Continued Government Spending must to Maintain Economic Momentum

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Continued Government Spending must to Maintain Economic Momentum

Rajesh Kumar Agrawal is the President of the Confederation of Nepalese Industries (CNI). He has been associated with the CNI for over one and half decades. Born in Kathmandu, Agrawal has been actively involved in Nepal's industrial sector since the 1990s. He is the Executive Director at RMC Group, a business conglomerate engaged in the manufacturing of steel, cement, food, and other products. In an interview with Madan Lamsal of New Business Age, he discussed a wide range of issues including the recent arrests of business people, the upcoming budget, and the broader economic landscape. Excerpts:

We have seen multiple arrests of bankers and business people over the past two months. The private sector has vehemently opposed these arrests, cautioning that they could harm the business environment and undermine confidence. What is your take on the government's action targeting the private sector?

There is no doubt that a thorough investigation must be conducted if business people are suspected of engaging in criminal activities. However, the current debate revolves around whether it is prudent to promptly apprehend industrialists who have diligently paid taxes, provided employment opportunities to numerous individuals, and contributed significantly to the business landscape. There is a debate regarding the timing of a person's detention: whether it should occur after the completion of the case as per a court order, or beforehand. The nature of the offence, whether criminal or civil, should be carefully considered before any arrest decision is made. The primary consideration for arrest could be justified if there are concerns about the individual in question tampering with evidence. It is unreasonable to detain an industrialist, who has employed thousands of people, solely for investigative purposes. If they are proven innocent, who will compensate for the irreparable damage to their reputation? We are not advocating against investigations. We are only opposing the direct arrest of business people without a thorough and proper investigation. The government must consider these matters carefully.

Do you believe that the Central Investigation Bureau (CIB) of Nepal Police has been granted more authority than necessary?

I may not be fully informed about the legal authority granted to the CIB. However, my understanding is that the CIB will only arrest someone after obtaining an arrest warrant from the court. Since business people typically have significant investments and property within the country, they are unlikely to flee. Authorities must recognise this aspect and distinguish between criminal and civil offences. In our view, arrest should only occur if someone evades a summons from the investigative agencies to record statements.

Looking at comments on social media, there seems to be a public opinion supporting the legal action. What could be the reasons behind such widespread support?

Envy towards wealthy and affluent individuals is pervasive in our society which often draws critical comments on social media. Unfortunately, there is a lack of tradition to respect entrepreneurs and some people are perpetuating a narrative that portrays business people negatively. This perception will persist until the contributions made by entrepreneurs to the country's economy are duly recognised. Therefore, efforts to improve the image of entrepreneurs are essential. Some business people may have engaged in unethical practices. This does not mean that the positive contributions of the private sector as a whole should go unnoticed.

There seems to be a sense of pessimism among members of the business community regarding the current economic state. What are your insights on this?

Positive indicators as per the recent report of the Nepal Rastra Bank (NRB) such as rising foreign exchange reserves and remittance inflows signal improvement in Nepal's external sector. However, our domestic sector is not showing signs of improvement. The government data shows imports during the first eight months of the current fiscal year were down compared to the same period of the previous fiscal year. This includes imports across various sectors, from daily consumables to industrial raw materials. Furthermore, the slow growth of government revenue speaks volumes about our economic challenges. Although government revenue has increased by 10% over the first eight months of the current fiscal year, it needs to be viewed in the context of a 30% decline during the same period in the previous fiscal year. This suggests that the recent increase may not be sufficient to offset the previous downturn, indicating ongoing economic strain.

Although government revenue has increased by 10% over the first eight months of the current fiscal year, it needs to be viewed in the context of a 30% decline during the same period in the previous fiscal year.

Likewise, the quantity of diesel and petrol imports has decreased, while there has also been a reduction in industrial electricity consumption. These indicators suggest that industries are operating at only 30-50% capacity. Even pharmaceutical industries are seeing reduced production with hospitals also reporting decreased turnover. These factors paint a picture of a troubled economy even though there are positive trends in certain sectors.

In your view, which sectors are currently thriving, and which ones are facing challenges?

The only sectors currently faring well, in my opinion, are remittance and the IT sector, with notable potential for further growth in IT. However, the absence of official data tracking has overshadowed these positive developments in the IT sector. Nepal's IT sector is engaged in software development projects for foreign countries. Over the past two years, Nepal Rastra Bank implemented a policy aimed at curbing inflation by increasing interest rates and reducing demand. While this policy did succeed in decreasing demand, the downward trend in demand has persisted. Despite the increase in interest rates, inflation and prices have continued to rise. Unfortunately, while interest rates rose, people's incomes did not follow suit which resulted in diminished spending power. This decline in spending power has led to reduced consumption among consumers. While some may challenge this assertion, a decrease in spending power correlates with decreased consumption. The consequences extend beyond consumer behaviour. It impacts even critical services such as urgent surgeries in hospitals which have been delayed due to reduced spending capacity. Consequently, this downturn in consumption has also affected the income of hospitals. Our focus was primarily on managing inflation and bolstering foreign exchange reserves, while maintaining stability in the banking sector. However, with the emergence of broader economic challenges, issues have begun surfacing within the banking sector as well.

To what extent do you see the possibility of economic improvement?

Improvement is not just desirable; it is imperative at this juncture. The policies implemented by the government have effectively managed inflation, with Nepal Rastra Bank demonstrating some flexibility in its policies. However, despite these measures, the revenue collection has remained low, prompting a policy shift towards expense control. In such circumstances, governments worldwide tend to increase expenditure to stimulate the economy. This includes injecting money into the hands of the people through different methods. The government presently is financing its current expenditure through borrowing, while also relying on borrowing for capital expenditure.

During the COVID pandemic, numerous countries provided financial aid to their citizens. The central bank also facilitated disbursement of concessional loans in Nepal which increased money flow into the market and sustained us through the crisis. In the current scenario, continued government spending, even through borrowing, is necessary to maintain economic momentum.

What other steps do you believe are necessary to bring the economy on track? 

The cooperative sector in the country is currently facing significant challenges and requires careful attention from the government for resolution. Many people have entrusted their savings to cooperatives lured by higher interest rates. Approximately 6 million depositors have parked savings worth around Rs 700 billion in different cooperatives. These funds are now trapped within the cooperatives due to various reasons stemming primarily from imprudent practices in saving and credit cooperatives. The government must address this issue with urgency and implement measures to rectify the situation.

The government is nearing the finalisation of the next five-year plan. What should be the key priorities and focal points of the upcoming plan to ensure efficient governance and sustainable development?

The foremost priority should be investing in infrastructure development like bridges, roads and transportation networks. Additionally, significant investment in large-scale projects such as international airports is crucial. However, it is essential to develop a comprehensive plan for the efficient operation of these airports and integrate them directly with the tourism sector. There are concerns regarding the commercial viability of two international airports built recently with loan funding. Introducing public-private partnerships (PPP) to operate these airports, as proposed by the government, could potentially address this issue. Involving the private sector in airport operations could lead to better marketing and management strategies which enhances their commercial viability.

Approximately 6 million depositors have parked savings worth around Rs 700 billion in different cooperatives. These funds are now trapped within the cooperatives due to various reasons stemming primarily from imprudent practices in saving and credit cooperatives.

What is your opinion on the proposal to allow the Adani Group of India to operate the international airports on a PPP model?

We have also heard from the media that the Adani Group has expressed interest in operating and constructing airports in Nepal. In my view, even nationalists have come to recognise the necessity for the country's development with private sector involvement. While I am not specifically endorsing the Adani Group, handing over airport operations to a company with experience in airport management in India could be a wise move. However, it is crucial to maintain a balance and to prevent any monopoly. Opening up the bidding process internationally could attract diverse competitors. Nationalistic sentiments should not impede our progress. Over the past five-seven years, Nepal's hydropower sector has seen rapid growth, even reaching a stage of electricity export. Indian companies investing in Nepal's hydropower have contributed to expanding our electricity market in India which is a positive development.

Considering the unplanned nature of infrastructure spending in the country, where roads and bridges are being constructed without proper planning, and local governments are competing to build view towers, do you believe these expenditures truly contribute to meaningful infrastructure development?

This lack of planning highlights the necessity for establishing an Infrastructure Development Authority. Development endeavours should be based on identified needs, ensuring that resources are allocated effectively. Building a bridge without considering accessibility renders it useless and will be a waste of resources. To support the burgeoning IT sector, collaboration with foreign companies to build an IT park could be beneficial. Additionally, investing in the education sector could dissuade students from seeking education abroad. Health tourism presents another avenue for development, while targeted investments in competitive crops could boost our farm exports.

Furthermore, efforts to expand the construction industry and increase exports by manufacturing our key imports within the country could help in our economic development. We have seen how changes in government policies have enabled self-sufficiency in cement production and boosted cement exports. The ‘Make in Nepal’ campaign initiated by the Confederation of Nepali Industries (CNI), which is operational for the past three years, distinguishes between ‘Made in Nepal’ and ‘Make in Nepal’. The former signifies products manufactured within Nepal, while the latter emphasises local production to replace imports.

How effective has been the 'Make in Nepal' campaign? 

The government has also embraced our campaign. It is being spearheaded by the Ministry of Industry, Commerce and Supplies. The CNI initially launched the 'Make in Nepal' initiative with the ambitious goal of establishing over a thousand new industries and elevating the industrial sector's contribution to 26% of the gross domestic product by 2030. It is a long-term endeavour built upon public-private collaboration aimed at fostering a national environment conducive to domestic industrial growth, bolstering the competitiveness of local enterprises, and cultivating a stronger demand for Nepali products and services. Over the past three years, significant strides have been made in raising awareness about the importance of local production in Nepal.

What steps are essential to draw foreign direct investment (FDI) to Nepal? How do you think the upcoming investment summit can bring more foreign investments?

The government is organising the 2024 Emerging Nepal Investment Summit in April to attract international investors to Nepal. However, it is important to recognise that merely hosting such an event does not guarantee immediate investment. Attracting investment is a complex and long-term process. The summit provides a platform to demonstrate Nepal's preparedness for investment by showcasing available facilities and the country's potential. It is essential to effectively project Nepal's favourable investment conditions to international investors. The summit will serve as a tool to communicate this message effectively. Furthermore, the summit is not solely focused on attracting foreign investment. It also seeks to cultivate an environment conducive to investment for both domestic and international stakeholders, while also fostering collaboration and growth opportunities.

The CNI initially launched the 'Make in Nepal' initiative with the ambitious goal of establishing over a thousand new industries and elevating the industrial sector's contribution to 26% of the gross domestic product by 2030.

The government has stated that it is working on reforming the budget-making process by initiating pre-budget discussions three months before its presentation in Parliament. Do you believe this initiative will significantly enhance capital expenditure? 

While the government's initiative is a positive step forward, it is important to first address the underlying issues to ensure its effectiveness. The primary concern lies in increasing our capital expenditure. Looking ahead to the upcoming budget, the government must bring programs that can be executed. Likewise, it needs to create an environment to expedite capital spending, particularly in the infrastructure sector. One of the systemic challenges we face is the lengthy procurement process. It takes as much as six months to award a project after a tender is opened. This should be addressed. Additionally, our procurement laws prioritise the lowest bidder which often leads to unrealistic project cost estimates. This undermines project feasibility and execution. Moreover, the previous government brought a program named Tourism Decade. It needs to be implemented more effectively. Incentives should also be provided to the IT and agriculture sectors to stimulate growth and innovation.

How are you presently ensuring business sustainability? 

No sector is shielded from the repercussions of globalisation on our economy. We need more than just individual industry strategies to address or mitigate these impacts. In the present circumstances, the onus lies on the government to take decisive action. As industrialists, we are eagerly awaiting government policies that can stimulate the economy and facilitate growth. Currently, industrial units are compelled to cut costs and navigate through challenging times. Capacity utilisation has plummeted to approximately 30-40%. Without an uptick in demand, industrialists are limited in their ability to make substantial changes. We are essentially in a survival mode, cutting our expenses to weather the storm.

How do you perceive the impact of infrastructure development projects on the industrial landscape? What role can the private sector play in their implementation?

The role of the private sector, I believe, will vary depending on the nature of the project. There are lingering uncertainties regarding the extent to which the private sector can participate, particularly in projects related to constructing highways or expressways. Nepal still lacks a system like the Viability Gap Funding (VGF) which could have encouraged private sector involvement. This absence of VGF regulations has deterred private sector interest in constructing expressways. About a decade ago, an Indian company expressed interest in building an expressway but withdrew due to concerns over the absence of viability gap funding regulations in Nepal. In the absence of VGF regulations, the responsibility of investing in large infrastructure projects, including expressways, falls primarily on the government or multilateral agencies. It will continue to remain the government's responsibility until VGF regulations are established.

How are Nepali businesses addressing climate challenges? What measures are CNI taking to encourage its members to embrace climate change adaptation?

Since climate change adaptation is still a relatively novel concept in Nepal, there is limited awareness among industrialists regarding climate challenges. The consequences of climate-induced infrastructure damage are of grave concern, as they heighten credit and insurance risks for the banking and finance sector. Nepali banks, however, are increasingly prioritising this issue. At CNI, we have taken proactive steps to address this challenge. We have established a sub-committee on the environment and collaborated with Price Water Coopers to produce a report titled ‘Environmental Change Adaptation’, which we've submitted to the government. This report outlines steps that Nepali businesses can take to enhance their adaptation efforts. Moreover, it underscores the imperative for collaboration between the government, development organisations, industry associations, and the private sector to effectively combat the escalating threats posed by climate change and ensure sustainable business operations in the country.

Nepal is currently exploring regional economic partnerships. What are the advantages, disadvantages, and challenges associated with this endeavour?

CNI has undertaken the initiative to establish bilateral investment agreements (BIAs), recognising their significance in providing security for foreign investors. Currently, there is a lack of framework and consideration regarding BIAs. Through interactions with foreign chambers, it has become evident that investors prioritise the security of their investments when evaluating opportunities in any country. The government is now in the process of drafting a template for bilateral investment agreements (BIAs). The potential benefits of BIAs are substantial. Even if just a few significant investments materialise through these agreements, it would prove beneficial for us. However, it is important to note that while BIAs focus on bilateral investment, Nepalis currently face restrictions on investing abroad. This results in a one-way investment scenario.

Additionally, CNI is also involved in bolstering the skills of the Nepali workforce through its Skill Committee. We have provided skill training to 3,700 individuals so far which has resulted in employment opportunities for 2,400 of them. In collaboration with the European Union, CNI has teamed up with five professional organisations to develop 28 distinct skill-related courses. Likewise, in partnership with the Council for Technical Education and Vocational Training (CTEVT), we are developing additional skill courses. Moreover, together with the industry ministry, we are currently training 1,665 individuals and facilitating their employment within the industry. 

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