State of the Economy and Navigating Through Prudently

Samriddhi Foundation in association with Friedrich Naumann Foundation for Freedom South Asia  (FNF) in collaboration with Society of Economic Journalists (SEJON) and Federation of Nepalese Chamber of Commerce and Industry (FNCCI) conducted a public-private dialogue titled, ‘State of the Economy and Navigating through Prudently’ on 22nd of December 2022 at Marriott Hotel Nagpokhari. The panel discussion was honored with the presence of esteemed dignitaries like Ms Shreejana Rana- President of Hotel Association of Nepal (HAN), Mr. Anjan Shrestha- Vice President (Commodity) of FNCCI, Dr. Gunakar Bhatta- Executive Director of Nepal Rastra Bank and Mr. Shankar Prasad Adhikari- former Secretary of Ministry of Finance. The session was moderated by Mr. Saurabh Jyoti- Director of Jyoti Group of Companies with the main agenda of discussing the present economic state of the country, its challenges and the way forward in overcoming those challenges and achieving development within twenty years.

The discussion kicked off with Ms Shreejana Rana highlighting the importance of the tourism sector in Nepal. Before the pandemic, the contribution of the tourism sector in Nepal’s GDP was 7.9 percent and in the year 2019, Nepal received around 12 lakhs tourists which has been considered as the best year in this sector till date. The anticipation of high arrival of tourists with Visit Nepal 2020 was completely shattered by the pandemic and as a result of that almost 94 percent of the companies in this sector were shutdown. As of November 2022, the sector has recovered almost by 50 percent and its contribution to GDP has stayed at 5.58 percent. She acknowledged that the support from the Government was immense for such revival with schemes of loan for refinancing the tourism sector. She expressed how the last 3 years has been critical for the tourism industry. Post COVID 94% businesses closed temporarily, 17% shut down permanently and 85% businesses are in debt. However, support from the government has been lacking this fiscal year and expressed her opinion that the sector has been undervalued despite having so much to offer to the country’s economy. Aa a woman representative, she also highlighted the extra challenges faced by women during pandemic since domestic violence against women had hiked during that period and expressed her concern over climate induced vulnerability for women. 

Some other problems that Rana identified were lack of skilled manpower in this sector, lack of clarification and standardization in tourism products, and unsystematic infrastructure development plans, etc. In order to overcome the challenges, she suggested that government and economy should move ahead parallelly instead of government taking over major decision making processes. While making master plans, the government should take the opinions of the private sector and other different associations to make it more inclusive. She also emphasized on increasing connectivity to foster the tourism sector and shift the focus on taking the right tourism products into the right markets.  

Then Dr. Gunakar Bhatta took over and he highlighted various measures taken by NRB to manage the country’s economy during the time of COVID crisis. In regard to the import ban, Dr. Bhatta defended the government’s decision by highlighting the necessity of holding consumption to maintain the depleting FOREX reserve of the country. As a result of such measures, today the country is able to recover its foreign currency reserve and has been successful in avoiding the crisis similar to that of Sri Lanka. He is very optimistic about the fact that the present liquidity crisis in the economy will ease next month as the cash deposit ratio of banks is estimated to rise, which will increase the private sector’s access to loans that will ultimately increase the money supply in the economy but this is possible only if international affairs does not affect our economy.  He also defended NRB’s decision of regulation in the interest rate by holding the change in interest rates of loan in 3 months and deposit in 1month with maximum deviation of 10%. He claims that stability of interest rate is what the country requires at the present time. 

He suggested that the country should shift its focus on food security and energy security since food price inflation and energy crisis are some of the burning issues at the moment. For this, we must focus on harnessing our comparative advantage and hydropower is definitely our plus point in creating long term stability in energy security. He then stretched on the need of strong cooperation between the private sector, Government of Nepal and NRB to make it happen. Adding to this, he also highlighted the importance of building strong institutions using debenture issuance as a tool to avoid economic crises in the country. 

Shankar Prasad Adhikari, the former secretary of the Ministry of Finance, expressed that targeting techno-economic solutions will not solve the economic challenges Nepal is facing today. Giving the example of Sri Lanka, he pointed out the fact that endorsing populist policy decisions led to economic crisis in the country, so tackling the problem of political economy is something that Nepal should focus on to avoid a similar situation. One of the reasons Nepal is not able to achieve growth even after three decades of economic liberalization is its failure to achieve political stability. Even after forming a stable federal government after the 2017 election, the intra-party feud led to bureaucratic instability making it less accountable. When the question of why Nepal has a low capital spending of less than 50% on the budget arose he related that low risk taking and firm decision making environment in the government due to political instability. He elucidated bureaucrats of Nepal as the “risk averters”.  Another reason that he highlighted was Nepal’s inability to cooperate with India. India and Bangladesh are the only potential markets for our hydropower. Moreover, we must rely on India to sell electricity to Bangladesh due to the enclosed border with India so economic cooperation with India is very vital for Nepal’s prosperity. But due to pretentious nationalism and hatred against India, the country is not able to harness the benefits. In order to avoid such mishaps, there must be a shift in the geo-political and geo-economic narrative against India.

Another reason that Adhikari pointed out was the governance induced compliance cost that weakens the business environment in the country. The duplication of institutions in the present federal composition has also resulted in increasing governance cost and to address this problem, he suggested that the top level structure of government should be reduced, which will reduce the cost as well as enhance the efficiency of bottom level institutions. Highlighting the fact that the country at present lacks the clear understanding of the functionality of bureaucracy which tends to get changed every time with change in political leaders, the way forward for the country to overcome such problems is by stopping the politicians taking over the working mechanism of bureaucracy with their personal vested interests along with putting emphasis on public-private partnership. He summed up stating the policy measures in Nepal as “Reactive Policies”. Suggesting the urgency of foresightedness among the  policy makers he emphasized on the need of “Proactive Policies” in Nepal. He also related the situation with the COVID times when liquidity was high, brain drain was low and interest was low, we as a country were unable to grasp the opportunity which shows a lack of foresightedness in our side. 

Coming to the final panelist, Mr. Anjan Shrestha, who is the Vice President of FNCCI put forward the idea that the economic liberalization of 2048 that set the foundation of free market economy in the country should have been reformed at least three times. He acknowledged the contribution of monetary policy in managing the economy during hard times however, he also expressed the concern that with present bank rates, which is higher than the rates recommended by IMF, private firms are unable to take loans and repay them forcing many to close down their companies and those which are still operating are merely producing at 20 to 30 percent of its capacity. The decision to hold consumption through import ban might have helped to bring the balance to previous levels but as a result of such government intervention, many car importing companies had to shut down forcing many to lose their jobs, so the effectiveness of such intervention is doubtful. The negative portrayal of the private sector as profit making institutions should be changed, instead these profits are what encourages the private sector and makes it a driving force of the economy. Thus, such narratives should be changed and an environment should be created where private firms can work freely.  

The only way forward for Nepal at present is finding ways to convert these identified challenges into opportunities. While talking about harnessing comparative advantage, Mr. Shrestha expressed the problems in the hydropower sector of the country and one was the monopoly of Nepal Electricity Authority (NEA). Creating opportunities for the private sector to get involved in distribution of electricity might help to break the monopoly of NEA that will eventually aid to consumers’ benefit. While addressing the problem of skilled manpower, he pinpointed the fact that many citizens have received multiple training but still almost 55 percent of untrained manpower are working in the country. The lack of coordination between different agencies involved has created this problem and loss of our resources. In order to overcome this problem, FNCCI at present is collaborating with CTVT to fix the occupational standard and to prepare a work based manual for different jobs required in the market. Along with this, he also emphasized the importance of taking our forest based industries one step ahead by processing the available medicines and herbs instead of exporting raw unprocessed forest based resources. 

In conclusion, public private partnership is the only way forward for Nepal to overcome the existing challenges. The government and private sector should move ahead parallelly instead of government partaking the major roles in decision making to make the development plans and policies more inclusive and that is how we can achieve the goals it has anticipated within a few years