‘Growth should be driven from seven corners of Nepal, not just the central valley’

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

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

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

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

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

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

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

Do you believe that the FDI threshold should be minimized?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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