23Sep2022

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OP-EDs and Columns

Implications of India’s Agnipath Scheme for Recruitment of Soldiers for Nepal’s Gurkhas

SANTOSH Sharma Poudel

The column originally appeared in The Diplomat on 14 September 2022. Please read the original article here.

On June 14, India announced the Agnipath Scheme, a new model for recruitment into the Indian military. Under the scheme around 46,000 youth between 17.5 and 21 years of age will be recruited for service for a period of four years. A quarter of these recruits will be retained at the end of this period, while the rest will receive a severance package of approximately $15,000 and return to civilian life.

The goal of the Agnipath scheme is to make the Indian military “leaner, fitter and more youthful.” It is expected to cut ballooning salary payments and pension costs, which could be used to modernize the military. Despite countrywide protests India has moved ahead to recruit under the new scheme.

Upon announcing the scheme, the Indian Army wrote to Nepal’s Ministry of Foreign Affairs, seeking approval to recruit Nepali nationals under the new plan. India’s Ministry of External Affairs confirmed that there would be no exception for Nepali Gurkhas.

Recruitment under the Agnipath scheme was to start on August 25 in Butwal and September 1 in Dharan in Nepal. However, the Nepali government halted recruitment.

Impressed by the valor displayed by Nepali Gurkha soldiers in the Anglo-Nepal War, the British East India Company started recruiting Nepali soldiers into a Gurkha regiment in 1815. Upon Indian independence, India, Nepal, and the British government signed a tripartite agreement whereby India would continue to recruit Gurkhas from Nepal.

Under the agreement, the countries would form exclusive Gurkha regiments, and recruits will be eligible for pensions. Currently, 34,000 Nepalis serve in the Indian Army, and 122,000 pensioners reside in Nepal. Cumulatively, they bring in $620 million (compared to Nepal’s defense budget of $420 million).

The recruitment of Nepali nationals in the Indian Army (and the British Army) is a contentious issue in Nepal. Some are opposed to it. Stopping the recruitment of Nepali soldiers in foreign militaries was one of the 40 demands raised by the Nepali Maoists when they started their 10-year armed insurgency. Even as recently as 2020, the Nepali government under Prime Minister K.P. Sharma Oli termed the 1947 tripartite agreement “redundant” and officially proposed its review, which the U.K. government declined.

Nepali nationals are raising several questions relating to the Agnipath scheme.

First, the scheme sidesteps the 1947 tripartite agreement. Although New Delhi has not rescinded the agreement per se it has been consistently stretching its understanding of the pact’s terms. The agreement provided a separate regiment of Nepali soldiers in the Indian Army and made provision for pensions. However, over time the Gurkha regiments in the Indian Army comprise fewer Nepali. They are now 60 percent Nepali, while the rest are ethnic Nepalis from various parts of India. The Agnipath scheme erases the pretense of a distinct Gurkha regiment, as all recruits will be Agniveers. The Agnipath scheme has direct bearing on Nepal and Nepali recruits. Yet India hardly consulted the Nepali government while devising the plan. It only sought Nepal’s approval after it had announced the scheme.

New Delhi often touts its “neighborhood first” policy. But it is increasingly taking Nepal for granted.

Second, retired and aspiring Gurkha soldiers in Nepal have criticized the short-term of the service under the Angipath scheme. For a long time, recruitment in the British or Indian Army was seen in Nepal as an economically secure job with high social status. Agnipath’s terms neither provide a long-term job nor financial security. Indian Agniveers will have priority access to jobs in government and elsewhere after four years. The Nepali government is unlikely to be able to provide such preference. On the contrary, “retired” Agniveers may not be able to join some government services or security forces because of their age upon completing four years of service.

Third, there are lingering concerns about rehabilitating the young “retirees” (who will be 22-23 years) into society. It will be a highly-trained and energetic cohort, potentially struggling to find a job or pay in Nepal. Therefore, there are risks of some of them joining armed groups operating in Nepal. After the Maoist insurgency was over, Nepal struggled to integrate the Maoist guerillas into society.

In addition, some foreign countries could take advantage of the trained forces for covert activities within Nepal. It could embroil Nepal further into the geostrategic nightmare, which could spiral out of control.

Gurkhas have a proud tradition of serving bravely and loyally in the Indian Army. The military of the two countries shares a close bond. As a result, the Chief of the Indian Army is accorded the status of an honorary chief in the Nepali Army and vice versa. Gurkha soldiers are a vital component of this special relationship.

In this context, many expected Nepal and India to have frank discussions on the issue and reach an agreement during the five-day visit of Indian Army General Manoj Pande earlier this month. However, the issue made no headway during his visit. Pande did not raise the matter during his meeting with Nepali Prime Minister Sher Bahadur Deuba. Deuba’s foreign adviser Arun Subdei said Nepal is engaging India at diplomatic and political levels on the issue.

Going forward, Nepal has three options.

Firstly, it could argue that the relevance of the tripartite agreement is over and hence, seek a new form of negotiation with India at the bilateral level and halt the recruitment until a deal is reached. Secondly, it could approve recruitment under the Agnipath scheme. Finally, it could permanently stop all forms of recruitment of Nepalis into foreign militaries.

There is a need for extensive consultation within parties and across parties regarding these options. There are differing views even within parties, let alone the ruling coalition. Therefore, Nepal needs an extensive national debate on the conditions under which Nepal should allow its nationals to be recruited into a foreign military, if at all.

This affects the long-term security of Nepal and Indo-Nepal relations, and Kathmandu should not rush to a decision. With elections due in two months, the current government is unlikely to decide one way or the other. But the onus will likely be on the current top leadership even after the election.

OP-EDs and Columns

Regulating Online Businesses

ANKUR Shrestha

The opinion piece originally appeared in the 2022 September Issue of New Business Age Magazine. Please read the original article here.

The shift towards online businesses has not been new in Nepal. The COVID-19 pandemic especially helped increase this movement while social media marketing had already been a common thing even before the pandemic. The pandemic has forced even traditional businesses to go online as they searched for new ways to reach consumers. Moreover, online businesses can be set up at a relatively low or no cost, and it is easier to market using social media. Therefore, online businesses became attractive to new entrepreneurs using social media to sell retail goods or services. Most of these new businesses, however, were not registered.

The problems in business registration are, however, not new. According to the latest available National Economic Census 2018, almost half the business establishments are unregistered. Two out of three businesses operated by a single person are not registered.

Then why are we seeing a large number of unregulated establishments, especially small-scale ones? There are various reasons. First, it is a strenuous task to register a business in Nepal. The World Bank ranks Nepal at 94th overall in its Doing Business Rankings in 2020, but 135th in starting a business and 151st in enforcing contracts. These are critical for small businesses.

Secondly, the government has not been able to offer substantial benefits (or impose costs) to warrant registering a business. Regular processes that need to be easy and fast, such as registering a business and paying taxes, come with cumbersome bureaucratic hassles without offering any particular benefits. Additionally, the government’s ability to impose contracts in case of any issues between contracting parties is slow. The people then see no reason to seek help from the government. On the flip side, most unregistered businesses do not face any consequences for not registering.

The third reason is that government regulation is slow to catch up, especially for online businesses. For example, when ride-sharing services like Tootle and Pathao started their services in Nepal, they had no exact regulations to operate under. Riders were arrested by the police as existing laws did not allow private vehicles to provide ride services. But, protests from consumers as well as service providers have forced the government to allow ride-sharing even in the absence of legal provision even though it has been more than five years since these services came into operation.

Even registered small businesses have been known to avoid paying taxes by showing a negative balance sheet. Customers have also contributed to the informal economy by not necessarily demanding VAT or PAN bills from the businesses. This has encouraged newly formed online businesses to operate without staying registered.

A glimpse of a genuinely free market economy in the country can, however, be seen. Albeit informal, the online market has been known to be relatively easier to purchase from, allowing consumers to compare prices across different sellers and choose one that suits them while paying relatively lower costs, all from the comfort of their homes. Sellers are compelled to sell better goods as setting up shops becomes easier through online mediums, and comments and ratings (reviews) in online mediums are viewed by a large number of potential future consumers. These act as incentives for sellers to improve customer service, sell better goods, try and create their niche, and perform better overall.

The government has remained a mute spectator, allowing sellers to provide goods cheaper to consumers while maximising profits. This type of informal arrangement is not covered by the government protection mechanisms for consumer safety. Of late, however, the government has tried to rectify this and drafted an E-commerce Bill intending to create, regulate, and facilitate online trade in Nepal. The first of its kind bill dedicated to e-commerce focuses on consumer protection. The question of allowing a truly free market without government intervention remains. The government needs to do more for both online businesses and consumers to remove the hassles in business registrations and taxes. While the E-commerce Bill is a step in the right direction, it has still not gone through the parliament.

The government’s slow and unresponsive nature, procedural challenges to reduce steps in business registration, and the high tax slabs will always hinder businesses from entering the formal fold of the economy. Questions of the role of government in only acting as an insurer of contracts rather than directly intervening in the market will also remain. Regardless of the arguments, the registration of businesses (online or otherwise) will help the government plan better and invest in easier access to resources for both sellers and consumers. 

NCIThe Explainer - NIPoRe Blog

An analysis of FDI statistics of Sudurpaschim Province

ANUSHA Basnet

Foreign Direct Investment (FDI) is defined as a “category of cross-border investment” in which an investor from one country invests in another country wherein the investor has significant control over the business it invests in (IMF, 2009). It may also involve a “transfer of technical know-how, managerial and organizational skills”. For a country aiming to expedite its development process, FDI has been one of the factors aiding the development process of Nepal especially in recent years. The government has also made provisions to make Nepal a more investment friendly country. Acts such as The Foreign Investment and Technology Transfer Act (FITTA) 2019 and Foreign Direct Investment Policy 2015 have been created by the government in an effort to create a better environment for foreign investors. The FITTA states that “investors need to bring 25 percent of the pledged investment within a year from the date of registration, 70 percent by the start of operation, and the remaining 30 percent within the next two years.” The Department of Industry (DOI), Nepal Rastra Bank (NRB), and Investment Board Nepal (IBN) are three agencies that implement the laws regarding FDI. 

As of 2018/19, the stock of FDI in Nepal was Rs. 182.92 billion of which 48.2 percent was paid-up capital, 42.8 percent were reserves, and 9.0 percent was loans. Of the total FDI stock, the service sector accounts for 51.1 percent and the industrial sector accounts for 48.8 percent. Furthermore, within the industrial sector manufacturing, mining and quarrying industry accounts for 28.6 percent and electricity, gas, and water sector accounts for 20.0 percent of FDI stock. While the level of FDI pledge is high, the actual inflow of FDI is still low. 

Looking into the provincial breakdown of FDI statistics, we see the following numbers:

Figure 1: Provincial Breakdown of FDI figures (Data taken from NRB)

From the above graph, we can see that Sudurpaschim province has received the least amount of FDI in all three years (2017, 2018, 2019). The province received FDI of Rs. 13.2 million, 10.8 million, and 27.93 million for the years 2017, 2018, and 2019 respectively. The increase in FDI for the year 2019 can be attributed to the investment brought in for the manufacturing sector (cement industry) and information technology sector (software development industry). Comparatively, Sudurpaschim province lags behind other provinces in terms of being able to attract foreign investment. Years of lack of concrete development plans from the central government, lack of investment in the infrastructure sector and other factors such as a difficult geographical terrain have caused the province to lag behind in terms of development which has affected its current ability to seek investment. Furthermore, delays in current projects have not inspired confidence from the investors. 

However, the provincial government in Sudurpaschim has made efforts to bring in foreign investment. The provincial government has started a process to create a Provincial Investment Board in order to streamline projects that require higher investment (projects requiring investment from Rs. 1 billion to Rs. 5 billion). The government also put in extra effort to woo investors during the Investment Summit organized by the Nepal Investment Board. In terms of attracting foreign investment, tourism, manufacturing sector, energy sector, and transportation sector are few sectors that are being prioritized by the provincial government. The provincial policies and programs for the fiscal year 2078/79 has emphasized completing the ongoing projects in order to attract new investment. The recent agreement between the Investment Board of Nepal and NHPC for the development of Seti river hydropower projects also shows promising signs for the province. 

As the Sudurpaschim government has been creating ambitious plans to expedite the development process of the province, FDI will play an important role in the process. While the province has a lot to do in terms of catching up to other provinces for bringing in FDI, the steps initiated by the government show their commitment and dedication to the economic development of the province.

South Asia Bulletin

SAB Vol 1, Issue 3

South Asia strives to address natural disasters, political instability and economic crises. At the same time, they have newer bilateral and regional issues such as Agnipath scheme, and Chinese military presence in Indian Ocean littoral states to sort out. 

Research Commentaries

Issues with Higher Education Sector in Nepal

PRADHYUMNA Wagle

SYNOPSIS

The education sector in Nepal is very heterogeneous with visible differences among the existing institutions. Notably, public and private educational institutions vary widely in terms of education financing, infrastructure, quality, admission, retention and graduation rates. Nepal’s education system is very peculiar especially when available data are compared to other countries with the enrollment rates being lower than half of the global average. It can be easily discerned that higher education in Nepal is fragile and inconsistent within and beyond the system. The data discussed below suggests that enrollment rates diminish with increasing educational level. This article discusses some barriers to enroll into the educational system and some barriers to graduate in Nepal.

INTRODUCTION

Higher education in Nepal is limited to a very few umbrella institutions with the majority of students still enrolled in colleges affiliated to Tribhuvan University. Although all universities in Nepal are public, three of the largest universities after TU, Kathmandu University, Purbanchal University and Pokhara University have autonomy highly comparable to private universities. Hence, these universities have to depend on tuition fees as their primary source of funding. Most of the educational grants from the government are provided to TU through the University Grants Commission. Around 3.5 percent of the total educational budget is allocated for higher education and that amount when distributed for more than a third of enrolled students is inadequate.

ISSUES WITH NEPAL’S EDUCATION SECTOR

According to the World Bank, Government of Nepal’s spending on education as a percentage of the GDP and total budget, both are higher than the world and South Asian average. That could have been the key to increased enrollment rates in primary and secondary schools in recent years. Net enrollment in elementary schools has reached 97 percent in the last two decades and that in secondary schools is 60 percent. But the enrollment rate in higher education in 2019/20 was just 14.9 percent which is less than half of the global average (WENR) and 12 percent less than that of other developing countries like India and Vietnam. This trend suggests that enrollment rates diminish with increasing educational level.

Despite plans to increase domestic funding for education, the process of allocation and distribution of funds is ambiguous with the transition to federalism. Educational loans are available through commercial banks but the complexity of the process with high interest rates has made those schemes unpopular. Hence, students are highly constrained with access to educational financing. Thus, low federal aid and those constraints along with increasing tuition fees have made it harder for students to finance their education.

The heterogeneity within educational institutions in terms of budget translates to variation in quality of education. Publicly funded institutions are compelled to use inferior technology compared to private institutions who serve a limited population, mostly those in Nepal’s urban areas. The University Grants Commission claims that lack of standard norms and mapping of Higher Educational Institutions has made the sustainability of educational programs and resource mobilization difficult. Also, the highly centralized economy has led to the establishment of majority institutions in limited cities. For a student graduating high school from a remote district, there is a need to move to a bigger city which is an additional financial burden. So, a large population is compelled to enroll into public colleges which teach limited coursework. All these factors impose a barrier to enter the higher educational system.

Among those who enroll into higher education, graduation rate is low. Tribhuvan University, with more than 75 percent of students within the country, had a pass rate of 26.6 percent in 2015/16 and 26.1 percent in 2019/20. The National Educational Policy 2019/20 has identified irregularity in educational policy, irrelevancy of coursework in the labor market and uncompetitive and hackneyed nature of degree programs as the main challenges in higher education. The enrollment rate in the management sector is 46.37 percent with that in the STEM field being 8.38 percent. On the contrary, the STEM field is the most popular among Nepali students going abroad for higher education. This implies that either the standard of STEM education in Nepal is low or a STEM degree has less chance of landing a job after graduation in the related areas. The government plans to formulate policies where students graduating from subjects of national demand will be required to serve under government supervision for at least a year. This could be beneficial for recent graduates searching for entry level jobs. On the other hand, local governments will have educated youths working for them. Moving higher in the educational spectrum, less than one percent of total students in higher education are in post-graduate degrees focused on academia like PhD, MPhil or PGD.  Although the UGC claims that the target of publishing 85 publications in international journals was exceeded in the 2019/20 academic year, there is very limited research done in applied sciences with most publications being theoretical.

Another major problem within higher education in Nepal is internal inefficiency. This includes poor management, delayed admission and exam results and ineffective communication. Many students are forced to wait elongated periods for exam results. Even the simplest of administrative processes are tortuous. The inclusion of politics especially in public institutions has caused frequent disturbances in colleges often leading to violence. While youth involvement in collegiate government is important and could be beneficial in terms of equity and inclusion of all parties in college, educational institutions should never be a place to ignite political ideologies. The internal inefficiency along with negative external influence has exacerbated the structure of higher educational institutions in Nepal.

POLICY IMPLICATIONS

While there is a long way to go in terms of cutting off the barriers to enter and exit higher education in Nepal, there is some rainbow within the clouds. The share of female students in higher education has increased with 52.04 percent making the Gender Parity Index 1.9. Historically, female population has been deprived of education with all higher educational institutions being male dominated but this is a notable improvement. It is disappointing to see that National Education Policy 2019/20 lacks plans to accommodate people of LGBTQ community in education although recent movements through civil societies have apprised the government to promote diversity and inclusion within the educational sector. Resource wise, educational budget has decreased but the Ministry of Education recognizes the need to increase the allocation to 20 percent of the national budget in order to upgrade from under-developed to developing country by 2022. The National Education Policy 2019/20 plans to focus on technical education and training, collaborate with national and international institutions for research and development and increase emphasis on tourism, sports, entrepreneurship and ayurvedic and herbal education, and spirituality. The government and the Department of Education is often claimed to follow a circuitous route for a lot of reasons, most stated above, their recent publications regarding plans and policies have recognized the deficiencies within themselves, which is a good place to start.

BIBLIOGRAPHY

Edusanjal. (6 December 2021). Education in Nepal [infographics]. Edusanjal. Retrieved 6 September 2022, from https://edusanjal.com/blog/education-in-infograph/  

Education in Nepal. WENR. (30 March 2022). Retrieved 6 September 2022, from https://wenr.wes.org/2018/04/education-in-nepal  

Government of Nepal (2021). ANNUAL REPORT 2019/20. University Grants Commission

Government of Nepal (2021). Education Sector Analysis, 2021. Ministry of Education, Science and Technology

Government of Nepal (2021). National Education Policy, 2076. Ministry of Education, Science and Technology

Paudel, A., Chen, J., Shimauchi, S., Woo, W. T., Rai, S., Sen, R., Wardana, W., Chaudhary, M., Hurley, P., Kishan, A., Tiberghien, Y., Laksmana, E., Gupta, S., Horta, L., Dhungel, N., editors, E. A. F., & *, N. (14 May 2020). Rhetoric and reality in Nepal’s education system. East Asia Forum. Retrieved 6 September 2022, from https://www.eastasiaforum.org/2020/05/15/rhetoric-and-reality-in-nepals-education-system/

OP-EDs and Columns

Trapped in migration and remittance

NISCHAL Dhungel, Non-Resident Fellow

The opinion piece originally appeared in The Kathmandu Post on 4 September 2022. Please read the original article here.

Nepal has faced tremendous hitches in the path of economic development. Keeping natural barriers (landlocked externally and challenging topography internally) aside, the nation has been undergoing a protracted era of political change over the past two decades, graduating from a monarchy to multiparty democracy, marred by armed war, ethnic unrest and frequent changes in power. Frequent changes in government, irrespective of a unitary or federal form of government, has directly hampered Nepal’s development path, compounded by poor policy decisions. Poor policy decisions have led to weak performance of the primary agricultural and industrial sectors, low public investment and capital accumulation, and low productivity growth.

Given this context, it is not surprising that foreign employment has become more pervasive, particularly in the years following Maoist conflict. The Department of Foreign Employment started issuing labour permits in the late 1990s. The number of labour permits issued peaked in 2013-14 at a high of 519,638. In 2020-21, the number of labour permits issued plunged to a 16-year low of 72,081 due to the Covid-19 outbreak and the ensuing restrictions on people’s freedom of movement. At present, formal overseas employment procedures have become cumbersome due to the bureaucracy that requires foreign employment agencies to produce authentic labour demand letters, get the demands attested from the Nepali embassies in target countries, and provide several other documents. Despite the cumbersome out-migration procedures, foreign employment has become a lucrative area to escape Nepal’s job market.

Remittance trap

Remittances in Nepal have surged at an unprecedented pace. Personal remittances received were less than 1 percent of GDP up until the late 1990s, lower than Bangladesh and India. This share dramatically increased during the first half of the 2000s, rising from 2 percent in 2000 to 22 percent in 2010 and 30 percent in 2015. Following the pandemic, it was anticipated that Nepal would experience a sharp fall in remittance inflows, impacting imports, the balance of payments, foreign exchange reserves, consumption, savings, loans and interest rates. However, according to the data released for fiscal 2020-21, Nepal performed better in remittance inflows.

Given the extraordinary increase in remittances, they are probably the main driver of the improvement in living standards seen in Nepal, directly (households receiving remittances) and indirectly (increased labour income of those that remained). Research published by Nepal Rastra Bank showed that compared to households that do not get remittances, households that receive remittances have a 2.3 percent lower chance of falling into poverty. With every 10 percent increase in remittance inflows to households, the likelihood of those households falling into poverty lowers by approximately 1.1 percent.

Large-scale migration is a symptom of underlying, long-standing issues rather than a sign of strength. One of the world’s most extensive and dense anti-poverty initiatives is likely to be found in Nepal. Unfortunately, more resources go into the process of delivering benefits to “the poor” rather than achieving impact (making “the poor” rich). Economists Yurendra Basnett, Chandan Sapkota and Sameer Khatiwada have rightly pointed out that much effort is also put into process innovation and complexity (how to get the goodies to “the poor”) while neglecting the apparent reality that a great job with a high salary would go a long way in reducing poverty in one of the chapters of the book entitled Politics of Change.

Large-scale migration and the resulting remittances have facilitated the expansion of low-productivity services. Still, they have also contributed to the low competitiveness (via appreciation of the real exchange rate). As a result, this cycle intensifies already-existing problems that Nepal has faced for a while, further impeding its competitiveness and limiting its economic potential. Because of all these factors, Nepal, home to some of the most hardworking and adventurous people in the world, may remain in a high migration and remittance trap for years to come.

Domestic employment

The pandemic provided the government with a fantastic opportunity to learn a lesson from the existing policy gap to keep the people who had returned to help with the need for the nation’s development. It is a monumental task to switch from foreign employment to domestic employment. Approximately 500,000 young people enter the workforce each year, and 80 percent of them manage to find work abroad. Due to a lack of investment that may have helped produce output, Nepal is now entirely dependent on imports. Ironically, Nepal imports even agricultural items, even though 66 percent of the country’s population is employed in agriculture. Agriculture, which accounts for two-thirds of the workforce and one-third of GDP, has to undergo reforms to increase productivity, reduce poverty and free up labour for new sources of economic growth.

For Nepal, unleashing massive hydropower investments would be a game changer. It would not only result in considerable increases in productivity and new investments, but it also has the potential to raise wages dramatically, reverse migration and boost competition in downstream industries. According to the National Planning Commission and UNICEF report Demographic Changes of Nepal: Trends and Policy Implications, Nepal will have an ageing population by 2028 and an elderly population by 2054. Therefore, Nepal has a very limited window of opportunity to capitalise on the demographic window. It is necessary to invest in the skills of Nepali youth to fully realise the demographic dividend. For Nepal to continue on a more robust and sustainable growth path, more human capital must be put to productive use.

History also shows us that Nepal has implemented significant reforms in the past and is capable of doing so again. The broad-based reforms that Nepal implemented between 1986 and 1996 positively impacted the economy. The share of commerce in GDP and exports, as well as the share of manufacturing, virtually doubled, increasing the economy’s openness and diversification. The political shift to democratically elected administrations, which also gave the populace a new purpose, served as the foundation for these reforms. Today, they serve as a sobering reminder that Nepal can undergo significant and complex reforms. To escape the out-migration and remittance trap, a clear set of plans and policies to increase domestic employment should be the top priority of the federal, provincial and local governments. Without rethinking our development model, the country cannot prosper or graduate to a middle-income country.

OP-EDs and Columns

Nepal’s Ad Hoc Policies Toward China

– SANTOSH Sharma Poudel

The column originally appeared in The Diplomat on 25 August 2022. Please read the original article here.

A day after U.S. House Speaker Nancy Pelosi visited Taiwan, Chinese Ambassador to Nepal Hou Yanqi released a statement denouncing the visit. In the statement, Hou “highly appreciated” Nepal’s longstanding commitment to the One China principle.

In a subtle warning, she reminded Nepal that the One China principle was the foundation of Sino-Nepali relations and expressed hope that Kathmandu would continue to abide by the principle and support China’s legitimate interests. Hou also urged cooperation to “defend each other’s sovereignty, security and territorial integrity.”

Then on August 5, Hou met with Nepali Home Minister Bal Krishna Khand. In the meeting, Khand reassured the Chinese envoy of Nepal’s position on the One China policy. Nepal would not allow any forces to use Nepali territory for “anti-China separatist activities,” he said.

This was followed by a hastily arranged trip of Nepali Foreign Minister Narayan Khadka to Beijing on August 9-11 at the invitation of China’s State Councilor and Minister of Foreign Affairs Wang Yi. Both countries billed his trip as a return visit in the wake of Wang’s visit to Nepal in March.

Khadka’s visit also followed two high-level Chinese visits in recent months. However, the timing and both countries’ statements during and after the visit indicate that Pelosi’s Taiwan visit was a critical factor.

Nepal frequently reiterates its commitments in support of the One China policy and “not allowing Nepali land to be used against Chinese interests.” Prime ministers, foreign ministers, foreign secretaries, and others in leadership positions across time and political parties have restated these commitments to the Chinese. Nepali Foreign Policy 2077 also codifies the latter. As Hou stated, these are the foundations of China-Nepal relations.

There is little doubt that Nepal is sincerely committed to these principles and policies. Unfortunately, Nepal’s understanding of the implications of those principles is less clear-cut.

The implications of the One China principle are relatively easy to understand. Under the principle, Nepal (as do most countries worldwide) believes the People’s Republic of China to be the sole representative of China. In that context, Tibet and Taiwan are parts of China. Thus, Nepal has helped repress the political activities of the Tibetan refugees because China considers the Dalai Lama a separatist.

The implication of Nepal’s second commitment — i.e. not allowing its territory to be used for activities that could undermine Chinese interests — is more complex. The principle is sensible but requires an understanding and agreement between Nepal and China on what legitimate Chinese interests are.

Nepal’s lack of a shared national understanding allows for ad hoc decision-making. Also, not all of Nepal’s interests align perfectly with Chinese interests.

The Millennium Challenge Corporation (MCC), a $500-million grant program from the U.S. to build transport and energy infrastructure in Nepal, tested the principle. Beijing was fiercely opposed to Nepal ratifying the agreement and vocal in raising its concerns. Experts in Nepal were bitterly divided over whether Chinese security concerns regarding the grant were legitimate. Eventually, Nepal went ahead with the ratification, displeasing Beijing. Nepal has sought to reassure Beijing that its interests would not be harmed.

In July, Nepal wrote a letter to the U.S. government rescinding the State Partnership Program (SPP), an exchange program between an American state’s National Guard and a partner foreign country. Nepal and the Utah National Guard signed the SPP in 2019. In Beijing’s perception, the agreement is part of the U.S. Indo-Pacific strategy.

Despite American clarifications that the SPP is not a security or military alliance, Nepal decided to withdraw from the agreement to address Chinese sensitivity on the issue.

Nepal may have a rationale for both decisions, but they point to the ad hoc nature of understanding what constitutes actions against the interest of its neighbors. Such behavior opens the door for influence peddling or even bullying, especially given the meek nature of Nepali bureaucrats and political leaders vis-à-vis their Chinese counterparts.

Additionally, the need for Nepal to regurgitate those principles in every meeting with Chinese leaders indicates China’s insecurity over developments in its neighborhood. Beijing may also be justifiably concerned with Nepal’s ability to implement the principles, though it has praised Nepal’s efforts to limit the activities of Tibetan refugees.

Either way, it is high time that foreign and security policy stakeholders in Nepal reach a common minimum consensus. It would help Nepal engage China on an equal footing. At the same time, it will clarify what Nepali “red lines” are to Beijing. Without such understanding, Nepali policies will continue to be ad hoc and reactionary.

OP-EDs and Columns

अमेरिकामा ब्याजदर बढ्दा संसारभर किन पर्छ असर ?

– NISCHAL Dhungel, Non-Resident Fellow

The opinion piece originally appeared in the Naya Patrika Daily on 22 August 2022. Please read the original article here.

विश्वव्यापी अर्थतन्त्र अझै पनि कोभिड–१९ महामारीबाट गुज्रिरहेका वेला, उन्नत अर्थतन्त्रमा रहेका केन्द्रीय बैंकहरूले ब्याजदर बढाइरहेका छन्, जसले विश्वको बाँकी देशहरूमा ठूलो प्रभाव पार्नेछ । अन्तर्राष्ट्रिय मुद्रा कोषको (आइएमएफ)को ‘विश्व आर्थिक परिदृश्य’ प्रतिवेदनले विश्वव्यापी वृद्धि घट्ने अनुमान गरेको छ । विशेष गरी उदीयमान र विकासशील राष्ट्रहरूका लागि बढ्दो सामाजिक र आर्थिक जोखिमहरूको पूर्वानुमान पनि गरेको छ । रुस–युक्रेन द्वन्द्वले नीतिगत ट्रेड अफलाई सन्तुलनमा राख्न चुनौतीपूर्ण बनाएको छ ।

मुद्रास्फीतिसँग लड्न, आर्थिक सुधारको संरक्षण गर्न, अर्को कमजोरहरूलाई मद्दत गर्न र वित्तीय बफरहरू पुनस्र्थापित गर्न चुनौती छ । रुस–युक्रेन द्वन्द्व र आपूर्ति शृंखला अवरोधका कारण खाद्यान्न र इन्धनको मूल्यवृद्धि बढ्दै जाने देखिन्छ । विशेष गरी कम आय भएका देशहरूको कमजोर जनसंख्यालाई हानि पुर्‍याएको छ । हालै संयुक्त राज्य अमेरिकाको फेडरल रिजर्भले उपभोक्ता मूल्य ८.७ प्रतिशत बढेपछि मुद्रास्फीतिविरुद्धको लडाइँलाई तीव्र पारेको छ । १५ जुन २०२२ मा फेडले १९९४ पछिको उच्च ब्याजदर वृद्धिको घोषणा गर्‍यो । फेडले आगामी दिनमा ब्याजदर अझ बढाउने योजना बनाएको छ । अमेरिकामा ब्याजदर बढाएर मुद्रास्फीति घटाउने फेडरल रिजर्भको प्रयासले बाँकी विश्वलाई नोक्सान पुर्‍याउन सक्छ । अमेरिकाको बढ्दो ब्याजदर मध्यम र न्यून आय भएका देशहरूका लागि दुस्प्रभावी हुने थुप्रै कारण छन् । 

पुँजी पलायन
विकसित राष्ट्रहरूमा कम ब्याजदरको लामो युगपछि लगानीकर्ताले उच्च प्रतिफलको खोजीमा विकासशील र उदीयमान बजारहरूमा आफ्नो अधिक पुँजी केन्द्रित गर्न थाले । विकसित देशहरूमा ब्याजदरमा भएको तीव्र वृद्धिले अमेरिकामा ठूलो पुँजी प्रवाह र विकासोन्मुख देशहरूबाट निकासी बढ्नेछ । अमेरिकामा ब्याजदर बढ्दै जाँदा उदीयमान बजारहरूमा लगानी गर्ने लगानीकर्ताले उच्च प्रतिफलको फाइदा लिनका लागि अमेरिकामा पुँजी स्थानान्तरण गर्ने निर्णय गर्न सक्छन्, किनभने उनीहरूका लागि अमेरिकामा लगानी गर्नु बढी फाइदाजनक हुनेछ । 

ऋण संकट र मुद्रा अवमूल्यन
इतिहासले देखाउँछ कि राष्ट्रहरूको तीव्र आर्थिक विस्तारक्रममा ऋण बढ्ने गर्ने गर्दछ । विशेष गरी विकासोन्मुख देशहरूमा ‘ऋण पासो’ (डेब्ट ट्र्याप) तब हुन्छ, जब उत्पादकता र ऋण सन्तुलनमा रहँदैन । अमेरिकामा बढेको ब्याजदरका कारण विश्वव्यापी ब्याजदर बढ्न सक्छ । धनी देशहरूको केही केन्द्रीय बैंकले ब्याजदर बढाइसके । अन्तर्राष्ट्रिय मुद्रा कोष (आइएमएफ)का अनुसार ३८ उदीयमान अर्थतन्त्र खतरामा छन् वा हाल ऋण संकटमा छन् ।

सन् २०१९ र २०२१ को बीचमा महामारीले विकासशील अर्थतन्त्रहरूमा सार्वजनिक ऋणमा (जिडिपीको ५४ प्रतिशतबाट ६५ प्रतिशतसम्म तीव्र वृद्धि ल्यायो । कम्तीमा २५ विकासशील अर्थतन्त्रले आफ्नो सरकारी आयको २० प्रतिशतभन्दा बढी विदेशी सार्वजनिक ऋण सेवामा खर्च गर्छन् । आइएमएफले विकसित अर्थतन्त्रहरूमा ब्याजदर वृद्धिले उदीयमान बजार र विकासोन्मुख देशहरूका लागि बाह्य वित्तीय अवस्थालाई असर पार्न सक्ने उल्लेख गरेको छ ।

विकासोन्मुख देशहरूको मुद्रा अवमूल्यन, जसले क्रय शक्तिलाई कम गर्छ र अमेरिकी डलरजस्ता विदेशी मुद्राहरूमा ऋण तिर्न गाह्रो बनाउँछ । यस कारण बढ्दो ब्याजदर उदीयमान अर्थतन्त्रका लागि अर्को जोखिम हुन सक्छ । सन १९८० को प्रारम्भमा फेड ब्याजदर वृद्धिले संयुक्त राज्यमा दोहोरो अंकको मुद्रास्फीति कम ग¥यो, तर विश्वव्यापी रूपमा धेरै देशमा नराम्रो असर पर्‍यो । विशेष गरी ल्याटिन अमेरिकी देशहरूमा ऋण डिफल्ट भयो । बेरोजगारी र गरिबी बढ्यो र जिडिपीमा ठूलो गिरावट आयो । त्यो समयलाई ‘हराएको दशक’ (लस्ट डिकेड) भन्ने गरिन्छ, जहाँ ल्याटिन अमेरिकी देशहरू क्रमिक र असमान पुनरुत्थानमा गुज्रिरहेका थिए । अफ्रिकाका भारी ऋणी राष्ट्रहरूले ल्याटिन अमेरिकाजस्तै समान समस्या झेल्नुपर्‍यो ।

चीनको उदाहरण : ऋण दिगोपन र ऋण व्यवस्थापन
उच्च र बढ्दो ऋण–जिडिपी अनुपात सामान्यतया गैरजिम्मेवार उधारोपनाको संकेत हो । यस्तो गैरजिम्मेवार उधारो कटौती गर्नुपर्छ । बढ्दो ऋणलाई उच्च सरकारी तलब वा ठूला निवृत्तिभरणका लागि उपभोग गर्ने कि शिक्षा र पूर्वाधारजस्ता उत्पादनशीलता बढाउने सार्वजनिक वस्तुहरूमा लगानी गर्ने भन्ने कुरामा ध्यान दिनुपर्छ । ऋण–जिडिपी अनुपात बढ्दा दीर्घकालीन पूर्वाधारमा लगानी कति भयो र उत्पादनशीलता र प्रतिफल कति बढायो भन्ने कुरा महत्वपूर्ण हुन्छ । यस विषयमा श्रीलंका र अफ्रिकी मुलुकबाट पाठ सिक्न सकिन्छ ।

चीनले १९९७–१९९८ र २००८–२००९ मा वित्तीय संकटबाट बच्न विस्तारित वित्तीय र मौद्रिक नीतिको प्रयोग गरेर पूर्वाधार र सामाजिक खर्चहरूमा सार्वजनिक लगानीलाई प्रोत्साहन गरेको थियो । आफ्नो पुँजी खातालाई पूर्ण रूपमा उदारीकरण नगर्दा पनि चीनले राम्रो आर्थिक नतिजा हासिल गरेको छ । विगत ४७ वर्षमा चीनको आक्रामक वृद्धिलाई प्रभावकारी आर्थिक योजना र कार्यान्वयनलगायत स्थिर नीतिले बल दिएको छ ।

नेपालजस्तो देश विकासको प्रारम्भिक चरणमा छ र छोटो अवधिको राजस्व आर्जनलाई परियोजना छनोटका लागि प्राथमिकता दिनुपर्दछ । चीनजस्ता धेरै देशले विकेन्द्रीकृत वित्तीय प्रणाली अपनाएका छन्, जसले वित्तीय स्थायित्वको विश्लेषणलाई जटिल बनाउँछ । चीनमा धेरैजसो सार्वजनिक सामाजिक खर्च स्थानीय सरकारहरूमा निहित हुन्छ, जबकि राजस्व विनियोजन केन्द्र सरकारले नियन्त्रण गर्छ । स्थानीय सरकारहरूले आफ्नो आवश्यकता पूरा गर्न ऋणपत्र जारी गर्छन् र स्थानीय सरकारले आफ्नो वित्तीय प्रणाली बुझ्न महत्वपूर्ण छ । 

अर्थतन्त्रको आकार र संरचनामा धेरै फरक भए पनि नेपाल र श्रीलंकाजस्ता देशले चीनको विकास अनुभवबाट फाइदा लिन सक्छन् । चीनको विकेन्द्रीकृत आर्थिक विकासले स्थानीय सरकार र वित्तीय संस्थाहरूलाई संघीय सरकारभन्दा बढी महत्व दिन्छ, जसले गर्दा लगानी र वित्तीय निर्णय गर्न मद्दत हुन्छ । दीर्घकालीन विकास लक्ष्य हासिल गर्न स्थानीय विकास रणनीति र नीतिहरू राष्ट्रिय प्राथमिकतासँग मिल्नुपर्छ । तर, स्थानीय आर्थिक कार्यसम्पादनका लागि स्थानीय निकायलाई जवाफदेही बनाउनुपर्छ । 

नेपालको सन्दर्भ 
नेपाल एउटा यस्तो राष्ट्र हो, जसलाई संरचनात्मक परिवर्तनको नितान्त आवश्यकता छ । समस्या मौलिक भएकाले संरचनात्मक सुधार नै छोटो र दीर्घकालीन जवाफ खोज्ने एक मात्र उपाय हो । भुक्तानी सन्तुलन कायम गरी बाह्य क्षेत्रमाथिको दबाब कम गर्न ऋण विस्तार र क्षेत्रगत वितरणको व्यवस्थापन, अत्यधिक आयात घटाउने र औपचारिक माध्यमबाट रेमिट्यान्स आप्रवाहमा सुधार गर्न आवश्यक छ । मौद्रिक नीतिले बैंकिङ र निजी क्षेत्रहरूलाई वर्तमान वातावरणमा ऋण प्रयोग गर्दा बढी सावधानी र जवाफदेहिता अपनाउन निर्देशन दिनुपर्छ । तीन दशकसम्म उच्च कर्जा वृद्धि भए पनि आर्थिक वृद्धिदर ४.४ प्रतिशत मात्रै रह्यो । यसले हाम्रो कर्जा वृद्धि नीतिले आर्थिक वृद्धिमा सकारात्मक प्रभाव पार्न नसकेको देखाउँछ । आगामी दशकमा आर्थिक वृद्धिलाई प्रत्यक्ष रूपमा सहयोग गर्ने क्षेत्रमा ऋण प्रवाह केन्द्रित हुनुपर्छ । कर्जाको वृद्धि पनि निक्षेप वृद्धिसँग मिल्दो हुनुपर्छ ।

आयात प्रतिस्थापनको सन्दर्भमा निजी क्षेत्रले जिम्मेवार र सक्रियताका साथ काम गर्नुपर्छ, आयातको सट्टा स्वदेशी उत्पादन वृद्धि गर्नुपर्छ । निजी र बैंकिङ क्षेत्रले घरेलु उत्पादन बढाउन सहयोगी सरकारका नीतिहरूसँग मिलेर काम गर्नुपर्छ । आयात र व्यापारमुखी अर्थतन्त्रलाई उत्पादक अर्थतन्त्रमा परिणत गर्ने, अर्थतन्त्रलाई विश्वव्यापी मूल्य शृंखलामा जोड्ने, घरेलु कच्चा पदार्थमा आधारित औद्योगीकरणलाई प्रोत्साहन गर्ने, खुला सिमानाका कारण लामो समयदेखि चलिरहेको आर्थिक घाटा कम गर्ने केही दीर्घकालीन उपाय हुन् ।

हालको कोभिड प्रकोपको सामना गर्न र कठिन परिस्थितिमा विकासका आवश्यकता पूरा गर्न केही नीतिगत विकल्प छन् । संयुक्त राष्ट्रसंघको व्यापार र विकास सम्मेलनले सार्वभौम ऋणको पुनर्संरचनाका लागि बहुपक्षीय कानुनी ढाँचाका लागि वकालत गरेको छ, जसले निष्पक्ष र व्यवस्थित ऋण संकट समाधान ल्याउनेछ, जसले सार्वजनिक र निजी ऋणदाता दुवैलाई समावेश गर्दछ । आइएमएफले थप ऋण जारी गर्न सक्छ । आइएमएफ, विश्व बैंक समूह र क्षेत्रीय वित्तीय व्यवस्था (आरएफएएस)लाई थप आपत्कालीन तरलता ऋण जारी र वितरणलाई छिटो गर्न सकिन्छ । पहिले नै सम्पन्न सार्वजनिक सम्पत्ति परियोजनाहरूमा आधारित नवीन वित्त पोषण र पुनर्वित्त योजनाहरू डिजाइन गर्ने अर्को उपाय हुन्छ, जसलाई ‘सम्पत्ति–आधारित पुनर्वित्त’ पनि भनिन्छ । विश्वव्यापी ऋण–राहत संयन्त्र, जसले संघर्षरत राष्ट्रहरूमा वित्तीय संकट रोक्न सक्छ र थप विवेकपूर्ण उधारो र ऋणका लागि दिशानिर्देश आवश्यक हुन्छ ।

अन्त्यमा, उन्नत देशहरूको ब्याजदर वृद्धिले न्यून आय भएका देशहरूलाई प्रत्यक्ष वा अप्रत्यक्ष रूपमा असर गर्छ । कम आय भएका देशलाई संरचनात्मक सुधारको आवश्यकता छ, जुन आफ्नो ऋण व्यवस्थापन गर्न छोटो र दीर्घकालीन समाधान खोज्न एकदम महत्वपूर्ण छ ।

The Explainer - NIPoRe Blog

Can Nepal Sustain Increasing Election Expenses?

SAMJHANA Karki

An election is a basis for democratic governance. The ways elections are conducted, including overall election financing, affect the overall performance of the resultant democracy and the related public institutions. However, the increasing election costs in Nepal is a matter of concern as it ultimately results in a higher level of corruption among the thus-elected lawmakers and officials. 

Nepal spent NPR five billion for the recently held second round of nationwide local elections on 13 May 2022. The amount thus spent for the election is equivalent to almost 14 percent of Sudhurpachim Province’s annual budget for the FY 2022/23. On a similar note, as the Government of Nepal (GoN) has announced to conduct the second round of federal and provincial elections scheduled on 20 Nov 2022, it is very likely that GoN will have to spend significant financial resources to finance the upcoming elections. As of now, the Election Commission (EC) has asked GoN to allocate an estimated budget of NPR 10 billion, equivalent to about one-third of Karnali Province’s annual budget for the FY 2022/23. This clearly shows that a country like Nepal, with very limited industries and revenue-generating activities, is forced to spend billions of rupees every five years, in an upward trend, to conduct elections at the federal, provincial and at the local levels. In addition, arranging financial resources for managing election-related security mechanisms adds additional burden on GoN. For example, the Ministry of Home Affairs has suggested to GoN that the ministry needs to recruit 120,000 Myadi Police personnels for managing security arrangements for the upcoming elections. As per the estimates, the total costs for these personnel will incur additional NPR six billion. Undoubtedly, these figures clearly show how Nepal’s elections are getting more costly with each election cycle passing.

Some past studies have shown that the actual election costs in Nepal remain quite higher. For Example, a study has found that the combined costs of GoN authorities, political parties and the candidates remained at NPR ​​131.63 billion for Nepal’s 2017 elections – held for all three levels of the government, with the candidates and their supporters spending NPR 96.91 billion and the GoN authorities spending NPR 34.72 billion. Though the election-related legal framework (the Election Offense and Punishment Act, 2017) mandates that all political parties and candidates participating in the election must submit their income and expenditure statements along with the sources of funds raised and used during their election campaign to the EC within two weeks of the election. Yet, given the whopping election-related costs and less reporting by the concerned candidates and the parties, it is certain that the political parties and candidates do not accurately maintain and report their costs of campaign financing to the EC.

On account of these figures, Mr. Bhojraj Pokharel – a former Chief Election Commissioner of Nepal – shared in one of NIPoRe’s नितिका कुरा: Policy Talks episodes that the rules and policies related to election-financing in Nepal are strong enough. However, due to poor monitoring mechanisms and the subsequent penalties, political parties and the candidates continue to neglect those terms and policies. He further stressed that the recruitment of a temporary police force in every election, can also be controlled using the available force and remaining from the voluntary participation of the youths from the local level. This can help GoN to minimize the extra coats by a large margin. Besides that, a strong civic and moral education on election and election-related affairs will definitely help make better use of the resources that are spent on elections each election cycle.

To conclude, increasing election costs in Nepal are worrying. The EC and other concerned stakeholders, including GoN, political parties and candidates should work to make future elections in Nepal affordable. As increase in election costs will have direct and indirect implications on the subsequent plans and policies, an intervention to keep these expenses within limits can definitely help all policy stakeholders in the country and beyond.

Research Commentaries

US interest rate hikes trample on developing countries

– NISCHAL Dhungel, Non-Resident Fellow

The commentary originally appeared on the East Asia Forum, a forum based at the Crawford School of Public Policy at the Australian National University, on 18 August 2022. Read the original article here.

The International Monetary Fund’s recent World Economic Outlook report paints a bleak economic future. It has downgraded global growth predictions from 6.1 per cent in 2021 to 3.2 per cent in 2022. While the global economy is still recovering from the COVID-19 pandemic, central banks in advanced economies are hiking interest rates — a policy change that will have a significant global impact.

The depressing growth predictions are a consequence of tighter monetary policy and the increasing threat of social and economic risks, particularly for emerging and developing nations. Food and fuel prices have skyrocketed due to the Russia–Ukraine war and supply chain bottlenecks. The Russia–Ukraine conflict has made it challenging to balance fighting inflation, supporting the global economic recovery, helping the vulnerable and restoring fiscal buffers.

The US Federal Reserve (Fed) stepped up its fight against inflation after consumer prices increased 8.6 per cent in the United States. On 15 June 2022, the Fed voted to raise the target range for the federal funds rate to 0.75–1 per cent. It plans to implement additional hikes for the rest of 2022. But efforts to reduce inflation by increasing interest rates in the United States could harm the rest of the world.

As interest rates rise in the United States, those who invest in emerging markets to receive higher rates of return may invest in the more appealing US market. This will result in massive capital inflows to the United States and increased outflows from the developing world. Without proportionally tighter domestic monetary policies, the ensuing rise in borrowing costs will deplete foreign reserves, appreciate the US dollar and result in balance sheet losses for nations with US dollar-denominated net obligations.

Rising US interest rates have the greatest impact on economies with higher macroeconomic vulnerabilities. Between 2019 and 2021, the COVID-19 pandemic caused a sharp rise in public debt in developing economies — on average increasing from 54 per cent to 65 per cent of GDP.

Thirty-eight emerging economies are now in danger of a debt crisis or are currently experiencing one. At least 25 developing economies spend over 20 per cent of government income on servicing foreign public debt. This is why interest rate hikes in advanced economies could tighten external financial conditions for emerging markets and developing countries.

There is a worrying comparability between today’s economy and the economy of the 1970s and early 1980s which was rife with high inflation, slow growth and rising borrowing costs. In the 1970s, oil exporters benefitting from increasing energy prices used their surpluses to increase funding for debt markets in emerging market economies. Fed rate hikes in the early 1980s reduced inflation in the United States but drove up global interest rates, causing many emerging economies to default on their debts.

The debt crisis that followed the Volcker shock was distressing for developing nations. The Fed interest rate hike had a devastating effect on Latin America. The region experienced plummeting GDP and ballooning unemployment and poverty. The subsequent decade was lost to gradual and uneven economic recovery. The consequences of the Latin American debt crisis were similarly experienced in Africa’s heavily indebted nations. The Fed did not pay enough attention to how its choices would affect the rest of the world.

Though today’s economic situation has similar origins to that of the 1970s and 1980s, there are some significant distinctions. Today, oil producers acutely feel the world’s reducing dependence on oil. Real oil price increases are smaller than they have been historically. Policy tightening in response to the economic downturn has also begun sooner than it did in the 1970s and 1980s, especially in certain emerging markets and developing nations. Unlike the 1970s and the 1980s, there has not been as much time for recycled petrodollars to fuel imbalances in developing and emerging market economies.

Despite these encouraging developments, new risks have emerged. Due to increased exposure to sizeable bilateral creditors and the recent COVID-19 pandemic, public debt has risen and stunted the growth potential of many countries.

While international financial institutions are doing their part to provide debt relief and stop punitive measures like surcharges — additional fees imposed on countries that fail to make debt repayments —  there needs to be swift and systematic action on debt resolution. This must involve collaboration with private creditors and large state creditors like China. Major food and fuel businesses must be prevented from profiteering and speculating.

Special drawing rights (SDRs) — a foreign reserve asset issued by the IMF that can be used for foreign exchange stability in addition to gold or US dollars — must be redistributed to those countries that urgently require them. A new release of special drawing rights with an equivalent value of US$650 billion is necessary for immediate relief. The UN Conference on Trade and Development has advocated an alternative way to facilitate fair and orderly debt crisis resolutions. It would involve a multilateral legal framework for restructuring sovereign debt using both public and private creditors.

Interest rate increases in advanced countries will always impact low-income countries. But that does not negate the need to pursue structural reform in low-income countries. Structural reform is the only way to find short and long-term solutions to debt management.