Steering Economy Away from Crisis
- Industrialists and businesspersons in Province 1 are agitating since November 9 against the rising borrowing rates and demanding the resignation of Nepal Rastra Bank Governor Maha Prasad Adhikari claiming that the policies of the central bank like the guidelines on working capital loans have hampered doing business environment.
- Cement and steel industries that flourished over the past two decades are now facing distressing times with a massive slump in market demand for construction materials as real estate and construction activities have slowed dramatically in the last couple of months. Some cement and steel plants have shut down temporarily while many have drastically reduced their production even during the start of the construction season.
- Not only the manufacturing businesses are affected by the slowdown. The import-based trading businesses, which were seen as insulated from economic and political whirlwinds in the past, in sectors such as automobile and consumer electronics are now reporting a significant decline in their sales as market demand dwindles.
As the whole country waits for the new government post-November 20 elections, the private sector is furious and agitated. The current state of the economy, according to industrialists and entrepreneurs, is the worst they have experienced in the last 30 years, which has pushed their businesses to the brink.
In the last few months, the leading private sector bodies have made a series of meetings with Finance Minister Janardan Sharma, and central bank Governor Maha Prasad Adhikari, to mount pressure on them to address the situation posed by rising interest rates, and liquidity crunch.
However, the meetings with the country’s top officials who are in charge of economic matters, have failed to produce any results.
Business community members say that as political parties are busy with their election antics, the economic woes of the country have been sidelined. While there are big talks of economic development in the election manifestos of political parties, business community members, who have faced numerous problems for nearly three years since the start of the Covid-19 pandemic in early 2020, feel abandoned, thereby going to the streets to raise their voices.
‘First, there is little to no business at the moment. Second, borrowing rates have sharply gone up. Third, the payment cycle has been disrupted. Businesses are failing to repay bank loans,” says Vishnu Kumar Agarwal, President of Confederation of Nepalese Industries (CNI), explaining the reasons behind the recent protests of business community members across the country.
The slowdown in the economy is apparent as restrictions on the import of goods such as vehicles and mobile phones have also hit the government’s revenue collection. The Finance Ministry’s data shows revenue collection is below the target in the first quarter of this fiscal. The government has collected Rs 208 billion in revenue against the target of Rs 275 billion in the first three months of the current fiscal year. Business community leaders see this situation as a clear indication that the present-day problems in the economy will stem a crisis if the issues are not addressed immediately.
“The economic outlook of Nepal is not looking promising at present. The increasing trade deficit, declining foreign exchange reserve, and skyrocketing inflation have hit the life of ordinary people and crippled Nepal’s economy badly,” said Chandra Prasad Dhakal, Senior Vice President Federation of Nepalese Chambers of Commerce & Industry (FNCCI), adding, “Besides, the banking sector is going through a prolonged liquidity crunch. The shortages of loanable funds in the banking industry have caused a significant hike in interest rates. It has further increased the cost of doing business.”
Prominent members of the business community say that the government has not yet shown seriousness to address the causes of the problems. “The government is not opting for some kind of austere measures to reduce unnecessary administrative expenses even when the revenue sources are gradually drying up,” said Anand Bagaria, Managing Director of Nimbus Holdings.
The country’s foreign trade declined by around 19 percent in the first quarter of the current fiscal year. According to the Department of Customs’ latest report, Nepal’s imports in the first quarter of FY 2022/23 have shrunk by 16 percent while the exports are down by 35 percent. Not only the manufacturing sector businesses, which have gone through tumultuous times in the past, are experiencing a slowdown at the moment, the import-based trading businesses that remained insulated from difficulties in the past, are now reeling with various problems. The automobile business, for instance, is facing a crisis stemming from restrictions on the import of vehicles and a liquidity crunch. The festive season which usually ramps up market demand has failed to bring cheers to automobile dealers and other businesses this time. Meanwhile, the cement and steel industries are operating far below their capacity even when construction season has begun. Among the worst affected by the current crisis are small and medium enterprises (SMEs) just as they were emerging from the Covid-19 pandemic. “The crisis will affect a lot of businesses and SMEs are the most vulnerable among them. When SMEs are affected, the whole economy suffers,” said Agarwal. “It would even hit banks, big corporates, and other large institutions.”
Private sector leaders who talked to the HRM say that the new government must act, and act soon to bring the derailed economy on track. According to them, the government and its agencies are still in denial mode. If the government fails to show urgency to resolve the pressing issues, the country›s economy will go into freefall, getting difficult to manage, they say.
Business community members point out the policies of the Nepal Rastra Bank as responsible for the current mess. According to them, the monetary policy and working capital lending guidelines are not business-friendly. They are also annoyed with the central bank for not being able to tame the banks for raising arbitrary interest rates and charging premium fees.
In a country like Nepal where the creation of new jobs is already low, the slowdown in economic activities is likely to affect the jobs of many people who are employed in the business sectors.
For instance, the once booming Nepali automobile sector is facing an existential crisis as the Nepal Automobile Dealers’ Association (NADA) warns that the four-wheeler business will collapse if the government rejects importers’ appeal to lift the ban on the import of vehicles.
The import ban, according to NADA, has resulted in the closure of 58 dealers across the country, resulting in over 1,000 job losses, with over 100 dealers on the verge of shutting down the doors of their businesses in the next few weeks.
Currently, there are restrictions on the import of four-wheeler passenger vehicles and motorcycles with over 150cc engine capacity which is in place since April. In October, the government extended the import ban on these goods till December. “The motorcycle market is down by 50 percent. The market for passenger vehicles and construction vehicles is even worse with sales falling by 70 percent and 80 percent, respectively,” shares CNI President Agarwal who is Managing Director of MAW Group of Companies which has automotive and earthmoving equipment and major business verticals.
“As the sales are down, the losses for businesses are mounting. The entire payment cycle is hampered. It has become very difficult even for the distributors to receive payments from the market,” he added.
Depressed Market Demands, Shrinking Production Capacity
Cement and steel manufacturers say they are in deep trouble. Some have closed their factories, while most have slashed production drastically due to a lack of demand in the market.
According to them, they are facing multiple issues, a slowdown in demand for construction materials, lack of investable capital, rising interest rates, and higher costs for industrial raw materials due to the strong US dollar.
Cement manufacturers say the cement industries are currently operating at 20-25 percent of their capacity. The same is the story of steel manufacturers who are operating their plants at 30 percent on average. The steel and cement industries have been hard hit by two factors. The higher borrowing rate has hit the realty sector, resulting in a slowdown in construction activities. This has weakened the overall demand even during the season (winter is considered the peak season for construction business) while the progress of large infrastructure projects and development activities of the government has stalled. “The government development activity has not picked up speed while the private sector’s investment plan has stalled due to rising interest rates. Given the current adverse market scenario, I think the demand for cement will decline by 60-70 percent this year,” said Pashupati Murarka, former President of FNCCI.
A Tussle Between Finance Ministry and Central Bank
For more than a year, one of the talking points in the country’s economy is the ‘cold war’ between two institutions responsible for navigating the economy. At a time when the country’s economy is grappling with deepening problems, the Finance Ministry and Nepal Rastra Bank are being seen at opposite ends when it comes to addressing the issues. Observers see the tussle between the Finance Minister and NRB Governor Maha Prasad Adhikari as one of the major reasons for the deepening economic slowdown.
The central bank, as an autonomous body with a mandate to maintain macroeconomic stability through monetary, foreign exchange, and financial sector policies, has brought in a tighter monetary policy this fiscal year to discourage credit growth and control inflation. As low-interest rates post the Covid-19 pandemic contributed to a huge surge in imports, that resulted in a steep decline in forex reserves, the central bank is adopting tighter measures.
The central bank is of the view that higher interest rates would attract deposits, increase liquidity in the banking system by limiting credit expansion, and discourage imports.
The NRB also asked the BFIs to ramp up the interest rates on deposits and credits. As soon as the BFIs followed the central bank’s order, the private sector was up in the arms against the central bank. On the other side, the government’s fiscal policy for the current fiscal year has been seen as expansionary. Similarly, Finance Minister Sharma contradicted the NRB when he hinted at intervening in interest rates issues.
The ministry on September 25 formed a committee headed by Joint Secretary Baburam Subedi to recommend measures to be taken regarding the concerns raised by the business community over high-interest rates. However, the committee suggested that the government should not interfere with the interest rate and the market should be left free. However, the committee suggested that the spread rate as well as the premium rate can be reduced to address the high-interest rate issue.
The Upcoming Government’s Priority
Private sector leaders say that the upcoming government must first acknowledge that the country’s economy is not in the right shape. Suyesh Pyakurel, President of the Chamber of Industries Morang said, “The new government, in the first place, should acknowledge there are problems in the economy and it needs a team of experts to navigate the economy to a safer zone. Pyakurel suggests appointing experts who have a deeper understanding of economic, financial, commercial and industrial matters as ministers of two crucial ministries – Finance and Industry. “If possible, let’s appoint experts in charge of the Ministry of Finance and the Ministry of Industry, Commerce and Supplies as these two ministries take crucial decisions on economic matters of the country,” he said, adding, “If that is not possible, the new government should form a council with experts who will advise these ministries.”
Besides addressing the current problems in the economy, as an entrepreneur in the manufacturing sector, Pyakurel believes improving and upgrading the road and custom infrastructure should be another area for the new government to look in. “In Nepal, running the manufacturing industry has been a costly proposition because of costly energy prices, and labor wages,” he said.
Bagaria of Nimbus Holdings is of the view that the new government should be clear on charting out the direction of the economy and sees the need of publishing a ‘white paper’ on the economy. “The white paper should present a clear picture of the current economic situation, unlike the past ones,” he said. “The government should adopt a ‘strategic approach’ to not repeat the mistakes. In my opinion, the central bank and the finance ministry should issue a white paper and both institutions should take joint ownership of it.”
“A favorable business climate is all that the private sector desires for”
CHANDRA PRASAD DHAKAL, Senior Vice President, Federation of Nepalese Chambers of Commerce &
Industry (FNCCI)
How is the Nepali business community facing the current macroeconomic challenges?
The economic outlook of Nepal is not looking promising at present. The increasing trade deficit, declining foreign exchange reserve, and skyrocketing inflation have hit the life of ordinary people and crippled Nepal’s economy badly. Besides, the banking sector is going through prolonged liquidity. The shortages of loanable funds in the banking industry have caused a significant hike in interest rates. It has further increased the cost of doing business.
The liquidity crunch that has grasped the economy for the last one year is the most severe shortage of investment-grade liquidity in living memory resulting in various problems for businesses. How has the interest rate hike disrupted economic activities in the country?
Higher interest rates make servicing of loans costlier. As interest rate drops, consumer spending increases, and this in turn stimulates economic growth. As the interest rates have increased, economic activities have been squeezed badly. The restrictions imposed to contain the coronavirus pandemic had already impacted the small-scale businesses here. Small and medium enterprises (SMEs) suffered the most during the pandemic. A large number of SMEs collapsed at that time and many of them that survived are on the verge of collapse now. They are in dire need of external support. However, the liquidity crunch seen in the banking sector in the aftermath of the pandemic has further deteriorated their condition.
What should be the priority of the new government to bring the derailed economy back on track? What are your expectations from the new government that will be formed after the election in this regard?
It would be sufficient if the political parties are honest in implementing their election promises. We all know the potential of the country and we just need to capitalize on it. For this, we need domestic as well as foreign direct investments. The new government should focus on preparing an environment conducive to investments. As Nepal is a free market economy, everything will be guided by the market itself. The strategic location of our country in between the two giant economies of the world further offers greater opportunities.
Our colossal hydropower potential allows us to produce low-cost clean energy. This will further attract large industries here. Therefore, we simply need good planners and managers to benefit from the existing natural and available resources. Additionally, the political unpredictability and frequent changes in the government have brought on a state of confusion in the economy. We hope the new government would address this gap.
How does the new government need to pay heed to the suggestions of the apex bodies of the private sector like FNCCI?
The new government needs to pay heed to our suggestion as the private sector is the engine of our economy contributing more than 75 percent to our economy. The private sector provides employment for a large number of people, contributes to government revenue, and plays a very huge role in service delivery. Therefore, the new government should work on making a conducive business environment for flourishing businesses and industries. Besides, there are a few policies and laws that are not in favor of the private sector’s growth and development. They also need to be changed accordingly to make the investment climate. A favorable business climate is all that the private sector desires for.
With general elections around the corner, major political parties have unveiled their election manifestos laden with lofty promises of economic development. Do you think the past promises/commitments of political parties in this regard have been fulfilled?
The parties must be honest to fulfill their promises as per their election manifesto. However, the parties have not been honest in their promises/commitments so far. When we go through the manifestos, almost all seem practical and attainable. They often work very hard to prepare these documents. The problem is in fulfilling the promises, not the manifestos.
“Addressing economic problems needs to be the topmost priority”
VISHNU KUMAR AGARWAL, President, Confederation of Nepalese Industries (CNI)
What expectations do you have from the new government that will be formed after the elections?
The entire private sector, and particularly small and medium enterprises (SMEs), are facing mounting challenges at present which is something we have not seen in the last 30 years. Businesses are reeling from an acute shortage of investible funds in the banking system. The market demand has fallen by up to 70 percent. The graph of borrowing rates is moving upwards consistently. In the last couple of months, the real estate sector has slumped at a rate never seen before.
The financial reports published by banks and financial institutions (BFIs) show that non-performing loans are growing alarmingly. I don’t see any improvement in the country’s macroeconomic outlook till the month of Poush (mid-December to mid-January).
Addressing economic problems needs to be the topmost priority of the new government. Due to the elections, the problems surrounding the country’s economy are not the focus of the government. The recent protests organized by business community members in different parts of the country show how tough the times are for them. The upcoming government should be serious about the state of the economy and needs to bring in experts, including representatives from the private sector, to solve the current crisis.
In the election manifestos unveiled by the political parties, have you seen agendas to address the current crisis?
The Confederation of Nepalese Industries (CNI) provided various suggestions related to the economy when political parties were preparing their manifestos. Nevertheless, I don’t see any manifesto that has incorporated our suggestions to address the problems.
How are businesses affected by the economic slowdown?
Right now, we are facing big difficulties. Our troubles will only grow if the current problems go unaddressed. The crisis will affect a lot of businesses and SMEs are the most vulnerable among them. When SMEs are affected, the whole economy suffers. It would even hit banks, big corporates, and other large institutions.
Lately, representatives from the private sector met the governor and the finance minister. In Province 1, businesspersons started protests against the government and the central bank. What caused businesspersons to go to the streets?
First, there is little to no business at the moment. Second, borrowing rates have sharply gone up. Third, the payment cycle has been disrupted. Businesses are failing to repay bank loans. In such a situation, the central bank brought new guidelines on working capital loans and the requirements are extremely difficult to meet. Such changes in policies, done without sufficient homework and consultation with stakeholders, will lead to the collapse of private sector institutions.
Automobile is one of the major verticals of your business. How deep is the slowdown in the automotive market?
The motorcycle market is down by 50 percent. The market for passenger vehicles and construction vehicles is even worse with sales falling by 70 percent and 80 percent, respectively.
As the sales are down, the losses for businesses are mounting. The entire payment cycle is hampered. It has become very difficult even for the distributors to receive payments from the market.
“Unnecessary freebies would put a further dent in the already troubled economy”
ANAND BAGARIA, Managing Director, Nimbus Holdings
Q: As an entrepreneur, what are your expectations from the new government?
The Ministry of Finance and the central bank should work together to solve the current economic problems. There should be clarity on where the economy is directed from here. If the slowdown continues, our difficulties will only exacerbate.
The current fiscal year’s first quarter reports of businesses indicate a worsening of the country’s economic situation. There are no bases to expect good reports in the second quarter. The new government which will be formed after the elections should issue a white paper, showing a clear picture of the current macroeconomic economic scenario. It should adopt a ‘strategic approach’ to not repeat the mistakes. In my opinion, the central bank and the finance ministry should issue a white paper and both institutions should take joint ownership of it.
Do you think major political parties’ election manifesto shows they are serious about resolving the pressing issues of the economy?
Unfortunately, no. Major political parties are competing to offer freebies in their election manifestos. Unnecessary freebies would put a further dent in the already troubled economy. If past precedence is any indicator, the economic agendas of the political parties will be limited to the election manifestos only. But if the parties work to fulfill their promises of freebies, it would only harm the economy.
The first quarter statistics of the country’s foreign trade show both imports and exports have declined. And, entrepreneurs say there is no demand in the market. Are we headed toward a deeper recession?
How do you define a recession? In my opinion, it is a sum of many factors that affect economic activities. 7-8 months ago when our forex reserves started to deplete, we were worried whether we are going the ‘Sri Lankan way’. The central bank handled the situation sensibly and managed to calm down the panic situation.
We knew that the growth in exports we had in the last two years was not sustainable. Our export mainly grew on the back of palm oil and soybean oil exports to India; these two commodities are not produced in Nepal and the growth in export is basically due to the differential in import duties levied on them in Nepal and India. The ban on the import of some high-duty items have led us between a rock and a hard place. Continuing with the import curb is affecting the government revenue while lifting the restrictions will help the fast depletion of forex reserves. The government is not opting for some kind of austere measures to reduce unnecessary administrative expenses even when the revenue sources are gradually drying up.
“The new government needs to acknowledge there are problems in the economy”
SUYESH PYAKUREL, President, Chamber of Industries, Morang
What are the expectations of the business community from the new government?
The private sector always expects the political parties forming the government to keep their promises. Unfortunately, the priorities of political leaders change once they are in power.
The new government needs to understand that the country’s economy is not in a good shape at the moment. Declining revenue collection, depleting forex reserves, rising interest rates, and prolonged liquidity crunch clearly indicate the multiple problems in the economy. There has to be a team of experts to navigate the economy to a safer zone. If possible, the experts should be given charge of the finance ministry and commerce ministry as these ministries have to take crucial decisions regarding economic matters of the country.
Business community have come out to the streets to protest against interest rate hike and changes in arrangements related to working capital loans. What the new government should do to pacify the agitating private sector?
The protests have been halted after the request from apex bodies of the private sector. If the new government doesn’t handle the situation seriously, it will not take time for the disquiet of business community to erupt. Businesses are reporting drastic declines in their sales and market demand has become very weak. Industries are operating at around 50 percent of their capacity and getting loans is becoming harder. In such a situation, how can we expect businesspersons to remain at peace?
The new government needs to instill confidence in the private sector. Therefore, the government should address the current situation taking it as an ‘economic emergency’.
Apart from interest rates, what are the other issues that the new government should look into?
Lately, the country›s business environment has become unpredictable making doing business harder for us. As a businessperson, I would want policy predictability that will make my investment plans easier. Sadly, there is instability in the arrangements of the government and the central bank which means my businesses could become unsustainable in the long run.
In Nepal, running manufacturing enterprises has been a costly proposition because of expensive energy prices and labor wages. One of the most neglected issues is the poor state of the road infrastructure and custom infrastructure and how it increases overall logistic costs, making domestic products uncompetitive in the market. Improving road and rail connectivity should be the paramount importance to the new government if it wants to bring a paradigm shift in our economy.
