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Nepal falls behind in economic freedom

In the Economic Freedom of the World Report 2016 Annual Report, Nepal ranks 108th out of 159 economies, with an overall score of 6.54 (in a scale of 1 to 10 where a higher value indicates a higher level of economic freedom). Nepal has dropped two places down in the global ranking compared to last year’s ranking. Previously, Nepal ranked 106th out of 157 economies with a score of 6.56.

EFWR 2016

Nepal scores in key components of economic freedom are:

  • Size of government: dropped to 7.89 from 8.72 in the last year’s report
  • Legal system and property rights: climbed to 4.79 from 4.33
  • Access to sound money: climbed to 6.43 from 6.42
  • Freedom to trade internationally: climbed to 6.72 from 6.47
  • Regulation of credit, labour and business: climbed to 6.87 from 6.85

About the Economic Freedom Index

The Economic Freedom of the World Report is world’s premier measurement of economic freedom, measuring and ranking countries in five areas: size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally, and regulation of credit, labour and business. It measures the degree to which the policies and institutions of countries support economic freedom.

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 nations and territories. Samriddhi Foundation is member of the Economic Freedom Network and is a co-publisher of the report in Nepal.

Deekshya Nakarmi

About Deekshya Nakarmi

Deekshya Nakarmi is Communications and Outreach Assistant at Samriddhi, The Prosperity Foundation. She is a student of Development Studies.

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Economy
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Four Problems in Credit Market of Nepal

Every year, the Canada-based think tank, Fraser Institute, publishes the Economic Freedom of the World Report. Samriddhi, The Prosperity Foundation releases the report in Nepal as the country partner. This time around, Samriddhi Foundation also undertook a Country Audit process to test how truly the numbers in the Index reflect the attributes of the economic sector of Nepal. The process further studies how the economic freedom of the Nepalese people has been restrained.

Out of the five major components and forty-two sub-components of economic freedom, Nepal score a 7.28 (out of 10) in the Credit Market Regulation sub-category under the category “Regulation”. The country audit process has identified the following 4 problems in the credit market sector as the major challenges to instating economic freedom in Nepal.

  1. The first major problem in Nepalese banking sector is low public participation. A large proportion of the people do not have access to banking. In real 1984/85 terms, the per capita cash deposit in the banks and financial institutions was as less as Rs. 20 in the year 2007. This figure depicts that a large number of people are deprived of banking services, and consequently, of credit as well. This deprivation is one of the main hindrances for capital accumulation and formation, and thus, higher economic growth.
  2. The direct control of the government over the banks has added more problems. The government has pressured banks to provide collateral-free loans at low interest rates to some ‘deprived/marginalized’ groups. This has compelled banks to make riskier investments in order to increase revenue generation from alternative sources. Also, there is a provision in the monetary policy of 2012/13 that prohibits banks and financial institutions from charging interest of more than 9 percent for refinancing in the productive sector. Such interest caps can also been seen in some other sectors too. It is true that these sectors may get loans at cheaper interest rates; but only at the cost of interest expenses of other sectors, meaning, banks will charge higher interests in other sectors to cover up the loss.
  3. The Central Bank has also regulated the spread. In July 2014, the Central Bank issued a directive that restricted the spread rate –the difference between interest charged to borrowers and that paid to the depositors –at 5 percent. These controls over the credit market, in the pretext of benefitting some groups, have hampered the growth of a free credit market.
  4. Another problem in the credit market is lack of alternative channels of investment. There are inadequacies of the entities like hedge fund, mutual fund and venture capital. These alternative forms of investment provide opportunity to the people to invest in various forms and gain higher returns instead of saving in the banks and earning negative real interests or investing in the physical assets. Development of these alternatives will lead to more choices to the investors and will induce more investments.

Hence, the regulatory control of the authority over banks seems to be the main reason behind the underdevelopment of the credit market. Freeing the credit market may help boost up the financial system and thus yield higher levels of growth. Although the regulator had not set forth any regulation over the specific interest rates since liberalisation started in Nepal in the early 1990s, the 2014 directives of Nepal Rastra Bank (the Central Bank of Nepal) instructing commercial banks to keep the spread rate within 5 percent is against the principle of liberalisation and economic freedom. This has shown the Central Bank’s duality in its commitments and actions. The end of this control seems more justifiable to resolve the problems of the credit market.

Another potential solution could be pooling up the various government funds such as Youth and Small Enterprise Self-Employment Fund into a single larger fund and mobilizing it through a private party. Similarly, in order to increase the banking habits of the people, the provision of the bill-payment of the various public utilities through banks should be executed. Another requirement for an improved Nepalese banking sector is competitiveness. Allowing the foreign financial institutions to enter the Nepalese market freely can promote competition, lead to innovation, increase choices to the consumers and thus improve the whole financial market.

Along with the free entry of foreign banks, a liberal Foreign Direct Investment (FDI) policy should also be implemented for an easy inflow of capital. Allowing FDI would also help local banks, enhancing their client base.

In addition to these, a liberal financial policy that will foster alternative channels of investment such as hedge funds, mutual funds, and venture capitals may provide capital owners with choices beyond conventional banking and real estate.

For more details on the 2015 Economic Freedom Country Audit Report Nepal, please click here

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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Economy
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Selling yet another false promise?

Sub-article two of the Article 17 of the Constitution of the Federal Democratic Republic of Nepal, 2015 states that every Nepalese citizen has a fundamental right to practice any profession, carry out any occupation, or establish and operate any enterprise within Nepal. This freedom to enterprise was also upheld by the Constitution of the Kingdom of Nepal, 1990 and later by the Interim Constitution of Nepal, 2007.

But were the citizens of Nepal really free to carry out any profession of their choice? Not quite! The 15-year (and counting) ban on the registration of taxis in Bagmati Zone is a manifestation of the state depriving its people of their constitutionally guaranteed fundamental right to choose an occupation, a profession or an enterprise.

The taxi industry

In May 2000, the Department of Transport Management put up a “90-day” halt on the registration of new taxis in Bagmati Zone in the pretext of carrying out a study about whether the number of taxis (8000, when this decision was made) had surpassed the carrying capacity of the roads. UntitledNow 15 years down the line, the decision of halt still persists in the form of a quota limit while the number of taxis has fallen much below the year-2000 level and the population in the zone has more than doubled.

Kathmandu valley alone has higher population to taxi ratio, and lesser taxis per square kilometer of area, compared to some of the cities with better alternative public transportation services. This ban, and the agreement between the government and the Federation of Nepalese National Transportation Entrepreneurs (FNNTE) requiring the recommendation of the FNNTE to issue service license or route permits to enter the industry, together, have created an almost-impenetrable entry barrier for prospective entrepreneurs that want to enter the industry and make a living by providing transportation service.

On top of it all, the government has also exercised price control by setting fares for the taxi service – one that is almost never followed.

How it affects prospective entrepreneurs

The quota (quantity control) means that new players will not be able to enter the industry. That automatically converts the taxi operation licenses into valuable assets. The taxi operators, who were already in the industry before the ban was introduced, now have the opportunity to collude and engage in anti-competitive practices. Today, the taxi licenses sell for around nine hundred thousand Rupees while the registration of other vehicles of similar capacity (car, jeep, van, pick-up and tempo) is only Rs. 750 as per the Motor Vehicles and Transport Management Rules, 1997. Used taxis sell for another one million Rupees in the market. That makes it around Rs. 1.9 million just to enter the industry with a 15-year old third-or-fourth-hand cab, excluding time and money that these prospective entrepreneurs have to spend trying to build ties with the Federation and earning their favor.

How often do we hear of ‘access to finance’ as one of the major challenges to micro, small and medium entrepreneurs in Nepal? And how often do we read of young Nepalese men and women going to the Middle East or Malaysia in search of jobs and in the hopes of earning a decent living for their families back home, just to come back a corpse locked up in coffins? An ‘awful’ lot of times! And yet, here we are, restraining them from enterprising in Nepal itself. Are we forcing them to seek opportunities in hostile environment in some foreign land by denying them their fundamental right of engaging in a profession or an enterprise of their choice in Nepal?

Deregulation the only way

A complete deregulation of the taxi industry will guarantee that the people are free to exercise their fundamental right. The Ministry of Physical Infrastructure and Transport (MoPIT) is mulling introducing a fixed number of taxis into the market. But this will still mean that lots of other prospective entrepreneurs cannot enter the industry at will. At this point, I urge the readers to keep in mind that not entering a market because one does not see great economic prospects in the market, and not being allowed to enter the market are two very different things. The former is a voluntary action of the individual while the latter is a violation of his/her right due to barriers created by regulations.

MoPIT, as the line ministry will then have to mitigate the opposition that it is likely to face from the existing taxi operators that are benefitting from the existing set-up. Countries like Ireland and New Zealand adopted a zero-compensation policy while deregulating the industry because the privilege (for example, the Rs. 900,000 for an otherwise Rs. 750 service license in Nepal’s case) that the taxi operators were about to lose were unfair benefits of an unfair policy. However, there were also people that had only recently taken loans and just bought their way into the industry. In cases like these, the MoPIT would have to learn practical lessons from how other countries have deregulated their transportation sectors.

Conclusion

Of course, deregulation of the taxi industry is only a small example of the many economic reforms that are necessary to create a favorable environment for the people to enterprise freely in Nepal and become prosperous. The advent of the new constitution does not only signify the federation of the country into autonomous states, and the devolution of the powers of the central government to the local bodies. To the citizenry, it signifies new hope and new spirit. The people believe that in this new Federal Democratic Republic of Nepal, they will finally find economic opportunities within their homeland and be able to earn a decent living and grow prosperous together with their fellow men and women. But, will the autonomous states be bold enough to make such strides, or will words like ‘prosperity’ prove to be just another ‘word’ put up on the new constitution to justify the eight years that it took to write the constitution?

This article was originally published in Perspectives, The Himalayan Times, on the 27th of Spetember, 2015. Click here to access the published version.
Akash Shrestha

About Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

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Economy
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Three ways how GoN has complicated international trade

Last week, Samriddhi Foundation launched the Economic Freedom Country Audit Report. The country audit delved into six areas of economic freedom based on the forty-two components and sub-components of Economic Freedom of the World Report, 2015 produced by the Canadian think-tank, Fraser Institute.

As per the latest economic freedom of the world update, Nepal ranks 117th in the category “Freedom to Trade Internationally” with a score of 6.4 out of 10. Here are some of the problems areas within Nepal’s international trade sector as identified by the country audit.

1) High Tariffs

Nepal imposes duties on both imports and exports. Take imported vehicles for example; Brace YourselvesNepalese customs levies up to 241 per cent tax and duties, which means, a TATA Nano which costs 170,000 INR (272,000 NPR at prevailing exchange rate) in India will cost you 1.18 million NPR in Nepal after imposing duties and taxes.

The government might have numerous arguments for imposing high duties but when the cost of doing business through official channels is high, it is likely that unofficial ways will be used. Taxing international trade implies discouraging it. This is a counter-intuitive move, especially for a poor country like Nepal, where international trade can prove to be the engine of growth.

2) Excessive Regulatory Trade Barriers

Import and export has never been easy in Nepal. The traders have to submit 11 different documents while trading internationally. Certificate of origin, permission for financial transactions, foreign exchange provision, are some of the many documents that need to be submitted. If we compare the number of documents to required for international trade in other land locked countries such as Luxembourg (4), Switzerland (4) Czech Republic (6), we can see that the number of required documents is much more in Nepal.

In addition to this, lack of clarity of roles and responsibilities among ministries, departments and implementing agencies are few of the institutional barriers that discourage international trade.

What If I Told YouNepal, being a land-locked country, does not have access to sea transport. Nor does it have railway systems or efficient airports. All of this already makes international trade a challenging business for Nepal. Road transport thus remains the only viable option. It is unfortunate that we have such weak economic diplomacy and regulatory regime along with incoordination between various government agencies that the only possible mode of international trade for us takes 40 days to complete an import or export process (Doing business Report 2015, World Bank).

3) Movement of Capital and People

Nepal imposes control on flow of money outside and inside the country, creating a restrictive environment for foreign investors. Foreign investors, for example need approval for direct investments, technology transfers and/or providing credit. Also, foreigners cannot own land in Nepal and have to go through stressful immigration process to acquire a business visa. Additionally, there is a minimum investment requirement of USD $50,000 which discourages FDI in Nepal. Companies, which don’t require more than $10,000 as capital, such as some software companies, will be discouraged from entering Nepalese market because of such cut-offs. Similarly, there is practically no outflow of capital as Nepal Rastra Bank imposes restrictions on Nepalese to invest abroad.

The policies for foreign employment in Nepal are also discouraging. Nepal’s Foreign Investment Policy (2014) sets a condition Too Damn Highthat as long as a Nepalese citizen can do a particular job; he/she has to be preferred to an expatriate. Foreign workers may only be hired if individuals with such skills are not available in Nepal. Such approval is to be secured from the Ministry of Labor (MoL). After hiring a foreign worker, the investor also needs to guarantee that such expertise is transferred to a Nepalese citizen so that a domestic worker may replace the foreign worker within five years. The same policy of preferring Nepalese to expatriate was originally stipulated in the Labor Act, 1992, the governing labor Act as of now. Such terms and conditions not only dissuade foreigners from undertaking employment in Nepal, but also discourage foreign investment.

The Way Forward

The phrase “making a prosperous Nepal” has never been as frequently used as since the promulgation of the new constitution. You can find the word ‘prosperity’ all over the constitution. But how exactly is Nepal planning to achieve it? Perhaps working towards a higher degree of economic freedom is the right way to go. Given that countries with high levels of economic freedom are also the ones with some of the highest economic growth, per capita income and life expectancy, it is perhaps through economic freedom that Nepal will also be able to attain this “prosperity.”

International trade can be encouraged by rationalizing the tariff regime, removing the revenue dependence on tariff and by moving away from para-tariffs. Another solution is simplifying regulatory regimes by removing requirements to contact multiple government agencies for permits and authorizations to trade, which would help resolve coordination failures amongst government agencies. Furthermore, as for the movement of capital, it can remove capital controls and facilitate foreign investment both inward and outward such that it can become a credible player in the international market.

For more details on the 2015 Economic Freedom Country Audit Report Nepal, please click here

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Economy
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Private Property Right – You have it, but you don’t

The freedom of an individual to keep ownership of the fruits of his/her labor is the fundamental principle of private property right. This right manifests in the form of lending the owner of a property, the freedom to use, dispose of, and transfer the ownership of that particular property to any other individual/group through voluntary transaction. It is one of the fundamental pillars of economic freedom – the harbinger of prosperity. The UN has also ratified it as a Human Right. Countries today guarantee this right to their people as their fundamental right through their constitution – the supreme law. So does Nepal. Or does it?

Mere addressing property right as a fundamental right does not necessarily guarantee it. Particularly so when the article instating the property right is quickly followed by the lawmakers’ favorite little word – explanation. This is usually where the lawmakers tweak the preceding texts in such a way that they promise something, but they don’t really have to keep the promise. The Constitution of the Federal Democratic Republic of Nepal lends us an example:

Article 25: Right to Property

“Every citizen shall, subject to laws in force, have the right to acquire, own, sell, profit from, or engage in other transactions relating to, property.”

And then (you guessed it right): Explanation!

“(3) … when the state acquires private land for purposes relating to public interest, the basis and process of compensation will be as per the law.

“(4) Nothing … shall be deemed to prevent the State in enforcing land reform, management and regulation for the purpose of increasing production and productivity of land, modernization and commercialization of agriculture, environment preservation, organized housing and planned urbanization.

“(5) As per the sub-article 3, when the state acquires any individual’s private property for public interest purpose, nothing shall prevent the state from using the property in any other public interest purpose than the one cited at the time of acquisition.”

Note: The above text is an unofficial translation by the author.

Since the constitution stipulates that the property expropriation1compensation be determined as per by the law, the compensation against the expropriation of private property per se is no more guaranteed by the constitution. It would depend on the Acts relating to the purpose that it is actually being expropriated for. And it is again possible (although not necessarily so) to amend the Acts to rid the state of the burden of compensation altogether. One recent example would be the government denying land-owners a compensation for the acquisition of their land by the state during the road expansion drive in Kathmandu. The constitution does not make it mandatory that expropriation only be allowed after complying with a due process, including a just, fair and reasonable compensation. Instead, it states that nothing shall prevent the state from expropriating private property for ‘public interest’ purpose.

Here are a few examples of how other countries protect private property, and make compulsory provisions for compensation if there ever need be to expropriate somebody’s private property:

Article 31, The Constitution of India 

“… it shall not be lawful for the State to acquire any portion of such land … unless the law relating to the acquisition of such land, building or structure, provides for payment of compensation at a rate which shall not be less than the market value thereof.”

The Constitution of the United States, Amendment 5 – Trial and Punishment, Compensation for Takings. Ratified 12/15/1791: 

“ … nor shall private property be taken for public use, without just compensation”

Compare these constitutional provisions with those of Nepal and it becomes clear that you and I, the citizens of Nepal have our property right, and yet not.

“The right to life is the source of all rights—and the right to property is their only implementation. Without property rights, no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life.”

– Man’s Rights, Ayn Rand

Featured image source: www.demotix.com
Akash Shrestha

About Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

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Economy Politics
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External environment is not a valid excuse

Ask a lawmaker what the problem with Nepal is and a reply you commonly hear is ‘external environment’. Ask an industrialist or a trade union leader, or even perhaps a man walking on the street, and you’ll hear the same answer, ‘external environment in this country is not right’ is echoed all across.

But what is the nature of this ubiquitous monster that plagues Nepal’s economic and political prospects? What is it made of? After all, if this is indeed the problem then understanding its character becomes vital to any attempts to formulating a solution.

External environment, the very word feeds on its ability to overcome narrow definitional constrictions. It perhaps refers to the lack of a central covenant viz., the constitution, to guide our internal relations as a nation. It would also mean a political culture where the rights of others is grossly disrespected, or an environment in which the grand notion of freedom is snipped at and edited to suit ourselves. Or does it mean hostile foreign forces bent on molesting the resources of Nepal and forever keeping it under the shadow of dependency. External environment begs the question: external to what? External to self? If so, that sounds more like a mere terminological side-step to avoiding any form of moral and professional responsibility. After all, if the problem is external how can internal actors be held responsible or even accountable!

Aware of the vast challenges that confront our ever-transitioning nation, I still find it difficult to make peace with blaming an ambiguous environment for our shortfalls; as if to suggest we have no control over our own conditions. As if we, as individuals and a society, cannot dictate the terms we choose to live by. Such carelessness with our power of choice, the power to make a difference goes against the spirit of democracy that our peoples have repeatedly sacrificed. Acceptance of such helplessness should be a matter of shame, where we have surrendered our individual and social energies at the feet of an abstract, intangible, and self-imposed tyrant.

It would indeed be unfair to suggest that there isn’t anything that people cannot control or must not control to suit our needs. Research in the field of political and social psychology, genetic studies, and sociology point to a number of factors that are beyond our immediate control: we are limited by our biological and social genetic makeup. But when we repeat the excuse of external environment however is not about these. It refers to those things that are very much under our control and our jurisdiction but best left untouched lest it inconvenience ourselves and a structure to which we’ve accustomed ourselves.

If the policy is at the roots of the problem, lets debate the policy; if work culture is the problem, let the stakeholders stand up and weigh there claims against each other. If the problem is illiteracy or the lack of capital, there are ways of addressing them. These are not issues we can’t solve. The excuse of external environment refers to a gross magnification of the status quo bias: we don’t want to change because change makers themselves are cosy in the present state of things.

Given the challenges we face, and the opportunities ahead this excuse of ‘external environment’ stands invalid. The restoration of democracy and freedom of choice transcends the act of punching a ballot every couple of years. It means we have a right to transform our condition, and no environment, external or internal, should be a reason against exercising such a liberty.

Slok Gyawali

About Slok Gyawali

Slok Gyawali is a Senior Research Officer at Samriddhi, The Prosperity Foundation. He has previously worked as a political analyst for think-tanks in Washington D.C, and New Delhi. He has also contributed articles for various newspapers and magazines in Nepal, India and the UK. He holds strong opinions about Test cricket.

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