January 19: The industries of Nepal are reeling under the effects of economic recession, interest rate instability, falling demand in the domestic market and price hike of raw materials, resulting in a decline in industrial production.

The production capacity of industries that produce food, oil, ghee, cement and steel among others are found to have declined.

The recently published 'Economic Activity Study Annual Report' of Nepal Rastra Bank has shown that the average capacity utilization of Nepal's industries in the last fiscal year (FY) 2079/80 was limited to 49.8 percent. In the previous year (FY 2078/79), the capacity utilization of the industries was 52.2 percent.

The central bank's report also backs a recent report released by the private sector organization’s Confederation of Nepalese Industries. The report published by the confederation in early January of stated that there has not been any improvement in the country’s overall economy.

The report mentioned that the investors’ morale was down due to decline in the overall demand and turnover of the industries, prompting the investors to stop making new investments.

The report of the central bank has shown that the capacity utilization of the electricity generating industry was the highest at 86.2 percent last year. The capacity utilization of vegetable ghee production industry was the lowest (2.6 percent). Similarly, despite the cement industries of Nepal starting export to India, the capacity utilization of the cement industry declined due to the slowdown in the domestic construction sector.

The slowdown in the business of the construction industry has resulted in the decline in the capacity utilization of related industries that involve in production of construction materials like cement, iron rods, polythene pipes, steel, electric wires, GI pipes, etc. The capacity utilization of the cement industry, which was 46.06 percent in the year 2078/79, decreased to 44.44 percent in the last fiscal year.

Dhurba Thapa, president of Nepal Cement Producers Association, the umbrella organization of cement industries, said that the capacity utilization has decreased due to the stalled construction work and the inability of the government to spend the budget.

"Last year there was a 75 percent reduction in development and construction works," said Thapa, adding, "Due to this, the capacity utilization of all industries involved in producing construction materials decreased. This situation should not be repeated in the current year."

The effect of India's ban on wheat exports has affected the production capacity of Nepal's food industry. The impact of the Indian policy has also been seen in the industries producing vegetable ghee/oil. The capacity utilization of wheat flour industry, which was 50.74 percent in 2078/79, dropped to 38.46 percent in 2079/80.

India's reduction in the customs duty imposed on the import of palm and soybean oil has resulted in a significant decrease in the export of refined oil from Nepal to India. In the last two years, due to the rapid decrease in the export of refined oil, the capacity utilization of soybean oil as well as vegetable ghee industry has been badly affected. The capacity utilization of soybean oil industry, which was 82.33 percent in the year 2078/79, dropped to 47.61 percent in the last fiscal year. Similarly, the report shows that the capacity utilization of vegetable ghee industry was limited to 2.59 percent last year.

Similarly, the average capacity utilization of industries in Gandaki, Karnali and Sudurpaschim provinces has increased, while the average capacity utilization of industries in Koshi, Madhesh, Bagmati and Lumbini provinces has decreased.

The report of the central bank shows an increase in the capacity utilization of industries that produce mustard oil, processed milk, rice, biscuits, sugar, processed tea, soft drinks, synthetic fabrics, garments, jute products, paper, capsules, ointments, dry syrup, plastic goods, bricks, GI wire, household metal wares, footwear and electronic goods.

On the other hand, there has been a decline in capacity utilization of industries that produce vegetable ghee, soybean oil, wheat flour, chocolate, animal feed, noodles, beer, cigarettes, yarn, raw hide, wood, plywood, rosin, dyes, tablet medicine, soap, iron bars and sheets, steel products, GI pipes, polythene pipes, bricks, electric wires, tires and tubes, textile and shoes.

The report of the Central Bank has suggested all stakeholders to reduce the cost of establishment and operation of the latest industries, and to effectively manage and expand the industrial zones/corridors and special economic zones.

The report also points out the need to increase the production and consumption of domestic industrial raw materials and make the industrial supply chain effective.

The report has pointed out the need to attract foreign investment in the industrial sector. It also suggested developing minimum infrastructure such as roads, electricity, communication, transfer of technology and enhancement of management capacity to create an investment-friendly environment.

According to the report, there are still challenges in the industrial sector such as ensuring the availability of skilled labor by preventing the brain drain of semi-skilled and skilled manpower,  and increasing investment in export-oriented industries with comparative advantage and competitive ability through the creation of an investment-friendly environment.