We have overcome almost every challenge to put the economy back on track: Finance Minister‘Our immediate priorities in the last one year were enabling laws, putting administrative and budgetary set-up in place, and ensuring division of roles and accountability in the context of fiscal federalism.’
When the government appointed Yubaraj Khatiwada, former governor of the Nepal Rastra Bank and two-term vice-chairman of the National Planning Commission, as the minister for finance, expectations were high. Khatiwada, who is often described as a technocrat, is well-versed on the economy, economic policies and development aspects. As Khatiwada completes his first year in office, the Post’s Mukul Humagain talked to the minister about his progress till date, the upcoming investment summit, the government’s plans to address bottlenecks in foreign direct investment and development projects, among other issues. Khatiwada will be one of the key panelists at the Kantipur Conclave on February 17 & 18. For details about the event, please visit KantipurConclave.com.
Below are excerpts from the interview:
It’s been almost a year since you took the helm of the Finance Ministry. But things have not moved ahead as per expectations on the economic front.
This government is the first one to implement the constitution in terms of operations. Other than holding the elections, nothing had happened to translate the constitution into action.
Hence, our immediate priorities were enabling laws, putting administrative and budgetary set-up in place and ensuring the division of roles and accountability in the context of fiscal federalism. All these issues have been addressed in the last year.
The whole process itself was a huge task, especially because federalism’s implementation was in its first year and there was a lot of push and pull over the resources. I think we have been able to manage these issues in transparent ways, especially in the sharing of revenue and expenditure.
When our government took charge, the economy was in a mess. Our initial effort was spent cleaning up the past mess and creating new tracks for development policies and programmes in a federal set-up. We have almost overcome these challenges.
Concerns are growing about the country’s economy and that you are failing to give momentum to it, especially against the backdrop of worsening external sector, widening current account deficit and balance of payment.
Yes, there is stress on the external sector. But this is only one aspect of the story. Let me talk about the brighter side also. When you’re having 6 to 7 percent economic growth, you must import capital goods and industrial raw materials, for which one cannot create a base for production in a single year.
If we look at our production structure, every product we’re making must have import content—be it agriculture or other sectors. When you increase industrial production, you have to import more. When the economy is expanding, there will be pressure on trade. That’s why our import of capital goods and industrial raw materials increased by 40 percent this year.
If we want high growth, you have to import for the medium term. If you’re looking long term, we can export and grow. But at the medium term, we have to put pressure on external trade.
The issue here is that we have not been able to expand our exports. Our comparative advantage in exports, ie commodities exports, is limited. We have given incentives through budget; the results of which will come sooner or later. But our strategy is to import material to be able to export services. Take the case of the tourism sector. When an aircraft is imported, it comes under the commodity import, however, the service provided by the airlines and foreign exchange earnings come under the service sector. Since our service sector is also not earning much, we have taken a series of measures to manage this sector and ensure there is no deficit in it.
But if there is still some deficit in the current account, we have to bring more capital, official capital as well as FDI. On both fronts, the government is taking bold measures so that our foreign exchange reserves are not depleted.
The growth we’re having this year will be more than 7 percent. And this growth will come with low inflation and more jobs.
Unlike other countries, we don’t have any official system in place that tracks the job market periodically. What is the basis for your claim that jobs will grow?
One has to make an approximate assessment. When there is growth in bank loans for self-employment, an expansion of banks’ credit to productive areas, and massive response to the government-announced scheme on a subsidised loan, and the way agriculture and SMEs are driving growth process, we can guess all this will be job incentive.
Another method which will help us keep track of jobs is our registration of unemployment people by the Ministry of Labour Employment and Social Security. This will tell us how many people are in an acute, unemployed position.
The report of a revenue secretary-led committee to address the widening trade deficit and balance of payment is on your table. One of the measures being discussed is imposing quantitative import restriction. If the BoP deficit deteriorates further and the foreign reserves deplete, will the government approach the IMF for Standby Credit Facility?
As of now, we are not thinking about approaching the IMF. It is not an immediate need. We follow global and regional trading rules and global trade practices. If there is dumping of some commodities, we have to control it. The Cabinet recently passed an anti-dumping law for this. We don’t have to put a quantitative restriction on all the goods. If there are some goods that are damaging or hurting our domestic industries, then we will go for quantitative restrictions. But that list will be very small. This will be done only in the case of having no other options. But we do have other options, such as revising custom valuations.
Regarding the Standby Credit Facility (SCF), IMF support is always desired, but only if we are in a bad balance of payment situation. Even when BoP was in a comfortable position, we have taken their support.
Currently, our foreign reserves are in a comfortable position, worth sustaining about eight or nine months of imports. Our job will be to protect our reserves. We should not take the current situation to call upon any BoP rescue. It is not necessary at the moment.
So are you saying that the economy is still in a manageable state and we don’t need any external support?
The World Bank and the IMF reports themselves state this fact. What they are concerned about is banks’ credit, which has grown too much, and strain in the external sector.
While your administration has been successful in revenue mobilisation and controlling revenue leakages, the same cannot be said about budget implementation. The capital expenditure has been disappointing, as usual.
Some of the key ministries executing large infrastructure projects failed to deliver in the first six months mainly because they are in transition, handing over their offices to provinces and local governments. It takes some time to settle their structures, functions and budget.
At the same time, the Voluntary Retirement Scheme that the previous government had introduced created some problems. The government was also engaged in other pressing issues—adjustment of civil servants in three-tier government, enabling of new laws for federal setup, among others. While the budget was allocated, it was not spent because of these reasons.
Now with the system effectively in place, expenditure will pick up the pace in the next few months. And my own assessment is that by the end of this fiscal year, we may not have sufficient capital to meet the demand.
While you claim that by the end of this fiscal year, the government may not have the capital to spend, the ground reality is different. Some of the flagship infrastructure projects are either stalled or mired in controversy. Melamchi Drinking Water Project is one of them. A majority of road and bridge projects are running behind schedule. Don’t you think the structural problems in budget implementation and public procurement must be addressed at the earliest to give impetus to development spendings?
I agree there are structural issues that need to be addressed to enhance the quality of capital spending. Ministries get the budget and authority to spend on the very first day of the fiscal year; however, the budget is not delegated down to the respective project offices on time.
There are also issues related to awarding the tender and developing a bid document, which normally takes more time than expected. Once the tender document is ready, the responsibility comes to us (leadership) to take timely decisions to award the project. Oftentimes, delay in decision making hits the project cycle.
Most of the contractors we employ don’t have the capacity to undertake projects, yet they keep on winning contracts.
Even when the contractor is incapable, our procurement law allows them to win the contract on the basis of the lowest bidding. There are some loopholes in procurement law whereby the contractor can protect themselves and remain free from penalties.
This cycle has to be changed if we want to get better results and quality in our development projects. The procurement law is being amended for this. The act is currently at the Cabinet.
What is the progress in bringing a separate law to govern mega projects? There is also apprehension over this law, as it allows the government to grant the project through direct negotiations.
The law is being enacted. A Cabinet committee has already approved the bill and it will be forwarded to the Cabinet next week. This law will govern only a few projects, not all mega projects. Those projects which will transform the economy will come under its purview.
Having said this, I would like to assure that the whole process will be rule-based and transparent. Every project would be cost estimated and any negotiations will only go around with the cost we agree.
The NepalLeaks revelation shows Nepalis have invested in offshore companies flouting the existing laws, and using the foreign direct investment to bring illegal funds into the country. You had said there would be prompt action on this issue — what’s the status?
Money parked in tax havens doesn’t necessarily mean it is illegal, although you have to be authorised by the central bank to hold bank accounts outside of the country. Tax havens are also strictly monitored by AML/CFT agencies. And it is not that every dollar has gone from Nepal; the money could have been generated outside the country. We will be looking into this.
The ministry has formed a committee led by revenue secretary comprising officials from the Central Bank and finance ministry. The team is already working, but we need support not only from police but also from the countries that are related to this scam.
These investigations must be supported through legal instruments. We also have to look into the whole gamut of existing laws to find out legal loopholes. The misuse of the NRN Act is one such example. There is also a need to have a mutual legal assistance agreement with the countries from where our capital flow is taking place.
The third aspect is we should be careful in doing the Double Taxation Avoidance Agreement (DTAA) now onwards. I have seen in the past that if such funds are to be channelised from some countries, we were so quick to sign DTAA with those countries. The motive seems to be quiet clear: bringing these investments in and taking money back without paying taxes. It is not tax evasion; it is tax planning before investment comes in.
The NepalLeaks revelation also raises questions over Nepal’s commitment to anti-money laundering regimes, particularly when the third mutual evaluation of the country is taking place next year. Don’t you think Nepal needs to put its house in order before global anti-money laundering agencies sit for a review?
It’s a big challenge because it is not an easy task to fix everything in short notice. But if we don’t expedite all of our works from now, we won’t be able to gain the trust of our development and business partners.
While we’re doing well in reporting suspicious transactions, we must make our banks more responsible to report such transactions. The Financial Information Unit under the central bank should report complicated and suspicious cases to the Department of Money Laundering Investigation which then must take cases to the court. We are now trying to reinvigorate the department to take money laundering cases to the court. Hopefully, by 2020, we will be able to address most of the deficiencies in our AML regime.
Recently, you had a meeting with the Chief Justice to expedite tax-related cases that are stuck at the Supreme Court. Was a meeting with the Chief Justice necessary?
I had two meetings with the Chief Justice. The first was a courtesy call to congratulate him and brief him on our ongoing activities, and how the court could be proactive in the issues. This is not to influence the court, but to expedite the cases pending at the court.
When development projects get stalled because of the court decisions, can we not request the court to expedite the process to resolve the deadlock? Similarly, if some revenue cases are pending, can’t we ask [the court] to expedite the court proceedings.
If cases related to development projects remain pending at the court for long, the cost overrun and time overrun will make the projects expensive. We want decision-making processes to be expedited which will help in development works and revenue mobilisation in an efficient way.
The Supreme Court recently passed a landmark judgment on Ncell capital gains tax issue. But there are still concerns over whether the government will be able to collect the tax, given the indifference the previous governments showed on capital gains tax issue.
There are no ifs and buts. We will proceed as per the court’s decision. We will collect the money from those who haven’t paid, whoever they are.
The government is hosting an investment summit in March. But there are serious issues related to FDI. Some of the development partners have already questioned the hosting of the summit in the absence of serious commitment on the government’s part for institutional and legal reforms. Will the government address these issues before the summit?
Our effort will be to bring the required laws before the summit. These legal reforms will address the concerns of investors. Our expectation is to bring these into place all before the summit. We’ve also formulated by-laws for the Industrial Enterprise Act. The Cabinet has recently approved an amendment to Foreign Investment Technology Transfer Act which will assure the investors that their foreign technology transfer will be protected. The Company Act, Foreign Exchange Regulation Act and Intellectual Property Act are in the process of the amendment while bylaw for implementation of Labour Act has also been approved. There are a number of laws related to land acquisition, forest clearance, availability to basic infrastructure to investors, which are in the process of amendment.
The other reforms we’re working on is the regulatory side. Given the lengthy and cumbersome process for getting FDI approval, we’ve now set up a single-window system for industries to be established through the industry ministry. This has already been approved by the cabinet.
The public-private partnership and investment act is being brought to have a single-window system at the Investment Board Nepal. The cabinet committee has already approved. Once the parliament endorses it, we will be able to implement a single-window system at the Investment Board too.
The third part is an operational issue, which is related to our behaviour, ie, how fast the government can make decisions. We have to seriously look into these behavioural issues that have often discouraged the investors when they visit government offices.
There are other issues which we are looking into—availability of electricity supply to power incentive industries, basic road and the transmission line for hydropower projects, and enabling some laws even at the local level for some urban transport investment projects.
The government will try to convince the investors by showcasing the reform measures taken so far, reform agenda that will be completed in the next few months and operational mechanism that we will be putting in place.