Reigniting Nepal’s Economic Engine Post-pandemic

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Reigniting Nepal’s Economic Engine Post-pandemic


Covid-19 has disrupted the global economy as never before. Its devastating impact lies in its unpredictable and swift spread across the globe with phenomenal speed. The citizens of the world were caught off-guard when governments the world over - at the behest of the World Health Organization (WHO) -started imposing lockdown in their countries promoting ‘social distancing’ to prevent physical contact of individuals to the maximum extent possible. At the time of writing of this article, the global death toll had reached over 170,000 with the mortality rate showing no signs of abatement. Surprisingly, though this pandemic is known to have originated in China, the worst victims are countries like United States, Italy, Spain, France, United Kingdom and Iran.

Nepal is also under lockdown up to April 27. People hope that further extending it may not be necessary. The reason for the lockdown of course, has been to contain the spread of the coronavirus. However, the country’s economy may suffer for long-term as a side effect of the restrictive measures; the country’s economy was already sluggish prior to the beginning of the crisis. This pandemic has made the emerging dismal scenario worse. Assuming that the lockdown will be lifted soon in a gradual and phased manner, it is presumable that the small and the medium enterprises (SMEs) will be confronted with the following dire situations as they open up. Large enterprises will equally be in the same boat.
a.    Unprecedented cash crunch at all levels of government and the private sector.
b.    Foremost will be the cash requirement to pay wages and salaries of workers and other employees.
c.    Government will demand accrued Value Added Tax (VAT), income tax, excise and other local taxes.
d.    Private companies will be required to release documents from the banks for the goods that have arrived.
e.    Private companies will require funds to pay for shipping and transport of goods, import duties, VAT and other logistic costs for clearance of goods and containers from border customs and dry port in Birjunj.
f.    Industrial and trading enterprises will be required to open letter of credits (LCs) for raw material, capital goods and other tradable items for which margin money will be needed in cash.
g.    Creditors in the market will have to be paid.
h.    Loans that have become due for payments will have to be paid to bank with interest.
i.    Retail markets are dried up and supply chains are totally disrupted. The gaps created by this situation will have to be filled by credit.
j.    Consumers will have spent all their savings during the lockdown period. Additional liquidity is required to spur demand in the market.
k.    Post covid-19 pandemic, there may be a surge of migrant workers returning to Nepal for various reasons. This inward flow of migrant workers may aggravate unemployment particularly in the rural areas.
The economy will take at least six months to bounce back after the lockdown is lifted; it may take more time if an effective recovery back plan is not in place. Since the world economy will be in the doldrums too, the financial resources of multilateral agencies will be stretched to its seams. To get its rightful share, Nepal will have to demonstrate not only ingenuity and creativity in its recovery plans but also assure international lenders of its capabilities to spend the money efficiently. The government needs to work more carefully this time as the post-quake recovery experience was not very pleasing. Resource mobilisation will be a daunting task for the government which it will be able to handle only by acting prudently such as slashing wasteful expenditure. The current situation calls for a Marshall plan like funding initiated after World War II to rebuild a devastated Europe.

In these despairing and grave moments, the government will have to have a firm grip over the situation and drive the economic revival. Though the private sector will on its own do its best to bail itself out, still the government will have to intervene to grease the economy generously in terms of:
a.    Immediate measures,
b.    Short term measures in order to address looming issues of cash crunch as well as stalemate in the growth.
It has been observed that Americans are driven to find quick solutions when faced with a crisis, often ignoring a complete and thorough analysis of the problem, whereas Germans tend to make statements about problems much more than the solution. This is the issue of mindset. The crisis that we are in requires our politicians and bureaucrats to deeply analyse and enquire about the immediate and other invisible embedded issues not only among themselves but also with stakeholders at large. While analysis is important, more important will be a willingness on the part of the government to be a true steadfast guardian messaging a triumph of hope over the depressing national mood. Variety of ideas will enrich our arsenal and instead of knee jerk solutions, we will embark upon viable and sustainable innovative measures.

Response requires a real matter of fact evaluation of the economy post-coronavirus pandemic in terms of the government presenting a white paper in front of the Federal Parliament. The government should not be in a defensive mood in this crisis. All positive and doable suggestions from any quarter should be welcome. It should not wait for the ensuing budget session to initiate the revival plan, rather, if deemed necessary, the budget session can be preponed. However, the most important role will be that of the private sector which needs to be trusted, incentivised and assisted in order to help kickstart the business operations, which are now stalled, to get into full throttle at the earliest. This occasion should also enable industrialists to turn around the sick as well as the closed industries.

The first priority of the government is to pump in enough cash into the business sectors in the shortest possible time. The economists will have to advise wisely about the potential sources of money and ways to infuse it into the system without any repercussions. A few measures, which should be the subject of discussion, are suggested below for serious perusal by all stakeholders including the government.

Immediate Measures
1.    Arrangement for payment of matured loans including interest be in six equal installments without any penal interest.
2.    Payment to government of accrued income tax, VAT, excise duty, electricity bills of the lockdown period of 3 months to be allowed to be paid in six equal installments without any interest and / or penalty.
3.    Banks should extend additional limits equal to 25% of existing limits for a period of one year.
4.    Provision of black listing the defaulter be kept in abeyance for a two-year period.
5.    In order to stimulate the transportation sector, the service tax to be waived for the next two years and the price of diesel be reduced.
6.    Banks should start discounting bills to the retail sector so as to bring retail sector into the ambit of formal banking.
7.    Prioritising internal movement of goods, especially industrial products and agricultural goods to mandis. Public transport and air travel should wait.
8.    Harvesting of standing crops should be be facilitated and banks have to find ways to finance the harvested crops so that farmers have money to buy fertilizers and seed for the next crops.
9.    The central bank should follow an expansionary monetary policy with checks and balance. If necessary, deficit financing may have to be resorted to.
10.    In the gradual process of opening, retail trade, industrial production and construction should be opened up first. Public transport, air travel and public places should be opened last.
11.    The government should immediately release those payments which have fallen due for the work done and the purchase made to vendors and contractors.
12.    The government can undertake construction of low-cost housing in rural areas which will help in creating new jobs.
13.    The government should not raise loans internally as it will soak up savings and reduces demand.
14.    To create demand and revive retail trade, waiver of corporate income tax to entities in retail trade and halving of personal income tax rates for the next two years.

Short term and midterm packages :-
Apart from taking immediate measures to supply the business sectors with the much-needed cash, the government also needs to think in terms of a directional change in Nepal’s economy. So far, the country’s economy is characterised as dependent on remittance, imports and foreign aid. Now there is a real possibility that all these aspects will be adversely affected that it will make Nepal very vulnerable if it relies too much on them. It is most likely that overseas labour market will shrink, foreign aid will become conditional, and free and liberal imports become unaffordable. These changes will not occur overnight but imperceptibly they will creep in. To preempt their suddenness, it will be prudent that our economy takes a paradigm shift.

Salient features of directional transformation:-
1.    Agriculture has to be fully integrated to processing in Nepal. Import of raw agricultural crops from the cheapest sources should be undertaken and then processed in Nepal. Nepal should produce only high value agricultural products with high technical inputs.
2.    Nepal has become a high-cost economy. Cost of production in any sector is quite high. The government is a silent spectator. It has to intervene now. The purpose of intervention will be to create comparative advantage in our economy as a whole so that production of goods and services becomes competitive in the region.
a.    Cost of electricity has to be the lowest in Nepal among SAARC countries. With so much production of power on the anvil, the export and local consumption can go up only if the power tariffs are comparatively cheaper than other countries and that of substitutes also.
b.     Cost of capital is a major obstacle to competitive cost of production. There is divergence of opinion among policy makers as to the necessity of bringing it down. There is a linkage with inflation, investment and interest rates, unless there is a healthy balance among them. The trend will always be to import from those countries which are producing their goods cheaply. It is a strategic decision on the part of the government on how to lower the economic costs. It can be hoped that Covid-19 compel us to mend our ways.
c.    Third intervention which is called for from the government is in the realm of wages / strike / lockout issues relating to industrial relations. There should be a national tripartite agreement for freezing wages and banning strikes for the next five years. Rather these agencies should work together to enhance productivity, develop skills and retrain migrant labour to absorb them locally.
d.    The fourth intervention demanded from the government is the rational management of imports so as to promote indigenous production. Any hindrance to production in Nepal by way of tariffs must be discouraged irrespective of WTO/ SAARC bindings. The phenomenon of globalization is already at peril.

It is high time that the government postulates a new revenue policy for the next decade considering not only our revenue requirement, but also taking into account the need for directional change in keeping with our required rate of growth, investment, inflation and our priority areas of manufacturing, agriculture and tourism. So far Nepal has cashed in on the opportunities presented to it in terms of high tariff walls in India and its LDC status. Henceforth Nepal will be required to follow a strategy of a defined path - a path systematically identified in advance - through a chosen set of activities within a given timeframe. Mobilising resources will be our greatest challenge. Though we shall have access to multilateral funds to take care of our needs for crisis management, we shall have to cut down on all sorts of wasteful expenditure for which a meaningful audit, with the sole objective of identifying areas and scope of such extravagances will be an important step.

The government for the last two to three years has been trying to attract FDI earnestly, particularly in the infrastructure sector without much success. In the current period of high unpredictability and uncertainty, hoping that FDI will come in infrastructure development, which normally has a long gestation period, will be a pipedream. However, we should give more emphasis to contract manufacturing, assembly, agro processing, tourism and export for FDIs. One important reform the government has to ensure is easy exit of investors.

The central bank also has to review the lending and borrowing scenario from the banks as on today which may not be healthy as it looks. Loans are converging on perceived green fields thereby creating unnecessary surplus production capacities. Secondly the lending has got linked to fixed deposits. There is no alternative exploration for funds by banks, neither are depositors taking any look at other avenues of savings. This has only distorted our capital market as well as its costs. Risks are unequally tilted.

Our currency has been pegged to the Indian currency for a long time and it can certainly be said that the circumstances which prevailed years ago for us in terms of currency pegging does not persist now. The pegging may be doing us more harm than good. Resistance to change always come from the top because the top is always afraid of failure and does not want to come out of the comfort zone of past successes, however, it is time that they come out of their jinx.

Tourism is the backbone of Nepal. This sector alone can sustain Nepal’s economy at a very high rate of growth if it is brought into the centre stage. This pandemic has impacted it the worst. The bounce back also will take time as it is the confidence of the tourist that matters in a virus free Nepali climate. Till then not only the infrastructure that is built has to be maintained in shape but also the financial burdens have to be shared. With the support of multilateral agencies like the international Monetary Fund (IMF), World Bank (WB), Asian Development Bank (ADB), the government should bring a recovery package which can also help us to promote Nepali tourism internationally.

Downturn is quite frequent in the business world when either the shareholders’ return collapses suddenly in the capital market or there is a precipitous decline in company revenues and profits. But in some of these circumstances, business also bounces back. This science of resilience has to apply to today’s economic downturn as well. The strategy that they follow is equally valid for the countries to reignite their growth and regain their vitality. These strategies are:
a. The sincerest responsible use of available resources for a long-term result.
b. The government has to focus on the welfare of the citizens so that they side with the government through thick and thin.
c. Bouncing back becomes difficult when governance becomes complex, mired in too many rules and regulations, resistance and discretionary power of the bureaucrats, slowing down the nation’s metabolism and tempering quick decision-making abilities.
Let us believe that post-pandemic circumstances will play a catalytic role to shed our lethargy, pull up our socks, muster courage and build new strengths to defeat threats and move the economy in a new transformational trajectory.

Agrawal is Chairman of Nimbus Group.

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