Economy Grappling With Overcapacity Problem

Not so long ago, a well-made, old but still functioning building at the centre of a city that had withstood the devastating earthquake and hosted a theatre for as long as one can remember got vacated for demolition and, in all likelihood, to get replaced by a high-rise structure. This has been a general trend over the past few decades. The last decade saw a mushrooming of high rise building all over the country, with the similarity among them being not just limited to the number of stories they share but them being vacant or unoccupied most of the time. The new capacity created was underutilised.

Similar is the case for the cement and steel industries, a sector that has time and again lamented the fall in the demand for their products as well as their struggle to survive. Many of such buildings that were constructed in the last decade were severely damaged by the 2015 earthquake. The reconstruction boom that followed then led to a surge in demand for construction materials. After a flurry of reconstruction activities, that growth eventually subsided. It was natural for the demand to fall, but the needless capacity added to the industry has remained wasteful. The national economy is in no position to absorb this overcapacity, and a few export cases are more of a posturing scheme rather than serious business scope, a fact further highlighted by recent obstruction of export of such products. As such, this overcapacity is here to stay unless new business opportunity rises.

Abuse of funds

Our economy, through policy-driven initiatives, focused major resources on the sector like agriculture, hydropower, tourism and Small and Medium Enterprises (SMEs) to base the overall economic development of the country. The SMEs sector received considerable access to investment, but if the recent data on credit defaults are anything to go by, there seems to be a serious abuse of funds, resulting in failure to have any meaningful impact in the economy and almost no capacity enhancement. For tourism sector, Nepal currently has capacity to hold three times the tourist arrival it currently gets. The capacity of energy sector, however, is all being absorbed by the economy, which is a good news. 

This over capacity of the tourism sector has been a major headache and needs to be addressed, but with such a high airline ticket prices and costly hotels, the prospect looks grim.  Add to that the sad tale of national flag carrier which is mired in mismanagement and is currently operating below its actual capacity. Lastly, agriculture sector would have been that one sector where even the over capacity would have been welcomed but if various official reports offer any guidance, a huge sum of subsidized credit, donation aided by multilateral agencies has been severely misused and siphoned off without any capacity enhancement. 

Further, the rise of e-commerce has been a great disruptor of sort in the economy. Numerous online platform that operate from cheap premises or cloud have found a dependable market online and with further improvement on overall infrastructure to support that mode in terms of internet speed, devices, delivery eco-system, legislation, accountability and trust from the buyers, it is almost sure to grow further. The rise of e-commerce has vacated many spaces in the leading commercial area which was once highly coveted. With the prospect of even more powerful technology emerging in the future, this problem of over capacity is likely to get even worse. 

Vanity projects

Add to this the numerous vanity projects initiated by the government, constructing airports, seminar halls, view towers and others which have remained grossly underutilised, and this over capacity has been too costly for the overall economy if one analyses it from different angles of opportunity cost lost. These are hard elements that are actually visible. The other side is composed of soft elements.

A superstructure has been created at a great cost of the tax payers to govern the entire country, seemingly providing the best of facilities and amenities for effective and efficient governance as well as personnel development. However, if one examines just a few cases, old and new, from the past decade, one reaches at different conclusion. The instances of ill-advised undertaking of insurance for all during pandemic or the recent tax fiasco over a cost centre or the huge scandal related to embossed number plate and license are the evidences supporting this.  

The lack of decisiveness on fiscal affairs - from a deep superstructure muddling deeper and deeper into trouble to the gross misapplication of monetary tools - all hint at one simple thing: a lack of capacity. The ability to objectively and decisively solve a problem facing the economy is a must and failure to do so is sheer incompetence and institutional failure. These different instances related to capacities - both hard and soft - does make one curious despite years of experience in how we as a country could not even get the basics right. 

(The author is an ex-banker who currently is working on promoting financial literacy)