Mobilization of domestic savings in Nepal

Earlier this year in January, Nepal Infrastructure Bank (NiFRA) issued an Initial Public Offering (IPO) worth NPR 8 billion, which brought in nearly 1.5 million applications.[1] This goes on to show that rather than the low rate of savings, it is the inability of the state to channel these savings into productive usage that ultimately thwarts Nepal’s economic growth. The country has been largely inept at mobilizing national savings and resources to drive economic development. One of the reasons for such inefficacy could be attributed to the high cost of capital. In Nepal, commercial banks often act as investment banks whereby they extend loans for long-term capital intensive development projects. This in turn makes these projects costly as commercial banks charge higher interest on their loans, which are typically short-term. Moreover, the capital market of Nepal, Securities Board of Nepal (SEBON), is underdeveloped and consists primarily of the primary market and does not have a trading platform to trade government securities in the secondary market. This is unfortunate as a functioning bond market is extremely vital in mobilizing resources efficiently, and “finances development activities of the government” as well as “provides a variety of funding avenues to the public and private sector”.[2]

Furthermore, foreign direct investments (FDIs) are mistargeted, with the majority of these investments going into profitable sectors serving domestic consumptions. Case in point being the acquisition of 60.4 percent of Ncell shares by Axiata, a Malaysian telecommunication conglomerate back in 2016.[3] Such investments entail shadow price and are counterproductive as the profits generated are repatriated in foreign currency, putting an additional pressure on the foreign exchange reserve. FDIs should be mobilized to create high tech exports and bring new management instead of financing domestic consumptions which could be done through domestic savings.

Likewise, there is a widespread misuse of the foreign currency brought into the country through remittance. In FY 2019/20 Nepal’s gross domestic saving was estimated to be 18.1 percent of GDP while gross national saving 46 percent, highlighting the potential role of remittance in capital formation.[4] However, as the incentive mechanism to channel national savings into domestic investments is absent in Nepal, much of the valued foreign currency is used for consumption purposes. Furthermore, since remittance alone cannot perpetually fuel forex, considering it derives not from production within the country but from exporting of cheap labors, there is a pressing need to focus on expanding domestic savings.

Saving schemes:

Mobilization of savings through the postal network has been one of the commonly used systems to not just finance development projects but also to promote greater financial inclusivity, especially among the East Asian countries. The postal saving system functions to serve the financially disadvantaged cohort that generally fails to gain access to formal financial institutions. Japan relied extensively on the expansive reach of its post office to bring financial services to low income and rural populations. Moreover, postal savings were instrumental in modernizing Japan as these were mobilized to fund large scale development and infrastructure projects.[5]

India also has several saving schemes under public/private banks or the post office, the most popular one being public provident fund. Small savings are mobilized for investments with sound returns and income tax benefits.[6]

Similarly, owing to its Public Pension Schemes, South Korea ranks among the highest with regards to the percentage of household savings. This pension system comprises four different schemes: “the national pension, government employees pension, military personnel pension, and private school teachers pension”.[7]

There are multiple institutional bottlenecks that impede Nepal’s capacity to effectively mobilize savings. The absence of institutional funds, lack of good governance, uncertainty in the bankability of projects, abuse of power, and political instability are some of challenges the country must navigate in order to strengthen its domestic capital formation. The government, in strategic partnership with the private sector, should explore incentive mechanisms that could not only encourage domestic savings but also channel these resources into productive uses.