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The International Monetary Fund (IMF) and the World Bank Group have recently concluded their 2020 spring meetings, held in virtual format and mostly focused on the coronavirus pandemic’s impact. The global bodies urged countries to protect poor and vulnerable groups, and minimize economic and social impacts through fiscal, monetary, and financing measures. The IMF also announced debt relief for 25 countries including Nepal. Pushpa Raj Acharya of The Annapurna Express had a virtual conversation with Catherine Pattillo, the IMF’s Assistant Director to the Fiscal Affairs Department. She is also the chief of the Fiscal Policy and Surveillance Division.

The IMF has been tracking fiscal policies of various countries adapted in response to Covid-19. Which measures can countries adopt?

The objective of fiscal policy in responding to the Covid-19 pandemic is to save lives and livelihoods. Countries need to provide resources to health systems, provide emergency lifelines to households to meet basic needs, and to firms to preserve employment and wages. They need to maintain capacity that will be crucial for recovery. Protecting people from losing jobs and incomes, and viable companies from bankruptcy, will help prevent this pandemic from imposing long-lasting damage to the economy. These are not a conventional fiscal “stimulus” but rather vital emergency lifelines. 

Effective fiscal measures are those that deploy limited resources efficiently, and in a targeted, temporary, and transparent way. The April 2020 Fiscal Monitor surveys these measures. But let me provide a few examples here. 

Existing social safety nets were expanded and coverage was improved not only in advanced economies such as Germany and the US, but also in Indonesia and Senegal. Not all countries have strong social safety nets. Countries should use what is available. There are good examples everywhere. India and Kenya have used unique identification systems and digital technologies to provide cash transfers. In Bangladesh, the focus has been on in-kind provision of food and medicine.

Temporary wage subsidies, transfers to workers and firms, and paid sick and family leave are important instruments as well. They support those who are unwell and provide them incentives to self-isolate, stay at home, and take care of children. Several countries like Denmark, Korea, and Singapore have expanded these benefits.
 
Tax payment deferrals, tax filing extensions, and loans and loan guarantees provide liquidity support to cash-strapped businesses, especially in hard-hit sectors such as transport, tourism, and hospitality. The same applies to SMEs and micro businesses. These measures have been put to good use in China, Korea, Thailand, the UK, and Vietnam.

Low-income countries like Nepal have less fiscal space. How can they use their resources to expedite economic recovery after Covid-19?
 
The first priority is to save lives by fully accommodating additional health and emergency services. Countries with less fiscal space can reprioritize spending toward the health sector while safeguarding other priority social spending and vital public services. 

Second, governments need to provide temporary and targeted emergency lifelines to protect livelihoods. Direct cash transfers or in-kind provision of food and medicines are possible options. As the pandemic abates and the shutdowns end, fiscal policy can facilitate the recovery in order to achieve sustainable and inclusive growth, subject to financing constraints.

Low-income developing economies typically have less room in the budget to respond. Global efforts should support countries with less capacity, including through aid, medical resources, and concessional emergency financing. The IMF is responding rapidly to a record number of requests for financing. We have recently doubled the access limits of the IMF’s emergency financing facilities, provided through the Rapid Financing Instrument and Rapid Credit Facility. The latter is specifically for low-income developing countries.

Nepal’s relatively low debt-to-GDP ratio provides some room for policy action. In this context, the authorities should continue to actively seek additional budget financing from our development partners to support their Covid-19 response efforts. The IMF has already provided an up-front grant to pay off upcoming debt service to the Fund. We are processing the request for financing under the Rapid Credit Facility. 

What sort of fiscal stimulus would you like to recommend to Nepal?

Covid-19 is severely impacting growth in Nepal, mainly through a decline in remittances from countries in the Persian Gulf, India, and Malaysia. There has also been a contraction in tourism as well as a drop in domestic activities because of the nationwide lockdown. 

As in other countries, the immediate priority is to deal with the human and economic impact of the Covid-19 pandemic. It is important to increase health spending, strengthen social assistance, ensure adequate liquidity to the banking system, and support access to credit. The authorities are already taking these steps. 
Once the pandemic fades, it will be critical to implement a policy agenda that promotes inclusive growth while preserving financial sector and external stability as well as fiscal sustainability. A cornerstone of the agenda will be to strengthen the investment climate in Nepal. This includes implementing structural reforms that encourage high-quality public- and private-sector investment projects, in particular FDI.

The IMF has provided debt relief to 25 countries including Nepal. Do you recommend other donors do the same? 

Low-income developing countries are likely to be hit the hardest by the pandemic. Containment measures represent great disruption to economic activity and people’s lives. It will require significant emergency lifelines. Most countries, however, have very limited resources to respond. Thus, it is necessary for the international community to mobilize financial means—for example, in the form of grants and concessional loans—but also health workers, medical equipment, and supplies. 

The debt service relief provided by the IMF to 25 countries through the Catastrophe Containment and Relief Trust (or CCRT), by freeing up resources that would have otherwise been used to service debt, will help the poorest of our members to use any available resources towards vital medical needs and other emergency relief efforts. Nepal was among the group of countries to obtain this debt relief.

And on April 15, the G20 endorsed the earlier call by IMF Managing Director Georgieva and World Bank President David Malpass that bilateral creditors temporarily suspend debt service obligations for the poorest countries. More, however, is needed. A parallel initiative by private creditors would be welcomed. As IMF Fiscal Affairs Director Vitor Gaspar has said, a health emergency is a call for unity and solidarity both within and among countries.

Do you think fiscal policy should further reinforce healthcare?

Ensuring all necessary health resources are available to save lives should be the number one priority. This requires fully accommodating additional spending on health and emergency services, irrespective of fiscal space or debt positions. Governments should plan carefully to allocate increased health spending to areas that are most effective at managing any virus outbreak and identify activities that are necessary to monitor, contain, and mitigate the health impact. And as noted above, the international community should robustly support countries with limited health capacity.

How can a country harness its demographic dividend for development before its old-age population starts outgrowing working-age population? 

Nepal is currently benefiting from a demographic dividend. Its working-age population is expected to continue growing strongly through about 2025. To better harness the demographic dividend, the private sector must play a larger role in driving economic activity, and creating quality jobs. To provide a supporting environment for private investment, and to attract foreign direct investment, reforms are needed to address important gaps in the size and quality of the infrastructure network as well as streamline regulations and bureaucratic processes.

What sort of adjustments in fiscal policy is required after the corona crisis is over?

The Covid-19 pandemic underscores the need to adopt, over time, broader enhancements to tax and expenditure policies that reduce vulnerabilities and boost medium-term growth. Improving social insurance schemes and safety nets can help protect people in the face of this pandemic and future adverse shocks. Investing for the future—health care systems, education, and infrastructure—remains an important priority so that countries can make progress toward their Sustainable Development Goals. Putting these plans in a comprehensive medium-term fiscal framework is important. Once economies recover, we need to ensure progress on ensuring debt sustainability. 

How will the IMF support countries in the next phase, if the crisis prolongs?

To address ongoing needs of the countries, the IMF has $1 trillion in lending capacity. As noted above, emergency financing, other concessional financing, and debt relief for the poorest countries will substantially help them respond to this crisis.

The IMF’s policy advice and capacity development support to countries is also responding rapidly and adapting to evolving realities. We are producing a series of notes on different fiscal policy and management measures to respond to the Covid-19 crises, which you can see on the IMF website. Our Fiscal Monitor has included granular details on the types of fiscal measures selected countries are taking. We are developing new initiatives to deliver country-specific, granular “virtual” capacity development support on revenue (tax policy and administration) and spending (public financial management and expenditure policy) challenges that countries are facing during this crisis.

The Executive Board of the International Monetary Fund (IMF) has approved the proposal of providing debt relief to 25 countries including Nepal in light of the coronavirus pandemic.

Issuing a statement on April 14, Kristalina Georgieva, IMF Managing Director, said the debt relief for low-income countries would help them cope with the Covid-19 crisis.

In view of the severe setback to the global economy, the Bretton Woods twins— the World Bank and the IMF—are in a virtual spring meeting to gauge the magnitude of loss and prescribe fiscal and monetary stimulus to hard-hit countries.

“Today, I am pleased to say that our Executive Board approved immediate debt service relief to 25 of the IMF’s member countries under the IMF’s revamped Catastrophe Containment and Relief Trust (CCRT),” the statement quoted Georgieva as saying. “This provides grants to our poorest and most vulnerable members to cover their IMF debt obligations for an initial phase over the next six months and will help them channel more of their scarce financial resources towards vital emergency medical and other relief efforts.”

The CCRT can currently provide about $500 million in grant-based debt service relief, including the recent $185 million pledge by the UK and $100 million provided by Japan as immediately available resources. Others, including China and the Netherlands, are also stepping forward with important contributions. Reportedly, the IMF MD has urged other donors to help IMF replenish the Trust’s resources and boost the fund’s ability to provide debt service relief for two years to its poorest member countries.

Apart from Nepal, Afghanistan, Benin, Burkina Faso, Central African Republic, Chad, Comoros, Congo, D.R., The Gambia, Guinea, Guinea-Bissau, Haiti, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, São Tomé and Príncipe, Sierra Leone, Solomon Islands, Tajikistan, Togo, and Yemen were chosen for debt relief. 

Nepal’s economy has been battered by the novel coronavirus. Hotel occupancy is under 15 percent in this major tourist season, supply chains have been affected, all major construction contracts with Chinese contractors have been delayed. The government has also cancelled on-arrival visas for eight corona-hit countries and people are scared to go to restaurants, department stores and multiplexes. 

The global progression of coronavirus is still uncertain even as the fear that it could tip the global economy into recession rises. Against this backdrop, Nepal has done little to sustain its industries, businesses and to retain jobs.

Currently, over Rs 200 billion remains unspent in government treasury. But just a few days ago, the government got $29 million in grant from the World Bank Group to cope with coronavirus. This support will be spent to strengthen health services and primary health care, bolster disease monitoring and reporting, train frontline health workers, encourage community engagement to maintain public trust, and improve access to treatment for poorest patients. The International Finance Corporation (IFC), the World Bank Group’s private sector arm, says it is ready to support the private sector’s continued operation and job-retention. Another multilateral development partner, Asian Development Bank, also pledged sufficient financing for the recovery of private sector.

But the government has neither asked for subsidized credit with development partners nor has it announced any stimulus package for the private sector.

Finance Minister Yubaraj Khatiwada says the first priority is to smoothen supply chains, and control black-marketing and other ill-practices in the market. “In the next step, the government will address the severely hit sectors after studying the magnitude of their loss,” the finance minister says. “The government will definitely rescue any vital sector from a total collapse.” But he did not elaborate how the government was going to support the private sector.

The hospitality and airlines sectors have asked the government for loan-restructuring with add-on interest method (combining the principal amount borrowed and interest for the certain period), rescheduling loan repayment for at least for a year.

Domestic airlines operators are already witnessing sharp decline in the number of foreign and domestic passengers. Yograj Sharma Kadel, spokesperson of the Airlines Operators Association of Nepal (AOAN), says booking cancellations and decline in numbers of passengers have resulted in almost Rs 4 billion in losses to the domestic airlines business in past two months.   

Nepal Rastra Bank (NRB) says it is flexible on one-time loan rescheduling and restructuring for corona-hit businesses. This provision is also mentioned in the bank’s half-yearly review of the monetary policy. Gunakar Bhatta, NRB Executive Director, says the central bank will also provide concessional finance worth Rs 22 billion to severely affected sectors from the bank’s refinancing window, albeit it will take another month for these provisios to come into effect.

The World Bank Group has been supporting Nepal in multiple areas including infrastructure development, public finance management, human resource development and others. The Bank currently has 16 IDA-supported projects with a total commitment of $2.23 billion. Pushpa Raj Acharya of APEX caught up with Faris H. Hadad-Zervos, World Bank Country Manager for Nepal, to learn about the Bank's partnership with the government, its efforts in promoting economic growth, and suggestions for attracting FDI, among others. Excerpts:

The World Bank Group has projected 6.5 percent growth for this fiscal. Looking at the scenario till mid-term of the current fiscal, are you still upbeat about high growth?

In terms of the World Bank's analysis, the growth continues to be strong in this fiscal. In last fiscal, we have witnessed 7.1 percent growth. We are expecting 6.5 percent growth in current fiscal. Obviously, there are lots of things that have been happening over the recent period. Global growth estimate is concerned with the current global health issue. It may impact tourism, trade, and industrial sector across the globe. We have to see how it plays out. These are the things that are exogenous, they are beyond the control of Nepal. Nepal can take policy actions to maximize growth. In view of the situation, we see growth in Nepal is driven by agriculture and services sector. We see there is a lot of work happening on the fiscal side to expand the sources of growth. There have been efforts which need to continue to bring private sector investment. We are optimistic that growth remains strong.

You mean Nepal will achieve sound growth not only in this fiscal but also in the medium-term as the World Bank has predicted before?

Over the medium term, we expect average growth to be around 6.5 percent. Growth will be driven by services. We are hoping and we continue to hope that the tourism sector is going to be important. Visit Nepal 2020, which the World Bank is supporting, is an important initiative. We are very optimistic that the global health issue will not take a toll on this. Nepal is doing a lot of things to increase tourism and it should pay off. We expect that growth continues to be robust. Irrespective of what happens, this remains a window of opportunity for Nepal to continue deep reforms particularly to bring private investment and help them with infrastructure and creating jobs in the country.

Slowdown in tourist inflow from China along with coronavirus (COVID-19) outbreak, slump in paddy production, and deteriorating private investment are considered major factors affecting growth in this fiscal. In view of this situation, how can we be optimistic?

The storyline for Nepal's development is: Nepal has to diversify its base. We did have good monsoon last year and remittances are being transformed into productive use. We have long been saying that remittances should not just fuel imports, they should also fuel investment in the country. We also talked about the importance of congenial environment for FDI that creates jobs in different sectors. Similarly, scaling-up tourism will continually help to get large number of tourists. It's not only about the number of tourists, but how much they spend is important. The country is developing other forms of services and to enhance Nepal's export potential. Before the recent dialogue on coronavirus, there was a lot of discussion on how to enhance productivity in Nepal and increase exports. Currently, there is some concern on global economy and tourism. In fact, it’s a pressing issue now. The dominant strategy is to look at other sources to diversify economy. We can expect that tourism can go up or down in a particular year due to various circumstances but the policy should be consistent. We are upbeat with the efforts to diversify economy. We have seen major foreign direct investment (FDI) transaction in Upper Trishuli-1. The 216-megawatt power plant is a large-scale FDI. Such large-scale investment is important. But Nepal’s economic salvation comes from small and medium enterprises (SMEs), not just these big foreign-investments.

Do you believe that the FDI threshold should be minimized?

Absolutely. The minimum threshold of US $500,000 prevents the entry of FDI where it is most needed: the SMEs. This sector needs both financial and technical input from other countries.

Let's look at the economy of China and India, where the situation is 'precarious'. How does it affect Nepal’s economy?

The world is interconnected. Nepal is not only connected with its neighbors, but also with the source market from where remittances come: the GCC (Gulf Cooperation Council) and Malaysia. Due to this interconnectivity, Nepal is likely to see some effect. The thing about the economic solution is 'irrespective'. People and nation work not only when you are in good situation, they work even more when you are in a 'precarious situation'. Nepal will continue to work well. But diversification is important. It comes down to the ability of Nepali to be able to engage investors, including non-Nepalis, across different sectors. It is very common in a deep economy to have various sectors. Often, we talk about advanced economies: let's take the example of Germany. When we talk about Germany, people automatically start thinking about Mercedes Benz and large-scale industries. But very few people recognize that Germany is propelled largely by SMEs and that is the heart and soul of the German economy. I think focusing also on SMEs, giving them opportunities—access to finance, access international investment and expertise—is going to be very critical for Nepal.

While talking about attracting investment, the Ease of Doing Business Report, 2020 of the World Bank ranks Nepal in the first half of the countries, which have better business environment. How can Nepal capitalize on this improved ranking?

What Nepal has done last year to improve its ranking from 110^th to 94^th was quite positive and extraordinary. It was actually a record for Nepal to have some considerable policy reforms. Nepal has not any record of policy reform in the history of doing business in facilitating construction permits, ease in getting credits, trading across borders, and enforcing contracts. Whoever has worked on it should be congratulated. Nepal has entered into a healthy Doing Business race and is competing for foreign investment. To compete, the country has to be ahead of the game. Nepal has now moved to the top 94, but there is still a lot to go. To move up the ranking this year too, Nepal has started new set of policy reforms. The trick with the Doing Business is: Once the country starts moving up, moving down is not an option. So, the trick is how to continue being upgraded. There are other 93 countries ahead of Nepal that are competing to retain their positions. Nepal has very positive story and it has made re-strike. But that does not matter when it comes to foreign investment. Foreign investors look at Nepal vis-à-vis other countries. I used to be the country manager of Malaysia before, which is in the top 20. I had also worked in the same region, Singapore, which is the most competent country. Private sector investors are demanding more reforms there, despite being in the top rank. This is why reform is a continuous process. It never ends.

Nepal has achieved an average of 4.5 percent growth in the last decade. Since the promulgation of constitution, Nepal has a new structure and there is a stable government in place. This is considered opportune time for Nepal to overcome the structural constraints of the economy to move forward. What would you like to suggest how the country can capitalize this situation?

Nepal has a democratically-elected government, and the people of Nepal are in search of their economic destiny. It is not for the World Bank to tell them. We would like to offer advice from our experience or what we learned from working in different countries. The main story is to create an environment in Nepal where Nepalis can self-realize their economic ambition for growth and share prosperity of the country. I know this sounds little philosophical but it is very important. Nepal should create a situation where Nepalis with ideas can access resources and infrastructure. They need to be able finance the ideas. By tapping international expertise, well-trained and capable Nepalis can actually fulfill the idea. The major objective of the economic policy should be to create an equal level-playing field. Rules of the game should be predictable and transparent, allowing young Nepali women and men to achieve their goals. Once you create an ecosystem, it will take care of itself. This is what international experience has shown. Now there is an opportunity to make growth in Nepal that is not only driven by the central valley but actually through the seven corners of the country. Nepal has an ability to reset or reboot the system, even the Karnali, Sudurpaschim, Gandaki or Bagmati or wherever people have access to the same opportunity. 

Absorption capacity of foreign aid is another long-time debate in Nepal. Utilization of net available funding from the multilateral development partners is critical to bridge yawning infrastructure gap. Do you think that low absorption capacity reflects the inefficiency of project execution?

The government's absorptive capacity for public investment is certainly critical priority. The government will be the first entity that can tell about things to focus. This is not only an issue of spending money, it is also an issue of providing services to the population. If you don't do the project, you are not achieving your development objective. Having said that, we have witnessed improvement in disbursement ratio of bank-financed projects. Despite that, there needs to be considerable acceleration on this. For delivery, the government should provide incentives. High turnover of project chiefs results in lack of action. The government should make the project officials accountable through incentives.

Secondly, it is important to look at the public procurement regulation. We have seen series of revisions in this fiscal. To really look deeply into the public procurement regulation that actually tackles the issue of incentives of both the public and private sector.

Recently, the World Bank Group has approved credit worth of $120 million for the YETI project. There is widespread impression that it is revamped version of Prime Minister Employment Program (PMEP). The program was already controversial for their last-minute spending at the fiscal end. How would you like to assure that the fund will not be misused?

The YETI project stands for Youth Employment Transformation Initiative, the title itself tells what this project is and what it is not. This project is being led by the Ministry of Labor, Employment, and Social Security. The project itself was set up to work closely with various initiatives including Prime Minister Employment Program (PMEP) and others. The YETI project is about creating management information system. It is not about job creation. In fact, it is fundamentally data project related to the private sector. Data is the most important thing for Nepal for transparency, for effectiveness, productivity and accountability and everything. Data is important to know where the priorities are and whether you are doing a good job or not. For citizens to know what their government is doing, and for the private sector to operate, data is needed.

Recently, the World Bank has carried out Federalism Capacity Needs Assessment (FCNA). What are the gaps you found and what would you like to opine on fiscal sustainability of federalism?

FCNA was a historic moment. Two federal ministers (finance minister and federal affairs and general administration minister), five of the chief ministers, and other representatives have talked about FCNA. It was not only the federalism capacity, it was also about a roadmap. It is the first time that we have managed to sit together and talk. As a result of that, we are now actually working with the central, provincial and local governments. The FCNA was done in consultation with 115 palikas. We can go to the 7 provinces and operationalize it. It is very understandable that we don't have data. Again, considering Nepal's two-year-old transition into federalism, we cannot expect everything to exist. We have to be patient. The FCNA was meant to kick start a process of constant dialogue and feedback.

World Bank-funded projects are moving at a snail’s pace. How can those be pushed up?

Obliviously, given to the aspiration of the Nepali people, it is very clear that we need to move as fast as we can possibly go. Even if we achieve our maximum velocity, we need to move faster. As far as our concern, we can never go fast enough. But there is huge room for acceleration. However, I would not say, probably, not accurate to say 'snail pace'. The disbursement rates of World Bank finance projects in the South Asia region and Nepal is one of the higher performing ones. It’s actually moving relatively well. It may not be the fastest as we wanted, but definitely not at a snail's pace. If we look at the Kamala-Dhalkebar-Pathlaiya road, in four months, it went from the concept to having a DPR. It is moving quite quickly. Kathmandu-Naubise-Mugling was also agreed just few months ago. Now we are expecting to go to the board within this fiscal year. ICD Chobhar is very important. Our goal is not to do things fast but to do it right. ICD Chobhar was in the process of moving forward. There were some grievances and concerns from the community. For the World Bank, we take this extreme seriously. The issue or any concerns of the community around the development projects financed by us really get a lot of attention. They are taken seriously. This is why we actually needed slow this down, the government decided to slow this down. The government formed two-tier grievances redressal mechanism and issued a public notice to gather public grievances. Now the grievances also had to be reviewed and final decision shared with the communities. Kabeli 'A' project is closed for us and the government has not requested for renewal. The idea is not to do things quickly, but to do them right to make sure that they reaches the Nepali citizen.

In its recent report, the World Bank Group has highlighted huge gap in infrastructure sector in Nepal and talked about attracting private sector investment to bridge the gap. Despite PPP (public private partnership) policy, the private sector is not willing to invest in infrastructure. Against this backdrop, the government can encourage private sector through viability gap funding (VGF). What is your take on this?

We know the gap is massive as Nepal is willing to achieve a status of middle-income country by 2030. It needs to quadruple its infrastructure investment. To do that, the government does not have enough resources. This is why it is important to have the private sector. In my observation, the number one priority for Nepal is ecosystem, just create the field. Put the laws/regulations in place, and make them credible. Laws themselves are necessary but insufficient. Laws/regulation should be clear and transparent, they must be investors-friendly. That provide clear message to the investors where Nepal stands on this. This will provide assurance this will not require the interpretation of the specific civil servant and that must be codified in good practice. It is important for the government to create the ecosystem, create the lines, protect the people, and predict the rights of investors as well consumers. Beyond that, let the private sector do what it does best.

Pushpa Raj Acharya of APEX talked to Bhawani Rana, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI). Excerpts:

 How would you evaluate the country’s investment climate?

The country has a stable government after a long time. We experienced the decade-long conflict and another 10 years of political stalemate before the constitution’s prom­ulgation. This is an opportune time for the private sector to grow rapidly as the govern­ment has emphasized economic develop­ment with its vision of ‘Prosperous Nepal, Happy Nepali’. Private sector is considered the engine of economic growth as it contrib­utes to 70 percent of total investment in the economy. But the government does not see the private sector as a trusted partner.

Trust deficit between the government and private sector is hindering investment and private sector growth. The private sector had a huge expectation that the govern­ment will join hands to translate its vision of rapid socio-economic development. We had expected economic policy reforms and accelerated infrastructure development to attract fresh investment. But the government focus seems to be more on regulating instead of facilitating the private sector. The busi­ness sector is also terrorized by the arrest of prominent businessmen in cases where the civil code is attracted. On the other hand, enforcement of multiple regulations simulta­neously contributed to a lack of confidence in private players.

A private-sector organization like the FNCCI can approach the highest political level. And you have had several rounds of meetings with it over various regulations. How do you see this engagement?

Earlier, we were facing problems like labor unrest and frequent power cuts. These issues have now been resolved. But the higher lend­ing rates of the Banks and Financial Insti­tutions (BFIs) are yet to be resolved. In the meantime, the government has enforced multiple rules and regulations on the business sector, like the mandatory Permanent Account Number (PAN) bill in transactions above Rs 1,000, vehicle consignment tracking system, abrupt changes in tax policies, enforcement of social security scheme, among others. These compliances add to the cost of operat­ing business. The government does not even consider it necessary to consult the private sector before formulating different bills. The government has been feeding antibiotics to the private sector to make everything perfect, however, the antibiotics are resulting in side effects. The prescribed pills have not been able to treat the ills they are targeting. Based on the size or classification of business, there are multiple categories of business from micro enterprise, small medium enterprises (SMEs), to largescale enterprises. But the government has kept all of them in a single basket.

What should the government do to encour­age the private sector?

The private sector suffered a lot during the conflict and the political transition, and the government should carefully diagnose this suffering. Rather than slapping new taxes and increasing tax rates, the tax net should be expanded to generate more revenue. We are in favor of pleasant taxation. The gov­ernment should collect tax and enrich its treasury slowly by soft and pleasant taxation just like a cub slowly grows on cow milk. The government must accelerate infrastruc­ture development. Development works are slow-moving, which cannot trigger private sector investment. Against this backdrop, private sector investment is key to attracting foreign investment. Unless the government can get domestic investment, it cannot create ground for foreign investment. The domestic private sector investment can play the role of a catalyst. The government is lacking SMEs pol­icy, even though they are the economy’s spine. Even our southern neighbor, India, has a sep­arate ministry, i.e. Ministry of Micro, Small & Medium Enterprises, to facilitate micro, small and medium enterprises. They are crucial in sustaining grassroots growth and are effective in inclusive economic development and pov­erty-alleviation. The government can replicate such policies and best practices to make the investment climate more favorable.

You also mentioned economic reforms. Could you elaborate what sort of reforms you seek?

Nepal saw major economic policy reforms in 1990s, and private investment was opened up in many sectors through economic liberaliza­tion. That expanded the country’s economy, and government tax collection increased sub­stantially. We need similar reform to expand the economic pie now. Almost every economic sector is stagnating, and in need of fresh investment. Investment comes with economic policy reforms. The government together with the private sector should think out of the box to trigger and sustain growth to achieve our targets like being a middle-income country by 2030 and achieving Sustainable Development Goals (SDGs). The government should come up with economic policies that lure invest­ment. We have to reform every sector from agriculture, manufacturing, to services. Low yield in agriculture hinders private invest­ment, and our youths do not want to enter agriculture.

How do we initiate reforms in these sec­tors?

The government can reform agriculture through contract farming policies, irrigation facility, improved seeds and fertilizers along with other extension services, and easier access to credit. Similarly, tourism can be another major sector of competitive and com­parative advantage. Many tourism potentials are still unexplored in the absence of better tourism infrastructure, and such is also the case with manufacturing and services. We can see how private investment triggered hydro­power development after the government announced purchase of electricity generated by independent power producers (IPPs) in take-or-pay contract with the Nepal Electric­ity Authority. This shows the private sector is ready to invest if the government protects it and ensures return of investment. The govern­ment should resolve the economy’s structural constraints in coordination and collaboration with the private sector

The government has introduced a provision of mandatory Permanent Account Number (PAN) bill for every transaction over Rs 1,000 made by a firm or a company. All workers will now have to get a PAN to withdraw their salary and perks from the new fiscal 2019-20. Mandatory PAN has been introduced by amending the Income Tax Act in order to control revenue leakages, according to Yagya Dhungel, spokesman for the Inland Revenue Department (IRD). “In the absence of PAN bills, small expenses as well as salary expenses of firms and companies appear unbelievably high,” he adds.

Mandatory PAN will allow the tax administration office to easily trace/cross-verify every transaction of business entities that are being shown as expenses. The goal is to bring more firms, companies and people into the income tax net. Dhungel hopes the new provision will allow the IRD to get a real sense of the business efficiency of different companies. This will happen, he says, because companies will no longer be able to cheat on income tax by inflating their expenses in general (and often invalid) bills.

But the private sector, the major stakeholder to implement this provision, has labelled it ‘impractical’. “In my office, two staffs come early in the morning for cleaning. They work for around an hour a day,” says Rajesh Kazi Shrestha, President of Nepal Chamber of Commerce (NCC). “Their wage is low compared to other full-time staffs. I now have to ask them to bring PAN to get their wage. Without it, I cannot pay them because I cannot show that expense in my books.” Shrestha says this is impractical and contradictory to the income tax law, which provides for no income tax for low income groups. The fiscal budget has offered income tax exemption for those who earn less than Rs 400,000 individually and Rs 450,000 as a couple. Before that, on earnings of under Rs 200,000, there was a provision of a lump-tax Rs 7,500. Shrestha says the new Rs 1,000 PAN threshold is astonishing. “If I asked a vendor to serve tea in a board meeting, he has to give me a PAN bill,” he said. “How is it possible? We have suggested the minimum amount be raised to Rs 5,000.”

Unintended consequences
After the formation of the incumbent government led by Prime Minister KP Sharma Oli, the private sector feels left in the dark on vital policymaking. “When the government is preparing laws for us, they must listen to our perspective too,” says an office-bearer at the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) requesting anonymity. With the private sector kept out of the loop, there could be unintended consequences: the June 5, 2018 stock market crash following the enforcement of the new measure to calculate capital gain being the prime example.

How about foreigners working in Nepal? How will the new PAN regime affect them? Many Indian nationals work in industrial corridors of the Tarai, and it will be difficult to pay them now. “Our industrial production will plunge if we cannot pay our Indian workers,” one industrialist in Bhairahawa says. However, the IRD says that PANs can be provided even to Indian nationals in coordination with the Indian Embassy in Kathmandu. “We do not intend to create difficulties for businesses. We only want their transactions to be transparent,” says Dhungel of the IRD.

Another worry of the private sector is high ‘compliance cost’ of the new initiative, which will erode their competitiveness, especially the micro, small and medium enterprises (MSMEs). These vulnerable enterprises require government protection and many countries provide special treatment to sustain them. “Not so in Nepal,” says Shrestha of the NCC. “In front of my office, an old-women runs a tea shop. We ask her to supply tea with the pious objective of supporting her. But from the new fiscal, either the old women has to have a PAN or we have to find other tea-vendor,” he says.
The low-income groups are typically levied little or no tax as they are less-educated and low-skilled. But with PAN, the MSMEs, tea shops, handicraft vendors, and pickle vendors will face difficulties. “How does the government think they will keep books?” Shrestha questions.

VAT, PAN, TAX
Almost two and half decades ago, the government of the day was preparing to enforce the Value Added Tax. Businessmen requested the then opposition leader Manmohan Adhikari to strongly oppose VAT enforcement. Adhikari invited experts and academicians for their feedback, including the current finance minister Yubaraj Khatiwada. Back then Khatiwada had argued that VAT’s implementation was mandatory in order to collect enough taxes, without which the government cannot function.

The IRD says the PAN requirement is nothing and the program has in fact been running for the past few years under the title ‘PAN for All’. “We have established many centers to distribute PAN numbers and are also arranging for online submissions if the applicants have all the required documents,” says Dhungel of the IRD. “The private sector and salary earners should not take it as an additional compliance measure or a hassle. We should remember that for a country like Nepal, taxation is easily the most effective means of income redistribution.”
Till date, a total of 1.2 million business entities have obtained PANs while 900,000 personal PANs have also been issued thus far.

 At a recent interaction program, Finance Minister Yubaraj Kha­tiwada was asked about the rationale behind the one rupee hike in sales tax in each liter of petroleum products. (This has been labeled a ‘pollution tax’). The government had already been imposing vari­ous other taxes like infrastructure tax and pollution tax on petroleum products. In response, the finance minister said, “If you pay one rupee more on the consumption of every liter of petroleum products, we will spare you from potholes on the streets.” There you go. Again, the government has been imposing heavy taxes on petroleum products. According to the Nepal Oil Corporation, the state-owned petroleum monopoly, the govern­ment collects Rs 4 from every liter of petrol as road maintenance tax and Rs 5 as infrastructure development tax. With the new pollution tax, plus additional custom duties and value added tax, around Rs 40 is collected in taxes from a liter of petrol.

Similarly, every year, taxes on health hazards like alcohol and tobacco products, as well as on lux­ury goods, are raised. For instance, the government has levied about 229 percent tax on private jeeps and cars. The government defines private vehicles, gold, and other branded products as luxury goods.

Soaring Scotch and sticks

The fiscal budget 2019-20 has also revised the excise rates on alcohol and tobacco products. For example, it has raised excise duty on a liter of beer by Rs 15, on a liter of wine by Rs 35-40, and on a liter of whisky by Rs 65-70. Likewise, excises on tobacco have gone up by Rs 10 per kg, on gutkha (chewing tobacco) by Rs 55 per kg, and on cigarettes by Rs 45-50 for every 1,000 sticks.

The government hopes to collect Rs 981 billion in revenue in the next fiscal, against this fiscal’s target of Rs 831.31 billion. Many think the country is already overtaxed, there­by discouraging investors. Binod Chaudhary, a member of the federal parliament representing the main opposition Nepali Congress, says the government’s recurrent expenditure is almost equal to its revenue collec­tion target. This means there is little money left for development works. The government can raise taxes only to a certain limit. As it is, Nepal’s rev­enue collection is almost 25 percent of its Gross Domestic Product (GDP), the highest in South Asia.

The government is raising taxes instead of cutting down unnecessary expenses, streamlining develop­ment projects and adopting aus­terity measures. Against the spir­it of austerity, the government has increased the social security allowance of senior citizens, the marginalized, disabled and wid­ows from Rs 2,000 to Rs 3000 a month. According to the Ministry of Finance, the government’s liability toward welfare is rising, which ultimately comes from taxes. While it is undeniable that the gov­ernment has to look after the needy, the question is: Where will the money come from?

Expenses on social security allowances will be around Rs 64 billion in the next fiscal, compared to Rs 42 billion in the ongoing fiscal. Similarly, the salary and allowances of civil servants and members of constitutional bod­ies including MPs, ministers, vice president and president increased by 18-20 percent. The govern­ment’s expens­es on salary and perks have been increased from Rs 117.33 billion to Rs 145 billion, according to the Ministry of Finance. For a cash-strapped state, such excesses are hard to justify.

Barrels of pork

On the other hand, the gov­ernment has been promoting pork-barrel spending by providing funds to the MPs to execute devel­opment projects of their choices in their respective electoral con­stituencies. Each member of the parliament elected under the first-past-the-post system will get Rs 60 million under a constituency development program while the MPs elected under the PR quota will inspect/moni­tor the projects, as per the new budget. Altogether, Rs 9.90 billion has been earmarked for the con­stituency develop­ment program.

Experts say squeezing taxpayers to spend on welfare programs will ultimately result in low investment and fewer jobs. “Priority should have been giv­en to the production sector through incentives like technical support and interest subsidies, which would have boosted production and created new jobs,” says Shankar Sharma, former vice-chairman of the Nation­al Planning Commission. “When the government starts raising welfare investments through excessive tax­ation, it will be difficult to attract investment.”

Sharma thinks the govern­ment should expand the tax net instead of increasing rates. “The government does not have enough space to make major revisions in customs duties as we are bound by commitments to regional and multilateral trade arrangements,” says Sharma.

This is why the government had to raise excise duties to meet its revenue target. Normally, the gov­ernment revises excise on domestic goods if custom duties on similar products are to be raised. This is done to provide a level playing field for domestic and imported goods as per the country’s international commitments.

The result: a double whammy of high inflation and a greater tax bur­den on citizens.

 The International Monetary Fund (IMF) has urged coherence in fiscal, monetary and financial sector policies for broad-based growth, stable macroeconomic situation and external sector stability. It has also emphasized leveraging knowledge and innovation, efficient fiscal and monetary institutions to mitigate downside risks in every economy. How does Nepal fare on these metrics? Pushpa Raj Acharya of the Annapurna Media Network caught up with Geert Almekinders, IMF mission chief for Nepal.

Nepal is going to achieve sound growth for three consecutive fiscals and is projected togrow at 6-6.5 percent in next two fiscals. Yet the IMF has pointed the risks of macro-economic instability.

The near-term outlook for growth is favorable. We, at the IMF, expect growth to reach 6.5 percent this fiscal and 6.3 percent in the next fiscal. This is supported by ongoing reconstruction, investment in hydro-power projects, and strong tourism-related activity. In the context of the IMF’s annual discussion with Nepali authorities in December and the subsequent staff report published in February, we noted how the strong growth is fueled by expansionary fiscal and credit policies. These expansionary policies lead to rising non-food inflation, a widening current account deficit, falling foreign exchange reserves, and a buildup of financial sector vulnerabilities.

You mean Nepal cannot sustain higher growth?

In the 10 years before the 2015 earthquake, Nepal’s growth averaged 4.4 percent a year. Governments changed frequently. The capital spending was low. The pace of macroeconomic and structural reforms was slower compared to neighboring countries, and domestic and foreign private investment were subdued. Because of the suppressed economic prospects in Nepal, large numbers of people went abroad to find work. As a result, Nepal’s actual and potential growth averaged about 4.4 percent a year. Put differently, Nepal’s economy got used to this level of growth.

Several recent developments have likely raised Nepal’s growth. Improved and reliable supply of electricity and increased political stability will both raise investment and boost growth. However, looking at the experience of other countries and the external pressures experienced by Nepal in the past two years, it is probably not realistic to target 8 percent growth.

What does the IMF recommend then?

In the staff report we recommend that the authorities focus on containing rising domestic demand pressures and external imbalance, and safeguard financial sector health. Combined with actions to make Nepal’s economy more competitive and attractive to investment, this will also deliver stronger and more sustainable medium-term growth. The government is making commendable efforts to upgrade the legal framework for domestic and foreign investors. It also held a successful Investment Summit last month. Nepal needs to build on this reform momentum and continue to strengthen the business environment.

But our finance minister has been saying that the BoP deficit is not a serious issue; it like a child suffering from diarrhea due to teething troubles.

It is only natural for post-earthquake reconstruction and investments in infrastructure to push up imports. But there are limits to the absorptive capacity of Nepal’s economy, and rapid decline in reserves is one of the signs that it may be advisable to slow the demand growth. In this regard it is encouraging to note that central bank reserves have staged a recovery in recent months and are now back up to $8.5 billion.

Nepal has had the perennial challenge of loanable fund crisis in its bank and financial institutions. And banks are now lobbying to increase the credit to core capital cum deposit (CCD) ratio from the current 80 percent. However, the central bank itself has been relaxing CCD time and again.

The narrative of the loanable fund crisis or credit crunch is not validated by data. Going by the numbers published by the central bank, banks expanded their credit to the private sector by about Rs 520 billion over the past 12 months. This is a phenomenal increase, equivalent to 17 percent of GDP. According to our assessment tools, credit is growing too fast. To contain the buildup of risk in the financial sector, we support efforts of the central bank to slow credit growth to a sustainable pace. Given the banks’ desire to expand their loan portfolio and increase their profits further, it is perhaps understandable that they are lobbying the central bank to increase the CCD ratio. However, to support financial stability, we think the central bank should resist such pressures.

Nepal has been raising revenue target every year, yet the capital expenditure is low. Banks blame the government for low deposit growth due to lack of spending of development budget. How can these problems be solved?

It is true that there is considerable seasonality in government spending. Unfortunately, a large share of central government capital spending typically takes place in the last few weeks of the fiscal. This is an old issue and there will be important gains if this spending can be spread out evenly across the fiscal. The quality and efficiency of capital spending would rise and overall cashflow in the economy would be more balanced. It will take time to address this issue and for now banks should take the seasonality into account when they plan and manage their lending business.

Imports are fueled by bank loans and the government depend on imports for revenue. Do you think this is a sustainable approach?

To sustain growth over medium term, the economy’s productive capacity must be increased through higher investment and greater competition. The capital budget management and the investment climate both need to improve. To improve budget planning and promote efficient spending, immediate action should focus on proper planning, selection and implementation of major capital projects and spreading them evenly throughout the year.

Many say remittances are contributing to the ‘Dutch disease’ in Nepal. What should be done before remittances slow down?

The steps we just discussed are also essential to create jobs in Nepal, which is needed to create a viable alternative to going abroad for the work. Recent improvement in availability of electricity has reduced the cost of doing business in Nepal. Other reforms, including steps to address physical and social infrastructure gaps, can also be expected to help boost investment, productivity and growth.