Choose SEBON

The Securities Board of Nepal (SEBON), the apex regulatory body for the country’s capital market, just celebrated its 28th anniversary via a webinar. But as it did so, the country’s capital market suffers from weak regulatory capacity, lack of institutional ability to effectively monitor the market, and inadequate market infrastructures. When the world is abuzz with the mantra of digital departure, the SEBON collects market information manually and gives outdated data to concerned investors.     

Addressing the virtual event, Finance Minister Dr. Yubaraj Khatiwada expressed his optimism that Nepal would soon have a robust capital market to meet the country’s huge financing needs. He shared his hope that Nepal’s capital market would become more and more competitive in South Asia, so that investors start diverting their investment here from other countries. But that seems like wishful thinking, given the paucity of homework towards that end. 

Despite repeated assurances to advance the capital market, the government has not let the SEBON be operationally independent. Although it is an independent agency, it is often not able to pursue its mandate independently. A SEBON official stated in a recent roundtable organized by Milken Institute in Kathmandu that the SEBON was being forced to function as an extension of the Ministry of Finance. 

Nepal’s capital market is so weak that it can mobilize precious little funds for long-term investment. That leaves the country vulnerable to deficit of finance to develop large infrastructure projects. The onus is on the ministry to enable the SEBON to independently carry out its activities and to work toward making the capital market more robust. However, there is also a need to reform the ownership and governance of the Nepal Stock Exchange (NEPSE) in order to improve the country’s capital market, and eventually make it lucrative for investors from South Asia. 

Capital market’s efficiency also depends on investors having access to high-quality information on government debt structures, funding needs, and debt management strategy. One such basic practice is disseminating issuance calendar for government securities. Unfortunately, the calendar has become a victim of weak institutional coordination and communication. 

Nepal can learn from India’s well-developed system of information dissemination on government securities. Far from having high-quality public dashboards displaying critical information for investors, the SEBON does not even have a basic Information Management System (MIS) to collect, process, and analyze market data. This leaves it vulnerable to the manipulation of shady investors. 

When there was an upsurge in the secondary market a couple of months ago on the back of the news of the exit of Finance Minister Khatiwada, the SEBON was relying on un-vetted data to make the market cheer up. One did not know if these data sources were reliable, but they did play a vital role in decision-making. The absence of real-time market data and analysis for investors has time and again proved costly. 

Unfortunately, neither does the SEBON have funds to buy such a system nor can it work independently to secure such funds from development partners, as the ministry always comes in between. And that is hardly helpful. 

 The Securities and Exchange Board of India (SEBI), which is just a year older than the SEBON, was established in 1992. Today the SEBI regulates one of the most vibrant capital markets in Asia, and mobilizes much-needed funds for India’s growing economy. If Khatiwada is honest about his commitment to improving the state of Nepal’s capital market, he should learn from his Indian counterpart and let the SEBON operate independently—away from the ministry’s revenue- and rent-seeking mindset.  

Nepal’s financial markets rank as the least developed in South Asia. They cannot be competitive without strengthening the SEBON’s regulatory capacity, changing ownership and governance mechanism of the NEPSE, and developing critical market infrastructures. A couple of lines in the budget speech to advance the capital market without a clear roadmap will not be enough. 

Khatiwada, who can now perk up the market only with news of his exit, has a great opportunity to clean up his investor-unfriendly image by letting the capital market proper unhindered.

This article was first published in The Annapurna Express on June 11, 2020. 

Rocky road to Nepal’s economic recovery

People were expecting the budget for the upcoming fiscal 2020/21 to give them some relief. There was a hope that the government led by a party with socialist credentials and the agenda of prosperity would come up with a prudent fiscal policy to lift people up from the gloom of Covid-19 pandemic. Dashing the collective hope, the government has announced a budget that offers no reassurance of people’s economic safety.

Finance Minister Dr Yubaraj Khatiwada presented the budget of Rs 1,474.64 billion for the upcoming fiscal in the parliament without clarifying how it would help steer the path to prosperity that the government has promised. Dr. Khatiwada—who has spent most of his time since his retirement from the Nepal Rastra Bank (NRB) drafting election manifestos of Nepal Communist Party (NCP) (then CPN-UML)—has a knack for revenue collection and dealing with development partners.

Unfortunately, he lacks a political constituency, the most critical ingredient a finance minister needs to be bold enough to tell elected MPs how he wants to steer the economy in times of an unprecedented crisis. No surprise then that the new budget is hopelessly traditional, and without any good program to tackle the challenges created by Covid-19 ‘lockdown’ in the economy and in people’s lives.

Dr Khatiwada has projected 7 percent growth for the upcoming fiscal. But the reason behind his optimism is misplaced. He says such a growth is feasible as he is ‘confident’ the economy would again gain its vibrancy when the lockdown is lifted. Unfortunately, people do not share that ‘confidence’ as they are already short of cash to buy two meals a day. Small and medium enterprises (SMEs) or big corporate houses, they are all struggling to provide even minimum pay to their employees. The informal sector, meanwhile, has been decimated by the lockdown.

This Covid-19 crisis could have been exploited a lot better. This time could have been used to initiate bold reform agendas in health, education, and agriculture. Our public health system is already overwhelmed with just over 2,500 corona-infected cases. The government has allocated Rs 90.69 billion for health, which is much more compared to allocations in previous years. Yet there is no clarity on how this money will be spent.

Agriculture has gotten Rs 41.40 billion, along with subsidies in the procurement of chemical fertilizers. Moreover, this sector falls under the government’s flagship ‘Prime Minister Agriculture Modernization Project (PMAMP), which alone is worth some Rs 3.22 billion. The budget has announced ‘one local government, one product’ policy under this project. But there has been no study to find out which local government has a comparative advantage in which product. In this regard, the project may result in haphazard investments of scarce resources in the production of agricultural products that cannot be marketed.

A total of Rs 150 billion has been allocated to support businesses severely affected by the lockdown. Another fund of Rs 50 billion will give them subsidized loans. Since the NRB will manage these funds, an enormous volume of paperwork will be needed to be eligible for them, a big challenge for SMEs. So, there is room for doubt if these funds will really support SMEs. Industries will have to make a significant investment in covering the health of their workers, increasing the cost of production, and making the products less competitive.

Another program projected as a game-changer is the Prime Minister Employment Program (PMEP), which gets Rs 11.60 billion. This program aims to create 200,000 new jobs. But the program has been tainted with allegations of corruption. There is a risk of this money being funneled to local level party cadres.

Overall, most programs are similar to those in previous budgets, as if the pre- and post-corona ground realities are the same. The government could have helped the private sector steer through the crisis through tax policy reforms.

Tourism will suffer in the foreseeable future, as tourists won’t risk travel to a country with a weak health system. As Nepal cannot rely on tourism anymore, it must bank on some other sector as the foundation of the country’s future growth. As most farmers continue to practice subsistence agriculture, this is also not the sector that can support robust growth.

The only other growth avenue is technology. It could have allowed firms registered in other countries to bid for business in Nepal, as there is little chance that a Kathmandu-based firm will win an international bid. That could have set the foundation of a technology-driven, advanced economy.

In a nutshell, this budget’s scope is limited to sustaining the state apparatus and supporting ruling party politics.

This article was first published in The Annapurna Express on June 5, 2020. 

Absent Nepali agriculture jobs

The government has prioritized agriculture in the short-term for economic recovery in light of the Covid-19 pandemic. Agriculture has never really taken off in Nepal even though the sector employs around 66 percent of the total employed population, contributing 27.1 percent to the GDP. Most of the labor force engaged in agriculture doesn’t have regular basic income and other supports such as health insurance.

The government policies and programs for 2020/21 focus on boosting investment in agriculture with the goal of creating jobs. But there is little hope of the desired outcome due to the lack of technology and other prerequisites such as market access, all-weather transport connectivity, and irrigation.

Productivity and competitiveness of the agriculture sector are low, and adoption of improved technology limited, despite repeated government commitments to improve the sector over the past few decades. Most of the current Nepali migrant workers were once into agriculture in their own country. They could not generate enough income to meet their families’ basic needs such as nutritious food, health, and education for their children.

Employment in agriculture is mostly seasonal, which represents a significant loss of human resources, as the workers are idle for almost half the year. Return on investment in agriculture is much lower compared to the interest rate provided by commercial banks in fixed deposits. Most returning migrant workers would be willing to put their money in fixed deposits in commercials banks rather than make an investment in agriculture.

Nepal has completed the implementation of the Agriculture Perspective Plan 1995-2015 and is now implementing the Agriculture Development Strategy 2015-2035. The sector saw a meager 3.2 percent growth during the 1995/96-2015/16 period, which is why the country’s youth and most productive labor force looked elsewhere for jobs. The new strategy aims to develop a self-reliant, sustainable, competitive, and inclusive agricultural sector that can drive economic growth and contribute to improved livelihoods and nutrition security. Unfortunately, there is little government investment in agriculture and budget allocation in it has been consistently conservative.

There is a dearth of skilled human resources in agriculture in the absence of investment in training people to use improved technology. The government has announced an expansion of the Prime Minister Agriculture Modernization Project (PMAMP) to create jobs across the country. However, that will be insufficient to absorb the workforce that will swell with the return of migrants from different countries.

Additionally, there will be a mismatch in skills required in agriculture because most returning migrant workers won’t be trained in the sector. Hence the government should focus on skills enhancement. Moreover, the project, already tainted by financial irregularities, may not be able to generate much hope among youth and returnee migrants.

Against this backdrop, the hope of the agriculture sector driving the economy out of the crisis seems misplaced. The government’s slogan ‘Consume domestic products, promote internal production’ sounds laughable considering that Nepal imported, among many other vital stuff, fresh vegetables worth of $4.5 million in the first ten months of current fiscal.

The agriculture sector has always had low productivity. There is no possibility of it driving the economy while other sectors are down too. There is thus an urgent need for structural reform in the sector that is aimed at ensuring higher rate of return on investment. Let us hope the government policies and programs for the upcoming fiscal are well-intended and public expenditure will really attract private investment. Only then can we hope that the sector will generate enough jobs.

This article was first published in The Annapurna Express on May 28, 2020. 

Nepal, Lipulekh, and pragmatism

In May 2015, China and India signed an agreement to augment border trade via the Nepali territory of Lipulekh Pass. This was done during Indian Prime Minister Narendra Modi’s state visit to China. Nepal, a Landlocked Least Developed Country (LLDC), was a mere spectator.

Last week, India’s Minister of Defense Rajnath Singh inaugurated an 80-km-long strategic road from Dharchula (Uttarakhand) to Lipulekh, which will serve as the shortest route to Kailash-Mansarobar from New Delhi. Nepal’s Ministry of Foreign Affairs (MoFA) issued a press release ‘regretting’ the inauguration.

India has been deploying its Indo-Tibet Border Police (ITBP) force at Kalapani since 1962, something Nepal has termed an action against the letter and spirit of Sugauli Treaty (1861). In the past 60 years, Nepal’s economic development has progressed at a snail’s pace and the country has lacked an ability to maintain an assertive neighborhood policy with its two giant neighbors.

Beijing enthusiastically welcomed Modi in May 2015, calling him ‘Indian Nixon’, sparking hope of greater collaboration between the two giants. But it was disheartening for Nepalis as the ‘Indian Nixon’ was violating Nepal’s sovereignty by signing a controversial agreement with China without Nepal’s involvement.

Haidian district in Beijing, which hosts three world-class universities—Tsinghua, Peking and Renmin—is undoubtedly the most vibrant intellectual hotspot of China. A huge number of Nobel laureates and global leaders visit Haidian on a daily basis to deliver lectures and take classes in these universities. The area is full of debates on China’s past, present and future, including Chinese President Xi Jinping’s potential as ‘China’s Mikhail Gorbachev’.

I brought up the painful topic of the 2015 Joint Statement during one of those debates. The statement had clearly violated Nepal’s sovereignty, and I was disturbed by the actions of our two neighbors. In the end, I and some other friends of Nepal decided to recommend to the Nepali Embassy in China hosting of high-level forums that discussed important topics for Nepal, most importantly those concerning its sovereignty.

Informally, I was told that the Nepali embassies around the world are short of cash to host such forums. “It costs a lot to host such events in Beijing and we don’t have the money,” shared a Beijing-based senior Nepali diplomat. “When we are perpetual guests at tables hosted by other countries, how can we assert our own issues?” he questioned.

Moreover, Nepal rarely appoints ambassadors on merit basis, and that is where the issue gets worse. These ambassadors cannot convince or fight with the MoFA for funds. The flip side is, even the financial resources in the basket of these embassies are poorly managed.

This issue is largely linked to the country’s state capacity. “If the Nepalese government cannot increase state capacity, the state itself could gradually dissolve,” wrote Robert D. Kaplan in his influential book, The Revenge of Geography: What the Map Tells Us About Coming Conflicts and the Battle Against Fate’ (2011). He further writes that China and India could play a new version of the Great Game in the Himalayas.

The only way to manage these Great Game players is to increase our capacity both in economic and military terms. Nepal needs to be economically powerful to give its embassies enough funds for incidental expenditure. Had the Embassy of Nepal in China raised the issue of Lipulekh in Beijing’s high tables in 2015, who knows, perhaps China would have been more careful about stepping on Nepal’s sensitivities in the future.

Nepal saw 15 different prime ministers and 40 governments in the past six decades. But the issue of Kalapani remains unsolved and the country’s economic stagnation continues. This can be attributed among other things to the tendency of our leaders to seek personal favors from abroad, particularly India.

A poor and politically unstable Nepal has only one option out of this three-dimensional problem. That is to enhance its economic power by making its people the most wanted consumers of Indian and Chinese goods. “Above all a pragmatist” when dealing with stronger powers, as Machiavelli would advise. The most pragmatic way is to build a country of 30 million indispensable consumers. If we have to make a small investment for this, for instance in hosting important discussions and debates abroad, it will be well worth it.  

This article was first published in The Annapurna Express on May 13, 2020. 

Political stability no panacea for Nepal

Nepali people cast their votes overwhelmingly in favor of the communist coalition under KP Oli in the 2017 parliamentary elections. The hope was that with a stable, single-party government would come national development. But in a little under three years, their hope on the Oli government looks increasingly misplaced (even as efforts are underway to oust it). In a country that witnessed a change in government every nine months, three years is a long time for any regime.

In 2014, Zahid Hussain, the then lead economist at the World Bank, had highlighted the deep connection between economic development and political stability. However, he added, there are also politically stable autocracies and new and unstable democracies. Hussain wrote, “…political stability can be achieved through oppression or through having a political party in place that does not have to compete to be re-elected. Hence, political stability is a double-edged sword.”

In another paper, “Does Political Stability Accelerate Economic Growth in Tanzania?” published in 2016 in the Global Business Review, authors Abeid Ahmed Ramadhan, Zhi Hong Jian, Kyissima Kelvin Henry, and Yapatake Kossele posit that political stability normally plays an essential role in a country’s economic development. And yet, political stability often blocks change and stifles innovation and ingenuity. Political stability can take the form of complacency and stagnation that undermine competition. As the governing elite faces no effective opposition, it can suppress free voice, which in turn contributes to abuse of power and corruption.

The promulgation of new constitution in 2015 was considered a departure from Nepal’s chronic problem of political instability. People gave the communist coalition the mandate to rule. Yet look at what has happened to the country since.

Some African countries have been able to achieve high growth with stable governments and some are performing badly even with regime stability. Hence, for political stability to translate into economic gain, it should be accompanied by rule of law, strong institutions, an efficient bureaucracy, low corruption, and a favorable environment for investment. This distinction is critical in understanding why Nepal could not make an economic leapfrog even with a relatively stable government in place.

The Oli government’s credibility has steadily eroded. As public trust has been lost, efforts to topple the government are underway. Nepal will enter another cycle of political instability if this government goes away. Yet that may not be Nepal’s biggest problem. The bottom line is, as Hussain argues, not all forms of political stability are equally development-friendly; much depends on the extent to which stability translates into accountability and good-governance.

This article was first published in The Annapurna Express on May 2, 2020.