Fostering Good Governance for Sustainable Economic Growth

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Fostering Good Governance for Sustainable Economic Growth

It is necessary to facilitate private sector investments by creating a conducive environment that nurtures Nepal's investment ecosystem.

Despite hosting three investment summits in Kathmandu over the past decade, Nepal has not seen noticeable economic development or substantial employment opportunities for its youths. The government's technical shortcomings in utilising capital expenditure for infrastructure projects, coupled with slow revenue collection and a decline in foreign investment and development assistance, highlight the discouraging trend in the Nepali economy. Efforts to strengthen the economy have fallen short, creating a vicious cycle where expenditure exceeds revenue collection.

Medium and small-scale industries are struggling to sustain operating costs, with many units either operating at reduced production capacity or shutting down altogether to mitigate recurring losses. With no new job openings in the industrial sectors, many youths are compelled to seek employment abroad. These economic conditions have instilled a sense of despair among the Nepali people regarding their prospects within the country. The combination of economic stagnation and a decline in the efficacy of democracy and open market policies calls for a re-evaluation of the political landscape.

It is necessary for all political parties to demonstrate a commitment towards implementing concrete measures aimed at catalysing the nation's economic resurgence. This requires a comprehensive approach that extends beyond rhetoric, focusing on tangible actions that foster rapid, inclusive economic growth, reaching even the poorest and most marginalised segments of society, particularly those in remote areas. Proactive engagement from all stakeholders, with political parties at the forefront, is needed to avert the looming crisis.

The private sector contributes more than 80% to the national GDP and serves as a primary job platform for the majority of youths. Recognising this, the government should facilitate private sector investments by creating a conducive environment that nurtures Nepal's investment ecosystem. Misappropriation of public funds deposited in financial institutions, particularly cooperatives, by a select few individuals with political connections severely hampers the ability of business startups, new entrepreneurs, and small and medium enterprises to thrive due to a lack of financial support. Additionally, underproductive agricultural land, poorly-managed industries, and sluggish service sectors require international technical expertise and investment, alongside favourable government policies, to revitalise.

Nepal's geopolitical position, situated between the major economic powerhouses of India and China, makes it an appealing investment destination for foreign investors. Despite immense opportunities in sectors such as hydropower, tourism, agriculture, and information technology highlighted during successive investment summits, foreign investments predominantly flow mainly into the energy sector. Large-scale projects often face funding gaps and are underserved by both government and private banks. The ongoing economic crisis poses a significant obstacle to achieving Nepal’s target of graduating from Least Developed Country (LDC) status by 2026. To elevate Nepal from its current LDC status, the country’s economic policy must attract investment from Development Financing Institutions (DFIs), coupled with diligent government performance management.

Although hundreds of business representatives from over 50 countries participated in the 2024 Nepal Investment Summit, there is no guarantee that foreign investors will engage in the Nepali economy with the enthusiasm displayed during the summit. Prior to any venture, investors thoroughly assess their business from all possible angles to anticipate potential risks arising from both domestic and international challenges. In addition to the uncertainty surrounding policies related to the foreign investment environment, deep-rooted structural issues in governance have hindered the flow of foreign investments. The government's approach to fostering an environment conducive to both national and international investments has proven insufficient. By embracing open-door policies and fostering a spirit of public-private partnerships, both domestic and foreign entrepreneurs should be assured that their journey in Nepal is meaningful and aligned with mutually agreed-upon documents. This approach will ensure a win-win situation for all parties involved.

The challenges encountered by telecommunication company Ncell due to legal and regulatory ambiguities serve as a striking example of the government's inadequate administrative management in regard to foreign investment.

However, the business environment often turns unfriendly after the investment, as the government struggles to smoothly manage business operations until the termination of the contract period. The government's approach towards the private sector has frequently veered off course, leading to disputes that force many entrepreneurs to close their businesses in an unprofessional manner before their contract agreements expire.

With the establishment of a full-fledged democracy and free market economy aimed at attracting private-sector involvement, the government initiated the privatisation of certain industries. The objective was to encourage private sector investment to boost production and improve quality, while also enhancing competitiveness. However, due to a combination of factors including the inability of political parties and lack of good governance from the government; efforts to increase production, achieve targeted revenue, and creating employment opportunities for Nepali youth did not materialise.

The political doctrine advocating for an open economic policy to engage private entities in the country's rapid economic development has not materialised, primarily due to non-compliance with the terms of reference originally agreed upon by the government and private parties. The existing situation of these companies is worrying, with little hopes of returning to their intended functional state as institutions. The oversight mechanism designed to monitor good governance attributes failed to effectively regulate the operations of these companies. The government and its relevant ministries also could not compel these industries to adhere to the mutually agreed contract terms and obligations on time. There was a lack of regular performance reviews and monitoring. There was no system for reward and penalty based on performance, and no arbitration mechanism to resolve conflicts as they arose.

The challenges encountered by telecommunication company Ncell due to legal and regulatory ambiguities serve as a striking example of the government's inadequate administrative management in regard to foreign investment. Despite Ncell's significant investment in Nepal over the last two decades, which amounts to billions of rupees, the company faced numerous legal hurdles, public criticism, tax disputes and accusations from political factions. These issues highlight the challenges faced by foreign entities operating in Nepal.

Regulatory bodies must thoroughly understand the terms of the contract, conflict resolution procedures, amicable dispute settlement mechanisms, arbitration processes, the criteria for arbitrators, and the periodic progress review mechanisms based on compliance monitoring. This understanding is crucial for ensuring the effective management of investor performance throughout their resource investment in Nepal. Our underperforming and non-performing sectors must be handed over to foreign development finance institutions. This will not only help strengthen our economy but also facilitate the infusion of modern technology, advanced knowledge and skilled expertise, while also bringing financial benefits. 

(Adhikary is an engineer and served Nepal government in various high level capacities.)

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