Nepali Times
"Nepal needs help for self-help"

Sukhwinder Singh is the new International Monetary Fund (IMF) Resident Representative for Nepal. In the runup to this week's budget, Nepali Times asked him about the country's macroeconomic situation and the IMF's role in policy advice and technical assistance.

Nepali Times: How do you rate Nepal's pre-budget macroeconomic situation?
Sukhwinder Singh:
Despite the security situation and difficult external environment, the macroeconomy has been managed fairly well in recent years. Fortunately, as we go into the budget we are not confronted with major imbalances, and the foreign exchange reserves position is comfortable. But of course there are major challenges that must be addressed urgently. Growth has slowed and is clearly inadequate to deal with poverty, and unemployment is unacceptably high. Trade, manufacturing and tourism are weak. Fiscal pressures have been rising in recent years and implementation problems have really held back development spending.

So what needs to be done?
I see the main challenges are to generate higher growth rates, especially in agriculture so the poor benefit, improve social service delivery through better management of public resources, raise private investment, modernise and streamline the civil service, improve the fiscal position through higher revenues, more productive use of expenditures, and a reduction in domestic borrowing, strengthening governance and anti-corruption efforts, and finally diversifying the economy away from a handful of exports.

That sounds like a tough job for anyone. Where do we start?
Above all, action is required by the Nepali government with concerted support from the international community. One could call it "help for self-help". First and foremost, progress in the peace process and a reduction in political uncertainty will clearly improve the environment for growth. At the same time, the government needs to move urgently on a wide-ranging reform agenda that creates the conditions for private sector investment and growth. This agenda is well documented in the government's 10th Plan/ poverty reduction strategy, which I believe has received inputs from a wide cross section of Nepali society. Industrial countries also need follow through on their trade commitments and reduce subsidies.

And what is the IMF's role?
The IMF is responsible for helping low-income members like Nepal through the provision of policy advice, technical assistance and financial support. In Nepal's case, in addition to possible financial support under the Poverty Reduction and Growth Facility (PRGF), the Fund has been providing technical assistance in areas such as modernisation of the central bank, reform of the tax system, as well as development of the money and foreign exchange markets. My role as resident representative is to make sure we coordinate closely with the Nepali government in giving policy advice so it can create conditions for growth and poverty reduction.

How come the IMF keeps getting hit for its conditionalities?
Countries don't come to the IMF when their economies are in good shape. A country usually seeks assistance when, through a combination of bad policies and bad luck, it has run into difficulties. Regardless of whether or not the country comes to the IMF, the country will need to adjust its policies. The IMF provides a country a bit of breathing room, in fact lessens the extent of the belt-tightening needed, and aims to bring about a quicker rebound in incomes than would otherwise be the case.

So blaming the IMF is a little like blaming the doctor for the patient's illness! Nonetheless, the IMF is also very aware of the concern about intrusive conditionality, and we've been devoting considerable resources to dealing with this issue. In low-income countries, the IMF is strongly committed to the Poverty Reduction Strategy Paper (PRSP) process, and Nepal has developed its own poverty reduction strategy, the 10th Plan, and we've been participants in these discussions, along with other development partners. The reforms we support will not be imposed. Rather, they will be reflected in the country's own strategy and will reflect country circumstances. But let us also be realistic, there is a role for conditionality. The money that the IMF lends belongs to all of its 184 members, and loan conditions in essence provide a guarantee to the international community that its money will be repaid as an economy returns to growth and stability.

Have you noticed any positive signs in banking sector reforms, especially in case of Nepal Bank Limited and Rastriya Banijya Bank?
Yes I have. We are encouraged by the progress being made by the management teams at both NBL and RBB. Together with dedicated Nepali staff, they have made substantial progress in assessing the financial status of the banks, improving financial performance and securing loan recoveries, strengthening internal controls and introducing modern banking practices. However, to build on this, it is now crucial that the government make decisions on key issues that affect the costs and performance of these banks. I see two issues as particularly important at this juncture: reduce overstaffing and improve the debt recovery framework.

Speaking of which, how bad is the problem of politically-connected defaulters in the Nepali banking system?
Willful default should not be excused. After all, this is the depositors' money, and the government's scarce resources should not be used for bailing out big loan defaulters. Such defaulters should be given an opportunity to first regularise their accounts within a reasonable time period. If they fail to cooperate, banks should use standard tools that are common worldwide to recover their money; for example, blacklisting defaulters and related firms for any further borrowing, or foreclosure. Where there is strong evidence of malpractice, I would expect cases to be placed before the CIAA and for them to proceed speedily to prosecution. It's difficult to compare with other countries, but the problem is certainly not unique to Nepal. Suffice to say that the origins of the problems are often similar, the magnitude of the problem at the banks is broadly comparable, and the resolution process and solutions are also similar.

Nepal's soft loans from decades ago are maturing, and we have to repay them in a situation where the loans have not been used productively. Is this a classic debt trap?
You are right that previous borrowing could have been used more effectively and generated higher returns in terms of growth and poverty reduction. That said, Nepal's debt service and debt stock ratios are reasonable compared with other developing countries. It helps that much of the external debt is on highly concessional terms. Looking forward, there is scope for prudent external borrowing but a strong effort has to be made to ensure the aid is used productively, including in support of the growth enhancing reforms. The Medium Term Expenditure Framework that the government is implementing and the poverty reduction and growth-based prioritisation that it applies to development spending is a very encouraging step.

(11 JAN 2013 - 17 JAN 2013)