How are Businesses Responding And Adapting?
A prolonged crisis, such as that facing Nepal, requires a strategic change in leadership vision and action. From the earthquake to the embargo and then the Covid 19 pandemic to the Russia-Ukraine war and the ensuing instabilities, Nepal has seen it all. And all this in the wake of a people’s war that crossed a decade. Today many economies around the world are challenged by surging inflation, debt tightening, climate emergency, human migration, changing geopolitics, and decelerating growth rates.
Crisis situation demands crisis response but what does prolonged crisis demand such that the country is undergoing and which has seen thousands of young people leave Nepal in search of livelihoods? Add to this, an unstable government, corruption of huge scales in governance, in law, and in business.
The world output growth is projected to decelerate from an estimated 3% in 2023, marking one of the lowest growth rates in recent decades, according to the United Nations World Economic Situation and Prospects (WESP) 2023.
Future recession and uncertain economic conditions are guaranteed. While global growth is forecast to moderately pick up to 2.7% in 2024, can smaller economies sustain the heat of tightening global financial conditions and debt vulnerabilities? Over 85% of central banks worldwide have tightened monetary policy and raised interest rates in quick succession since late 2021 to tame inflationary pressures and avoid a recession. But global inflation reached a multi-decade high of about 9% in 2022 and is projected to ease but remain elevated at 6.5% in 2023.
In Nepal, growth rate is in the red. Mining, quarrying and construction industries are struggling. The economy has been shaken by the real estate and stock market crash and credit crunch. Sales have slowed down and business, in general, is down by 10% to 60% based on the nature of business. Industrial production has reduced to 30%. The private sector, which contributes 81% of the GDP and accounts for 85% of the jobs, is struggling to stay open and pay salaries. The situation is so precarious that even teachers' and government employees’ pension payments have been put on hold. Both the social security benefit payment and debt servicing are behind schedule. The federal government reduced the equalisation subsidies to the provincial and local governments by 50% as a result of this situation. And things could be grimmer unless the monitoring authorities think fast and well while executing policies and reforms.
In this edition of Business 360, we spoke to different sector experts on how they comprehend the situation, the impact on their business and industry and what are they doing to ease the challenges. Answers have been mildly edited for clarity.
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Sahil Shrestha
CEO, Cimex Inc
How has the sustained economic crisis affected your industry?
It’s a big crisis that automobiles are facing at the moment. If we look at the statistics, yearly average four-wheeler sales were around 15,000 with a fluctuation of 2,000 up or down. Last fiscal year 2079-80, total sales were only around 9,000. The crisis that is seen in the market has hit every sector severely. Ranging from the liquidity crisis to economic slowdown or downturn, automobiles have gone through a severe crunch.
Economic parameters were not that great overall but if we compare it with the database from the last 4-5 years in the automobile sector, we have seen a massive decline in sales. Only 60% of the market was in function, the people in this industry call the year 79-80, one of the worst years where they faced recession massively in the industry.
If we have to compare, this year has relatively been a better year for the industry to catch pace. We have realised that there has been a rise in inquiry about automobiles in the recent term and banks have also granted the first phase of loanable funds. Even if these are minimalistic changes it has given some hope to the industry.
On the contrary, we also have to look at the current economic situation of our country and globally as well. The pandemic and war have been a prime cause of global economic imbalance and its ripple effect can be seen today and in the upcoming days as well. Hence, the situation might not be better in an instant but will take some years to get back to the state we were in previously.
What are some of the things you have done to address the ensuing challenges in your business?
When we talk about challenges, automobiles have faced a lot of problems. There had been a luxury goods ban from our government and from that point onwards, it has gone downhill.
Similarly, from an EV perspective, sales boomed as people were aware that the price of petroleum products will be increasing and owning an EV will be far more beneficial. The fiscal year 2079-80, was the highest selling year for EVs and there are many reasons behind it. One is the awareness; consumers are aware about the opex expenditure saving meaning they don’t have to spend on the maintenance and fuels. Second is probably the consumption of domestic energy, the electricity we use is hydroelectricity which is green energy. Third, is technology. We as humans are always looking forward to learning more about the technology and EV models are providing exactly that.
EV is a new and revolutionary movement in history. As it actually boomed in the last year, we didn’t have to resort to any harsh measures. But as a stakeholder in the business, we should be prepared for any scenario in the coming days. Database and its analysis are the most crucial when it comes to being prepared for the future. So, we should always be ready to tackle the obstacles that come our way. Hence, we have to be in touch with other stakeholders to monitor the situation and create a space where we should be prepared for the unknown.
Could the government have better handled the economic vulnerabilities and in what ways?
In business, there are core things that the government needs to address in a basic rudimentary manner. Our economy is 37–40-billion-dollar GDP and it is not moving, growing and expanding according to the pace of our GDP. In Nepal, most of the economic activities have little value addition. Such as manufacturing service should be given priority as they can have the potential to export the products.
If your finances are proper, other things can be streamlined. In the case of our country, there is under-utilisation of budget and the uncertainty of the source. They prepare populist, one sided favourable budgets which are somewhat very dreamy and not reachable. They keep contingency in the sources and are never sure of what and how to proceed.
Despite thousands of hits and trials, the government tends to overestimate their revenue collection and as a ripple effect they start taking money from the citizens of Nepal.
Personally for me, running an organisation is about effective synergy, synchronisation, cohesion between different units because if we can achieve productivity in a cross-functional team, then only an organisation or any entity can walk in the path of success. But we can see a severe lack at every government level.
What are some policy reforms or initiatives that could help the industry/sector you are operating in do better?
As a company, we always prepare for both good and bad times. One thing that we are always concerned about is the policy department. In the last 3-4 fiscal policies, the EV taxation policy was changed around 5-6 times. As any business, we plan for a year or even more because businesses are there to last for a longer period of time. It involves other players or stakeholders of the ecosystem. But Nepal has been changing policies in a drastic manner. They keep changing the tax rates frequently. The frequency of change is unpredictable and illogical.
The person in the relevant department should understand and have knowledge about it. And what are its benefits in 10-15 years? Our government is only focused on receiving taxes but not looking after what can be its effect for all. There should be a suitable environment for businesses to run. Now the question is: isn’t it fundamental for the government to cater to the people of the country rather than changing their policies every now and then to just gain extra benefit from people? They are only thinking for themselves and not being far sighted at all.
Sustainability is the key to any business. Hence, the government should stop thinking from the tax bracket point of view and think for the betterment of businesses which can help generate revenues and profits.
How do you view the immediate future for your sector/industry?
We are hopeful this year can be better than last year. There are definitely challenges, both internal and external but for the EV stream, people have become aware of its benefits, the economic gains, and charging network availability has been a plus point for the EV ecosystem.
On a positive note, there is an increase in charging stations. Nepal Electricity Authority (NEA) has installed 15 chargers and is adding 15 more. Other distributors in the industry have also installed their charging stations. We have 30+ charging points along highways that link major cities and we are planning to add 15 more. Overall, I feel EVs will slowly start taking the market as its sustainability factor will encourage people to opt for it.
But as an overall scenario of automobiles, it might take a longer time to catch the pace of the current market. Vigorous research and study are required to go forward in the current environment.
Your business mantra when addressing a crisis? What can we learn from you?
I think one has to be patient and vigilant. One has to look in all directions and have the knack of checking out all the relevant areas in the business. Knowledge and information are crucial in any business. But information might be true or not. We live in a bubble where we tend to accept things that fit our mindset without looking at the facts.
In any business, one has to look at all the fields that concern you and then only proceed to make decisions. This is something that I follow to be updated and be on my ‘A’ game.
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Bijay Rajbhandary
Chairman & Managing Director, CE Construction
How has the sustained economic crisis affected the industry you operate in?
It has been affected severely. Basically, we are into three sectors, general contracting, real estate and hydropower. As far as general contracting is concerned, there are three stages in it; completed project, ongoing project and future project. Due to the economic downturn, our clients are not able to pay for the completed projects and for ongoing projects, there is lack of cash flow hitting our turnover directly. In earlier days, we used to enjoy credit facility from our vendors but currently, we have a limited facility due to the NRB directives’ working capital capping. The upcoming projects are on hold due to lack of trust in the economic situation of the country and globally as well.
Real estate is the most impacted during this economic downturn. Real estate is categorised in two parts - investor and end user. Previously, there were 80% investors and 20% end users, but in the current market that 80% has dropped down to 20%. People are not confident in taking the leap because of market volatility. End users might be wanting to upgrade their property or could be first time buyers but their decisions are on hold. End users have declined by 50%. Bank facilities are limited in addition to high interest rates and lack of loan investment and project financing. NRB directives are very stringent in terms of loan percentage and debt equity ratio.
The regulatory authorities have a huge role to play. They impromptu exercise ‘hathbandi’, ‘kittakath’, land classification, halsavik and others. These sudden rules and regulations have caused projects to go on hold and this ultimately hits revenue.
In the hydropower sector, we are not getting disbursement from banks. Previously it used to be a lot easier for development work. But now banks are not willing to issue the guarantee; in hydropower there is performance guarantee and advance payments system. Banks are finding it difficult to fund projects due to LC limitations. We also have severe problems with insurance and its policies making it all the more difficult to work in this sector.
What are some of the things you have done to address the ensuing challenges in your business?
I am practicing focus management. And within it what we call micro management or process mapping. Every process now needs to be more efficient than before. There is a terminology called lean technology and value engineering. We are putting everything we have learned previously in practice during the time of crisis. We have come up with out-of-the-box strategies to pull customers. Mission invented diversion is a model that we are actively using. Despite all the difficulties, we sold around 89 units in the last year.
The major challenge that we are facing is cash flow. Cash flow management is definitely a need but it is an art as well. The objective is to not give up despite the difficulties and to keep climbing the ladder even if it means that we take one small step at a time. These challenges have made us realise that if we keep on moving now, in the coming future, we will have no competitors.
Also, when it comes to layoffs and cost cutting or not being able to pay salaries on time, my question is who has provided salary right on time in this period? I am confident that most businesses are struggling to meet and accumulate revenues and pay their staff. But I believe that with right management we will overcome this obstacle as well.
Could the government have better handled the economic vulnerabilities and in what ways?
The government can handle things so much better. We do have good, intellectual people in there but who is our government? For example, one minister is allocated for education but tomorrow the same minister is placed in tourism. So, who is our government when they are changing so often? An expert and established person should be placed in a position where they have knowledge and ideas about the ministry.
Here in Nepal, I am always ready for the surprises that come unannounced and from nowhere. We have been in this business for the last three decades and every other day, there are new leaders, rules, policies and so much more. When there is a gap and uncertainty from the government, how can one depend on it?
The complexity of the system is something that we have become accustomed to. The uncertainty has trained us to have a far-sighted mindset where we are prepared for anything that is thrown our way. We just have to figure out the intensity of the change and right now, we are doing exactly that, understanding the risk and balancing the intensity of the presented situation.
What are some policy reforms or initiatives that could help the industry/sector you are operating in do better?
Rather than policies, it’s about the consistency. Nepal has been implementing policies with less research and dropping them after a while when they realise that it’s not working. Irrespective of who is in power, there should be national agendas that should have long-term goals.
For example, hydropower is one of the most sought-after sectors. If we have a concrete policy and management, then we will definitely be able to sell electricity to India and Bangladesh. This will help boost the economy and generate revenue. Additionally, it will have a socio-economic boost. The people where the construction is allocated will greatly benefit with 10% human resources being pulled from the area resulting in financial gains and quality life.
Therefore, consistency of policies is the need in every sector right now. The taxes we pay to the government should benefit us rather than the ones in power.
How do you view the immediate future for your sector/industry?
We don’t know what lies beyond the situation but I see opportunity in every problem. We, as a company, have started using strategies in real estate to help the sector enhance. We are launching 4-5 projects in the coming six months and working to make them possible.
The situation all over the country for construction looks like it will be worse in the coming six months. The government recently has mentioned that they will not be able to pay contractors, meaning that 80% of the flow is not activated from the government. It ties the hands of the contractors as they have to invest in human resources and materials. It’s a chain effect. Until and unless the government tackles this issue in depth, we will continue to have problems.
Your business mantra when addressing a crisis? What can we learn from you?
We as humans have to accept that crises do come but every problem has a solution. First of all, one has to know what is the root cause of the problem and communicate about it. Anyone in business has to accept and understand that problems could be anywhere in the system. So, one needs to hear from both the bottom and top levels.
Understanding the workflow and not giving up is the key to running a business. Business ultimately needs exposure and leaders of the business should have good relations with other stakeholders. Networking helps us in identifying problems and working on them.
Strategic planning and brainstorming ideas is the key to tackling many problems.
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Rabi Singh
President, Federation of Contractors’ Associations of Nepal (FCAN)