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One of the big fears going into the 2019 Investment Summit was that there would again be big investment pledges and, again, in keeping with the past, little of the pledged amount would materialize. In the last investment summit in 2017, expres­sions of interest worth $13.74 billion were made, of which only $2.5 bil­lion is going to materialize, accord­ing to the Investment Board Nepal. Even though the IBN is yet to make public the pledges made during the 2019 summit, initial indications are that the summit failed to live up to its potential.

Few projects presented during the summit received investment commitments. The govern­ment and the private sector had showcased 50 and 27 proj­ects respectively, worth some Rs 3,468 billion in total. Agree­ments on only 15 projects were signed. They include Business to Business (B2B) agreements by the private sector that were not showcased as potential projects for investment during the summit. Chaudhary Group, a leading cor­porate house in Nepal, alone has signed four agreements that were not in the priority project list that the IBN had unveiled.

The lukewarm response from investors is also highlighted by the fact that the IBN is listing even old investment pledges as the outcome of this summit. Among the four agreements signed by the Chaudhary Group, the one with TurkCell was already signed on February 26 during the Mobile World Congress 2019 in Barcelo­na. Similarly, another summit agreement between Hydro Solutions and Yunan Xinhua Water Conser­vancy and Hydro Investment had also already been signed during Prime Minister KP Oli’s visit to China last June.

According to former finance sec­retary Rameshwore Prasad Kha­nal, foreign investors are yet to change the way they look at the communist parties. “The Maoists had, in the past, attacked foreign companies like Pepsi, Unilever and others, and trade unions affiliated to that party had threatened inves­tors,” he says. Khanal further says the erstwhile CPN-UML had also failed to clearly articulate its posi­tion on foreign investment.

Nepal sought plenty, investors gave little

Agreements on only 15 projects was signed in this year’s summit. They include Business to Business (B2B) agreements by the private sector that were not showcased as potential projects for investment during the summit

 The government’s two-day Investment Summit ended with only lukewarm response from potential investors. Very few projects showcased during the sum­mit have received investment com­mitments. The government and the private sector had showcased 50 and 27 projects respectively, worth some Rs 3,468 billion in total.

The Investment Board Nepal (IBN) has declined to share information about the investment commitments and expressions of interest. In the last investment summit in 2017, expressions of interest worth $13.74 billion were made, of which $2.5 bil­lion is going to materialize, accord­ing to the IBN.

Agreements on only 15 projects was signed in this year’s summit. They include Business to Business (B2B) agreements by the private sector that were not showcased as potential projects for investment during the summit. Chaudhary Group, a leading corporate house in Nepal, has signed four agreements that were not in the priority project list that the IBN had unveiled.

Maha Prasad Adhikari, CEO of the IBN, says the government has set April 22 as the deadline to file applications. “We have devel­oped criteria to avoid unwanted expressions of interest. To file an application, an investor must have a net worth equivalent to one-third of the total project cost. And those expressing interest must send confirmation within two months,” says Adhikari.

The investment summit has drawn flak after the organizers listed the financial closure of the 900-MW Arun III project as an outcome of the summit. Arun III hydel proj­ect is going to be developed by the Indian government-owned Satluj Jal Vidyut Nigam (SJVN) Limited, which has signed agreements with a few Nepali banks to raise loans for the project. However, the Independent Power Producers (IPPs) have said that the government should have encouraged SJVN to raise loans from banks in India or other countries, citing the perennial loan crisis in the Nepali financial markets.

“The major objective of invit­ing foreign direct investment is to bring in capital and technology from foreign markets to upscale production and to create more jobs in the country,” says Shailendra Guragain, president of the Indepen­dent Power Producers’ Association Nepal. “When Nepali investors are facing a crisis of loanable funds, it is a pity that the government allows foreign investors to borrow from Nepali banks to finance their proj­ects,” says Guragain.

Around Rs 500 billion that is being mobilized by Nepali financial institutions is reportedly insuffi­cient for domestic investors. As a result, banks have been facing a loanable fund crisis for the past two-and-a-half years, even as the demand for loans continue to rise. Now, political stability is seen as a sign of improvement in the coun­try’s investment climate.

Around Rs 500 billion that is being mobilized by Nepali financial institutions is reportedly insufficient for domestic investors

Old wine, new bottle

Of the 15 agreements signed during the recent summit, four were signed by the Chaudhary Group. One of these agreements, with Turk­Cell, was already signed on Feb­ruary 26 during the Mobile World Congress, 2019 in Barcelona, in the presence of Minister for Information and Communication Technology Gokul Baskota. CG signed another agreement with Sky Power Global, whose representatives had visited Nepal last April under the initia­tive of Madhu Kumar Marasini, the erstwhile Consul-General to New York. They had met Finance Minis­ter Yubaraj Khatiwada and Energy Minister Barshman Pun to take for­ward their investment plan worth $1 billion to develop 600 MW of solar power within four years. However, the government has been reluc­tant to accept their proposal, citing insufficient installed hydroelectrici­ty capacity to get to Nepal’s desired energy mix.

Similarly, another agreement signed during the summit by Hydro Solutions and Yunan Xin­hua Water Conservancy and Hydro Investment had already been signed during Prime Minister KP Oli’s visit to China last June.

Likewise, non-resident Nepalis had proposed an infrastructure company with paid-up capital worth Rs 10 billion in London last year. The Non-Resident Nepali Association (NRNA) has been requesting the gov­ernment to raise around 80 percent of the proposed capital by issuing shares among the Nepali diaspora. However, under Nepali laws gov­erning this matter, 51 percent pro­motor shares are required to set up a company. As per the securities regulation, there is an exception for hydropower companies. The rest of the companies must have booked profit for three consecutive years since the operation to issue shares to the public. The government has signed an agreement with the NRNs without clarifying how it will resolve such legal complexities.

Financial closure of the Upper Trishuli-1 Hydel Project has been touted as a fruitful outcome. How­ever, the South Korean developer has proposed to chip in only half the amount in the hedging fund set up by the government to cover the risk of exchange-rate fluctua­tion. In the hydel projects, the gov­ernment, the sole power off-taker Nepal Electricity Authority and the project developer should chip in certain foreign currency as a hedge against exchange-rate fluctuations. The developer has proposed to chip in half the foreign currency and pro­vide free electricity to the NEA that equals the remaining 50 percent of the foreign currency.

Losing charm

According to former finance sec­retary Rameshwore Prasad Kha­nal, foreign investors have not yet changed the way they look at the rul­ing Nepal Communist Party (NCP), which was created in 2017 with the merger of the two major communist parties of Nepal. “The Maoists had, in the past, attacked foreign compa­nies like Pepsi, Unilever and others, and trade unions affiliated to that party had threatened investors.” Khanal further says the erstwhile CPN-UML had not clearly articu­lated its position on foreign invest­ment either. But he appreciates the prime minister’s commitment to facilitating and protecting foreign investment. “PM Oli’s speech at the inaugural session of the investment summit has shown the government’s readiness to welcome foreign invest­ment. But first we have to improve our business climate and we should be able to impress investors with our comparative and competitive strengths,” says Khanal.

It has been widely reported that the government organized the investment summit in haste, with­out adequate preparation and that the foreign investment-related bills were tabled and endorsed by the parliament without proper discus­sion and public hearings. “American and European investors did not like the way the bills were passed,” says Bimal Koirala, a former chief secre­tary. “The government also failed to attract investors from neighboring India and China because of inade­quate preparations.”

Chinese investors were also reluc­tant to sign MoUs. Shengping Zhou, Kathmandu bureau chief at Xinhua News Agency, has cautioned Chinese investors against signing agreements without careful consideration.

 Last week, banks sent mass SMS to their cardholders (those with internationally accepted debit/credit cards) stating that trans­actions in India had been capped at INRs 100,000 a month. Many Nepali travel to India for medical treatment, study and pilgrimage, for which they often have to spend a lot of money. Banks say they are only following the directive of the Nepal Rastra Bank (NRB).

The central bank was forced to act as the country’s foreign exchange reserves have continuously depleted since the start of this fiscal. In the first seven months of 2018/19, for­eign exchange reserves depleted by nearly 6 percent ($590 million), to $9.49 billion. The amount is enough to cover import of goods and ser­vices for no more than eight months.

It is the NRB’s duty to maintain foreign currency liquidity and utilize the reserves in capital formation.

The central bank has slashed cross-border transaction limit from cards in India in the wake of dwin­dling forex reserve. “Due to our fail­ure to earn enough Indian currency, the country needs to spend the reserve of convertible currency for the settlement of the card transac­tions and import,” said Bhishma Raj Dhungana, the executive director of the NRB who also heads its Foreign Exchange Management Division.

The central bank has cut from $2,500 to $1,500 the foreign exchange facility granted against the passport of those travelling abroad.

Similarly, the central bank has also slashed the exchange facility for migrant workers from $500 to $200, which in turn has invited great criti­cism. Migrant workers are the major contributors to the country’s foreign currency reserves. This remittance earning is added to the earnings from tourism, foreign direct invest­ment, reimbursement of foreign loan and grants, and capital transfer.

Contribution of the remittances was 68.5 percent in the total foreign exchange reserve in last fiscal 2017- 18, slightly up from 64.4 percent in fiscal 2016-17, according to NRB. “Such contribution is expected to rise in ongoing fiscal,” says Dhun­gana. Also contributing to the depleting reserves are an increasing number of outbound Nepali travel­ers. According to NRB, outbound Nepalis including migrant workers have spent Rs 54.95 billion in travel.

“Not only are migrant workers and students going. The outflow of Nepalis is also increasing because of incentive tours of corporate houses and attractive travel packages sold by travel agencies,” said Sudesh Gautam Chettri, managing director of ezTrip Pvt Ltd, which sells such travel packages.

On the other hand, the govern­ment has also discouraged lavish imports like luxury private vehicles. Finance Minister Yubaraj Khatiwada has asked bankers not to finance high-end private vehicles costing over Rs 5 million. The central bank has also raised the loan to value ratio (LTV) to 50 percent, which means those who want to purchase vehicles must fork out 50 percent of the value in down payment. In the worst-case scenario, the gov­ernment can curtail imports if its foreign exchange reserves further deteriorate. That would be hard on Nepalis increasingly addicted to for­eign goods in recent times.

The country is set to achieve nearly 6.5 percent economic growth in this fiscal, on the back of good agricultural production, growing wholesale and retail trade and post-earthquake reconstruction activities. In that case, Nepal will have achieved high growth for three consecutive fiscals (after 7.91 percent growth in 2016-17, and 6.29 percent growth in 2017-18). For this fiscal, even conservative forecasts of the International Monetary Fund (IMF) has pegged growth at 6.3 percent. But this growth will be hard to sustain. There are numerous chal­lenges. Finance Minister Yubaraj Khatiwada has repeatedly compared the economic problems to a child suffering from diarrhea because of teething troubles.

But experts says Khatiwada has been compromising financial stabil­ity by allowing banks and financial institutions (BFIs) to expand credit to the optimum regulatory level. A large chunk of the credit goes for import financing, which fuels the current account deficit. In the first six month of the ongoing fiscal, cur­rent account deficit widened to Rs 152.16 billion and the country’s bal­ance of payment (BoP) was Rs 63.68 billion in the negative. Meanwhile, total trade deficit widened by 32.1 percent, to Rs 678.53 billion, in the same period.

The widening BoP deficit is a risk to foreign exchange reserve, which has depleted by 6.7 percent since the beginning of this fiscal, to $ 9.41 billion. Based on the imports of six months, foreign exchange holdings of the banking sector is sufficient to cover prospective merchandise and services imports of only 7-8 months. Keshav Acharya, a former advisor to the Ministry of Finance, terms the situation as ‘alarming’.

Recently, the IMF said that expan­sionary fiscal and credit policies are leading to rising non-food inflation, widening current account deficit, falling foreign exchange reserves, and a buildup of financial sector vulnerabilities. IMF expects the financial sector to cool off and remit­tances to decrease.

Economist Acharya says the gov­ernment should promote sustainable growth backed by manufacturing and agricultural production. Growth backed by production and construc­tion create jobs and strengthen the production base. “Growth led by the production sector can bring eco­nomic well-being for people at large, and that is the country’s need,” he says. “On the other hand, growth fueled by imports is unhealthy and unsustainable”.

In a major blow to Nepali busi­nesses, banks and financial insti­tutions (BFIs) have again started raising interest rates on their loans, even as they were expected to gradually bring them down. They had started increasing their lend­ing rates after Nepal Rastra Bank (NRB), the central bank, increased their paid-up capital requirements last year. As cost of production has gone up due to high lending rates, the com­petitiveness of our industries has gone down. Even before the recent rate hike, Nepal was considered a high cost-of-production destination, with its high transport costs, lack of reliable electricity, labor unrest, and frequent strikes.

Shekhar Golchha, vice presi­dent of the Federation of Nepalese Chambers of Commerce and Indus­try, blames the NRB of failing to effectively regulate BFIs in order to maintain stable lending rates. Such regulation is crucial to maintain the predictability that is required to run any business, he says.

Higher lending rates also affect FDI inflow, as foreign investors increasingly worry about the health of Nepali economy. According to the NRB, FDI inflow is down 40 percent in first five months of this fiscal (Rs 6.78 billion) compared to the same period (Rs 11.12 billion) the previous fiscal. Along with foreign investment, domestic investment has dried up as well.

Investors fear their projects will be unviable. The multi-year projects designed and started on assumption of one set of borrowing rates are suddenly having to pay double the agreed rates. For instance, hydro­power projects, which have fixed rate of return and which cannot pass on increased cost to consumers, are badly affected.

BFIs’ rampant expansion of loans has increased default rates as well. As the rates continue to climb, most of those who brought out auto or home loans are not in a position to repay. This is dangerous. As the volume of non-performing loans increase, not only the profits of banks will be affected. It will imperil the whole financial sector.

Moreover, consumer prices will shoot up when producers and trad­ers have to pay higher interests on their borrowings. They will simply pass on loan servicing cost to their final consumers. In Nepal, where a large chunk of the credit goes to import financing, higher rates will make imports dearer.

At the root of the problem is that banks are lending beyond their capacity. They are giving more than they are collecting. In the first six months of this fis­cal commercial banks’ deposits increased by Rs 168 billion (up 7 percent) while their loan mobili­zation increased by Rs 245 billion (up 12 percent).

Interest payment is the major source of earning for the BFIs. How­ever, they should refrain from biting more than they can chew. The bur­geoning defaults could ultimately sink them.

At the end of 2018 Nepal Rastra Bank (NRB) enforced some flexible rules to perk up the slumbering stock market. But going into the New Year, stock investors are still not interested in buying. The flexible rules were prescribed by a panel led by deputy NRB governor Shiva Raj Shrestha following a steep fall of the Nepal Stock Exchange (Nepse) index. Yet the benchmark index retreated below the 1,200 threshold on Jan 3. This despite the new rules allowing banks to raise total loan amount from 25 percent to 40 percent of core capital, and to give 65 percent of the value of collat­eral stocks against loans, up from 50 percent earlier.

Another reason for depression in stock market is change in capital gain tax calculation

The central bank has also min­imized the weightage of risk in margin lending—loan against col­lateral of stocks. Earlier, on Dec 5, Nepse index had nosedived to 1118.13 points. Increased supply of stocks, tightening margin lending, high lending rates and the govern­ment’s view of stock-market as ‘a risky business’ have all contributed to the bearish mood.

The benchmark index was bullish just before the govern­ment had presented its fiscal bud­get in May. Nepse index had on April 21 witnessed its yearly high of 1438.49 points.

The index was widely expected to go up following the introduction of the automated share trading ear­lier this year. However, increased supply of shares because of right issue and further public offering of the BFIs for the increment of their capital resulted in plummet­ing stock prices in the secondary market. Commercial banks have issued right shares worth Rs 50.09 billion for increment of their paid up capital, as instructed by the NRB. “When there is increased supply the stock prices are bound to go down,” says Prakash Rajaure, a stock market analyst.

Market capitalization has dropped by Rs 212.65 billion in a year’s time, according to the Nepal Stock Exchange, indicating a steep drop in stock prices.

Another reason for depression in stock market is change in capital gain tax calculation. The fiscal bud­get 2018-19 provisioned 7.5 percent capital gain tax when the bonus or right shares are traded. Earlier, the government used to enforce 5 percent CGT on trade of bonus and rights share in the secondary market. Along with the increase in the CGT to 7.5 percent on May 29, the CGT calculation method has changed too. To protest this move, stock investors had halted share trading on June 5.

After continuous slide of the benchmark index, a few investors had even staged a fast-to-death, demanding the resignation of the finance minister.

Stock analysts say the market’s future trajectory depends on whether the central bank changes the lending rates again and whether the supply of shares slows down.

Government position

The Home Ministry has recently submitted a draft executive order, titled ‘Controlling Sale of Liquor, and Restricting Injurious Drinking,’ to the Cabinet for its final approval. According to Ram Krishna Subedi, the ministry spokesperson, the goal is to control the rampant sale of liquor and restrict injurious drinking. The executive order, when signed, will be an interim arrange­ment. The producers and distributors of alcoholic beverages, as well as hotel and restaurant operators, have strongly opposed the new regulations. But the government firmly believes they are necessary to maintain peace and harmony in the society.

"Alcohol has been killing the creativity and productivity of our youth, and could hamper with the country’s growth and development," Narayan Prasad Sharma Bidari, joint home secretary.

According to a survey carried out by the Institute for Health Matri­ces and Evaluation (IHME) in the United States, mortality by alcohol in Nepal increased by 376 percent between 1990 and 2016. The study said 21 percent males and 1.5 percent females in Nepal are habitual drink­ers. Liver diseases, cirrhosis, cancers and other ailments caused by excess use of alcohol claimed 3,972 Nepali lives in 2016, according to the survey.

The government also believes that domestic violence, mainly violence against women, is largely the result of alcohol consumption. “In over 50 percent of these cases, the males get violent against their female part­ners when they consume alcohol,” Narayan Prasad Sharma Bidari, joint secretary of the ministry told APEX.

This government has already made special licenses mandatory for shops wanting to sell alcohol, unlike in the past when even groceries openly sold liquor.

While talking to APEX, Joint Sec­retary Bidari pointed out that the country right now has the advantage of a burgeoning youth population. But a large chunk of the youth is out of the country—around four million have migrated to Gulf countries for jobs and another one million are in developed countries for various purposes. This is besides the millions more who are working in India.

“The small youth population that remains in the country will be cru­cial for the government to realize its vision of ‘Prosperous Nepal, Happy Nepali’,” said Bidari. “But alcohol has been killing the creativity and productivity of our youth, and could thus hamper with growth and devel­opment of the country.”

The government also argues that use of alcohol largely contributes to violence against women. Analyzing the cases registered with the police, the ministry had come to this con­clusion before drafting the executive order. Home Minister Ram Bahadur Thapa has repeatedly linked increas­ing incidents of rape and other forms of violence against women with alco­hol consumption. He reckons alco­hol is a major impediment to social peace and harmony.

Moreover, alcohol is thought of as a gateway to hard drugs. As such, the government is working on two simultaneous strategies on alco­hol: supply control and demand reduction. Besides tightening rules on production and sale of alcohol, the federal government has already started awareness campaigns in close coordination with subnational governments, according to Bidari. “Such awareness campaigns are being carried out through local gov­ernments, civil society organizations as well as schools and colleges,”he informed.

But that is not the whole story. A source at the ministry, who requested anonymity, informed that the new regulations were partly the result of the state’s failure on law and order. “With the government seem­ingly incapable of solving high-pro­file cases like the rape and murder of 13-year-old Nirmala Pant of Kan­chanpur, and the resulting public backlash, the government had to show that it was not sitting idle,” the source said.

Pushpa Raj Acharya heads the business bureau of Annapurna Post