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Mon, April 15, 2024

Decisive Moves Required From The Finance Minister

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The United Nations forecasted that global economic growth will fall significantly to 1.9% this year as a result of the food and energy crisis sparked by the war in Ukraine, the impact of the Covid 19 pandemic, persistently high inflation, and climate emergency. Painting a gloomy and uncertain economic outlook, the UN Department of Economic and Social Affairs said the current global economic slowdown “cuts across both developed and developing countries, with many facing risks of recession in 2023.” The report said this year’s 1.9% economic growth forecast — down from an estimated 3% in 2022 — is one of the lowest growth rates in recent decades. But it projects a moderate pick-up to 2.7% in 2024 if inflation gradually abates and economic headwinds start to subside. Nepal does not remain untouched. Numerous factors have contributed to the current downward trend and the liquidity crisis that range from low investor confidence, government’s failure to meet its targets in the semi-annual review of the Monetary Policy 2022/23, current political developments and insecurity, populist moves that have stressed the government budget, increased national debt, poor policies, disproportionate BoP, rising inflation, etc. During the time under consideration, even the total market volume plummeted by 51.09% to a mere Rs 36.26 billion. The indicators all point to a very sluggish economy and the man who is set with the task to pave a way out is the new Finance Minister. Appointed on March 31, Dr Prakash Sharan Mahat takes on a fragile economy and a commercial ecosystem that is shrouded in uncertainty. In this edition of Business 360, we asked three experts on what would they advise the new FM to help aid Nepal’s economic recovery.

Rameshwor Khanal

Former Finance Secretary

The new finance minister has assumed responsibility at a time when fiscal situation is in terribly bad shape. Since the beginning of this fiscal year, revenue collection remained below target. The situation turned bad to worse and by the middle of the year, there was indication that government revenue would fall below the level achieved immediately preceding year, which is a first in the last 55 years. The country faced a decline in output, measured by Gross Domestic Product, few times in the last six decades due to either unprecedented natural calamities or trade blockade or pandemic. Even when the GDP growth remained in negative territory, government revenue growth had remained positive. Strangely, this year, there are indications that the GDP growth will be in excess of 4.5%. Year on year inflation is going to be about 7.5%. This means, in nominal terms, GDP will grow by about 12%. With this level of growth, revenue should be growing by about 16% at the least. On the contrary, revenue this fiscal is expected to remain 5% lower than the amount collected last year. Thus, there is going to be a 21% loss in revenue. There was import restriction on certain items until the first quarter of this fiscal year. On the whole import volume has declined. Some revenue loss is due to decline in imports. But the loss in income tax and value-added tax cannot be justified. Even the loss in customs revenue is far more than that can be accounted for due to decline in imports. These figures indicate that revenue administration has seriously been weakened. The outgoing Finance Minister - worst in the last 55 years - not only tampered with the revenue policies but also seriously damaged the revenue administration. While revenue performance has been historically low, recurrent expenditure has been rising. This is because the outgoing finance minister increased committed expenditures – raising salaries and reducing the eligibility age for old-age allowance. Capital expenditures performance has been dismal. In this backdrop, the most important task before the new finance minister is restoring the fiscal balance of the government. He should restore the credibility of the revenue administration. While trying to contain the recurrent expenditure, he needs to facilitate sector ministries to accelerate capital expenditures. Accelerated capital expenditures at this juncture can also act as a stimulus to the economy. For over a year until the first quarter of this year, country struggled to keep external sector in balance. Current account deficit last fiscal year exceeded 10% of GDP and FOREX reserved dipped. With calibrated monetary instruments, there is an improvement, but sustainability is questionable. In this context, it is necessary to ensure that measures taken to tame external sector problems are not abruptly dropped. A gradual phasing should be considered. Excessive bank credit and lower interest due to measures taken for the post-pandemic recovery has now led to deterioration in the quality of bank assets. It is necessary to require banks to ensure the quality of their assets. Market participants certainly demand easing of the monetary measures. Finance Minister should not yield to these demands and put undue pressure on Nepal Rastra Bank, something that the earlier Finance Minister openly did. The Finance Minister needs to take measures for the long-term health of the economy rather than for the short-term and short-lived popularity.

Suman Joshi

Founder & Managing Partner, True North Associates

Nepal’s economy is currently stressed owing to external factors as well as its poor structure i.e., heavy dependence on imports, weak manufacturing base, low job creation, etc. Asset bubbles (shares, land) were created due to large borrowers’ access to easy credit (readily available loans plus low interest rates) during much of the past decade. The government’s operational expenses are on the rise while revenue collection is on the decline prompting significant increase in national debt. The new Finance Minister has an unenviable task of balancing the need to reverse the economic slowdown in the short term while initiating reforms to make structural adjustments so that we do not end up in a bigger mess next year. Nepal’s economy will need doses of strong medicine. This is also an opportunity to articulate Nepal’s vision for economic growth. Here are three of the many advices I have for the Minister:
Let’s not make any concessions or favourable policy changes specifically aimed at reviving the speculative investments in the stock market or the real estate sector. These are the activities that have directly contributed to weak fundamentals of our economy.
We need new money to be pumped in. All options considered, the best way to achieve this is to set up a fast track to convert numerous FDI commitments. Remove all procedural, policy and perception (3p) bottlenecks to assuage foreign investors with an aim to reach FDI to GDP ratio of 2% in next five years. Let’s not make any concessions or favourable policy changes specifically aimed at reviving the speculative investments in the stock market or the real estate sector. These are the activities that have directly contributed to weak fundamentals of our economy. Both these asset categories will benefit automatically if and when the economy is anchored on real, productive sectors. Can we pay serious attention to digitalisation of government processes? We have spent way too much money on setting up digital infrastructure (software, hardware) but they don’t seem to work. Public service delivery is abysmal - often said to be due to malfunctioning of those very digital mechanisms. Are the bureaucrats really interested in improving their efficiency and transparency or is there more to it than meets the eye? Efficiency and transparency in public service delivery go a long way in improving productivity of an economy. Here’s a bonus point I’d like to make: Historically, we have harped upon agriculture, tourism and hydropower as areas where we have comparative advantages. ICT has now emerged as a new sector we can add to the list. Nepal’s potential as a tech hub is now real and we should make aggressive moves in realising this possibility.

Shivanth Pandey

CEO, NIBL Ace Capital

Central bank needs to play active monetary policy and has to use the transmission mechanism better to control interest rates, right now the most effective rate is a gentlemen’s agreement among the Nepal Bankers Association. Capital Controls need liberalisation to stop chronic capital flight. India did the same in the 70s or 80s. Any law/act older than our constitution needs to be reviewed and changed for the modern context. Give tax breaks to the real agents of the economy, proponents of growth and employers rather than increase tax to raise revenue so the government is easier off versus real population. Ease of doing business in Nepal is at rock bottom. The government needs to enable businesses rather than policing them. If needed, take action against explicit rule breakers, wrong-doers rather than blanket banning the misused activity on all industry players. We face collective punishment rather than the wrongdoer being punished. Take a look at the Swiss central banking model, their central bank manages to make profit like a bank to return to any public investors as well as control inflation by purchasing assets like gold, securities etc. Their currency is 90% backed by real assets and this has also kept inflation very low there.
The government needs to enable businesses rather than policing them. If needed, take action against explicit rule breakers, wrong-doers rather than blanket banning the misused activity on all industry players.
After Covid and the recent global financial sector instability, the government should focus on employment maximising and price stability rather than on tax revenue maximisation. Government can borrow, issue bonds, raise other investments to balance their books but the current hawkish tax collection has stalled the economy and may in the medium to longer run lower total potential tax collection, e.g. economy growing at 6/7/8 % pays more tax then one growing at 4%, and excessive taxation like we have now may even contribute to a recession where the government shoots itself in the foot and has much less government income and taxes fund the budget. Governments need to think extremely big and try to effect huge, direly needed reforms and structural changes that can be a new game changer in our economy. In Dubai, government ministers are mandatorily required to use the best management consultancies such as BCG, McKinsey etc to construct any policy. Perhaps we could do the same to figure out how to attract investment, tourists and discover what changes we need to enact to prosper in this century.
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MARCH 2024

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