Mindset of government machinery towards private sector must change

Rajesh Kumar Agrawal is currently the President of the Confederation of Nepalese Industries (CNI). As the President of CNI, he has been taking forward some innovative and notable interventions to strengthen, encourage and elevate the private sector. Agrawal has over 30 years of experience in business. He is the Executive Director of RMC Group, established by the Agrawal family in 1992, and which has more than 20 products in its portfolio. While leading the umbrella organisation of businesspeople in the country, he has been dealing with various issues of the private sector with the concerned stakeholders, including the government. The HRM caught up with Agrawal to learn about the private sector perspective on the current economic issues and remedies for stimulating the economy. Excerpts:

Q. Private sector umbrella bodies held a meeting with the prime minister recently and discussed about business confidence measures. Why is the private sector losing confidence?
A. Those who are in the government machinery have the wrong mindset in understanding the private sector. The government mechanism has been treating the private sector as profit mongers and there is no recognition of the contribution made by the private sector. Obviously, the private sector is profit oriented; it is because the private sector cannot sustain without profit. The private sector pays taxes from its profit, and without taxes how will the government function? If we are making investments, running companies, providing employment, working with our knowledge, innovation and management then people should understand that it is actually making the economy functional. ‘Profit’ itself is not bad, this is essential for the private sector to sustain, they cannot do social service and that should be duly understood by those who are involved in the government mechanism. Private sector is the largest contributor in the economy, however, the new Bills that are registered in the parliament and the newly drafted Bills give a message that the private sector is usually involved in wrongdoings and in line with that perspective penalty provisions have been mentioned in these Bills. They are guided by the perception that the private sector does wrong, and it should be penalised, which is a wrong mindset. We strongly oppose this. Private sector/businesspeople are arrested for unintentional and minor human errors. They are treated under criminal offence for unintentional human errors. There should be a distinction based on the offence; whether it is a criminal or civil offence.

In the last two years, the Nepali economy has been facing continued slowdown mainly due to the policies adopted by Nepal Rastra Bank and for international reasons – Russia-Ukraine tensions and global commodity price rise. The consistent slowdown is gradually affecting large businesses and banks and financial institutions (BFIs) as the cyclical impact started from small and medium-sized enterprises. This has been witnessed as the structural problem and the government is not taking any initiative to address the challenges.

Q. Though the private sector has been repeatedly raising these issues why do you think has the government turned a deaf ear despite the problems escalating?
A. It might take some time to get things back on track even after the interventions. However, the government has not been doing anything though its revenue is plummeting sharply. Either there is a lack of realisation of the problem or the government is unwilling to accept the problem that is rooted in the economy. Consumption is shrinking. Just a few days back, farmers protested against the delays in getting their payments settled. The dairy industry has been facing challenges as consumption of milk is shrinking, stocks are increasing, and they are not in a position to purchase from farmers. The whole value chain has been interrupted. We have been advising the government to come up with remedies and the private sector is always ready to join hands with the government to execute the remedies.

Q. Could you please share a few interventions that need to be done immediately by the government?
A. The restrictive policies, namely, working capital guideline and asset classification guideline, taken by Nepal Rastra Bank since the last one-and-a-half years should be revoked. The guidelines are responsible for restricting credit mobilisation to the private sector. Though working capital guideline has rational, however, this is not right time to introduce it. The asset classification guideline is not appropriate for our country. In our context, a few people may form a company in partnership and among them someone might have another business with others in partnership or on a sole proprietor basis. In this context, if any one of the business runs off, then all the businesses they are involved in will be blacklisted. Another harsh provision is if a loan is listed under watchlist, that borrower will remain in the watchlist for another six months even though such loans have been cleared.

Second, the government has not been able to collect revenue as per the target and has been borrowing for its recurrent expenditure. The government should enhance capital expenses by mobilising the debt given the scenario of slumping revenue mobilisation. It is because capital/development expenses will have a multiplier effect on the economy and enhance revenue mobilisation as well as boost productivity and create jobs. Further, there are many development projects initiated by the government by providing resources guarantee which are stalled as the government has not been settling the payments. At least they should be paid for the work completed so far. Another fundamental aspect is the government should focus on priority projects and quality of spending, and budget should be allocated adequately for priority projects and ensure that the amount which has been allocated must be spent. The government should prioritise 100 projects and allocate adequate funds and execute them meticulously in a timebound manner instead of allocating inadequate funds in thousands of projects over the years that has no certainty of completion. Then only will projects deliver results.

Third, proactive oversight agencies are another challenge. They are obstructing government procurement and works and also expanding their jurisdiction to the private sector. Government authorities are reluctant to take any decision and when decisions are not taken how will the country move forward? The private sector has been dealing with more than 30 regulators and there must be compliance with multiple authorities for the same thing. For example, the private sector currently has to deal with Inland Revenue Department, Revenue Investigation Department and Money Laundering Prevention Department regarding tax-related affairs. The Commission for the Investigation of Abuse of Authority (CIAA) has also been expanding its jurisdiction to look into the private sector’s affairs. More regulation and compliance have a huge cost for businesses. We would like to request the government to conduct the regulatory impact assessment.

Q. The private sector has taken the monetary policy as the panacea instead of the fiscal policy. However, the central bank has been saying that the borrowing capacity of the private sector is weak as they are already overleveraged. What is your take on this?
A. The entire problem has been accelerated by the monetary policy. When international commodity prices surged globally, that caused inflation in Nepal too as an importing country. The central bank then moved ahead to lower demand by increasing credit rates, however, the authorities have overlooked that hyperinflation was not caused by rise in demand. It was due to international commodity prices rise, but the monetary policy tried to tame inflation by lowering the demand. Though many say that the flexible policies taken during the Covid regime were wrong, I personally support those policy measures. But where NRB went wrong is they started tightening that too early. If you try to tighten things in months which have been in place for three years then that is bound to create problems. The central bank has not only minimised refinancing but has simultaneously started addressing the loan growth by raising the credit rate. We are convinced that the monetary policy is not a panacea for the existing problem. The problems emerged due to the adoption of various policies and they should be addressed by tweaking these policies and bringing back things on track. Fiscal spending and incentives are equally important but the current slowdown in the economy has been caused by the monetary policy and it should be resolved through the monetary policy.

In fact, the aftereffects of the monetary policy also affect the smooth execution of the fiscal policy as the plummeting demand (consumption) is adversely affecting revenue mobilisation of the government.

Regarding the concerns of the overleveraged private sector, I do differ with this though the development partners are also enticing the central bank with the statement that a huge loan amount, (approximately, 90% of GDP) has been mobilised to the private sector. But we should segregate the corporate and household loans to analyse the situation. Recently, the data unveiled by NRB shows 65% of it is corporate loan and remaining 35% has been mobilised in the household sector. The corporate sector is not as overleveraged according to the hue and cry that is going on. Further, if the corporates are overleveraged or someone has misused the funds, that should be properly analysed. For example, cost intensive projects like hydropower availed a big chunk of loans as they are allowed to obtain up to 80% against the 20% equity. The loans mobilised in the private sector should be prudently judged and analysed like how much has been mobilised in projects that create fixed asst like hydropower, how much has been mobilised in term loans, how much has been mobilised in the household sector. Even the term loan mobilised in imports should relate with the stock and Value Added Tax (VAT) credit.

Q. The government has been initiating some policies like relaxing real estate and stock market. Do you think this will help sort out the current challenges?
A. The problems that we are facing with the cooperatives, microfinance companies and others have surfaced due to the monetary tightening. The central bank has tried to do everything at the same time; increasing credit rate, lowering demand, tightening the real estate and share market, and as a result everything has stalled. First, they allowed the real estate and share market to create a bubble and then all of sudden they tried to tighten it in a single year. Most of the cooperatives might be facing challenges as they are not able to return the depositors’ money by selling the property or land they have invested in. When we take a decision, we must think about the aftereffects. To a large extend the knee-jerk reaction of the central bank is responsible for the current problem. When the government took the decision of import restrictions, the private sector had suggested thinking about alternatives instead of restrictions like raising customs and loan to value (LTV) ratio. However, that was not considered and as a result the problems gradually escalated. Considering the manifold challenges we are witnessing in the economy; we would like to request the government to take corrective actions promptly because the challenges we are facing in the economy cannot be sorted out overnight. The problems that have accumulated in the last one-and-a-half years might take an equal time to bring the economy on track if the government starts working with high determination.

Q. The International Monetary Fund has urged the government to enhance the quality of fiscal spending, improve investment climate and strengthen the anti-graft institutions and the government seems focused on these recommendations. How does the private sector analyse these recommendations?
A. These recommendations are appropriate but this will deliver results only in the medium term or long term. However, we have to accelerate economic activities to get rid of the current economic slowdown. Against this backdrop, the government must resort to solution centric ways. The recommendations of the IMF that urge the government to enhance the quality of fiscal spending, improve investment climate and strengthen anti-graft bodies are valid and we agree with this. To improve the investment climate, various reform agendas should be implemented. Most importantly and immediately, we would like to request the government to carry out research on the cost of regulatory compliance in business. The government has been taking initiatives to amend laws to facilitate investment ahead of the Nepal Investment Summit and the private sector appreciates that the government consulted us while preparing the amendment draft. Other key issues to be sorted out in the doing business reforms are frequent transfer of government staffs and lack of decision-making capacity, as without political and bureaucratic stability it is difficult to implement the reforms that are required to improve the investment climate.

Q. In recent years, businesspeople have been accused of corruption charges by the anti-graft bodies even in the decisions made by the government authorities. Why do you think is this happening?
A. We do not oppose any investigation as such. Our only concern is that oversight agencies should treat everybody equally. What we have seen is a bureaucrat makes decisions on behalf of the government and is later appointed to an anti-graft body and becomes an authorised person for investigation. That could be guided by an interest or a conflict of interest could prevail there. There is a saying, ‘Let hundred guilty be acquitted but one innocent should not be convicted’ and that should be duly followed by the responsible entities including anti-graft bodies.

Q. There is a layman understanding among people that a nexus exists between the private sector, politicians and top bureaucrats. Is there any truth to that?
A. Nepal’s private sector is gradually evolving. The government should allow political funding officially and we should be permitted to adjust that in our bookkeeping accordingly. Ultimately, we should go for digital transformation and laws should be amended accordingly. Along with full-fledged digital transactions, acts/laws should also be amended accordingly to control corruption. Further, there should not be any ambiguity in laws and procedures/processes and service delivery should be simplified and digitised.

Q. The government alone is not the supplier of goods and services. As the private sector is the major player of the economy and is involved in the delivery of goods and services to the people, it is said that the private sector can play a critical role in governance reforms. Why has the private sector not taken any initiative in this regard?
A. We are definitely playing our role. We are advising the government on what should be done through various studies and research. The government should take ownership and implement it. For a country like ours, political and bureaucratic stability is key for making decisions and implementing those decisions properly. We can sense that the government leadership has realised that it has to intervene as we are heading towards a crisis and a large number of people are leaving the country. Strong, committed and determined leadership should act proactively for governance reforms.

Q. As the President of the CNI, what are your major priorities?
A. As the President of CNI, we are focusing on improving the investment climate and we are working as a think tank of the government. We provide feedback to the government based on thorough research. One of the major works we have done so far is recommending the government regarding the need to amend acts/laws to facilitate investment and business operation with extensive study-based report comprising of the existing provision, required amendment and rationale of amendment. Further, there are some other internationally established values and provisions, like we have bankruptcy law but that is not effective. We are collaborating with the government to introduce Chapter 11 – Bankruptcy Basics and recovering loan (either cash or kind). Similarly, we are also trying to work on tax related issues. Our tax laws need to be amended to make it more contextual. The gig economy is prevailing worldwide, ecommerce is another emerging area, however, our tax laws do not recogise the modern dynamics and as a result we faced issues with the ride-sharing platform issues in the past. This is why tax and other laws should be dynamic, solution oriented and facilitation centric to enhance the investment climate.

Q. The next 10 years are precious for Nepal in terms of demographic dividend, rise of neighbouring India and China and the spillover effects, and the high aspirations of the citizens to move forward. In that context, what do you feel will be the scenario of Nepal in the next 10 years?
A. Both who are saying ‘nothing is happening’, and ‘we’ve achieved a lot’ are extremist opinions. In my observation, many things have been taken forward, and new challenges and opportunities lie ahead. If you analyse the situation of 10 years back and now, you can feel many things have changed. The private sector also is evolving; tourism, energy, ICT, health and education, among other sectors are progressing. I cannot say we will be able to transform in the next 10 years in the existing scenario. If the government and private sector collaborate for reforms including in governance and enhance the investment climate to attract more private sector investment including foreign direct investment (FDI), we will be able to create more opportunities in the country.

Q. Around 20% of the population is below the poverty line, the per capita income is low and political instability is prevailing. Given this scenario, are you optimistic that Nepal can sustain its graduation to the league of developing nations?
A. We have to enhance our competitiveness because we have enough space to leverage the economy. Recently, a survey has indicated that the IT service export is valued at approximately $515 million. If we are able to spread this message globally and attract global companies to establish their backend offices or data centres then anything could be possible because we have sound climate, cheaper labour force as well as cheaper electricity cost. We have to focus on sectors that have niche market advantage or unique selling benefits. CNI has recommended the government to craft the industrial development strategy to prioritise industrialisation as it will enhance our economy and sustain our graduation and we will be able to move ahead in a higher growth trajectory.

Q. As a successful entrepreneur, what message would you like to convey to aspiring youths who are thinking about embracing entrepreneurship?
A. I would like to tell them that they should be focused because consistency matters. You should not deviate in various sectors. You should consistently focus with sincerity, that will deliver. I am not saying that all will be successful. Failure also leads you towards success later. You may rise again from failure. But unless you are sincere and consistent, no one can succeed.

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