The advent of federalism in Nepal has planted a new seed of hope among Nepalis who expect the new form of government to usher in an era of political stability, good governance and sustainable economic growth. As Nepal transitions towards federalism, economic policy reforms may be one of the forces that could help Nepal graduate from its status as a least developed country (LDC).

Historically, both the Rana regime and constitutional monarchy each failed to institutionalise economic liberalisation. Economic liberalisation refers to the lessening of government regulations and restrictions in an economy to enable greater participation of private entities and drive economic growth. It is still unclear whether federalism will lead Nepal down the path of economic liberalisation. To this end, the following factors will be crucial.

Reform in private sector

Privatisation is key for the institutionalisation of economic liberalisation. The central government has to play a crucial role as regulator by lessening restrictions and fostering privatisation. In Nepal, the government introduced the concept of liberalisation by enforcing the Privatisation Act 2050, which aimed to improve socio-economic conditions and the financial position of the government. Ironically, the focus of the Privatisation Act was more on improving the performance of the public enterprise sector than that of the private sector.

Thus far, government regulations have done little to improve Nepal’s private sector. The private sector tends to take advantage of a lenient government and forms cartels and syndicates in sectors such as transportation and education. By creating market monopolies, cartels and syndicates have hindered the notion of a free market economy and created market inefficiency. The government should strictly enforce Acts such as the Competition Promotion and Market Protection Act (CPMPA), 2063 and Consumer Promotion Act, 1997 to protect the rights of consumers by controlling monopolies and restrictive trade practices.

Reforms in the private sector can have an immense impact on economic growth if a favourable environment for healthy competition is fostered. Privatisation will drastically reduce the financial and administrative burden of the government. In countries where privatisation functions at its best, the improved operational efficiency enables companies to thrive in highly competitive markets. Likewise, public enterprises that have weak operational efficiency can be privatised so efficiency improves and higher quality services are provided.

Reform in trade sector

To institutionalise economic liberalisation, Nepal needs to leverage trade liberalisation by bringing reforms in import and export. World Bank’s Doing Business 2017 report ranked Nepal at 107. The report highlights the huge prospects of growing entrepreneurship and ease of doing business in Nepal compared to other SAARC countries. Each state of the new federal government should promote domestic industries by prioritising domestic and foreign investments based on available resources.

India is taking measures to formalise its economy by implementing Goods and Service Tax (GST). On the flipside, GST is likely to make some goods, such as luxury items, expensive in Nepal. It could also have an effect on Nepal’s export of agro-based and textile products to India. In the year 2016/17, imports from India increased by 32.8 percent. The extent to which the GST will affect the balance of trade is yet to be seen, but it is likely that Nepal’s trade deficit will increase. 

Nepal has taken some steps to mitigate its trade deficit. Nepal started implementing Automated System for Customs Data (ASYCUDA)—a world data management system that has made exporting and importing easier-from the Mechi Customs Office on International Customs Day 2016. The system aids effective management of the Customs clearance process and trade compliance to speed-up the clearance of goods and prevent smuggling. ASYCUDA also helps provide timely and accurate information. The proper implementation of the Special Economic Zones Act can further play a role in facilitating exports, thereby promoting export-oriented industries and identifying areas of comparative advantage, which in turn helps the balance of trade deficit.

Reform in financial sector

The financial system is considered the brain of an economy. Financial liberalisation helps improve the functioning of the financial system by increasing the availability of funds and allowing risk diversification and increased investments. Nepal should start developing Information and Communication Technology (ICT) infrastructure for the availability of real-time information. The world is rapidly transforming into a digital economy. As such, systems based on e-governance, e-business and e-commerce are crucial for Nepal to thrive in the global digital economy.

Nepal’s net Foreign Direct Investment (FDI) inflows are on the rise—from $55.8 million in FY2016 to $127.5 million in FY2017.

The biggest foreign grant in Nepal’s history, the Millennium Challenge Compact (MCC) worth $500 million, was signed between the USA and Nepal on September 14, 2017. In the same year, the biggest investment deal in the manufacturing sector was signed with a Chinese company. These developments indicate that foreign investors are keen to invest in Nepal.

We must applaud the government for successfully hosting international conventions regarding Nepal’s reconstruction post-earthquake, which grabbed the attention on 35 donor countries. Moreover, the government successfully hosted Nepal Investment Summit 2017 which garnered nearly $13.51 billion in order to harness investment opportunities in Nepal.

Nepal should also work to make the most out of global initiatives such as Belt and Road Initiative (BRI) and BBIN Motor Vehicle Agreement (BBIN). Such initiatives will help develop cross-border connectivity, build physical infrastructure, and promote trade and tourism in the country. FDI inflows are flowing into the country like never before. If Nepal can capitalise on these investments, it will help leverage economic growth in the country.

It is a sad reality that political tensions and unexpected incidents like the 2015 earthquake, economic blockade, and floods in the Tarai region have been stumbling blocks for Nepal’s economic development. To foster economic liberalisation reforms in private, trade and financial sectors, and capitalising on FDI inflows will be pivotal in transforming Nepal’s economic systems. Federalism has already taken off in Nepal and it presents an opportunity to rethink the viability of existing economic laws and improve upon them.

Most importantly, no matter what form of government Nepal adopts, execution of economic policy reforms should be the bedrock and prime focus to leverage economic growth and promote sustainable economic development in the country.

Dhungel is a graduate of the University of Delhi