ICAS

Rehabilitating the Nepalese economy

  • Swastik Mohan Bhattarai 

Introduction

Parichay
Infomatics

The Covid-19 pandemic has put a stop on normal life as we know it. While our heroes in their white capes are fighting on the front lines to keep the country healthy a bigger problem is cooking beneath the surface. Sectors of our economy have vanished, and the financial aftermath of the pandemic and the nation-wide shutdown could be disastrous. With the entire world is slipping into an economic recession, the economy of Nepal is on thin ice. A global recession is not a matter of ‘if’ but ‘when’ and the question we need to ask now is can our economy handle it and what can we do to survive. Nepal managed to escape the 2008 financial crisis unhurt and without massive impacts, but we may not be so lucky this time. Out of all the sectors, the two hardest-hit sectors of our economy happen to be the biggest contributors to the Nepalese economy; tourism and remittance. The Covid-19 pandemic has undone years of progress and it will take time to bounce back and regain our economic footing.

It is a dark and solemn hour for this nation, but every dark cloud has a silver lining and there is light at the end of this tunnel. The resilience and power of the Nepalese people is not in never falling but is in rising stronger every time we fall. The Coronavirus may have shaken and strained our hope, but it has not broken them. If there has ever been time to unite the Nepalese people and to have effective leadership, it is now. The coronavirus may have brought disturbance and chaos into our lives, but it has also brought many opportunities. Opportunities that we must seize if we wish to survive this disastrous pandemic and its even more disastrous aftermath. The scenario calls for bold and necessary policies, especially financial policies to steer this nation away from misery. This article introduces and explains policies and strategies that the Nepal Government must enforce and abide by to protect the nation from the inevitable future.

The Inevitable employment crisis

One of the biggest threats the future brings is unemployment. The pandemic and the nationwide shutdown has obliterated many businesses and many jobs along with it. The Nepalese economy is in a standstill and entire sectors of the economy have evaporated and will not be back for months or even years. For example, the International Monetary Fund projects than 1 in 4 jobs in the service sector across the world are never coming back. For a country whose prowess lies in the tourism and service sector, this is an alarming problem. Thousands of people will lose their jobs especially the people working in the service industry. It will be an enormous task to reassign and generate new employment opportunities for these people. With a slowdown in the service sector, the job opportunities will need to come from construction works, the energy sector, banking, industrial, agricultural and other sectors which will be comparatively less affected by the pandemic and its aftermath. However, unemployment of the people working in the service sector within the country is only the tip of the iceberg. A bigger threat is possessed by the effect of Nepalese people overseas facing unemployment.

According to the Nepal Labor Department data and the International Labor Organization almost 5.3 million Nepalese people have been employed outside the country. The Covid-19 pandemic will cause a huge portion of these migrant workers to return to their nation once the lockdowns are over. If the Nepal government cannot provide these people with employment opportunities when this inevitable return occurs the country will descend into turmoil. The current job opportunities cannot handle a hike in demand of this magnitude, and all the efforts that we have put in to alleviate poverty in the last decade will be undone. Once these Nepali workers return, there will be a spike in unemployment and to make matters worse there will be a significant drop in remittance.

Remittance in Nepal and it’s future

Remittance is in a way the backbone of the economy. It is the thread on which the entire economy of the country is hanging. In 2019 remittance accounted for 26% percent of the country’s GDP. During the two months of lockdown, the same number has dropped to 1.3%. This could be disastrous and even a 5-year old can tell you that we need to come up with a solution to cover this huge hole in our economy. The government cannot and should not deny these migrant workers to come back home; we cannot expect to earn from remittance if workers abroad have no job nor money. The only solution to the imminent and inevitable problem is to create jobs at home and to cover up this huge hole through other sectors. Nepal will have to create as many jobs in the next few years as it has in the last two decades. The objective at hand may sound ambitious and even impossible to many but with the right policies and leadership, it is very much within our reach.

The other obstacle regarding remittance is concerning the hundi or hawala system. Through this system, a huge amount of money earned by Nepalese workers never makes it into this country or never gets accounted for by the federal bank. In recent years, this system has promoted acts of money laundering and other illegal black money transactions as well.  The mechanism of this hundi system is very easy to understand, and the solution is even more easy to understand and enact. In this system, a migrant worker who is seeking to send money to his family here at home does the cross-country transaction via agents and not registered financial institutions. For example, take the case of a migrant worker in Qatar wishing to send money to Nepal. Instead of doing the complicated banking procedures, he sends the money to another person/agent residing in Qatar. The agent has a counterpart in Nepal who will then give the money to the worker’s family but through another account. In very basic terms, the money our workers are earning and sending to Nepal never get accounted for. No ledger or financial books of the government has the slightest clue of such transactions. Low remittance turnover occurs due to precisely the reason, due to third party money distribution. This gravely affects our foreign reserves and financial system and overcoming this problem would be a huge assistance to the growth of this economy. The easiest method to eliminate such hundis and hawalas are by incentivizing remittance. If the government offers a 1% or 2% incentive on remittance transactions the system would be eradicated. This will have a great impact in the long run and will help set a stable pillar for the economy. The government will be able to track and record remittance money which will help the nation grow its foreign reserve, and at this juncture, our very survival depends on creating and expanding our foreign reserve.

 

Foreign Investment Policy and Generating employment opportunities

The creation of jobs and employment opportunities will require the creation of more business projects. To create new businesses at a rate that has never been done before the government needs to strike down and change many of its conservative and outdated financial policies. The sad reality is, that many policies enacted by the government have hindered development and stopped businesses from reaching greater heights. At the very core of conservative and outdated policies is the country’s policies regarding foreign investment. Instead of enacting policies to encourage foreign investments, we have managed to go in the exact opposite direction. The current procedure for foreign investment in the nation is very tedious and lengthy. Investors are made to pass countless number of formalities and have to seek permission from almost half a dozen ministries. It takes more than a  year to pass and verify initial documents for foreign investment in most cases.

The United Nations Conference on Trade and Development (UNCTAD) performed a study on Nepal’s foreign investment policy back in 2003 and made similar discoveries. The report by UNCTAD called the procedure ‘harassment to any investor’ and termed the entire procedure as a ‘legal mess’. The study declared the roots of Nepal’s poor FDI ( Foreign Direct Investment) was not because the region lacked potential or infrastructure but was because of these conservative policies instead. To quote the report “Nepal has failed to offer investors generally satisfactory standards of policy and administration of taxes and regulations of vital interest to business”. UNCTAD and the WTO (World Trade Organization) made these suggestions almost two decades ago but no real change has been brought till now. While the Foreign Investment Act was updated and rolled out in 2075 BS this ‘legal mess’ and ‘harassment’ still persists.

However, now the tides have changed, and it is time to set aside our differences and do what is right for the nation. If we wish to create jobs here at home, if we wish to become self-reliant and if we wish to prevent an economic disaster, we have to put an end to these stale old conservative policies. The legal procedure and administrative work required to bring foreign investment needs to be simple; it is imperative to make foreign investment appealing to investors rather than a legal mess. Nepal needs to adopt a ‘one-door’ policy when it comes to matters of FDI. A one-door policy refers to granting permission and consent for foreign investment only once and all at one place  Now is not the time to seek permission from half a dozen ministries, and push tons of paperwork only to get consent after at least a year. To create jobs on this unprecedented scale we need to construct and plan mega projects and these megaprojects will require a huge investment. This huge capital can only come through foreign investors; so, it is crucial that we get rid of the legal mess and complicated paperwork and start making real progress. It is high time that Nepal abolishes its extreme FDI screening (except for negative list proposals).

The need for liberal taxation

One of the other factors the UNCTAD pointed out in their report is the lack of financial policies that create a better business environment. Nepal has an astronomically high-income tax rate and a 13% Value Added Tax as well. There are also other forms of taxes such as the service tax which make businesses unprofitable and many projects non-feasible. The high tax tariffs is another chief reason for why Nepal has such a poor FDI. These high taxes have made any business ventures in the nation unappealing to investors. The high and sometimes unnecessary taxation has repelled and prevented foreign investors from exploring business opportunities in Nepal. If we wish to attract foreign investors and encourage foreign investment in mega-projects the taxation system needs to be more liberal and relaxed. The country needs to cut down on regressive taxes to let private and public businesses grow and flourish.

The country must generate jobs for the millions of Nepalese workers who are currently working overseas due to a lack of employment opportunities here at home. With the Covid-19 pandemic and the approaching global recession, we have little to no time in hand. We must lower the income tax rates for businesses. The Value Added Tax must be lowered to 10% or lower for mega projects to make projects feasible. Relaxation in taxes will increase foreign investment in the nation which will, in turn, create jobs for the millions of Nepalese people who will soon be needing them. The relaxed tax rates will be an economic boon for companies and the government as well. Although the tax rate will be reduced the amount of tax revenue generated by the government will increase since there will be a significant rise in consumption and production. This is all based on a fundamental economic principle; it will be better for the government to tax a small percent of a billion-dollar estate, than taxing a large percent of a thousand-dollar estate. The boosted productivity will show a sharp rise in the nation’s GDP (Gross Domestic Product) and will steer the nation on the path of fast and healthy economic growth.

The other measure that the government must take at the current juncture is to remove the 10% service tax for the next few years. Under the current system, the government levies a 13 tax on the base price of a commodity and then an additional 10% service tax. This additional 10% abruptly increases the price of goods and makes basic goods and services expensive. According to one of the most basic laws of economics (the law of demand), the demand for goods and services will increase significantly if the prices for the goods are lowered. Removal of the service tax will help increase sales and supply in all sectors of the economy. The other matter at hand is how the service tax is being utilized at the current moment. While the belief is that the service tax is given to the employee the practice is quite different. The service tax in most cases is given to the workers union and not to the employee. During such a time of crisis and economic uncertainty, we cannot afford to have people protests and riots on insignificant matters. Now is not the time to form unions and protest on every small inconvenience; compromises need to be made for the financial security of the nation. Additionally, the work done by the labor unions is already being done by various other organizations such as the International Labor Organization, Human Rights Council, and many NGOs and INGOs. Removal of the regressive service tax will aid the country to recover and bounce back from the damages the pandemic has caused.

Hydroelectricity: a savior of the Nepalese economy

The two greatest resources available to the nation is its natural tourism capabilities and the nation’s water resources. While we have utilized and made progress in the tourism sector, we have not been able to take advantage of the water resources available in our country. Nepal is very rich in terms of water resources; in fact, it is one of the richest countries in the world in this aspect. Nepal has one of the largest hydropower potentials in the region the country with the third-highest sediment yield (after Brazil and Peru). In a way, water resources are to Nepal what oil and natural gas are to the middle-eat and gulf nations. The prospect of hydropower electricity is mind-blowing and has the capability of generating billions of dollars in revenue every year. The energy sector of Nepal is a top contender to take over and cover the space remittance has left behind in the economy. Nepal has the potential to harness enough energy that could end any sort of energy crisis in the energy-starved region of South-Asia. Investing and constructing hydro energy power plants and harnessing this energy will create a lot of employment opportunities and help grow the economy as well. If Nepal could unleash its true potential in the sector, we will experience economic growth no one is even capable of imagining. However, the promise for this tomorrow and hydro powerplants come at a price, a very large one. The infrastructure and mechanism to harness this energy are very expensive and projects such as these require tremendous amounts of investment. In order to make an unbelievable amount of money from this sector, we must spend an unbelievable amount of money to build the infrastructure first. Once again, this is where we turn to foreign investors and liberal policymaking. The cost and the capital for making these energy projects are incredibly high but the government can enact policies that will make these projects more feasible and easier to create.

One of the first decisions the government could make to encourage investors to invest in hydro powers is by increasing the lease or grant time. According to current laws and policies privately created and owned hydro-power plants must be handed over to the government completely after a period of thirty years. This short lease time has managed to repel many investors and has hindered the growth of the energy sector. Thirty years of business is not merely enough time for any investor to get a return on the huge effort and capital it takes to build any kind of hydro-power projects. It would be in everyone’s interest to increase this lease term to forty or even fifty years to provide better assurance to investors. This increase in tenure will be beneficial for the public who hold the public shares, as it will generate revenue for them even during old age and retired life. If the time frame for such ventures is increased the public will not need to rely on the government completely to take care of them during old age and retired life. This act will also save the government a lot of money in social security in the future years. An increase in the time frame will increase investment for these projects and will also make the people of the country self-reliant even in their retired lives.

Along with an increase in the lease period, it is essential to extend and increase the bank repayment period. Projects like these require a huge amount of loans from banks and other financial institutions. Bank repayment time is the time within which the loan taken for the said project must be paid off with interests. When this repayment time is small, all of the profits from the venture are used up in paying the loans. The profits from these projects cannot be used to invest and fund other new projects and the stakeholders cannot get a return on their investments. Short repayment periods also make projects unappealing to investors which prevent the sector from growing. Under current regulation, the repayment time is mostly set at eight-ten years, which is comically low. Studies and estimates show that a larger repayment time of about eighteen-twenty years is ideal to achieve rapid growth in this industry. Longer payback periods would stabilize and benefit banks for a longer period and it will allow the stakeholders to invest the profits of one project in other business ventures.

The other immediate change that authorities need to make are changes regarding the current system of PPAs(Power Purchase Agreement). A PPA is an agreement made between the power plant and the NEA(Nepal Electricity Authorization). A PPA agreement sets a protocol and rate at which the NEA would buy electricity from privately-owned power plants. As the sole distributor of electricity in the nation, the NEA sets the rate at which it would buy electricity from these plants. The rates in the PPA are more or less fixed and do not change with changing market dynamics. Hydro-power plants in the country are all evaluated in the United States Dollar, and when there is a fluctuation in the rate of the dollar, power plants run into a loss. Having a fixed PPA rate but a fluctuating dollar rate has proven disastrous to many power plants; power plants with the capacity of below 20 Mega-Watts have not been able to survive due to precisely this reason. Since we cannot control and reassign the value of the dollar, the rates mentioned in the PPA should change in accordance. The rates mentioned in the PPA should change in accordance with the change in the value of the United States Dollars. This small but reasonable policy change will drastically improve the feasibility of smaller power plants. The proposed new system would allow power plants (under 20 Mega-Watts) to run on a profit. This slight change could save the energy sector and encourage more investments; even the tiniest of changes in policies can create a huge ripple effect and help our nation reach greater heights.

The needs and means to be Self-Reliant

The principal objective and the priority for the nation is to become self-reliant. The 2015 Nepal Earthquake and the Trade Blockade were instances in our not too distant past that depicted the necessity for the country to become self-reliant. To survive the fast-approaching global recession and a financial crisis the country must cut down on imports. Creating a large foreign reserve and controlling the flow of money to the international market could be the deciding factor that will save our nation from financial havoc. The government with immediate effect should ban the import of luxury goods such as vehicles, liquor, jewels, ornaments, branded electronics, branded clothes and accessories, and other non-essential commodities. It is time for the people of our country to assess their priorities and to avoid wasteful spending. The people of our country cannot be spending money on imported cars and alcohol while Nepalese companies are running into a loss due to the lack of sales. For the past decade, we have talked about using more Nepalese products and in boycotting foreign brands. Now we must move from talking to acting and put our words into action. If we fail to put the nation’s interest above ours in this time of peril, we may never recover from the aftermath of the pandemic.

Development is a two-way street. It requires the active participation of the government as well as the public. The role of the government in achieving economic stability and growth is vital but the role of the public is also equally important. Preserving and maintaining this economic growth is not a one-man job but is the responsibility of the entire 30 million Nepalese people. The money and wealth of the country must stay within the nation. Reducing our imports and boycotting foreign products is the only way to achieve our dream of self-reliance and rapid economic growth. The government needs to discourage international tourism and promote domestic and national tourism. The economy of the country cannot afford the people of this nation traveling overseas for tourism purposes. For the next few years, the people of this country must put a halt on any of their overseas vacation ideas and should plan domestic vacations and trips only.

The greatest import of the nation is in fossil fuels. Nepal spends a ridiculous amount of money on fossil fuels and this amount increases significantly every single year. One of the biggest hurdles in achieving self-reliance is to overcome the energy shortage. The solution to this problem is very simple; the only way to reduce the import of fossil fuels is to reduce our consumption of fossil fuels. The country is in desperate need of a green revolution. We must use renewable sources of energy whenever possible. Industries and factories need to make gradual changes and move towards green technology. The government needs to lower custom taxes and provide incentives on the purchase of electric vehicles. We must utilize the resources we have in our hands and eradicate our consumption of fossil fuels. The individual efforts of the people can combine to form a huge impact in this respect. Our green revolution starts with you, at home; no one and no act is too small to make a difference. A reduction in the consumption of fossil fuels can do miracles for the Nepalese economy.

Apart from its countless financial benefits, the reduction of fossil fuels will have a great positive impact on the environment. Out of 122 countries all over the world, Kathmandu is the seventh most polluted capital in the world and the air quality in the city is getting worse every day. Many studies and reports have claimed that at this rate of deterioration the city will become almost uninhabitable within the next 70 years. Reducing the emission of pollutants and harmful gases from vehicles and industries contribute to creating a safe and healthy environment to live in. Breathing clean air is a right and it should not be treated as a privilege.

One of the other major imports which can be eliminated is our imports of agricultural products. Despite having almost two-thirds of the country directly engaged in agriculture and being proclaimed as an agricultural country Nepal still relies on imports of grains, fruits, and vegetables from India to feed its people. Commercialization of agriculture and the inclusion of modern technology in the agricultural works could help us minimizing and eliminating imports of such goods. The Covid-19 pandemic has undone years of progress in this sector and has brought great misery for the farmers and peasants of this nation. The government needs to empathize with the plight suffered by our farmers and should help to get them back on their feet. The government needs to enact and enforce several policies to revive and restore the agricultural sector. The agriculture sector can generate employment opportunities for lakhs of Nepalese citizens, especially for migrant workers who seek to return to the country. Farmers and peasants need to be given soft loans at a single-digit interest rate and access to modern farming technology and techniques. Commercialization of agriculture through modern methods and technology will help satisfy all the hungry mouths in the nation and will be more beneficial financially. It is the answer to self-reliance concerning agricultural goods.

Conclusion

Achieving economic stability and economic growth in Nepal has been a long walk but this long walk is far from over. The Covid-19 pandemic and the approaching economic recession may be a setback and it will undo years of progress, but we can overcome it. The current situation may be dire, but the night is darkest just before the dawn. If the people of this great nation unite there is nothing that this country cannot achieve. Our greatest strength is not in never falling but is in rising every time we fall. The current scenario demands better policymaking along with decisive and effective leadership. Forward is the battle cry, and we can only move forward if we stand together. The stakes for economic stability and financial growth have never been higher. The immediate and urgent need for better policies cannot be described in words. These changes will be critical in determining whether our nation can prevent financial collapse and chaos. The Covid-19 pandemic possesses a threat not just to the financial institutions of the nation but to every fabric of our democracy. We are at the crossroads where two paths diverge. We can either learn our lesson now and move towards inspiring real change and development or we could plead ignorance and run the country into ruins. If there ever was a time when this nation, this democracy required effective leadership it is now. A journey of a thousand miles begins with a single step and we must now embark on the path of better economic growth and self-reliance. A better world is possible.

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