RUPAK D SHARMA
On January 7, a group of unidentified men vandalized an SUV that Rajan Singh Bhandari, the CEO of Citizens Bank International, was traveling on in Kathmandu.
On March 22, another group of people attacked BK Shrestha, the managing director of Hotel Radisson.
Although both of these prominent personalities in the Nepali business community did not sustain any major injuries, the attacks reflect the security situation in the country which has become a major concern for businesspersons and investors.
Successive governments that ruled Nepal over the years have all talking about mobilizing domestic and foreign investment to create jobs, raising people´s living standards and making the country economically prosperous. But they have so far failed to improve the country´s law and order situation, which is a basic minimum to boost investor confidence.
What is even more upsetting is that some of the leading political parties are directly engaged in polluting the business and investment environment.
In late December and early January, the Mohan Baidya-led Communist Party of Nepal -Maoist demanded millions of rupees from the business community as donation to hold its general convention. At around the same time, Unified Communist Party of Nepal (Maoist), a ruling party at that time, launched a similar extortion drive citing it needed close to Rs 50 million to finance its convention.
When a major party in the ruling coalition -- whose senior member held the prime minister´s post at that time -- engages in such dirty tactics to extort money, what can the business community expect from others?
The Nepali business community is already knee-deep in problems.
Take for instance power cuts of up to 18 hours per day that have prevented many industries from operating at full capacity. Then there are the frequent government changes that lead to frequent changes in policies. Add to these the security issue and the private sector starts losing investment appetite.
Little wonder, the contribution of private investment to GDP fell to 15.3 percent in the fiscal year to mid-July 2012 from 18 percent five years ago, when the decade-long insurgency came to an end and Maoist combatants entered mainstream politics.
Lately, the number of cottage and small industries has dropped to around 6,050 from 17,722 of around seven years ago, eliminating hundreds of thousands of jobs. And the contribution of the manufacturing sector -- a mass job creator -- to the GDP has fallen to 6.2 percent from 8.2 percent a decade ago.
In this scenario, the only thing that is keeping the economy afloat is remittance sent by Nepalis toiling in the Gulf countries and Malaysia.
Workers´ remittances rose by 19.6 percent to Rs 225.06 billion in the first seven months of the current fiscal year to February 11. Although remittance has played a key role in reducing absolute poverty, a huge chunk of that money goes on to finance consumption, rather than capital formation process. And since Nepal is a net importer of most of the consumable products, it could be said that incoming remittance is being used to finance imports.
Nepal imported Rs 316.21 billion worth of merchandise items in the seven-month period, up 24 percent from the same period last fiscal year. This compares with a meager 5.6 percent rise in merchandise exports worth Rs 44.98 billion in the same period.
This discrepancy widened Nepal´s trade deficit -- the difference between exports and imports of merchandise goods -- by 27.7 percent in the seven-month period to Rs 271.22 billion, while causing the current account -- the difference between exports and imports of goods and services -- to post a deficit of Rs 1.71 billion.
To alter the situation, Nepal needs to open more industries of its own and lower its dependence on foreign countries. But since private sector confidence is at low point that is not happening.
At a time when the private sector is not pouring money into the economy, the government should have ramped up spending to build various infrastructures that the country needs to lure investment. Yet the government´s capital spending is always low, which is hurting Nepal´s development endeavors and costing the economy a lot.
The government´s capital spending stood at around Rs 10 billion in the first seven months of the current fiscal year, which is 20 percent of the budget allocated for the purpose.
One of the reasons for the low spending of capital budget this year is the inability of the government to introduce a full budget due to political wrangling. This forced the government to create capital expenditure targets based on what was actually spent last fiscal year without allocating funds for new projects.
The government had spent only around 73 percent of last fiscal year´s capital budget. This meant it had to create a ceiling based on this spending for this fiscal year. Because of this constraint, many projects did not receive adequate funds, forcing them to postpone investment plans. As a result most of the funds collected by the government in taxes lied idle in its coffers. And this, in turn, created liquidity strains in the banking sector.
As cash piled up in the government´s treasury, excess liquidity in the banking system dipped to around Rs 8 billion last month and the interbank lending rate shot up to 6.79 percent, forcing banks to increase lending rates.
Although the situation normalized after the government released several billion rupees of pension fund amount, the low capital spending of the government is expected to hit this year´s GDP growth rate.
The International Monetary Fund has already revised its earlier GDP growth rate estimate of 3.8 percent for this year to 3 percent, as against 4.6 percent of last year. Even the central bank has revised its economic growth rate target to 4.1 percent for the fiscal year 2012/13 from 5.5 percent.
Lately, the formation of a technocrat government earlier this month to hold elections has offered ray of hope, as it can still come up with a full budget for the current fiscal year and boost capital spending. The sooner the full budget is introduced, the better for a flagging economy.
source: republica,5 April 2013
