned by the government.