Donors shying away from supporting industrial development

If the trend of resources mobilized in foreign aid for capital financing is anything to go by, the government has fared badly to live up to its promise of reducing poverty by mainstreaming industry and trade.
Statistics compiled by the Ministry of Finance (MoF) shows the government in 2011/12 mobilized a total of Rs 107.56 billion in foreign assistance, but only 1.6 percent of that or Rs 1.74 billion, was garnered for the purpose of industrial promotion.
During the year, the government signed assistance agreements with 12 bilateral and 5 multilateral donors for 49 different development projects, but only one bilateral donor - the United Kingdom - pledged assistance to support the industrial sector.
The UK´s assistance came in the form of grant of Rs 1.74 billion and officials said it would be used for the industrial promotion project named Nepal Market Development Program (NMDP).
“In a country that relies heavily on foreign aid for developing basic infrastructure, products and their promotion, the extent of resources that the government garnered for the industrial sector sheds lights on priority of the sector. Analysis of the extent of fund funneled in the industrial sector clearly shows the sector is neither mainstreamed nor is getting any priority,” Keshav Acharya, former senior economic advisor at the MoF, told Republica.
He attributed such situation to the lack of focus of the government as well donors in the development of industries in Nepal.
Under the Enhanced Integrated Framework initiative, the government has since 2004 recognized trade as crucial development agenda for poverty reduction. As development of industries and enhancement of supply capacity are integral parts of trade development, it had also promised strong initiatives for industrial development
But the number of programs and fund received by the Ministry of Industry suggests huge gap between commitment and delivery, said Acharya.
“Unfortunately, even donors who eagerly contribute fund in crucial sectors don´t have much interest in the industrial sector,” he added.
This was not the case prior to 1990 though. Establishment of multiple industries, like Udaypur Cement Fatory, Birgunj Sugar Mills, Bansbari Leather Shoe Factory, Hetauda Textile Factory and Bhrikuti Pulp and Paper Factory with the assistance of bilateral donors sheds light on that history, said senior MoI official. But since 1990, donors have shifted their priority largely to social sectors.
“In a present liberal economic regime that respects private sector´s leadership role in country´s growth, we do not expect the government to seek aid to set up industries. But it should have a number of programs on industrial infrastructure, product development, supply capacity improvement, and branding and market promotion, among others,” said Acharya. “But such programs are barely visible,” he added.
MoF officials who coordinate with the donors say they can could approach the donors for aid in the industrial sector. “But we never receive a clear business plan and strong proposal from the MoI. In such a situation, how can we drive donors toward industrial sector?” a senior MoF official wondered.
Acharya agreed with the MoF official. “The responsibility of identifying the needs of the sector and building a strong case for support rests on the MoI. But affairs suggest MoI simply lack such capacity,” he stated.
Officials at the MoI too admit what Acharya said. “We have industrial promotion division at the ministry, but it lacks capacity and lagged behind to spend even mediocre allocations of Rs 4.2 million last year,” said a senior MoI official.
But despite admitting its weakness, the MoI officials say they are failing to come up with strong business plan because of a number of reasons like poor industrial relations, party-based unionism, power crisis and political instability.
Although fresh Industrial Policy as well as Commerce Policy promises to end those problems by improving labor law, prioritizing key industries, laying down crucial industrial infrastructure and providing incentives for product development and industrial growth, the MoI officials argue those commitments have barely reflected in the annual fiscal programs.
“Unless MoF itself translate those policies into actions in annual budgets, we cannot say the government has mainstreamed and given high priority to the industrial sector,” said the MoI official, volleying the reasons behind its inability toward MoF.