2-8 June 2017 #861

Taking politics out of the economy

Nepal can attain lower middle income status by 2030, but conditions apply
Om Astha Rai

Caretaker Prime Minister Pushpa Kamal Dahal laid the foundation stone for the Kathmandu-Tarai fast-track highway this week. What he conveniently forgot was that Deputy Prime Minister Bijaya Gachhadar had already laid the foundation stone for the same 76 km expressway when he was a minister back in 2009.

Read also:

White swans, Editorial

Nepal 2030, Guest editorial

It is emblematic of the seemingly insurmountable barriers Nepal faces in improving infrastructure that the project was stuck for a whole decade because politicians competed for credit and kickbacks for a project that was never built. Nepal has had six prime ministers since the first foundation stone was laid for the highway, and in all that time millions of buses and cargo trucks between Kathmandu and Birganj have made 200km detours via Mugling.

Excessive politics and slow motion bureaucracy have led to chronic delays in all big-ticket infrastructure projects, and many have been abandoned midway. Every government says it will prioritise ‘Projects of National Pride’ but even that doesn’t seem to speed up projects, some of which were launched 30 years ago.

The World Bank is worried enough to say in a new report that delay in infrastructure projects is one of the factors slowing down Nepal’s economic growth, jeopardising its goal of graduating to middle income nation status before 2030.

The report comes as Nepal achieved a 21-year high economic growth rate of 6.94% in the last fiscal year – mainly because of the near zero growth last year due to the double whammy of the earthquake and Indian Blockade. This prompted outgoing Finance Minister Krishna Bahadur Mahara in his budget speech this week to project an ambitious near 7% growth next year. Good performance this year was mainly due to the end of power cuts, a good monsoon and reconstruction.

The World Bank’s Nepal Country Economic Memorandum 2017, however, is not so optimistic. It warns that Nepal cannot become a lower middle income economy by 2030 unless it boosts investment and productivity. The report argues that Nepal will probably not graduate to that level of annual per capita income in 13 years without comprehensive reforms.

Economists at the National Planning Commission (NPC) say the World Bank report is needlessly pessimistic and point to several factors why the current growth rate can be sustained, and that the 2030 target is realistic.

“The World Bank report is tone-deaf because it fails to take into account factors like how new budget has radically decentralised the economy which will boost infrastructure and increase capital expenditure,” says NPC economist Swarnim Waglé, who thinks Nepal can sustain the 7% annual growth rate to double its GDP in a decade.

Another NPC member Chandra Kanta Poudel agrees, and points to a slew of hydropower projects coming online in two years including the 456MW Upper Tamakosi which will end power cuts, and there are large irrigation projects nearly complete in the Tarai: “Of course, we may not enjoy good monsoon each year, but with irrigation agricultural productivity will no longer be so dependent on the rains.”

However, 24-hour electricity or the completion of irrigation projects may not be sufficient to ensure sustained growth. Nepal also needs to attract more Foreign Direct Investment (FDI) to create jobs, increase exports, reduce its trade deficit and eventually reverse outmigration of its productive labour force.

There have been efforts in this direction, but Nepal’s investment climate is still not as attractive as other Asian countries. Although the Special Economic Zone (SEZ) Act is in place, and the Foreign Investment and Technology Transfer Act (FITA) and the amended Labour Law are being passed, the Investment Board of Nepal (IBN) is yet to evolve into a one-window service provider it was supposed to be.

“We cannot accelerate economic growth without attracting FDI, but procedural hurdles that deter foreign investors persist,” admits CEO Maha Prasad Adhikari of the Board.

At an investment summit in March, top political leaders vowed to make Nepal investment-friendly, but most potential investors had heard it all before and said they needed to see concrete steps on the ground.

Ram Prasad Gyanwali, Head of the Central Department of Economics at the Tribhuvan University, says sustaining a 7% annual growth rate is possible but only if Nepal also reduces its dependency. “What if another trade blockade brings our growth rate down to zero again again?” he asks.

There are still too many ifs and buts in Nepal’s road to graduating from its Least Developed Country (LDC) status by 2030. The biggest ‘if’ is political instability, but economist Swarnim Waglé says Nepal does not have the luxury to first sort out political crisis, and then focus on fixing the economy. (see Guest Editorial).

Large-scale migration is not a sign of strength but a symptom of structural problems in the economy. Planners have alerted successive governments to channel $7 billion Nepal officially earns from remittances annually into productive sectors, and boost investment so that jobs are created to in turn reduce outmigration. Newly-elected local governments can help the process by encouraging investment in local development.

“Remittance looks a huge amount, but it is in fact small streams of money going into individual households,” Waglé says, “but we can still use that to boost the economy.”

Read also:

Bleak economic report

Big delays in big projects, Sahina Shrestha

Making Nepal FDI friendly, Shyamal K Shrestha

Stability for growth

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