--BY TEAM NEWBIZ
With coronavirus infections receding as the Covid-19 vaccination drive in Nepal gains momentum with 22 percent of the population fully vaccinated as of third week of September, debate about the country’s economic direction post-pandemic has gained a lot of prominence. Nepal, which went through a massive economic slump in 2020 registering a negative GDP growth of 1.9 percent, has been expected to achieve a growth of around 4 percent this year.
There are still clouds of uncertainty created by the pandemic as supply disruptions in international trade have not eased fully. As a country that relies on remittance inflow, it is hard for Nepal to cope with the situation as many migrant workers have not been able to go abroad due to the travel restrictions put in place by many countries. Similarly, tourism has been the hardest hit as normalcy is yet to resume in the pandemic-ravaged international travel sector.
The National Planning Commission has set a target of raising Nepal's per capita income to USD 2,900 by 2030 by upgrading the country's status from a developing country to a middle-income nation. For this, an average economic growth rate of 10 percent has been set. Meeting this ambitious double-digit economic growth was considered 'unrealistic' even before the pandemic when Nepal recorded an average growth of 6.5 percent for three consecutive fiscal years starting from FY2016/17. The pandemic has made the double-digit economic growth target impossible to achieve, at least for the next few years, as it has been estimated that a combined investment of USD 100 billion from the government and the private sector will be required.
The pace of the ongoing economic recovery will depend on several factors such as political and policy stability, government support, the confidence of the private sector and demand in the market.
Bright Spots in Infrastructure Development
Failure to complete infrastructure projects on time has long remained one of the biggest problems in Nepal's economic development. Nevertheless, projects get completed despite the sluggishness and cost overruns. The construction work of various connectivity projects is gaining momentum. Ambitious road projects like the Kathmandu-Terai Expressway, Mid-Hill Highway and North-South Kaligandaki Corridor are under construction. Similarly, Gautam Buddha International Airport has reached the stage of test flights while the Pokhara International Airport is also expected to be completed within a year.
In the meantime, the much-talked-about railway projects have also seen some progress. Nepal has procured two trains from India to run on the Jayanagar-Kurtha-Birgunj railway route. However, the date of the operation of the railway is still unknown.
Similarly, Nepal's aim to expand connectivity with China is gradually making some progress after the historic agreements between the two countries in the years following 2015. The Rasuwagadhi-Kerung border point came into operation after the closure of the Tatopani-Khasa border in 2015 due to the earthquake. A pre-feasibility study of the USD 2.5 billion Trans-Himalayan Railway has already been carried out and both countries have agreed to conduct the project's feasibility study which had been hampered by the pandemic.
Nepal is also making big strides in energy sector development. The 456 MW Upper Tamakoshi Hydroelectric Project has started the commercial generation of electricity. The peaking run-of-river hydropower project, which was slated for completion in July 2018 was pushed to February 2020 and again to August 2021 when it began the full-fledged production of electricity. Upper Tamakoshi is the largest hydropower project in Nepal which has been completed with domestic funding. The successful completion of this project has boosted the confidence of stakeholders in the Nepali hydropower sector, and Nepali energy sector experts are beginning to believe that projects with a capacity of up to 1,000 MW can be built in the country.
Meanwhile, exporting electricity to neighbours such as India and Bangladesh is gradually becoming a reality. Though the power export is yet to start, Nepal Electricity Authority (NEA) has taken a new step to sell electricity competitively by filling bids in Indian companies. Nepal has signed agreements with India for power trade between the countries and the construction of hydropower plants and transmission lines. Also, Nepal and Bangladesh have signed a power cooperation deal as the latter has shown an increased interest in importing electricity from Nepal.
Progress is also observable in the construction of trade and transit infrastructures. For example, the Chobhar Dry Port, an inland facility for storage and clearance of goods, has also reached the operational phase. The Nepal Intermodal Transport Development Board will operate the dry port in the initial phase and will hand over the management to a private company later. The government has kept the dry port on its priority list while the private sector has also hoped for a noticeable reduction in the costs related to import and export. It has been planned that the Chobar Dry Port will be connected to the railway in the future for receiving freight trains from India and China.
Infrastructure Projects in Limbo
There are issues, however, with many other under construction and proposed infrastructure projects that have fallen victim to unnecessary political and other controversies. The US-funded MCC Nepal Compact, which aims to spend USD 50 billion for building transmission lines and roads has become a matter of huge political wrangling in the country.
The Budhigandaki Hydropower Project is another one. The reservoir-type hydel project, which completed the land acquisition part a couple of months ago, has been regarded as necessary for energy balance in Nepal. But, the government has become a victim of indecision in terms of whether to develop this project on its own or award it to a developer. Similarly, the Sunkoshi Marin Diversion Project, an inter-basin project to transfer water from Sunkoshi River to Marin Khola for discharging water to the Bagmati Irrigation Project to irrigate 122,000 hectares of land in Mahottari, Sarlahi, Bara, Rautahat and Dhanusha, is yet to move ahead. While the Rs 10.5 billion contract has been awarded to the Chinese Overseas Engineering Co, there are fears that the fate of this project will be similar to the Kaligandaki-Tinau Diversion Project. In July, the Supreme Court issued an interim order asking the government to scrap the project.
Progress in Legal Reforms
The last couple of years have seen momentum in legal reforms to encourage and facilitate domestic and foreign investment in the country. Some key amendment Bills including the Industrial Enterprises Act, Land Act, Revenue Leakage (Research and Control) Act, Special Economic Zone Act, Bill to Amend and Integrate the Prevailing Laws Related to Industries and Enterprises, Bill to Amend and Integrate Laws Related to Environmental Protection, Bill to Amend and Integrate Laws Related to Foreign Investment and Transfer of Technology have been endorsed by the parliament, while new laws such as the Land Use Act, Economic Procedure and Fiscal Responsibility Act, Public Private Partnership and Investment Act and Safeguards, Countervailing and Anti-dumping Act have come into force. The government has formulated some work procedures to implement these laws and some procedures are under preparation. Nonetheless, some important laws such as the much-awaited umbrella law related to intellectual property, industrial property, patent, design and trademark, remain to be formulated.
The amended and new laws are expected to ease the legal and procedural hurdles and facilitate investment. In its common minimum programme unveiled on August 9, the coalition government led by Prime Minister Sher Bahadur Deuba has mentioned that it will work to pass all the bills related to the economy within three months. The country's private sector has pinned its hopes on the parliamentary approval of the bills, long sought for by the sector for the security of investments.
Improved Labour relations
For foreign as well as domestic investors, investing in the country remained an arduous task during the height of the Maoist insurgency in the early and mid-2000s and the ensuing years of political instability until the promulgation of the new constitution in 2015. The degradation in the relationship between the industrialists and workers was one of the major reasons behind the bad investment environment in the country.
Over the past half decade, labour relations have improved in Nepal. Many issues between industrialists and workers have been sorted out and the commencement of the Social Security Fund in November 2018 has strengthened the social security of private sector workers to a great degree.
Although many businesses in the country were forced to axe jobs and reduce the salary and wages of their workers due to the Covid-19 pandemic, the fact that labour unions did not stand against the cost-cutting measures undertaken by the companies also indicates to improvements in labour relations.
Growing Use of Technology
The pandemic is being seen as a pivotal moment for global digital convergence that will have an impact on every aspect of human life. In Nepal too, the use of information technology has grown exponentially. From e-commerce, electronic banking and payment systems to stock market transactions and job recruitment, ordinary Nepalis have embraced digital technologies in meaningful ways. It is estimated that there are over 4 million digital wallet and e-banking users in Nepal at present with the country observing record-high monthly digital transactions of Rs 368.66 billion during mid-March to mid-April this year.
Besides the booming e-commerce, e-banking and digital payment systems, the pandemic has also pushed institutions of other sectors to adopt new technologies. Education and health, for example, are undergoing big changes. Online learning, e-health and remote working have helped ease the lives of many Nepalis during these difficult times.
While the private sector is active in adopting and introducing new technologies, the digital transformation of government services has remained sluggish. The Digital Nepal initiative announced two years ago is yet to move ahead at a satisfactory pace as the implementation of different programmes is slow. Nevertheless, progress has been seen in some areas. The government is preparing to start the second phase of the biometric-based National Identity Card distribution. The first phase of the programme, which started in 2018, concluded with the distribution of 118,000 cards.
Meanwhile, real estate transactions have gone digital and the Inland Revenue Department has fully digitalised the tax payment system ending the hassles for taxpayers. Meanwhile, all the information related to the quality and properties of soil in any specific area of the country for agriculture and other purposes can be accessed via the digital soil map. Similarly, the commencement of the National Payment Gateway will be another significant step towards developing a cashless economy. Nepal Rastra Bank is all set to launch the much-hyped payment gateway from mid-October this year.
Challenges to Recovery and Resurgence
In these uncertain times, economic recovery and resurgence can be fragile due to various factors. There are challenges from global climate change and natural disasters. The recent floods and landslides that devastated parts of the Melamchi area and Manang district caused large scale damage to infrastructure projects that were nearing completion. A preliminary study has estimated that the physical damage caused to the Melamchi Water Supply Project due to the massive flooding of the Melamchi Khola, a tributary of Indrawati River, in the third week of June, amounted to nearly Rs 2 billion. The government has requested the Asian Development Bank to provide support for the restoration of the project.
But the recent new rounds of flash floods have added to the problems in reconstruction delaying the operation of the project by at least another year. Similarly, the incessant monsoon rainfall also caused different rivers to overflow damaging several under construction and operational hydropower projects, road sections and bridges in different parts of the country. According to the Independent Power Producers' Association, Nepal (IPPAN), hydropower projects sustained physical damages amounting to Rs 10 billion as a result of the floods.
According to climate experts, there has been a shift in the monsoon pattern and mountainous areas are observing more rainfall than before causing bigger floods and landslides. So, in a country like Nepal with a weak topography, extra caution needs to be taken while constructing infrastructure projects. The fate of the Melamchi Water Supply Project has reminded everyone that more attention has to be paid to the safety of projects like the Upper Tamakoshi Hydropower Project.
The sudden disruptions that can occur to the international supply chains have presented another challenge to Nepal's economic recovery and resurgence. The possibility of new waves of coronavirus infections hitting the South Asian and Southeast Asian countries should be seriously taken into consideration so as to avoid disruptions in the supply of raw materials, capital goods and different types of consumer items from the countries as well as exports from Nepal. For this, government authorities and private sector bodies should work together on a preparedness plan for emergency situations.
In addition, disputes related to taxation, repatriation of investment and dividends by foreign companies, policy instability, and changes in priorities with a change of government or ministers also present challenges to the process of economic recovery.
Conditions for Sustainable Recovery
Natural disasters and pandemics are unpredictable. But it requires effective plans and preparations to avoid a worst case scenario. The devastating 2015 earthquake and the Covid-19 pandemic have highlighted the weaknesses of the government in this regard. Had they been in place, the loss of lives and property, and the adverse impacts to the economy would have been averted to some extent.
At the moment, the good health of citizens is the biggest condition for sustainable economic recovery. The decline in coronavirus infections and deaths has indicated that the vaccination drive is working effectively. The government has targeted to vaccinate 33 percent of the country's population by September and 100 percent by April 2022. This has increased the optimism of the private sector that the economy will come out of the slump soon. While the 7 percent economic growth targeted by the government in the revised federal budget for the current fiscal year is unlikely to be achieved given the current national and international scenario, a modest growth rate is seemingly achievable.
The Asian Development Bank in its latest Asian Development Outlook 2021 Update has anticipated Nepal's economy to grow by 4.1 percent in the current fiscal year 2021/22. Even though the Manila-based agency has slashed its earlier forecast of 5.1 percent, ADB has said that Nepal’s economic growth will be supported by increased paddy plantation and production, growing industrial output due to a large increase in export volume and stronger domestic demand, increased economic activities in wholesale and retail trade, transport and financial services along with the vaccine rollout.
