Hello, next finance minister!The prime minister should pick a capable and honest person for this important role.
Immediately after assuming his office two and half months ago, Prime Minister Pushpa Kamal Dahal said the first priority of his government would be to revive the country’s economy. He also assured the leaders of the umbrella organisations of the private sector—the Federation of Nepalese Chambers of Commerce and Industry, and the Confederation of Nepalese Industries—to address the pressing economic issues, including high interest rates, liquidity crisis and low capital expenditure faced by the country.
Deliberating in a separate programme, “The Way Forward to Nepali Economy”, organised by the Society of Economic Journalists of Nepal on February 12, Prime Minister Dahal lamented, “Economists, despite their high-sounding academic degrees from so-called reputed Western universities, also appear unable to understand and address the problems of the Nepali economy. Apart from the knowledge about economic theory, persons with a deeper understanding of our social dynamics are perhaps better placed to tackle our country-specific socioeconomic problems.” He was, in fact, responding to an observation that 12 out of 16 finance ministers changed in as many years after Nepal became a republican democracy were the henchmen of powerful party leaders, who lacked formal training in higher education, let alone in economics.
The connotations of these statements are clear. First, the understanding of the looming crisis in the economy among the political class is very shallow and so the promise of addressing it “head on” is nothing beyond political platitude. Second, his pick (for that matter by any party leader in his coalition government) as the next finance minister is more likely to be a trusted lieutenant on the pretext of the person’s better “understanding” of Nepali society (politics?) than economics. A counter-argument of convenience, vociferously put forth by underqualified politicians to this end is: Even the trained economists, when appointed as the finance ministers and office bearers at the National Planning Commission (NPC), could barely make any tangible difference in the economy. This claim certainly has some flesh; however, it needs deep digging into the exact reasons for such underperformances.
These lackadaisical leadership traits are risky as the economic challenges for Nepal emanating from domestic and international factors are real and just around the corner. Domestically, economic growth is difficult to cross 4 percent while inflation is poised to shoot to double digits in the current fiscal year. The shrink in the manufacturing sector is unabated, which now contributes only less than 5 percent to the gross domestic product (GDP), while the projected trade deficit is feared to cross Rs2 trillion. In the first seven months of this fiscal year, the deficit has already hit the Rs875 billion mark, including about Rs50 billion loss in services imports alone. Exports totalled less than Rs93.5 billion. After eight months of the financial year, the capital expenditure has been barely 21 percent of Rs380 billion allocated. Even at the provincial and local levels, the scenario of capital expenditure is not fundamentally different.
By now, two-thirds of the revenue target of Rs1.4 trillion should have been met, but only 41 percent of it has been realised so far. The capital market vulnerability has defied all logic of modern economic management. The national debt is now near 45 percent of GDP, about half of which is an international obligation. This, among several other indicators, makes public financial management increasingly challenging for the government.
Internationally, the collapse of two moderate-sized American banks, namely Silicon Valley Bank and Silvergate, a crypto bank, in just 48 hours last weekend is seen as the prelude to a 2008-like financial crisis in the US economy. In addition to food and fuel price spirals primarily due to the protracted Russia-Ukraine war and resultant global supply chain disruptions, the cascading effects of the looming global financial crisis are sooner or later certain to hit the Nepali economy as well. A more telling effect compared to other smaller economies is likely as ours due to its complete dependence on imported fuels and almost 80 percent dependence on imported foods and essential items. The rapid devaluation of the Nepali currency and rising import bills will worsen the wounds.
Although no systematic data is available, there is a tangible fall in the disposable income of the common man. Small and medium enterprises (SMEs) are hit hardest. They are the basis of employment and self-employment and the backbone of the Nepali economy. Policy experimentation at unnatural frequencies and poor economic governance are disturbing the market mechanism and the economic cycle.
What kind of personality should the prime minister pick as the new finance minister during these testing times? An obvious answer would be a capable and honest person for this important role. But it is not as straightforward as stated. In the past, the preference was more often than not given to a sycophant of influential leaders over available capable persons. The idea of an honest finance minister has already become antithetic as the post has become a sharp instrument to extract funds required for the party in power and finance for the “regal” lifestyle of a handful of political top-hats.
The contingent question is: How much change can an individual as finance minister bring to the economy even if they are genuinely committed to substantive reform? And why have a couple of trained economists, who had the opportunity to head the ministry, also fared badly? It takes a lot of courage on the part of the political leadership to allow, ideally even an economist finance minister, to function as per their conscience vis-a-vis the national need. Even several well-trained economists appointed in the finance ministry and the NPC have failed the nation. It is primarily because they are given these responsibilities only after effectively converting them into “yes-men” to the heads of the party to which they belonged. Conversely, their self-seeking character finds it easy only to do and say exactly what pleases the ears of their masters to get and retain these lucrative public positions.
If the prime minister and his partners in the coalition yet again fail to give the responsibility of the finance ministry to a person who knows the Nepali economy well and understands the increasingly pervasive malfunction of fiscal federalism, it is certain to cost the economy dearly and dash its future.