A comprehensive review of existing economic policies is essential to address the problems

It has been six months since Anjan Shrestha was elected unopposed as the Senior Vice President at the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the apex body of the Nepali private sector. Shrestha, who is the Executive Director of Laxmi Group, got elected to the role at a time when Nepal’s economy was grappling with significant challenges.

While some of the challenges have eased to some extent, the economy is still mired in a recession which the members of the Nepali business community say is the deepest in the living memory. the HRM caught up with Shrestha, to talk about the current state of the country’s economy, the ongoing challenges faced by the private sector, and the necessary policy reforms to address the issues. Excerpts:

Q. Now that the first quarter of the current fiscal year has concluded, how would you evaluate the current economic condition by considering the available data and indicators?
A. It seems people from different quarters of society have different perspectives when it comes to analyzing the current state of the economy. Despite the differing viewpoints of the people in the government, regulators, business community, and the general public, there is widespread concern about the present economic conditions. While the external sector of the economy appears promising, with a favorable outlook for foreign exchange reserves to sustain imports for a year, the overall macroeconomic situation has deteriorated badly.

The government is grappling with resource constraints, leading to a slowdown in infrastructure development and resorting to increasing domestic debt, almost on a monthly basis, which exacerbates the already grim conditions. This situation points to further challenges.

Low revenue collection indicates a decrease in market demand. Despite some positive indicators, such as a surge in tourist arrivals and an increase in remittances, imports have declined, resulting in reduced consumer spending. This decline in consumption is evident in the festival spending pattern which signifies the shift of consumers toward savings. Even during the festival season, the demand did not meet the expectations of businesses.

As a result, businesspersons and investors are losing confidence. The cost of borrowing has risen with high interest rates. On the other hand, Nepal’s tax rates are comparatively higher among the South Asian countries. Logistical costs in Nepal contribute to the challenging economic landscape. Given these various issues, a comprehensive review of existing economic policies is essential to address the problems.

Q. You talked about fundamentally revisiting the economic policies. Could you elaborate on which sectors you think need fundamental reforms?
A. Over the past three decades, Nepal has operated as a free-market economy. While economies worldwide tend to periodically reassess their policies, Nepal has struggled to do so, resulting in a failure to identify and address critical issues. We should have been more proactive in implementing economic reforms.

The federal budget for the current fiscal year has talked about reforms. But there is a lack of concrete plans. This raises questions about the readiness of the government. The delayed action on economic reforms highlights the systemic issues that urgently require resolution.

We need significant changes that encompass legal reforms and improved infrastructure. Nepal faces higher logistics costs compared to neighboring countries primarily due to the poor condition of roads.

The country’s power sector grapples with substantial issues, including poor energy quality, irregular supply, voltage fluctuations, and monopolistic practices. The Nepal Electricity Authority (NEA) lacks commitment to providing quality energy to the country’s major industrial areas and corridors, further exacerbating the situation. When engaging with Indian businesses and discussing why they are not operating in Nepal, a recurring concern is the country’s unreliable power system, despite the availability of energy resources.

A key solution to these challenges involves introducing multiple players in the power market to enhance competition and ensure the provision of high-quality power supply to consumers and businesses. Additionally, the deterioration of major road networks, such as the Mugling-Pokhara and Narayanghat-Butwal sections, has led to increased transportation costs, hampering overall infrastructure development in the country.

Q. What are the reasons behind the recent slowdown in economic activities? Is it the result of the central bank’s actions, global conflicts, or mishandling of economic problems by the government?
A. It is said that “Misfortunes never come singly.” The recent economic slowdown can be attributed to a confluence of factors. This crisis arises from a notable lack of coordination among institutions and authorities, extending beyond the central bank and the finance ministry. The issue of fragmented coordination is not limited to just the finance ministry and the agriculture ministry; it also extends to various departments within the same ministry. A blame game among authorities is noticeable, with each pointing fingers at the other as the source of problems. The absence of accountability and a tendency to shift responsibility will only exacerbate the crisis. The government has often underestimated the importance of incorporating the private sector’s perspective and expertise.

The government often simplifies the private sector’s motivations, assuming their sole interest is profit. While it is true that the private sector operates with a profit motive, their insights and concerns should be taken seriously. Private enterprises have invested capital to generate profits, and it’s essential to acknowledge the significant value of taxpayers’ contributions within the Nepali economy. Even though Nepal’s Constitution guarantees the “Right to Property” as a fundamental right, this concept has not translated into the expected economic and political improvements. Initially, the private sector had high hopes following the constitution’s promulgation, anticipating economic prosperity and positive shifts in the political landscape. However, the reality has been quite different, with unmet expectations and a prevailing sense of disillusionment among private sector stakeholders.

Q. Has the lag in the economy and the private sector’s inability to advance toward prosperity been primarily pushed behind by the political leadership?
A. The current economic slowdown cannot be solely attributed to political leadership; we also need to consider the inefficiencies within the bureaucracy. While politicians are frequently criticized, they also grapple with problems of implementation delay mainly due to bureaucratic red tape. An illustrative example is the Prime Minister’s recent commitment before the Dashain festival to engage in discussions with the private sector and establish a committee to address the economic downturn. This commitment has yet to be fulfilled. The onus is now on the Prime Minister to take the necessary action and address the lingering issues.

During the Covid-19 pandemic, there was a noteworthy uptick in private-sector lending, which ideally should have been subject to closer monitoring and control. The economy carried substantial leverage during the pandemic. However, the Ukraine-Russia conflict triggered a surge in import bills, significantly impacting the external sector. Approximately 60 percent of total imports consist of fuel, the costs of which doubled, further exacerbating the economic challenges.

Faced with reduced income from tourism and depleting foreign exchange reserves, the government pursued a policy of controlling imports and implemented interest rate hikes, which were widely seen as excessive and ill-advised. The choice to impose import bans proved to be a significant setback, highlighting the necessity for a more balanced and nuanced approach to economic regulation and management.

The imposition of import restrictions not only led to a substantial decrease in government revenue but also a drop in market demand. Prior to the pandemic, 1,500 young people on average

used to leave the country daily for employment abroad. Post-pandemic, this number has surged to 3,500 per day. This mass outflow has had a significant impact on overall domestic market demand.

The decision to raise interest rates in an effort to curb inflationary pressures ultimately yielded limited success. The latest report indicates that the inflation rate stands at 8.17 percent, surpassing the average inflation rate of 7 percent observed over the past year. These are pressing issues that demand immediate attention and resolution. The absence of coordination and the ad hoc decision-making processes conducted without thorough consultation have further complicated the economic situation.

The government has not paid construction contractors for a year and a half, resulting in a substantial disparity between what the contractors claim they are owed, estimated at around Rs 80-90 billion rupees, and the government’s assertion of approximately Rs 45 billion. This discrepancy has led to significant issues.

Furthermore, unresolved Covid-19 insurance claims and delays in settling agriculture insurance claims have added to the financial strain. Addressing these outstanding payments would infuse funds into the formal banking channels, potentially jumpstarting the economy and generating signs of recovery.

Q. How is the issue of the interest rate currently being addressed, especially in the context of the protests by the private sector last year against the interest rate hike?
A. The central bank bore some responsibility for the initial spike in interest rates nearly two years ago, which has since declined marginally. Even though various economic indicators show positive signs, doubts remain about the sluggish pace of interest rate adjustments. The central bank has, through its monetary policy, addressed certain concerns, such as the tightening of working capital guidelines.

Q. How would you assess the last six months of FNCCI after the new leadership in the private sector body was elected? How has FNCCI attempted to contribute to resolving the ongoing issues?
In our relentless efforts to address the ongoing crisis, we have been engaged in continuous discussions with the relevant authorities. However, the fundamental issue of a lack of coordination among the authorities continues to exacerbate the persistent economic challenges. We now need to collectively shift our focus toward the economy and formulate effective strategies to overcome the current downturn.

The recent amendments to the monetary policy proposed by the central bank, including loan restructuring and the provision of stress loans, are yet to be implemented. The need for a serious commitment to implementation is evident. The absence of operational procedures for these policies, even after several months, underscores the necessity for a more dedicated and efficient approach to policy implementation. The delay in establishing these necessary working procedures erodes confidence within the private sector, demanding a more proactive and expedited approach from the authorities.

We need to see how many countries in the world took steps to help businesses stay afloat during the Covid-19 pandemic. I emphasize the need for similar protection of businesses in Nepal. Laxmi Group has been providing employment opportunities to 3,000 individuals in its different business verticals. Our potential collapse or failure would jeopardize their livelihoods. Hence, the government must ensure the protection and support of various industries and businesses across the country. While safeguarding the banking sector is crucial, preserving other businesses is equally imperative, considering their significant contributions to the overall economy.

Q. How did the Laxmi group manage to sustain itself during the challenging economic conditions over the past two years? How it has hit the group’s business expansion plan?
A. Similar to other business groups, the current circumstances have forced us into a struggle for survival. If the current situation persists, sustaining our operations could become increasingly challenging. Traditionally, businesses in Nepal have reinvested their profits to diversify their portfolios, but the current crisis has affected all sectors, making further investments appear unviable.

The banking system is currently grappling with excessive liquidity, and the government has resorted to increased domestic borrowing. Without this government borrowing, the liquidity in the banking system would be even more pronounced.

The automobile industry is also witnessing a downturn, with the anticipated growth in the electric vehicle (EV) sector falling short of overall expectations. The central bank’s tightening of bank financing for internal combustion engine (ICE) vehicles has impeded the automotive industry’s growth. Given these circumstances, our plans to invest in the agriculture sector have been postponed for the time being.

Q. Laxmi Group is gearing up to assemble Hyundai vehicles in Nepal. How is the project progressing? 
A. Production at the Hyundai plant in Nawalparasi is set to begin in 2024. The plant is geared towards local manufacturing of all Hyundai models. We have invested approximately Rs 5 billion in the project. Our goal is to launch Nepal-assembled Hyundai cars in the market by 2024.

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