Kamlesh Kumar Agrawal, the President of Nepal Chamber of Commerce (NCC), leads a pioneering business organisation established after the advent of democracy in the country. Since its inception in 1951, the NCC has been dedicated to expanding the chamber movement within Nepal. NCC consistently acts as a bridge between the government and private sector, collaborating with the government on policy formulation in the socio-economic sphere. It has made significant contributions by playing a catalytic role in shaping the nation’s trade and commercial environment.
Agrawal, a seasoned business personality, has been at the helm of the NCC after serving in various capacities, including General Secretary and Vice President. He possesses extensive experience in the chamber movement, private sector development, and effective policy design, having represented the NCC in various government-formed mechanisms. He also served as a member of the High-Level Economic Reform Advisory Commission. In an interview with the HRM Nepal, Agrawal offered valuable insights into effective policymaking and implementation strategies to address the current economic slowdown. Excerpts from the interview are provided below.
Q: Recently, the government unveiled its fiscal budget for 2025/26, aiming to create an environment that will boost economic activity, achieve stability, and restore confidence in the private sector. Do you agree with the government’s statement?
A: To fully answer this, we need to consider the recent economic history. Following the promulgation of the Constitution, Nepal’s private sector was quite optimistic about inclusive and equitable development as the nation began its journey toward federalism. Despite challenges, including demonstrating remarkable resilience during the massive earthquake, the private sector maintained high confidence. This led to significant economic growth in three consecutive fiscal years: 2016/17, 2017/18, and 2018/19. The private sector had even envisioned achieving 9% economic growth, primarily driven by the hydropower and tourism sectors.
However, the COVID-19 pandemic severely impacted the economy starting in 2019/20. While the global economy contracted by 20%, Nepal’s economy experienced a negative growth of 2.09%. In FY 2020/21, the government introduced expansionary fiscal and monetary policies, resulting in an economic rebound with 3.9% GDP growth, followed by 5.8% growth. During this period, Nepal saw a decline in foreign exchange reserves, though they were still sufficient to cover three months of merchandise and service imports. This decline was primarily due to mild impacts on remittances and a slight return of migrant workers. However, the government and Nepal Rastra Bank (NRB) lost confidence and reacted impulsively, particularly after witnessing Sri Lanka’s crisis, where its foreign exchange reserves were severely depleted, making it impossible to import even essential medicines and daily necessities.
Against this backdrop, NRB issued a contractionary Monetary Policy in FY 2021/22, which severely impacted the economy, leading to a cyclical downturn. Real estate prices plummeted, imports were curbed, and the cost of trade increased due to monetary instruments like 50-100% margin requirements for opening Letters of Credit (L/C). This contractionary policy also resulted in high interest rates from banks and financial institutions (BFIs). Consequently, entrepreneurs who had taken out credit at lower interest rates struggled to repay both principal and interest as rates rose. Over the last three years, more than 100,000 borrower entrepreneurs have been blacklisted. Simultaneously, the cooperative sector faced a crisis due to its significant exposure to the real estate and stock markets. Furthermore, consumer sentiment, anticipating an economic crisis, has limited spending.
The government’s inability to spend on development projects exacerbated the crisis in the construction sector, which, in turn, adversely affected related industries in the value chain, such as producers of construction materials like cement, rods, aggregates and bricks. The construction sector, typically seen as resilient and a major employer, significantly impacted other economic activities. The contractionary monetary policy resulted in a decline in growth, which plunged to 1.8% in FY 2022/23 and 3.3% in 2023/24.
All this background highlights how government facilitation is crucial for maintaining economic momentum and attracting private sector investment.
Q: Do you agree that the capacity of the private sector is equally important for the economy to gain momentum?
A: The private sector’s capacity has already been proven, having demonstrated its ability to achieve high growth for three consecutive years. Since the beginning of the current fiscal year (2024/25), two major political parties have formed a stable government, which has made the private sector optimistic that the economic stagnation will be addressed. To counter the negative impacts on the economy caused by policy inconsistencies and illiberal policies, the government formed a high-level economic reform advisory commission. This commission was led by former finance secretary Rameshore Khanal and included economists and representatives from private sector umbrella organisations as members. The Cabinet has committed to implementing the commission’s report. While some laws have been amended, they will only become effective once their corresponding regulations and procedures are also amended.
Q: Do you think the fiscal budget 2025/26 will be able to address the challenges of the economy in the current context?
A: The budget outlines resource estimates and expenditures, and notably, it prioritises allocations based on private sector feedback, which is a positive development and has been widely applauded. However, budget execution remains questionable, largely due to resource mapping challenges. Achieving the desired level of revenue mobilisation is highly difficult given the ongoing economic sluggishness. The share of revenue in the total budget, at nearly 67%, remains high. Furthermore, volatility in the global economy, coupled with ongoing tensions in the Middle East and the Russia-Ukraine conflict, could impact foreign loans and grants. The fiscal budget projects a 6% growth rate and 5.5% inflation. To meet these targets, monetary policy must play a complementary role.
Q: The budget reportedly has not made a major amendment on the revenue side, aiming to enhance stability and predictability in the economy. What is your interpretation of this?
A: Our economy is open and liberal but we lack competitiveness. As an import-based economy situated between two major global production hubs (India and China), high tax rates in Nepal lead to flourishing illegal trade. In this context, the government must consider the prevailing tax rates in India and China. We operate under a high tax regime, and although we have advised the government to reduce customs tariffs, our recommendations have not been heeded. Nepal Chamber of Commerce (NCC) has long advocated for multiple value added tax (VAT) rates, a concern that has not been adequately addressed, though the 2025/26 budget does mention a study on this matter. Consumer prices are affected by four types of taxes: VAT, customs tariffs, excise and income tax. Compared to India, our tax-to-GDP ratio is high, and India employs multiple Goods and Services Tax (GST) rates.
The government is losing revenue due to stringent tax policies. A study we conducted a few years ago revealed that illegal trade is substantial, amounting to approximately Rs. 500 billion. Given our porous open border, this can only be controlled through effective policy measures. While the government agreed with our feedback, it has not been reflected in the budget. Moreover, the government still relies on reference prices rather than transaction prices at customs points. Once imported goods clear customs, they should be transported to importers’ warehouses without hassle. However, the Department of Revenue Investigation often creates issues with multiple checks during inbound transport, even after customs clearance. The high-level economic reform advisory commission has urged the removal of such impediments. Restrictions and hassles, in effect, create fertile ground for illegal trade and smuggling. This is evident from the fact that products restricted to prevent foreign exchange reserve strain were still available in the market through smuggling, leading to government revenue loss. Therefore, customs tariffs must be revisited to enhance competitiveness and transaction prices should be allowed for customs clearance.
Moreover, NCC protested during the initial enforcement of VAT, which concluded with an agreement that VAT would be a single tax, eliminating excise and other multiple taxes, however, this has not materialised. We currently use an 8-digit HS code, while the global standard is a 10-digit HS code. Due to a lack of proper product identification, customs has been enforcing tariffs and excise duties irrationally. Such enforcements have retrospective impacts because the government makes inconsistent decisions. We have advised the government to consider transaction prices for customs clearance of goods imported from multinational companies, goods with GST invoices, highly prestigious goods, and those imported via Letters of Credit (L/C).
Q: The government has been claiming that enforcement will be weakened if multiple rates are levied in VAT?
A: A single VAT rate is unjustifiable from a social justice perspective. Nepal has immense potential for agricultural production, yet we import agricultural commodities worth over Rs. 350 billion. This is due to a lack of competitiveness caused by multiple factors, including taxation. We must adopt a competitive tax policy.
Q: Given the circumstances, what should be done to make the economy vibrant again?
A: The government must prioritise facilitation and creating an investment-friendly environment, moving away from a controlling mindset. For example, Nepal currently holds over Rs. 2,500 billion in foreign exchange reserves, a historic high. While the Monetary Policy aims to maintain foreign exchange reserves sufficient to cover 7.5 months of merchandise goods and services imports, current reserves are adequate for 15-16 months of imports.
The government collects approximately 35% of taxes in advance, including income tax at customs points. Income tax is typically paid after income is earned, however, the government has imposed a 10% Tax Deducted at Source (TDS) on pulses and legumes, with the amount required to be settled within the fiscal year. This indicates ill intent, as it’s unreasonable to expect settlement of income tax before a commodity is sold in the market and there’s no guarantee that imported goods will be sold within a single fiscal year. Foreign exchange reserves could be maximised by utilising them for infrastructure development and boosting production by fostering a favourable climate for capital goods investment.
Q: Is the private sector hopeful about the proper implementation of the budget and achieving 6% growth?
A: The 6% growth target is directly linked to monetary policy, necessitating at least 15% credit growth to the private sector to be achievable. In this context, Nepal Rastra Bank should introduce an accommodative monetary policy. The budget has addressed persistent challenges, suggesting that blacklisted individuals should be provided with loan rescheduling facilities and partial interest rate waivers. Many entrepreneurs stand to benefit from this scheme announced in the budget, which will be further elaborated in the monetary policy.
Another significant obstacle is the working capital guideline, enforced on October 18, 2022, which contains controlling and restrictive provisions. This guideline, with its ‘one size fits all’ approach, fails to accommodate the unique requirements based on business nature, needs and seasonal variations. Recent amendments to the working capital guideline have extended the compliance period for two years from mid-July 2025 for those who availed credit before the guideline’s enforcement and those who borrowed above Rs. 20 million. However, instead of offering such piecemeal solutions, our recommendation to NRB is to scrap the working capital guidelines entirely.
The introduction of these guidelines has crippled credit mobilisation to the private sector, resulting in BFIs being flush with over Rs. 700 billion in liquidity despite low interest rates. This is because existing working capital loan borrowers cannot borrow more from BFIs and new entrepreneurs are not encouraged to avail credit under such a controlled and unpredictable policy regime. I would like to highlight some critical provisions despite the recent amendment. For instance, the requirement to settle 100% of the loan for one week in a year is impractical if a trader/entrepreneur needs more time, and can often only be managed upon business wind-up. We believe that the new governor, who recently assumed office and understands the private sector’s concerns, will provide a remedial solution in the upcoming monetary policy.
Q: Following the COVID-19 pandemic, Nepal Rastra Bank was very generous in providing ‘3R’ facilities (loan restructuring, rescheduling and refinance). Then, it ended abruptly and focused on recovery by introducing working capital guidelines. How do you observe these inconsistencies?
A: This reflects significant policy deviations, inconsistencies and a ‘hit-and-trial’ approach, which is Nepal’s biggest challenge. After the COVID-19 pandemic, many countries offered stimulus packages in response to government-enforced lockdowns to curb the virus’s spread. Our government, facing resource constraints, offered no hope of a stimulus package. At that time, over Rs. 240 billion was mobilised at concessional rates. However, Nepal Rastra Bank abruptly applied the brakes, causing widespread economic impacts. Without correcting this, it will be difficult to move the economy forward.
It is a reality that many business people have invested substantial amounts in the real estate sector. Initially, they invested in real estate and secured credit by using their properties as collateral. Now, the valuation of these collateral properties has dropped by 50%, and BFIs are demanding additional collateral. The stringent policies introduced over the last three years must be reviewed. Furthermore, if someone purchases real estate, the source of income must be disclosed. When there are no declared records, it becomes challenging to present the income source, even though people have the right to purchase real estate by selling inherited properties. Moreover, margin lending policies were abruptly reviewed, distorting the market. The false narrative of ‘unproductive sectors’ is hindering investment diversification and the deepening of capital market development. Investors are discerning enough to make their own investment decisions and diversify their portfolios. Over-regulation, excessive compliance burdens, inconsistent policies and false narratives are the primary reasons behind the economic slowdown.
Q: How can the government play a role as a facilitator to spur growth, in your opinion?
A: We possess three crucial sectors with immense potential: agriculture, hydropower and tourism. Despite these opportunities, we are net importers of agricultural products, while much of our land remains fallow. We have failed to incentivise agricultural producers with essential support such as irrigation, fertiliser, improved seeds, extension services, subsidised credit, transport infrastructure and market access.
In the hydropower sector, private sector investments, spurred by the introduction of ‘take or pay’ power purchase agreements, led to significant transformation. However, this has recently changed to ‘take and pay’, which is a clear example of policy inconsistency. The government is reluctant to open up power trade windows to the private sector but is proactive in seizing facilities.
Regarding the tourism sector, Indian tourists face hassles at immigration when carrying more than INR 25,000. The high-level economic reform advisory commission has recommended increasing this limit to the equivalent of USD 5,000. Such procedural simplification would boost tourist inflow. To further increase tourist arrivals, Nepal should focus on developing more attractions. For example, a few months ago, the Kumbha Mela in Prayagraj attracted at least 650 million visitors over 45 days. We should consider developing infrastructure – roads, airports, accommodation services and more – to cater to high numbers of tourists. While the fiscal budget 2025/26 has announced welcoming tourists as guests, our immigration offices are currently discouraging them, which needs urgent attention.
In addition to these three sectors, the mines and minerals sector presents another significant potential. Recently, large natural gas deposits were discovered in Dailekh. There could be many other mines and minerals in our Himalayan alpine belt, requiring further exploration and exploitation. Satellite surveys have even identified uranium in the Upper Mustang region, yet we remain unable to utilise this potential. Efficient and effective use of natural resources is key to achieving affluence, as demonstrated by the experience of developed countries. The budget has emphasised the utilisation of natural resources, a commitment also reflected in its allocation.
Q: From where will the investment come to fill the gap in the potential sectors you’ve mentioned?
A: Definitely, domestic resources are insufficient and foreign direct investment (FDI) is crucial. The budget has addressed issues like easy entry, exit and profit repatriation, but these provisions need to be implemented effectively in practice. Currently, bringing in FDI faces significant hurdles. I am often astonished why discussions about the profit repatriation of companies like A, B and C become front-page newspaper headlines in parliamentary committees. If someone invests, they are not doing it for charity; the basic precondition for any investment is a return. After consistent emphasis from the private sector, the government recently conducted a sovereign credit rating, achieving ‘BB-‘, which is remarkable in South Asia, second only to India. However, despite abiding by compliances, Nepal has once again been placed on the Financial Action Task Force (FATF) grey list. The primary reason for falling onto the grey list is a failure of economic diplomacy. In this context, there must be a clear vision for reforms, along with appropriate policies and intentions.
Q: The monetary policy 2024/25 is quite flexible compared to the previous one. Why does credit growth remain slow?
A: Monetary policy has limited objectives. Perhaps Nepal is the only country where monetary policy is discussed as if it were the primary economic policy. Monetary policy aims to control inflation to a desired level, although this is not entirely within Nepal’s control given our import-based economy. Furthermore, monetary policy supports the achievement of fiscal policy’s growth targets through private sector credit mobilisation. We have the potential to achieve up to 9% credit growth. In the past, restrictive and contractionary policies were introduced, and while the current monetary policy for 2024/25 has shown some flexibility compared to past restrictions, credit growth remains slow due to a lack of demand.
There have been interventions in interest rates instead of trusting market-driven (demand and supply-based) models. Interest rates were artificially raised through interventions, including the introduction of spread rates and premium rates. A major intervention was the provision requiring a 5% difference between saving accounts and fixed deposits, which led to an increase in the bank base rate. Over the past three years, entrepreneurs have incurred significant losses due to contractionary monetary policy, even facing capital erosion. Who will evaluate this – has the World Bank Group, International Monetary Fund, or even the government evaluated this impact? All political parties have expressed a commitment to strengthening the economy but commitment alone is not enough. Due priority must be given to enhancing infrastructure quality and investment-friendly policies. If this happens, Nepal could become the highest per capita income-generating country in South Asia.
Q: There has been a debate about separating bankers and businesspersons. What impacts could this initiative bring to the banking sector?
A: Initially, only government banks – Nepal Bank, Rastriya Banijya Bank, Agricultural Development Bank Limited, and NIDC – provided credit to industries. With liberalisation, foreign joint ventures and private sector banks were established. The growth of the economy is undoubtedly due to the private sector’s participation in BFIs. In the past, before the operation of foreign joint venture and private sector banks, it was difficult to avail credit. Suddenly, after almost four decades, the government and Nepal Rastra Bank attempting to effectively ‘throw businesspeople out the window’ is irrational. This kind of debate discourages investors, causing them to lose confidence.
The government/state can initiate policies but they should not be abrupt. The entire issue of separating businesspersons and bankers stems from NRB’s weak regulatory capacity. Banks have two components: owners and managers. The question always remains for the NRB: why didn’t they intervene with any problematic policies earlier? If the state introduces such policies, investors should be provided with an appropriate way to exit or divest their shares. There is currently a difference between promoter and public shares; if promoter shares are converted to public shares, the supply of shares will increase and share prices will fall.
Today, institutional deposits are vastly greater than the savings of businesspeople. If the government and NRB introduce a policy that allows institutional depositors to purchase promoter shares, it would offer a graceful exit for promoters. Investors, depositors, employees and borrowers are all crucial for the smooth functioning of BFIs. Therefore, there must be a win-win situation for the exit of promoters, rather than any forceful measures.
Q: There has been preparation to set up an Asset Management Company to manage the non-performing assets of BFIs. How would you explain this move by the government?
A: Establishing an Asset Management Company (AMC) to acquire troubled assets is a complex undertaking. The primary challenge for an AMC’s operation lies in maintaining transparency. Without transparent management, significant disputes could arise. To ensure transparency, an AMC should ideally be established through a partnership with the government. Otherwise, if it’s solely government-owned, issues of transparency and accountability could lead to numerous disputes. The processes of asset purchase, renovation, management and disposal/sale are all equally critical. Currently, the government has not initiated dialogue with the private sector regarding the establishment of the AMC.
