The latest economic indicators for Nepal show that, apart from its alarmingly increasing trade deficit that exceeded 46 percent of the gross domestic product (GDP) in the last fiscal year 2018-19, the rapidly decelerating external sector indices are also an equally serious cause for concern. The current account deficit of $2.4 billion (approximately 9 percent of GDP), balance of payments deficit of $612 million, decline in foreign direct investment and depleting foreign exchange reserves are among the key indicators of the country's economic health, and they hardly buoy hopes of rapid development and prosperity.

Major international development partners, both multilateral and bilateral, are keen to support Nepal's endeavour for economic progress. Although private investors seek assurances for their investment, they are not yet averse to investing even in large projects. The Nepali diaspora has developed a substantial capacity to invest if the right level of confidence-boosting environment is provided.

Typical questions

Unfortunately, these strengths have failed to lead to better delivery of the 'goods' to the economy. What’s more, fast decelerating trends in multiple sectors scarily threaten the viability of Nepal as a sustainable national economy in the long term. What is not working for us? And, what went wrong despite persistent claims of 'successful implementation of the restructuring of the state' by our political class? These are typical but obvious questions now being asked at present by one and all.

Since the economic outcomes are contingent on a number of impacting variables, within and without, the answers to these excruciating questions are not simple and straight. One of the critical components that had such a devastating consequence appears to be the abandonment of the idea of 'comprehensive economic reform' that encompasses both fiscal and monetary policy formulations. Such policy omissions are felt more keenly when the country is going through a critical transition from a unitary to a federal polity.

Two consecutive budget speeches of the federal government, including one for the current fiscal year, are a clear example of this. Not that these budget statements do not propose about a dozen reforms, like structural reform in agriculture including loans to smallholding agriculture, capital market reform, educational reform, land reform, insurance sector reform, labour reform, governance reform (in the federal context), revenue reform and so on; but the approaches taken are largely fragmented across the sectors and lack a much needed comprehensive approach with well-defined yet achievable objectives of these inadvertently overlapping propositions.

Nepal, for example, has failed to set up a functional single-window document processing mechanism for foreign investors as per the commitment made at the investment summit in March 2019. It had then promised to operationalise it within a month after the conference. Other measures to enhance credibility include being part of a globally accepted sovereign credit rating system and the government's ability to sell its development bonds and debentures at the time and on the scale it desires. Needless to say, these are mere mirages for Nepal now.

The capacity of both public and private financing is severely constrained. In fact, public financing suffers from a paradoxical capacity constraint spectre. On the one hand, the state apparatus is unable to spend the available budgetary appropriation efficiently, and on the other, it suffers from a chronic constraint of 'sizeable' resources causing severe underinvestment, mainly in infrastructure and public service delivery systems like education and health.

The capacity of the financial sector is also limited which, in turn, has failed to spur private investment. The available loanable funds in the entire banking sector may not be enough to finance even a 200-megawatt hydropower project that generally costs $300 million. Moreover, the financial industry is highly reluctant to finance projects with a long gestation period. However, a tangibly risen conspicuous consumption pattern over the last few years is testimony to the fact that there are untapped financial resources in the economy, more often than not unaccounted for in the input-output matrix.

On the corporate governance front, there are three gaps to be filled. First, the accountability framework has completely collapsed. Politically protected and, at times, promoted defalcation of public funds and rampant impunity for crimes related to the same have significantly weakened the authority of the state. Second, the government's inability to contain a fast burgeoning ghost economy skews redistributive justice, and casts its dark shadow over future prospects of course correction, thus making comprehensive reform more inevitable. Third, as federalism is now a constitutionally mandated system of governance, it is ideally expected to devolve power and automatically strengthen the public audit practices at the grassroots. Sadly though, federalism now suffocates in its own existential battle.

Comprehensive economic reform on any scale is only possible in a dispensation free of philosophical or ideological delirium. Its comprehensiveness should warrant a simultaneous and all-encompassing transformation of all three dynamics—policy, institutions and operational efficiency—of the state structure.

Nepal's economic policy regime suffers from over-regulation, duplication, contradiction and lack of clarity, more evidently in the laws enacted after the adoption of the federal system. The inherent intents of the policies seem to be more to control investment and entrepreneurship than to facilitate them. This has historically been the major deterrent to potential new investments and resulted in low efficiency for those who have already made investments. In the absence of a comprehensive approach in policy reform, even if some ministries (like industry) have come up with favourable laws, others (like forest and finance) continue to create policy hurdles.

Performance appraisal

The institutional set-up of Nepal's public sector is inadequate in the first place. The gap seems to have widened as the state failed to put institutional arrangements in place as envisaged by the federal set-up. Lack of efficiency, professionalism and inter-agency coordination are the issues in institutions that already exist. Some institutions like the National Planning Commission have already outlived their political rationale for existence. At the operational level, the provisions of the law are often violated by all and sundry.

A performance and effectiveness appraisal of public or semi-public institutions is thus far an unconceived agenda in our development discourse. A monolithic narrative of growth has also been part of the problem. This is because even an impressive economic growth story does not automatically translate into development, let alone social equity. Therefore, amid the current awe and bewilderment regarding the future of the economy, the initiation of comprehensive reform may provide some respite in the short run and serve as the foundation to rescue it in the long run.

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