The Nepal Communist Party (NCP) Co-chair KP Sharma Oli-led government has completed a year. The government was formed based on the twin mandate of ‘stability’ and ‘prosperity’. But while a semblance of stability has been ensured, there is a big question mark over its commitment on prosperity. FDI is down and trade deficit steadily inching up. Meanwhile, the government is preparing for ‘Nepal Investment Summit 2019’ on March 29-30. Biswas Baral and Kamal Dev Bhattarai talked to Former Finance Minister and senior Nepali Congress leader Ram Sharan Mahat to solicit his views on the government’s economic performance and the investment summit.
What is your assessment of Oli government’s economic policies over the past one year?
There is not much to be optimistic about. The government seems preoccupied more with publicity, self-praise, aggrandizement, and high-flying rhetoric, rather than undertaking tangible actions vital for the country’s long-term economic interest and sustainability. There is increasing trend toward unproductive expenditure like raising perks and privileges, and distributive and consumptive activities. The government thinks it has done a lot, but the country’s economic condition is getting worse. Good governance, security of private property and strong law and order are prerequisites for economic development. There were explosions in Arun-3 hydropower project last month. This week, there were blasts at dozens of Ncell towers as well, resulting in human casualty and corporate losses. Such incidents create suspicion and terror, which in turn affect foreign investment. With regard to public investment, thousands of infrastructure-related development projects approved and started by previous governments at the central level are in limbo as their implementation has been halted. This is one reason why the capital expenditure is low.
On what basis can we say the economy has fared poorly under the Oli government?
There are several indictors. The declining trend of NEPSE is a matter of concern. Stock market is often regarded as one nerve center of the economy. In the last one year since the formation of this government, the NEPSE index has gone down by over 25 percent. Similarly the country has slipped five places in the Doing Business Index. Nepal’s rank in the Corruption Perception Index (CPI) is getting worse too. The private sector seems terrorized. All this shows the country’s economy is not faring well. Cost of production is going up. The country suffers from a huge trade deficit and even the balance of payment has deteriorated now. Traditionally the country has maintained a balance of payment surplus, continuously raising the foreign exchange reserve. But this year it has gone down. We have to think of how to increase Nepal’s competitive strength. But the government does not seem concerned about these. Its activities are increasing the production cost and making the country less competitive.
After a long time, a stable government has been formed. Political instability was long blamed for the country’s economic woes. What is wrong now?
People had high expectations of the government because it was elected for five years with a popular mandate. But the government feels it can do anything with a majority in parliament. It thinks pompous speeches and high-flying rhetoric would bring about economic development and prosperity. The government’s stability must be reflected in its behavior, action and administration. Do you see stability in the administration? Obviously not. There have been frequent transfers of civil servants, even three or four times in a year. So political stability is not reflected in the government’s performance. Election of a new government for five years does not by itself ensure stability and steady development.
The focus should have been on strengthening existing institutions. There are coordination problems among federal, provincial and local governments, resulting in confusion and conflicts over the division of responsibility and mandate. The government’s failure to continue implementing the multi-year projects started in the past by taking ownership or handing them over to provincial and local governments on time, and with necessary funds, has created disarray in thousands of road, drinking water, irrigation and other projects. There are complaints from provincial and local governments about the lack of adequate manpower. Further, bureaucratic transfers and appointments are excessively politicized and based on partisan interests. To ensure good governance, you should have right people in right places. This is not happening. The government has failed to produce expected outcomes.
What do you make of the 6.5 percent projected growth in this fiscal year?
Economic growth in the past two years has been favorable, particularly against the poor base of 2014/15 and 2015/16, which was the result of the earthquake and the blockade. But such growth cannot be sustained. The government is boasting about 7-8 percent growth, and trying to influence estimates by others. Around 5-6 percent growth can be achieved because of several factors. First, a good monsoon has contributed to greater agriculture output. Second, massive post-quake reconstruction works are taking place due to the policies and initiatives of previous governments. This is also boosting growth. Third, there is now uninterrupted power supply and expansion of the service sector.
Data show Foreign Direct Investment has declined after the formation of the new government.
The country’s investment climate is not good, as I said before. The stock market, which is a nerve center of the country’s economy, is continuously declining. The private sector seems terrorized and foreign companies are apprehensive. Even domestic investors do not seem confident about the future. Wide-spread corruption in bureaucracy, administrative hurdles in doing business, lack of confidence in the communist government, deteriorating quality of governance—all these contribute to low foreign investment.
Is the communist background of the government also turning investors off?
Bombs are going off at various places, which raises questions about investment security. There are reports of the finance minister’s remarks that the state should own land, meaning it should not be privately owned. Similarly, the stock market has been billed as an unproductive sector. Communist ideology could have played a role.
Are there any structural and legal problems that contribute to low FDI inflows?
There are not many legal problems with FDI, although some refinements here and there may be required in response to the evolving situation. The real problem lies in implementation, confidence- building and administrative efficiency. We have enacted a law on special economic zones and established one in Bhairahawa, but only a few industrial units have been registered and set up there. A new labor act has been enacted through consensus. During the Investment Summit in 2017, donor agencies had pledged $14 billion but that has not materialized. We have generally a favorable legal framework but the problems are with implementation, quality of governance and confidence-building. Several provisions in the last budget including tax measures were not helpful either.
If the money committed in the last investment summit failed to materialize, what could be the point of holding another one?
It is for the government to explain its rationale. My own advice would be to first review the commitments made in the last summit, and analyze why these pledges have not materialized. There must be a serious appraisal of that, with proper follow-ups. Only after that, and only if it is necessary, should another investment summit have been held. Follow up on previous commitments, and only then think about the future. But the government seems to be planning the summit more for publicity, to show that it is actually doing something.
What do you make of the government’s recent employment guarantee scheme? Surely, it is good.
Creating more employment opportunities is a good thing. But there must be proper homework and preparation before announcing a scheme. The problem in Nepal is not just lack of employment opportunities, but creating skills and motivating Nepalis to take up jobs where foreign manpower is being utilized. There are plenty of job opportunities in areas where foreign labor is being used. Many development projects are suffering for lack of manpower. A few weeks back, I had read that there is a lack of manpower in big industries and they are having to bring manpower from India, Bangladesh and other countries. The construction industry is dominated by foreign workers. Nepal is the seventh biggest remittance sending country to India. Of our total remittance inflow of US $7 billion this year, we send about $3 billion to India. We only have to provide skills to Nepali nationals so that they can work here. The employment guarantee scheme seems to be directed more toward distributing money and providing an unemployment allowance rather than creating skills. We need solid programs to create jobs. This calls for a serious exercise by top experts and policy makers with the right background and expertise.
Do you think the communist government is trying to follow the Chinese economic model?
I cannot say what the government has in mind. As far as attracting foreign investment is concerned, China is a great success story. But they have adopted a different political system, which makes it difficult for others to exactly replicate their model. However, we can learn a lot from their model and experience with regard to productivity growth, work discipline, technological improvement and foreign investment. It must be noted that the growth and prosperity of China started with the policy shift in 1978, when the inward-oriented, centralized and state-centric policy of the Maoist era was discarded in favor of an open and liberal policy.