Private sector investments are important for Nepal to achieve a production-driven growth strategy

  19 min 12 sec to read
Private sector investments are important for Nepal to achieve a production-driven growth strategy

The partnership between Nepal and The World Bank Group can be traced back to 1963 when a team from the Washington, DC-based international development agency visited Nepal for the first time in November, 1963. The bank in 1971 opened its Nepal office in Kathmandu. Since then, the World Bank has been a major partner for Nepal providing the country with a range of support from financial assistance to knowledge services in areas including infrastructure development, human capacity building, policy formulation, and private sector growth. In early August of this year, the bank approved the new Country Partnership Framework (CPF), a five-year overarching development plan, in a bid to support Nepal in its smooth drive to the newly implemented federal system. 

In mid-November, Hartwig Schafer, the World Bank’s vice president for the South Asia Region, was in Nepal for his first ever visit to the country after his appointment to the post in July, 2018. Earlier, he worked as the Vice President for Global Themes, a unit of the World Bank working in areas of fragility, conflict and violence, gender, infrastructure, public-private partnership, guarantees, climate change finance and knowledge management. Schafer, who is a German national, has also served as the bank’s Vice President for Operations Policy and Country Services, Country Director for Djibouti, Egypt, Yemen, Malawi, Zambia and Zimbabwe, among other responsibilities. During his visit, he met with the Prime Minister, finance minister and top government officials and discussed Nepal’s new pathway for economic development and the role of the World Bank. In an interview with Sanjeev Sharma of New Business Age, Schafer talked about the bank’s support to Nepal, impediments to a sustained economic growth, challenges the country faces, among other issues. Excerpts:

It’s been 55 years since the partnership between Nepal and the World Bank started. What are the major accomplishments for Nepal from this development collaboration? 
Next year is the 50th anniversary for the first project of the World Bank in Nepal. Over the years, we have seen increasing per capita income of Nepal and poverty rates in the country coming down. In the last 10 years, the poverty rate has declined to 10 percent from 15 percent, which is an enormous achievement. However, there is still a population in Nepal living under USD 1 daily income.

What has been the role of the World Bank in supporting Nepal in its development initiatives?
The partnership between the World Bank and Nepal has been a very strong one. The ways of engagement of the two sides have changed over the last 50 years. Initially, we used to do just projects with a lot of focus on infrastructure. Over time, we have also engaged much more in human development sectors including education, health, social safety nets along with agriculture, water resources and infrastructure development including energy and transport sectors. The World Bank has 27 projects under implementation in Nepal with a total portfolio of about USD 3 billion. Our current project portfolio here is at an all-time high which is reflective of the importance of the partnership between us and Nepal. The World Bank is actually more than a bank as we not only provide financing but also technical assistance alongside analytical and policy support to our partner nations. 

This year we are providing USD 600-700 million in total which is a record high on an annual basis. When the projects are implemented successfully, we will provide more resources. We are very much motivated to support Nepal not only with the financial resources but also with the knowledge and solutions.  

The bank has committed time and again to support Nepal’s transition to federalism. But what concrete steps is it taking in order to do so? 
After the implementation of the new constitution and the federal structure, the challenge for Nepal is to make sure that the capacity is there at every part of the three levels of the federal structure to deliver to the people. For this, we are conducting a needs assessment by going to all the districts to look for the specific needs of each district in order to provide support for the capacity to deliver to the people. Overall, the federal structure brings the government much closer to the people and we believe this system of governance is a much better accountability mechanism to put the people in charge of their own destiny in terms of designing and implementing the projects that are a priority for them. 

How is the World Bank planning to provide capacity building support?
Having a worldwide experience, we seek to bring the expertise to Nepal. We want the global expertise adopted in the local context and to make sure that expectations of the people from the federal structure are being met. It will be done through lending, financial management operations because the fiscal element of federalism is important. It will also be done through providing knowledge services. We can also bring people from other countries who meet with their local counterparts to exchange their ideas and experiences. 

Nepal is finding it hard to practice the federal governance at present. How can the issues be addressed?
At the moment, Nepal is experiencing teething problems. This is something the people who are in charge of the administrations have never worked with. So, they need some time to learn. When we learn new traits, we need to learn from our mistakes. In fact, the new system of governance is a paradigm shift for Nepal. In a new system, we need to work with news ways. For instance, if the government approaches the e-governance structure, it will be a huge game changer. The federal system presents an opportunity for Nepal. But these are early days of federalism in the country and it needs to be consolidated and brought to full implementation. 

The federal system is all about bringing the government to the people. It is in fact a very effective accountability mechanism to allow people to determine the local priorities and oversee the implementation. There is no better accountability mechanism than by the people themselves. There will be teething problems; but as long as this is moving towards the right direction where you have all three levels of the government providing services in an effective way, this is a formula for success. 

Is the transition to federalism linked to your recently released Country Partnership Framework (CPF) for Nepal? Tell us a little about it.
The CPF for Nepal was built around the federal structure. A lot of the institution building we are going to undertake under the strategy will support the agenda of federalism. So the two concepts are going to reinforce each other. We believe that institution building is absolutely central for the development of Nepal. 

The World Bank in its latest Nepal Development Update has expressed some discontent over the ongoing policy reforms undertaken by the government. What factors are hindering the acceleration of policy reforms for higher economic growth? 
Nepali economy has been growing at the rate of around 6 percent. This growth is very much driven by remittances and consumption. To make this growth sustainable and robust, it is important for Nepal to have a production-driven growth strategy. In order to achieve that, there is a need for more private sector investments to create jobs for Nepalis. 

The main message of the latest Nepal Development Update is consistent with what the government is calling “maximising finance for development” and attracting private investors. The World Bank is ready to support Nepal to create an environment conducive to private investments. This means having business regulations and policy institutions to make it easy and transparent for private investors. 

What particular policy reform initiatives is the bank looking for?
We are looking into the revision of Companies Act, making procurement policies transparent and formulating effective IPR policies. The government is already working on these areas. Other areas we are looking in terms of policy reform initiatives include simplifying business registration process, making it easier to pay taxes, speeding up and accelerating the provision for utilities such as electricity and water for businesses, and facilitating availability of land for private investors. At the moment, these are the things local and international private investors are looking for. 

Last year, it took 39 payments and 353 hours for an investor to pay taxes in Nepal. The global average in paying taxes is 24 payments and 273 hours. This is just one of the indicators that investors respond to. When the rules are transparent, governance is strong and capacity is there in terms of strong institutions, investors will come. They still face the commercial risks, but some other risks and uncertainties need to be eliminated beforehand. And, it is totally up to the government. 

Besides the policy reform, what other things can be done to ensure a better business environment?
Having a functioning public-private-partnership (PPP) framework will also help in attracting investments.The framework is useful for sharing the risks between the private and public sectors. The World Bank has the experience, expertise and tools to train the people in the government in terms of implementing the PPP framework effectively. When done in right ways, PPP can result in big successes. There are many success stories of PPP from across the world. We also need to learn from the failures.

How is The World Bank providing its support to the Nepali private sector?
We have been supporting the private sector through the International Finance Corporation (IFC). IFC will now start equity investment in businesses here to comfort other investors. It will be pilot investments that other investors are likely to follow. We have seen this successfully happening in areas like renewable energy in several countries of the world. It will help Nepal to switch from remittance and consumption-driven growth to investment and production-driven growth strategy, making it feasible for Nepal to sustain an annual growth rate of 6-7 percent. 

Talking about hydropower development, Nepal has an enormous potential, in terms of achieving energy self-sufficiency and electricity export. The next area is agriculture which can be enhanced by value addition and increasing agricultural production. In this particular area, we have been helping many countries with the Sanitary and Phytosanitary (SPS) measures to access markets in Europe and elsewhere. Nepal needs to focus on producing high value cash crops as such agro produces have been very transformational economically for a number of countries across the world. 

Tourism is another major area of focus for Nepal. The country is known for its wider range of the tourism market. By combining all these opportunities with technology and innovations, Nepal can access markets far away. For this, the country needs reliable road transport and air connectivity, electricity supply and an efficient services sector. Similarly, reliable broadband internet connectivity has also become a necessity for businesses nowadays. The government has been working towards building the necessary infrastructure which will make Nepal an attractive destination for investment. 

How can Nepal cash in on the service export opportunities?
Globally, the services sector has become a major exportable industry. We have seen many countries benefitting from the export of services. The increasing wage and labour costs in many advanced countries present an advantage for countries like Nepal in service trade. This is why investing in skill enhancement of Nepali youths has become so important. We have proof that Nepalis have skills because that dexterity is sought after in the Middle East and other markets. What does it takes to keep those skills at home- providing employment opportunities to the people is a challenge for the government.

Nepal has been receiving financial and other support from the World Bank in power sector development. How will the bank continue its assistance in Nepal’s energy sector reform initiatives?
We are looking at some of our investments concretely. Besides, we are also ready to assist Nepal in other areas of power sector development such as formulating energy regulations and tariff policies.For the export of power, we are also doing quite a bit to enhance the regional integration in South Asia. While being the fastest growing region, South Asia is among the world’s least connected regions. It has made the costs of connectivity, whether it is transport, electricity or broadband, in the region to be enormously high. We are looking at the regional integration sector-by-sector. 

There may be opportunities for some countries in shared waterways, while some countries might have surplus energy to trade. We have seen this happen in East Asia where many countries are engaged in trading hydroelectricity. We are confident that the Bhutan, Bangladesh, India and Nepal (BBIN) Initiative will move ahead for a meaningful integration of the South Asia region. The World Bank is currently working with the energy ministries in a number of South Asian countries to see how we can make arrangements for energy trade in the region. 

How do you view the government’s engagement with the country’s private sector?
The finance minister Dr Yubaraj Khatiwada has mentioned several times that the government recognises the need of the private sector for the country’s economic development. It is very important that the government sees the private sector as a partner in development. The government has also said that it is ready to undertake policy and procedural reforms and build necessary institutions. It is a very good baseline to work from. Now it is important to get the agenda of policy and procedural reform through the parliament and make sure that they are actually being implemented. 

Private investments are also necessary to conserve the scarce public sector resources. The resources need to go to the areas such as health, education, vocational training and human capital development where the private sector is not engaged in. 

Dr Khatiwada has also talked about organising the investment summit. This will be a huge signal that Nepal is open for business. This would entail finalising some of the investment deals that are in the pipeline and implementing some of the policy changes to show to investors that this is a different Nepal from the past.The World Bank will do everything it can to support the capacity development that needs to go hand in hand with investments. It is important that people in the ministerial levels and the bureaucracy, who deal with investors on a day-to-day basis, have the same mindset that private investment is beneficial for economic growth and employment generation in Nepal. 

What do you think the government specifically needs to do in order to achieve the target of elevating the country’s status to a middle-income nation by 2030?
The target is achievable. There are all prerequisites present in Nepal to upgrade its status to middle-income nation by 2030. But it should be done by fully leveraging the private sector. We have seen many countries upgrading their status by sustaining 6-7 percent in real GDP growth for several years in a row. 

What new challenges from outside the country do you think have emerged for Nepal?
An economy like Nepal which is so reliant on remittances and consumption is vulnerable to external events. For instance, there could be oil price and trade shocks that could impact on the remittance inflow and put pressure on the macroeconomic stability of the country. This is why it has become even more important to have a production-driven growth strategy. Currently, the global economic growth stands at 3 percent.The growth rate of the South Asia region is close to 7 percent. At the moment, we also see high ratios of debt to GDP in many countries and the levels of indebtedness could cause some economic shocks internationally. Having a diverse economy and production-oriented growth strategy could be the best ways to minimise the risks.   

Nepal slid five spots on the World Bank’s ‘Doing Business 2019.’ Why is Nepal unable to move ahead in this ranking, will it ever develop in this regard?
It is not a question of moving ahead in an index like the Doing Business one. The question is whether you move ahead faster than others, or others move faster than you. Actually, we measure this in two ways. One is the Distance to Frontier benchmarking to find out the coefficients. Then the countries are ranked based on the coefficients. If a country doesn’t change anything and other nations behind it move faster, the country’s rank goes down. Over the years, we have seen Nepal’s position fluctuating in the Doing Business index and always being around the 100 rank among the countries. 

As Nepal is facing teething issues, we can hope the problems will be corrected next year and we will see improvements in Nepal’s rank in the index. I have spoken to the finance minister Dr Khatiwada and informed him that we will be sending a team to Nepal to identify the key bottlenecks for improving Nepal’s position in the index. It is important because the index is a very good benchmark indicator for investors. Every year, the countries are rated according to the number of policy reform they undertake. I am certain the teams of the government and The World Bank can identify at least a dozen policies that we could work on to revise over a course of the year. Then we will see improvements. It will be the right approach because the whole purpose of the indicators in the Doing Business index is to initiate discussions and find out the things we need to change, what it takes and is it possible or not. Then with the measures, low hanging fruits are picked first which will have a huge impact in terms of receiving investments. Some of the examples that come to my mind in this regard are making it easier to get building permits, creating a one-stop service centre for investors and introducing the e-filing of taxes. 

The deepening trade war between the United States and China has created uncertainty in the global economy. What impact can the trade dispute have on the South Asian region? 
We are closely looking into the trade issues between the two countries. Basically, the current global trend in terms of raising the trade barriers will have two outcomes. One, products can become more expensive in the global market. Second, it could divert the flow of international trade. Ironically, if two large economies are engaged in trade disputes, it can actually benefit third countries like Nepal which could be in an advantageous position due to increased demand of products. It is because suddenly Nepal’s products could be more competitive in the international market. 

This is where I am thinking about Nepal’s agro products, and so on. This would be a country specific analysis because the trade pattern of each country is different from the other. Nevertheless, this scenario is unlikely to be sustainable because such a situation can cause distortions in global trade and misallocation of resources.

In a worst case scenario if the trade dispute adversely affects a small economy like Nepal, how can the country shield itself in such a situation?
This is why Nepal needs to become a diverse economy. My concrete recommendation is let’s work together to reduce reliance on remittances and create a diverse economic base by developing key sectors including agriculture, tourism and energy so that if one sector takes a hit, the others can pick up and provide a buffer from the impacts. This is the best recipe which has always worked for highly diverse economies to withstand economic shocks. For instance, we have seen this several times during the oil crises in the past. When the oil exports were hit, some countries diversified from oil and gas into sectors like technology. The growth strategy for Nepal is to tap all potentials in terms of its services and natural endowments. 

Many economists have been projecting that the global economy is approaching the next downturn in a few years time. How is the World Bank watching the emerging economic cycle?
Together with the International Monetary Fund (IMF), we are closely watching the global economy. This year’s global growth has been projected at around 3 percent but we are also observing that emerging economies are recovering and performing better than the average. Particularly, the South Asia region’s growth is at 6.9 percent which may grow faster the next year largely because of the strong Indian economy. Overall, emerging economies are weathering economic storms better, which is important for countries like Nepal. It is because Nepal has been receiving a lot of visitors and tourists from big emerging economies around it. Similarly, we will see how the potential debt overhang of the countries will impact the global economic growth. 

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