Restructure Investment Board Nepal

The prime minister need not chair the Investment Board Nepal (IBN) any more. The board was established through a 2011 Act, with the goal of pushing large-scale infrastructures so as to lay a strong foundation for the country’s economic takeoff. Almost a decade down the road, this government entity has turned into yet another waste of taxpayer money and under-utilizer of foreign aid. Having failed to efficiently manage political, technical, economic, and aesthetic aspects of mega projects, it doesn’t have one project completed in the past decade. For one, the PM-chaired board has not given its senior management clear guidance to make maximum use of available resources.

The Rwanda Development Board (RBD), a government institution with a mandate to accelerate Rwanda’s economic development by enabling the private sector, was established just two years before the IBN. Today, the RDB provides trusted market intelligence, practical advice, and business tools to help Rwandan companies expand into global markets. It also attracts foreign investment in 12 different sectors such as manufacturing, agro-processing, real estate, ICT, financial services, mining, infrastructure, energy, tourism, health, and education.

In the case of Nepal, the IBN is slowly turning into no more than a government office with some consultants on donor payroll. The RBD, on the other hand, is chaired by a venture capitalist with cabinet ministers as members, along with other representatives from both public and private sectors. One could argue that Rwanda is an authoritarian state that hands out high-end jobs like CEOs to ruling elites. But this is no different in the case of the IBN. All its three CEOs so far have been appointed based on their loyalty to this or that PM rather than on their core competences.

Notably, the Public-Private Partnership and Investment Act, (PPPIA) 2019 had replaced the Investment Board Act (IBA), 2010 with the support of the Asian Development Bank (ADB). The new Act envisioned two separate units within the IBN—PPP Unit and Investment Unit—for greater efficiency in investment approval and in processing projects built under PPP mechanism. The Act also aims to make PPP more operational (and the IBN secretariat has a bigger role to play in this regard). But more than a year since the Act’s promulgation, not much has been done to honor its letter and spirit.

The expenditure to run the board has become a sunk cost for the economy as it has failed to yield any desirable fruits. It hasn’t been able to develop the capacity of domestic private sector nor to attract foreign investors. The IBN does not even have a basic mechanism of collecting, processing, and analyzing data, which is vital to get a clear picture of domestic and international markets. Most of its work is routine bureaucratic stuff that predictably fails to excite potential investors. The same can be said of the couple of investment summits Nepal has hosted.

Against this backdrop, time has come to reengineer the board to make it professional enough to push private sector to perform better. If a board chaired by the country’s prime minister fails to deliver for so long, it should either be dissolved or restructured. Or it will continue to consume state resources without having anything to show for it. The country will suffer mightily during the Covid-19 crisis if we retain such an expensive institution that delivers almost nothing to the economy. Pre-Covid-19 projections of the need for investment won’t make any sense in the coming days.

Foreign investment is something that nearly all countries are angling for. To be competitive enough to attract international private investment, we must at least have a decent investment institution equipped with basic institutional and human resources.

There are two ways to do this: i) By restructuring the board and recruiting senior management based on core competence, and ii) By strictly implementing PPPIA to make PPP more operational so that the domestic private sector can contribute more on project development.

This article was first published in The Annapurna Express.

FNCCI’s masters

The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) will soon elect its new senior vice-president (who is president elect by default) through its 54^th general assembly. The private sector’s apex body has been struggling to establish itself as a professional corporate entity due to a perpetual shortage of capable leadership. The leaders the FNCCI has gotten over the past two decades have been more oriented towards pleasing their political masters than in establishing high standards of corporate governance.

Rather than speaking the industry’s voice, the FNCCI is consumed with fulfilling the interests of its leadership. For instance, the Federation of Indian Chambers of Commerce and Industry (FICCI), India’s private sector’s umbrella agency, has ‘Industry’s voice for policy change’ as its motto. The FNCCI lacks any such guiding principle. 

The federation has seen little growth in the past three decades since the opening up of the economy and reforms in 1990. Since its establishment in 1966, up until 1990, was the time for the organization’s institutional development. Yet, even after 1990, the FNCCI has had little to show for it. Its past presidents like Mahesh Lal Pradhan, Padma Jyoti, and Binod Chaudhari gave the institution some shape. But recent leaders such as Kush Kumar Joshi, Pashupati Murarka, Suraj Vaidya, and Bhawani Rana have done next to nothing to strengthen the capacity of the private sector and empower domestic investors. 

The FNCCI leadership has instead used the organization to curry favors from those in power. Suraj Vaidya became the coordinator of the Visit Nepal 2020 campaign, no sooner than he had completed his tenure as the FNCCI president. Likewise, Kush Kumar Joshi was able to get the ‘Kathmandu-Hetauda Tunnel Highway’ project immediately after the end of his term. In both cases, there was simply no match between the person’s expertise and the projects they later received.  

The FNCCI could have, over the years, pushed political leaders to adopt the right set of policies that favor industrial development in order to achieve higher growth and to create jobs. Yet the focus of the FNCCI, which has a nationwide network through its district-level units, has been on lobbying for higher margins in foreign trading business of its leadership, thereby eroding the private sector’s credibility. “The FNCCI has failed the country by limiting itself to being a lobby group, while the expectation was that it would contribute to industrial development and economic growth,” shares Pushpa Raj Acharya, former president of the Society of Economic Journalist-Nepal. “The golden opportunity for creative transformation of the private sector has been wasted in the past three decades,” he adds.

The 54^th general assembly was scheduled for March 2020, but was postponed due to the Covid-19 pandemic-induced lockdown. It has now been postponed again, due to internal disagreements within the FNCCI. Whenever the general assembly happens, all those contending for new FNCCI leadership positions have already shown enough evidence of groupism and vested interests. In other words, we cannot expect much from whoever leads it next.   

Raghuram Rajan, an economist and former governor of the Reserve Bank of India, points to three pillars of national development: state, market, and community. He argues that if the market colludes with the state then the community fails, causing people to suffer. This is exactly what is happening in Nepal.

Looks like the private sector will have to wait a long time before it gets capable and visionary leaders. 

This article was published in The Annapurna Express. 

Monetary pleasing 2020/21

The 2020/21 monetary policy unveiled by governor Maha Prasad Adhikari last week has apparently come as a relief for the business community. The Nepal Rastra Bank, which is implementing its third strategic plan (2017-2021), has supposedly generated ‘oxygen’ for the economy that was suffocating due to the Covid-19 pandemic and months-long lockdown. It seems to have been conveniently forgotten that the tools that have been used to improve the economy through financial sector management are traditional.

On the one hand, there is doubt over whether these policies would be rightly implemented. On the other hand, there is no reflection of the much-needed digital push to increase access to finance or to advance collateral-free loans to small and medium enterprises (SMEs) in service sector.

The plan to support SMEs forces financial institutions to inject funds. The need of financing in agriculture is critical but that is not the sector that can absorb all channeled funds. The traditional collateral-based lending may not be effective as the need of the hour is to invest based on project viability. But the monetary policy is mum on whether it would force commercial banks to invest in project financing. Hence the strategy of increasing direct lending may not be as effective as it has been portrayed.

The monetary policy allows financial institutions to issue ‘agricultural bond’ aimed at channeling that money to commercial agriculture. But would these institutions be able to do so while they are already struggling to sell regular bonds? Moreover, such bonds might not seem lucrative for individual buyers due to the general lack of awareness on bond investment.

The plan of mobilizing funds through tools like bonds may also not be fruitful because of existing regulatory issues in the capital market. The Securities Board of Nepal (SEBON) is still functioning in a cocoon of the Ministry of Finance (MOF) and cannot effectively monitor and regulate high-quality specific bonds such as agricultural bonds and energy bonds that the new monetary policy envision.

Since 2002, the NRB has been unveiling monetary policy in its core form. Prior to that the focus on the monetary front was on imposing policy decisions to sustain the financial sector. That limited space for the market to influence policy outcomes. But in the past 18 years, Nepal’s financial sector has grown exponentially. Again, it has been expanding with the same traditional approach of managing deposits and loans.

Our financial institutions did not try to keep pace with developments abroad, let alone be a risk-taker and invest in innovative projects in the country. The task of digitizing the sector has not even started, as we do not even have basic infrastructures such as National Payment Gateway (NPG). The government has announced the NPG would come in operation this fiscal but that looks unlikely.

Against this backdrop, the new monetary policy has been getting all the applause from lobby groups such as commercial banks and private businesses as the loan payment schedule has been extended as per their wishes. But the policy has done nothing to make the financial sector more innovative and to encourage investment in people’s ideas, not just providing loans against collateral. The NRB should learn from other countries on how they have been getting financial institutions to invest in high-potential projects and businesses, even though these businesses have no property to use as collateral.

New governor Adhikari has tried to please all, including Finance Minister Dr. Yubaraj Khatiwada. But he is missing a trick in his failure to maintain price stability and in getting the financial sector to become more inclusive and innovative.

This article was first published in The Annapurna Express. 

Nepal: Figuratively richer

The World Bank Group has now categorized Nepal as a Lower-Middle Income Country (LMIC). The classification based on the country’s per capita Gross National Income (GNI) is useful for the bank’s operational lending policy but it does not quite capture Nepal’s level of development or measure of welfare.

A country labeled an LMIC may not even be so as if it has a large informal economy and subsistence level of economic activities. This is also not the best way to measure wealth distribution to reduce income inequality. Thus, Nepal’s ‘graduation’ does not have anything to do with the lifestyles of those under extreme poverty.

Zambia, Africa’s second-largest copper producer, achieved middle-income country (MIC) status in 2011 after a decade of impressive growth that averaged 7.4 percent a year. But the growth benefited only a small segment of the urban population and had a limited impact on poverty. Zambia still ranks among the countries with highest levels of inequality. Over 58 percent of Zambians earn less than $1.90 a day and three-fourths of them live in rural areas with no access to quality health, education, and electricity. The country’s elite now has easy access to both natural and financial resources, but the poor have seen no change in their fortunes after their country was declared an MIC.

Like Nepal, Zambia too is landlocked. But unlike Nepal—which lies between two big and prospering countries India and China—it is surrounded by many big and small countries like the Democratic Republic of Congo, Angola, Botswana, Mozambique, and Malawi. Yet Nepal and Zambia face similar problems. Zambia’s debt-financed connectivity infrastructures have supported the economy but also created a big financial burden. Persistent fiscal deficits have increased general government debt to 88 percent of GDP in 2019. Regrettably, the debt-fueled growth took place in the absence of a well-designed wealth distribution system. Moreover, Zambia’s debt composition is shifting toward commercial and Non-Paris Club bilateral creditors such as China.

The case of Zambia is worth considering for Nepal if it is to avoid being lulled into a false sense of security brought about by high growth figures and better country status based on GNI. They only highlight the country’s ability to process loans with bilateral and multilateral creditors. And these loans eventually leave the country vulnerable to high debt and low performance in terms of multi-dimensional poverty. In Nepal, approximately 50 percent population lives under the poverty line, as per the multidimensional poverty index.

The World Bank’s new classification of Nepal based on 2019 data does not consider the impact of Covid-19. Nepal’s remittance-driven economy may face severe challenges if the number of returnee migrant workers continues to go up. Nepal has made significant progress in the past few decades in poverty reduction in terms of the single dimension of income. But there is no clarity whether that is linked to growth or to job creation. Remittance-based poverty reduction is unsustainable.

In Zambia, as rising debt burden has hampered resource allocation in other important public spending areas, the priority is on fiscal consolidation. Covid-19 will only make things worse. In our case, there is still some space for public debt. But we must be careful about debt-financed growth, and it has no clear linkage with bringing about meaningful changes in the lives of those who suffer from multi-dimensional poverty.

It seems like we as a country are getting richer. But is this wealth being generated and distributed evenly? The sole focus on getting more and more loans on the back of our better income classification could prove disastrous.

This article was first published in The Annapurna Express. 

Nepal’s costly embrace of China

Developing Nepal as a ‘bridge’ between two Asian giants was a promising proposal. The China-India-Nepal trilateral cooperation idea sparked hope that the country of 30 million would prosper side by side with its two neighbors. The two would complement each other in developing critical connectivity infrastructure to turn Nepal not just into a transport corridor but also an urbanizing economic conduit. That boundless potential of Nepal is being eroded by the ruling party’s disoriented foreign policy.

India was never interested in the trilateral idea that could possibly end its hegemony in Nepal. Against this backdrop, rather than trying to keep convincing India to get more interested in the idea, Nepal constantly pushed the southern neighbor away.

Egged on by our own government, China is now interested in all Nepali sectors, from hydropower to military. The military cooperation has not amounted to much except adding India’s suspicion of the trilateral idea—to Nepal’s great loss.  

Nepal cannot prosper without a healthy and balanced relationship with both its neighbors. However, India remains a destination of choice for those unfortunate Nepalis who can’t dream of going to Middle East by paying huge sums to state-sponsored ‘man-power’ companies.

India’s public health institutions such as the All India Institutes of Medical Sciences in New Delhi and the Christian Medical College in Vellore still lure Nepalis who cannot get good treatment in their own country whose health sector has been captured by the mafia. Kathmandu’s failure to take New Delhi into confidence could cost those poor Nepali people who rely on India to meet their vital needs like healthcare.

Nepal’s relationship with China is no cushion for poor Nepali people. China only serves the interests of its elite. Moreover, Beijing looks at Nepal from the Tibetan lens. A security-centric approach does Nepal no good at a time it needs unconditional foreign direct investment.

China’s Communist Party (CPC) is enthusiastic about distributing Mao’s red books in Nepal but struggles to define what the Belt and Road Initiative (BRI) means for Nepal. Chinese diplomats in Kathmandu openly threaten our constitutionally guaranteed press freedom. Yet they don’t seem to understand the urgent need of the Nepali people to become economically empowered so that they won’t have to wash dishes in the dhabas dotting Indian highways.

Around three million Nepalis work in India to secure two daily meals for their families back home. Nepali unskilled laborers have an open access to India’s vast markets. As India is becoming more competitive and professional, Nepal can benefit more and more from this relationship. Suppose India is tomorrow a global economic superpower and Nepal still has an open border with it—what great opportunities such a scenario bring! But for that Kathmandu has to tame its anti-India ultra-nationalism.

If the future is Asian, as Parag Khanna claims, it is as much of India as it is of China. Nepal can benefit a lot from a balanced foreign policy by pursuing trilateral cooperation rather than stand-alone relationship with neighbors. Even if this is not possible, the goal should be to carefully balance India and China, and surely not to completely throw our lot with the Middle Kingdom.

Please do not destabilize the country with a flawed foreign policy approach at the cost of the poor. India’s treatment of Nepal as just another country may have no implications for Kathmandu’s power elites but will result in devastating consequences for poor Nepalis who can’t ever think of working in Beijing’s restaurants, even as dishwashers.

This article was first published in The Annapurna Express.