The government recently unveiled a ‘white paper' on the current economic scenario, which paints a bleak picture of the economy. The government's policy, programmes and budgeting will be harmonised to address the challenges highlighted by the white paper. The white paper talks about addressing the structural bottlenecks of the economy, which are low productivity, unsustainable growing trade deficit, inefficient use of public money, low growth and high inflation, among others. Minister for Finance Yubaraj Khatiwada spoke to Pushpa Raj Acharya of The Himalayan Times, on how the government will cope with these obstacles that have been hindering high, inclusive and sustainable economic growth. Excerpts:

The white paper has revealed a rather pessimistic scenario of the Nepali economy and has sought some structural transformations. What could be the option for the government?

A white paper generally talks about structural bottlenecks of the economy, particularly, on the structure of investment that includes public, private and foreign investment. It talks about consumption structure, which is based on imported goods and services. What it means in terms of stability of the economy is that we have become import intensive and are perpetually facing balance of payments deficit. Without proper economic stability, we cannot find a ground for a sustained high economic growth. Secondly, without productive investment, which is efficient and based on more domestic resources, we cannot reduce trade deficit. The white paper we released highlights that we need structural transformation in investment, production and consumption as well. It also mentions about the vicious cycle of more remittance being needed to finance imports at a time when remittance growth has almost stagnated. Unless there are alternative means of financing, there is a risk that we might underfinance our imports causing a depletion of our foreign exchange reserves. That’s a worry I put in the white paper.

While talking about production sector-led economic growth, availability of resources is very low in those sectors that are supposed to lead our economy. Not only public investment, even private financial sector is not enthusiastic to finance these sectors. What is your plan to ensure financing in productive sector?

When I was appointed the central bank governor in 2010, the total share of loans in agriculture and hydro electricity in the total loan portfolio of banks was less than three per cent. Now it is 15 per cent which is a five-fold jump, and it is significant compared to the base. But I do agree that it is not sufficient as those are the two sectors that drive our economy. If we add tourism to that, these three sectors must drive our economic growth. We must spend more of our bank credit on these three areas. Having said that we also have to be mindful about the bank’s portfolio and their liabilities as their sources of funds are short-term in nature. Thus, they cannot lend for long term. Hydropower and tourism require long-term financing. Even if banks have money there is the portfolio mismatch issue. In agriculture, lending is not the only issue. There is also an issue of risk management — crop insurance, proper marketing channels, basic infrastructure and the extension service. They should all be put together.

There has been consistent loan growth of above 20 per cent but it does not correlate with economic growth. Why is it so?

Credit growth is consistently growing by more than 20 per cent. But if we look at our growth pattern there is no correlation.  Our growth pattern is like a seesaw.  Credit growth is not related to the real production even outside of agriculture. We can have a detailed analysis on it. By looking at the nature of investment and the report that central bank publishes through its current economic scenario, we are getting the impression that credit is not properly used in the productive areas it was intended to. This means we could have better allocation of resources in productive areas. And the nature of imports we see today is very revealing. We are investing more on consumption goods rather than capital goods. My intention as central bank governor too was to orient bank loans towards more productive sectors instead of less productive areas. Investments in productive areas create more jobs and income, and also reduce imports. That would justify any increase in the flow of credit. Even if credit growth is 30 per cent it should not be a cause of concern as in a growing economy like ours we require more credit. However, we must assure that credit goes to productive areas.

The white paper has laid emphasis on development of productive sector. If we look at the contribution of manufacturing sector to GDP it is declining. Do you still see prospects of industrialisation and will our domestic products be able to compete with cheaper imports?

We still have scope of promoting import substituting industries. We have been facing some challenges but looking at our cement industry we have proved that we can substitute imports. I believe we can also be competitive in sugar. We can also compete in some other construction materials like iron rods. Basically, we should first look into substituting imports and after that we need to look into revival of some export oriented industries like garments, carpets and handicrafts including pashmina. We need to make those products that can be exported at a larger scale more competitive. We are also ready to review our subsidy regime on exports. We do not expect rapid industrialisation at present but we want to stop process of deindustrialisation and gradually raise share of manufacturing to GDP through import substituting industries and export based industries.

What could be the opportunities and challenges of the fourth industrial revolution for Nepal?

The fourth industrial revolution talks about artificial intelligence. It is the beginning of interface/interaction among physical, digital and biological substances and the fifth revolution would be a realisation of the same. We are talking about robotics, chauffeur-less driving, and the internet of things. This is basically a digital revolution. The digital revolution obviously affects our industrial relations. There is no kind of exploitational relation between labour and capital. Technology is now the driving force for labour and capital. The technological revolution means that there is a growing risk of a large number of population being unemployed. This will create a lot of inequalities among labour market positions. People have the knowledge but not sufficient enough to cope with technological challenges. I think this is the era where we have to match the demand created by technology and the kind of human resources we are creating. The transformation process does not work for Nepal because we jumped from agriculture to services without entering into the heavy manufacturing sector. We are already a service driven economy. The case of deindustrialisation is also related to the structural transformation from agriculture to services by bypassing the manufacturing sector.

The white paper stated trade deficit will rise in the short term as we will be importing capital goods to boost production sector. Depletion of foreign exchange reserves is also a concern highlighted by the white paper. How can we finance our imports in such a situation?

We must link our production to our domestic resource base to reduce the import intensity of the productive sectors. Take an example of tourism. We are importing 80 to 90 per cent of the consumable goods but most of the things can be produced in the country. We can promote organic agriculture and supply food items to the hotels. Handicrafts and other products that tourists buy can also be domestically made. Employees can also be recruited from among our own human resources. So, we need to look into how we can link these with domestic producers. We can reduce the import of associated things in construction too by using domestic materials like cement. Companies are not using domestic cement and rods. And the argument is always about quality and quantity but we can readily address these issues. Self-reliance in agricultural products will also save us money. As we are importing chemical fertilisers to increase agro production, we can produce organic manure, which will also help in organic farming. We also have to bring changes in consumption pattern. Though it is a behavioural issue we must bring certain changes in our daily life. The craze for imported goods should not be our behaviour. It is about backward linkages to our own resource base, new designs, new structures of production and new thinking of production.

The previous governments claimed that they had provided tax incentives to productive sector to protect domestic industries but white paper has questioned the rationale of tax incentives. In this context where will the money come from to subsidise the productive sector?

I am not talking about subsidising them absolutely; it is about cross-subsidising. For instance, we can tax other sectors that are making more profit and subsidise agriculture. We can tax the goods imported for consumption and subsidise exports. This is basically cross-subsidisation. Any government’s policy of subsidy means there is cross-subsidy and revenue exemption is also a kind of cross-subsidisation. In one of the programmes of the business community they demanded for 15 per cent cash subsidy and then I asked them to pay 15 per cent more revenue on their imports. The government is a manager. It cannot create more money. We collect taxes from those who make profit and cross-subsidise those industries and businesses that are not competitive but create jobs. This is kind of fiscal management using the fiscal tools. Through this we want to be assured that we do not  do anything which is not sustainable as subsidises have often been disproportionate. First we should be careful that we do not create distortion in terms of competitiveness. We should be careful not to overly protect any one kind of sector but if they are strategically important like for health security, food security and environmental security, then we have to cross-subsidise them.

Critics have said that the white paper is like a ‘criticism of the past’. What is your take on this?

It is not criticism. It is a self-assessment of the present situation. We want everybody to know where we stand and that only can shape our future course of actions. White papers are only for showing where we are or the current status of the economy. From now onward, the government’s policies, programmes, budget and every action we do should be based on the problems we have highlighted. We have also provided an indicative roadmap and we need to work in that direction. In the next couple of months, we will be able to witness more actions to address those things.

How do you plan to stop the fiscal anarchy that the white paper has stated?

We cannot retrofit everything. From now on, we will try to restore confidence and discipline. The taxpayer should feel confident that they are paying taxes for the right kind of allocations. We do not want budget to be a dynamic process where you are making programmes all round the year. We will have a budget once in a year, which is towards end of May. If we need more programmes, then we will require a supplementary budget. You cannot have a budget framed haphazardly on a monthly basis as was seen in the past. Budgeted programmes were not implemented and new programmes started coming in. In this manner unlimited liability was created and that is what I put in the white paper. We should stop that. We have protected our fiscal system in the last 25 years by adhering to that discipline. It is not that there was no fiscal discipline at all in the past but situation was deteriorating and we are worried about that.