It is crucial to bring reforms that foster a favourable environment for the private sector, encouraging increased investments.
While there is a consensus on the crucial role of a strong private sector in the country's development, efforts to turn this consensus into concrete action have persistently fallen short. The country is on the brink of an economic recession, weighed down by a series of compounding issues. Although we experienced a recession in the previous year, only the manufacturing sector is in the negative territory this year.
Stagnant production has essentially brought expansion to a halt. With employment and revenue figures declining, the nation is in need of an urgent intervention. Addressing the root cause is paramount if we are to improve the situation. Restoring confidence in the private sector could be an important step toward resolving the issue. The current problem, which originated from small businesses, has now spread to banks and financial institutions with profits declining and non-performing loans (NPLs) rising. Consequently, it is poised to affect the government, presenting inevitable challenges in managing its expenses.
Market demand at present is sluggish, primarily due to four main factors. First, a significant portion of the youth demographic, which typically drives demand in many markets, is opting to migrate abroad. This means a considerable size of the population is now outside the country. Second, there is a lack of confidence in economic improvement which is discouraging common people from spending their savings. Moreover, the sharp rise in prices has made it challenging for many to afford daily necessities. Third, investors have struggled to secure adequate returns leading to a buildup of remittances in banks. Despite historical increases in remittances, these gains have not translated into increased investments. Fourth, due to issues observed in cooperatives and microfinance institutions, small businesses are facing operational challenges. With cooperatives facing difficulties, they are unable to extend funding, in the form of loans, to small business owners running grocery stores and small industries. The situation remains dire for individuals who have deposited their funds in troubled cooperatives.
Tackling the fourth issue, concerning cooperatives and microfinance institutions, is of utmost importance to reinvigorate market demand. These entities can no longer operate in the same manner as before, necessitating the implementation of new regulations to prevent their previous problematic practices. Simultaneously, needful measures must be taken to safeguard the savings of ordinary citizens, whose funds are tied up in these troubled cooperatives. One potential solution could involve introducing new schemes through banking institutions or alternative methods under the oversight of the central bank, Nepal Rastra Bank, to safeguard the deposits of small business owners and individuals. As market demand and economic activity gain momentum, public confidence will grow in tandem. However, preventing the outflow of young talent migrating abroad for better prospects is not a simple task. It is intertwined with the socio-economic and political landscape of the nation. The key solution lies in expanding the domestic economy to provide sufficient employment opportunities and competitive wages that can retain the workforce within the country. To achieve this, there is a need to implement a well-crafted short and medium-term reform or action plan tailored specifically to address the aspirations and needs of the next generation. The situation cannot be more favourable to implement such reforms. A comprehensive reform mechanism, involving all relevant agencies and led by the Prime Minister, is essential to drive this transformative process. Failure to act promptly could result in the issues currently affecting banks spilling over and eventually burdening the government.
The quality of public school education has been deteriorating for quite some time, and this malaise has now permeated into the higher education sector, affecting universities as well.
Encouraging domestic investors to invest within the country should be a priority. The imposition of retrospective laws has only added to investor hesitancy. Furthermore, frequent changes in tax policies have failed to establish a stable business environment. As a result, foreign investment and export volumes remain below expectations. Despite a rise in tourist arrivals, expenditures related to the tourism sector continue to outweigh the income generated from this industry.
Foreign investment, exports and tourism are interconnected facets of the economy. In the fiscal year 2022/23, foreign investment plummeted by a staggering 65%. Although there has been a surge in Foreign Direct Investment (FDI) commitments this year, this increase is largely a rebound from the substantial decline witnessed in the previous fiscal year. We have yet to thoroughly explore the topic of education, which serves as one of the cornerstones of the economy. This deficiency has not only led to social repercussions but has also made long-term impacts on the country's economic framework. The quality of public school education has been deteriorating for quite some time, and this malaise has now permeated into the higher education sector, affecting universities as well.
Despite widespread access to education, the quality remains low and dropout rates are alarmingly high. This concerning trend is now extending to university education as well. Sustainable reform in the education system is unattainable without addressing the flaws. The next step towards improvement must be focused on enhancing the quality of education at all levels.
While precise data is unavailable, it is estimated that roughly 300,000 Nepalis migrate abroad for permanent residence annually. The primary drivers for this mass exodus are concerns regarding the quality of healthcare and education opportunities within the country. Another significant factor contributing to this outflow of human capital is the difficulty in accessing public services. Whether dealing with government officials or elected representatives, people often encounter hurdles and frustrations in obtaining essential services. This predicament not only undermines public trust in institutions but also raises questions about the effectiveness of the political system being pursued.
Improving the delivery and accessibility of public services can be achieved through two main avenues. First, by expanding digital services to streamline processes, reducing the need for multiple in-person interactions between service providers and recipients. Second, by offering continuous orientations to public service employees and bolstering monitoring efforts with penalties for non-compliance. Embracing technology to its fullest potential represents the most sustainable solution.
Investment can take various forms, such as capital, intellectual property, or other services. However, the trend of earning money without making any substantial investment, such as acting as a middleman for managing government contracts or licences, has surged recently. Entrepreneurs, who painstakingly build businesses through significant investments of time and labour, are also unfairly lumped into this category. Profit-making is unfortunately perceived as criminal behaviour in some instances. It is essential to understand that earning profit is the primary function of the private sector. While it is essential to hold the private sector accountable for any wrongdoing or unethical practices, it is equally crucial to ensure that individuals are not subjected to unnecessary hurdles while doing their work.
Capital formation is primarily driven by the private sector. The government's role should be to support and facilitate the private sector in its capital-formation endeavours, as the private sector is a significant provider of employment opportunities and contributes substantially to government revenue. In Nepal, the private sector accounts for a staggering 81% of the economy.
Without active participation of the private sector, meaningful reform are unlikely to be achieved. The current reluctance of entrepreneurs to invest, despite accumulating funds in banks, indicates a lack of confidence among them in the prevailing business environment. To unlock the potential of the private sector, it is imperative to implement reform action plans that are friendly to the private sector and address their concerns.
(Awasthi is the Director General of the FNCCI - the Federation of Nepalese Chambers of Commerce and Industry.
