Many economists of the 20th century spent their life working on theories of economic growth. They have explained their growth models in varying ways and from different angles. The technicalities in these theories might vary but if we carefully examine, we can find a common aspect in all of them. They agree to each other on the fact that higher level of economic growth cannot be attained without high level of investment. The growth in the level of investment increases the level of income and employment, directing the country towards the path of economic prosperity. Continue reading
– This article was originally published by Akash Shrestha on July 3, 2016 in The Himalayan Times.
With the start of July, we are now into the month of the new fiscal year 2016/17. The budget that was presented before parliament five weeks ago will go into implementation from mid-July. The objective of the budget once again is to “… increase income and employment …,” and “to attain high economic growth through increasing productivity and production,” among many.
On one hand, we have these; on the other, there are people migrating out of Nepal by over a thousand a day in search of economic opportunities — including some of the most hostile territories in the world. They do so because they have no other choice. When there are no jobs in the country, one makes the obvious choice of becoming an economic migrant.
One common thing that binds the budget, the Constitution and migrants is jobs. And what creates ‘new’ jobs? Private enterprises! And creating private enterprises that will create new jobs is not easy for Nepali citizens to do. Thus, the immediate focus should be to work towards facilitating enterprises. To begin with, the two most important aspects of facilitating ‘enterprise’ will be ‘facilitating entry’ and ‘facilitating exit.’
Starting a business — facilitating entry
Facilitating entry should eventually translate to a situation where a Nepali can easily dream of starting his/her own business. Then, the next thing to look into will be how long does it take for an aspiring entrepreneur to get from thinking about starting a business to registering one and moving to the operation phase. As things happen in Nepal, the latter tends to hinder the former.
Say, one wants to start a small manufacturing industry. If one studies the official processes, it will look like the company can be registered in a matter of weeks, if one is lucky. But for an entrepreneur, registering a business at the Office of the Company Registrar is merely creating a legal person. This legal person does not have any right to engage in economic activities unless it gets necessary permission from other agencies, depending on the nature of its business. This is where things get more inhospitable for aspiring entrepreneurs. If one needs to do an Environmental Impact Assessment, it can only be passed through the Department of Industries and can take him anything between four to six months, to years.
Then there are a number other agencies to get the permission from before one can operate, vis. the Office of Cottage and Small Industries, the Inland Revenue Office, other concerned departments, et cetera. Some of the common grievances of all existing industrialists are that there are too many and unclear legal processes, and all of these cost a lot of time and under-the-table fees. Now that Nepal is going to implement federalism, people should feel that this is a positive change for them. From starting a business perspective, this can be achieved through devolution of the regulatory agencies that are centred in Kathmandu to all new provinces, further guaranteeing that people get all kinds of services from One Stop Service Centres (OSSCs), and reviewing and reforming existing procedures to get rid of redundancies and make them less time-consuming.
Closing a business — facilitating exit
Another equally important factor that affects people’s decision to start a business is how easy it is to close the business should s/he choose to. Sometimes businesses go in loss, other times, people feel that there are greater prospects of profit in another business and want to close their existing business. In order to make sure that the switch is prompt, people are still economically active, and the utilisation of resources is optimised, it should be easy for business to wipe their slate clean and start anew.
To put it simply, there is no clear policy regarding exit. One of the hurdles is that it is a challenge to find your own file at the regulatory agencies, then, tax files are practically never closed, you have to hire a liquidator irrespective of the size of your business, the regulatory agencies are not at all friendly, and there is no coordination and harmonisation across functions of different government agencies. When people see that it is difficult to get their hands off a business once they get into it, that their resources are likely to be stuck in a not-so-profitable or even loss-making business, and that they are always being monitored, that already acts as a big demotivating factor.
To start with, facilitating exit would require a clear exit policy on the regulator’s part. Then, the processes will need to be simplified and made entrepreneur friendly, redundancies be done away with, and entrepreneurs be made to believe that the regulators are there to facilitate rather than to stifle their entrepreneurial spirits. Just as in case of entry, the exit processes should be handled from the provincial level, too.
It is when people feel that they can earn their own livelihoods by starting their own businesses in Nepal that we will be able to meet the goals as stated in the Constitution and the budget. We cannot be promising to create jobs for people without analysing why people are not doing it on their own. At the end of the day, it is private entrepreneurs that create new jobs, and not the government.
Kathmandu, Oct 20, 2014: Micro and Small enterprises in Nepal could do lot better in a more economically free environment, shows the findings of a study conducted by Samriddhi Foundation on Kirana Pasals (small retail stores selling groceries and fast moving consumer goods whose services are used by a vast majority of Nepali people) in Kathmandu Valley. Samriddhi Foundation shared a first of its kind report on how Economic Freedom translates into the day to day lives of micro and small entrepreneurs in Nepal, taking the example of Kirana Pasals. The study (which was conducted from April – September 2013) focused on identifying some key hurdles in the growth of these independent businesses run by entrepreneurial and hardworking people.
Part of the research, two hundred and sixty eight Kirana Pasal owners were interviewed to capture valuable information, insight and stories on the impediments they face to grow their enterprises. The report reveals that regulatory environment pertaining to registration, taxation and standardisation are immediate areas of concern. The report also highlights the fact that laws and regulations that are applicable to KiranaPasal s are scattered across several acts, regulations and rules; and are enforced through several government agencies, which makes it difficult for these entities to be operating in a fully legal manner.
The report shows that taxes are also something which further suppresses the growth of Kirana Pasals, especially those that are registered. Thus the report highlights the need to reform the tax code by reducing tax rates and simplifying it to widen the tax bracket. This would help Kirana Pasals operate legally and consequently access finances and other resources to grow.
The report also recommends rethinking the current standards applicable to Kirana Pasals and fixing practical and acceptable standards in consultation with the Kirana Store owners and consumer groups. Access to finance was another issue of concern for Kirana Pasals wanting to grow. According to the report, capital available from micro finance institutions (which most Kirana Pasals use) are limited and often more expensive than loans from commercial banks and other financial institutions. Since most owners/manager of Kirana Pasals have limited capital and little formal education in business, documents like business plans, balance sheets, rental contract, letter of approval from municipality, tax documents, asset valuation, etc. are hard to produce.
Finally, barriers to exit were also considered as barriers to growth as when entrepreneurs fail, they have to have an opportunity to wipe the slate clean and start again. This is almost not an option for retailers such as Kirana Pasal owners in Nepal as exiting formally is extremely difficult. The report makes recommendations to address the aforementioned impediments to the growth of Kirana Pasals and the recommendations together help increase Economic Freedom in Nepal.Download the full report here. Download the summary of the report here.
Industrial growth, has, for long been seen as a premise for development in Nepal. While many among us have shown concerns over the state of industrial relations in the country and the not-so-strong-hold of law over issues, the idea that once made it to the headlines and now watches from the sidelines has been the formation of Special Economic Zones (SEZs). There was a time when recommendations for the betterment of industries in the country resounded with the proposition of SEZs. Totally commercial areas, especially established for the promotion of foreign trade, SEZs are meant to have more liberal economic laws in comparison to the laws of the land. Specifically delineated enclaves treated as foreign territory for the purpose of industrial, service and trade operations, SEZs come with features like relaxation in customs duties, a more liberal regime in respect to other levies, foreign investments and other transactions. Overall, it provides for special tax subsidies, fully facilitated buildings and physical infrastructures with all necessary services, necessary procedural service systems through a one door system, establishment of an export oriented industry and bringing in of FDI and modern appropriate production technology.
Keeping this and the endless recommendations in mind, the Government of Nepal (GoN) adopted the concept of Special Economic Zone (SEZ) to attract foreign and national investments for the establishment of industrial and business units. It formed Special Economic Zone Project (SEZP) on 2060/10/15 under Ministry of Industry, Commerce and Supply (MOICS) to formulate laws, rules and regulation, implement planning, design and construction of Special Economic Zones throughout Nepal. Special Economic Zone Ordinance-2005 and related rules were also formulated in accordance. The Ministry of Industry has also identified 10 areas to be developed as Special Economic Zone.
Said to be the first one, SEZ in Bhairahawa initially brought much hope to the industrialists. It was supposed to be have been completed by February, 2014. Alas, it hasn’t been. The construction in Bhairahawa is in a limbo after the contractor refused to complete it citing that the project has yet to clear out the payment worth NRs. 20 million for the works already finished. Looks like even ‘special’ zones are forgotten with time in this country.
And then there is the bill on SEZ, long under consideration. The government last year had decided to operate SEZ issuing a formation order after efforts to formulate an act had failed. The bill was opposed by the ruling party when the then government had tabled it in the parliament in 2008. The bill includes provisions like ban on workers inside SEZ to get into politics, and strikes, mass meetings, and working as a cadre of any party, and will implement the system of No Work No Pay. This adds to the already existent financial burden.
The delay in the implementation of the project, whatever the endless reasons are, has meant much despair to the industrialists. For now, the SEZs seem far from meeting their three-fold objectives of attracting FDI, increasing exports and accelerating the country’s economic growth; those seem secondary—they better be set up first. Or before long, like everything else, they won’t be the priority anymore
The Ministry of Finance has presented a budget of Rs. 618 billion for the fiscal year 2071/72. While the Finance Minister has promised to kick-start second generation of economic reforms by reforming economic policies, bringing down anti-competitive practices like syndicate and cartels, encouraging the private sector and offering various fiscal incentives like tax exemptions and rebates, the budget has, in the mean time, also been a subject of debate in terms of issues like Constituency Development Fund, being pro-rich and many more.
Samriddhi, The Prosperity Foundation hosted its latest round of Econ-ity on “Analysis of Budget 2071/72 Presented by GoN” on the 17th of July, 2014 at Hotel Everest, New Baneshwor, Kathmandu.
This edition of econ-ity featured Dr. Chiranjibi Nepal (Chief Economic Advisor to the Prime Minister) and Prof. Dr. Bishwanbher Pyakuryal (Senior Economist) as speakers. The event was moderated by Mr. Rameshore Khanal (Former Secretary, Ministry of Finance) who started by acknowledging that this budget has been presented in the right time for Nepal. He shared that the current government is capable of staying in power throughout its tenure and has potential to deliver results in terms of constitution drafting, delivering economic growth, enhancing production, generating employment, etc. In the meantime, he also acknowledged the fact that this budget has been critically analysed in the parliament itself and opposition parties have raised concerns over its not being regionally balanced.
Here is a snippet of what the speakers said during the forum and what their analysis was regarding the new fiscal budget.
Prof. Dr. Bishwanbher Pyakuryal
Prof. Dr. Pyakurayal commenced his deliberation by acknowledging the good aspects of this budget. He mentioned that the allocations justify the government mission of employment generation, economic growth, social physical infrastructure, long term growth and poverty reduction.
He then went on to warn that this budget will not it yield any result unless the plans and policies and reform measures are implemented. The underlying assumptions that are made during the preparation of the budget do not seem to hold up in reality in Nepalese context. He talked about how theoretical economic policies and ground realities of Nepal do not match.
Nepal has seen wages go up or down, without really affecting labor productivity; despite the much talked about effect of India’s economy, Nepal’s inflation was still double digit when only last year it was contained at zero in India; the monetary policies have failed to deliver desired results in inflation. There does not seem to exist a robust relationship between Nepal’s monetary policy and inflation. He further expressed that we need to understand which among the factors like policies, capital adequacy/inadequacy, governance structure, and institutional set-ups are responsible for these issues.
He highlighted that one of the major problems in Nepal is the inability to make capital expenditures. Despite Local Self Governance Act and guidelines set by the fiscal commission, we have failed to spend on time. This raises concerns over our resource allocations. He said that we have already missed the train if we are to make it to Developing Nation status by 2022. We need to make 13-18 billion dollars worth of capital expenditure to graduate to Developing Nation status, but our current growth rates will not lead us there.
He raised serious concerns over how we never study India’s budget allocations’ impact in Nepalese economy despite its being released few months in prior. With their levels of planning, their currency is going to strengthen against USD. This will lead to lower production costs in India. On the contrary, our production costs are higher than market prices in India. Only 13% of the agricultural produces reach the markets in Nepal. In this case, the priority of the budget should have been making markets available to these entrepreneurs, farmers, businessmen. This has not been addressed by this budget.
While on one hand, the budget talks about reforming policies and Acts, in reality we have been relying on very old policies. We are still guided by Foreign Exchange Regulation Act, 1962, while India has made 3 amendments to the same Act of theirs till date. There are as many as three dozens of proposed policies and Acts lying around in the cabinet; some are stuck in the parliament. These processes need to be expedited.
He also expressed that we need to make structural changes in our tourism sector. 55-65% contribution to tourism sector comes from domestic tourism, but we have failed to recognize the domestic tourists. We need to explore further on possibilities of pilgrimage tourism, adventure tourism, trekking, sights-seeing, and formulate relevant programs for the domestic tourists. He also mentioned that we should look into popular international tourism practices like keeping Tourism Competitive Indices.
He concluded his deliberation by commenting over lack of capital/financial management in Neal and economic viability of possible federal states. There is domestic saving worth Rs. 2 trillion in Nepal itself but we have failed to channel these funds into productive sectors. He further drew attention to the issue of economic viability of federal states. While have been talking about federalism in Nepal, we have been overlooking facts like 60 % of Nepalese districts only somehow manage to collect revenues worth 10% of their total expenditure. Under such a situation, it is obvious that it makes no economic sense to go into federalism.
Dr. Chiranjibi Nepal
Dr. Nepal commenced his deliberation by expressing that we cannot have very high expectations from the budget. His focused majorly on our inability to make time-bound reforms to our existing policies and regulations. He acknowledged that for the first time in history, this budget has addressed Second Generation of Economic Reforms. However, lot needs to be done for the promises sowed by the budget to materialize.
He stressed on the need for industrial policies to adapt and respond to the changing trends and rapidly developing technological innovations coming in the market. Comparing it with India and China, he lamented that Nepal has been very slow in economic reforms and mentioned capital and financial market as an example of how the economy has been hit by lack of timely policies. China has continued to grow since its economic reforms of 1978, achieving as much as double digit annual economic growth and falling to single digit only recently. Industrial policy of China changes every 3 years to allow the industries to adapt to the technological advancements in the world. Similarly, India, that opened up its economy in 1994 has been continually reforming its economic policies and is all set to be one of the biggest economies in the world by 2020. In the meantime, Nepal has failed to internalize the positive changes occurring in the neighboring countries.
Dr. Nepal also shared that the Constituency Development Fund (CDF) will do away with the long bureaucratic procedures delaying the funds from reaching the local level, and expressed his consensus with the policy.
The pre-budget discussion, addressing Public Procurement Act, Financial Accountability, Land Acquisition and quality control are some major highlights of this budget, as expressed by Dr. Nepal.
Interaction with the audience
The participative and interactive audience then further talked about education, ability of the government to spend, youth self employment, foreign employment, sectors of comparative advantage, and other issues pertinent to the topic. Some highlights of the interaction session are as follows:
• Currently in Nepal, inflations has been rising and output is falling. There is therefore a situation of stagflation. Similarly, there does not seem to be a sound link between growth and employment. We have seen unemployment levels remain the same despite economic growth. In order to address situations like these, we need to form coordinated policies.
• Agricultural Development Bank has gone on loss due to its subsidy program. Now, instead of going for technological up-gradation and commercial agriculture, we are giving continuity to the same subsidy program. It appears that necessary homework has not been done in this regard.
There is a free flow of electricity in Nordic countries and prices are determined by free interaction of supply and demand. This mechanism has helped new players to enter the market which eventually reduces the price and brings new innovation. Additionally, it has created energy security in the region. Learning from the success of the Nordic region, East African countries like Rwanda, Tanzania, and Kenya are also reforming their energy policies so as to aid the formation of a common market for energy exchange. All this has been possible in the South Asian region because various sources of electricity are available in different countries—Nepal and Bhutan have rich hydro resources, Bangladesh has a substantial amount of gas reserve and India generates vast amounts of cheap energy from coal.
Power exchange seems much more favorable in case of India and Nepal as there exist a complementary relationship in demand and supply of electricity in these neighboring nations. Electricity production in Nepal is high during summer season due to maximum flow of water in the rivers. Additionally, majority of the projects which are under construction are also run-of-the-rives as such requires low cost and has lesser environmental impacts. As a consequence, there is energy surplus in Nepal during the wet season. At the same time, the demand for energy in India may be higher due to use of refrigerators, coolers, air conditioners, and other electrical appliances that are used for lowering temperature. Moreover, the hydropower potential of Nepal is substantial than its population size and expected needs. On the other hand, energy demand in India is growing at the rate of 9 percent due to rapid economic transformation. Therefore, electricity trade between these countries can be beneficial for both the countries.
Nepal’s hydropower potential which is concentrated in far western region is difficult to harness if it is used only for domestic purpose because demand of electricity in that area is relatively low due to sparse population and less availability of industries. Therefore, lengthy transmission lines should be constructed to bring power to the load center. Building such transmission lines, however, is very costly and sometimes costs more than the construction of hydroelectric project itself. Additionally, it significantly increases technical losses. In this case, it is beneficial to export power to various adjacent parts of India, including Uttarakhand, Uttar Pradesh and even Haryana which makes more economic sense. However, for the execution of such a plan, Nepal needs Power Trading Companies that exchange electrical power in commercial manner considering water as a market commodity instead of a political good. This mechanism will further facilitate buying and selling of electricity at different times of the day. Prices will be fixed according to market signals and this is very essential for the development of hydropower.
Power Trading Companies like Power Trading Company-India were established in India as its energy market was liberalized. It makes energy integration much easier as Power Trading Company is an essential body for trading power in a competitive market. Due to presence of it, power markets seek to maximize competition in generation and compete on price instead of cost. Thus, it creates value for power by discovering market for power which is crucial for introducing innovative products according to need of customers. Additionally, it provides a single window service to take care of all intermediate requirements like transmission agreements, metering, accounting and other necessary things.
Furthermore, integration of energy market through formation of Power Trading Companies helps to optimize existing energy resources and provides commercial outlook to the sector by catalyzing investment especially from domestic and foreign private sector. It identifies and promotes opportunities for mutually beneficial cooperation projects in the power sector. The countries of Greater Mekong Sub-region (GMS) like Cambodia, Lao PDR, Myanmar, Vietnam and two provinces of China, namely Yunnan, Guangxi Zhuang have already practiced this principle. This ushered in much needed prosperity in the region through exchange of energy and further led to integration in other economic activities.
Nepal also needs to initiate similar work by holding a series of dialogues and discussions with the state governments of Uttarakhand, Uttar Pradesh, Haryana and Bihar which are neighboring states of India as people living in this region have been suffering from acute shortage of power for a long time. The invitation from Narendra Modi to Nepalese counterpart during his sworn in program provides a wonderful opportunity to raise such issue for the betterment of both countries. If Nepalese Prime Minster is able to float this idea during his formal and informal meeting, it might pave the way for detailed discussion in secretarial and ministerial level as follow up process, and a long term agreement will happen for power exchange. This leads into construction of mega projects which have been waiting for a long time for suitable environment and the adequate availability of energy will surely bring higher economic growth with rapid industrialization and modernization process in the region and remove people out of vicious circle of poverty in massive number.