What’s holding back Nepal’s economic growth?

The problem lies in the government’s inability to prepare concrete and well-thought-out project plans. - Kenichi Yokoyama, Country Director (Nepal) of Asian Development Bank

Kathmandu, June 22

A three-member delegation headed by Finance Secretary Lok Darshan Regmi left for Beijing today to take part in the board and annual meetings of the China-led Asian Infrastructure Investment Bank (AIIB).

Nepali officials attend meetings of this type largely for the sake of formality. Yet, their participation cannot be discounted as unnecessary because real benefits can be reaped if officials hold meaningful talks with prominent personalities on the sidelines of such events.

The Nepali delegation that has left for China is also planning to meet with top AIIB officials when formal meetings are not taking place.

This means Nepal can use the sideline meetings as platforms to seek concessional loans from the AIIB — which has authorised capital stock of $100 billion — to finance construction of physical infrastructure crucial for economic development.

Identification issues

But unfortunately this is not likely to happen this time because ‘we have not been able to identify projects’, a senior official of the Ministry of Finance (MoF) told The Himalayan Times on condition of anonymity.

This is where the problem lies.

Every government that comes to power always talks about unleashing Nepal’s potential to achieve high economic growth rate and share prosperity. They also chatter about building critical physical infrastructure to unlock private investment, and making poverty and chronic power-cuts a history.

Yet, Nepal has neither been able to remove key binding constraints to investment nor rekindle growth.

“The problem lies in the government’s inability to prepare concrete and well-thought-out project plans. Because of this, Nepal lacks ready-to-implement projects. This is the reason why the government has not been able to make proper use of funds pledged by development partners,” Country Director (Nepal) of the Asian Development Bank (ADB) Kenichi Yokoyama told THT. “This calls for the need to create a project bank, which can keep good stock of detailed reports of projects considered critical for Nepal’s economic development.”

Long lists

On the surface, it appears the country has numerous ready-to-build projects at hand. Many hold this perception because most of the ministers and government officials produce a list of projects when asked to name one.

But such lists are prepared on the basis of hearsay or after holding discussions at superficial level. What is even more surprising is that the projects mentioned in these lists are later incorporated in the fiscal policy.

This is where the problems begin.

Since most of the projects are included in the budget without conducting proper homework, the first thing the government does is conduct a feasibility study.

If things move smoothly, these studies can be completed in a year. But feasibility study alone is not enough to begin construction of a project. A detailed project report (DPR) also needs to be prepared, which generally takes another one year.

This is the reason why most of the new projects announced through the budget are never implemented in the same year because it takes at least two years to conduct feasibility study and prepare DPR. But in many cases, this process of conducting feasibility study or preparing DPR comes to a halt mid-way because of change in government or other problems.

Capex crisis

All these reasons ultimately hit capital spending of government.

Capital expenditure — or investment in land, building, furniture and fittings, vehicles, plants, machinery and civil works, which helps in capital formation process — has always remained low in the country, because the cycle of incorporating half-baked projects in the budget or terminating studies mid-way has been repeating for years.

And this fiscal is no exception.

Capital spending is likely to take a big hit this financial year because the government has only been able to use 30 per cent of the total allocated budget of Rs 208.9 billion so far.

Since only around 20 days are remaining for the current financial year to end, a huge chunk of capital budget is unlikely to be spent. No wonder, economic growth is likely to be squeezed to 0.8 per cent in the current fiscal.

“To keep capital spending at a higher level, the government must come up with concrete investment plan for at least 15 years. This plan must be backed by DPRs of crucial projects,” Yokoyama said, adding, “We are ready to assist the government in this process if there is need.”

No dearth of support

Like the ADB, many other development partners are willing to extend support to Nepal. But even if they extend funds, the government is unlikely to have the capacity to utilise the money because it does not have ready-to-implement projects.

This is one of the reasons why Nepal, so far, has not been able to make use of line of credit of $1 billion extended by India during Indian Premier Narendra Modi’s visit to Kathmandu in November 2014.

“We are now thinking of using credit of $550 million at the moment and demanding the remaining $450 million at a later date when we identify enough implementable projects,” another senior MoF official said.

This statement sounds weird because Nepal should be asking for more of concessional loans from development partners at the moment, as the World Bank has said the country needs to invest up to $18 billion in infrastructure projects, especially energy and transport, by 2020 to avoid possible binding constraint on economic growth.