The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) has launched a ‘Save the Economy’ campaign in the face of worsening economic indicators.

Although the indicators of the external sector have improved due to the strict import control measures, industrialists complain of a sharp decline in demand for goods and services, which has forced them to cut down on the operations of their businesses and factories.

Slow economic activities are also indicated by the slump in demand for electricity from the industrial sector, according to the Nepal Electricity Authority (NEA), which resulted in the spilling of electricity during the wet season.

“Industrial operations have shrunk by 60–70 percent,” said Shekhar Golchha, president of the FNCCI. “Demand has shrunk by 70–80 percent, inflation remains high and liquidity crunch is persistent. All these factors are pushing the country towards a recession.”

Amid the economic crunch, there is also uncertainty about the country’s politics.

The recent federal and provincial elections have resulted in a hung parliament.

As several political parties are required to form the government, political analysts foresee frequent government changes though CPN (UML) and CPN (Maoist Centre) agreed to lead the government turn by turn under the new coalition.

On Sunday, CPN (Maoist Centre) chairperson Pushpa Kamal Dahal was appointed as the new Prime Minister of the country after seven political parties and a few independent lawmakers came together to support his candidacy as prime minister.

“Such a coalition can break, leading to the government’s fall, even when one coalition member is dissatisfied,” Ram Krishna Tiwari, a professor and chief of the Central Department of Political Sciences, Tribhuvan University told the Post in early December.

In the past too, political instability has had a debilitating effect on the country’s economy.

“Having a new government could help address the current economic problems. But we are as concerned about its stability as political instability means high corruption, which discourages investments,” said Golchha.

Article 100(4) of the constitution prohibits a motion of no confidence for the first two years after the appointment of the new prime minister. However, that doesn’t completely shield the government from dissolution.

Article 100(2) of the constitution says that in case the political party which the prime minister represents is divided or a political party in the coalition withdraws its support, the prime minister must go for a motion of confidence in the House within 30 days. If the government fails the floor test, it falls.

A study report titled “Nepal Growth Diagnostic”, jointly prepared by the government and the Millennium Challenge Corporation (MCC), a bilateral United States foreign aid agency, in 2014, pointed out that policy instability was one of the critical constraints to Nepal’s economic growth.

Policy instability caused by political instability; electricity shortages; high cost of transportation and poor labour relations and rigid labour laws were four binding constraints identified by the report.

Nepal went through political instability and conflict during 1996-2006 when the country’s economy suffered badly. In fiscal year 2001-2002, when the conflict was at its peak, the economy grew by just 0.12 percent. Since then, the maximum growth rate recorded was 4.68 percent (in 2003-04) until fiscal year 2006-07, when the conflict ended in the country.

After the Maoists came into mainstream politics in 2006 after signing a peace agreement, the constituent assembly elections were held in 2008. But the country plunged into political divisions leading to the formation of six governments during the period of 2008-2012, before the dissolution of the first constituent assembly.

During the period, approval of Nepal’s annual budget in fiscal 2008-2009, 2009-2010, and 2010- 2011 was delayed by months due to the protracted process of building political consensus.

The fiscal year 2012-13 was an extreme example of the difficulties that resulted from a late budget presentation.

According to the report, this delay shortened the time frame for spending the capital budget. “The government’s capital expenditure as a percentage of gross domestic product, dropped off significantly along with measures of stability,” the report stated.

“The government’s capital expenditure is an important factor in contributing to growth. Low capital expenditure hits the economy,” said Economist Keshav Acharya.

The impact of Nepal’s past political instability is reflected in different channels, according to the report. Frequent changes in government leadership can affect government policy and unpredictable policy implementation. This unpredictability can be especially challenging for businesses,” the report added.

“There is a tendency among political leaders to change bureaucratic leadership along with the change in government,” said Pushpa Lal Shakya, former joint secretary at the National Planning Commission. “The implementation of projects is affected due to frequent transfers of key bureaucrats.”

Political instability affected employer-labour relations. With a lack of long-term credits for firms, companies were unwilling to invest in long-term projects and there were poor inflows of foreign investments.

Stakeholders say the return of a similar situation cannot be ruled out. “Because of factories being closed most of the time, many firms have started laying off staff,” said Golchha. “We cannot rule out worsening of employer-labour relations in the days to come, if the new government doesn’t take firm measures to improve the situation.”

In recent years, employer-labour relations have improved as the employers readied to provide social security, while trade unions agreed to flexibility in hiring and firing workers. In the case of the factories requiring to be closed, the harmonious relations may worsen, industrialists say.

According to stakeholders, political instability deters long-term investments as investors seek predictability. “Instead of investing in manufacturing and other long-term projects, investors tend to focus on trading, which gives them benefits in the short-run,” said Keshav Acharya, a senior economist.

This has been the trend in the country with the contribution of the manufacturing sector to the GDP dwindling, while the share of the services sector has been growing over the past several years.

The contribution of manufacturing to the GDP was 9 percent in fiscal 2000-2001, which plunged to 6.3 percent in fiscal year 2011-2012 and it is estimated to have plunged further to 5.65 percent, according to the Economic Survey 2021-22.

The manufacturing sector is considered a mass employer. With Nepal witnessing a decline in the contribution of the manufacturing sector to the GDP, the country’s workforce is migrating for foreign employment on a large scale.

Nepal has a history of frequent changes in policy along with the changes in the government. For example, the Pushpa Kamal Dahal-led government in May 2017 decided to hand over the 1,200MW BUdhi Gandaki Hydropower Project to a Chinese company—China Gezhouba Group Corporation, a decision which was overturned by the Sher Bahadur Deuba-led government in November the same year.

Later, KP Sharma Oli, who led the government in September 2018, decided to hand over the project to the same company. Now, the government has decided to develop the project on its own.

“Hydropower needs long-term investments and developers will not be ready to invest, so long as there is no policy stability,” said Ashish Garg, vice president of the Independent Power Producers Association of Nepal.

The government tends to be populist when it has to please individual lawmakers to save the government, according to experts. “The projects are selected to please the leaders who are influential to keeping the government intact,” said the economist, Acharya.

Stakeholders say amid a possibility of frequent changes in government, those who are in power want to make a quick buck in a short time, leading to the promotion of corruption. “Corruption flourishes in times of political instability,” said Golchha. “We cannot attract investments in such an environment.”

Nepal’s position on the Corruption Perception Index 2021 remained unchanged at 117th among the 180 countries and territories from 2020, as people’s perception of the prevalence in corruption continued to remain high, according to the Transparency International, Nepal.

While bad governance is a concern, immediate economic challenges are bigger concerns for the business community. “Irrespective of who leads the government, we want a political consensus on addressing the current economic crisis,” said Golchha.

With several political parties forming the coalition government, there is concern whether they could come to a consensus on policy to address the ongoing economic crisis.

“The government has not been able to spend the capital budget and there are not enough resources to increase the capital budget. Current foreign exchange reserves are also difficult to sustain,” said Prakash Kumar Shrestha, chief of the research department at the Nepal Rastra Bank. “So, the next government has the challenge to ensure proper fiscal management.”