Slumping Revenue – Distressing Public Spending

Due to lack of revenue mobilisation capacity, the government brought the monetary instrument and private sector credit as a panacea, that has a serious implication on the economy along with the financial sector resources overleveraged the big borrowers.

the HRM
T he widening gap between the revenue target and actual collection in recent years has made it difficult for the government to fulfil its spending obligations that were announced through the fiscal budget. The continuous shortfall in revenue over the years has posed manifold challenges in public spending thereby derailing the credibility of the budget, quality of the spending, and above all the trust of the people.

The government’s inability to mobilise revenue has compelled it to resort to other sources of budget financing like public debt and foreign aid, however, those sources are also shrinking due to the challenging global economy. The government is also barred from using debt and aid money for recurrent expenses, that mostly goes in salaries and perks including pensions of civil servants, allowances to senior citizens, marginalised ethnic communities and single women, among others.
This gap between the target and collection stood at Rs 393 billion in the last fiscal year and there is no sign of improvement in this fiscal. The shortfall against the target in the first six months of FY 2023-24 is Rs 152 billion, as per the Revenue Division of the Ministry of Finance.

Expanding Committed liability
The committed liability of the government is expanding. The government cannot set aside liabilities such as national security, judicial administration, federal administration, foreign affairs, domestic and foreign debt repayment, pension and gratuities, and allowances to senior citizens, marginalised communities and single women, among others, share and loan investment, higher education management, national pride and priority projects, periodic elections, disaster preparedness and other emergency situations. For such unavoidable expenses the government has to spend more than 60% of the budget, said Uttar Kumar Khatri, head of the Budget Division at the Finance Ministry.

The concept of federalism is to make the federal government lean and thin, however, the federal government has barely handed over the power/authority to the subnational governments and is still maintaining a large structure like in the previous years before the federal system of government was adopted. The subnational government, mainly the provinces, are not functioning properly, said Dr. Binaya Kumar Mishra, Assistant Professor at Kathmandu University School of Management (KUSOM), adding, “Local levels have been delegated power to perform, but unfortunately not the provinces, which has paralysed the federal structure that we are practising.”

As there has been a significant slump in revenue collection, the government must streamline its public spending and introduce major reforms in the tax system, though Nepal’s tax system is considered prudent while comparing it with the other nations in the region.

Nepal’s revenue to GDP ratio peaked at 22% in fiscal 2017/18, which has gradually dropped to 17.49% in the previous fiscal which is worrisome.

Outstanding Dues
The government has not even been able to clear the outstanding dues of the previous year. Though the government is the largest procurer of goods and services, its inability to pay the contractors has raised eyebrows against the notion that the government does not default. Unlike carrying over outstanding dues like in recent fiscal years, the government used to carry over unutilised revenue of the previous fiscal. “We don’t think the government will default the payments that need to be made to contractors. We have been consulting with the Ministry of Finance, however, the schedule of payments is not followed and repeatedly postponed,” informed Rabi Singh, President of Federation of Contractors’ Associations of Nepal (FCAN). The government has to clear Rs 40 billion outstanding dues of contractors, and it has yet to extend the deadline of 1,800 projects of an estimated total cost of Rs. 400 billion.

Out of the pending dues worth Rs. 40 billion, 25% is concerned with projects that obtained extension of deadline (implementation schedule) and construction works are being carried out regularly, according to FCAN. The decline in government revenue impacts the overall economy as it stimulates private sector investment too because contractors avail construction materials, pay charges of the engineers, labourers and other logistics. The money, thus, circulates in the economy propelling growth and creating jobs. However, due to lack of revenue mobilisation capacity, the government brought the monetary instrument and private sector credit as a panacea, that has a serious implication on the economy along with the financial sector resources overleveraged the big borrowers. “The government used fiscal stimulus measures during the Covid-19 crisis and beyond rather than resorting to monetary instruments to address the problems being faced in the economy then,” said Rameshore Prasad Khanal, former finance secretary.

Remittances-import-consumption Cycle
Nepal’s revenue is largely import based and still 50% of the tax revenue is collected at customs points under different headings like customs tariff, value added tax (VAT), excise and other fees. VAT still is the major contributor to the revenue and consumption tax is still a dominant player in revenue mobilisation.
Consistent domination of VAT in revenue mobilisation is especially due to the remittances that have lubricated the Nepali economy. The consumption capacity of people or purchasing parity has improved and that has resulted in exponential import growth over the years. The recent contribution of income tax is growing neck-to-neck with VAT, however, it is due to a slump in consumption that has hit the consumption tax hard. Despite the growth in remittances due to outward migration of youth, import in recent years has not risen due to the significant surge in commodity prices, job cuts, as well as uncertainty and the widespread rumours of economic slowdown has compelled people to think twice before spending money as a result of which consumption has dwindled.

Normally, remittances, imports and consumption have positive correlation, however, the prevailing situation of uncertainty, lack of government spending as well as private investment, and rising unemployment have distorted that correlation to some extent. On the other hand, private sector credit that is availed from banks and financial institutions is lukewarm as the lending rates stood in the higher territory.

Against this backdrop, the government has been encouraging private investors to make investments in the productive sector and is aligning public spending towards the productive capacity enhancement of the government. The government has been providing special focus on productive capacity enhancement, channelising both public and private sector investments in the productive sector to achieve a sustained, stable and inclusive economic growth, according to Ram Prasad Ghimire, Revenue Secretary at the Ministry of Finance.

However, the government has yet to introduce a major reform to enhance the quality of public spending, trim down the unnecessary expenses and create conducive investment climate.

‘Public spending should support productive capacity enhancement’

Dr. Bimal KoiralaFormer Chief Secretary

The low public spending, especially capital expenditure has ramifications everywhere. The private sector is not utilising its full capacity to produce goods.

The shortfall in revenue target repeatedly creates a great problem and the deficit cannot be reversed to surplus in one year, therefore the government should have a revenue increment plan and work to at least bridge that gap. The Public Expenditure Review Commission’s Report will be valuable for the government so that it can reduce its regular expenditure and increase capital expenditure to provide dividends to the people. Traditionally, we are an import dependent country and we have not experienced trade balance at any time. The country, instead of focusing on productivity and enhancing production, has lost direction over the years. Therefore, in order to sustain the economy, there is no other way than to increase production or productivity be it in the agriculture sector or in industry and trade. This is the only way to achieve sustainable growth and sustainable development in the country.

Public debt is not an issue in the country but public debt management is a great issue because if public debt is not used carefully it will create a burden on the society. Therefore, public debt should be used for productive purposes that generate yields to the economy. Otherwise, public debt will be a burden to the citizens. The government should think of how best public debt can be utilised to generate more income in the society. The low public spending, especially capital expenditure has ramifications everywhere. The private sector is not utilising its full capacity to produce goods. Capital expenditure is directly correlated with private sector expenditure and investment. Therefore, to increase private investment, increment in capital expenditure is also a must.

Again, governance is one that generates hope among the people and hope is the answer to all frustration. And there is no other way than increasing productivity in the economy. To attract investments to enhance productivity, governance reforms are fundamental. Once investments are made in the productive sector then the country will start generating revenue and repaying, as well managing public debt. This is why the country should focus on receiving public debt only in the productive sector.

‘Making tax system buoyant necessary’

Rup Khadka, Tax Expert

Revenue increases through two means – increased economic activities expand the tax base and another is revision/change in tax rate and removing tax waivers or introduction of new tax among others. Tax buoyancy is the sum of the increase in tax base and also the policy measures taken by the government. One fundamental is that economic activities should be formalised or brought under the tax bracket/net. Providing so many waivers or subsidies is not the right way to dealing with tax. If we do so then the tax system will be isolated from economic activities and the increase in economic activities will not be reflected in tax.

A buoyant tax system is the basic characteristic of a sound and prudent tax system. If we expand the tax net or formalise the economy, the government might not require reviewing the tax rate because upward revision of the tax normally makes the government unpopular. This is why, the wise way is to formalise economic activities or bring them in the tax bracket.

Another fundamental aspect of encouraging people/businesses to come into the tax bracket is efficiency in public spending. Tax is an effective means of redistribution of resources. The government must use the taxpayers’ money to enhance the quality of service delivery, for infrastructure development and other activities that leverage economic activities as well as make public life easier.

In this regard, the government should narrow down its recurrent expenses and increase capital expenditure that creates jobs, assets and propels economic growth. There is always room to enhance the quality of public spending, that must be rational and civil society, vigilance bodies and the parliament need to scrutinise whether the taxpayers’ money is being misused. However, the primary obligation of the best utilisation lies in the executives or the government.

There are premium and exempted sectors in the economy. The value addition of the premium sector in the GDP and how much this sector is contributing to revenue in relation to the GDP should be gauged properly. Simultaneously, the government should properly evaluate how much the informal sector contributes to the economy and in revenue. If the exempted sector has not been contributing to revenue, the government should focus on mobilising revenue from the exempted sector. The principle of tax is it should be levied horizontally in an equitable manner and that should not create a burden on any specific sector. This will help the economy to grow.

Big borrowers have no appetite to utilise additional financing

Rameshore Prasad Khanal, Former Finance Secretary

The consistent slowdown in the economy has posed manifold challenges in the country, however, there has not been a solid intervention from the government and private sector to cope with the challenges. The government, which is considered the largest procurer of goods and services that stimulates private sector investment and capacity utilisation of industries has not been able to spend much in development works since the last few years. Monetary tools have been used as panacea to contain all the problems that have arisen in the economy following the Covid-19 pandemic. Weak governance and deteriorating investment climate in the country have triggered youth migration. Rameshore Prasad Khanal, Former Finance Secretary, shares thought-provoking insights on these issues in an interview with the HRM. Excerpts:

Q. What are your observations on the current state of the economy in Nepal? Is it a slowdown or are we actually going through a recession?
A. The Nepali economy experienced growth of over 7 percent in the post-Covid period. This growth was primarily attributed to the low base during the pandemic. The relaxed monetary policy and quantitative easing implemented during the Covid-19 crisis led to increased lending by banks and financial institutions. However, due to a lack of productive investment opportunities, most of the loans flowed into the property market, including shares, land, and other assets. Following the Covid-19 period, large businesses borrowed extensively despite being unable to invest in capacity expansion or productive activities. Consequently, the quality of banking assets declined, and many businesses faced reduced profitability. In Fiscal Year 2021-22, Nepal encountered an economic slowdown with high inflation. This situation persisted until the second half of FY 2022-23, characterised by slow growth and elevated inflation – a scenario akin to stagflation. The tight monetary policy prevented borrowers from accessing additional funds, impacting loan repayments. However, in FY 2023-24, the Nepal Rastra Bank slightly eased the monetary policy. Certain sectors, such as tourism and construction, experienced a rebound. While this year’s outlook is marginally better than the previous one, Nepal’s economy remains constrained. Infrastructure deficiencies, poor trade logistics, and an overall unfavorable investment climate contribute to the country’s low growth momentum. Occasionally, higher growth may occur due to one-time events, such as the completion of large hydropower projects. However, sustained high growth remains challenging given the existing constraints.

The accumulation of the problems you have explained is due to the easing of Monetary Policy rather than the tweaking in the fiscal policy or increasing public spending?

Government policies carry distinct responsibilities: fiscal policy serves one purpose, while monetary policy serves another. During the Covid-19 pandemic and subsequent economic slowdown, an assertive fiscal policy was essential. However, during that period, fiscal policy failed to propose stimulus packages. Instead, the burden fell on monetary policy, which was unveiled 2-3 months after the fiscal measures. I initially welcomed this move because it addressed the urgent need to support small and medium enterprises. Many of these businesses had shuttered, short-term workers were losing jobs, and small traders faced severe challenges. Even large-scale industries suffered due to disruptions in the global supply chain, leading to depleted raw material stocks and an inability to replenish them. Ideally, the fiscal policy should have provided the necessary stimulus, rather than relying solely on monetary policy. While the short-term impact was positive – allowing businesses, both small and large, to manage loan repayments through measures like loan rescheduling, generous refinancing, and interest rate reductions – prolonged reliance on monetary policy can have adverse effects on the economy. Nepal Rastra Bank’s lack of proactive market assessment is evident. Despite being among the countries that eased lockdowns relatively early, including neighboring India, we faced challenges. By July 2021, most businesses had reopened, domestic tourism rebounded, and international flights remained limited due to Covid-19 vaccine-related travel restrictions. In summary, while Nepal’s economy showed resilience, sustained growth remains constrained by factors such as infrastructure deficiencies and an unfavourable investment climate.
Nepal boasts several captivating domestic tourism destinations, including Sauraha, Pokhara, and Lumbini. Despite the severe blow dealt by the Covid-19 pandemic, the tourism sector demonstrated remarkable resilience, bouncing back swiftly. Similarly, large industries also regained their footing. However, certain sectors faced challenges, primarily due to inadequate governance – most notably, the construction industry. The government’s lacklustre capital expenditure not only impacted the construction sector but also had a ripple effect on manufacturing industries producing goods for construction – such as iron, rods, cement, and other construction materials. During this period, the Monetary Policy Authority missed an opportunity to proactively assess market dynamics and implement necessary adjustments. Measures like tightening the refinancing scheme, increasing the bank rate, and adjusting policy rates were expected but remained elusive. Curiously, our policy rate during that time was lower than India’s – a situation that defies the norm for a country like Nepal, which shares economic ties with India. Ideally, our policy rate should align with India’s for stability reasons. Unfortunately, we persisted with the low policy rate, relaxed refinancing scheme, and simultaneously witnessed declining market interest rates. This prolonged reliance on a relaxed monetary policy was the primary cause of the economic challenges we faced over the past year and a half.

Q. Does this mean that private sector borrowers, who had borrowed subsidised credit, invested in land and stock market, however, they couldn’t make money from there and are facing problems to repay their loans?
A. I understand. Business community leaders, including Shekhar Golchha, the former President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), have voiced similar concerns. According to Golchha, borrowers misused credit, contributing to the current economic challenges, particularly within the private sector. Let’s delve into the specifics: during the relevant period, the growth of money supply and credit in the economy surged significantly. The money supply-to-GDP ratio rose from approximately 89% to 116%, while the credit-to-GDP ratio experienced exponential growth – from 70-72% to 112%. Although the credit-to-GDP ratio has improved due to contractionary monetary policy, it still exceeds that of India, Sri Lanka, Bangladesh, and Pakistan, among others. Interestingly, our money supply-to-GDP ratio even surpasses that of the USA. The issue arose because borrowers assumed they could profit from investments in the property market. However, this assumption proved incorrect. The market did not perpetually expand, and additional buyers did not materialise. Typically, additional buyers emerge when credit is readily available. Unfortunately, as credit tightened, extra funds were unavailable for land investments. Consequently, individuals who had invested in land found it challenging to release funds from those investments and repay their loans

Q. Are you confident about the asset quality of banks? The International Monetary Fund (IMF) has been consistently raising this issue and urging the Central Bank for a comprehensive audit of their credit portfolio?
A. The recent numbers, if we choose to believe them, indicate a definite increase in the percentage of non-performing loans (NPLs). These NPLs represent the challenge banks face in collecting both interest and principal amounts. However, according to Nepal Rastra Bank and individuals well-versed in the internal workings of commercial banks, the gravity of this problem isn’t as severe or perilous as to cause any bank to collapse. I firmly believe that no banks will collapse. Some argue that a banking collapse is necessary for the market to learn a valuable lesson, and there is merit to their viewpoint. While I don’t entirely disagree, it’s essential to recognise that Nepal Rastra Bank’s regulation and regular supervision have generally maintained stability. International Monetary Fund (IMF) expresses doubts about the public reports of commercial banks due to widespread rumors. These rumors suggest that significant borrowers engage in evergreening their loans – essentially extending repayment without addressing underlying issues. Additionally, there’s a conflict of interest within the business community: some of the largest borrowers also hold major shares and serve on the Board of Directors of large banks. To address these concerns, the IMF has urged Nepal Rastra Bank to conduct independent verifications. Collusion within Nepal’s system – where auditors, promoter shareholders, and bank managers may present overly optimistic pictures – necessitates unbiased scrutiny. The IMF’s request focuses on selected banks, aiming to enhance the credibility of financial disclosures. This move is commendable, and no one should perceive it as undue pressure on the government.

Transparency is crucial; concealing problems today may lead to serious repercussions tomorrow. A more effective approach involves identifying problems, understanding their root causes, and then implementing targeted reforms to address those issues. Simultaneously, even without any specific concerns raised by the IMF, Nepal Rastra Bank has rightly emphasised the need for thorough scrutiny of certain borrowers. The business community itself acknowledges instances of misuse of agriculture credit, refinancing, and subsidised credit. Going beyond the confines of the bank is a valid strategy. Ordinarily, Nepal Rastra Bank does not directly visit borrowers at their doorstep. However, in the case of specific borrowers, conducting on-site assessments ensures transparency and verifies whether the loans have been utilised appropriately.

Q. The private sector right now does not have the capacity to mobilise loans from banks and financial institutions. For how long do you think will this situation prolong? In this situation, how should the fiscal policy act?
A. There is a prevailing belief that credit growth is essential for economic expansion and employment generation. However, I aim to dispel this notion – it is a myth. Credit growth alone does not directly correlate with GDP growth, and historical evidence supports this assertion. In Nepal, the rate of credit growth significantly outpaces the rate of GDP growth, yet the two variables lack a meaningful connection. Rather than fixating on credit growth itself, our concern should focus on why individuals struggle to borrow. Many are already overleveraged, taking substantial financial risks. Given this scenario, why would banks extend loans to borrowers with existing financial vulnerabilities? As prudent borrowers, why would anyone willingly place themselves in a precarious position? The real issue lies in the scarcity of better investment opportunities within the economy. Is this due to poor governance? Perhaps the government’s support for private sector investment in productive sectors is inadequate. Government intervention is necessary, especially when it comes to granting licences and permits – for activities like forest clearance or mining. While the private sector plays a crucial role, the government should provide robust policies and facilitation. Several factors contribute to the limited investment opportunities like inadequate infrastructure hinders investment prospects and our market remains constrained, and we have yet to fully integrate into India and China’s value chains.

Addressing these challenges will pave the way for more fruitful investments in the productive sector. Among these challenges, there are additional underlying issues, particularly the irregular power supply in certain areas. Even today, manufacturing industries grapple with unannounced load shedding. When considering investment opportunities where Nepal holds an advantage – such as hydropower and tourism – it becomes evident that many destinations lack adequate infrastructure. Imagine someone attempting to establish a resort in Khaptad without the necessary infrastructure. The growth we’ve witnessed in places like Nagarkot, Dhulikhel, Pokhara, and Bhairahawa would be impossible in the Far Western Province and even in Province 1 without robust infrastructure. Insufficient infrastructure significantly dampens investment prospects in the tourism sector. Similarly, the absence of basic amenities like roads and transmission lines hinders investment opportunities in hydropower. Against this backdrop, the government shoulders the primary responsibility of propelling the nation toward high growth. Unfortunately, the government has not fully embraced this responsibility. For instance, the transportation cost between Kathmandu and major customs points such as Birgunj and Bhairahawa is exorbitant due to poor road conditions. Most heavy machinery for hydropower projects and industries originates from Bhairahawa. Consider Pokhara, a major tourist destination where many Indian tourists arrive by car. However, the road conditions leave much to be desired. Potholes abound, causing flat tyres and broken components for travellers. The Bhairahawa-Pokhara and Narayangadh-Pokhara routes face similar challenges. These fundamental infrastructure constraints stem from governance failures.

Q. Can we say this is the failure of executives as we can witness an insular mentality in them?
A. Political leadership should command over the bureaucracy or civil service employees. Throughout the world, if you look at countries that have grown fast in recent times like Vietnam, Cambodia, Bhutan and Bangladesh that is the norm. Do you think it is because of the bureaucracy these countries are progressing rapidly? Obviously, it is because of the leadership. If leadership wants things to happen, they should focus on action for delivery. Let’s cite an example of Nepal; in less than six months, the road from Ratnapark to Maharajgunj was widened and blacktopped after demolishing so many houses. The Department of Roads and engineers were always there but it was up to the leadership how to mobilise the instrumentalities. The erstwhile prime minister was committed; he did not want any compromises regarding deadline. He ensured every requirement including security. In fact, armed police were deployed wherever problems arose, at the same time, there was consultation with the local public. Some people were against the road-widening drive. Here I am not defending the Kathmandu Road widening move, what I am trying to justify is that if the political leadership wants, things can happen.

Q. In the current scenario, it seems that the government has been facing resource constraints. What are your observations on this?
A. In Nepal, financing is not a significant hurdle. There is public scepticism about government borrowing, some argue that the government borrows excessively. While the loan per capita in Nepal is relatively high, the total debt-to-GDP ratio remains low due to limited private sector borrowing from external sources. Our foreign exchange reserves have generally been comfortable, except during the Covid-19 period when they were depleted due to substantial imports aimed at replenishing lost inventory. As of today, our reserves exceed necessary levels. The question arises: why maintain excess reserves without utilising them? We have an opportunity to invest in large-scale projects that can yield multiplier benefits. Chinese diplomats often quip that Nepal’s democracy is so vibrant that it impedes progress. Whenever action is taken, voices emerge – raising concerns about gender, environment, and other issues. While I don’t entirely agree with this sentiment, it’s true that the pace of government and project implementation in Nepal is sluggish due to these myriad voices. Democracy is essential, but an excess of voices can indeed delay projects. If external borrowing isn’t feasible, we can explore domestic markets for funds. Our revenue-to-GDP ratio is commendable. Unfortunately, leadership within the Ministry of Finance disrupted the system, causing a decline from our peak of 23% to the current 19%. Although revenue is showing slight improvement this year, it remains unsatisfactory. Nepal need not worry about financing; donors are willing to provide support. Remarkably, resources committed by the World Bank and the Asian Development Bank remain largely untapped. The real challenge lies in effective project management and execution.

Q. When you were the finance secretary, you initiated multiple mega projects with multiyear contracts with prudent planning of resources. Despite having a cushion of resources, why are the recent governments not initiating any large projects which can offer multiplier benefits?
A. I can’t comment on what the Ministry of Finance and other ministers are doing. I don’t know their internal problems; I often speak to them, but they may not be able to tell things in detail due to confidentiality issues. I don’t think that the government is contemplating large-scale projects. During my tenure as finance secretary, the most important project we had initiated and pushed through in spite of challenges was Upper Tamakoshi and that has been a boon for the country now. The project was delayed but completed. Bheri-Babai Diversion Multipurpose Project (BBDMP) has been progressing very well. Mid-hill Highway was contemplated at that time totally from our own resources. Madan Bhandari Highway, which is between Tarai and Mid-hill has been taken forward. In recent times, Sunkoshi Marin Diversion is a large-scale project the government has been implementing. Similarly, there are certain hydroelectric projects coming up. The government has paid attention, but implementation and continued attention are lacking. It is because all the prime ministers are spending more time on political management. Even today, if you ask what the prime minister is doing, he has been allocating most of the time consulting with political parties to take forward the Truth and Reconciliation Commission (TRC) Bill from the parliament. His agenda is more focused on political management, keeping the government stable and keeping the coalition partners happy. Even in case of certain action against corruption, he has been contained by his coalition partners from moving forward. These are the reasons, the focus/attention on large scale projects has been derailed. The prime minister has been issuing so many directives to expedite development projects but nothing has happened. His directives are not working. What he should be doing is decide what is required to solve the problem. He must identify the problem and resolve it. If the prime minister does not take decisions and only issues directives, then who will decide on solving the problem? Ministers do not decide, other executives do not decide, and the system as a whole is not working in tandem.

Q. We can see other countries like India have been accelerating infrastructure projects under Public Private Partnership and alternative financing models. Why has Nepal not been doing satisfactorily in this regard?
A. Things are moving but not as rapidly as we have expected. In hydroelectricity, most of the projects are public-private partnership (PPP). The government has to provide right to use the water, provide land, forest clearance and others. If you look at the success of India in PPP, they are very good at managing viability gap financing (VGF). If the project is profitable, private sector will jump in, if the project is not lucrative and profit is dismal, the government has to provide VGF. In Nepal there is resentment of VGF from among the knowledge people, they say, why should we waste tax payers’ money by providing VGF to the private sector. As a result of which there is no example in Nepal where the government has injected money to make PPP projects viable. On the flip side, the private sector also has a problem, whatever PPP arrangements we had made in the past, for example, Nepal Metal Company, Butwal Spinning Mills, Gorakhkali Rubber Udhyog, Nepal Orient Magnesite have gone into loss and the losses have been passed on to the government. Businesses often reap profits indirectly, and this holds true even within the realm of Public-Private Partnerships (PPPs). In such collaborations, private companies engage with the government to provide essential services or develop infrastructure. However, the intricacies of these partnerships can lead to unintended consequences. Consider a scenario where a company operates under a PPP arrangement, offering services to the public at a reduced cost. While this seems advantageous, there’s a hidden twist: the same private sector promoters also have their own separate businesses. These businesses interact with the PPP company, benefiting from the arrangement. Meanwhile, any losses incurred fall squarely on the government’s shoulders. This experience can be disheartening.

Despite our efforts, achieving true success in PPPs remains elusive. To gain insights, we must look to neighbouring countries like China and India. India, in particular, offers valuable lessons not only in infrastructure projects but also in large-scale manufacturing endeavors, such as oil exploration. Let’s take the example of Cairn Energy, which explored petroleum projects in Nepal. Interestingly, they had simultaneous projects in India. The contrast was stark: their projects in India progressed swiftly, while in Nepal, they faced obstacles and eventually withdrew. The key difference? Governance. Unless we enhance our governance practices, leveraging PPPs effectively will remain a challenge. Let’s learn from our neighbors and strive for better outcomes in future partnerships.

Q. It is said that the private sector is making hue and cry of recession as their profit has slumped in recent years. Do you agree with this?
A. Unfortunately, Nepal’s private sector does not align with the modern concept of private enterprise. Instead, it remains largely family-controlled, with its most significant growth occurring during the era of licensing. These business owners prioritise personal relationships with politicians and exploit policy advantages to accumulate family wealth. Their mindset was shaped during their formative years, and many of these business houses rose to prominence during the Panchayat regime. However, there are exceptions. A handful of business empires have managed to expand beyond the 1990s, but their management styles and business attitudes differ significantly from those of the major players who thrived during the Panchayat era. The modern private sector, albeit small in scale, includes enterprises in tourism, IT, e-commerce, and various service industries. While they are performing well, their impact remains limited compared to the wealth amassed by the private sector that emerged during the Panchayat era. These two groups diverge in their fundamental philosophies regarding business and society.

Q. Are the old ones in a position to influence the government and policy makers?
A. Definitely they are.

Q. How can they influence the government?
A. In recent years, the government has engaged in significant procurement activities and granted licenses to insurance companies. However, there is an ongoing initiative to issue a licence for a new stock exchange in Nepal. This decision raises questions, especially when we consider that China, the world’s second-largest economy, operates with just one major stock exchange. Most people are unaware of the Beijing Stock Exchange; instead, the Shanghai Stock Exchange dominates securities trading in China. Comparing globally, the United States initially lagged in digital transformation, leading to the emergence of Nasdaq as a prominent digital platform. In contrast, the United Kingdom swiftly digitised its financial markets, with the London Stock Exchange leading the way even before the 1990s. Similarly, in India, the Bombay Stock Exchange was slow to adopt digital platforms, prompting the establishment of the National Stock Exchange. Now, let’s focus on Nepal. The Nepal Stock Exchange (NEPSE) has already embraced digitisation. However, the government’s decision to issue a licence for another stock exchange seems perplexing. What flaws or weaknesses did they identify in NEPSE? The rationale behind this move remains unclear. Some argue that it reflects a collusion between the private sector, government, and political leadership – a pattern observed in various businesses where licences are required. In these cases, the same business houses often maintain their influence when dealing with the government. Hence, the decision to create a new stock exchange warrants scrutiny, especially given the existing digitisation efforts and the dominance of NEPSE in Nepal’s financial landscape.

Is it a concern for corporate leaders in the private sector that brokers often overshadow them in dealings with the government and political leadership?
In Nepal, the intricate relationship between political financing and business interests reveals two distinct faces: brokers backed by the private sector. These brokers, however, diverge in their scale of operations. While some are major financiers of political leaders, others operate as mere brokers without large-scale businesses. Political leader financing constitutes a significant portion of funding, serving as a potent tool for capturing and maintaining control within political parties. Unfortunately, this financial influence often stifles intra-party democracy. The brokers, who straddle both business and political realms, facilitate this process. When political leaders amass substantial wealth, the question arises: What do they do with these billions of rupees? The answer lies in investment – either directly by the leaders themselves or indirectly through brokers. Interestingly, many shareholdings remain obscured, often registered under proxy names. Politicians rarely appear as shareholders or directors of companies. Instead, they function as conduits between the business community and political leaders, bypassing the formal party structure. Contributions to political parties remain relatively low. However, this financing is typically transparent, with donors receiving receipts. In contrast, when money exchanges hands with political leaders, transparency evaporates. These transactions lack evidence or documentation, perpetuating a murky cycle. This symbiotic relationship between brokers, political leaders and business interests has far-reaching consequences. It sustains the prevalence of questionable business practices, hindering genuine economic growth. The fusion of political financing and business dynamics continues to shape Nepal’s landscape. As the country navigates its federal structure, addressing these challenges becomes crucial for sustainable development and accountable governance.

Q. Is political financing and corruption unique to Nepal or does it have similar characteristics like all least developed and developing countries?
A. Across the globe, questions surrounding politicians and political parties persistently arise. In India, Bangladesh and Sri Lanka, serious concerns have been raised. Notably, Sri Lanka experienced a riot where the presidential palace was attacked, leading to the president’s departure. This trend is not unique; it echoes throughout most developing countries and even extends to some emerging economies. However, there exists a nuanced difference between emerging economies like Vietnam and countries such as Nepal, Bangladesh and Pakistan. In these latter nations, politicians accept financial contributions, yet their decision-making processes remain uncertain. For instance, the Bhutanese refugee scam unfolded due to inaction even after money changed hands. In contrast, emerging economies like Vietnam exhibit swifter decision-making, actively supporting the private sector. Their accelerated growth often obscures corruption, preventing it from becoming a focal point of public debate. Nepal, unfortunately, faces challenges in controlling corruption.

The authorities responsible for this task encounter political interference, as publicly acknowledged by the Minister for Home Affairs. When corrupt individuals are targeted, pressure from political leaders hinders effective action. This testimony underscores the political involvement in safeguarding corrupt practices. A similar scenario unfolded during the refugee scam. Corruption is not exclusive to developing countries; it also permeates China. Recently, several senior political leaders absconded, prompting President Xi Jinping to take action against corrupt officials. However, in Nepal, the lack of active anti-corruption measures perpetuates the problem. In summary, the delicate balance between political financing, economic growth and corruption remains a critical challenge for nations striving for sustainable development and accountable governance.

In the present context, Nepal finds itself in a multipolar world. There are assertions that not only the executive branch but also constitutional bodies like the Commission for the Investigation of Abuse of Authority (CIAA) and the judiciary wield significant power. Is this merely a system of checks and balances, or are these constitutional bodies potentially misusing their authority?

It is prudent to refrain from making direct assessments of the Commission for the Investigation of Abuse of Authority (CIAA). However, it is worth noting that certain cases investigated in recent months could have fallen under the purview of the CIAA. The reasons behind their apparent self-restraint warrant introspection. While I refrain from passing judgement, it is not uncommon for governments, even in advanced countries, to take the lead in combating corruption. The proactive stance of Nepal’s Central Investigative Bureau (CIB) and the National Vigilance Centre should be commended, as the primary responsibility lies with the government. When the government’s performance falls short, constitutional bodies, the judiciary, and the parliament must step in. Acknowledging the government’s efforts to maintain the integrity of its institutions is essential. Interestingly, in many corruption scandals, India’s Central Bureau of Investigation (CBI) has acted swiftly, often preceding any accountability authority or ombudsman. Remember, fostering transparency and accountability is crucial for the effective functioning of any system.

Q. In the face of current economic challenges and widespread corruption, what should the government prioritise in the short-term and medium-term to navigate these issues effectively?
A. The government must remain focused on its core responsibilities. When the government struggles to issue timely driving licences and national ID cards, it raises questions about its capacity to handle more complex tasks, such as producing and selling medicines at reasonable prices. Similarly, can the government efficiently manufacture clothing materials at competitive rates? It is crucial for the government to adhere to its original purpose, which is to ensure better governance. While public goods should ideally be accessible to all at nominal or no cost, the reality is that the quality of education and health services often falls short. Furthermore, the government’s interest in managing textile and jute factories adds complexity. Clarity regarding its role is essential. In my view, the most significant barrier lies not in the shortage of skilled and technically proficient human resources. Nepal possesses individuals who, while not globally competitive in scientific research and technical innovation, can contribute significantly to our nation’s growth.

Our potential lies in sectors such as forestry, agriculture, mining, tourism, agro-processing, and clean energy. However, infrastructure remains the critical bottleneck. Trade logistics are woefully inadequate. For instance, a farmer producing specific agricultural crops faces constant challenges in reaching the market. Our domestic supply chain is virtually nonexistent. Interestingly, traders in Kathmandu find it easier to order goods from Nagpur (India) or Beijing (China) than to receive timely shipments from Jumla. Addressing these infrastructure gaps is vital for unlocking Nepal’s true potential and fostering sustainable development. The government’s primary focus should centre around enhancing physical infrastructure, which includes roads, railways, airports and transmission lines. Simultaneously, there is an urgent need to elevate governance standards. Many of our current challenges stem from governance issues. Citizens face delays in obtaining driving licences and other essential public services. Even those seeking foreign employment encounter obstacles during immigration processes. For Nepal to attract substantial foreign investment, addressing governance concerns is paramount. Large-scale investors often visit our country but become disheartened by the conduct of government officials. Therefore, the government must channel its efforts into three critical areas like regularly revisiting and refining policies to create an enabling environment for growth and development; investing in robust trade logistics, efficient transportation networks and reliable energy systems; and ensuring transparency, accountability and professionalism in government operations.

Q. Do you think this will be reflected in the 16th periodic plan being formulated?
A. I was part of the discussion team for a few important chapters of the 16th periodic plan. This plan is not going to be like the plans we used to prepare previously. It will be the first plan after the country embarked into the federal structure. This will try to empower the local and provincial governments. It is because most of the activities are implemented by the subnational governments. In this regard, this will be a strategic plan. These orientations are subject to discussion. However, without going through the final draft, I can’t say whether the discussions have been incorporated in the plan.

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