Nepali Times
"Peace is the pre-requisite."

Finance Minister Ram Sharan Mahat has made no bones about his objection to a cabinet expansion, and has voiced concerns about a governance crisis. But, in this chat with Nepali Times before leaving for New York for the UN General Assembly, he was still optimistic about the economy, and says peace would it economy a chance to perk up.

In recent speeches you have gone out of your way to highlight the positive side of Nepal's development in the past 12 years. Do you really believe that?
There is a tendency to belittle our country's achievements after democracy. We suffer from negative thinking. We see negatives every where. There is a lot of negativism that the donor community has also started. This has spread cynicism. Let us not forget that there has been economic, social and political progress too. We've had about a five percent growth rate on average throughout. Our exports have been increasing by more than 20 percent each year. Foreign exchange reserves are sound. Our net worth has nearly doubled from about Rs 7,000 million to around Rs 15,000 million. Look at the social indicators: there are more schools, health services have improved, we had one medical college 12 years ago, now even I have lost count.

Right, but how come we don't see all this making a difference to the quality of life?
Maybe because the media has a tendency to highlight only the negatives. True, we have also failed on many fronts. Governance capability, for instance, has weakened. In general, we have succeeded in areas where we have deregulated, where we have allowed more space for the private sector. Look at our tourism industry, it is now the best run in South Asia. Exports have done very well, non-agriculture sector performance is around seven percent, because we have given a major say to the private sector. Civil society has expanded. Areas where government has less control have flourished.
Where we have failed is in the regulatory function of government. We have failed, for example, to control the aberrations in private sector education and private sector health delivery. Similarly, despite investment, the capacity to deliver services in rural areas remains poor. In other words, there is leakage, corruption. The quality of roads has gone down despite increase in investment. The cost of services has gone up because of mismanagement.

You must have a ringside view of the get-rich-quick mentality in government. As an insider, how bad is the corruption you see?
Although it is sometimes frustrating and disorienting, you cannot give up. You cannot generalise on the get-rich-quick mania. This is a phenomenon you see everywhere, not just among politicians. There are politicians, but not all of them have become rich overnight. It is a tendency also in the private sector, and the public sector, among bureaucrats.
My Voluntary Tax Declaration Scheme (VDIS) is an effort to control corruption. We have also prepared new financial regulations to tighten up things and make spending more transparent in order to ensure proper accountability. We are also trying to empower enforcement agencies to control corruption. Democracy is rule by law and everything should be done in accordance with established norms and rules, which is what we are doing.

Your VDIS is also backed by a law that gives it more teeth. But will it go after the crooks in high places?
Everybody has to declare unaccounted wealth. Politicians have been excessively targeted. The problem is much more serious elsewhere. People see politicians because they are very visible.

But is it going to help you take out the bad apples?
I don't deny that there are bad elements in political life also. I can't deny that, but the problem is more serious elsewhere.

So heads are going to roll?
Of course. I am sure with cooperation of all sections of society this drive will yield results. The scheme also is admission of the fact that we cannot achieve results only through administrative enforcement. You may sue somebody but it may take years for the result, and it may not even be positive. This has happened with corruption cases. Just how many cases have resulted in real punishment, or material fines to add to the treasury? Practically zero. So we are using the tax method to unearth unaccounted money and bring it to the treasury.

Government spending has soared, revenue collection is down. How are you going to make ends meet? You are even said to have differed with the prime minister on cabinet expansion.
Cabinet expansion is the privilege of the prime minister. I can give advice, but cannot contradict him. On the whole, I am against the expansion of government institutions, I am against unproductive expenditure. There is a tendency everywhere to ask for more money-by ministries, or elected representatives. We just cannot afford this. A finance minister's job is very difficult and always thankless. There are priorities elsewhere, more need for teachers, drinking water, health services, rural roads. At the same time there is a tendency to expand government by creating new institutions and jobs. I resist that. Look at the public corporations, they are a big drain on the economy, they are incurring huge losses of taxpayers' money. Their productivity is poor, but still employees are demanding more benefits and perks.

Even if the talks with the Maoists is successful, we need to create new jobs, otherwise they will go back to their guns. To create those jobs, you need to generate investment. Do you have a plan?
Before the outbreak of Maoist violence six years ago, our economy had been expanding. Millions of jobs were created. Look at the service sector in Kathmandu Valley, people are spending more, there is more income. The market has expanded, which would not have been possible without jobs. But after the Maoist violence started, and with their on-going extortion, people are closing down factories. Now there is almost a stop in new investment. So if we are to create more jobs, Maoist violence has to stop. It is a serious setback on the economy. At the same time, the government should concentrate on social services-education, health, rural development, infrastructure, policy making and policy support-and leave the other things to the private sector. That way jobs can be created, but the prerequisite is peace and a business-friendly environment.

Do you mean we should wait for peace, and then start creating new jobs?
No, we need to do job creation simultaneously. And we are already trying to create business confidence with easier policies. In the last budget I tried to make the overall environment more business-friendly. The government is in dialogue with the Maoists to ensure peace and stability. The Maoists have not stopped their activities completely, but the law and order situation has improved and this has given some hope for the economy.

How would you rate the economy today?
Not very good because of various national and international reasons. We have declining exports, revenue from distilleries have been hit. The tourism industry has suffered. There is increasing demand for more security expenses. We are not in a very happy situation. But our fundamentals are okay. We have managed our economy relatively better than many other countries. Even the IMF and the World Bank have complimented our economic management. The Vice President of the Bank was here recently and her only advice was that we maintain fiscal prudence.

Are you also considering bailout plans for the tourism sector post-11 September?
Yes. But tourism was suffering even before 11 September. The package announced in the budget is for the whole industrial sector, including tourism. It is a sort of a rescue package because they cannot bear the present costs-the cost of capital, the servicing of their liabilities vis-?-vis the financial institutions, debt restructuring, debt re-scheduling, freezing liabilities and even writing off part of their obligations, stopping the capitalisation of their interests, etc. It is aimed at essentially reducing their financial obligations.

Looking forward to 2002-2003, what do you see?
If we are able to restore peace I see hope, although the global environment is not very favourable. We can manage the economy despite international constraints. But if there is no peace here, then the economy will suffer, our exports, industrial production, tourism will all suffer. That will be the worst case scenario. Peace is the prerequisite.

(11 JAN 2013 - 17 JAN 2013)