A Roadmap for Development

  9 min 55 sec to read
A Roadmap for Development

By Janardan Dev Pant

The decades-long microfinance movement has made significant contributions to poverty reduction in the country, providing access to finance and fostering entrepreneurship among the poor populace. However, despite these efforts, the poverty rate remains around 18%, raising questions about the effectiveness of microfinance, and a need to enhance efficiency from within.

Nirdhan Utthan started collateral-free microfinance three decades ago in Siktahan, Rupandehi. A decade ago, collateral-free microfinance reached all 77 districts in the country. Microfinance has played a significant role in lowering the poverty rate to 18% now from 42% in 1995. Equally, remittance also plays a role in poverty reduction. We should not forget that microfinance provided loans to the poor for foreign employment and further supported them with additional loans, as well as skill and entrepreneurship development training, to engage them in income-generating activities. Thus, microfinance has helped generate remittances through foreign employment loans for migrant-sending families.

Today, we are still experiencing 18% poverty, despite a total outstanding loan amount of Rs 437 billion from microfinance institutions (MFIs). This calls for us to search for efficiency from within. It is evident that the loans have also been extended to well-to-do households instead of the target group – those below the poverty line – and these loans have been misused. As a principle, 100% of the loans should have been allocated to capital formation and productive activities for the target group, aimed at the production of goods and services. With Rs 437 billion in outstanding loans of MFIs, the poverty rate should have declined to zero. Understandably, the loans have been used for consumption and to repay other debts. This presents a significant challenge.

Avenues for increased income

Our course of action should be to eradicate poverty entirely within the next five years by transforming the target groups from job seekers to job givers through skill training, entrepreneurship training, financial literacy, and health literacy, while adhering to the principles of microfinance.

During visits to the Centres in villages and cities, as well as homesteads and animal sheds, it becomes evident that many families own a buffalo. A Murrah buffalo, on average, can generate a net income of Rs 170,000 within a year. One might question why not keep 10 Murrah buffalos, which could yield an average income of Rs 1.7 million annually. Similarly, keeping 20 goats could generate a net income of Rs 200,000 per year, but keeping 20 pigs would result in Rs 600,000 net income. Pursuing piggery could potentially generate more income. Likewise, saffron cultivation at elevations between 1,500 to 2,500 metres above sea level could produce Rs 500,000 net income per Ropani of land. Therefore, we encourage our clients to increase their income by pursuing projects that promise higher returns on their investment of time, money, and energy.

Public debt, investment and economic growth 

The volume of public debt has been steadily increasing on an annual basis in recent years. While the percentage increase over previous years has been declining, the actual amount of public debt continues to rise, reaching Rs 2,175 billion in the first 11 months of the FY 2022/23.

A domestic credit to GDP ratio exceeding 100% creates an asset price bubble and poses significant financial risks to the system. In our case, the public debt has more than doubled between FY 2018/19 and FY 2022/23. Banks are heavily involved in intermediating this debt, and we have increased our expenditures beyond what our means can sustain. To mitigate the risks, we have to cut spending. 

Since FY 2019/20, we have observed the domestic credit to GDP ratio crossing 100%. Nepal's fiscal health for the future is at stake, considering the public debt to GDP ratio already at 42%, economic growth rate below 6%, and an annual growth rate of approximately 20% in public debt. If this trend persists, the debt could rise above 60% of the GDP within the next three to four years. Therefore, it is essential to limit the public debt to GDP ratio to a maximum of 50%. There is a concerning consumption bubble that needs to be addressed.

Ideally, an increase in public debt should be accompanied by an increase in exports. However, despite experiencing higher percentage growth in exports compared to imports in recent years, our export volume remains significantly low, with a nominal share in total foreign trade. In the fiscal year 2021/22, Nepal's import volume reached Rs 1,920 billion, which was nearly ten times higher than the export volume of Rs 200 billion.

Countries like ours, with import-based economies, face risks when the local currency depreciates against foreign currency. As exports remain weak, the absence of sustained income sources for future debt servicing could lead to an imbalanced economic situation and the risk of falling into an economic crisis.

The success of our public investments today will determine our future production capacity. Efficient and productive public investments can drive the intended economic growth. Therefore, it is crucial to manage our public investments more effectively to achieve higher efficiency. In the FY 2023/24 budget, the share of capital expenditure is Rs 302 billion, accounting for 17.25% of the total annual budget of Rs 1,751 billion. However, the trend over the last 10 years has shown an average capital expenditure of only 67.5% of the allocated amount. Based on this lower absorption rate trend, the capital expenditure for FY 2023/24 is expected to be around Rs 203.90 billion.

Our public investments, including capital expenditure, are not adequately supporting sustainable growth. Over the past 10 years, the government has spent approximately 13.4% of the capital budget in the first six months, and the major portion of the remaining budget is utilised towards the end of the fiscal year. This practice often results in poor-quality infrastructure work and mismanagement of resources, failing to generate proper social and economic cash inflows from the investment. Therefore, it is essential to mobilise and manage capital expenditure while ensuring a return on and productivity of the investments. 

Since our economy cannot sustain the level of investment needed to develop all 753 municipal bodies in the country, we should concentrate our investments in one province at a time. By doing so, we can potentially make one province economically dynamic within a period of around 15 years. People from underdeveloped villages and towns can move to the dynamic city/province and become more productive, and contribute to its growth. Again, it is essential to attract large companies and employers from around the world. Collaboration with some of the top hospitals, engineering colleges, IT companies, and other key industries can help to foster further development and growth in the region.

The FY 2023/24 budget targets a 6% economic growth rate. To achieve this, based on the credit growth portfolio of the past 10 years, a 15% credit growth is required. However, if we prioritise increasing the share of capital formation and production sectors in the credit portfolio while reducing the share of the consumption sector, we can potentially generate an economic growth rate of over 6% in the long-term even with credit growth lower than 15%. Therefore, loans toward real estate and the stock market shouldn’t be increased further.

Way forward

A self-reliant economy can be built in Nepal by implementing a changed course of action and work plan that focuses on improving the overall economic conditions. To achieve this, we must address the current challenges, such as the lower credit-to-deposit (CD) ratio of 83%, which is likely to decrease further and contribute to lower bank interest rates. It is crucial to utilise our foreign exchange reserve of $11.21 billion strategically. However, our resources are spread thinly across 753 municipalities, which are not utilised effectively and are not yielding proper returns on investment. To tackle this, the concept of developing one big city at a time through a public-private partnership model has been proposed, aiming to excel in the services sector and create world-class infrastructure.

We must prioritise enhancing efficiency in public investments. The government's capital expenditure should be increased, and funds should be strategically allocated to projects with high social, economic, and environmental benefits, ensuring long-term development dividends.

Additionally, it is essential to control the unproductive and uncontrolled expansion of recurrent expenditure, keeping it at a sustainable level. One approach to achieving this is by halving the number of municipalities from the existing 753 to 377. Reducing the number of municipalities will also halve the number of wards, resulting in reduced salaries, vehicle expenses, office rent, etc. This would lead to increased efficiency, reduced costs, and improved infrastructure quality. To manage the heavily burdened expenditures of federal, provincial, and local bodies, mergers should be considered, bringing their expenditures within the capacity of the economy.

The domestic loans should be utilised in a sustainable manner, focusing on projects that have been carefully analysed and proven to be beneficial for future generations. The emphasis should be on increasing economic development, government revenue, exports, import substitution, and reducing the trade deficit.

To boost production and productivity, we need to target the services sector, particularly areas like health, education, tourism, and IT, where we have a competitive advantage. The share of the services sector to GDP has risen from 26% in 1980 to 42% in 2022. There is a need to further enhance it to around 80% to drive the country's advancement.

Given the low-interest rate regime in the banking sector, the government can leverage this opportunity to borrow and invest in infrastructure development. One approach is to create one dynamic city each year by allocating approximately Rs 400 billion for this purpose. The government has plans to develop 130,000 Ropani of land in Kathmandu valley, including areas like Mulpani, Sakhu, Gothatar, Suryabinayak, Balkot, Khokana, and Sainbu, with a total investment of Rs 500 billion within 10 years. We need to redistribute economic opportunity and prosperity, which is currently concentrated in Kathmandu valley. The development of Kathmandu valley as a historical city and the establishment of new centres of economic growth outside the valley will lead to significant productivity gains.

As stated earlier, health institutions should collaborate with some of the top 50 hospitals in the world, such as Mayo Clinic, The Johns Hopkins Hospital, and Singapore General Hospital. Similar collaboration in the education and technology sectors should also be promoted. Furthermore, efforts should be made to attract large companies and employers to invest in the dynamic city, creating job opportunities and attracting people from smaller villages and towns, enabling them to become more productive.

The proposition of developing a dynamic city holds significant rationale for Nepal's economic growth. Firstly, concentrating public investments in one city will ensure triple benefits in terms of social, economic, and environmental returns on investment. Second, a city with world-class facilities will attract and retain Nepali professionals who are currently engaged abroad, allowing them to return and contribute to the country's development. Third, by offering high-quality education, healthcare, and employment opportunities within the country, the exodus of Nepali citizens seeking these services elsewhere can be reduced, saving valuable foreign currency. Lastly, the public-private partnership (PPP) model will ensure that even those who cannot afford premium services can still access better facilities through the government quota system.

As we propose using the supply side economics, we have to boost the confidence of local and global investors in pursuing service enterprises in the country. Deregulation, long-term investment guarantees, and tax cuts are some measures that can foster increased production and management of world-class services in Nepal.

Looking ahead, the government's borrowing must be directed towards investments in future-focused infrastructure, such as high-speed rail, subway systems, schools, and hospitals. These long-term investments should offer greater benefits than the cost of borrowing, making the borrowing justified and contributing to sustainable economic growth. 

(Pant is Vice Chairman of Nirdhan Sanstha. He can be contacted at [email protected]

No comments yet. Be the first one to comment.