Wendy Werner: The IFC is looking to scale up investment in NepalThe country manager of International Finance Corporation on the institution’s strategy for Nepal, how it is assessing Nepal in the wake of the Covid-19 pandemic and how it wants to support the country in its recovery.
Wendy Werner is the country manager of International Finance Corporation (IFC) for Bangladesh, Bhutan and Nepal, based in Dhaka. She implements IFC’s strategy to expand financial inclusion, sustainable infrastructure, and support competitiveness through investment and advisory services. Werner manages IFC’s committed investment portfolio of over $1.3 billion in Nepal, Bangladesh and Bhutan, alongside a $59 million advisory programme. Prior to her current role, Werner was IFC’s Manager for Trade and Competitiveness Advisory Services for the East Asia Pacific region. She has worked in Tajikistan and the Western Balkans. In an email interview with the Post’s Sangam Prasain, Werner describes IFC’s short-, medium- and long-term plans in Nepal’s financial and economic sector and response to the Covid-19 pandemic situation to help the country with more financing.
As a result of the Covid-19 pandemic, it’s the private sector that got hit far more quickly and harder. As an international financial institution that offers investment, advisory and asset management services to encourage private-sector development in less developed countries, how do you assess the overall situation? Do you have any rescue plan?
This is a pandemic that has delivered multiple blows–which then has had a domino effect across economies. The effect is evident in key pillars of Nepal’s economy–the services sector, remittances and tourism are already hard hit. Though remittance figures for June are surprisingly high, we think this is an aberration. Economic growth is expected to fall in Nepal to a range between 1.5 and 2.8 percent in the fiscal year 2019-20. And the early results from a recent survey of over 500 businesses in Nepal, by IFC, clearly indicates that businesses have been severely impacted by the pandemic.
The hospitality industry employs about over a million people. Over half a million jobs were directly dependent on tourism arrivals last year. Initial estimates from tourism entrepreneurs suggest that the loss to the sector could be already over $1.6 billion. About 31.2 percent of Nepal’s population are estimated to live between $1.9 and $3.2 a day. They face significant risks of falling back into extreme poverty.
Globally, IFC has put in place a package of measures—worth a total of $8 billion—to help sustain economies and protect jobs around the globe. Our short-term goal is to help cushion the blow of the economic crisis. Overall, IFC and its sister organisation, the World Bank, are deploying a $14 billion fast track financing package to respond to immediate health and economic needs.
In Nepal, we have just invested $25 million in NMB Bank to support small and medium-sized enterprises (SMEs) and green projects, and there are more under discussion with other clients. Despite the market uncertainties, the fiscal year 2020 has been a record year for us—as we were able to commit $563 million.
The tourism industry is the worst hit sector by the ongoing crisis, and investment worth billions is at risk. Is the industry on your priority list? If yes, what are the plans?
You are quite right. Tourism has been really hit hard. We are in close discussion with both our private sector clients and government agencies on leveraging IFC support to help in the relief, repositioning and in the resilient recovery of the tourism sector. Tourism is indeed in our priority list. The first phase of IFC’s global response was focused on financial institutions to ensure an abundance of liquidity in the financial system for businesses and SMEs to pay their suppliers and workers. The second phase of our global response will be sectoral, and we are looking for ways to leverage IFC’s global facility for our tourism and other sectors in Nepal.
On the advisory side, we are already planning support in the immediate response phase by bringing together key stakeholders to develop an integrated communication strategy, including a pilot assessment to understand key market recovery scenarios, flight connections, and insurance coverage, among other things.
Subsequently, IFC’s recovery efforts will focus on improving standards for accommodation, including hygiene around food preparation while identifying business propositions which may support access to finance for upgrading facilities in lodges.
As a lead lender to the 216 megawatt Upper Trishuli-1 Hydroelectric Project, could you tell us about the status of the project? When will construction begin?
Upper Trishuli-1 is a flagship project for us. IFC and the World Bank have worked on the project development for years to ensure its viability. Infrastructure projects are complex even in normal circumstances. Our client Nepal Water Energy Development Company is in the process of finalising the Engineering Procurement and Construction contract. Like everything else, the pandemic has affected the timeline for bringing a contractor on board. We expect construction to begin later this year. IFC remains committed to ensuring that the project is completed at the earliest possible time while delivering electricity to millions and providing tangible development benefits to the affected indigenous population.
Are you investing in solar projects?
IFC-backed SME Fund, B02, has invested in small scale solar projects. IFC is looking to scale up solar investment in Nepal. IFC is exploring different investment options and pursuing market creation activities.
While hydropower is abundant in Nepal, the country needs some energy mix for energy security as hydropower projects only run at 40 percent capacity during dry seasons. Energy portfolio diversification is also critical for reliable electricity supply, particularly during disasters such as earthquakes.
IFC’s overall strategy envisions an investment of $800 million to $1.2 billion in Nepal by 2023. Currently, half of that amount has been invested. Based on the current situation, will it be realised? How would you plan to invest the amount in the next three years?
We have an ambitious strategy of investing between $800 million to $1.2 billion, and all hands are on deck to ensure that our goals are met. Our fiscal year 2020 ending in June was a record year for us. Our committed portfolio grew to $563 million. If you compare that with the previous year, our portfolio stood at $75 million. In fact, both 2019 and 2020 have been record years for us. We are actively looking into several sectors to invest and we expect to reach the target of $800 million by 2023, and clearly infrastructure will be a big part of our investment strategy.
IFC is also working with the government agencies to promote public-private-partnership projects to ease the burden on the public sector in infrastructural development. What achievements have been made?
Even before the pandemic, Nepal faced a significant funding gap in the public infrastructure space. IFC has been advocating for increased foreign direct investment involvement of private developers, particularly in the power sector, and public private partnerships (PPP) as a viable alternative to narrowing the funding gap in this sector. PPPs involve risk and burden sharing between the public and private sectors. Without some assurance of profitability, the private sector would not want to risk their investment.
IFC has been in discussion with the government of Nepal for the last 10 years to develop large and important infrastructure projects through the PPP model. IFC has also signed a memorandum of understanding with the Investment Board of Nepal and the Ministry of Energy to provide a framework for such collaborations.
We have engaged with the government side on several potential projects like the development of a Special Economic Zone at Simara, power transmission lines, hydropower projects, affordable housing and airports operations. IFC has also supported the government in developing the viability for the private sector participation for some of these projects.
Recently, IFC announced a $25 million loan to NMB Bank to boost financing for green projects and SMEs. How much support are you planning to give to the financial institutions, how many of them are seeking funding and for what purposes?
IFC’s investment in NMB Bank is part of our broader strategy to strengthen SME banking in Nepal—which involves supporting regulatory reforms and providing up to $170 million of loans, specifically focused on SME lending to several banks over the next two years. We can’t reveal the names of our potential clients just yet, but we are in discussion with several of them.
SMEs are a priority sector for Nepal and represent more than 99 percent of registered businesses in the country. Pre-Covid-19, SMEs contributed about 83 percent of industrial jobs, and about 80 percent of the industrial sector’s contribution to Nepal’s GDP.
IFC is also working with Nepal Rastra Bank and the Ministry of Finance to help SMEs develop by strengthening the credit bureau in Nepal and improving the regulatory framework. In its current form, the credit information bureau in Nepal only covers 1.7 percent of the adult population.
Will IFC’s involvement in financing banks to meet their liquidity needs encourage other international lenders to eye the Nepali banking sector as a good market? Could Nepali banks get good deals from other international lenders?
IFC’s investment in Nepali banks has already paved the way for other international lenders. As you mentioned above, our recent support to NMB Bank was our second investment. IFC has invested in NMB since 2015 through a Global Trade Finance Program facility; and in 2018, IFC extended a working capital solution loan. Following the IFC investment, CDC invested $15 million in NMB last year.
As you alluded in your question, given the inability of international institutions to lend in local currency, often the terms of investment for the local companies may not appear very attractive at first glance. But there is more value add to IFC’s investment than just liquidity. We invest in first mover projects and projects that deliver tangible development impacts—summoning the tools and facilities of the World Bank Group and wider donor communities in support of such projects.
We are certainly looking into options on leveraging good deals in support of the private sector in Nepal. As mentioned before, for our investments into the two microfinance institutions, we will undertake a process to provide those funds in local currency.
What is the specific development in issuing local currency bonds for Nepal?
Nepali Rupee (NPR) offshore bond is part of our investment plan into two micro-finance institutions in Nepal. We are in the process of finalising the terms of agreement with the micro-finance institutions. Once we commit the investment, we will then begin the process of issuing offshore bonds. Clearly our timeline has been affected by the massive global economic disruptions caused by the pandemic. We are assessing the market conditions and will roll out the process when the time is right. Since this will be NPR's debut in the international market, we are conscious of the need to ensure a good benchmark so that it sets a positive precedent for other issuers of NPR bonds in future.
How difficult will it be to raise funds for Nepal as the global economy is in the doldrums? If the response is poor, won’t it hit Nepal’s image as a good investment destination? As a private sector lender, what specific suggestions do you have to improve the overall investment climate in Nepal?
In times of crisis like the Covid, liquidity is a global issue as there has been a massive decline in revenue for both the public and private sectors. But given IFC’s triple A ratings, we don’t think raising funds will be a challenge, once we are convinced of the timing and project viability. Consider for instance how IFC brought together eight other lenders to invest in Upper Trishuli-1. You are quite right about the timing of issuing a NPR offshore bond. We want to ensure that market conditions are right and that it sets a good precedent for future issuers.
Nepal certainly has made progress in the last few years, but there is still room for more improvement. Private investors (domestic and foreign) look for a stable and business-friendly environment that gives them confidence that there will be a meaningful return on their investments, and that they will have no problem in repatriation. This notably means reducing the risks and cost of doing business, such as simplifying procedures, fairly enforcing the laws, efficiently issuing approvals, and having clarity around the repatriation of earnings.
IFC is significantly increasing investments in Nepal aimed at improving the lives of people. By 2030, we will reallocate 40 percent of our annual programmes in countries like Nepal and Bangladesh, among others. This means there will be more resources available for the Nepali private sector to tap into. This also coincides with Nepal’s target to become a middle-income country. IFC will be ramping up its efforts to support Nepal’s journey towards prosperity—by supporting the private sector to play a key role in delivering inclusive and sustainable growth.