2-8 August 2013 #667

Believing in Nepal

Eight economic reform actions on how to get over this difficult phase to make Nepal stronger
Srikanth Srinivasamadhavan
In the last two decades, Nepal has been constantly trying to redefine itself socially, politically and economically. This transition period has been defined by a low GDP growth rate, attempts of various model of self sufficiency, a low domestic savings rate, a high dependence on foreign aid and high unemployment. The response needs to be drastic and quick, and the reforms need to go ahead despite the fluid situation.

The most basic and important focus of the economy has to be on stimulating domestic demand. This has helped many other countries grow and prosper, and Nepal should also intensify efforts through quick reforms to boost demand that will build a more competitive economy that benefits businesses and consumers alike.

In order to improve Nepal’s economy to boost investment and demand, here are eight action areas:

1. Stimulate local consumption and incentivise local manufacturing. This will not only generate employment but also create a strong competitive environment to generate consumption and demand. The government needs to differentiate between companies who have invested locally and stayed on so as to encourage investment and enable faster and cheaper innovation that drive local consumption, and perhaps give rise to export opportunities. Facilitating and stimulating local manufacturing will lead to stronger investments and help the economy grow faster.

2. Improving tax collection. Create greater drive and stronger mechanisms for tax collection and enable other reforms. Proper VAT implementation will help the government generate even more revenue from a reduced VAT rate in future as the base expands.

3. Encouraging domestic savings. Savings help fund economic growth and ensure that the current underemployed working population will be able to find local jobs more easily. Nepal has a significant advantage due to its robust remittance. Continued progress in remittance, and increased work opportunity locally will be key drivers for higher GDP growth.

4. Key sector reforms. Focus on deregulating tourism, power, education, IT, banking etc so the country can generate large-scale employment and benefit from technology transfer and practices. In the medium term, this will make Nepal an attractive investment destination and the expertise will make Nepal sought-after in advising and generating revenue with its presence in other countries that want to emulate Nepal.

5. Improving infrastructure reliability and access. Infrastructure bottlenecks to growth are keeping Nepal back. Improving road connections to towns and villages and increasing access to electricity are challenges facing Nepal today. Improving infrastructure reliability, reducing cartelisation and transportation time are important areas for reform.

6. Shifting emphasis from foreign aid to foreign investment. Foreign aid is driven by the ideology of charity and relief. It sometimes promotes inequality, dependency, and in many cases may not be aligned to what the country wants to do. Foreign investment, on the other hand, allows one to demand equality, promotes incentives to grow, creates atmosphere for self-reliance and empowerment.

7. Protecting intellectual property. Globally, the development of new products and services have been possible because of significant research and development. Foreign investors will seek strong protection for their intellectual property. While a country seeks investments, along with it comes the burden of protecting the investment from elements that will undermine future investments. Enforcing intellectual property rights, curbing copies and the gray market will allow Nepal to protect and drive innovation and create a platform for driving a vibrant economy.

8. Strengthening labor reform. Simplified labour laws will help to drive the confidence of the investors, and can be a significant driver of foreign investment. Such laws will help set up large scale projects that can provide the much needed export earning. Nepal needs to seize this opportunity to become an exporter of limited but focused set of industries with significant cost advantage and a skilled, English- speaking workforce. Nepal’s location between India and China will be an advantage if it combines this with a strong partnership with other emerging economies.

Despite having gone through tumultuous changes over the past two decades, Nepal is poised to forge ahead. There is more optimism now than there ever was in the past, reflecting the indomitable spirit of the Nepali people. It is now time to act on reforms.

Srikanth Srinivasamadhavan is the Managing Director of Unilever Nepal]\, and this piece is adapted from his presentation to the Nepal-India Business Conclave organised by the Nepal India Chamber of Commerce and Industry (NICCI) in Kathmandu on 26 July.

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