Finance Minister Yubaraj Khatiwada is presenting the budget for fiscal year 2019/20 in Parliament on Wednesday amid a host of challenges.

While Khatiwada is likely to take some bold steps, buoyed by 6 percent growth for three consecutive years and 7 percent growth projection (Economic Survey 2018/19), one of the challenges will be finding ways to ensure sustained high growth in coming years.

For a technocrat like Khatiwada, resisting political pressure for populist programmes will also be a challenge, just as he will have to set the tone for the subsequent years, as the KP Oli administration has been making ambitious plans—achieving a double-digit growth by 2024/25.

The government’s Approach Paper of the 15th Plan (2019/20-2023/24), approved by the National Development Council recently, has aimed an average of 9.6 percent growth for the next five fiscal years.

Industrialists and experts say there are opportunities for the incumbent government—the strongest in the last two and a half decades—to achieve a high growth rate but only if it can set its priorities right and maintain fiscal discipline. Creating a favourable environment for large scale investments will be a major challenge, they say.

For example, Nepal’s gross fixed capital formation (investment) should be  Rs9.22 trillion to achieve an average economic growth of 9.6 percent over the next five years, according to the Approach Paper of the 15th plan.

The national account, produced by the Central Bureau of Statistics, says such investment in the economy in the current fiscal year stood at just Rs1.27 trillion, leaving a huge gap of resources to be filled in the next five years.

The government has aimed 55.6 percent of the total required investment from the private sector followed by 39 percent from the government and 5.4 percent from the cooperative sector.

“The targeted growth is a big jump from the traditional growth rate of 4-5 percent,” said Shekhar Golchha, senior vice-president of the Federation of Nepalese Chambers of  Commerce and Industry. “Whenever the growth rate picks up pace, we face a shortage of liquidity in the market. So, if we talk about a double-digit growth, there should be adequate liquidity in the market.”

One key area where the incumbent government has failed like in the past is capital expenditure.

Despite political stability and a strong mandate, capital expenditure has remained sluggish this year as well, which was one of the factors of liquidity crunch in the banking sector.

“The liquidity crunch in the banking sector deprives the private sector of access to the capital, and high interest rate caused by liquidity crunch discourages the private sector from taking loans, limiting their ability to invest,” said Golchha.

He said there should be more alternatives available for the private sector in addition to the banking sector for financing, including capital markets and other sources of fund.

While the private sector is expected to make investments over 50 percent, it has for long said that the government has failed to introduce policies and laws that are friendly to the private sector. That aside, bureaucratic hassle continues to be the bane of the private sector.

“For example, the Industrial Enterprises Act, Land Related laws, Bonus Act, revenue laws and labour laws are not yet attractive to the investors,” said Golchha. “The difficulty of land acquisition for enterprises continues to affect investment.”

According to analysts, the incumbent government has an opportunity to take the country on a higher growth trajectory provided that it creates favourable climate for domestic and foreign investments.

In the past, the country went through the decade-long conflict (1996-2006). Then there was another decade of political instability until 2017. Hours-long power cuts, strikes and labour unrest, the deadly earthquake in 2015 and Indian economic blockade also dealt a deadly blow to the economy.

As a result, average economic growth in the last decade stood at just 4.6 percent despite relatively high growth in the last three fiscal years, according to Economic Survey 2018-19.

“The electoral mandate for the current ruling party is a huge opportunity and it should not squander the opportunity. Once this political capital exhausts, it will be difficult to bring things back on track,” said Swarnim Wagle, former vice-chairman of National  Planning Commission,  the key agency for economic planning for successive governments.

The incumbent government can also hugely rely on a number of large infrastructure projects, which are scheduled to complete by the time the country holds the next parliamentary elections, to achieve the targeted growth.

For example, the 456MW Upper Tamakoshi Hydropower Project and Gautam Buddha International Airport are expected to be completed by the end of 2019.  The Gautam Buddha International Airport at Bhairahawa is expected to be ready by early 2020 and the Civil Aviation Authority of Nepal says even the Pokhara International Airport will be completed by 2020—earlier than the targeted deadline of July 2021.

Large infrastructure projects can immensely lift the economy.

“For example, once 456MW Upper Tamakoshi project comes online, the contribution of the electricity in the economy will grow substantially, as country’s installed capacity currently stands at just 1,142MW,” said Puspa Lal Shakya, former joint-secretary at the planning commission, who has extensively studied macro-economy.

“It will have a multiplier effect on other sectors when industries start getting uninterrupted power supply,” said Shakya. “This will reduce the cost of production as well as the trade deficit, as the country can hugely cut down on fuel imports.”
Likewise, the Kathmandu-Nijgadh fast track project, once completed, will also have a huge multiplier impact on the economy.

“It will save fuel and time and reduced logistic costs for the industries which will be important to attract more investments in the industrial sector,” said Shakya.

There are, however, some areas where the government needs to improve, according to experts.

Wagle, the former vice-chairman of the planning commission, suggested improvements in three areas.

“First, project efficiency or project implementation capacity should be enhanced,” said Wagle. “Second, new sectors of economic growth should be explored and third, investment in existing sectors from both domestic and foreign investors should be substantially increased.”

Project efficiency in Nepal has remained largely poor, which is reflected in the government’s failure to boost the capital expenditure.

As of March 27, capital expenditure, also known as development expenditure, stood at just 44 percent of the total capital budget of Rs313.99 billion, according to the Financial Comptroller General Office.

A large number of development projects have turned sick due to lack of timely completion.

According to a recent study conducted by the Commission for Investigation of Abuse of Authority, a total of 1,848 projects with the contract value of Rs118 billion are incomplete and missed their deadline as of December last year.

These projects are related to seven development-focused ministries.

“Project efficiency can be enhanced by improving laws, management competence, and institutional pro-activeness. And most importantly, by enhancing accountability,” said Wagle. “This has not happened at the desired level.”

According to Wagle, the government should also explore new areas.

“Digitalisation, tourism sector, clean energy, garment and textiles, connectivity with large markets are needed to achieve sustained high growth,” said Wagle. “With the policy and legal reforms, investment in existing sectors such as agriculture, tourism and manufacturing should also be increased.”

The government has introduced the concept of Digital Nepal to harness its growth potential which is expected to deliver an impact of up to Rs800 billion by 2022.

Shakya said though the set target is still too ambitious, there is room for maintaining optimism.

“The government should pull out all the stops to complete the ongoing large infrastructure projects, particularly hydropower projects, for a multiplier effect on the economy,” said Shakya. “After completion of the Upper Tamakoshi and some private sector hydel projects,  Nepal will have surplus energy, at least during the summer,” he said. “Then, we have to reverse the current tariff regime where consumers need to pay more for consuming more. If we establish a system of paying lower tariff for more consumption, the country will be able to attract more investment in industries and create jobs.”

According to him, during the time of load shedding, the higher tariff for high electricity consumption was necessary but in the context of surplus energy,  the policy needs to be reversed.

Industrialists, however, expressed concerns over the ongoing activities of the Netra Bikram Chand-led  Communist Party of Nepal which has made foreign investors its target and is carrying out violent activities.

“Investors around the world are always concerned over law and order situation, and it won’t be different for Nepal,” said Hari Bhakta Sharma, former president of the Confederation of Nepalese Industries. “Their activities may not be a big threat at present, but the government should be mindful of not letting their activities spiral out of control. The government should make attempts to solve the issue through dialogue,” Sharma told the Post. “The country’s vision of high growth and prosperity cannot be achieved under a cloud of violence.”