'The objectives of the monetary policy are price stability and stability of the overall economy'

Dr Prakash Sharan Mahat

Finance Minister, GoN   

Dr Prakash Sharan Mahat joined politics as a member of the Nepali Congress while he was a student. Over the years, he has served in different portfolios in the government including Minister for Energy and Minister for Foreign Affairs. Dr Mahat holds a PhD in Economics from Southern Illinois University at Carbondale, and a Master’s of Science in Policy Economics from the University of Illinois at Urbana, United States of America. He was appointed as Minister of Finance in the incumbent coalition government and was responsible for unveiling the budget for fiscal year 2023-24. As Finance Minister he holds the responsibility of navigating turbulent times in a challenging economy. Business 360 caught up with Dr Mahat to learn about the strategies he wishes to adopt and his concerns. Excerpts:

What are your immediate and short-term action-plans to navigate the economy as it is moves through a situation of slowdown?

We all know that there are a few problems rooted in our economy. The structural problems – low productivity, burgeoning trade deficit and high inflation – need to the addressed in due course of time starting from right now and we have already started our interventions. As a result, we are seeing some improvements. The external sector is stable right now; we are in a comfortable position in terms of foreign exchange reserves. Tourists' arrival is increasing and timely monsoons might boost agriculture output, which are contributory factors to jobs, foreign exchange earnings and ultimately to growth. However, this is not sufficient. The chronic problems lying in the economy in terms of low productivity, unemployment, and nosediving growth require further investments. The kind of investment we are looking for is not happening in a big way. The interest rate is still high, percentage of non-performing loans is going up which means the capacity of banks and financial institutions (BFIs) to mobilise loans is deteriorating. The current interest rate has to come down for credit expansion.

At the same time, we must improve the performance of government spending as well. But I am confident the investment climate will improve at the private sector level and government spending will gather pace based on our budget execution action matrix and the reforms we have proposed and are going to implement. We had several rounds of interactions and discussions with relevant ministries and I am hopeful and confident that our spending performance will improve in the coming days. Thus, more capital will be injected into the economy which will spur economic growth and generate employment.

The budget execution trend of the last decade shows that projects and programmes are seldom executed prudently; how are you planning to quash the bottlenecks?

There are some inactions and the pace of work is slow. We always wait for the eleventh hour to get work done and that culture needs to change. We are strictly telling all the stakeholders that we must change our style of work. Whatever we need to do, we should do it now and we cannot wait for tomorrow. Tomorrow never comes, we cannot wait for an indefinite period for anything to be done. All responsible entities should follow a time-bound action plan.

Will there be action against the procrastinators?

Yes, of course. We cannot and should never tolerate uncertainties, there will be no excuses for non-performance. Problems have piled up over the period. In my opinion, the promotions, exposures and incentives of civil servants must be aligned with the delivery and results, and there must be a thorough performance audit. I will not claim that it will be problem-free overnight. It will take time and all the stakeholders should cooperate. The whole government structure should work in a fashion that this is our common objective. We should minimise our problems and focus on results. Gradually, we will be able to resolve all the remaining problems in a collaborative way, and we expect cooperation from all sides.

You have highlighted high cost of funds as a major challenge to accelerating economic growth. The private sector is also dissatisfied with the monetary policy of fiscal 2023-24 unveiled recently by Nepal Rastra Bank; this may not complement the growth target set by the fiscal budget. How do you view this?

The monetary policy complements the fiscal budget’s objective of growth and jobs by maintaining macroeconomic stability, taming inflation and ensuring adequate flow of private sector credit. Fiscal policy has a bigger role to play and monetary policy has to complement attaining the growth target by fulfilling the credit demand of the private sector. Cost of borrowing is still considered as a major challenge as business people are reluctant to avail credit due to dismal or no profit. Considering the consistently high borrowing rate and slowdown in the economy, Nepal Rastra Bank should be serious about addressing the genuine demand of those who are working in the private sector. We have asked the central bank to do the needful in this regard and the government is expecting the central bank to seriously ponder upon the high cost of borrowing through different instruments of the monetary policy.

If this does not happen in line with the government’s instructions to the central bank, will the Finance Ministry intervene?

The objectives of the monetary policy are price stability and stability of the overall economy. What I am saying is that NRB must think about whether the lending atmosphere has been helping the economy to grow. Bankers also have to come up with their own homework to minimise the interest rate spread keeping in mind the profit they are making. It is also their responsibility to contribute to navigating the economy during turbulent times by motivating fresh investments in every sector of the economy.

Contractors have been protesting for their outstanding dues to be cleared at the earliest by the government. Why is this not happening?

Those who have already fulfilled all the conditions of the contracts or completed their work deserve to be paid. It is true that we were not able to settle all the outstanding dues of the last fiscal within the desired period of the fiscal year calendar. Recently, I invited representatives of the Federation of Contractors’ Associations of Nepal (FCAN) and told them that we will settle the liabilities that the government owes. What actually happened in the last fiscal is all those invoices weren’t submitted to the Ministry of Finance at the right time. The government will address their grievances. However, they also have to introspect on whether they have fulfilled the conditions in prudent inspection of the concerned government agency.

The fiscal budget of 2023-24 has given top priority to reforms in investment regime, legal and procedural provisions and the removal of some boards, committees, commissions and others to operate the federal government in a lean manner. Could you please elaborate on this?

Reforms are a continuous process and always evolving which is why we have to take them forward. Some of the reforms do not require financial backing, some are stroke-of-pen reforms, and some require incentives and financial backing; we’ve classified these reforms and we will execute them gradually. Transparent legal regime provides smooth procedural environment that in turn improves the investment climate. The logic behind shutting down some of the government agencies is an execution of the recommendation provided by the Public Expenditure Review Commission (PERC). Irrelevant and non-performing institutions in the current context are a burden for the government, especially when we are facing challenges in revenue generation and spending such precious resources in irrelevant and non-performing institutions does not make any sense. We are doing homework to broaden the tax base, make the tax system more prudent and efficient to meet the revenue mobilisation target. I do admit that the problems also lie within the taxation system and we are trying our best to address the shortcomings and to make it more scientific, efficient and relevant as well as bringing more taxpayers within the tax net.

Why has the government not been able to mobilise climate-related aid from the international community?

I am having a series of meetings with multilateral and bilateral development banks and development finance institutions, among others. We are also trying to bring in resources from Green Climate Fund (GCF) and other climate-related funds. Nepal must be compensated by the CO2 emitting countries. The streamlining of climate financing will help countries like Nepal to cope with the climate change-induced challenges as well as achieve the target of net zero carbon emissions by 2045 as promised at COP26. 

Rampant corruption is one of the major challenges in ensuring better governance. Even the private sector and renowned corporations have been allegedly involved in corruption. What are your views on addressing this?

Corruption is a serious threat to good governance. We want to make sure there are no illegal activities and actions from the government side. The government is transparent and has adopted a zero-tolerance policy against corruption. Whether the government agencies or the private sector, they must work abiding by the existing legal provisions and respect the rule of law. At the private sector or NGO sector level, it is the duty of all to support the control of corruption.

However, private sector leaders say that the government cannot draw them into corruption charges that are caused by the decision of the government agencies or the failure of governance in the government mechanism…

It does not make sense to say that corruption happens only through the government mechanism. This is not the right way to describe corruption issues. The problem lies in the government and also in the private sector and we should not be blaming each other. We should work towards anti-corruption and act from our own place. No one is convicted without any proof, evidences or their involvement in such malpractices. And no one is above the law. We should help to clean our sector and make it more transparent, prudent and oriented towards achieving the broader objective of national development. In corruption issues, we all must support proper investigation against the charges and whoever is found guilty must be convicted.

The structural problem of the economy, you have mentioned, is low productivity. How does the government visualise orienting the private sector towards production from trading businesses?

Whenever we have had interactions, we have told them to change their mindset from running only trading-related activities towards production. The fiscal budget 2023-24 has announced incentives for producers of goods and services in the country. We need to come out from such a trap of low productivity and focus on production. The short-term gains through trading may not last long. We want the private sector to get involved in manufacturing, tourism, IT and agriculture businesses, among others.

Sovereign credit rating has been recommended to facilitate the flow of FDI and availing financing from the international market. Why has the process of country rating stalled?

The Ministry of Finance had initiated the process before, and it might have stalled due to the Covid 19 pandemic. We might proceed with it in the near future.

Nepal at present has record-high foreign exchange reserves. How is the government thinking of utilising this?

People should look into the opportunities that we have. However, we have some sort of herd mentality. If someone is making money in a particular sector, everybody starts doing the same business. People have to be innovative and look into new avenues and opportunities. There is a dearth of people having entrepreneurial mindset. We want those who are living outside the country, the non-resident Nepalis, to come and grab the opportunities by investing their technology, skills and capital in Nepal as we have sound investment climate in the country. Nepal, right now is peaceful and we have been initiating reforms for a better investment climate.

Why has the government not given priority to passing the money laundering prevention related bills despite the international compliance?

We have given high priority to these bills. However, the impasse in smooth functioning of the parliament is obstructing in taking these bills forward. We have some other bills to be endorsed by parliament once the parliament starts functioning.

What do you have to say regarding the regular obstruction of the parliament by various political parties?

Parliament is a place for discussions and any issue needs to be discussed. Obstructing parliament may not be the solution. The opposition parties should lodge their point of view, their differences and make the government responsible. There are various issues concerning the public that should be discussed in the parliament and also the important bills for the smooth functioning of the government should be discussed and endorsed by the parliament.

Shrinking foreign trade and consumption base are hitting revenue mobilisation. Taking these into consideration, the government has announced the management of properties. However, the government does not have aggregated data on its assets/properties and funds created at different levels?

This is an important issue. We need to take that into account and monetise the assets. The government’s properties and assets should be fully audited and protected so that it is not encroached upon.

You have taken the responsibility of Finance Minister in a challenging economy having to take forward the legacy of non-economics background finance ministers in the past. It is believed that they have derailed from prudent decisions triggering some of the current problems. How do you perform under such conditions?

The Finance Ministry has to work by example so that other ministries follow suit. Not only words, we have to perform also. I am running the ministry professionally. We are in a state where there is a huge gap between necessities and the availability of resources. The resources that we have must be channelled in priority areas in a prudent manner. We have to take the support of all the ministries and we have convinced them on how we should move forward.

I do not want to comment on who has taken the helm of the Finance Ministry in the past and their background. That is not important. I can talk about myself and how I am working here. All of us actors of the economy must work to achieve the common goal and we must cooperate and collaborate to achieve the national development goals.

Text: Pushpa Raj Acharya