– ANKUR SHRESTHA

Introduction

Nepal, since time immemorial, has been regarded as an agricultural country. From most politicians’ speeches to our class textbooks, our idea of the Nepali economy has revolved around agriculture. Historically, that was true; in the late 1980s, it was the livelihood for more than 90 percent of the population – although only approximately 20 percent of the total land area was cultivable – and accounted for, on average, about 60 percent of the GDP and approximately 75 percent of exports – the numbers of drastically reduced as of today.

Evolving Trends

While some reports still claim that more than 66 percent of the total population is still engaged in agriculture, the contribution to GDP is declining each year compared to other key non-agriculture sectors. In the last ten years alone, it has declined from 32.7 percent of the total GDP to 23.9 percent in the previous fiscal year, FY 2021/22. Meanwhile, the contribution of the service sector has increased immensely, reaching 61.8 percent in the last fiscal year.

If one travels across Nepal’s villages, this decline in agricultural sector becomes even obvious. Most arable lands in the country remain empty, with workers traveling to foreign countries in search of better employment opportunities. The annual increase in remittances sent back reinforces this new economic reality. The villages are left chiefly with young kids and the older people who depend on remittances to sustain their livelihoods. Meanwhile, agriculture is still being done largely for sustenance rather than for commercial purposes, painting a bleak picture of the country’s agricultural endeavors. It is not remiss that out of our top five exports in the last fiscal year, namely soybean oil, palm oil, carpets, woven fabrics, and cardamom, only cardamom is commercially farmed, with other top exports being imported and exported again, with little value-added within Nepal. Interestingly, cardamom only contributes 2.4 percent of our total export value, while our top export, soybean oil, contributes 24.1 percent.

Some Experiences from the Field

This is not to say that efforts are not being made or commercial farming is not being done. Local levels were primarily found to be proactive in this regard as well. In particular, our interviews (done as a part of NIPoRe-ALIGN research collaboration) with the local government chairs and mayors showed that many local levels had focused on agriculture to raise its population’s economic standards. In the Sisne Rural Municipality of Salyan, for example, the local government had made efforts to separate different zones of the municipality into various agricultural sectors. The local government assigned different zones to plant different types of vegetables and fruits depending on land conditions and weather to increase productivity. The lands were found to be productive for fruits such as kiwi and oranges. Similarly, in Ichhyakamana Municipality of Chitwan, the local government brought a provision to distribute NPR 5 for each plant planted by the locals to encourage farming. Additionally, the local government also offered subsidies for buying cows or buffalos. Similar efforts by local governments can be seen throughout the country. Development partners and the federal government have also encouraged farming by regularly training farmers and distributing much-needed seeds and fertilizers.

However, efforts many times look to be wasted. Various issues come to light in conversations with agricultural experts who have worked as consultants in this field for decades. Experts whom we met during our field visits (of NIPoRe-ALIGN research collaboration works) claim that distributing only seeds without proper technical know-how of crop cycles, crop placements, and timely fertilizer inputs has led to smaller harvests with less domestic consumption and export market potential. The distributed seeds are of high quality, but inadequate understanding of timely fertilizing techniques leads to low-quality outputs that are not marketable. Farmers who have contributed many years to grow oranges, for example, then can harvest it only for two-three cycles before the trees stop bearing fruits. This leads to frustrations among the farmers, who then move on to look for better alternative opportunities in other sectors or migrate to foreign countries, as is the case in Nepal. Training for farmers also seems to be provided most of the time to fill quota numbers. Any attendee of most trainings gets monetary incentives to join in. This causes training recipients to join just because of the incentives rather than actually learning the necessary techniques helpful for them. 

Rooms for Improvements

What, then, must be done to change this? At the policy level, the government has been proactive in giving out subsidies and creating tariffs to promote Nepali agricultural products. However, in reality, an assessment seems necessary to analyze who the subsidies are going to and who benefits from these tariffs. Additionally, the government needs to proactively work with local farmers in breaking the syndicate systems that have been established to get farming output to the markets. Nepali news platforms are rife with intermediaries cheating farmers of their hard-earned money and paying them drops compared to what the goods are sold in the market for. Strict quality control mechanisms are also needed if we want to be export-oriented. Quality testing facilities must be made available in major production centers so farmers can access them easily. This will serve to ensure quality goods come to domestic as well as foreign consumers. Nepal also needs to identify what products are viable to be grown in different parts of the country and determine which products have a competitive advantage. Focusing on specific products and actively working on ensuring storage facilities, testing mechanisms, and meeting international standards for those will be easier for a developing country like Nepal. The government can expand the list of identified goods as we develop our agricultural ecosystem and set better product standards. The Nepal Trade Integration Strategy 2016 was a good idea in regard to this. However, it needs to be immediately and regularly updated, keeping in mind our international export market, the value of our products, and the capabilities of upscaling our farmers.

And lastly, a provincial agriculture and trade policy seems instantly necessary to coordinate local efforts. Unfortunately, the trade data of our country still has not been able to shift to the provinces levels. With us not knowing the origin of our export products, we only have a disaggregated idea of which province is better at growing which products. Historically, some products have been raised in certain areas of the country, like tea in the eastern region, but focusing on different products means production data at local levels is a must. This will help direct our limited resources to build specific infrastructure and facilities for particular regions to increase the country’s overall export. Negotiations and identification of export markets, meanwhile, are also vital. Nepal has two large markets as its neighbors that have relatively fewer quality controls than, for example, the European Union. This means our diplomatic focus on export negotiations can be with these two large markets while we continue to improve the quality of our products and look toward other markets.

– SANTOSH Sharma Poudel

The column originally appeared in The Diplomat on 27 January 2023. Please read the original article here.

On January 15, a Yeti Airlines aircraft carrying 72 people, including four crew members, crashed a few kilometers away from Pokhara International Airport (PIA). Fifty-seven of those on board the aircraft were Nepalis and 15 were foreigners. This is the deadliest air crash in Nepal in the last three decades.

The crash came barely a fortnight after Pokhara International Airport began operations.

Apparently, the pilot did not report “anything untoward,” and PIA is among the “easier” airports in Nepal to navigate. An investigation is underway to identify the cause of the crash.

Nepal is no stranger to airplane crashes. It has been barely eight months since the last crash; a Tara Air plane crashed in May 2022 killing all 22 on board. In the last decade alone, there have been 20 crashes.

The mountainous terrain of Nepal means that air travel is the only option to reach some places. Even with alternatives, poor road infrastructure, short air travel, and increased disposable income have led to a rapid increase in the number of air travelers.

Investment in air travel infrastructure has also increased; over the last eight months, two new international airports have started operations.

The Yeti Air crash has raised concerns over air safety in Nepal. The role of aircraft operators and pilots as well as equipment is under the scanner.

First, Nepali aircraft operators cannot afford to buy new aircraft, forcing many to opt for cheaper used aircraft. Operators are said to have complied with only four of five accident investigation recommendations for air safety. Their close links to influential political leaders shield them from scrutiny, even when they flout the safety regulations. Many airports have not followed simple fencing, parking, and emergency vehicle standards.

Second, Nepali pilots are generally well-qualified, but there have been cases of indiscipline. Recently, three Nepal Airlines Corporation (NAC) pilots were barred from flying after they disobeyed instructions from the air traffic control (ATC) specialists in Hong Kong. Two more pilots have been grounded for failure to adhere to ATC’s instructions.

Third, Nepal’s air operating and safety mechanism is a mess. Corruption is rampant across the board. Aviation corruption has even brought down a prime minister. The Civil Aviation Authority of Nepal (CAAN) is the service provider and regulator of the aviation sector in Nepal. This has engendered a conflict of interest, especially regarding safety regulations. Ironically, the Ministry of Culture, Tourism and Civil Aviation has not complied with about half the accident investigation recommendations directed to the ministry.

It is partly because of these risks that the European Union has imposed a blanket ban on Nepali airlines flying in European airspace.

The committee investigating the latest air crash will submit the report, detail the cause of the crash, and issue recommendations to improve air safety. However, it is unlikely to make much of an impact on Nepal’s current air safety regime.

The crash is also unlikely to dent air travel in Nepal. Currently, many Nepalis and foreign tourists are anxious about air safety. Pokhara is a major tourist destination for domestic and foreign tourists. After the crash, local businesses reported a decrease in visitors to Pokhara. However, as weeks pass by, the necessity of air travel will override the anxiety about air safety, and aviation patterns will return to normal. Nevertheless, in the short term, it will impact tourism, which was slowly gaining momentum after a two-year disruption due to the COVID-19 pandemic.

There could be a fall in Indian tourist arrivals by flights to Nepal. More Indian tourists could opt for travel by the overland route to Nepal, at least in the short term.

Prominent Indian newspapers have used the tragedy to box China and BRI. They have highlighted that the newly inaugurated international airport was built with Chinese support. Some have drawn attention to the controversy that China claimed the airport was a Belt and Road Initiative (BRI) project. While the statements are factual, the reporting gives the impression that Indian newspapers see this as an opportunity to get back at China. It is a pity that the Indian press has shown little sensitivity to the tragic incident itself.

The crash also provides ex post facto justification for the EU’s ban on Nepali airlines in the EU airspace. At this point, the EU’s pressure on Nepal to make institutional changes to air safety could provide the impetus to Nepal to address the dire situation.

– NISCHAL DHUNGEL

The opinion piece originally appeared in The Kathmandu Post on 2 February 2023. Please read the original article here.

The modern globalised ecosystem has increased public debt due to changing economic and political circumstances. Handling public debt goes hand in hand with an effort to balance those circumstances. Public debt is a domestic or foreign loan issued by a government, which remains a viable option to support government spending, and development initiatives, for which the government lacks funding. Owing to economic complexity and the Covid-19 pandemic, government spending has recently increased more quickly than its capacity to generate revenue. With interest rates skyrocketing, the rising debt severely impacts the budgets of developing countries that must invest in their economies.

Nepal started budgeting in 1951, taking debt 11 years after the budgetary practice began. The history of our public debt is not very old. The government started taking domestic loans in 1962, while foreign loans were only accepted beginning in 1963. Post-earthquake and transition to federalism, Nepal’s public debt has increased over the past several years, reaching 42.2 percent of GDP in fiscal 2019-20 from a progressive reduction of 25 percent of GDP in fiscal 2016-17. The impact of Covid-19 and responses to it are responsible for the significant increase in fiscal 2019-20. The debt-to-GDP ratio for Nepal stood at 39 percent in fiscal 2020-21. Due to Nepal’s access to concessional funding (grants or loans less than 2 percent with long repayment periods) from multilateral institutions and foreign countries, its foreign debt servicing needs are low. As per the World Bank, Nepal’s debt distress risk is rated low for both external and total debt. The International Development Cooperation Policy (2019) allows Nepal to obtain a foreign commercial loan, but Nepal has yet to utilise this opportunity. The country needs to be careful while borrowing large commercial foreign loans with highinterest rates.

The impact of public debt on Nepal’s economic growth, examined by the journal Public Debt and Economic Growth of Nepal utilising data from 1978 to 2020, indicates no clear link between public debt levels and economic expansion. The limited revenue sources have resulted in a rise in government spending more quickly than government revenue. The government has borrowed money primarily for weak areas, leaving it cash-strapped and forcing it to take out another loan to repay the previous ones. Some of the current capital loan money is in the stock market and land. Due to insufficient domestic resource mobilisation, excessive fiscal deficit, export-import imbalance, and gaps in revenue and spending, the external debt has worsened. Thus, some authors argue that deficit financing should not be considered as long as there is sustained economic growth and the possibility of encouraging investment rather than discouraging it. Furthermore, there has been no improvement in the country’s capability to repay debt; there has only been an increase in overall public debt and interest.

It is also crucial to analyse the country’s debt condition in light of its foreign exchange reserves. The depreciation of the Nepali rupee against the US dollar has increased Nepal’s debt liability in local currency terms. Foreign currency debt payments may become more challenging at a time of shrinking foreign currency reserves and rising government borrowing from foreign creditors. Nepal’s foreign direct investment (FDI) is the lowest in the region at 0.5 percent of GDP. The impact of lowering the FDI threshold to Rs20 million will further decrease the inflow of FDI. Further, capital flow restrictions may have negative effects on GDP, but FDI offers the extra benefit of not increasing the nation’s debt and relieving strain on foreign exchange reserves. The government should put in place long-delayed FDI reforms, such as simplifying regulatory approval processes, which would lead to foreign currency inflows and spur the transfer of capital and technology to boost growth.

Lesson from Bangladesh

Thanks to a robust economy and a stable government, Bangladesh has avoided relying on foreign forces for domestic survival. Three factors—exports (second largest clothing exporter), remittances (one of the biggest recipients), and fuel prices (relies on imported fuels)—together account for the majority of the economic health of the country. But these factors are in jeopardy due to a global economic slowdown that is particularly destructive in developing nations. Bangladesh has less money to import fuel as exports fall and prices rise simultaneously. It has decided to postpone non-urgent projects and expressed concerns about a growing trade deficit and a decline in remittances.

However, Nepal’s exports are not as strong as Bangladesh’s, and will be less affected by the global slowdown. The government of Nepal is making several efforts to boost foreign reserve exchange. To stop the mounting debt, the newly passed Public Debt Management Act set a limit on external debt at one-third of the GDP. This measure is intended to prevent the government from borrowing carelessly and motivate it to pay down its debts on schedule so it can borrow more money in the future. Nepal also came up with a slew of measures to ban imports of luxury goods to prevent the depletion of its foreign exchange reserves and ended the ban as foreign reserves rose. These underlying traits will continue to shape how Nepal and Bangladesh react to the current global upheavals, including growing prices, impact on remittances, and widened trade imbalance.

State institutions in Nepal are fragile and continue to have problems with checks and balances. The government will struggle in 2023 to stop tax evasion and broaden its revenue base, increasing its need for public borrowing. With a new government in place, synchronising fiscal and monetary policy should ease liquidity shortage to fuel investment in productive sectors. A significant issue with the democratic history of Bangladesh is the absence of robust and viable opposition. Despite political hiccups and mounting public debt, Bangladesh has made commendable economic progress. Nepal and Bangladesh are unlikely to have the same situation as Sri Lanka if their policy measures successfully utilise public debt, and balance national goals and domestic capabilities.

Addressing structural barriers

Building on prior accomplishments and addressing structural barriers will help to accelerate growth, attract private investment, boost productivity, and develop climate resilience to successfully graduate from the least developed country’s (LDC) status and achieve lower middle-income status by 2026. Nepal’s plan for economic growth and how trade, infrastructure, exchange rates, and other economic policies can help with economic development is still unclear. The growth potential will be increased by fostering an environment, encouraging trade and foreign direct investment, growing the financial sector, building human capital, and enhancing good governance. The country must spend the borrowed funds wisely and enact programmes to reduce debt. As Nepal plans to leave the LDC status in 2026, it is crucial to leverage the advantage of a lower interest rate with a long repayment period of borrowed funds. It should then work towards building a sustainable economy by investing in productive sectors with high-efficiency levels to repay the loans over time.

– SANTOSH Sharma Poudel

The column originally appeared in The Diplomat on 16 January 2023. Please read the original article here.

Nepali politics continues to confound observers. Communist Party of Nepal-Maoist Center (CPN-MC) chief Pushpa Kamal Dahal, who was sworn in as prime minister on December 26 despite his party standing third in the recent general elections, received a strong but surprising boost in a trust vote in parliament on January 10 when his former electoral alliance partners, the Sher Bahadur Deuba-led Nepali Congress (NC) and the Madhav Kumar Nepal-led Communist Party of Nepal-United Socialist (CPN-US), voted in support of his new government.

Less than a fortnight ago, Dahal ditched the NC and CPN-US to head a government with support from the Khadga Prasad Sharma Oli-led Communist Party of Nepal-United Marxist Leninist (CPN-UML). NC and CPN-US backed Dahal in the confidence vote despite his last-minute betrayal.

The decision of the NC and CPN-US to support Dahal has become the topic of much discussion in Nepal. Some speculate that Deuba might have supported Dahal in an attempt to secure a share in the spoils of power. Others see Deuba’s move as aimed at driving a wedge between Dahal and Oli. Meanwhile, others see it as a shrewd move by Dahal to minimize Oli’s influence in the ruling coalition. Whatever the reason, it is evident that instrumentalism determines Nepali politics, and that gaining power is the only currency.

The ruling coalition comprises parties with diverse interests and political goals. Its survival and domestic issues will be Prime Minister Dahal’s primary focus. Speeches of leaders in the new parliament focused on domestic issues like good governance, political stability, corruption control, and effective implementation of federalism.

Coalition partners wield considerable leverage in the new government and Oli, who heads the largest party in this coalition, will exercise significant control. He leads the mechanism to support the government and develop a common minimum program for the coalition government. His leverage will increase if the presidency or the house speakership (or both) go to the CPN-UML. Dahal seems to be in for a rough ride.

Meanwhile, several issues on the foreign policy front deserve Dahal’s immediate attention. The need for Nepal to “balance” its engagement with the big powers – India, the U.S., and China – in the context of heightened Sino-Indian and Sino-U.S. competition while maintaining strategic autonomy and sovereignty will be a major challenge. Another is Nepal’s widening trade deficit. Such challenges have intensified in recent times.

Dahal will need to tackle several issues with India. Firstly, he will need to decide on India’s Agnipath scheme. The previous government, of which Dahal’s party was a coalition partner, kicked the Agnipath can down the road for the next government to deal with. The Agnipath scheme provides for short-term recruitment into the Indian Army, which violates the tripartite agreement between Nepal, Great Britain and India regarding the recruitment of Nepali Gurkhas into the Indian and British armies. Last year, such recruitment in Nepal was suspended because Kathmandu was opposed to the short-term recruitment of Nepalis into the Indian Army. The current government does not have the luxury of delaying a decision on the matter as Gurkha recruitment from Nepal, which has been a critical element in Indo-Nepal relations, is in jeopardy.

Secondly, Nepal needs New Delhi’s cooperation to export hydroelectricity to Bangladesh. In August last year, Nepal and Bangladesh decided to request India to allow the export of 40-50 MW of Nepali hydropower to Bangladesh as Nepal needs to use the Indian grid (via Indian territory) to export electricity to Bangladesh.

When Nepali officials raised the issue during the recent Power Summit organized by the Confederation of Indian Industries on grid connectivity in the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), Indian officials said that the Baharampur-Bheramara line connecting Nepal to Bangladesh was “fully occupied.” Therefore, the issue will test Dahal’s diplomatic skills.

Thirdly, Nepal has requested that India grant air entry points to facilitate aircraft movement to Bhairahawa and Pokhara. The two airports were built by Chinese companies, though the former was funded by the Asian Development Bank. Without India granting appropriate entry points, airplanes will need to circle in Nepal for a few minutes before landing, increasing operational costs. Kathmandu should engage India at the earliest to ensure the international airports are sustainable for airlines to use.

Fourthly, Dahal needs to continue the “return to normalcy” in India-Nepal relations after its nadir in 2020, when the Oli government amended the Nepali map to include Kalapani, Limpiyadhura, and Lipulekh in the far west – territories also claimed by India.

There are also issues with China that require immediate attention. One is China’s opening of the Kerung border point. This was closed with the outbreak of the COVID-19 pandemic but was reopened after Dahal assumed the premiership recently. There are concerns in Nepal over the reopening of this border point amid the surge in COVID-19 cases in China.

Nepal needs clarity on its position on Global Security Initiative (GSI), a Chinese initiative to counter rival regional blocs such as the Quad. Beijing is keen for Nepal to join the GSI. Although Nepal has clarified its commitment to non-alignment, which would mean Nepal will not join any security pacts with any country, President Bidhya Devi Bhandari joined the GSI meeting last year despite the Deuba-led government’s reservations.

Also, Beijing is impatient to see projects under the Belt and Road Initiative (BRI) take off in Nepal. Days after Dahal’s appointment as prime minister, a Chinese delegation came to Nepal to conduct a feasibility study of the Kathmandu-Kerung railway connectivity. With a friendlier government in power, Beijing would like to see BRI projects make concrete progress.

Whether Dahal makes New Delhi or Beijing the destination of his first foreign visit will be keenly watched. However, it will be pragmatic if he were to pick New Delhi first, ceteris paribus. As much as his visit to Beijing would show that he is attempting to balance between Nepal’s two giant neighbors, which every leader in Nepal professes and which is the official foreign policy, the fact is that Nepal has more issues that require immediate engagement with its southern neighbor.

Kathmandu is abuzz with speculation that New Delhi wanted Deuba, not Dahal, to lead the new government. However, despite New Delhi’s suspicions of Dahal and Dahal’s earlier misgivings regarding New Delhi, Nepal needs healthy relations with India. He might get a warmer welcome in Beijing than in New Delhi. Yet, a visit to New Delhi will show his intent to tackle difficult issues head-on, not shy away from them.

In this context, his decision to make New Delhi the first port of call, likely to be in late February or early March, is a mature decision. He has the experience of engaging India as prime minister and has a host of immediate and enduring issues on his plate. His level of success in resolving those issues will determine his legacy.

Pradhyumna Wagle

Digitalization has been at the forefront of development in the last 50 years. It has allowed developing countries to access information and resources like never before. Often, it is suggested that digitalization would help underdeveloped economies to skip the industrial development phase and quickly catch up with the developed economies, a process known as leapfrogging. Increased internet access and rapid transformation of bricks and mortar to digital form after the mid-20th century has laid out a base for the so-called Fourth Industrial Revolution (4IR). A World Economic Forum report suggests that 4IR will be a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres. It cannot be emphasized more on how quickly developing countries need to prioritize digitalization and thrive through the 4IR. On the other hand, there has never been a time in history where access to information and knowledge has been so available. Therefore, it is a perfect opportunity for small economies to absorb as much resources as they can and recognize digital transformation as the way forward.

Nepal’s inability to compete with other developing countries in industrial development, especially manufacturing, can be primarily linked to geographical structure and human resource, among others. While digital infrastructure would need geographical convenience at installation, connectivity and evolution do not. Nepal is in a good position to exploit the digital resources that are available, and the ones it can generate from within, like electricity, to climb up the development ladder. The base for digital infrastructure, electricity, can be accessed by 94 percent of the population and Nepal Electricity Authority plans to achieve 100 percent electricity access by 2024. Internet penetration is at an all time high with 99 percent of the population having access to mobile broadband connection. It is safe to say that the Government of Nepal has realized the importance of digitalization and recognized it as the future. Hence, it published the Digital Nepal Framework 2019 (DNF) which includes short-, medium-, and long-term plans to reshape Nepal’s economic and social structure. As the government plans to focus on transforming different sectors to digital infrastructure, I discuss a few specific policies, possible challenges and what we can learn from other developing countries.

Adoption of technology

While emerging technologies are readily available, there needs to be proper policies that welcome new technology and create a suitable environment for it to grow. A study by Samuel A. Ejiaku concludes that most developing countries have ineffective information technology policies, and this hinders the proper growth and application of the IT sector. Interestingly, Ejikau points out that developed economies also have not contributed much to assist developing economies. This is because exporting technology would need to be modified to suit the environment and culture of the target economy. This means there must not only be policies that make importing of technology smooth, but also emphasizes on the need of skillful people that can make the adoption of technology suitable to that location.

Government of Nepal has identified digital foundation as one of the major sectors that needs to be addressed. Increasing quality digital access is the main goal of laying out the digital foundation. The government has recognized poor quality and connection strength, and digital literacy as the main problems that occlude the digitalization process. Hence, DNF includes plans to train all government employees using a proposed e-learning platform that is publicly available. It is expected that the training program would help increase digital literacy and the learning platform would generate awareness in the public as well as maintain the supply of digital trainers. The former makes sense, but the inclusion of the latter is vague. It is not clear if the platform would be used in schools or only the government agencies, but unless there are incentives to learn and teach, it would be difficult to consistently find digital trainers.  Also, there is a plan to establish ‘knowledge-parks’ in special economic zones, but this has only been linked to economic growth. Skillful manpower is one of the vital aspects of digitalization, but DNF does not include priority plans to increase technology-friendly workers in all aspects. The government should focus on changing the academic structure to push institutions to use available technology. This would help make the workforce ready and well equipped with technological knowledge. Training programs could then be used to focus on a certain technology.  

Government Services

DNF has focused on changing government agencies’ structure: from paper to digital. This includes structural transformation from within the agency: recordkeeping, budgeting, and cybersecurity as well as in the services provided: public service applications, document processing and digital signatures in national identity cards. This is promising and has already come to implementation in many offices. But there is a serious lack of maintenance among the installed technologies. Lots of public service offices showcase themselves as being ‘online accessible’ but people need to show up in person and that violates the entire purpose of making the system online. A study in Ghana about the barriers to digitalization of government budgeting in developing countries identifies outdated laws and culture of paper document flows as the institutional barriers to digitalization in public service sectors. Literature in this sector identifies culture and structures of government agencies, pre-established hierarchical structures within the organization, operational divisions and politics and resistance to innovation as the main barriers to digitalization. All of these can be associated with Government of Nepal’s offices. Hence, it is important for the government to think about tackling these issues alongside the implementation of digital platforms. Most of the plans regarding within office digital transformation listed in the DNF are longer-term and those about public services are short term. I believe that this should be the opposite. Making the internal systems secure, stable, and efficient would then pave the way for service-oriented technologies like payment systems, online registrations, and administrative works. So, there is a dire need to identify what plans are short, medium, and longer term to make the digitalization process smoother. 

Small and medium enterprises

With the wave of digitalization, all forms of market transform structurally. From production to sales, every aspect of the economy is affected by digitalization. While big organizations and manufacturers have early access to new technology using their power and accessibility, the government must ensure that small and medium enterprises are well placed to take advantage of digitalization. New technology provides small and medium enterprises comparative advantages especially in local markets and that is very important for the economy. Within the execution plan of the DNF, most plans focus on the agro-economic sector like training farmers about digital platforms and pre-season education, quality check of agricultural equipment using technology, and smart irrigation facilities. There are a few short-term plans about facilitating e-commerce services, digital payment systems and development of mobile apps for transportation and healthcare. However, all these plans require governmental support and political stability: which is missing in Nepal. A similar study about digitalization of small and medium enterprises in Yemen, whose numbers regarding digital penetration is similar to that of Nepal, finds that economic and political instability, and lack of support for small and medium enterprises to thrive, as the major challenges. What the government could do is learn from developing countries that have undergone digital transformation like Rwanda. Rwandan government is well known for creating an environment for small and medium enterprises to adopt technology and thrive, mainly through innovation support. Government of Nepal’s plans are good in a sense that they want small and medium enterprises to grow, there is no specific plan that promotes innovation. Small and medium enterprises excel mainly because of the uniqueness of their products and services and innovation is necessary for them to survive. The government should aim to remove bottlenecks in the creation of new enterprises and even if they fail, provide support to regrow through improved digital access and minimizing administrative hurdles, mainly in technological import, export, and deployment.  

Concluding Remarks

Digital access is penetrating every aspect of society today. When it comes to digital transformation, it is not if but when. The most important step developing countries like Nepal could take is to open all possible pathways to welcome and integrate digitalization into the society as smoothly and quickly as possible. In terms of time, the more time it takes for an economy to digitalize, the loss in potential to develop is exponentially worse. Therefore, it is high time Government of Nepal takes necessary progressive steps towards digitalization.

– NISCHAL Dhungel* and ABIJIT SHARMA

Dhungel is a non-resident fellow at NIPoRe. The opinion piece originally appeared in The Kathmandu Post on 18 January 2023. Please read the original article here.

With the onset of the Covid-19 pandemic and the Russia-Ukraine war, foreign relations trembled among major economic powers. While condemning Russia’s aggression and barraging the country with a series of sanctions, the West expected India to follow suit. However, New Delhi adopted studied public neutrality and abstained from successive votes condemning the Russian move in the UN Security Council, General Assembly, and Human Rights Council. Just like India, China maintained relative neutrality, with a solid foreign policy stance in response to the conflict. Despite its closeness with Russia, Beijing stopped short of supporting it in the war. It also stopped short of calling Russia the aggressor and abstained from a United Nations Security Council vote denouncing the ‘invasion’. Beijing and New Delhi had made their decision loud and clear. And they were not going to listen to anybody.

Assertive New Delhi

Speaking at the Globsec 2022 forum in Slovakia, Minister of External Affairs of India, Dr S Jaishankar laid clear India’s increasingly confident foreign policy. “Europe has to grow out of the mindset that Europe’s problems are the world’s problems, but the world’s problems are not Europe’s problems,” Jaishankar said. He criticised the West for hoarding vaccines, which impacted the Least Developed Countries (LDCs). It is crucial to understand how India came to this position, which was unimaginable until a few years ago.

India’s political, social and economic fabric had been damaged after 200 years of colonialism. Its foreign policy could not remain untouched. Following independence, New Delhi slowly started to chart its own path, pursuing different strategic approaches from 1946 to 2013. Nehruvian influence persisted from 1946 to 62, an era of strategic non-alignment amidst US-Soviet Union rivalry. From 1962 to 1971, considered the decade of realism and recovery, India made pragmatic choices in national security and political challenges despite a lack of resources. The country went through a complex phase from 1971 to 1991 as the US-China-Pakistan axis came up. From 1991 to 1999, it had challenges in retaining its strategic autonomy in a unipolar world, whereas from 2000 to 2013, India focused on balancing power.

But since assuming office in 2014, Prime Minister Narendra Modi has made an unprecedented transformation of Indian foreign policy. Modi has put India as an emerging superpower on the map and sought to engage rather than remain ‘non-aligned actively’. New Delhi now understands that it deals with multiple global complexities, making decisions based on calculated risk-taking. As a result, India is slowly standing out, drifting away from strategic ambiguity to strategic freedom and taking a solid foreign policy stance on international fora. This is a significant departure from the older ‘non-alignment’ tenet that had long established India’s typical social values and norms, at least in foreign relations.

India’s central foreign policy tenet under Modi is seen to be guided by the Eastern principle of ‘Vasudhaiva Kutumbakam’, which translates to “the world is one family”. This was evident during the Covid-19 pandemic when New Delhi delivered more than 100 million doses to countries in Asia and Africa. While Modi has spearheaded this new brand of foreign policy, his bureaucrats and ministers have helped implement it. In 2015, just two days before his retirement, the Narendra Modi government appointed a highly agile foreign service officer, a foreign ambassador to the US and China, to the position of foreign secretary. Jaishankar has been the flag bearer of Modi’s foreign policy ever since Modi’s second term in office. Jaishankar openly admits India’s shortcomings and stays committed to securing its national interest with/without taking any sides.

‘Wolf-warrior’ in Beijing

Coinciding with India’s assertive stance in global politics is China’s equally aggressive stance, especially against the West. The Chinese foreign policy has been so assertive and aggressive in recent years that it has earned a new name: ‘Wolf-warrior’. While aggressive Chinese rhetoric might appear quite normal now, it is a shift from China’s earlier foreign policy. And the man to bring about this shift is none other than Xi Jinping. At heart, Xi’s diplomacy calls for a more active role for China as a great power on the world stage, including reforming the Western-dominated international order and creating what China calls “true multilateralism”.

When the architect of China’s economic reform, Deng Xiaoping, came to power following Mao Zedong’s death in the late 1970s, he prescribed a foreign policy which was subtle and cooperative. His approach focused on “biding one’s time without revealing one’s strength”. As a result, in the 1980s and 90s, Beijing was focused on “securing position, coping with affairs calmly and hiding capacities”. The leaders who came to power after Deng continued the policy.

But Xi’s ascendance since 2012 has slowly changed things in Beijing. Far from “biding time and hiding strengths”, it is now focused on making its stance clear on the global stage. Most importantly, it is open to show its strength. Take, for instance, its recent response to the Taiwan issue. Just before the then US House of Representatives Speaker Nancy Pelosi visited the island in August last year, the Chinese President issued a stern warning to his American counterpart, allegedly saying that “… those who play with fire would perish by it”. When its alarm went unheeded, the Chinese military launched targeted military exercises.

Xi’s ambitions to help China regain its glory of the Middle Kingdom years have been evident since he took office. Upon gaining power in 2012, he immediately identified “national rejuvenation” as his primary goal. The ambitious Belt and Road Initiative (BRI) was announced a year later. At the 19th Party Congress in 2017, Xi stated that China would no longer shy away from world leadership and efforts shaping the international order. The BRI is an important example of how China has pursued its foreign policy interest. The initiative has 147 signatories and includes US allies and partners such as Saudi Arabia, Greece and UAE.

Quite naturally, the West has been critical of this stance, often saying that it might invite dangerous confrontations between China and the West. But Beijing has maintained that it is not the real aggressor but simply responding to Western threats. Defending China’s aggressive foreign policy, the then-Chinese Foreign Vice Minister Le Yucheng said last year that Beijing “had no choice but to fight back against constant ‘nagging’ and ‘insults’ from foreign critics”. Interestingly China has many flag bearers of this new assertive foreign policy, most notably the foreign ministry spokesperson Zhao Lijian. Zhao has had public spats with US diplomats and has been a vocal critic of the West.

If there is any lesson that Nepal should learn from its neighbours, it is that we need to pursue an independent foreign policy, especially in light of the geo-political games often played in the country.

– NISCHAL DHUNGEL

Quality digital infrastructure is the foundation of a fully-functioning digital economy. Digital infrastructure using any form of the technology enables a smooth flow of goods and services in the economy. The Government of Nepal (GoN) considers the advancement of digital technology as a crucial enabler of more resilient, inclusive, and growth-oriented development. The GoN came up with the Digital Nepal Framework (DNF) plan in 2019 to restructure the economy through integration of available ICT tools. It plans to do so by granting all segments of the population equal access to services and infrastructure, encouraging private sector innovation and competitiveness, and enhancing the delivery of public services. The DNF comprises 80 initiatives divided into eight categories – digital foundation, agriculture, health, education, energy, tourism, finance, and urban infrastructure. The Nepal Planning Commission (NPC) has deemed the DNF a game-changing initiative.

Before diving into Nepal’s digital landscape, it is crucial to understand the state of digital-related infrastructures in the country. Electricity is the backbone of digital connectivity in addition to availability of quality infrastructures. In this regard, electricity is fuel to develop any form of digital connectivity. Without proper access to electricity, it is almost impossible to foster digital connectivity in the desired way. Hence, access to electricity directly impacts the availability, adoption, and use of digital connectivity. Digital connectivity may be less readily available if a steady electrical supply is not always available. Even though the electricity supply has reached most of the population, the government needs to deploy base stations in non-electrified areas to ensure affordable and reliable electricity access for all Nepali citizens.

Figure 1: Access to Electricity, Nepal (Percentage of Population)

Source: Nepal Economic Survey 2021/22, Ministry of Finance *Till – Mid March 2022

More than 90 percent of the population have access to electricity as of mid-March 2022 (Figure 1). Access to electricity has considerably increased over past years from 88 percent in 2018/19 to 94 percent till mid-March 2021/21. During the same period, the Madhesh province has the highest access to electricity i.e., 99.66 percent of Madhesh population and the Karnali province has the lowest access to electricity 43.87 percent of Karnali population (Figure 2). In 2021–2022, the installed electricity capacity stood at 2,189.6 megawatts (MW). Increasing the installed capacity of electricity has made it possible to increase access to electricity. Nepal experienced power outages that lasted up to 18 hours a day for more than ten years, from 2006 to the mid of 2017. The country currently has surplus energy, primarily during the wet season, and “load-shedding” has almost been eradicated thanks to better management, leakage control, and increased power generation. Although electricity penetration in Nepal (90 percent of the population) as of 2020 is slightly low in comparison to South Asian (95.7 percent of the population) countries, Nepal stands in an excellent position to strengthen its digital infrastructure. Before the target year of 2030 was established by Sustainable Development Goal 7, the Nepal Electricity Authority (electricity regulatory body)  revealed its plan to achieve 100 percent electricity access by 2024. The plan is realistic to set a strong base for the uptake of other digital infrastructures.

Figure 2: Access to Electricity by Province (Percentage of Province Population)

Source: Nepal Economic Survey 2021/22, Ministry of Finance *Till – Mid March 2022

The Government of Nepal has placed great importance on transforming the potential of ICTs within the broader context of its ambitious developmental objectives, which are based on reducing poverty as its primary goal. The Information Communication Technology (ICT) Policy 2015 outlines the rules and practices for developing IT infrastructures and human resources for a knowledge-based society. ICTs have the potential, among other things, to help create the environment for better governance with more open, transparent and effective bureaucracies. ICTs can also address structural issues in education and health systems, enabling more access to education and health services and bridging quality gaps in education and health.

The internet is a crucial component of the digital economy. Over the past few years, Nepal’s technology and communication sector have experienced significant growth. Nepal Telecommunications Authority (NTA) is the telecommunication regulatory body of Nepal established to provide a favorable and competitive environmentfor the development, expansion, and operation of telecommunications services along with private sector participation. According to NTA Annual Report 2021/22, total broadband (mobile and fixed) internet subscriber has considerably increased over the past years, from 66 percent in 2018/19 to 131.6 percent in 2021/21. According to the same report, there are around 38.3 million broadband subscribers in Nepal, of which 28.7 million are mobile broadband subscribers and 9.6 million fixed (wire and wireless) broadband subscribers in 2021/22. While fixed broadband (wired plus wireless) penetration has reached 33.1 percent of the population, mobile broadband penetration is 99 percent in 2021/22. Mobile broadband peneration has significantly increased over the past years from 52% of population in 2018/19 to 99 percent of population in 2021/22. According to the report, mobile broadband is the most popular means of using the internet, and the trend of mobile broadband users is increasing faster than fixed broadband. With 3G and 4G internet service already in place, the government is advancing the testing of 5G technology.

Figure 3: Broadband Internet Penetration (Percentage of Population)

Source: Nepal Telecommunication Authority, Annual Report 2021/22

Despite the progress in internet and electricity penetration, there are still issues with affordability, the digital divide, and digital illiteracy in many areas of Nepal. With regards to digital governance, the government has taken steps to digitalize public services, including, but not limited to, the digitization of data from land revenue offices, the introduction of the Nagarik App, the launch of the Nepal National Single Window (NNSW) system, the opening of the National ID card, and others. However, service seekers continue to encounter issues due to limited installed technology capacity and improper system management.

Workplace practices are changing due to disruptive technologies like artificial intelligence (AI), robotics, and the Internet of Things. The governments and businesses around the world are now able to fully realize the promise of exponential development because of digital technologies. Since the initial shutdown starting from March 2020 onwards (due to COVID-19), online commerce and digital payments have become more common. Also, the use of digital technology and GDP growth are closely related. A World Bank study found that a country’s economy grows by 1.3 percent for every 10 percent rise in internet access. Nepali pay more for internet connection than people in other South Asian countries, according to the Connectivity in the Least Developed Countries Status Report 2021. The report has emphasized a need for effective solutions in developing nations like Nepal to increase digital access and the need to develop specific policy proposals to hasten the transition to inexpensive and universal connectivity. 

Way Forward

The digital economy highlights the importance of digital technology in improving trade and competitiveness, economic opportunity and efficiency, and international economic integration of an economy. The COVID-19 pandemic and related lockdowns have sped up the uptake of digital services, making remote learning, e-commerce, and digital payments more crucial than ever. The pandemic has also made it clear how vital it is to adapt systems to accommodate shifting preferences, hastening the transition to a cashless and digitally aware society.  Supportive policies and investments in the workforce, vital digital infrastructure, and cybersecurity will have a long-lasting impact on leveraging the digital economy in Nepal. For Nepal to develop into a technologically advanced, rapidly expanding economy, digitalization and digital governance should be implemented, strengthening its digital-related infrastructure.

Recommendations

• Bring stakeholders from the public and corporate sectors and civil society to help shape digital policy in several key areas. 
• Encourage the adoption of inclusive digital policies and collaborate with the appropriate governmental entities. A working group on internet affordability should be established, with representatives from the private sector, civic society, ISPs, and regulators. 
• Build collaborations with the private sector to construct a digital economy that benefits all Nepalis.
• Concentrate on improving transactional efficiency, security, transparency, traceability, and financial inclusion. 
• Work with universities and technical schools to solve the cybersecurity workforce and research and development demands.
• Support the reform of IT curricula in higher education, work with the private sector to start apprenticeship or internship programs, and support the ICT initiatives of the Ministry of Education to increase the skill-building of the digital talent pool to match the demands of IT-sector employers better and increase Nepal’s competitiveness in the IT labor supply.

– BINITA Nepali

The opinion piece originally appeared in the January 2023 Issue of New Business Age Magazine. Please read the original article here.

Nepal ranks first in South Asia and second in Asia in terms of the share of women representatives in the parliament. However, it ranks 123rd in the world in terms of the number of women holding ministerial posts. Women in Nepal have been assigned ministerial roles at general ministries only. It demonstrates the reality that, despite increased female political participation, women are not trusted to exercise authority and manage resources at the key ministries that have the potential to make major policy implications in the country.

In 2008, a mixed-model election system [First Past the Post (FPTP) and Proportional Representation (PR)] was introduced to encourage positive discrimination of women and other marginalised and unrepresented groups in the country. However, the political parties have exploited the PR system and turned it into the sole route for women to enter politics.

Political parties are reluctant to field women under the FPTP system. Therefore, to ensure constitutional adherence, women are brought onto the PR list. Only 9% the FPTP candidates in the 2022 federal and provincial elections were female. Most of the female candidates were fielded in fiercely competitive constituencies, with the less competitive seats going to the supposedly “strong” male leaders.

As per Article 84 of the Constitution of Nepal, at least one-third of the members elected from each political party to the federal parliament must be women. Therefore, at least 92 of the 275 members of the new federal parliament must be women, as there are currently only 19 women (32.2 percent), in the 59-member upper house. As only nine women were elected directly, the remaining 85 seats have been filled through proportional representation. It means there are just nine women in the top decision-making positions, as it has been found that the directly elected representatives – more than 95% of whom are men – hold greater sway over resources, authority, and influence than those who come via the PR system in Nepal’s parliament.

The country also fell short of meeting the target of having 50% women representatives in the local units. Only 14,407 (41.21%) out of the 34,953 elected in 753 local units were women. Of them, only 25 women have been elected to top or decision-making posts (13 mayors and 12 chairpersons). Moreover, women were sidelined in the guise of political coalitions during the recent local, provincial, and federal elections. Consequently, fewer women today hold leadership roles at all three tiers of government, owing to political parties’ aversion to promoting women to decision-making positions. To put it another way, Nepal missed out on the opportunities that more women in decision-making positions would bring.

First, more women in politics means a more inclusive democracy. A study shows more women in decision-making roles, with their inclusive and cooperative leadership styles, result in tangible gains for democracy. This entails better service delivery, stronger collaboration across racial and political boundaries, expanded social safety nets, and a more sustainable future.

Moreover, other research links women’s political participation to improved governance, transparency, and low levels of corruption. As women are often seen to be more trustworthy and honest, it is hoped that their increased participation in politics will reduce corruption. In 2011, Mexico replaced all of its male traffic cops with female cops to curb corruption, since women are seen as more trustworthy. New Zealand has the highest level of female representation (49.2%) of any parliament in the Asia and Pacific Region and the sixth highest in the world. Now wonder, the country ranks first out of 180 in the Transparency International Corruption Perception Index (CPI). Whereas, Nepal  ranks first in South Asia in having more women in national parliament (32.7 percent) and is 117th out of 180 in the CPI. Undoubtedly, Nepal needs more proactive women leaders who would guarantee more inclusive policies and responsible institutions that combat the pervasive corruption.

Second, more women legislators mean a more stable, inclusive, and vibrant economy. Researches show that gender equity has favourable economic gains for everyone and that the presence of women in politics corresponds with a wider economic impact.

India showed much improved socio-economic growth with greater gender-sensitive spending on programmes related to health, nutrition, and education when women were present in a decision making role. Likewise, women’s political leadership and women’s broader engagement in the economy are intertwined. Thus, if Nepal wants more women at work, it should prioritise raising the number of women in elected offices.

The government, which remains dominated by men as of now, repeatedly attempts to prohibit women from being involved in the economy. One recent example is the government’s effort to implement a law requiring women under the age of 40 to get permission from their family and local ward chair before travelling to the Middle East and Africa. In Nepal, 74% of women are involved in agriculture. Only 15.7% of agricultural work is performed by men, while the rest 84.3% is performed by women. However, they have no say in the earnings from farming and endure various types of discrimination (such as access to land, water, seeds, and training, among others). Yet, the government does not consider it essential to implement women-friendly farming policies, training, or materials.

Thus, women’s participation in two of the most important economic factors, remittances and agriculture, is minimal. This would be drastically different if more women were in positions of legislative power. More women in decision-making positions would fight against such discriminatory restrictions that limit women’s full participation in the economy and create a vicious loop: women don’t have money, they can’t win, therefore they are chosen through PR.

Third, there is significant evidence that women politicians are changing the way politics work by introducing policies in areas that aren’t usually talked about at the political table, like domestic violence, women’s reproductive health, and maternity leave, and by broadening perspectives on other policy areas. This has been seen in France, Sweden, South Africa, Rwanda, and Egypt, among others. Increased policymaking that prioritises welfare, healthcare, education, families, water and sanitation, women, and minorities is also linked to the number of elected women. Here, the New Zealand experience serves as the best example.

Women politicians not only propose such policies but also tirelessly work to put them into effect, as Margaret Thatcher rightly stated: “In politics, if you want anything said, ask a man; if you want anything done, ask a woman.” A study done in the US has found that congresswomen provide 9% more government programmes annually to their home districts than their male counterparts. And women are 10% more effective lawmakers and pass twice as many bills on average than men. The increasing instances of gender-based violence, rape, early child marriage, acid attacks, and girls’ trafficking are tearing the country apart. With Nepal’s political class becoming more and more apathetic, it is certain that greater representation of women in decision-making positions will increase efforts to put an end to these issues.

Nepal cannot afford to ignore women. It must ponder seriously what might be done to avoid losing out on these costly opportunities. As was done in Rwanda (which implemented 30% gender quotas in the parliament only in 2003 but ranks first in the world in terms of the proportion of women, 61.25%, in its national legislature due to rigorous implementation), one of the most important recommendations is to implement the legally mandated gender quota with adequate political finance regulations to support it, as the exorbitant cost of political elections is a significant barrier for women who are interested in running for elective office.

The patriarchal attitudes of Nepali society and local political parties that “women cannot win,”  which limit women’s electability and winnability in the elections must be challenged by raising awareness of the importance that women could offer to overall political governance and public service delivery. As women cannot be what they cannot see, elected women should get more media publicity to inspire other women to pursue leadership positions. Lastly, there should be more training and networks for women who want to run for government. For example, a cross-party and cross-country network for women politicians could be set up. 

– ANUSHA BASNET

As a developing country, foreign aid has been a major factor in aiding Nepal to meet the country’s all major development. Throughout the years, Nepal has mostly received foreign aid in the form of grants, loans and technical assistance. The country has received most bilateral aid support from countries such as  USA,  UK, Japan, India, and Germany and most multilateral aid from organizations including the European Union (EU), the World Bank (WB), Asian Development Bank (ADB), and the United Nations (UN). The central government created the country’s Foreign Aid Policy 2002 to create stipulations for donors. Also, the Nepal government  tried to streamline the process for the donors and make the whole system transparent by requiring the donors to upload all the accounting details related to the Aid Management Information System (AMIS) portal. The portal was launched by the government in 2019. 

The following graph presents the value of official development assistance (ODA) Nepal has received during FY 2016/17 and FY 2020/21:

The available data highlight fluctuation in the foreign aid that Nepal has received over the last five fiscal years. The official data for the first eight months of the recent fiscal year (FY2021/22) indicates a decline in aid commitment by 32.7 percent as compared to the same period of the previous fiscal year.

The following graph shows a breakdown of ODA disbursement from 2018 to 2020:

While Nepal mostly received grants during the 1960s, concessional loans have been a greater percent of foreign aid after the 1980s. The shift in the amount of foreign aid Nepal received from bilateral to multilateral partners caused this change. The above graph shows that 60 percent of total ODA in FY 2018/19, 69.91 percent in FY 2019/20 and 66.89 percent in 2020/21 were given as loans. A large portion of loans have been taken to develop the infrastructure projects in the country. In FY 2020/21, 98.8 percent of the disbursement received for the road transportation sector, 82.27 percent of the disbursement received for the energy sector, and 73.73 percent of the disbursement received for the reconstruction sector was received in the form of loans.

While the government has been taking out loans to finance development projects, concerns over this preference have been raised in the country. The biggest concern in recent years has been the fear of Nepal falling into debt trap and eventually facing an economic crisis. The tendency of development projects to get extended for completion and lack of effective aid mobilization puts Nepal in a precarious position as greater investment is required to complete these projects. Furthermore, even though its overall contribution to causing climate change is low, Nepal is one of the countries that is most vulnerable to climate change. It is estimated that the country will need USD 46 billion by 2050 to adapt to impacts of climate change. As such, Nepal taking loans from multilateral agencies for adapting to climate change will increase the  financial burden on the economy.

Way Forward

While foreign aid has always been an important component for covering the budget deficit, diversifying the source of financing is critical for the country moving forward. Few solution to minimize the reliance on foreign aid could include:

• Focus on Foreign Direct Investment (FDI): Finding alternative sources of financing beyond foreign aid is essential to reduce the dependence on foreign aid. One option for alternative sources of financing could be FDI, which means attracting foreign investors to invest in businesses and projects in Nepal.
• Increased focus on the productive sector: Nepal should strengthen the productive sectors of its economy. The government’s focus should be on providing support to agricultural, service and manufacturing sectors so that the economy can become  self-reliant and subsequently  a net exporter.
• Applying for grants instead of loans: The government should push for grants instead of loans when it comes to getting foreign aid for projects that are geared towards achieving sustainable development goals and climate resilience. The Nepali government should aim at getting grants to combat the negative effects of climate change in the country.

– SANTOSH Sharma Poudel

The column originally appeared in The Diplomat on 30 December 2022. Please read the original article here.

On December 27, a team of Chinese experts landed in Nepal to conduct the feasibility study of the Kathmandu-Kerung (Geelong) railway. On the same day, China opened the Rasuwagadhi border point, which had remained closed for 35 months because of the COVID-19 pandemic. It came a day after Communist Party of Nepal-Maoist Center (CPN-MC) Chairman Pushpa Kamal Dahal, a.k.a. Prachanda, assumed the premiership. These appear to be “goodwill” gestures from China to the new communist leader in Nepal.

The dream of a railroad linking Nepal to China is an old one. King Birendra Shah and Chairman Mao Zedong mooted the idea in 1973.

Landlocked Nepal’s connectivity with the rest of the world is through India. This has been a source of frustration for the Nepali public and policymakers as it has made Nepal very dependent on India. The railroad to China offers Nepal a way to break its India-lockedness and provides it with alternative access to the rest of the world. Also, there is an increasing need for better connectivity, given the expanding trade volume between the two countries. It was after the Indian economic blockade on Nepal in 2015 that Nepal and China accelerated their efforts on making the railway project a reality.

Then-Prime Minister Khadga Prasad Oli signed an agreement in 2018 during his visit to China. In April 2019, China included the Nepal-China Trans-Himalayan Multidimensional Connectivity Network in Beijing’s joint communiqué of the second Belt and Road Forum. The two countries signed an MoU on the feasibility study of the proposed railway during Chinese President Xi Jinping’s visit to Nepal in October 2019. Xi said the connectivity network would help Nepal “transform from a landlocked country to a land-linked country.” For China, the vision is a part of Xi’s ambitious Belt and Road Initiative.

The proposed rail will connect to the Lasha-Shigatse railway in Tibet. On the other side of the border, the rail could be expanded to connect Pokhara and Lumbini, two other major cities in Nepal.

The railroad offers hope and has significant potential. It will symbolize the Nepali dream of better infrastructure and economic connectivity and represent good Nepal-China relations. Strategically, railway connectivity with China diversifies Nepal’s connectivity and reduces dependence upon India. It will ensure Nepal will suffer minimal consequences if India imposes a blockade in the future. Economically, it will facilitate trade with China. Supporters also point out that the railroad could be instrumental in bringing a large number of tourists from China to Nepal.

However, obstacles aplenty remain. First, the railroad has to transverse the mighty Himalayas. The terrain and ecology are challenging. China has shown that it can build a railroad in a complex landscape. However, the trans-Himalayan railroad will test Chinese abilities. Almost 98 percent of the railroad will either be a bridge or tunnel because of the terrain.

Second, the cost of the railroad is a primary concern. Previous estimates put the cost at $3 billion. However, it is expected to now cost around $8 billion (to link up to Shigatse). We will have a more accurate estimate after the feasibility study. There is a high chance of the cost being revised upwards. It will be a massive commitment for Nepal, whose GDP is around $30 billion.

Third, China has provided a grant for the feasibility study, estimated to cost around $300 million. However, it will be loans that will likely fund the implementation of the project. There is a fear that Nepal could go the Sri Lankan way if Nepal undertakes such loans without due diligence. The Nepali media is abuzz with apprehensions over the “debt trap,” citing what transpired in Hambantota port in Sri Lanka. The Nepali ambassador to China has sought to dissuade such concerns, but it will not be easy.

Fourth, some are concerned that the railway does not benefit Nepal. Nepal’s trade with China amounted to NRs 235 billion ($1.8 billion) in 2020/21. However, Nepal’s exports accounted for a paltry NRs 1 billion ($8 million). With a 1:234 export-to-import ratio, trains running will carry Chinese goods to Nepali markets but can be expected to return empty. Therefore, the railroad could only increase Nepal’s imports from China.

Fifth, India sees the Himalayas as its natural defense frontier and the region south of the Himalayas as its sphere of influence. It could see the railroad as China broaching India’s security perimeter. India was not pleased when Nepal signed the BRI agreement in 2017.

Talks of a railroad connecting Nepal to China has had India on its toes. In recent years, Nepal and India have upgraded and expanded the dysfunctional Janakpur-Jayanagar railway to Kurtha. In April, Indian Prime Minister Narendra Modi and then Nepali Prime Minister Sher Bahadur Deuba jointly flagged the cross-border railway service between Jayanagar (India) to Kurtha. The 35-km-long railway was built with an Indian grant worth NRs 10 billion ($75 million). In addition, work is underway to expand the road to Bardibas via Bijalpura. This is one of the five cross-border links being talked about between Nepal and India.

Nepal has its task cut out. Firstly, it needs to do a cost-benefit analysis in conjugation with the financing modality. If the current trade trend continues, the benefit to Nepal will be minimal. Meanwhile, Kathmandu needs to engage New Delhi to communicate Nepal’s rationale and assure it that the railway will not affect Indian security interests. Nepal needs connectivity with both neighbors, and it is not a competition. Also, Nepal needs to harmonize infrastructure development to its northern border with China and its southern border with India to support Nepal’s growth.

India builds a broader gauge railway, and China, a standard gauge. It will be a challenge for Nepal to find a way to make the railway tracks built in collaboration with the two countries interoperable. This will be a major test of Nepal’s diplomacy.