Nepal: As Political Revolution Completed, Massive Challenges Ahead for Economic Transformations

By Hari Prasad Shrestha

Proper execution of federalism is of utmost importance agenda for prosperity in Nepal. The country has been devastated by great earthquake and reconstruction of infrastructures need great attention for its timely completion. It is necessary to increase employment opportunities for the population of the country and to work abroad through growth in national production and productivity. Speedy implementation of mega projects of hydroelectric, manufacturing, construction of roads, railway and international airport, tourism infrastructure, drinking water, and sanitation must be of high priority. We must modernize and commercialize agriculture sector to double its production within a short span of time.

The 2017 election of a federal parliament and the provincial assemblies expected the end of political transition and beginning of stability and economic development in Nepal. Political revolution completed and there are challenges ahead for speedy economic prosperity.

Investment in education, health, smooth operations and regulations of the bank and financial institutions, good governance and effective service delivery are other significant areas which relate to the national prosperity.

Starting in the late 1980s, Nepal embarked on the path of economic liberalization. As the government withdrew, the private sector took the lead role in the economy. The country has, however, made progress toward sustainable economic growth since the 1990s and opened the country with objectives to economic liberalization leading to economic growth and improvement in living standards than compared to the past. But the private sector took initiatives only in low-risk and highly profitable social, financial and aviation sectors and not in the key manufacturing, agriculture and power sectors that were important for the country.

Likewise, public sector industries were sold without proper evaluation only to acquire valuable lands and properties of the industries by the individuals and failed to run these industries even in the earlier conditions. This happened even though Nepali industries cannot compete with the goods produced in India and China, both of which have economies of large scale.

Nepal has never been proficient to exhibit an incredible enhancement in its economy as well as national development as the politics have been a crucial point of instability, affecting negatively entire system since 1951 till promulgation of a new constitution in 2015 and beyond all levels of elections in 2017.

South East Asian countries that were in a similar position of Nepal during 1960 have brought great revolutions in their economy, and even the other South Asian nations other than Nepal are in good positions about growth and development.

The three important sources of economic development, i.e., hydropower, tourism, and agriculture are very slow in growth and needed a Herculean effort. And without rapid growth in these sectors and better response, the development of Nepal would be very thorny.

The scale of the economy is one of the lowest in the world with US$ twenty-five billion. Inflation is mounting day by day. Foreign aid has proved less effective in supporting normal national growth. The economy is stagnant or following a downward trend as compared to even other least developed countries. And currently, the entire economy is in the doldrums. The economic losses by the great earthquake were estimated to be as much as $10bn. The cost required for its rebuilding is $5bn.

Nepal’s economy relies heavily on rain-fed agriculture – its share in GDP is continuously declining over recent decades to below 30 percent of GDP due to inadequate infrastructure for irrigation. Paddy is the key cereal crop, which accounts around 22 percent of agricultural GDP.

Poverty as multidimensional effects to worsen development. The vicious cycle of poverty has affected every sphere of the nation. Most of the poor are from remote areas. For them, development has very little meaning.

Only the capital city of Kathmandu cannot represent the true picture of Nepal. The innumerable patches on the clothes of most of the population of remote Karnali Zone of western Nepal and population below the poverty line of other backward areas and the traffic jams in Kathmandu valley and capitalistic capital society are visible examples of the inequalities.

According to the population census, poverty in the rural areas of Nepal is increasing much more than in the urban areas. Besides, the scale of poverty is increasing in far-western, mid-western regions and middle Terai of Nepal. There is the reproduction of poverty. The economic gap between the developed districts like Kathmandu, Biratnagar, and Birgunj measured against the undeveloped districts like Jumla, Baitadi and Saptari is as stark as the inequality between Europe and Africa. Wealth distribution is uneven, and there are extreme inequalities in its distribution. Nepal is the only county from India in South Asia which has global US$ billionaire. Nepal could produce more billionaires. Nevertheless, it would remain bottom-most county of the world economy.

Nepal is among the 16 countries that will graduate to the developing country status from the current Least Developed Country (LDC) category, according to a report by the UN agency. Nepal is projected to graduate only in two criteria — human asset index (HAI) and economic vulnerability index (EVI).

Graduation process is only the first milestone in a marathon of development, not the winning post of a race to escape the LDC category.
It must have gross national income (GNI) per capita of $1,242 for graduation. Nepal must do the dynamic movement of action to achieve results according to the plan, the present rate of growth and development efforts are not sufficient to achieve the target by 2022; it’s likely to miss that target, possibly becoming (along with Afghanistan) one of the last two LDCs left in Asia.

To enter the international trade regime, at least a country should be self sufficient in the production of foodstuff and mass consumable items. It is considered the primary base for forwarding activities. Weak, unstable and faulty economic policy, import-based revenue policy was short-sighted and less supportive of strong foundations of economic prosperity, which Nepal is knowingly or unknowingly still following.

One of the setbacks of the Nepalese economy was that before the year 2000, Nepal had a policy of supporting illegal export of third-country goods to India, when the Indian economy was not liberal. That was an easy method to increase revenue and to expand trading activities in the country instead of making strong foundations for the growth of manufacturing sector. By that time, Nepal was the paradise of foreign goods for the Indians. The Indians rushed to buy goods in Nepal. But the situation turned dramatically in Nepal when India announced its economy to be liberal and more open. After the announcement of liberalization, India began to import foreign goods, and the Indian industries also increased their production tantamount to the international standard of imported goods. After that, unlawful export of third-country goods from Nepal to India started to decline. It had the negative effect on employment, revenue, business and other economic activities in Nepal.

Before this situation during the eighties, the economy was any way surviving, through manufacturing items such as export of hand knotted carpets, garments, edible oil, acrylic yarn and some other products.

By that time, Nepalese woolen carpet shops across the streets of Frankfurt and other European cities were subject to major attraction. Nepalese garment export to the USA was contending with other major garment exporters of the world. And the export of Nepalese products to India including edible oil (Vanaspati ghee), acrylic yarn, copper products, zinc oxide, etc. had also given good impetus by that time. During 2000, the share of manufacturing sector to GDP was around 10%, and industries were supporting satisfactorily to export and import substitutions. But unfortunately, it could not be sustained longtime, and manufacturing sector shrank dramatically and share to GDP continuously fell, currently to 6%.

The manufacturing sector employed just 6.6 percent of the total workforce. The competitive performance of Nepal as measured by the Competitive Industrial Performance Index (CIP) is very low (119th out of 135 countries). The cost of export and import in Nepal is very high and excessive costs have also been challenging to develop industries.

Cancellation of United States special trade preferences and duty-free tariff benefits to Nepalese products and quota restrictions and non-tariff barriers imposed by India on major Nepalese exportable products were key elements for the crumble of Nepalese manufacturing. The Nepalese industries are assembling or large profitable primary consumer-based industries. It produces goods in large quantity, goods that are not essential and produces in small numbers goods that are needed in the real sense.

To enter into neighboring and rest of the world markets, costs and prices of Nepalese products must be lower compared the neighbors. At this juncture, Nepal is very weak. Even though labor is cheap in Nepal, the costs and prices of production are relatively higher compared to its neighborhood. And protection for the industries on some specified areas is needed.
There is no contradiction that Nepal is among capital poor or low saving and low investment economies. It requires external assistance or foreign aid to implement its projects and programs. Nepal started to receive foreign aid since the first five year plan (1956-61). Foreign aid covers a substantial share of capital expenditure as well as total government budget in Nepal. Along with external debt and grants, technical assistance (TA) is also increasing in Nepal, which is around 40%. Per annum, TA increasing rate is average 17% as estimated for the previous decade. Total outstanding debt is also high. It remains around 55% of the GDP.

Truly speaking there are four important objectives of aid flows as a. to gain political support of the donors, b. to accelerate growth in the recipient country, c. to increase donors export, and d. to improve income distribution in the recipient country.

Foreign aid in Nepal is not well managed. It has some positive aspects but less supportive of the growth. The donors and the government have some differences and reservations concerning foreign aid management in Nepal. The donors are not very happy with the foreign aid management in Nepal. They have their perspectives such as lack of ownership, lack of leadership and direction by the recipient, leakage and misuse of resources, a poor top-down planning, lack of accountability and transparency and proliferation of projects are major concerns of donor’s side.

The government also has reservations with the management of aid and with donor’s perspectives. Such as mismatch of development priorities, lack of project planning, use of inappropriate technology and conditionality, the gap between commitment and disbursement, channeling of aid through INGOs, rising debts, low absorption, direct spending, shortcomings in institutional capacity are major concerns from the government side.

In fact, the government can’t spend the development money it already has. Despite rampant mismanagement, and a splurge at the end of every year timed to escape scrutiny, around a quarter of the funds reserved for capital investment, remain unspent annually. This has been one of the major causes for an obstacle in growth and national development.

In Nepal, it has been observed that the international development partners are always helping all form of political systems and the governments through increased assistance. Their motto appears to be development and economic growth in Nepal. They are not bemused by any political system. Nepal should feel fortunate in this regard. Nepal must correct its weaknesses to satisfy the donor community by better planning, and effective implementation of projects, the donors’ community should also act according to ground realities of Nepal.

Nepalis have long suffered from poverty, underdevelopment, scarcity, and conflict; they also know the price of being dependent on a single nation. A long queue of the population could be seen to get some kilos of rice for their religious celebrations in the remote areas of the count. Moreover, people are dying in the lack of proper medicines and the small children and the general people walking for hours to reach schools, health posts and to fetch water is a normal phenomenon in the mountains of Nepal.

To abolish the extreme poverty, Nepal must make a strong effort to achieve Sustainable Development Goals(SDGs) set by the United Nations. The 17 broad goals are interrelated though each has its targets to achieve. The total number of targets is 169. The SDGs cover a broad range of social and economic development issues.

These include poverty, hunger, health, education, climate change, gender equality, water, sanitation, energy, environment and social justice. The SDGs are also known as “Transforming our World: the 2030 Agenda for Sustainable Development”. The goals were developed to replace the Millennium Development Goals(MDGs) which ended in 2015. Unlike the MDGs, the SDG framework does not distinguish between “developed” and “developing” nations. Instead, the goals apply to all countries. The SDGs require the substantial up-scaling of efforts. Eradicating absolute poverty within the next 15 years implies one percentage point reduction in the current poverty rate every year.

There are 21 projects of national pride, out of it six roads, four irrigations, three hydropower, three international airports, two religious sites, one railway, one drinking water and one conservation projects are under execution since a long time. The national pride projects do not include mega and sophisticated projects, which could bring real change in national economy and development. They are fertilizer plant, oil refinery, mega hydropower, manufacturing industries, bus transport, waterways, oil and LPG gas storage plant, solid waste management, satellite station, etc.
The physical infrastructures for internal and international trade are not well developed in Nepal. Development of minimum required infrastructures are prolonged, and almost all highways are narrow and not in conformity with the international standard. The only one international airport in Kathmandu is not capable of handling growing number of air travelers.

The biggest challenges faced by the country in achieving higher economic growth and economic development were obstructed by the Maoist insurgency for ten years from 1996 to 2006. The Maoist insurgency killed 17,000 people and infrastructure was destroyed.

External investors felt insecure to invest as they continue to be stymied by militant trade unions, power shortage, weak infrastructures, strikes, red tape, and frequent policy changes. The sudden cancellation of 1200 MW Budhi Gandaki Hydropower awarded to a Chinese company gave a negative message to external investors.

Due to conflict and instability and as result of low opportunities for jobs inside the country, millions of young people are working abroad as cheap, unskilled laborer. Each day, over thousands of Nepalis, fly out of Kathmandu for work. They serve in lower-skilled jobs in Europe and farm plantations and factory workers in East Asia, but an increasingly large percentage are employed in menial jobs in the Gulf states, where low skilled labors are badly needed.
Most of the migrant labor are employed in high-risk manual jobs, the worksite deaths, abusive bosses and exploitation and enormous debt usually incurred to procure papers and jobs are dark sides of their life.

Today, about five million Nepalis, some 15 percent of the population, work abroad. Their migration lends an outsized role to the economy. According to a UN report released, no country in the world is more reliant on remittances than Nepal, where it makes up 32 percent of the GDP. That figure had nearly doubled since 2007 when it stood at 17 percent.

Growth in remittances continues, but the rate of growth has slowed down. Consumer spending had been expected to grow in the service sector, including retail, wholesale, trade and tourism, and so to an increase in bank deposits; but it did not, despite large expenditures on the elections.
Remittances to maintain its balance of payments and the trade deficit indicates just how reliant on remittances and other flows of funds Nepal remains in the absence of any real change in the level of exports.

Nepal has potential to generate 83,000 megawatts of hydroelectricity. However, so far, less than 2% of the potential of hydropower has been harnessed in around a century. Nepal cannot export its electricity if it is not produced by the Indian Company in Nepal.
The tourism sector has not been able to head out farther than the city of Kathmandu and Pokhara; it has numerous ups and downs, and it is difficult to rely on it as a rapid source of development.

Since two decades, the average position of the agriculture sector is undependable. The billion rupees of import of foodstuff is strong proof of unreliability in the agriculture sector. The productivity of most of the plain land of the south is diminishing, and the agriculture sector is incapable of feeding the fast-growing population.

Due to an open border and easy accessibility of Indian currency, it has been impossible to control smuggling of Indian goods in Nepal. Moreover, dumping of cheap goods has killed off budding domestic production both from India and China.

Despite problems in the economy, recently some positive movements have also been observed. Increased connectivity with South Asia is a declared long-term plan of the Chinese and access to the Indian market through Nepal is significant for them. By 2020, Chinese railway would arrive at the Nepal-China border; after that, it will expand up to the Nepal-India border in Lumbini, economically it will positively change economic picture. This Agreement on Transit Transport in place, Nepal might not only gain access to Chinese ports but also get to use ports in Myanmar and road and train connections to and from Central Asia and Europe through Chinese territory.

FDI is open in most of the sectors in Nepal. There is equal treatment to foreign and local investors. Government ensures legal protection to foreign investment against nationalization and expropriation and allows repatriation of proceeds from sales of shares and profit. Significant investment incentives exist.
Recently the United States legislation authorized special trade preferences for Nepal by granting duty-free tariff benefits for up to many Nepali items, including certain carpets, headgear, shawls, scarves, and travel goods, is authorized for ten years.

Now with the Agreement on Transit Transport in place, Nepal might not only gain access to Chinese ports, roads and train connections to and from Central Asia and Europe through Chinese territory. It will certainly support for trade diversification and would decrease dependency with India.

The biggest investment summit held in Nepal in years concluded on March 3, 2017, drawing investment commitment of record $13.5 billion (approximately Rs 1,444.5 billion) from six countries, with China leading the pack.The government is in process fast track to update industrial and labor laws, foreign currency regulations and other related laws to support industrial development. To protect domestic industries, Nepal must think seriously in a separate way about imposing systematic non-tariff barriers, anti-dumping duties and quantitative restrictions on the import of some products in which it is self-reliant. Last but not the least, the end of load shedding in power sector has also shown some positive indications in manufacturing growth.

After complete implementation of federal structures, it is hoped that economic activities would spread and decentralized in provincial and local level and federal budget would certainly swell by more than fifty percent this year. Federal structures require approximately eight billion dollars for construction of infrastructures in the initial stage and on top of it, yearly one billion dollars of expenditure is estimated. It looks like costly and challenging to manage the budgetary gaps. A balanced and careful driving of the economy is required for swelling government expenditures, revenue growth, and growth in factors of production driven by the private sector. If national production is not increased in substantial level, in coming days, the size of government budget and the GDP could be, equal, which might be a dangerous scenario for the economy and could be counterproductive for the federalism.

For balance and efficient transformations of economy, there needs to be a new political commitment on the part of political parties at local, provincial and national level, to develop comprehensible and realistic strategies, policies, program and projects in the interests of all, and not only for a narrow minority; based on inclusive and seek the betterment and advancement of all, whatever class, caste, ethnicity, age or gender.

Neither over-optimism nor undue pessimism is appropriate at this changed juncture in Nepal. A genuine commitment is required for efficient utilization of the abundant national resources available, to address the challenges of climate change and natural disasters. It is most important to develop positive and constructive relationships with powerful neighbors and other international players, and the country must have committed to democracy, social justice, and sustainable development.

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