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Khim Lal Devkota, PhD, is an expert in fiscal federalism, specializing in public finance, fiscal decentralization, intergovernmental fiscal relations, and legislation. In May 2021, Devkota made a transition into political leadership, winning a seat in the National Assembly (NA). His tenure ended in March 2024. Devkota’s legislative initiatives, including drafting the Legislative Management Bill, 2024, emphasize provincial and local government participation. During Nepal’s transition to a federal republic, he held the esteemed position of the first Vice-chairperson of the Policy and Planning Commission of Bagmati Province from 2018 to 2019. His major task in parliament was the introduction of the ‘Federalism Implementation Resolution Proposal’ and recommendations related to federalism implementation from the ‘Federalism Implementation Monitoring and Parliamentary Special Committee’, of which he was the chairperson. The Prime Minister has repeatedly taken recommendations from this committee. Devkota presents a 10-point blueprint, addressing various federal issues.

Action plan

According to a Cabinet approved action plan to implement federalism, the Inter Province Council meeting should take place every year in March-April. Yet, as of today, there has been no progress in scheduling the meeting. The action plan included a schedule to collaborate with the ‘Policy Research Institute’ to ensure consistency in policy making and law formulation across all three tiers of government. Regrettably, this initiative has not commenced as of yet. Furthermore, the decision was made not to allocate small schemes and programs under the name of conditional grants starting from the current fiscal year 2023-24. However, many small plans and programs have been distributed through the budget speech. The action plan outlined the adjustment of the provincial police force within a year, which has also not seen any progress. It also promised to resolve the issues faced by subnational-level employees by the end of the second week of July 2023, but there has been no visible improvement in their situation.

Committee’s recommendations

The report from ‘Federalism Implementation Study and Monitoring Parliamentary Special Committee’, formed by the NA, if executed sincerely, has the potential to resolve citizen concerns and enhance the governance and federalism system. Recommendations include drafting laws to ensure inclusive representation in state organs and women’s participation in the electoral system, both at federal and provincial levels. The creation of a joint parliamentary committee for federalism, the development and implementation of an action plan based on parliamentary committee recommendations, and the establishment of a decentralization plan to delegate responsibilities to subnational levels are highlighted.

Moreover, the report suggests organizing training and public awareness programs on federalism, democracy, and the rule of law from the central to local levels. It also emphasizes the need for equal and easy access to state services, the safeguarding of the rights of marginalized communities, and the creation of a trustworthy environment to combat violence, abuse, and discrimination against vulnerable groups. Implementing fundamental rights, including social security, dignified living conditions for senior citizens, and the guarantee of human rights, is considered essential. To maintain consistency within the administrative system and the spirit of the federal democratic republican governance, the report suggests forming a high-level administration reform commission chaired by the prime minister. It advocates for a legal and policy framework to ensure that the chief executive officer of the local level is not below the undersecretary level. Discussing matters in sectoral thematic committees before presenting bills in parliament is recommended to maintain consistency in laws across different government tiers.

Reform in electoral system

It is crucial to change the electoral system, including the numbers. For this, the number of members of the House of Representatives (HoR) should be reduced from 275 to 165. The proportional electoral system should be abolished. Issues of inclusiveness should be included in the first past the post-electoral system. For this, constituencies should be determined based on rotation by determining the number of seats for women-women, Dalit-Dalit, etc. to other disadvantaged and marginalized sections and communities. It is necessary to follow the same tools as the HoR in the provincial assembly. This reduced the number of provincial assemblies from 550 to 330 only. The reduction in the number of members of HoR and the provincial Assembly will bring great relief to the government system, which is said to have become expensive.

There is another tool to make the parliament more precise. Those elected from the proportional electoral system in the HoR need to move to the NA. In such a situation, the 165 members’ HoR should be based on a first past the post electoral basis and 110 numbers NA in the proportional electoral system. But the procedure of electing the members of the NA from the provincial assembly and local-level representatives should be kept as it is. Both the methods discussed here will establish political stability in the country. Due to the mixed electoral system, no matter how popular the party is, it has been proven that no party will gain a majority in the HoR. Therefore, under any condition, reforming the electoral system is an urgent need of the country.

Strengthen NA

In order to simplify this governance system, it is also necessary to have a provision that the NA will do the work of the HoR in the absence of the HoR. If such a provision was written in the constitution, the 27 bills that became inactive due to the expiration of the term of the HoR would not have fallen to zero. 22 bills pending in the HoR, and five bills approved and sent by the NA became inactive due to the end of the term of the HoR. The bills will never be inactive. The accountability and responsibility of the government towards the Parliament also increased. Through the multiplier channel, there will also be improvements in the overall service delivery provision as well.

The role of the district coordination committee has not been effective. Although the constitution gives the role of monitoring and coordination, this committee has not been able to be effective due to a lack of financial resources and working staff. In the situation where the officials of this committee are also questioning its justification, it is better for the country to go for the cancellation of this committee. It also helps in the credibility of the governance system. Federalism, which is said to be expensive, is also relieved.

Many other parts of the governance system need to be reviewed and improved. Like, the constitution has given the right of state power to the sub-national levels. But leave the matter of state power. Even the rights related to the police force included in the exclusive list in the constitution have not been transferred to the province. The federal government has intervened in the jurisdiction of the subnational level. Important laws including the civil service bill have not been enacted yet. In fact, the subnational levels have not been able to feel the government.

Fine-tuning fiscal federalism

In Nepal’s federal system, the revenue part is highly centralized. This problem may have occurred due to the customs-based revenue system. But something more could be done regarding the revenue rights of the provinces. The sub-national levels have made no effort to increase internal revenue. The constitution stipulates that the volume of fiscal transfers received by the sub-national level shall be in accordance with the recommendations of the National Natural Resources and Fiscal Commission. But the commission does not have much of a role in other grants except fiscal equalization grants. Laws designed to weaken the commission must be amended. But more importantly, the commission must move forward in accordance with its rights.

As per the basic principles of grant distribution, the share of fiscal equalization grants should be increased in proportion to the gross domestic product (GDP) or budget side. But the ratio of fiscal equalization grants being distributed to the sub-national levels has been declining while the ratio of conditional grants has been increasing unexpectedly. Meanwhile, in the name of conditional grants, small programs and projects have been sent to the sub-national levels, creating an unnecessary burden for them.

Activating intergovernmental bodies

Nepal has adopted a unique approach to address issues related to federalism implementation by creating various intergovernmental coordinating bodies, such as the ‘Inter-province Council’, ‘National Coordination Council’ chaired by the prime minister, ‘Intergovernmental Fiscal Council’ led by the finance minister, ‘Province Coordination Council’ led by the chief minister, and ‘Sectoral Committees’ led by sectoral ministers. However, these bodies have not operated as smoothly as envisioned, with the Inter-province Council, for instance, not convening for five years. These intergovernmental coordinating bodies were established to ensure policy consistency, prevent conflicts, and resolve disputes through mutual agreement.

Nepal has witnessed numerous people’s movements for democracy, development, peace, and stability, resulting in frequent changes in the governance system and seven different constitutions in a short period. In contrast, countries like the United States, Switzerland, and India have maintained stable governance systems with their respective constitutions for many years. The instability in Nepal’s governance system hampers the country’s development and stability, making the activation of the inter-governmental relations mechanism crucial for achieving development, prosperity, and good governance.

Fine-tuning administrative federalism

According to the constitution, more than half of the workload is designated for local and provincial governments, yet many organizational structures remain unnecessarily centralized. The federal level has a high number of employees, with approximately 49,000 positions created and 40,000 retained. Despite an estimated need for 68,000 local-level employees, only 24,000 have been adjusted. During the adjustment, it was conveyed that there was a shortage of 24,000 employees at the local level. The law stipulated self-arrangement for the shortage. Provinces were tasked with managing a minimum of 9,000 employees independently.

However, avenues to address the staff shortage were obstructed, with no federal civil service law enacted for seven years, hindering provincial legislation. Although Provincial Public Service Commissions were established, they failed to deliver anticipated outcomes. Restructuring the entire bureaucratic system, including institutions, is imperative, as the principle of functional allocation is not being effectively implemented.

At the federal level, there is currently an excessive number of departments, with more than half of them being redundant. These unnecessary departments, along with unreasonable commissions and institutions, should be abolished to streamline and optimize the government’s functioning. Addressing personnel concerns, the federal level is burdened with an excessive number of staff, with over half of them being unemployed. Proper procedures should be implemented to either remove the unemployed personnel or redistribute them to subnational levels where their skills and expertise can be utilized effectively.

Revisit provincial structure

Central politics heavily influences provincial governance, leading to instability mirrored from the central power coalition. This situation not only undermines the autonomy envisioned in the constitution but also fuels public dissatisfaction, questioning the legitimacy of the provincial structure. Addressing this issue requires a comprehensive overhaul of the provincial system. Two potential models for ensuring stability have been proposed. The first model, akin to the German system, advocates distributing government leadership based on election results to ensure consensus and stability. The second model, similar to the Swiss cantonal system, suggests direct election of the chief minister by the people, holding them accountable to the Provincial Assembly.

Regardless of the model chosen, it is imperative to streamline the number of provincial ministers, reduce the excessively large provincial assembly, and transition to a direct electoral system for better representation. Ultimately, stabilizing the provincial government is crucial for fostering public trust and ensuring effective governance.

International practice

Nepal can take examples from many nations following federalism like India and US but here are two examples. When examining Switzerland’s parliamentary structure in comparison to Nepal, both countries have a bicameral system. In terms of rights and authority, both chambers in Switzerland hold equal standing, whether it’s related to government formation or legislative matters. In contrast, Nepal’s Upper House has no role in government formation. In the legislative procedure, its role has also been neglected. Switzerland’s local governments have full autonomy. They are responsible for local economic and infrastructure development and service delivery. The mentality of Nepal’s federal government is so poor that it wants to handle local tasks itself.

Germany operates on a bottom-to-top federalism model, unlike Nepal’s top-to-bottom approach. Even with the German population being three times larger than Nepal’s, the country operates with just 15 ministries whereas it runs into dozens in Nepal. There has been a nice separation of power. We need not look far to witness federalism in action; Switzerland and Germany provide a valuable example.

Conclusion

The effective implementation of federalism hinges on several key factors like constitutional stability, oversight mechanisms, inter-provincial coordination, electoral system reform, and limitations on prime ministerial tenure are essential for aligning governance with citizen expectations and fostering political stability. Strengthening the role of the NA, optimizing administrative and fiscal federalism, human resource management, and revisiting provincial structures are vital for efficient governance and resource utilization. Moreover, public awareness and participation, along with continuous review and improvement mechanisms, are crucial for ensuring transparency, inclusivity, and accountability in the federal system. By addressing these aspects comprehensively, the nation can embark on a path of sustainable development, prosperity, and social justice, fulfilling the aspirations of its citizens while adapting to evolving needs and expectations.

Badri Kumar Guragain is the Chief Executive Officer (CEO) of National Cooperative Bank Ltd (NCBL) with over 16 years of experience in finance, budgeting, planning, management and consulting. Currently, he is pursuing PhD in risk management of financial cooperatives in Nepal. He has also been awarded with ‘Prabal Janasewashree Chaturtha Shreni’ by the President of Nepal for his contribution in the cooperative sector.

Guragain, in this cooperative blueprint, has presented a report on the cooperative sector on four dimensions—present condition, challenges, way forward and the outcome. 

Introduction

Cooperatives occupy a foundational tier in Nepal’s financial ecosystem, focusing on empowering and supporting impoverished communities. They primarily serve individuals lacking skills, capital, and land, who constitute the cooperative’s target demographic. Despite receiving training, resources, and credit assistance, businesses within these communities often operate at a modest scale and face vulnerability, necessitating additional support such as insurance provided by cooperatives. As these businesses gradually expand and thrive, banks, the subsequent component of the ecosystem, extend their services to accommodate them. Thus, the primary goal for cooperatives is to empower poverty-stricken communities, ensuring their sustainable growth and development.

Production-driven

Cooperatives ought to prioritize production-driven initiatives to effectively contribute to the economy, functioning as a genuine sector. However, in Nepal, cooperatives often charge the highest loan interest rates. This contradicts the cooperative ethos of cooperation and undermines its true essence. To rectify this, cooperatives should focus on establishing a presence in marginalized areas and empowering residents with lower interest rates, subsidies, resources, and skills. Achieving this necessitates an alternative channel for resource provision, as cooperatives cannot rely solely on their deposits. Therefore, capital from the Youth and Small Entrepreneurs Self-Employment Fund which has around Rs 20-25bn, along with the 4 percent lending allocation by banks for deprived sectors (total around Rs 200bn), could be utilized. 

Mission drift

The ongoing crisis in the cooperative sector stems from past mismanagement and misuse. Historically, cooperatives have been community-oriented enterprises. However, there has been a decline in the spirit of community and cooperation within these entities. Factors contributing to this include management practices centered around promoters, marginalization of member roles, disregard for legality and due process in favor of individual interests, restriction of meaningful member participation to secure personal assets, and a shift towards individual benefit rather than collective financial gains. Hence, there is a misalignment between the intended purpose of cooperatives and their actual utilization—a mission drift.

Regulatory bodies

It is said that cooperatives rely on self-regulation, but as they grow in size and turnover, the need for an effective regulatory body becomes unavoidable to safeguard members’ savings and trust. Presently, the cooperative sector is overseen by a group of civil servants within the administration, yet the effectiveness of this regulation and monitoring is hindered by inadequate coordination in managing the detailed internal affairs and financial risks of cooperatives. This suggests a need for structural modifications—a second tier regulation system. Certain services offered by the country’s banking sector and financial cooperatives are similar in nature. However, differences in regulatory provisions create challenges. In cases where regulatory systems are weak, there’s a heightened risk of financial misconduct and tarnishing the reputation of the entire sector.

Youth and skilled human resources

The cooperative sector faces a shortage of skilled human resources, largely because the younger generation is not drawn to it. Additionally, existing employees often lack even basic knowledge of cooperative norms, values, and principles. This suggests that skilled individuals may not be attracted to the sector due to inefficiencies in employee selection, training, career development, service provision, and working conditions. As institutional governance weakens and the sector’s reputation declines, employee turnover rates escalate, contributing to high migration from the cooperative sector. It appears that cooperative organizations have made minimal efforts to enhance the capacity of their current workforce.

Community spirit

Cooperative business operates on principles distinct from individual entrepreneurship and open-market dynamics, prioritizing collective interests and common needs. However, there’s been a departure from upholding fundamental norms and values such as self-reliance, accountability, democratic management, equality, justice, and solidarity, with some businesses operating beyond the organization’s intended scope. The responsibility for self-regulation has been neglected, and cooperative education has been reduced to mere formality. As a result of inadequate coordination among cooperatives, the collective spirit inherent to cooperatives is diminishing.

Asset/liability analysis

The organization needs to conduct a thorough analysis of the costs associated with resource collection and the profits generated from its operations. This analysis should include an examination of financial sources such as share capital, funds, deposits, and the ratio of external debt. It appears that the cooperative sector is encountering challenges due to insufficient analysis. Specifically, cooperatives are grappling with a liquidity crisis, primarily stemming from their practice of investing in long-term loans and fixed assets using short-term deposits.

Direction

Cooperatives must avoid functioning as parallel banks. Reports from the National Planning Commission and other institutions pinpoint regions with high poverty rates and less resources, which cooperatives should prioritize. They should refrain from extending loans to financially capable individuals who can readily access funds from traditional banks. By concentrating efforts on underserved areas and directing resources to those truly in need, cooperatives can fulfill their intended purpose more effectively.

Way forward

The government should take the lead in returning depositors’ money in installments, prioritizing the poor and needy, especially those with relatively small amounts (less than Rs 500,000) that are crucial for their livelihood. As a first step, the property of cooperative management teams and employees should be frozen. To facilitate these payments, the government can introduce various schemes, such as tax-free funds. An amount of around Rs 10-15bn would be sufficient for this purpose, which can later be reimbursed to the tax-free fund investors by auctioning off the property of those responsible for mismanaging the cooperatives.

Result

Understanding the true essence of cooperatives and addressing all mismanagement issues while aligning with the aforementioned directions will lead to a reduction in multidimensional poverty and an increase in per capita income. As we approach graduation from Least Developed Countries (LDCs), access to loans at lower interest rates and subsidies from the World Trade Organization may diminish, potentially resulting in inflation, given our import-dependent market. However, a thriving cooperative sector can bolster locally-produced goods, meeting domestic demands and mitigating these challenges.

Bishow Parajuli brings four decades of experience in development, humanitarian affairs, diplomacy, fund raising, and management in several countries in Asia, Middle East and Africa, including World Food Program (WFP) Headquarters in Rome as Chief of Staff and Director, Resource Mobilization and Government Relations. He has served as WFP Representative and Country Director to India, Yemen and Egypt and United Nations Development Program (UNDP) Representative in Myanmar and Zimbabwe.

Food security is a pathway to peace, with rising food insecurity a trigger for instability and conflicts. Ensuring access to adequate nutritious food for everyone is an important part of a country’s responsibilities for the wellbeing of the citizens. The government must, as a priority, increase its support to agriculture development and strengthen livelihood opportunities to improve food security. In this write-up, Parajuli assesses the global and national scenario of food security.

Food security is national security

Increased land use for agriculture and rapid rise in crop yields over the years has resulted in massive increase in food crop production worldwide. Despite this, there are 850m people who do not have access to adequate food and some 345m people face high levels of food insecurity. Conflicts, climate change and supply chain disruption are causing food prices to constantly rise globally, and poor households are unable to access food, facing threats in their dietary needs and nutrition for their children. 

With continued decline in household food production, more and more Nepalis are forced to buy food, and the country is moving towards increased dependence on imports. This is a concerning trend in a country where 60-70 percent of the population are supposed to be engaged in agriculture. Nepal stands high in the global hunger index, with 36 percent of children stunted. Close to a million-hectares of land is estimated to be left fallow due to shortage of manpower because of migration of youth seeking employment abroad and movement of people from the hills to the Tarai. 

Crisis on farmers

Year after year, farmers are worried about delayed rainfall due to changes in weather patterns and are unable to plant paddy crops on time. The shortage and high prices of fertilizers and availability of seeds is a recurring issue every year despite farmers raising the alarm about being unable to fetch reasonable prices for their produce, making crop farming less and less attractive. 

Most worrying is the lack of meaningful support to farmers and comprehensive interventions to increase local production, productivity and impactful programs.

SDGs

At the historic UN General Assembly Summit in Sept 2015, 193 member countries (including Nepal) agreed to transform the world with a 2030 agenda, focussing on Planet, People, Prosperity, Peace and Partnership. This agenda which came into effect on 1 Jan 2016, aimed at the successful delivery of 17 Sustainable Development Goals (SDGs) by 2030. With seven years left for the completion of the Global Goals, will Nepal be able to achieve any of these 17 goals, including the elimination of all forms of hunger?  

At a recent Food Security Summit Plus 2 in Rome, Prime Minister Pushpa Kamal Dahal stated that “It is important that we address the bottlenecks in every sector for making a leap towards zero hunger”. He also stressed, “Transforming the food system is crucial not only for food security but also for the realization of all Sustainable Development Goals”. The PM is right—food security is affected by at least 11 Sustainable Development Goals. There is an urgent need to translate the PM’s statements into action with leadership, commitment, program activities and financing, so that all bottlenecks in improving food security to achieving zero hunger are addressed. Unfortunately, there is more talk than action. Frequent changes in the leadership in the Agriculture Ministry at the political level makes matters worse. 

Government commitments

The budget for 2023/24 makes a commitment for a national campaign for self-reliance in agriculture with an increase in food production from 10.7m tons to 14m tons and a reduction in import by 30 percent by the end of 2024. This is clearly unrealistic, within the time frame and in the absence of inadequate budget allocation, shortage of key agricultural inputs, lack of irrigation facilities and plans to mitigate weather challenges. 

The Agricultural Development Strategy (2015 to 2035) developed to modernize agriculture and promote agricultural growth, focussing on production, processing and marketing was a game changing plan. The PM’s Agriculture Modernization Program is linked to the strategy covering a 10-year period ending in 2023. There have been serious challenges in implementation of the program along with poor alignment with the country’s move to a federal system. With serious reviews there are opportunities to learn from these efforts to improve future strategies and interventions. 

Challenges and threats

The timely availability and high prices of fertilizers and seeds is a recurring problem. High interest rates and difficulties in accessing financial support limits farmers’ ability to enhance diversification and increase productivity. Climate change with increasing shifts in rainfall patterns such as delays in rainfalls, high intensity of rain during a short period and reduced or localized limited rain, is a rising threat to agriculture and food security. These trends are emerging all over the Tarai, the food basket of Nepal. In July/Aug 2023, there were reports of extreme weather and a long period of dry spells. It is understood that some eight districts in Tarai have suffered from delayed rain with an overall estimated shortfall in paddy of 15-20 percent in 2022/23. Over dependence on rainfalls and absence of irrigation facilities makes agriculture highly vulnerable. 

In absence of reasonable returns and unattractiveness, less and less youth are engaged in the agriculture sector, who continue to seek employment abroad and move from the hills to Terai, also causing serious shortages of labor and families are leaving their lands fallow in hill regions. It is reported that there is close to a million hectares of land uncultivated in the hill districts. There are also increasing reports of animals such as monkeys, wild boars and elephants’ threats to food crops in various parts of the country, most probably due to the animals’ habitats being encroached upon. An updated national strategy to deal with this menace and support to farmers is desperately needed.  

Our crops situation

It is estimated that Nepal currently produces 10.5m tons of cereals (5.5m tons of rice, 2.7m tons of maize, 2m tons of wheat and around 0.3m tons of other crops such as millets) with an estimated supply gap of around 2m tons of paddy for this year. The decline in production and consumption of traditional foods such as millets and maize and increasing consumption of rice and an increased import of grains to supplement domestic production are of concern with the risks of over dependence in import and mismatch efforts against the climate adaptation strategy. 

Besides high costs of agricultural inputs, low productivity in all three major cereal crops (Paddy (2.9 mtn/ha), wheat (2.2 mtn/ha and maize 2.25 (mtn/ha)) have drastically reduced farmers’ profitability. Furthermore, with a decrease in farm sizes, there are challenges in the economy of scale in modernization and corresponding profitability of farming in Nepal.  

Neighbor support

India is the main source of supplies of food commodities to Nepal. When India announces restrictions on global food exports, there is obviously concern about sudden food price rise at the local markets across Nepal, in absence of price stabilization measures established in the country. It is often the case that even in most cases of export ban, India makes special consideration for close neighboring countries such as Nepal, and regular supplies are maintained. Meanwhile, consumers are obliged to pay higher prices due to speculative steps by the traders and in the absence of government intervention. 

Millets (Kodo, finger millet and bajra) are nutritious and are adaptable to harsh climates and grow well in the mountain regions under rainfed conditions, but its cultivation is reported to be declining. 2023 was declared as the international year of millet. Nepal should have taken advantage of these international and regional efforts, (particularly by India) to promote millet cultivation and their use in our diets. There is continued concern among farmers that various existing government programs are not working with multiple shortcomings in implementation. The absence of a credible monitoring and impact assessment system makes it difficult to formally measure specific outcomes and value additions from these programs. 

Supporting vulnerable communities 

The WFP in Nepal’s recent survey findings indicate that about 4.26m people eat insufficient diets. There are also region-wide disparities in household food consumption, with the highest level in Karnali Province consuming an inadequate diet (22.5 percent), followed by Sudurpaschim Province (16.9 percent). Overall, 45.4 percent of children between six to 23 months of age did not meet the minimum recommended dietary diversity, with the highest level in Karnali (52.3 percent), Sudurpaschim (51.7 percent) and Lumbini (51.4 percent). The survey also indicates decreased income among the daily wage laborers. Given that nearly 70 percent households are depending on the market as their main sources for food, continued rise in food prices and decrease in income is resulting in extreme negative consequences for poor and vulnerable households for their food security. 

A nationwide government run program provides school meals to students up to middle school levels in all government schools. This program provides only Rs 15 per student per day, which is inadequate for an impactful intervention. I was glad to witness recently in a school that funds allocated for school meals were supplemented by additional contributions from the municipality. Such measures should be introduced across the country. There is support through Food Management and Trading Company in far western food deficit districts such as Kalikot, Humla, Jumla and Dolpa to subsidize transport of rice for sale to poor households. Unfortunately, there are reports of major problems in availability of rice for poor households from these programs due to irregularities in supplies. Perhaps encouragement and support for consumption of locally grown food crops would be more effective than supplying rice at subsidized rates 

Success stories 

Despite the lack of adequate efforts to promote agriculture there are several success stories, predominantly due to individual and private sector engagements. The growth in dairy and poultry industries supported by the government are commendable. Visits to several milk collection centers and conversations with many dairy farmers in Nawalparasi, show impressive levels of government support and costs sharing arrangements, and increased private sector investments has led to significant improvement in milk production, processing and marketing, with the nation reaching close to self-sufficiency in milk. Unfortunately, dairy farming is being threatened by non-payment of money owed by the Dairy Development Cooperation and others to hundreds of thousands of dairy farmers. Similarly, sugarcane farmers have repeatedly raised their concern on nonpayment of dues owed by the sugarcane millers for several months, repeated over many years, with an increased dependence on import of sugar.  

There has been good growth in the poultry industry, in vegetable farming, piggery and goats farming, with successful efforts by individuals, who have returned from working abroad, with increased self-reliance on these products. 

The way forward

The central government, in cooperation with the provincial authorities, develop and implement ambitious plans and increase the budget, along with establishing strong leadership and governance structure to lead the agricultural sector. It is now an opportune moment for an independent and comprehensive review of the Agricultural Strategy and new phase of PM Agricultural Development Program to help increase production, productivity, processing and marketing of food crops, adaptation to climate change, and expansion of livestock, poultry, fishery, horticulture, olericulture and medicinal plants based on different agro-climatic zones. 

Develop a resilient and sustainable agriculture sector by promoting new opportunities, access to finance, and innovation for small-holder farmers, with climate information and preparedness. There should also be extensive efforts to increase national adaptive capacity to address widespread climate concern and delayed rainfall by promoting various adaptation and mitigation measures such as expansion in irrigation facilities, cultivation of indigenous rainfed crops, and diversification of livelihoods. 

Create resilient and food security solutions by protecting and improving the livelihood of vulnerable communities with safety nets and employment. Existing govt support programs need to be reviewed for their impact and accountability. There should also be a mechanism to update the list of households and Communities who are recipients of assistance. 

Develop and adapt a food system approach to ensuring food production, with supplies and access guaranteed at all times to everyone. There must be a strong governance structure to coordinate implementation and review, and to monitor the progress in program deliveries/outcomes and impacts with measures to mitigate failures or redirect unsuccessful programs, without political interference.

There should be measures to bring fallow lands into cultivation. Supporting small farmers on agriculture inputs, technical know-how and marketing of their produce will be critical. In this connection, there must be an increased effort in enabling women’s engagements in the production processes and increased value addition and engagement of private sectors. 

The key to successful improvement in the agricultural sector will require effective coordination and implementation of essential program activities, besides good policies, programs, and sufficient financing. There must be efforts to revisit Technical capacity within the agriculture sector to make sure the current structure and technical knowhow is capable of responding adequately. 

Seek partnerships to enhance agricultural sector productivity. India and China have extensive experiences in transforming their agriculture from food deficit to food surplus nations; much can be learned with expanded exchanges, cooperation and partnership with these countries. The WB/ADB and key bilateral donors and the UN system can offer specific know-how and funding support as needed. 

Ramesh Kumar Hamal is the former chairperson of Securities Board of Nepal (SEBON) and an entrepreneur with decades of business experience in international markets as well as in Nepal. An engineer by profession with a degree in Electrical Engineering, he obtained an MBA degree in International Business Management and Finance from the Asian Institute of Technology, Thailand. He has over 30 years of senior management experience in the public and private sector enterprises, primarily in international markets. He is currently the founding partner of Omstone Asia, the developer and the operator of the 5-star Dusit Thani Himalayan Resort branded and managed by Thai hospitality chain the Dusit Thani, Thailand.

In this write-up, Hamal shares his insights on the capital market and entrepreneurial ecosystem.

Capital market importance

Nepal aims to achieve the Sustainable Development Goals and (SDGs) to become a middle-income country by 2030. To achieve this growth aspiration, Nepal must close its vast infrastructure gap. According to the World Bank, the Infrastructure Investment needs are estimated at 10-15 percent of GDP or $3bn annually. A credible and vibrant capital market could help address this investment deficit. Securities markets play an important role in promoting economic activity by un-locking and providing a mechanism for efficient mobilization of scattered savings, liquidity management and risk diversification. A credible and vibrant securities market could play a catalytic role in creating a conducive investment environment and a viable exit strategy for the domestic and international institutional investments inflows (infrastructure bond trading); all of which could play a transformative role in the growth of Nepal’s economy.

Reforming capital market

In recent years, the capital market has made important improvements and has seen encouraging signs of development with fundamental regulations in place, online trading and banking and in the real sector companies listing. However, major room for improvements seem obvious in the areas of maintaining international standard corporate governance protocols and compliance; effective surveillance to identify and root out market manipulating practices; and in the areas of market and product diversification, including the operationalization of the commodities exchange market, specialized investment funds, and appropriate derivative instruments, to help maintain the market stability and provide hedging instruments for investors.

Vast improvements in regulatory capability

A world class capital market is one that stimulates investor confidence, has breadth and depth in terms of product offerings, is characterized by the highest levels of integrity, has a sound regulatory framework, a transparent disclosure and accountability regime, and is fair, robust, and is an efficient market place. To achieve this status, firstly the regulator should have a greater degree of autonomy with legislative amendments. The government should take up this as a matter of urgency. This should then be followed up by digital capability enhancement including the operationalization of the “Automated Market Surveillance System (AMSS)” to monitor the market activities in real time and to establish the market confidence by implementing zero tolerance policy on detecting and penalizing all forms of market manipulating practices. A standard reporting system should be strongly implemented for all the market participants and the listed entities. It is equally important to improve the governance, technological capabilities and its professional operations at the stock exchange to establish higher credibility and fairness in the integrity of the market transactions. After all, the stock exchange in any market is the front-line regulator and the custodian, therefore integrity of the exchange is always at the forefront of a well-functioning and a credible capital market.

Entrepreneurial culture

The entrepreneurial culture is the bedrock of economic growth and development. It fosters the growth of enterprises, stimulates innovation in product and services and most importantly empowers the youth to become job creators rather than job seekers. To develop a thriving entrepreneurial culture, the government should work immediately on the inclusion of the entrepreneurial development curriculum right from the secondary to the college and university education. This coupled with the availability and a vibrant ecosystem of funding such as venture capital and private equity for the early stage start-ups financing is critical for Nepal to leverage the potential of entrepreneurial development.

Empowering SMEs

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90 percent of businesses and more than 50 percent of employment worldwide. In emerging markets, most formal jobs are generated by SMEs, which create seven out of 10 jobs. However, access to finance is a key constraint to SME growth. SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises. 

Studies have shown that only 10 percent of SMEs have a chance to survive more than five years. SMEs serve as a source of entrepreneurial skills, innovation, employment and the competitiveness in pricing. Given these facts, it is important for the government to create a conducive ecosystem for the SMEs that primarily comprises early-stage financing avenues, a vibrant capital market with a separate SMEs platform at the stock exchange, and a potent venture capital market.

Separate SME platform at stock exchange

Given that the access to finance is the most critical factor for the SME’s growth and generally the survival rate of the SMEs is low, it becomes imperative that SMEs growth is powered by financing avenues outside the conventional banking system which provides collateral based lending. Angel investors or venture capital therefore become the critical sources of funding for the SMEs growth, and this alternative funding is contingent on the existence of a vibrant capital market that facilitates viable and dependable exit mechanisms for the angel investors. This is where capital market plays an important and a catalytic role in the SMEs domain. Furthermore, crowdfunding via IPO is another important source of financing for the growth of SMEs. A separate SMEs platform at the stock exchange would first and foremost address systematically the high volatility at Nepal’s stock exchange by way of separation of large and small companies in different baskets and indexing. Secondly, the separate SMEs platform would make it feasible for the small companies for listing and raising of growth funds.

Internationally compatible SMEs platform

Study of the South and South East Asian emerging markets’ SMEs platform at stock exchanges shows that there are three critical elements of regulatory mechanism for an attractive SMEs platform; a) low cost of listing and yearly renewal fees; b) reducing risk exposure for small and unsophisticated investors in the course of IPOs (note the survival rate of SMEs is low); c) internationally compatible exit mechanism that facilitates dependable and viable exits for angel investor or venture capitals. With these in mind, SEBON in May 2023 submitted a new regulation to the government for approval of a separate SME platform at Nepal Stock Exchange (NEPSE). Capital market of Cambodia that is only 10 years in its evolution already has such a separate platform for the listing of small companies. It demonstrates that Nepal’s capital market in its three decades of operation is already lagging behind. The government should take up this matter urgently in approving the proposed legislation.

VC and PE for entrepreneurial growth

In recent decades, venture capital (VC) and private equity (PE) have emerged as critical sources of funding for entrepreneurial ventures in developing nations. VC and PE investments play a vital role in fueling innovation, fostering economic growth, and supporting the development of vibrant startup ecosystems. These two alternative financing avenues act as catalysts for entrepreneurial activities for startups and growth oriented companies that may not have adequate collateral or credit history. They fuel innovation in products and services and play a vital role in driving economic growth and stimulating job creations. VC and PE investments bring not only financial resources but also managerial expertise and strategic guidance to portfolio companies. Investors often have extensive industry experience and networks that they leverage to support the growth and development of the companies they invest in. This knowledge transfer enhances the capabilities of entrepreneurs, improves corporate governance practices, and builds managerial talent within the local ecosystem.

In order for Nepal to create an enabling environment for the VC & PE ecosystems, the government should undertake with priority four important reforms: a) Implement a “tax pass-through system” for PE/VC funds; b) create a fast-track ‘ease of entry’ mechanism for foreign VC and PE investors and operators, and enable a hassle-free exit mechanism such as IPO’s; c) through legislative and regulatory changes allow foreign investors’ participation and access to the secondary market in the stock exchange; d) provide tax incentives to attract large global institutional and individual angel investors.

Potential of VC and PE

The growth of PE and VC in India presents a compelling narrative. From $11.5bn PE & VC investments (domestic and FDIs) in 2014, PE and VC investments have grown to $61.5bn in 2023. In 2021-22 alone India’s PE and VC landscape witnessed over 1,500 deals with over $100bn in investment value. It is worth exploring the reformative forces that propelled this majestic progress in just a decade, so the lessons could be learned for Nepal to transform its own PE and VC landscape. 

The Alternative Investment Fund (AIF) Regulations, introduced by the Securities and Exchange Board of India (SEBI) in 2012, have significantly shaped the market trajectory for PE/VC investments in India. These regulations brought much-needed clarity and structure to the industry; they categorized funds into two main groups: Category a) which focuses on start-ups and SMEs and Category b) encompassing both PE funds and debt funds. This regulatory shift indeed transformed the very fabric of private equity operations in India. The framework it provided addressed the diverse nature of investments: startups thrived, and larger PE funds diversified their portfolios. Secondly, India swiftly addressed political and regulatory uncertainties, rose rapidly from 142nd in the World Bank’s 2014 ease of doing business rankings to 63rd in 2022, implemented a “tax pass-through system” for PE/VC investment funds, eased the FDI entry and exit mechanisms. 

Diversified and vibrant economy 

An internationally compatible and viable ecosystem for venture capital and private equity markets that foster and empower entrepreneurial culture, facilitates multiple avenues of non-banking financing for the SMEs and start-ups, and a thriving and credible capital market with a robust SMEs platform provides the foundation for the creation of a diversified and vibrant Nepal’s economy. The current building blocks of Nepal’s economy is akin to a single engine aircraft. The above ecosystem would provide that second engine to power the Nepalese economy to the next level and to avoid the risk of a failure. In all these, establishing a true meritocratic culture of work, that transforms the culture of glorification to the culture of performance, is the most important building block.