With the promulgation of the new Constitution of the Federal Democratic Republic of Nepal in September 2015, Nepal switched from a unitary system of governance to a federal system with three parallel forms of government – the federal, the provincial and the local. The Constitution confers both legislative and executive powers to all three forms of government. Schedule 8 of the Constitution of Nepal particularly confers exclusive power to the Local Governments on 22 matters, including matters relating to public finance (raising taxes, fees, and fines), management of local services, local infrastructures, local statistics and records, and local market. Furthermore, the Constitution also enshrines ‘prosperity’ as a national agenda. Along this end, creating employment through necessary economic policy reforms for an investment-friendly business environment has been widely accepted as Nepal’s mantra of prosperity. Having legislative and executive powers that can be exercised to achieve the goal of prosperity creates space for local governments to forge a shared vision of growth and prosperity together with local stakeholders. Continue reading
The government of Nepal must introduce the following reform agendas in the upcoming pre-budget discussion to achieve the desired economic growth:
Starting a Business:
- Devolve business registration functions to local levels and a functioning one-window for registration
- Develop a universal database and use compatible softwares at different government institutions to enable real-time inter-department coordination
- Allowing incorporation of a one-man company based on a one-page AoA; building a model document for more-than-one-man private companies; and allowing nominating agents to handle the entire incorporation process in case of a public company.
- Make a legal provision to complete industry registration within 36 hours and complete company incorporation within seven days of having filed application
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