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. 

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. 

Nepal on Precipice of Poverty

This article was first published in The Annapurna Express. 

Covid-19 has made the world pause. Nepalis stayed home on the eve of New Year 2077 and started the first morning of the new year with no idea of when they would get back to normal life. New cases of the novel coronavirus continue to appear, adding to the widespread fear. Meanwhile, the government is taking ad hoc measures instead of coming up with a firm strategy to support the poor and sustain the national economy.

The Ministry of Finance, which is supposed to come forward aggressively with plans that can be adjusted each day depending on the scenario, doesn’t seem to have a clue of what’s happening in the economy, let alone be bothered of the impending poverty and privation. Finance Minister Dr. Yubaraj Khatiwada, who seems intent on sidelining private sector and entrepreneurship, doesn’t know what holds the economy together. If he did, the situation today would be much different.

His statements before the World Bank Group Nepal Office representatives exemplified the stupidity, insensitivity, and recklessness of his leadership at this time of crisis. He talked about vague issues that had nothing to do with fighting the broad economic impact of the pandemic.

Likewise, Prime Minister KP Sharma Oli addressed the nation last week. But he too had no message of hope for the panicked public. Rather he spent his time explaining why it’s futile to question the procurement process of health materials from China. Estimates show that globally, around 600 million people will be pushed into poverty and that certainly includes people from Nepal. Those at the bottom of the income and wealth ladder have harder days ahead. But the government is silent on what can be done to help them survive this ‘man-made crisis’.

A recent World Bank update shows South Asia sub-region’s growth falling to between 1.8 and 2.8 percent in 2020, down from 6.3 percent projected just six months ago. Although Nepal’s share in sub-regional GDP is minimal, the country’s economic growth is expected to significant slow down in 2020.

The national economy, including the agriculture sector, has come to a halt. There is no preparation to ensure availability of agriculture inputs as planation time closes in. In the event of the country’s inability to control the crisis in agriculture, the economy will be in a free-fall, driving vast numbers of farmers into absolute poverty. The government doesn’t seem to be paying attention to this critical issue.

There will be severe food insecurity in the country due to supply shock. The World Bank has warned that a rapid spread of the virus could reverse the recent positive trends in poverty and result in high levels of food insecurity and widespread malnutrition among children.

Investment, both domestic and foreign, will fall, leading to lower job creation. A large fiscal deficit will be added to public debt, directly affecting Nepal’s fiscal sustainability. Daily wage earners will be hit the hardest. Remittances will significantly decrease, impacting both forex reserve and the livelihood of those who rely on it. The informal sector, which makes up nearly 70 percent of the national economy according to same estimates, has stopped functioning.

Against this bleak backdrop, the government seems the least concerned and ill prepared to handle the corona fallout. Worryingly, the Ministry of Finance does not seem to have a clue about how to move ahead. It is not having necessary dialogues with development partners, it lacks detailed analysis and insights on what’s happening, and it has failed to undertake a rapid assessment of the economic impact of Covid-19.

Dr. Khatiwada can always argue that even the best of government plans failed in tackling the virus, just as has happened in far more developed countries. But this will be a lame excuse even as the economy teeters on the edge. Let’s hope people won’t have to start dying for the government to come to its senses.

Full speed ahead

This article was first published in The Kathmandu Post, Dec 11, 2017. 

The 10th South Asia Economic Summit held in Kathmandu last month aroused hopes and aspirations as it discussed regional cooperation on many fronts, from promoting trade and investment to mitigating the risks of climate change. The National Planning Commission (NPC) was directly involved, along with Kathmandu-based regional think tank South Asia Watch on Trade, Economics and Environment (Sawtee). The main message from the summit was that, while the pillars of prosperity are shifting towards Asia Pacific from the West, South Asia has an important role to play as a dynamic and open society with a huge population dividend. 

An enabling environment

The government scrapped a $2.5 billion deal with China Gezhouba Group Corporation to build the 1,200 MW Budhi Gandaki Hydroelectric Project, which would be the largest in the country. The decision taken just before the scheduled parliamentary and provincial elections has spread the wrong message to the public. It has also generated conspiracy theories about the ‘relations’ of political parties with China and India. The country’s credibility has eroded as a result. Nepal needs foreign investment, and it can come from any country. We don’t have to worry whether it’s Chinese or Indian money as long as it helps to develop large-scale infrastructure. 

Nepal will require an estimated $15 billion for infrastructure development within the next few years, and another $20 billion for urban development. Multilateral development banks such as the World Bank, Asian Development Bank (ADB) and newly established Asian Infrastructure Investment Bank (AIIB) are funnelling new investments into Nepal, but they are not enough. The country now needs something more—a consistent inflow of private investment in the services and manufacturing sectors. Services and manufacturing can attract investment from domestic and foreign private parties only if the government ensures an enabling environment. This means quality connectivity infrastructure, policy clarity and consistency regardless of changes of government. 

While the second condition could be fulfilled by a stable government looking towards state prosperity, it is quite difficult to see how the first condition of quality connectivity infrastructure will be fulfilled. The question is about the massive funding needed to build connectivity infrastructure. At the same time, issues of governance and the expenditure capacity of our institutions and the technical capacity of the human resources remain.

The state mechanism is going to be bulkier and more expensive with the change from the existing unitary system to federalisation. The Finance Ministry has estimated that it will cost around Rs820 billion to establish office buildings and facilities for the local and provincial governments. Considering the huge amount of money needed, managing funding for municipal and scaled-up provincial level infrastructure is another question. 

It is not practical to expect local and provincial governments to secure funding for infrastructure development at this early stage of federalism. The central government has to support local and provincial governments so they are institutionally capable to function as soon as possible. The central government has to adopt policies that create an enabling environment for foreign investors to jump in to develop infrastructure projects. This will allow the government to focus on the core issues of institutionalising the achievements made so far in terms of federalising the country. The process has been more about political engineering so far, but now it will also require finance and technical capacity.

House in order

The country’s needs are beyond measure, and we have limited resources at our disposal. Nepal has to look towards both the south and north for support, not just financial support but also political support through which both China and India can help Nepal emerge from transition successfully. 

So, we have to be clear about what we want, and design our foreign policies accordingly. The first and foremost priority of our foreign policy at present should be attracting more foreign investment. Let’s revisit Deng Xiaoping’s time to get some nuggets of wisdom. In the early 1970s, the Nixon administration got closer to China to find potential ways to contain the influence of the former Soviet Union. This was phrased as America using the ‘China Card’ as a weapon against the Soviet Union. The then leader of China, Deng Xiaoping, was asked if the US was using the ‘China Card’; and his response was quite an answer to the world. He said that China wouldn’t be on the table but at the table. He continued saying that China didn’t want to be a card but a player. 

Nepal has to abandon this ‘card’ mentality. Nepal can neither be a card nor a player at the moment. It has to come out of the ground of regional geopolitics and get its house in order first. The challenges ahead are enormous, and we have to be serious. 

Beyond the growth figures

This article was first published in The Kathmandu Post, May 3, 2017. 

The government has projected that the economy would grow by almost 6.5 percent in fiscal year 2016-17. There were similar higher growth projections from different development agencies. For example, the Asian Development Bank (ADB) has predicted that the growth rate would be somewhere between 5.2 to 6.2 percent in fiscal year 2016-17. The International Monetary Fund (IMF) has stated that the economy would grow by 5.5 percent in its 2017 report. These figures are encouraging for a country that has seen an average growth rate of only 4 percent in the last two decades. 

But the projected higher growth rate is not led by infrastructure development. So the higher growth rate won’t be reflected significantly in people’s lives through job creation and income generation. Since the growth rate is mostly due to timely monsoon and ballooning import of consumer goods, there is a looming fear that it may not be durable. 

The government has identified a total of 21 national priority projects that have direct links with urban, semi-urban and rural populations. Right now, the most important aspect of development is building infrastructure that complements urban life and facilitates rural-urban migration. But the Development Committee under the Legislature-Parliament has concluded that none of the national pride projects would be completed in time. Only four out of the 21 pride projects have completed more than 50 percent of the work. Underlining the importance of fast-paced development of national pride projects, the Development Committee has directed the government to expedite work on these 21 projects.

Urbanisation and migration

Nepal’s average urban population density is 1,381 per square kilometre, whereas the total population density is 180 per square kilometre, according to the 2011 census by the Central Bureau of Statistics (CBS). Increasing urbanisation demands quick construction of infrastructure so that migration and urbanisation are in sync. Kathmandu, Pokhara, other medium-sized cities and some small towns along different highways are expanding, but severely lack adequate urban facilities such as education, health, drinking water, sanitation, public transport, electricity supply and, most importantly, land zoning. 

Remittance has been the mainstay of Nepal’s economy for many years. The official estimation is that the ratio of remittance to GDP is 32.1 percent in fiscal year 2015-16. Income from remittance has registered a 4 percent growth in fiscal year 2015-16, which is reflected in the form of semi-urbanisation in different parts of the country. If the government works to accelerate the pace of infrastructure projects, emerging semi-urban clusters could add value to the overall economic development more efficiently.

Infrastructure development connects rural population to the nation’s economic development, facilitating better access to health, education and advanced means of doing agricultural activities. In such a scenario, youths would find job opportunities in Nepal rather than having to migrate abroad. Evidently, development of high-end infrastructure projects would create job opportunities for all kinds of labourers—skilled, semi-skilled and unskilled. In such a fast-paced development process, Nepal could utilise its own working population to build a prosperous nation.

Infrastructure-led capital spending 

Capital expenditure in Nepal has consistently been low, creating strong barriers to economic development. With less than three months remaining in the fiscal year, the government’s capital spending stands at less than 30 percent of the total capital budget allocation of Rs312 billion for the current fiscal year. The government has to expedite the development of infrastructure projects so that money travels through all the veins of state apparatus and also through the private sector. This would employ a large number of working-age population and boost capital spending. However, there is no magic wand to increase capital spending through infrastructure development. The government has to design, process and implement various infrastructure projects connecting different parts of the country through road, rail and air. 

In addition, health and education infrastructures in Nepal are way below 

standards. For example, a visit to the library of Tribhuvan University in Kirtipur shows how unmanaged and ugly it is. Students studying there do not even get basic amenities such as proper toilets and drinking-water taps. This applies to any public education institution in Nepal. Needless to say, availability of basic amenities can be instrumental in enhancing the quality of education. The government has to spend on improving the quality of health and education infrastructures.

The economic growth rate figures should be directly reflected in citizen’s lives. This happens only if the government actually develops what is required and not just counts the numbers to project an inflated sense of development for public consumption. The projected economic growth rate for the current fiscal year comes mainly from the availability of farm inputs such as seeds and chemical fertilisers, timely monsoon, imports and somewhat increased levels of post-earthquake reconstruction activities. But these are not a result of planned development and expenditure to generate jobs and wealth. There has been no substantial progress in addressing the pressing needs of the economy that could uplift people’s livelihood and lay the foundation to sustain the growth rate in the coming years.

Trickier future path

McKinsey & Company, a management consulting firm, concludes in its Infrastructure Financing Report that inadequate infrastructure—and the resulting congestion, power outages and lack of access to safe water and roads—is a global concern. Worryingly, the pace of urbanisation in Nepal is the lowest in South Asia. As Nepal is entering a new kind of administrative structuring, large-scale infrastructure development might be mired in provincial disputes in the future. The government has to ensure that the national priority projects do not fall victim to bureaucratic inefficiency, provincial disputes and political bickering. As McKinsey & Company highlights, Nepal will face haphazard urbanisation in the near future if the government does not address the issue right now. For instance, the more time the government takes, the more difficult it will be to acquire land for project development. 

Rabindra Adhikari, chairman of the Development Committee under the Legislature-Parliament, has been vocal about reminding the government time and again to complete at least the 21 priority projects on time so that the country’s growth figures will reflect improvements in people’s lives. The more the government delays developing these infrastructures, the harder it will be in the future.

Purchasing power

This article was first published in The Kathmandu Post, Dec 16, 2016

Potential power exporters in Nepal have received a jolt from the new Guidelines on Cross-Border Trade of Electricity released last week by the Indian government. The policy has limited open access to the Indian market for Nepali power producers and foreign investors other than those from India. India’s new policy framework affects Nepal’s aspiration to attain double-digit economic growth through hydropower. The government has planned to develop 10,000 MW including export-oriented and domestic-oriented projects in the next 10 years to fuel economic growth. The question now is whether Nepal can fulfil that aim by developing only domestic-oriented hydropower projects. Yes, it can do so with the right rebalancing policy response to Indian interests in water resources in the region. 

India has highlighted that cross-border energy trade involves issues of strategic, national and economic importance in the new guidelines. This is a manifestation of India’s strategic interests in water resources in the region. Blocking unlimited and open access to the Indian power market serves India’s goal of having a stronger say in the utilisation of water resources in the region. Nepali power producers and investors from third countries will be hesitant to invest in Nepal’s hydropower sector due to limited markets. This is what the Nepal government has to focus on. 

The new guidelines are against the spirit of the power trade agreement (PTA) signed between Nepal and India in 2015 following Indian Prime Minister Narendra Modi’s visit to Nepal in 2014. The PTA was signed establishing a formidable ground that Nepal would have access to the Indian power market regardless of the nature of the investment in power generation. But now, the guidelines have not only eroded the prospects of hydropower development in Nepal but also hit the spirit of regional power trade in South Asia. 

Core of Nepal-India relations

Nepal’s economy is heavily dependent on India from the energy security perspective, and this will become even more complex in the coming days. Hence, the guiding principles of hydropower development in Nepal should be, one, ensuring national energy security and, two, shifting from dependence to independence from the Indian economy. Investment in hydropower development has a direct relationship with Nepal’s resource utilisation and national security. The state should help Nepali investors invest in hydropower development regardless of access to the Indian market. The Nepali private sector has to work in tandem with the government to invest in the energy sector and expand the domestic power market. 

The core of Nepal-India relations is water resources. India is interested in Nepal’s water resources. This is not wrong, but what is crucial here is whether Nepal’s leaders will be able to protect the country’s strategic interests while serving Indian interests. India desperately needs water to irrigate vast farmlands in Uttar Pradesh state. The new guidelines complement India’s plan to use water from Nepal for irrigation purposes eventually. Nepal does not win by keeping Indian lands dry, but it will lose if it fails to identify what strategic direction it should take in river-basin management and utilisation of water resources. 

Domestic power market

Nepal’s annual peak power demand is estimated at 1,385.3 MW. The Nepal Electricity Authority (NEA) has predicted that the average annual electricity demand will grow by 9 percent and peak demand by 8.85 percent. Currently, the supply of electricity from the integrated national grid amounts to 855 MW, and the shortfall is met by imports from India. Nepal’s economy has faced a power crisis since 2006. It has crippled the country’s industrial growth and slowed the ongoing shift from traditional to commercial sources of energy. In an environment where even the existing industries are not running at full capacity because of power shortages, there is no incentive for new industries to enter the market. Industrial growth remained at an average of 2.1 percent in the last one decade thanks to the energy crisis. There are signs of structural changes in Nepal’s economy—the contribution of the industrial sector is declining while that of the service sector is increasing. The service sector grew at an average of 5 percent in the last decade, but it also suffers from a lack of adequate power.

A sizeable portion of the rural population has not been able to enjoy the benefits of electricity. Only 76.3 percent of the population has access to electricity. Rural households have been denied opportunities to replace traditional fuels for lighting, better schooling, TV, radio and internet, improved health care and access to information, knowledge and learning. They cannot start home businesses or micro enterprises like milling and drying due to the lack of electricity. 

Against this backdrop, there is a potential market for the electricity that is expected to be produced in Nepal. There is, therefore, a strong economic rationale as well as imperative for investing in the power sector to remove the most critical barrier to economic growth and job creation. Supplying adequate and reliable electricity is a national priority and a growth driver that supports the realisation of the national goals of Vision 2030 including Sustainable Development 

Goals (SDGs).

Pathway for power sector

The pathway would entail basin-wide development of hydropower generation and transmission in a planned way. The investment portfolio has to be an optimal mix of run-of-the-river and storage projects; domestic-oriented projects; hydropower and alternate energy projects; and generation, transmission and distribution projects. But accelerated power development would require a series of reforms and administrative streamlining particularly in the areas of (i) Land acquisition, resettlement and rehabilitation policy, (ii) Environmental (forest) clearance and disaster resilience, (iii) Benefit sharing and local participation, (iv) Project bidding, licensing, project development agreement (PDA) and PDA negotiation framework, (v) Project financing agreement, project financing regulations and sovereign guarantee policy, (vi) PPA, power tariff, wheeling charge and tariff regulation and (vii) Credit worthiness of the NEA, its unbundling, power trading and power market development. 

As massive investments will be required to implement the accelerated programme of power development, the investment climate and ease of doing business need to be made favourable and consistent with global business practices to attract sufficient foreign direct investment (FDI) inflows, public resources need to be leveraged to build public-private partnership and 

financial sector development and reform need to be expedited to mobilise internal resources. The immediate priority in the sector, however, is to remove transmission bottlenecks, reduce system losses and place power trading with India by 

rebalancing the policy framework, which may require cross-country harmonisation of relevant systems and practices keeping in mind its new approach to cross-border electricity trade.