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Nepal is already caught in the geopolitics of great power competition, and we cannot escape from it. The only option left for us is building our capacity to deal with the fast-changing geopolitical situation. There is a national consensus that Nepal should use the current situation as an opportunity to advance its economic interests. Foreign and geopolitical experts, including this scribe, often wonder whether we have built our capacity to deal with the complex, uncertain, and chaotic world. In one way or another, Nepal is already bearing the brunt of increasing geopolitical tensions. The pressing issues that the global community is confronting are growing tensions between the US and China, the ongoing Russia-Ukraine war, Taiwan tension, the Middle East crisis and the impacts of climate change. The impact of those issues in Nepal is evident in the conduct of foreign policy, the economy, and to some extent, the domestic political landscape. Over the past few years, we have already become hostages of indecision, ill-decisions, delayed decisions, or fractured decisions on important bilateral, regional or global issues.

To deal with the complex geopolitical situation and other global issues, Nepal needs to pay serious attention to strengthen the existing mechanisms and create new structures, if required. First, it needs to make the existing mechanisms effective. Second, it needs to work out whether it needs new mechanisms. Third, there should be effective and timely coordination among the key state institutions. 

Let's begin with the Ministry of Foreign Affairs (MoFA). The ministry has 10 divisions covering all countries, regional and global organizations. However, these divisions fall short of human resources and expertise to deal with global issues, given the workload of all divisions. The creation of divisions is based on geography, not issues. Like in many other countries, there are no think tanks within the ministry to support its functioning. Nor is MoFA tolerant or positive about the government think-tank, the Institute of Foreign Affairs (IFA). MoFA officials have yet to realize the importance and role of think-tanks. They think, since they are involved in all bilateral, regional and multilateral negotiations, they have first-hand information on all issues and do not require inputs from any think-tanks. That is why, for a long time, the IFA has been left totally paralyzed.

And it is because of this hubris, the units within MoFA have failed to produce in-depth reports on important bilateral and regional issues. Take the examples of America's Indo-Pacific Strategy and China's Belt and Road Initiative. There has been no serious research and studies on either of these. As MoFA has not developed its capacity, other ministries and departments cannot take its support. Based on conversations with government officials, this scribe can conclude that there is a vague understanding of these issues among them, and they are facing difficulties in taking decisions. There is another side to the story too; there is a lack of independent experts and scholars who can conduct in-depth study and research on what Nepal's position should be in the changing geopolitical situation. There are some non-government think-tanks doing research, but government agencies and officials do not take them seriously due to their poor quality.

The underlying problem is that there is a serious flaw in the appointment of the foreign minister. Those who have at least some idea about foreign policy or geopolitics should be appointed foreign minister. On the one hand, the tenure of foreign ministers is usually short, while on the other, it takes several months for them to grasp the basic knowledge of how MoFA functions and what the key issues are. Foreign embassies or permanent representatives are one of the important wings of the ministry. However, they are almost dysfunctional. Barring some exceptions, Nepal is sending inexperienced, low-profile politicians as its ambassadors to key global capitals such as New Delhi, Washington and Beijing. 

There are some basic problems with ambassadors appointed on political quotas. First, they lack knowledge of the basics of how diplomacy works. Second, they usually do not cooperate with their respective division at the ministry; they do not even feel comfortable reporting to the foreign secretary. They work directly with the foreign minister or the prime minister. Whereas, career ambassadors have the tradition of not taking decisions out of fear of being dragged into controversy. That is why they confine themselves to day-to-day administrative tasks. There is, therefore, a need for a complete overhaul in the functioning of the ministry and its units.

Another equally important issue is the lack of cooperation between state mechanisms, mainly the Office of the Prime Minister and the Council of Ministers (OPMCM). Currently, there is a lack of coordination between OPMCM and the Foreign Minister. In some cases, the OPMCM takes decisions without consulting or informing MoFA. One example of this is the appointment of ambassadors. There is also a lack of coordination between the foreign ministry and other ministries. In principle, all decisions and communication related to foreign policy should be conducted through MoFA, but this is not happening. At the same time, there is a lack of consultation between MoFA and security agencies. Not only is there a lack of coordination among ministries, but there is also a lack of coordination between MoFA, and provincial and local governments.

Experts have been raising this issue for a long time. But political leaders do not take these issues seriously because they are wielding foreign policy to advance their party and personal interests. If all the activities and processes are made transparent, they fear losing the privilege of making secret deals or appeasing others to remain in power. This is why they usually do not want to include MoFA officials in talks with other countries, except in formal delegation-level meetings. At the same time, Nepal seriously lacks capable human resources to deal with the complex geopolitics. This should be our priority issue although it may not be a priority issue for our politicians. Our politicians should realize that they alone cannot handle foreign policy in this complex geopolitical situation. Politicians may have certain issues with the foreign ministry, but there cannot be its replacement. They, however, have all rights to restructure it.

The economy is expected to experience improvement in the current fiscal year 2023/24, particularly with the expansion of the service sector, the National Statistics Office (NSO) said in its economic forecasts for the current fiscal year.

In its preliminary national accounts estimates, the NSO has forecast a 3.87 percent economic growth (based on market prices) for the current fiscal year. Nepal's gross domestic product at consumer prices is estimated to reach Rs 5,704 bn in the current fiscal year. Likewise, the NSO has revised the size of the country’s economy in the previous fiscal year to Rs 5,348 bn.

The projections for the current fiscal year were based on the data of the first eight months of fiscal year 2023/24 and on assumption that the economy will continue to progress normally in the remaining period, according to the NSO.

The estimates, which have categorized the economy into 18 sectors, show progress in most sectors compared to the previous fiscal year.  The NSO has revised the economic growth rate of the previous fiscal year to 1.95 percent.

The service sector is forecast to experience the highest growth rate in the current fiscal year. Contributing an estimated 62.9 percent to the economy, the sector is projected to grow by 4.50 percent which is higher than the overall growth forecast.

Additionally, the primary sector, comprising agriculture and mining, is expected to grow by 3.03 percent. In the previous fiscal year, this sector's growth rate was estimated at 2.72 percent. Likewise, the secondary sector, which encompasses production, is projected to have the lowest growth rate of 1.20 percent, even lower than the previous fiscal year's estimate of 1.40 percent.

However, the industry and construction sectors are anticipated to experience negative growth in the current fiscal year. The industry sector's growth rate is forecast at -1.60 percent. Similarly, the construction sector is projected to have a negative growth rate of -2.07 percent in the current fiscal year.

Among other sectors, accommodation and food services are expected to record the highest growth rate of 21.84 percent percent, followed by electricity and gas with 17.44 percent, transportation and storage services with 11.89 percent, financial and insurance services with 7.80 percent, and human health and social work activities with 5.52 percent. The remaining sectors are projected to have growth rates below 5 percent.

Preliminary estimates suggest that exports will account for 7.94 percent of Nepal's gross domestic product in 2023/24, an improvement from the revised estimate of 6.96 percent in the previous fiscal year. Similarly, imports are estimated to constitute 33.70 percent of the GDP, compared to the revised estimate of 34.68 percent in the previous fiscal year. Likewise, remittances are expected to account for 22.96 percent of the gross domestic product in 2023/24, while the revised estimate for 2022/23 was 22.82 percent.

Per capita income reaches Rs 195,000

The annual average income of Nepalis is estimated to reach approximately Rs 195,000 in the current fiscal year. In US dollar terms, per capita income is projected to rise to 1,456, a rise of $51 compared to the previous fiscal year.  Nepalis are expected to spend 92.38 percent of their total income on consumption in the current fiscal year, according to the report.

Dr. Satoru Nagao is a fellow (nonresident) at Hudson Institute, based in Tokyo, Japan. From December 2017 through November 2020, he was a visiting fellow at Hudson Institute, based in Washington, DC. Dr. Nagao's primary research area is US-Japan-India security cooperation. He was awarded his PhD by Gakushuin University in 2011 for his thesis, "India's Military Strategy," the first such research thesis on the topic in Japan.

Dr. Nagao also holds numerous other research positions, including director at the International Security Industry Council, senior research fellow at the Japan Forum for Strategic Studies, specially-appointed research fellow at the Japan Forum on International Relations,  research fellow at the Security and Strategy Research Institute for Japan, senior fellow at the Institute of National Security Studies Sri Lanka, and senior research fellow of the Indian Military Review. In this interview with the ApEx, Dr. Nagao talks about Japan-Nepal relationship, Nepal's foreign policy, Indo-Pacific Strategy, China and more.

What is Japan's Indo Pacific outlook ?

The pioneer of the idea of Indo-Pacific instead of Asia-Pacific was former Japanese Prime Minister Shinzo Abe. In 2007, he addressed the Indian Parliament where he proposed the idea of both Indo-Pacific and QUAD. Since then, these two have been the main strategy of Japan’s foreign policy. 

The integrated concept of Indo-Pacific is better than Asia-Pacific because this region is under threat of China’s domination. Indo-Pacific is better than Asia-Pacific when people talk about counter China strategy. QUAD, meanwhile, is a group of all influential powers in the Indo-Pacific, except China. 

Viewing these original reasons that Indo-Pacific and QUAD were formed to prevent China’s domination in the rising region, Japan decided to cooperate with the Indian Ocean region, especially India. The purpose of these concepts is strategic. China’s infrastructure projects under the Belt and Road Initiatives (BRI) created huge debt for recipients and expanded China’s influence in the Indo-Pacific region. China’s project does not purely support local recipients, and it is dangerous for development in this region. A typical example was Hambantota port in Sri Lanka. China’s interest rate was too high, and Sri Lanka could not pay. As a result, Sri Lanka gave China the right to control the port for 99 years. A similar situation happened in Djibouti, and China set up a huge naval base there. There are many similar cases in the Indo-Pacific. 

Thus, Japan has focused on tackling China by suggesting alternative choices for countries. One of the examples was the Matarbari port project in Bangladesh. When China suggested the Sonadia port project, Japan suggested the Matarbari port project to Bangladesh. In this case, the Bangladesh government accepted Japan’s Matarbari port project. Thus, if there is an alternative choice, governments should be careful and avoid falling in the debt trap of China. 

How do you see Japan's engagement with South Asian countries? 

Japan’s support projects in the South Asian region are based on good motivation, which contributes to the development of locals. But at the same time, currently, Japan is taking care of many projects worldwide and cannot share enough money to support locals. Due to global free trade and China’s intended manipulation of currencies, many factories have relocated to China. As a result, factories in other countries lost competition with factories in China. 

The size of China’s contribution is bigger than Japan’s. Therefore, Japan needs to coordinate with the US, Australia, EU, and India now. Japan believes that India’s influence in this region is necessary. For example, when we check the geographical situation, the Chinese side of Nepal is mountainous and difficult to trade, but the Indian side is flat and easy to trade. In this case, the development of Nepal's economy relies on India. Thus, Japan cooperates with India, and Japanese cooperation can contribute to Nepal's economy.

What are Japan's key priorities in Nepal? 

Japan wants to develop the Indo-Pacific as a stable and peaceful region, including Japan as a regional member. Japan does not have any national interest in building the Nagdhunga Main Tunnel. It is an honor for Japan to contribute to the people of Nepal. Cooperation with India has also been strategic for Japan. In this region, India’s influence is strong. However, China has not cooperated with any foreign countries. That is why China’s projects have created conflicts with India. Japan does not want to create such conflicts. Japan’s projects are contributing to the people of Nepal without spending time and resources on conflicts.

How does Japan view China’s engagement with Nepal?

An opinion poll in Japan indicates that 90% of Japanese people have a negative image of China. The Japanese view of Chinese engagements with other countries like Nepal is also very bad. While Japan wants to develop the Indo-Pacific as a stable and peaceful region, China intends to exploit the poor conditions of developing countries for its own gain. Nepal’s cooperation with China is also breaking India's trust. In the long run, China-Nepal cooperation will not be beneficial for both Nepal and India.

What are your suggestions to Nepal in the conduct of foreign policy ?

Nepal wants to be an independent country. That is why Nepali people worry about India’s strong influence sometimes. It is understandable. But in my opinion, cooperating with China was the wrong choice. What happened in Japan can be a good example. After WWII, Japan chose the US side for about 80 years. This is why the US started to trust Japan. A long-term stable relationship can bring mutual benefits. The US decided to export 400 of the latest Tomahawk cruise missiles to Japan, whilst knowing that long-range missiles could be a threat to the US itself. This was possible because of the trustworthy relations between the two nations. 

In South Asia, India-Bhutan relationship is similar. Bhutan gets much support from India because they have stable and trustworthy ties.

The government is preparing to summon the summer session of the parliament, or the budget session, from as early as next week. As per the Constitution of Nepal, 2015, the government must bring fiscal budget on May 28.

Except for some bright spots, the Nepali economy is passing through a challenging situation marked by diminishing demand and sluggish growth. Banks, which have lending capacity of over Rs 600bn, are seeing a lack of demand for loans as the private sector is not making new investments. The central bank's efforts to stimulate the economy through monetary easing have not yielded desired success. Purchasing power of consumers is dwindling due to factors such as youth outmigration and the lingering effects of previous interest rate hikes. These developments have eroded the consumption base that fuels economic activity. This has left businesses struggling with unsold inventories and underutilized production capacities. While the central bank has lowered interest rates to historic lows, this has become ineffective as there is not much improvement in consumer demand.  

It is evident that monetary measures alone cannot revive the economy. A combination of both monetary and non-monetary reforms that foster collaboration among the government, central bank, financial institutions and the private sector is what the economy needs. Non-monetary reforms should address structural issues hindering economic growth. Measures to boost employment opportunities can limit the outflow of potential consumers. Simultaneously, initiatives to improve productivity and competitiveness could bolster the private sector's confidence to invest. Furthermore, the government must play a catalytic role through targeted fiscal interventions. Expediting capital expenditure and clearing outstanding payments of construction entrepreneurs can provide an immediate boost to economic activity.

The National Statistics Office has forecast 3.87 percent GDP growth for the current fiscal year, which is more or less similar to the projections made by the World Bank and the Asian Development Bank. This shows a significant improvement compared to the previous fiscal year.  Addressing the demand-side constraints through a mix of monetary and non-monetary policies is crucial to continue this momentum.