Despite the many problems Nepal faces, if the government is sincere about reforms, there is room for improving the economy
The CPN UML-led government, with support from the largest party, the Nepali Congress, was formed in August with three main objectives: amendment of the constitution for political stability, strengthening governance and reforming the economy. Regarding constitution amendment, no effort has been made so far. Similarly, instead of strengthening governance, it has been weakened further. On the economic front, only an Economic Reform Suggestion Commission (ERSC) has been formed. It seems that the government's economic reforms were not a priority during its honeymoon period. This article analyses the growing economic problems and thereby provide concrete suggestions to improve the economy.
Prime Minister Oli after the formation of this government had presented the economic situation as a severe crisis in the parliament. Nevertheless, in the name of addressing it, no concrete reform measures have so far been made except for the formation of the ERSC. The expansionary monetary policy recently announced should have been brought two years ago to address the adverse impact of COVID. It has tried to enhance investment by increasing credit, but due to lack of an investment environment, an excess liquidity crisis has created further problems for the economy.
Despite the increase in tourist numbers, tourism expenditure has been disappointing, imports, exports and foreign investment are declining, public debt is reaching a dangerous situation of about 50 per cent of GDP, there are abnormal fluctuations in the capital market, and only about 9 per cent of the capital expenditure has been spent in the first quarter of this FY. Low cooperative activities and problem-oriented microfinance have seriously affected economic activities. The recent loss of about Rs 16 billion (government estimates) and its multiplier effects have further hurt the economy. On the other hand, there are long-term contagious problems, low savings and investment, low consumption, low economic growth, low employment, policy instability, very weak good governance and a discouraged private sector that contributes 80 per cent to the economy.
However, instead of solving these problems, more have been added. However, the government claims, without any strong statistical base, that the economy has improved dramatically during the honeymoon period. In fact, neither the economy has been completely restored from the COVID impact nor the economy improved from the previous situation. Still Nepal is not serious to learn from the alarming events of Sri Lanka, Pakistan or Bangladesh.
Despite these problems, if the government is sincere about reforms, there is room for improving the economy. Recent positive developments have been observed across several key sectors, including agriculture, energy and tourism. Additionally, the macroeconomic production and supply side indicators have shown encouraging trends, reflecting growth and stability. But the aggregate consumption and demand side seems to be quite depressing due to slackness in investment and consumption.
Nevertheless, the economy could improve if the government cut down on its own expenditure and pursued exemplary reforms. Given the critical state of the economy, the approach of the commission formed two months ago appears to be more procedural than proactive. Rather than offering immediate, actionable recommendations for urgent implementation, it seems to be merely presenting its report in a customary manner.
In order to move the economy effectively and improve service delivery to the people, the government needs to implement four major tasks without delay.
• Steps to keep the economy moving: The government must settle all outstanding dues, estimated at around Rs 90 billion, to the construction industry, milk and sugarcane farmers, as well as for export subsidy and agricultural loan subsidy. In addition, the problems faced by the cooperative victims should be addressed by setting up a separate regulatory body. Similarly, an attractive investment climate must be created by removing all obstacles.
2. Reduction of expenditure and import control: First of all, the federal government itself needs to set up an example by introducing reform actions immediately for one year. The reforms should include withdrawal/reduction of different allowances, secretariat expenses, including some reduction in salary. These cuts should be followed by provincial and local governments. Other expenditure cuts can be made on foreign visits, official parties, meeting allowances of government offices and public enterprises. There should be control on import-oriented current expenditure and ban on import of luxury cars and goods. Once the government sets an example, it will encourage the people to increase investment by reducing their consumption.
• Introduction of other reforms include enhancing government services to the public, promoting tourism and information technology (IT), and advancing the development of Special Economic Zones (SEZs). Additionally, strengthening revenue collection, improving border administration, and effectively mobilising the growing foreign exchange reserves for development are essential steps to drive sustainable economic growth.
4. Consensus on economic agenda with policy stability. But so far no such consensus has been reached except on political issues. The current government with two major parties should thus reach an all-party consensus on this. This agenda should include a) stability with some reforms in economic liberalisation and privatisation policy; b) rationalisation of increasing social security expenditure; g) about 50 per cent cut in the expenditure as recommended by the Public Expenditure Review Commission; d) setting stringent criteria to increase capital expenditure; e) making trade union law investment-friendly; and e) building reservoir-based national hydro projects.
Karki is an economist