White lies on white paperKhatiwada’s failure to propose a rightful role and space for the private sector will further erode investors’ confidence
One single, unambiguous message that Finance Minister Yubaraj Khatiwada imparted through his white paper last Friday was: the new communist government has to contend with the fatal temptation of reverting to a state-controlled ‘socialist’ economy. Khatiwada summarily dismissed the past and potential roles of the private sector in the economy. While giving his statement, his inability to desist from politically motivated misrepresentations of the facts, over-exaggeration that made it seem as though Nepal’s economy is poised on the edge of a cliff, and an uncharacteristic failure to prescribe remedies only served to make the nation’s mood gloomier and dented investors’ confidence. However, the diagnosis of the Nepali economy that he presented, particularly in regards to its chronically dysfunctional structure, was not only overdue, it was also bold and comprehensive.
Finance Minister Khatiwada dedicated a substantial portion of his statement to document the rampant political interference in the operation and management of state-owned enterprises (SOEs) that rendered them highly inefficient and incurred huge losses. He has frankly admitted, “Price, quality, timely delivery, and quantity demanded of the goods and services produced and distributed by the SOEs do not match the consumer expectations. Even the natural monopolies due to their pricing policy and management inefficiency suffer from a huge cumulative loss....The SOEs, so far performing well, are losing the competitive edge to their private sector competitors.”
The white paper also said that the financial health of all SOEs, except for a couple of public financial institutions (which incidentally were bailed out in recent years by the state treasury to off-set their insurmountable negative net-worth) and Nepal Telecom, was precarious, to say the least.
Despite having these realities acknowledged, it is apparently paradoxical to advocate for retaining these budget sharks in the guise of ‘selective’ privatisation. The meddling of SOEs, particularly in the fast-moving consumer goods (FMCG) market, sucks up a hefty sum of tax-payers’ money year-after-year and distorts prices in an otherwise competitive market; this is an unequivocally established global phenomena.
Khatiwada’s contention that the modality, valuation and process of privatisation should be transparent and serve the national interest is valid beyond question. No doubt, the buyers of SOEs must honour their commitments as per the ownership transfer agreements, and must continue the production of the same goods and services. But, the principle of privatisation is that once ownership is transferred and proper monetary value is duly recovered, it is entirely up to the new owner how s/he would like to manage, mobilise and maintain the property.
The country automatically benefits in three distinct ways from privatisation. First, a huge amount of public funds is saved by stopping the financing of SOEs, especially when taking into consideration the losses these SOEs make year-after-year. This fund could, in effect, be available to meet other more pressing public needs. Two, the amount that the government receives from the sale of the SOEs could be invested in more inclusive public projects with potentially higher economic returns. And three, by ceasing to be one of the players in the market, the government creates a level-playing field for private players so that market fairness and competitive price of goods and services for the consumers can be better ensured. This entails increased private investment and enhances the credibility of the government.
It would be naive to assume that a seasoned economist like Khatiwada has failed to understand plain economics. After having listed several dozen anomalies in the functioning of SOEs, he failed to propose any alternative to privatisation as a solution for these incessantly loss-making burdens on the exchequer. His current anti-privatisation narrative, therefore, can be construed as being the result of an apparent push by political masters that he did not dare counter. His failure to propose a rightful role and space for the private sector will further erode investors’ confidence.
The derision of privatisation initiated by erstwhile governments, the Nepali Congress-led ones in particular, seems to have been deliberately designed to undermine the contribution of the private sector after the adoption of the privatisation policy. Regardless of this derision, substantial private investments, both domestic and foreign, in almost all key sectors of the economy such as banking, insurance, civil aviation, transport, telecommunication, education, health and lately hydropower development have helped Nepal maintain overall macroeconomic stability despite a decade long conflict that crippled all productive activities and another decade long political transition that took a heavy toll on the economy.
Undoubtedly, Nepal’s economy is faced with multiple, chronic structural as well as contemporaneous operational malfunctions. The vicious cycle of low investment, low employment, low output, low export and low growth is an accumulated effect of years of policy vacuum and political imperviousness. This certainly needs a drastic structural overhaul which, naturally, is not a quick fix. Despite this, some of the overtly gloomy pictures Khatiwada portrayed are misrepresentations of the available facts and figures.
Just a week before Khatiwada came out with his so called white paper, the Nepal Rastra Bank statement based on the first seven month of current fiscal year said, “Government of Nepal treasury surplus amounted to Rs301.64 billion (including Rs84.35 billion balances on Local Authorities’ Accounts) as of mid-February 2018.” The government also still enjoyed a significant fiscal space as the public debt is only 27 percent of the gross domestic product (GDP). The gross foreign exchange reserve at $10 billion is enough to cover the prospective merchandise and services imports of 9.8 months.
As such, either Khatiwada’s “empty treasury” narrative must be an over exaggeration of the situation or the credibility of country’s central bank is in question. Whom should a common man trust? And, why would Khatiwada portray the entire economy as being in such a hopeless situation? Political prognosis apart, he has been reportedly asked to create an atmosphere for foreign borrowing, as 82 percent of the domestic borrowing limit has been already utilised, mainly thorough fear-mongering about the impending economic emergency. A proposal for concessional funding of up to $1 billion at 3 percent annual interest that is to be channelled through China’s Belt and Road Initiative (BRI) is now said to be lying on Khatiwada’s table.