With the 16-point ascend in the global Doing Business Index published by the World Bank last week and positive symptoms in export trade, balance of payment, realising Foreign Direct Investment (FDI), economy of the country is set on the higher growth trajectory. The first year after the adoption of federalism was rather chaotic with all levels of governments trying to create the legal basis for their operations, secure the sources of revenue to manage much needed fund for the development and learn the nitty-gritty of the budget making and resource mobilisation. It was the foundation year for the new political system which was successfully manged by the federal as well as the sub-national governments, said Finance Minister Dr. Yuba Raj Khatiwada. He is confident that the economy would be further propelled by the increased investment, business opportunities, execution of development project and social security policies. Responding to the questions of the journalists at the weekly Gorkhapatra Sambad, Dr. Khatiwada talked about the overall scenario of the economy and prospects. Excerpts:
The government has been saying that the first year was the foundation year for federalism. How do you assess the current economic situation in the pretext that many processes and policy strings are yet to be fixed and certain groups are still critical about the recent economic policies?
Development and good governance are the primary agenda of this government. When this government came to power, a legal instrument related to election and a couple of them for federalism were activated. Political transition was almost concluded, but constitutional and economic transition had just begun so we had a responsibility to set the tone of the country's future. Rest is created by this government. Dozens of laws were promulgated.
But the main task in institutionalising the federalism was to execute the fiscal federalism and that is the responsibility of the Ministry of Finance. Shared and individual rights and the responsibilities of the governments have been defined. Balanced and just distribution of resources has been practiced. Revenue and budget distribution system has addressed the geographical and demographic dynamics in the new political set up. At the same time, we successfully mitigated the chances of conflicts among various levels of the government.
Policy for the distribution of the revenue from the natural resources is in the pipeline and will be implemented soon. Required laws will be developed within this fiscal year and go into implementation from next year. The problems in managing the projects have also been addressed through policies and action plans. However, we need to increase our project management capacity to get the desired results.
The Doing Business Report of the World Bank showed an impressive progress in terms of creating investment climate. What has made the country climb up in the index?
Doing business index is the indicator of the work we did in the foundation year. Various laws to facilitate the private sector with the business-friendly environment have been created and more such laws like the Intellectual Property Act will be promulgated soon. The government should never compete with the private sector, but it should facilitate the investment of the government and private sector. The recent Social Security policy has improved the labour relations and we hope that it will also increase the productivity of the workers.
One-door service centre at the Department of Industry has come into operation and another at the Investment Board of Nepal will start soon after the creation of procedures and bylaws. The intent of investment made at the Investment Summit earlier this year are being realised and the government has signed agreements for large infrastructure projects while private sector is collaborating with foreign investors in various projects. We recently witnessed the financial closure of the Upper Trishuli 1 Hydropower project. The Upper Karnali which was stuck for years due to inability of financial closure is set to begin the work soon. Arun III has also been moved ahead while multilateral donors are interested in Dudhkoshi Hydel Project.
To create infrastructure for electricity infrastructure and promote energy trade through the cross-border transmission lines will be developed with the support of the Millennium Challenge Corporation. Since hydroelectricity is instrumental for Nepal's economic growth, we must work to increase the production, transmission and consumption of renewable energy. To increase the electricity consumption, we are promoting electronic appliances and vehicles. Electricity export will balance the country's trade. It will also replace the electricity import from India.
The past year has also been a foundation year in terms of road, aviation and railway sector development. The Gautam Buddha International Airport in Bhairahawa will go into test operation in January next year, runway and parking space at the Tribhuvan International Airport will be expanded and Detailed Project Report of the Kakarvitta to Banbasa Railway Project will be completed soon. In terms of road expansion, it has reached almost every corner of the country though there are questions about the engineering and quality of such infrastructure. The government is communicating with the Japanese, Swiss and Chinese governments for the support in tunnel construction.
The country needs transformation in agriculture with greater mechanisation, access to land and better land use policy. We need to do more in this regard. Tourism is another area of priority. We are celebrating Visit Nepal year 2020 which has created demands of more tourism destinations, hotels, transport services and aviation companies.
But the reform in public procurement policies and laws is needed to make the government expenditure more effective and result oriented. Tax evasion has drastically reduced. We are trying to make the entire system transparent.
Hydropower service sector is leading the growth in recent years. But public sector spending has long been pathetic with maximum budget utilisation at the last month of the fiscal year. What is the government doing to improve the situation?
Though the service sector has witnessed an impressive growth in recent years, the government is promoting all three – primary, secondary and tertiary – sectors of economy. All these areas had 5 to 10 per cent growth in an average last year. Additional efforts and investment are needed to make energy and tourism primary instruments for the growth. We need supplementary investments and roles from the government and private sectors in developing these areas.
I agree with the fact that the government is more process oriented. It happens in all democratic societies since they have to follow the legal provisions. The land acquisition, Environmental Impact Assessment and public hearing also delay the projects. Therefore, we are set to shorten the process making amendments to the Public Procurement Act. To address the maladies of the EIA and Initial Environment Examination, the government has decided to set up a fund where the developer can deposit the money and the government will plant the trees instead of the developer. Industrial zones are in offing in all seven provinces to facilitate the private sector and attract investment.
Both the process and government mechanism are cumbersome while the decision-making process has also delayed many projects. At the same time, I must say that the classification of the government expenditure is not scientific. It does not show the actual capital expenditure. The capital budget that makes only about one-third of the total expenditure is not the only development budget. The grant mobilised to infrastructure projects like Melamchi Water Supply Project, Pushpa Lal Highway, and grant sent to the sub-national governments is also the capital budget.
Similarly, some payments of major projects are made at the end of the fiscal year. Further, we are trying to practice the budget surrender by mid-April at the latest so that the surrendered budget can be properly utilised in key projects. I urge journalists to look at the capital expenditure from this new dimension.
The Doing Business Report has pointed towards the exhaustive business registration process and complex taxation system, while saying that the new Social Security Act has added additional burden to the enterprises. What kinds of interventions are you planning to attract more private sector investment?
The issue of complex taxation system, which is raised by the Doing Business Report, has been addressed. We are amending the foreign exchange act as well. The report is an instrument for foreign investors, so the government has been giving enough attention to improve the situation.
Doing Business Report is based on the perception survey and when the situation is asked to a businessman who has been evading taxes, he would criticise the government moves. We are trying to make the economy more transparent and bring more areas under the tax net which is not easily taken by some section of the business.
Similarly, the report is based on the data till May 2019 while the government has made many reforms, including simplifying the social security provisions after that. Online taxation system has been implemented. Compulsory Permanent Account Number (PAN) is introduced. Insolvency Act will be brought soon. Bank deposits and lending have increased significantly, investment has been mobilised in the key sectors, therefore, the statement about investment climate is not justified. Be assured there is no despair in the economy. Revenue Board will also be constituted soon. However, bringing all social security instruments under a single net is the demand of the time.
This is the government that has initiated some steps to socialism with the social security for almost one third of people in the country. The social security will ultimately increase the productivity if the companies provide the workers with latest technology and skills-training. The workers also should be serious about increasing the productivity of the company since only the higher productivity results in higher payments. Meanwhile, the government will give attention to minimising side effects of the social security policy so that the business community should not hire foreign workers.
You said that the government had accorded high priority to the hydroelectricity development and mentioned many projects in the pipeline and development phase. But reservoir based Budhigandaki Hydroelectricity Project is stuck for many years. Has it become ping-pong between the two large neighbours?
Past governments misbehaved with the Budhi Gandaki. However, the present government is completing the land acquisition this year which will make the site clear for any investors. It will be an attractive project. The discussion on the alternative of reducing the capacity of the project to 800 MW has delayed Budhi Gandaki as the reduction would demand another DPR. But it would save a large area of land and some settlements.
The Chinese company was awarded the project as it was ready to develop it but it slowed down the development process, so the government had decided to develop it on its own. But the company said later that it had completed the internal works to develop the project, and it was retransferred to the company. There are complications at the local level as well as the people are demanding higher compensation for their houses and land.
The government has given high priority to agriculture. The sector is enjoying increasing investment, grant, bank lending and other facilities. But neither has the sector seen increment in products nor in entrepreneurship. Why?
Only those people who know about the agricultural grant are being benefitting from it. They know how to manage it and many farmers who should have got the facility have not been able to avail from it. Therefore, we are revising the entire grant procedure to make sure that the fund goes to the right people.
What made the sudden changes in the pattern of trade in the first two months of the current fiscal? It is also seen that the products that are not indigenous to Nepal are in the rise in export trade while import of consumer goods has increased.
Industrial raw materials and construction materials like wood, clinker and cement, steel bars, electricity and rice import is on a declining trend. Steel industries imported more raw materials last year which resulted in decrease in import. The government has consciously restricted or discouraged the import of sugar, energy drinks, luxury appliances and vehicles.
There is a growth in industrial product, registration of industries and their operation. About 5000 companies have been added in the last couple of years. There is 40 per cent increment in industrial sector lending. So far as the export goods are concerned, goods that have more than 30 per cent value addition will support the economy. Palm oil, pashmina and handcraft items are the examples.
The government will give more focus on the products listed in the National Trade Integration Strategy and will promote their export. I would like to remind you that the export growth is also the result of the Valued Added Tax refund facility. The refund will be made only after the export.
Besides the government's claim that the economy has set on the right track, common people are complaining about the increased tax burden such as the tax in ancestral properties and micro entrepreneurs. What do you say to them?
There is not a single solution to all the problems in an economy. If you say don't increase the tax and expand its net, don't borrow money but implement development, this is impossible. In a developing country like Nepal, there is a need to import capital intensive goods and raw materials for industrial development to achieve economic growth. Likewise, achieving high economic growth and decreasing import while increasing revenue is another challenge. impossible.
This is a great challenge for the finance minister to keep balance among balance of payment, inflation, import and export and tax rates. Local bodies cannot raise export tax, it will be discouraged.
On the backdrop of the Millennium Challenge Account controversy, do you see any geo-political competition in large infrastructure projects in the country?
Neighbourhood first is our policy. But we don't ignore the development concepts from the economic powers like the USA and EU. MCC has extended support in the national priority areas so we accepted it. It is not the grant under any strategic move. The next session of the parliament will ratify the MCC project at the earliest. We will exercise economic diplomacy to mobilise the external sector support in development and other areas in the country. Large projects sometimes become the matter of political concerns as well. This is not unconventional.
(Prepared by Modnath Dhakal, Photo by Ramesh Chhetri.)
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