Nepal economic vision 2030: Leveraging private sector growth and investments

In the last decade, Nepal has witnessed many milestones. Popular uprisings around the country in 2006 led to the reinstatement of democracy and paved way for the Comprehensive Peace Accord (CPA) which ended the decade long Maoist insurgency, overthrew centuries old monarchy, and elected a Constituent Assembly which finally promulgated the new constitution in 2015 in its second attempt. Despite epoch defining political changes, on the economic front Nepal has been a non-performer with per capita income of just USD 730.

Economic models driven by politics and vote-bank appeasement policies have relegated pragmatism and prudence to the backburner. In Nepal, the private sector is not seen as a key engine for growth and merely receives lip service even as it creates jobs and entrepreneurial opportunities, develops human and physical infrastructures, and generates public revenues for the government. Political forces continue to promote the government’s role in business and push the cause for cooperatives that can neither be scaled up nor regulated.

The political and economic liberalization of the early 1990s ushered in a new a shift in economic outlook. The reforms of this era paved way for creating an enabling environment for economic growth which was exemplified by impressive growth rates that the country had clocked at that time. However, progress was stymied midway as Maoist insurgency and political instability took center stage stunting average growth rates between 2-5%.

However, Nepal has made significant progress, especially in social service delivery.Poverty dramatically reduced and there have been significant reductions in child and maternal mortality over the years. Life expectancy has increased and primary schools now have close to 100% enrolment. Building upon these improvements and reinvigorating the economy will however require enormous investments both in human and physical infrastructures along with sustained periods of economic growth. The role of private sector in realizing a vision for 2030 is of paramount importance and deserves some much needed reflection.

Nepal Economic Vision 2030
In a country where myopic policymaking has been endemic with short-lived governments unable to look beyond the gratification of immediate needs, lack of a clear vision for the nation and of confidence on subsequent governments to live up to their commitments, have left the people disoriented and frustrated. A vision statement, therefore, can serve as a compass that can navigate the country through to the realization of its long overdue goals and aspirations.

The core vision for Nepal is to become a middle-income country by the year 2030, to alleviate poverty, and raise living standards of the people alongside fostering sustainable development and upholding social justice.

The vision for 2030, which consolidates previous lessons learnt, and incorporates analysis of past development strategies, and reflects on future prospects will provide a unified direction to the country, mobilize people and resources to achieve a common goal, and orient the country towards faster socio-economic transformation by focusing on areas of maximum opportunities.

Conceptual Framework
The vision for 2030 will be guided in accordance to the principles of sustainability, competitiveness, and fairness. The three pillars which uphold these principles and serve as the conceptual framework of the vision – which is a part of the National Planning Commission (NPC)’s Draft Concept Note entitled ‘ Vision2030 for Nepal Towards a just and lasting prosperity’—are illustrated in Figure 1.

The Goalpost
In order to realize the core vision as stated above, large proportions of domestic and foreign investments will have to be mobilized and each major sector will have to undergo significant reforms so as to create an enabling environment for development in respective sectors. The country needs to grow at a rate of over 7-8% in the next two decades in order usher in prosperity for its people and ensure sustained economic growth in the long run. Figure 2 explains the conditions required for Nepal to become a middle income country by the year 2030.

Private Sector as an Engine for Growth
Private sector is one of the most important drivers of growth in any economy. It is driven by profit and is instrumental in wealth creation. A vibrant private sector is the engine of growth; generating jobs and creating increased opportunities for growth. In a country like Nepal, where the government is often restricted by financing and other limitations, the private sector can fill in the void by providing goods and services and generating much needed employment.

The private sector also has the potential to be an important force for good governance. Since a large and formal private sector will stand strongly in the favor of policy reform, it can help establish a virtuous circle of improving business climate, private sector growth, and governance reforms. A blend of greater competition, free interplay of market forces, and profit motive can lead to the best possible utilization of Nepal’s natural and human resources.

Having said all this, however, the private sector in Nepal is not without problems. A combination of pre-requisite based, structural, and attitudinal challenges have created significant roadblocks in the path for the evolution of a vibrant private sector. Political instability, poor energy and transport infrastructure, and limited access to finance have played a major role in holding back the private sector’s potentials. Whereas on the other hand, structural challenges like stymieing greater competition, creating and cementing entry barriers into various industries and businesses, promoting and perpetuating crony capitalism, retaining the non-separation of ownership and management, creating cartels and syndicates which engage in price fixation and create entry barriers, and excessive politicization within the private sector,  have kept the private sector from attaining greater heights and being competitive at regional and global levels.

The narrow mindedness of the private sector which is insecure about its competitiveness and service delivery quality has meant that the government’s attempt to liberalize and open up the economy post-1990 failed to gain momentum. Leveraging their political influence, the private sector in Nepal has tried its best to ensure that foreign businesses and by extension greater competition, stay at bay.

Lessons from Kenya
Kenya has the largest and most diverse economy in East Africa and is currently growing at a rate of over 5% a year. The size of the economy is much bigger than that of Nepal, however the development challenges and the key constraints they face are similar.

Development Challenges	Key Constraints
Poverty	Taxes
Inequality	Poor Infrastructure
Social diversity	Access to Finance/Capital
Impacts of Climate change	Lack of skill in the labor market
Unstable Politics	Bureaucratic regulations
High level of corruption	Insecurity

 

Kenya had two main strategic objectives; to create a conducive business environment for private sector growth by easing constraints and to enhance the growth and competitiveness of private sector, especially the Micro, Small and Medium Enterprises (MSMEs). To achieve them, the following five-point strategies were identified:
1.    Improvement in Kenya’s business environment can be provided through the following:

•           Adequate and good quality infrastructure
•           Measures to handle crime and insecurity
•           Introduce anti-corruption measures
•           Reduction in legal, regulatory and administrative barriers

2.    Implementation of the institutional transformation between the public and the private groups in order to have a better service delivery.
3.    One of the key constraints to private sector in Nepal is the inability to exports goods and services and access to new markets. In Kenya, to address the same issue, the following         policy measures were taken;

•          Finalization of trade and industrial development policy
•          Revitalization of trade facilitation
•          Expansion of access to trade finance

4.    Enhancement of investment and skills in order to improve productivity and enterprises
5.    Entrepreneurship development through better access to  market and capital

Malaysia’s Employment Act
The Employment Act, 1995 in Malaysia is an example of a good legal framework for the labour market. It talks about a labour code that respects both the contracts given by employers and employees. It has highlighted the structure where not only the employers and workers stay together but also the unions have a mutual say. This makes the role of the government limited in legal system, which to extent helps in maintaining the place to freely enforce contracts by the three parties.

Key Areas of Focus
In order to find a trajectory of sustained economic growth, it is important that a country identify its core competencies and focus on further developing them. Identifying and unleashing these sectors will bring in much needed prosperity and pave way for the country to move to the next level of economic development. For Nepal, there are four sectors which have the potential to help the country achieve the slated targets for 2030 viz., Hydropower, Agriculture, Tourism, and Services.

Hydropower: While Nepal’s potential in developing hydropower had been identified a long time back., the country still reels under hours of power cuts – despite commercial feasibility to harness up to 42,000 MW of hydroelectricity. Total power generation at present is barely 1,000 MW. The unbundling of Nepal Electricity Authority (NEA), development of a trading platform, and continuous reforms in the sector are key to Nepal’s hydropower development.

Agriculture: Moving a large number of people out of poverty would require significant progress in the agricultural sector. Given that this sector contributes more than one-third to the national economy and employs more than two-thirds of the population, better agriculture will transform into higher incomes and better livelihoods for millions across the country. Extensively expanding irrigation throughout the country, improving farm technologies, increasing access to finance for farmers including crop insurance, focusing on products over which Nepal can enjoy comparative advantage such as medicinal plants and their processing, etc. should be prioritized. Commercialization of agriculture and forest products while ensuring sustainability can have a direct positive impact on the livelihoods of the rural populace.

Tourism: Despite the country’s known potential in tourism, it has not been able to capitalize on it adequately. The total contribution of travel and tourism to GDP was around 8.1% in 2015, supporting a total of around 918,500 jobs.  Poor infrastructure, service delivery below global standards, and lack of investor friendly climate are some of the challenges which have held back the development of this sector. Improvements in these frontiers will help Nepal attract a large number of the prospective 50 and 100 million tourists that India and China will add to the global tourism industry by 2020. Similarly, as incomes rise, the number of internal tourists will also rise creating further scope for investments into this sector.

Services: With little competitive and comparative advantages in manufacturing, Nepal will have to continue to focus on the service industry both domestically and internationally. At present Nepal is witnessing an exodus of workers migrating out of the country. Better working conditions at home could attract them back to the country after having acquired skills and experience abroad, which could assist in human capital formation for Nepal’s development. With half of the population under the age of 25, Nepal will have to capitalize on its demographic dividend, especially as workforce of developed countries age. Similarly, with rising consumption and urbanization, a large number of service sector jobs have been created. Increasing labor productivity and tackling labor related problems will be vital in ensuring that service sector fuels economic growth.

Structural Enablers
Given the number of constraints and challenges that plague the economy in general and the private sector in particular, coordinated reforms that will promote working conditions, improve income and productivity, create conducive environment for domestic and foreign investments, are necessary. This will require the country to make significant tax reforms along with increasing the tax net so as to widen the tax base. Leveraging technology to improve tax payments, using incentive on taxes; to encourage businesses to invest more and thereby employ more people, should be prioritized.

There is also a need for effective land reforms. Land revenue management requires a shift from land area paradigm to a land value paradigm. Improvements are long overdue in land record keeping and tracking. All land records and transactions have to be converted into electronic form, consolidating all data so that it can be monitored from a single government agency keeping a check on land mafia activities. Similarly, land needs to be zoned into agricultural, commercial, or residential purposes with proper guidelines.

As Nepal seeks to bridge investment gaps, leveraging capital markets will be imperative. An important aspect of capital market reform will be exploring and creating avenues for the participation of Foreign Institutional Investors (FII) in secondary market to begin with and later in primary market.  Similarly, Nepali companies should be able to list outside Nepal. In order to do that, Nepali companies need to level up to global standards requiring companies to follow international regulations in terms of governance and disclosure. This will help firms in Nepal to not only be at the same level but also compare and contrast their positives and drawbacks easily. Keeping that in mind, insider trading and other violations of law should also be strictly dealt with to ensure that these practices are discouraged.

For creating conducive business environment, labor reforms are absolutely vital and Nepal will have to usher in a paradigm shift in labor management issues. Over a period of time, political affiliations of workers unions should be done away with along with the system of collective bargaining. Strong labor courts should be able to settle disputes between employer and employee handing out verdicts that can be strictly adhered to. Currently, companies spend very little on human resource development, therefore spending on human development needs to be accelerated through legal provisions. Further, a cultural transformation has to be brought about by companies leading the way that will demonstrate that better training and performance can always change the fate of a worker.

The political-business nexus has hindered reforms in the financial sector of Nepal. Laws are required to make financial institutions more transparent and make possible use of financial instruments like leasing, guarantees, venture capital funds, social enterprises funds, impact funds and private equity. With close to 100% mobile penetration and 40% internet penetration, it is important that e-commerce and electronic payment platforms be expanded and made more user friendly.

Access to Resources
An important determinant of development is the level and ease of access to financial, technical, and human resources. In Nepal’s financial system, informal financial mechanisms like borrowing from friends, family, local moneylenders, etc. still command a significant position as just 26% of the Nepali population hold a bank account and around 18% depend upon cooperatives and financial NGOs to avail deposit service. Similarly, a large volume of remittance comes into the country through informal means. Widening the net of formal financial services throughout the country will play a major role in pooling in and mobilizing financial resources for developmental activities. Similarly, access to technological resources like better information and communications technology as well as better human resource will be pivotal in Nepal’s quest for attaining the goals set for 2030.

Key Recommendations
Our economy needs transformation and coordinated reforms and this requires a change in the mindset of people, from an individualistic approach to global ambitions. The reforms that are mentioned below are essential to ensure that the Nepali economy integrates with the global economy. The private sector needs to support policy institutions that are working towards building the right policy framework which includes institutional structures and legislations.

In order to realize the Economic Vision for 2030, private sector led growth is essential as is attracting global investments, and keeping up with global technologies and markets. These factors will also help Nepal realize its objective of graduating to a middle income country. In this regard, listed in Table 1 is a list of issues that need attention in order to attract global attention and push private sector led growth, apart from major reforms that the government needs to undertake.

Table 1: Key issues needing attention for economic growth

1	GETTING CREDIT RATING FOR NEPAL Why: Nepal has had difficulty in accessing global capital due to the lack of credit rating for the country. Currently, there are no global benchmarks based on which investors can decide whether to invest in Nepal or not. Further, the absence of credit rating impacts insurance adversely as there are no Nepal specific products available in the global insurance market. How: Make necessary legislative changes to eliminate conflict of interest and promote competition. Anti-competitive activities including cartels should be considered as a criminal offence and heavily penalized.
2	DISMANTLING CARTELS AND KEEPING PRIVATE SECTOR BODIES AWAY FROM REGULATORY ONES Why:Cartels and syndicates that have unofficial affiliation to political parties have been the biggest stumbling block to reforms and attracting international investors and firms. For instance, an airline association member should not be sitting on the board of the regulating agency, as it would be a sheer conflict of interest. How:Make necessary legislative changes to eliminate conflict of interest and promote competition. Anti-competitive activities including cartels should be considered as a criminal offence and heavily penalized.
3	INTEGRATING WITH GLOBAL MARKETS Why:Nepali firms should be prepared to take on global competition therefore it is important for Nepali firms to bring in practices at par with global firms. These would include governance and human development practices as well as audit standards that are not just limited to financial audit. How:Legislative changes for allowing global audit and other firms to practice in Nepal
4	ALLOWING NEPALIS TO INVEST OUTSIDE NEPAL Why:Nepalis should be allowed to invest abroad and reap the benefits of growth in the region as well as other sunrise markets. These investments should however be regulated. Global examples suggest that countries that allowed free flow of capital, benefitted more than countries that restricted flow of capital. How:Amendment in the legislation regarding Prohibition of Investment outside Nepal
5	LEVERAGING REGIONAL MARKETS AND CONSORTIUMS Why:Nepal is in a unique position that it is land-linked to China and India. With regional economic forums like BBIN, BIMSTEC being a reality, Nepal needs to leverage and negotiate favorable terms for trade and investments. For instance, an effective regional power grid and market will benefit the hydropower investments in Nepal. How:Better homework, stronger negotiating teams and leveraging platforms for Nepal’s benefit.
6	CREATE A FINANCIAL SERVICE COMMISSION OR AUTHORITY TO REGULATE NON-BANKING FINANCIAL INSTITUTIONS Why:Banks form only a section of financial sector lending or platform for access to finance. There has to be a regulatory body created that will regulate all non-banking and capital market related financial products and services. These could include Venture Funds, Equity Funds, Hedge Funds, Collective Investment Schemes, electronic transfer platforms, Guarantee and Leasing products and regulation of other financial instruments and structure. How:Legislative framework.
7	PROMOTION OF POLICY INSTITUTES, RESEARCH AND TRAINING CENTERS Why:Economic policy formulation in Nepal has never been structured. It is imperative that more formal sustainable institutions are created that will help in research, policy formulation as well as capacity building. However, the governance structure, audit and evaluation of such institutions should be made to follow global standards. How:Government support, international community support and tax sops for companies providing money to such institutions.
8	ALIGNING WITH GLOBAL PRACTICES Why:Over the years due to the political transition with short term governments, Nepal has tended to be inward looking rather than outward looking. It is imperative that Nepali business practices two global lines rather than taking an isolationist approach. For instance, usage of English language for documentation along with usage of global calendars will be important to make international investors at ease. Nepali as a language for global transactions has limited reach and appeal therefore; legislative as well as mindset changes are required. How:Legislative and mindset changes
9	EASE OF DOING BUSINESS Why:The Doing Business Index produced by the World Bank along with many other indexes like World Competitiveness Index provides international investors a perspective on the country’s willingness to do business. It is imperative that Nepal develop a clear strategy and plan to improve its rankings. Rwanda in East Africa has a focused plan in improving its ratings and in just five years being able to position itself as the top five countries to do business with. How:Legislative changes along with major overhaul of institutional framework.
10	INSOLVENCY LAWS AND EXIT Why:In Nepal once a person starts a business, it is very difficult to shut down. It is imperative that along with easing of starting businesses, closing down businesses should be made easy too.  While the laws relating to Insolvency exists, the practical implementation has been poor. How:Remove impediments through legislative and institutional changes
11	REGULATING DONOR ENGAGEMENT IN PROVIDING DIRECT OR INDIRECT SUBSIDY FOR BUSINESS Why:There are many institutions that are funded by bilateral and multilateral agencies that are indirectly or directly subsidizing firms. For instance, there are programs which fund private banks to open rural branches or which subsidize transportation costs of bringing produces to markets. While these may be done in good intent, Nepal’s 25 year history has shown that the businesses cease to exist competitively once the subsidies and support are withdrawn. How:Donor support should be limited to helping capacities and capabilities of firms but not directly or indirectly subsidizing to reduce expenses or increase income.
12	POLICY CONSISTENCY Why:The biggest complaint from international investors has been the inconsistency in Nepal’s legal and institutional framework. There are companies who have not been able to repatriate dividends. Recently, the Central bank issued a guideline for setting up ceilings for prior approval for hiring foreign consultants. These shake investor confidence and efforts should be made to ensure that there are policy consistencies and any changes to be made for better facilitation rather than restrictions. How:Legislative framework that indemnifies parties above certain investment threshold levels on change of law provisions.

 

The article is based on the report prepared by the author for Asian Development Bank under TA 8261 NEP Support for Formulating an Economic Development Vision. The report was based on the initial framework prepared by the National Planning Commission coordinated by Dr Swarnim Wagle then Member of NPC. All contents for this article are based on the Draft Concept Note – Vision 2030 for Nepal Towards a just and lasting prosperity March 25, 2015.