“It is difficult for the productive sector to survive when there is interest rate volatility”

A momentous day for the Nepali cement industry was recorded on October 10 with Arghakhanchi Cement commencing export of cement to India. That day, the company exported 1,400 sacks of Pozzolana Portland Cement (PPC) in its first lot of export to the Indian market. At a time when the domestic cement demand along with other construction materials has fallen to historically low levels as the country’s macroeconomic outlook worsens, the cement export news came as an encouraging signal for cement producers who are currently surrounded by several problems. Pashupati Murarka, Director of Arghakhanchi Cement, says that the company will increase cement export in the coming days. In a conversation with the HRM, Murarka, who is the former President of the Federation of Nepal Chambers of Commerce and Industry (FNCCI), talked about the company’s plans, difficulties businesses are facing and economic opportunities for Nepal at present. Excerpts:

Nepali cement manufacturers have finally started exporting Nepali cement to India. Just before Tihar, Arghakhanchi Cement exported cement to the southern neighbor. Could you tell us how this was made possible? And, how you are planning to increase cement export to India? 
When Argakhanchi Cement was established 15 years ago, I saw an opportunity to export Nepali cement to India. And, I had some strong reasons for my conviction. The main raw material for producing cement is limestone which is not available in the bordering Indian states of Bihar, Uttar Pradesh, West Bengal and Uttarakhand. Limestone has to be brought from other states such as Chhattisgarh and Madhya Pradesh which are far away from states in India bordering Nepal.

As Nepal has huge limestone deposits, the export of cement makes sense as the transportation cost to India can be economical. For instance, the Uttar Pradesh city of Gorakhpur, where Argakhanchi Cement has exported cement, is 100 kilometers away from our plant site in Siyari, Rupandehi.

The mismatch between production and demand in the domestic market has also compelled us to explore opportunities in the Indian market. Currently, the total installed capacity of domestic cement industries is 15-16 million tons while demand is 10 million tons meaning the extra 5-6 million tons can be exported.

The government’s decision to provide cash incentives to cement exports also encouraged us for exports. With an 8 percent subsidy, we believe Nepali cement will be competitive in the Indian market.

Eyeing Indian export, we applied for the ISI mark in India. It took us almost a year to get the ISI mark. Simultaneously, we also tested the quality of Indian cement available in the market where we’re targeting. The quality of our cement is better than Indian cement.

The government came up with export incentive guidelines and we received the ISI mark around the same time. Hence, we began our first lot of export just before Tihar. The good news is we have already received repeated orders from India.

We will be concentrating on the Uttar Pradesh market. Our first lot of exports was sent to Maharajgunj of UP.

How do you market Nepali cement in the Indian market where big Indian players spend astronomical sums for marketing and promotion? What are your plans to make Nepali brands visible in the vast Indian market?

Since we are concentrating on Indian towns bordering Nepal, we will focus on localized branding. We will be using local FM stations, local TV channels and wall paintings for branding and promotional purposes. Our plan is to move ahead through direct marketing making a network of small dealers.

A breakthrough in cement export has happened. What further the government needs to do to make Nepali cement more competitive?
The newly-introduced policy to provide subsidies to domestic cement producers is a welcome step that will help to increase the capacity utilization of cement industries.

However, much needs to be done to support the industry in terms of reducing the cost of production. Coal is the major raw material for the cement industry which we import from Australia and South Africa. But we cannot re-import any prepared or raw material imported by Indian importers from third countries. As India imports such goods in large quantities to keep the cost of production low. Therefore, it is cheaper to bring products from third countries to India than from third countries. If we allow importing of coal from India that has been brought by Indian importers, our cost will be low.

The other issue is, the upgradation of roads connecting the mining areas. If the roads are upgraded and large trucks are operated, it will also help us reduce our costs of production.

Besides, our demand is the Nepal Electricity Authority (NEA) provide electricity to cement producers at the same rate that it has been selling to India.

Cement producers have reported a sharp drop in demand in the last one year. What problems are producers facing currently?
The current condition of the domestic cement industry can best be described as ‘pathetic’. The gap between supply and demand is huge. Our domestic demand is 9-10 million tons whereas the total installed capacity of Nepali cement plants is 15-16 million tons. Economic activities have sharply slowed down this year. The liquidity crunch has hit the market badly. The revenue of the government is decreasing due to the ban on the import of some high-duty items.

The government development activity has not picked up speed while the private sector’s investment plan has stalled due to rising interest rates. Given the current adverse market scenario, I think the demand for cement will decline by 60-70 percent this year.

Times are tough for the private sector as the interest rate has almost doubled in the last one year. Industrialists and businesspersons in different parts of the country have come out to the streets to protest against the central bank’s policies. How do you see the impacts of the current macroeconomic whirlwinds on different sectors?
The impact depends on the nature of the sector. For instance, the hydropower sector has huge investments but doesn’t need raw materials for producing energy. Energy producers only have the liability of interest rate to bear. The revenue of hydropower projects is also fixed. For hydropower companies, rising interest rates can have big impacts.

But in the case of the cement industry, the situation is different; the cost of interest rate and depreciation is 25 percent in one sack of cement which is huge. The trading business would not be much impacted, but industries are hit hard by the current situation.

I don’t know when the interest rate would fall to a single digit. If the price of cement is high in Nepal, it can be imported from India. But we can’t bring money from India. We have to knock on the doors of banks for capital. We wouldn’t have any problems if banks had increased interest rates based on the base rate. But in the last one year, banks have increased premiums based on the demand and supply of resources.

Banks are well-regulated in Nepal. They are also well protected meaning the government doesn’t allow the opening of new banks. At present, banks are acting like a cartel. They [banks] have increased premiums even though they are well protected. This is the time to save the economy with collective efforts. I am not saying banks shouldn’t earn profits. But banks also need to look for those who do business with them.

On average, the base rate has increased by 2 percent, but the interest rate is up by 4 percent. And that too for only big businesses. The interest rate is up by almost 6-7 percent for small businesses. Shouldn’t the Nepal Rastra Bank look at it? Even the processing charge and letter of credit (LC) fee have been increased lately.

Also, interest rate stability is another major issue. It is difficult for the productive sector to survive when there is interest rate volatility.

The central bank has put a cap on working capital loans to businesses. There have been requests from the private sector to ease working capital loans. What are the grievances of the private sector regarding this? 
I wouldn’t label the central bank as entirely wrong on this. There are weaknesses also on the part of the private sector. Businesses may have taken working capital loans and invested in real estate and the stock market. But is it the right time to curb such practices? The central bank shouldn’t have the same policy for industries in every sector.

If you ask about our cement industry, we operate the mine for only six months a year. So, we have to manage stocks of limestone for six months working for just six months. If our working capital goes up by a huge margin, how can we manage production in such a situation?
Currently, the demand has slowed dramatically. Industries are operating at just 50 percent of their capacity. They are investing in raw materials, but the final products are being supplied to the market in considerably low quantities due to the depressed demand. Also, industries and businesses are struggling to recover money from the market. What I am saying is there shouldn’t be a blanket policy for businesses of all sectors. So, this is not the right time to cap working capital loans.

It’s banks versus businesses on the one side. But some business owners are also investors in banks and financial institutions. Doesn’t it seem conflicting that they are protesting against banks that have their investments? 
I have investments in a bank, and I am a businessperson too. But my major investment is elsewhere. The dividend I get from the bank will not be enough to run my industry. There are roughly 5-6 individuals who have investments in both banks and other businesses. But those focusing either on banks or industry/business, give priority to only one of the sectors.

The main issue here is the central bank has tightened policies without any notice. Not all businesses have invested in ‘unproductive sectors’ borrowing money from banks.

Do those in leadership positions in the government and the central bank listen to suggestions from the private sector?
No. Unfortunately, the private sector is not a priority for them. A mindset exists among bureaucrats and political leaders that businesses earn profits without effort. They don’t listen to us seriously. It is not wrong to earn profits.

If our business grows, we pay taxes and can create more job opportunities. The government is sluggish in easing policies that help the private sector.

For Nepal to become a prosperous nation, the private sector has a major role in improving productivity. But it has not been on the priority list of the government. Also, the bureaucracy also lacks the right person in the right place and expert advisors.

What are the expectations of the private sector from the upcoming government set to be formed after the elections?
Nepal is considered a free market economy as per the country’s constitution. But are the political parties committed to this? They are confused and so are we. We ask the central bank to determine the interest rate. If the market is based on demand and supply, then why should the central bank fix interest rates?

But it fixes rates on deposits, but not on lending. If we start practicing the free market in a true sense, the market will determine the interest rate itself.

Members of the business community are working patiently even during these distressful times. We need to be hopeful. Nepal is a small economy, and it takes no time to uplift the economic activities if the situation becomes positive. We are surrounded by giant Indian and Chinese markets. Now our focus should be on taking the “Made in Nepal” products to the international markets.

The way Nepal is involving India in the hydropower sector development has opened new doors of opportunities in terms of economic cooperation with the southern neighbor.

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