After the government brought the federal budget for the new fiscal year to the dismay of the private sector, all eyes are now on the central bank which is in the process of finalizing the monetary policy for FY 2023/24. Business community members are expecting policy relaxations that they stress have become vital to take the Nepali economy out of the current downturn that is deepest in living memory.
Like other private sector bodies of the country, the Nepal Chamber of Commerce (NCC) has also suggested the central bank take a pragmatic approach to monetary policy to get the derailed economy back on track. In a conversation with the HRM, Rajendra Malla, President of NCC, talked about the policy arrangements required at this crucial time, challenges faced by the business community, and the way forward for the Nepali economy, among other topics. Excerpts:
The federal budget for the next fiscal year did not come as expected by the private sector. However, the finance minister is claiming that the budget will spur the second generation of economic reforms in the country. Do you agree?
The budget has targeted economic growth of six percent. However, economic indicators draw a different picture. With persistently high borrowing rates and dwindling imports, the production sector is suffering resulting in decreased output.
The economy grapples with the burden of high inflation, increasing difficulties for both businesses and consumers. As a result, achieving the economic growth target of six percent will be an uphill battle. To further complicate the matter, the success of the budget hinges on the government’s ability to collect the projected revenue. Falling short in this aspect would render the task of achieving the growth rate nearly impossible.
If this happens, the government would need to reassess and revise the size of the budget, a practice we’ve been witnessing recurring over the past few years. While the budget has outlined plans to increase taxes, a more effective approach would involve expanding the tax base. By broadening the tax net, the burden on consumers could be lessened, thereby fostering a more favorable environment for economic activities. It is important to maintain consistency in tax policies regardless of changes in the government. A stable and predictable tax framework instills confidence among businesses and investors, enabling long-term planning and growth.
Has the government incorporated the suggestions from the NCC in the federal budget?
Some of our suggestions have found a place in the budget, but several key points have been overlooked, particularly those related to the expansion of the tax net. We’d recommended raising the VAT threshold from Rs 5 million to Rs 20 million for small entrepreneurs who operate as self-employed individuals. These individuals often lack the resources and skills to hire accountants and manage their financial records which makes business compliance challenging.
A tax of 0.5 percent on their transactions could be imposed, thereby broadening the tax base. Differentiating tax rates between daily consumption and luxury items is another measure worth considering. For example, reducing the VAT rate for daily essentials from the current 13 percent to 10 percent, while increasing it from 13 percent to 15 percent for luxurious items, would encourage responsible consumption and will also generate additional revenue for the government.
Implementing such practices in taxation can yield positive outcomes for the economy. Increasing consumption plays a vital role in rejuvenating the economy. By fostering a favorable environment for consumption, economic recovery, and growth can be achieved.
The government is being criticized sharply for the arrangement related to taxation in the new budget with many fearing that Nepal is becoming one of the most heavily taxed countries in the world. How do you see the government’s rationale behind increasing tax rates for collecting more revenue rather than expanding the tax net?
While the government has the authority to change tax policies and rates, it is crucial that the implementation of new policies begins from the date they are announced. Retrospective tax policies such as the one related to past mergers and further public offerings (FPOs) of publicly listed companies, create confusion and discontent among taxpayers.
Such tax policies discourage investment in the country, particularly when capital investment and foreign direct investment (FDI) are subjected to taxation.
It is worth noting that tax rates in Nepal are relatively higher than in other South Asian countries. While drawing a direct comparison with countries like India and China may not be entirely effective, looking at countries like Sri Lanka and Pakistan shows that Nepal’s tax rates are on the higher side.
Non-scientific tax policies and rates should be reviewed and amended to ensure a more competitive environment. High tax rates can deter investments, prompting potential investors to redirect their resources to countries with more favorable tax regimes. To foster economic growth and attract investment, it is essential to strike a good balance between the government’s revenue generation and creating an environment conducive to investment. Implementing fair and reasonable tax rates is important in this regard.
What are the other hits and misses of the federal budget?
The budget’s focus on Environmental Impact Assessments (EIA), promoting aggregate exports, and utilization of decayed timber is indeed positive. These measures reflect the government’s commitment to sustainable development and resource management. However, it is important to address the missing points in the budget. One such area is the export of herbs. Nepal has an abundance of medicinal herbs with immense potential in the global market. Including initiatives and incentives to support the growth of the herbal industry will be beneficial.
The government should prioritize exploring and tapping into this sector’s opportunities. Also, ensuring a hassle-free market for small producers would greatly benefit consumers. Streamlining regulations, reducing bureaucratic hurdles, and creating platforms where small producers can showcase and sell their products without unnecessary obstacles would promote local entrepreneurship and provide consumers with a diverse range of quality products.
Now all eyes are on the upcoming monetary policy. The finance minister himself has said that Nepal Rastra Bank has a great deal of responsibility to take the economy out of the slump. How can an expansionary monetary change the course of the economy?
The monetary policy should focus on reviving the business environment in the country as well as increasing the confidence of the private sector. The last fiscal year’s monetary policy contributed to a sluggish economy, high borrowing rates, and ample liquidity in the financial system resulting in the depressed market demand for goods and services. Efforts should be made to lower the interest rates in order to stimulate economic activities. One aspect that needs attention is the system of premium rates. It is important to ensure that the premium rates charged by financial institutions are logical and fair. Currently, there are inconsistencies, with some businesspersons paying a premium rate of 0.5 percent while others are charged as high as 6 percent.
Establishing a standardized premium rate which is stable at 2 percent, would bring more stability and fairness to the system. This adjustment will help restart the economic engine as businesses can seek more loans. By implementing measures to reduce interest rates and rationalizing the premium rate system, monetary policy can play a crucial role in reviving economic growth. Lower interest rates would incentivize borrowing and investment, providing a boost to business activities and overall demand in the economy.
The private sector organizations have also been asking to lower the risk weightage average (RWA) of hire purchase loans, as well as mortgage and margin loans from the current 150 percent. Why lowering the RWA has become important for economic revival?
Lowering the RWA to 100 percent could potentially have a positive impact on the economy. Banks would be able to increase their lending, which would provide a boost to businesses and stimulate economic growth. Or else the economy will not come back on track.
The primary step towards stimulating economic growth is to reduce interest rates. The implementation of stringent monetary policies has resulted in tight conditions. The central bank has introduced penalties for banks and borrowers alike, adding to the pressure faced by businesses. It is crucial for the private sector to have confidence in the effectiveness of policies. When businesses are plagued by fear and uncertainty, the potential for economic expansion becomes limited. Therefore, restoring faith in policies becomes important to foster an environment conducive to economic growth.
Lately, the financial system is flushed with investment-grade liquidity. But even then the demand for business loans has not grown. Why has this situation prevailed despite the easing of liquidity?
One of the major issues in this regard is the high borrowing rates despite the sufficient liquidity in the banking system. This has led to a tight flow of loans from banks. The cost of doing business is high with banks levying various charges on loans. Rather than having a monetary policy plan for a year, there should be a vision for five years to provide interest rate stability and predictability.
To encourage the establishment of new businesses, policies should be relaxed, and investments must be safeguarded for investors. Domestic investment alone is inadequate for Nepal, so attracting foreign investments is essential. Equally important is to consider whether ordinary citizens receive social security benefits according to the taxes they pay. If there are no benefits, the rationale behind high tax rates becomes questionable. Therefore, it is crucial to implement policies that ensure the return of benefits to taxpayers and provide logical reasoning for the tax rates imposed.
What are the challenges faced by traders in recent times?
Traders are facing hurdles when they attempt to import products by opening letters of credit (LCs). The Department of Customs (DoC) has been imposing penalties based on discrepancies between market prices, further complicating the situation. These obstacles indicate a lack of logical reasoning in our policies.
For instance, let’s consider the case of cotton yarn. Industrial enterprises are levied a tax rate of 1 percent when importing cotton yarns, whereas it is five percent for trading enterprises. Traders supply cotton yarns to small and medium textile producers who are unable to import directly by opening LCs themselves. In the past, there was a Value Added Tax (VAT) exemption on the sales of such threads.
With frequent changes in policies, it has become challenging to enhance production and improve the overall manufacturing sector. It is evident that the current policies are creating inconsistencies and hindrances in trade and production. There is a need for a comprehensive review and reform of policies to ensure logical and equitable treatment across various sectors.
How serious have you found the government and political parties to be towards solving the economic crisis?
The implementation side is very weak even though the government considers immediate actions in some crucial areas. For instance, the plotting of lands has not moved ahead even after the Prime Minister expressed the need to reopen the land plotting. The failure to address this issue has resulted in the weakening of industries producing construction materials such as cement, steel and paints. It is important for the government to develop a well-defined and executed plan to tackle this particular issue effectively. Without a proper strategy in place, the growth and sustainability of these high capital and labor-intensive industries will continue to be compromised.
Q. What role does the NCC play in terms of making political leaders and lawmakers aware of the problems surrounding the business community?
A. Despite our efforts, there are instances where crucial bills such as the Black Marketing and Other Social Offences Act have been stuck in parliament for many years. There are potential benefits to getting the endorsement of these important bills. One such example is the demand for cannabis oil in foreign markets. However, even among lawmakers, there are differences of opinion regarding the production of cannabis.
By allowing the production of industrial cannabis, we can tap into this opportunity and create economic benefits for the country. However, it is essential for lawmakers to reach a consensus on this matter and facilitate the necessary legislation to unlock its potential.