Restrictions need to be avoided to keep the wheels of the economy rolling

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Restrictions need to be avoided to keep the wheels of the economy rolling

In the last six months of the Covid-19 pandemic, Nepal has gone through a full-blown economic crisis. With the outbreak of the coronavirus showing no signs of abating, the outlook for recovery remains unclear sending the country’s private sector into a state of disarray. With each passing day becoming more stressful due to the worsening of the public health emergency, not only small and medium enterprises but also large business houses have found themselves surrounded by a number of challenges.

Manoj Kumar Kedia, executive director of Kedia Organization and chairman of Siddhartha Bank Limited, believes that most of the businesses in the country are struggling to survive the crisis on their own and that things could get worse without the proactive intervention of the government to address issues related to the economy and public health. In an interview with NewBiz Editor-in-Chief Madan Lamsal, Kedia talked about the current situation, prospects for recovery, new investment opportunities, among other topics. Excerpts:

How do you evaluate the impact of the Covid-19 pandemic on the Nepali economy?
The Covid-19 pandemic has impacted Nepal in different ways and the country’s economy will remain affected till 2022. Then after, we should observe the recovery gathering momentum. But it will also depend on how fast the Covid-19 vaccine is developed and distributed.

Currently, we are living in a state of big confusion. On the one hand, economic collapse is a fear as various restrictions are imposed, and on the other, we get distressed over worsening of the ongoing public health crisis which may delay lifting the restrictions.

We need to look into how some countries like China, New Zealand, Vietnam and South Korea are managing the Covid-19 challenge in terms of minimising the socio-economic impacts of the crisis. These countries are likely to witness a speedy economic recovery whereas the process will be slow in countries like ours. The fact that the government couldn’t work in meaningful ways over the last six months to chart out a path for the country’s economic revival will also add to the sluggishness in the recovery process.  

With Nepal’s major trading partners like India slipping into the deepest recession in living memory, there are fears that the Nepali economy is likely to take more hits in the coming days. What do you think the government needs to do to save the economy and the private sector from imminent collapse?  
The government needs to devise a comprehensive plan to face the current and the forthcoming economic and public health related challenges. It needs to bring the representatives of the private sector, prominent economists and public health experts together to find ways that can effectively minimise the impacts. First, there should be a roundtable discussion with doctors and health experts. The government needs to be ready to invest whatever amount of money is required to face the public health crisis.

Second, emphasis should be given to boost domestic trade as the Covid-19 disruptions are adding to the difficulties in our international trade. At the moment, domestic industries and businesses are looking for government support to keep their heads above water. Domestic consumption should be boosted in a careful manner so that industries and businesses are encouraged to gear up production activities. Similarly, construction of infrastructure projects should be resumed. Likewise, the border points with neighbouring India and China that have remained closed for many months should be reopened. While bringing the situation back to normalcy, private sector requires proactive government support. For example, while providing interest rate concessions or loan rescheduling to businesses, the government and the central bank not only should direct banks to implement the measures but also should take steps to secure the profit of banks. Utilising business infrastructure can be helpful at this moment. Incentivising service sector businesses like hotels and resorts and turning them into isolation facilities would not only support the hoteliers but also will increase domestic demand and production.  Likewise, special packages should be devised to bring in tourists into the country. We need to capitalise on the opportunities like the visit by the Prince of Bahrain last month to ascend Mt Manaslu to convey a positive message internationally about the Nepali tourism sector.

In the past 6 to 7 months of the Covid-19 crisis, not only developed and emerging nations but also many developing countries directly injected huge cash into their economy in order to boost consumer spending and to address problems in the financial sector. Our government has not taken such a step. It needs to ensure that restrictions are avoided to keep the wheels of the economy rolling.  

Do you mean the government has not done anything to tackle the crisis?
There is no reason to become optimistic by the government’s actions and responses.  While there have been repeated pledges to expedite the process of economic recovery, things have not gone as per the announcements. The crisis has aggravated the problem of unemployment in the country. Similarly, it has exposed our weaknesses in basic infrastructure be it in health, education or any other area. Times like these demonstrate the importance of collaborative approaches like the public-private-partnership (PPP) which has not been a priority in our country. While the government definitely has a role to play as a facilitator, the role of manager should be given to the private sector for efficient delivery of service.

What do you think is lacking in the government’s response to the Covid-19 crisis due to which recovery seems difficult?
The entire country has remained under some form of restriction for the last six months. The complete halt in long distance transportation and many other services has crippled industrial and commercial activities. The government in other South Asian countries were mindful enough to gradually reopen transportation, industrial and commercial activities thereby adding to the economic momentum. Recent data indicate that some countries have recovered as much as 50 percent whereas our recovery of 25-30 percent from the four months long lockdown was hammered again by the prohibitory orders that replaced the lockdown. Even though the restrictions have been lifted now, a state of confusion prevails if there will be lockdowns in the coming weeks or months with the surge in coronavirus infections. It has been proven worldwide that restrictions alone cannot stop the Covid-19 transmission; the situation needs to be faced boldly yet carefully to carry on with the daily activities until the threat recedes.

As a businessperson who has also invested in the financial sector, how do observe the impact of Covid-19 on the banking sector?
Businesses of all sectors have incurred big financial losses over the past six months. The impact is becoming more dynamic and the losses are likely to increase further. In such a situation, banks and insurance companies have also taken hits. The measures announced by the central bank such as loan repayment rescheduling, lowering of interest rates and service charge exemption have certainly affected the income of banks and financial institutions (BFIs). The measures have forced BFIs to provide facilities to all their clients rather than on need based assessments and mutual understanding between the two sides. The main thing here is to know that BFIs need to stay financially healthy in order to support their clients.

From large and highly leveraged industrial enterprises to small businesses like restaurants, all have already landed into financial and other sorts of trouble as the pandemic and subsequent restrictions have badly affected their revenue streams. The industries and businesses are going to face big shortages in investible funds as banks will not be able to lend them sufficient amounts because of their own problems and regulatory requirements.

Here, the government can manage this situation by introducing different policies to promote alternative financial tools such as private equity and venture capital solutions. Similarly, bringing rules and regulations for asset management companies will also help.

The central bank is pushing commercial banks to go into mergers amid this crisis. Is this the right time for bank mergers?
Creating large banking entities will not be sufficient to produce good results. There can be a ‘too big to fail’ situation if things go wrong.  Mergers should be based on advantages and synergy effects of the merging organisations. This will not be achieved through forceful mergers. At the moment, the question is about survival. So, the focus should be on strengthening the existing organisations.

What is Siddhartha Bank doing in this respect?
We have been discussing mergers for some time now and are studying to find the right partner. We are looking into how the merger would help us to strengthen our position, provide better services to customers and distribute higher dividends to shareholders. But there is no immediate possibility of forming a union with another bank. Siddhartha Bank is a CEO-driven financial institution with key focuses on institutional norms and values.

But many businesspersons say that banks are only focused on their own profits and do not care about the wellbeing of clients even at this time of crisis. Is it true?
In Nepal, those who are engaged in wrongdoings and unethical deeds aren’t penalised or scrutunised to the level they should be. This leads to things becoming so generalised that it is difficult to distinguish between good and bad. Here the role of regulators, press and other stakeholders come in to play in this regard.

People also complain about the services of insurance companies, particularly payment of claims…
We need to look into how insurance companies are run. They collect premium from a large number of people and use the money for payment of insurance claims, manage operational expenses, staff salaries and bonuses to investors. If the expenses exceed the income, then it indicates there are gaps in either the policies and decisions of the companies or the regulatory oversight.  Risk bearing is the business of insurance companies and the regulator’s job is to make sure that everything is working correctly.

I think insurance companies are doing a good job at present to increase the trust of ordinary citizens in insurance. The fact that the insurance market in Nepal has grown by at least 20-fold over the last two decades is indicative of this. While it cannot be ruled out that there might be some malpractices occurring, proper regulatory oversight and use of advanced technology can resolve the issues.  

The central bank was widely applauded for the Monetary Policy which many considered as private-sector friendly. How hopeful are you that the Monetary Policy will boost the economic recovery?
The arrangements in the Monetary Policy are aimed at providing relief to the crisis-stricken private sector. On the other hand, the arrangements have mounted pressure on BFIs. This will also impact the BFI sector-dominated stock market in the mid and long term despite the current increase in the stock market.

It needs to be understood that banks should be made financially capable.  At a time when the demand for investment has plunged so deeply, why would banks flow more credit in the market? Why would the banks or anybody buy land used as collaterals against loans that are being auctioned?

Interest rate stability is another major thing to consider here. Interest rate in Nepal has hovered around 12 percent historically and keeping it at 6-7 percent would be good in terms of interest rate stability. Now it needs to be determined whether our financial system will be development-centric or savings-focused.  I think maintaining the interest rate at around 7 percent will provide a better cushion to businesses thereby fostering entrepreneurship in the country.

I think some arrangements in the Monetary Policy are unnecessarily penalizing, such as directing banks to maintain a certain percentage of their lending in sectors including agriculture and hydropower. Given the current investment environment, these requirements will be difficult for banks to meet. There are chances for anomalies to happen in the banking sector due to problems such as increase in bad debts and loans not reaching targeted groups even if the requirements are met. Instead of penalising, the central bank should have adopted a reward-based approach, say, for instance, providing concessions on spread rates and income tax to banks that meet the lending requirements.

Do you see any prospects or opportunities for new investments and business expansion amid this crisis?  
Besides the macroeconomic environment, the approach of businesspersons in investment planning, formulation and implementation of a business strategy and their understanding of the whole situation also play an important role in ensuring the success of any investment. In Nepal, travel and tourism has been the most affected sector.  The business of perishable goods has also taken a big hit due to disruptions occurring in supply chains.  Healthcare and pharmaceutical sectors have also slumped into deep recession as people have refrained from visiting hospitals and with that there is decline in the demand for various types of medicine.

The food processing industry, in the meantime, has performed better than other businesses. Here also, those who took the risk to operate their industries benefitted and not those who chose to close their businesses fearing Covid-19 transmissions. Similarly, new types of businesses such as e-commerce and digital marketplaces are gaining popularity and registering growth even during this time of uncertainty. This indicates that those who can change themselves to adapt to the new situation will survive and see growth. For example, many airlines in countries like Kenya changed their business model and turned their passenger planes to cargo planes. In Nepal also, some airlines did the same which helped them to survive the Covid-19 onslaught.

The prospects for growth in the digital economy and the return of migrant workers are two factors that have reignited a sense of hope amid the pandemic. Do you observe other silver linings like these in the dark clouds of the current crisis?
When the Covid-19 pandemic started, there was total disruption in international trade for many months and many trading partner countries were hesitant to supply different types of medical and essential goods to other countries. This is something we still are experiencing. So, there can be opportunities in this regard.  We need to identify different medical goods and essential items that we can produce here. The government as well as the private sector should commit themselves to stop importing such goods and should also show a modicum of tolerance if the price of the domestically produced items goes up a little. Also, there can be investment opportunities in developing infrastructure related to affordable education, healthcare and housing that will ultimately boost the economy.

How has the Covid-19 crisis affected Kedia Organization’s existing businesses and investment plans?
Over the last few years, we have ventured into many new areas of business either with our own investment or partnering with others. In some new ventures like Arghakhanchi Cement and Shree Steels, we added new investment of around Rs 5 billion for expansion of the industries in the recent years. Similarly, we set up plants of Brij Glass to produce toughened glass and Asian Concreto to manufacture concrete blocks. Similarly, Reliance Life Insurance is our latest investment venture in the financial sector.  All these new ventures are bearing the highest economic burdens due to the pandemic and the situation has become very challenging for us at present.

What are you doing in terms of mitigating the risks to your businesses?
We have been doing all we can to keep the industries running by prioritising the health and safety of our staff. When the government allowed us to reopen industries, we carefully restarted operations. It has thus helped us in terms of regaining momentum in sales and revenue. We have also taken measures to trim our workforce and to make the human resource in our businesses more efficient, and also focusing on market management and recovery of the due amount. On the financing side, we are renegotiating with banks to lower the cost of interest of the loans we
have taken.

As a businessperson who has diversified investment interests, what possible sectors would you like to recommend to other investors to have better returns even during these economically gloomy times?
Investment in any sector depends on the supply and demand side. Currently, investing in stocks and equity investment in some sectors can give better returns. Personally, I don’t prefer gold and silver much, but people can invest some of their money in precious metals to balance their investment portfolio. In the meantime, real estate is another lucrative sector. Nevertheless, I don’t suggest going after speculative investing by availing bank loans.  

Talking about equity investment, there are a few IT-centric areas like e-commerce services, artificial intelligence, robotics and automation that have big potential for growth. Though the prospects in these areas might seem limited at the moment, the future possibilities can increase immensely with value addition. However, I would like to suggest prospective investors to avoid unnecessary risks and high leverage and keep some kind of cushion to absorb shocks of economic uncertainty. Talking with BFIs about your situation and plans can be helpful for investors to move ahead.

Of late, many business houses, SME investors and even the foreign returnees are looking to get into agribusiness. But I’ve heard you commenting that returns on investment in agriculture are not on par with several other sectors. What made you say that?
What I am saying is based on facts and figures. During the time of my grandfather, Nepal used to be a net exporter of rice and different food grains. Now we’ve become a net importer of such goods. When I used to import fertilizers some two decades ago, the demand for fertilizers in the country was between 150,000-200,000 tonnes. The demand has not increased from that level and the problems surrounding the import of fertilizers have remained the same.

There has been no meaningful attempt to lower the cost of production; our products could not compete with cheaper imported food items and agricultural products. On the other hand, increase in foreign currency inflow in the form of remittances and foreign aid also led to us to a state of complacency that has hindered the growth of the agriculture sector. Imports account for 90 percent of our consumption of food items. We need a moment of introspection to find out the reasons why the domestic production has not increased despite the rise in population over these years.

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