Nepali Times

Kenichi Yokoyama, Country Director of the Nepal Resident Mission of the Asian Development Bank (ADB) spoke to Nepali Times this week about infrastructure bottlenecks, political fluidity affecting the investment climate and Nepal’s macroeconomy.

CINDREY LIU

Kenichi Yokoyama: ADB’s draft new country partnership strategy has three thrusts: accelerating economic growth, pursuing inclusive and employment-centric growth, and emphasizing institution building. Our assistance will be about $250 million per year and will focus on addressing bottlenecks in energy, transport, and urban infrastructure, building human capital, and transforming agriculture. These are based on the lessons of our past programs and extensive consultations held across the country. Key findings are that we should be selective and focused on critical growth constraints with larger investments, continue to address inclusiveness issue as root causes of conflicts, and build institutions that can self sustain the growth process in an accountable and transparent manner.

Multilateral agencies in Nepal seem to swing wildly between deep pessimism and unrealistic optimism about the country's future. Where do you fit in?

I think we all agree on huge potentials of the country, but should be mindful that challenges to tap them are also significant. No one questions the bright prospects for hydropower, tourism, high value agriculture and agro-processing, IT and other industries. They can draw huge incremental earnings. But there are also substantial hurdles to overcome in triggering high growth process. Developing industries calls for infrastructure bases particularly power, better enabling environment, and strategic and proactive promotion policies. To resolve power shortage, foreign investment need to be drawn with rigorous attraction of investors while enhancing credibility of the off taker, that is, the Nepal Electricity Authority (NEA). We cannot forget that lasting peace and stability are also critical in unlocking Nepal’s full development potential.

But we have seen countries with political instability doing pretty well economically. Why is it necessary to get politics right first in Nepal?

Countries growing strongly and resilient against political changes tend to have firm and diverse growth bases. For example, a system that can maintain high level of quality public investment in physical and human capital will provide resilience. So will stable policy and legal frameworks that can protect the interest of private industries and investors even in times of political change. FNCCI has been pursuing political consensus on the minimum economic agenda, which can serve such a purpose. Other development partners are also making serious efforts to help establish a strong institutional basis to accelerate physical and human capital development with accountability, but we are still half way through in this direction.

What are the challenges in promoting investor confidence in Nepal?

Recent business surveys indicate political instability, power and other infrastructure deficit, weak governance, difficult labor relations, low confidence on macroeconomic stability, etc. While some would require medium-term efforts, there are areas that can bear immediate results. We think the government can be more proactive in attracting foreign investment by welcoming them as invitees and providing attractive incentives commensurate with the level of the country risk. Labour-industry dialogue may be facilitated to recognise that mutual collaboration can bear win-win results. Also helpful would be strong anti-corruption drives and enforcement of law and order to protect public investments, industries, and their employees. Stable policy, legal and regulatory framework can also help provide predictability to investors.

Despite all these problems, though, we seem to be ok on the macro-economic front?

If we look at macroeconomic indicators, the country is doing fine, except for inflation. Nepal’s economy has been growing at an average rate of 4.5 per cent per annum since 2006, with stable fiscal, balance of payment, and debt conditions. But this stability is also a reflection of the critical role played by remittances and the low performance in investments, particularly public capital formation. Public capital spending has been persistently lower than allocation: in fiscal year 2011/12 it was only 3.3 per cent of GDP compared with the allocation that was 5.9 per cent of GDP. So, in a sense the present stability is maintained at the cost of lost growth opportunities. I think Nepal can growth much faster, by strengthening capital expenditure to 8-10 per cent of GDP and institutional capacities and disciplines, and by improving efficiency of recurrent expenditure where large scope exists.

How important are remittance inflows in sustaining Nepal's economy?

There is no question that remittance has played a vital role. It accounts for 23 per cent of GDP in official statistics, and could be much higher if informal inflow is included. It has contributed to reduced income poverty and higher human development indicators (education and health) at household level, and helped finance burgeoning imports and maintain balance of payment and overall macroeconomic stability. On the other hand, this has increased the country’s dependence on global economic conditions. There is a higher risk of disruption due to external shocks. High remittance is also a reflection of insufficient jobs in Nepal, stemming from a lack of viable investment opportunities that can create jobs to 450,000 youths entering into the labor market each year.

What can be done to maximise benefits from remittances, as the Philippines or Sri Lanka have done?

Countries like the Philippines are also facing the same dilemma since remittance is largely used for consumption. In Nepal, the challenge is higher, since the import content of consumption is high, that means consumption does not induce local production so strongly. I think there is not an easy panacea that can drastically change the tide but to establish viable investment opportunities in Nepal, to which remittance can be channeled. The good news is that nowadays we hear a lot of stories about returnees investing in high value products in rural areas and gaining good incomes. Such new dynamics can be nourished by rural business incubation with value chain development and other technical support. Improved access to rural finance will also help to channel remittances to productive usages.

You mentioned energy as the big obstacle to future growth, is the ADB planning bigger involvement in hydropower generation?

ADB has just approved a $150 million loan for 140MW Tanahu Hydropwer Project, together with Japan International Cooperation Agency (JICA) and other co-financiers providing $280 million. This power plant will provide stable power all year round. In the new assistance strategy ADB is putting highest priority to help fully resolve power crises. Nepal may also see the development of hydropower not only for domestic use but as a major source of export. In this regard we are exploring further and larger hydropower projects to fully satisfy the domestic requirements while targeting export potential. This is challenging albeit highly worthwhile, since larger-size project will definitely require participation by private investors. This calls for sound financial structuring of the project. Sufficient investor confidence also needs to be built, with reforms within NEA and establishing a regulatory environment conducive for rapid expansion of the power sector. Agreement with credible off-takers in the export markets is also needed. The governments of India and Nepal are discussing an umbrella power purchase agreement, which can substantially facilitate private sector investments.

How about other infrastructure?

Water and transport are high priorities, the former including water supply and sanitation in urban areas, irrigation in rural areas and integrated management systems. Above all, ADB is strongly committed to deliver clean water to Kathmandu by early 2016, by completing the Melamchi tunnel, water treatment plant (assisted by JICA) and associated distribution systems. In transport sector, our assistance will cover both air and road transport, to provide much needed connectivity at local and national levels and beyond. ADB is also extending assistance for airport improvements in Kathmandu, Bhairawa, and remote domestic airports. We believe these will provide essential bases to attract investments in domestic industries and tourism.

How can Nepal benefit from its strategic location between India and China?

We see tremendous opportunities. In today’s world and particularly Nepal, we need to think beyond national borders, since district areas along the borders are strongly connected with the neighboring economy. We often talk of high costs of imported raw materials and transport as disadvantages for Nepal. But we may turn this into advantage, and start producing goods to compete with expensive imports in Nepal and extending supply to border areas of India and China. The five bordering Indian states alone have population of over 400 million and have seen rapid growth in recent years. China has also waived tariffs on a large number of export items, including agriculture products. Thus, Nepal can greatly benefit from regional economic integration by substituting imports and exporting energy and other goods and services. In addition to directly supporting trade facilitation measures, we are also aligning our energy and transport infrastructure assistance to support regional integration where possible.

Low project performance has always been an issue in Nepal. Are things getting better?

When measured by implementation timeliness, impact and sustainability, Nepal’s performance has been low compared with ADB-wide average. ADB along with the World Bank, DFID, and JICA have long been jointly pursuing improvements through a forum called Nepal Portfolio Performance Review (NPPR). Over the years, the performance has been improving, although this year is a challenge due to lack of full budget and other constraints. NPPR is now focusing on five areas affecting performance: public financial management, public procurement, human resources, management for results, and aid effectiveness. These are areas where we can expect a lot of practical achievements even under political instability, and we are hopeful that the present Government leadership can take a big stride and make significant difference.