– ANKUR SHRESTHA

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

Since the third generation of the Nepal Trade Integration Strategy (NTIS 2016) was introduced, Nepal and its trade policies have undergone significant changes. First, from 2017 onwards, the country formally adopted a federal structure with seven provinces. Second, for two years in a row (2020-2021), Nepal put all of its efforts into managing the COVID-19 pandemic. The pandemic disrupted Nepal’s domestic and international trade in major ways.

Third, Nepal has seen massive fluctuations in the country’s balance of payments in recent years. One of our regional neighbours, Sri Lanka, declared bankruptcy, igniting policy debates in Nepal as to whether we would run aground into the same problems. Despite this, Nepal’s foreign reserves are growing and will last for at least ten months. However, what is worrying is that our trade deficits are also rising to the same levels as during the pre-pandemic phase of 2020.

Nepal suffers from a considerable trade deficit with its biggest trade partners. For example, in the last fiscal year (FY) 2021/22, with India, our largest trade partner, Nepal’s import-export ratio stood at 8:1. With China, our second largest partner, it stood at a massive 327:1. This trend is worrying and shows the need for Nepal to improve its trade balance with its immediate trade partners. Despite opening up more border points with China, if Nepal does not take significant steps to promote exports, it is very likely that Nepal’s current trade deficit with China would further widen in the years to come. Nepal is also graduating to a developing country from a Least Developing Country (LDC) by 2026, and its trade advantages will decrease even further. As a result, bilateral trade treaties will also become essential for Nepal to retain its trade advantages.

Therefore, the Ministry of Industry, Commerce, and Supplies and the Ministry of Finance, together with other related ministries and departments, have been working tirelessly to create a new trade strategy and related industrial policies to promote trade. Examining where the country missed out with the NTIS and what impact it had on the country’s trade situation is necessary. Furthermore, it is also essential to understand the consumer benefits that trade provides and move towards decreasing the tariff and non-tariff barriers of trade. Policies that increase tariffs and implement protectionist measures to promote non-competitive industries will only burden consumers through higher costs of goods.

Nepal Trade Integration Strategy
The Nepal Trade Integration Strategy 2016 (NTIS 2016) was an updated version of NTIS 2010 and its predecessor, Nepal Trade and Competitiveness Study (NTCS) 2004. It was developed together with the complementary Trade Policy 2015. The NTIS 2016 recognized potential for product and value chain development in three priority export sectors: Agro and forest products, Craft and manufacturing products, and the Services sector. Under these, it identified 12 potential export sectors which are: 1. Large Cardamom, 2. Ginger, 3. Tea, 4. Medicinal and Aromatic Plants (MAPs), 5. Fabrics, Textiles, Yarn, and Rope, 6. Leather, 7. Footwear, 8. Chyangra Pashmina, 9. Knotted Carpets, 10. Skilled and Semi-Skilled Professionals at Various Categories (Remittance-Generating Sectors), 11. IT Services and Business Process Outsourcing, and 12. Tourism.

Export of NTIS goods
Data across the years since the fiscal year (FY) 2015/16 shows that Nepal has seen a slight increase in the identified export goods under the NTIS 2016, however, their percentage contributions to total exports have decreased significantly. For example, in FY 2015/16, NTIS goods made up 47.26% of the total exports, but it significantly reduced to 23.39% as of FY 2021/22. While the values of NTIS exports have increased slightly from Rs 33.2 billion to Rs 46.79 billion across this period, total exports reached Rs 200 billion from Rs 70 billion.

Specifically, in the last FY 2021/22, the list of goods identified under NTIS 2016 only made up less than 25% of the country’s total exports. Focusing on FY 2021/22, out of the total export value of Rs 200 billion, soya bean was the top export with Rs 48.12 billion of exports, this makes up 24.06% of our total exports. Products in the NTIS list, such as carpets, came in fifth contributing Rs 9.57 billion, while woven fabrics and cardamom came in sixth and seventh contributing Rs 5.66 billion and Rs 4.81 billion respectively. Other NTIS goods came further down the list. Even after adding all the NTIS goods exports, it falls short by Rs 1.33 billion. This provides evidence of either our incapability to understand the changes throughout the years in Nepal’s export capabilities or the mindset of Nepal’s traders.

– 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.

– 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.

– SAGOON Bhetwal

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

One can easily get glimpses of the informal economy while passing through the streets of Kathmandu. From street vendors to home-based workers, the informal economy accounts for economic activities that are carried out with informality. This refers to activities and enterprises that are not regulated or taxed while they also continue to lose recognition and protection. The International Labor Organisation (ILO) says that ‘the informal economy consists of activities that have market value but are not formally registered’. While this economy is a global phenomenon, it is most prevalent in Emerging Markets and Developing Economies (EMDEs). It has, on average, a 35% contribution to the Gross Domestic Product (GDP) in low and middle-income countries while the contribution is 15% in the advanced economies.

According to the World Bank (WB), 80% of the workers in South Asia are involved in informal economic activities. In this region, more than 90% of businesses are informal. The informal economy is mostly defined by its composition of low funding, low-skilled workers, irregular income, lack of social security, difficult working conditions, low level of productivity and lack of protection, to list a few. At the same time, it is also important to note that despite all the negative attributes, this economy also acts as the only safety net for people who are left out of the formal one. It is often identified as a shock absorber when making ends meet becomes impossible through the formal economy. In Nepal, according to the Central Bureau of Statistics (CBS), 62.2% of the total employed people are engaged in informal jobs. The occupations with the highest informal engagement are elementary occupations, agriculture, forestry, fishery, craft and related trade works.

Gender Composition
Women’s labour force participation continues to stay lower even today. Out of those women who are active, most are engaged in the informal economy. As per the Labour Force Survey, 90.5% of employed women in Nepal have informal jobs. A number of factors can be attributed to their large concentration such as lower educational attainment, low level of skill, and cultural restrictions. Their involvement can be found in the least visible and most vulnerable segments which continue to remain under-valued.

Women lack access to need-based benefits and face continuous safety risks. A study carried out by Centre for Social Change (CSS) found that women in the informal economy of Nepal face a disproportionate load of gender wage gap, discrimination and harassment, and even unpaid labour. The constant fear of Gender Based Violence (GBV) either puts women at continuous risk at their workspace or keeps them totally out of employment. According to a study done by CARE Nepal, 66.5% of women in informal jobs in Nepal are vulnerable to violence and exploitation. Even the existing legal provisions such as Sexual Harassment (Elimination) at Workplace Act, 2015 do not take into account the violence that happens in informal workspaces and lack specific provisions to address them.

When it comes to differences in income, 66.8% of women in informal jobs earn lower than the minimum wage standard in Nepal. This is extremely high when compared to 31.6% of men working in the informal sector. Wage discrimination persists even in formal jobs, while it is worse for those in informal engagements. What is concerning here is that women are the most discriminated-against as they receive the lowest rate of income or even remain unpaid.

Informal Economy and Covid-19
The Covid-19 pandemic, followed by its containment measures, took economies worldwide into contraction. The ILO estimates that globally 1.6 billion workers in the informal economy were hit the hardest. Due to measures such as mobility restrictions, people were confined to their homes. This meant that they faced difficulty in making livelihoods as their income increased. They also faced risk of losing their jobs. A survey conducted by the Kathmandu Metropolitan City (KMC) shows 81% of the respondents living in Kathmandu were unable to pay for their daily necessities, rent, and loans because of the sudden loss of their jobs.

Informal workers engaged in tourism, trade, construction, and manufacturing sectors bore the highest risk as they lost income and lacked protection measures. The ILO estimates that about three-quarters of the total workers in the tourism sector of Nepal are in informal jobs. Even some of those, employed in formal sectors, had to slowly shift to an informal job to make ends meet. COVID-19 further affected their mental and social well being because of the financial insecurity they faced. The pandemic has shown that vulnerability of informal workers can suddenly exacerbate as workers in informal lines of jobs lack social protection and benefits.

Transitioning from Informal to Formal
Shifting to formal standards for wage workers, home-based workers, and self-employed individuals means that they will have to comply under regulations that include both obligations and advantages. This will lead to their contribution to the tax base and GDP as they also receive access, protection and insurance. The ILO in 2015 adopted ‘Transition from the Informal to the Formal Economy Recommendation’. The objectives of ILO Recommendation 204 for the transition are i) creation of decent jobs and sustainable enterprises in formal economy, ii) transition of workers and enterprises to formal economy, and iii) prevention of informalisation of jobs. At the same time, the policy interventions needed to address the existing informality have to be context and stakeholder specific. The strategy that works for wage employees in developed countries might not always work for daily wage earners in Nepal.

However, it is important to realise that this transition is not easy and is rather a long-term process. The informal economy, despite entailing low productivity and low income, has been assisting families to supplement their income and provide a safety net. It has also been absorbing surplus labour and assisting families living on the poverty line when the formal economy excludes them. In the process, the condition of women in the economy and post-pandemic recovery has to be prioritised. It now becomes important for governments to identify how the informal economy can be assisted or decide the extent and process of their formalisation. One thing to remember is that workers need to be provided the incentive for their economic activities.

– 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. 

– 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.

– 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.

– SANTOSH SHARMA Poudel

The column originally appeared in The Diplomat on 9 August 2022. Please read the original article here.

On August 3, the U.N. aviation watchdog, the International Civil Aviation Organization (ICAO), formally asked the Nepali government to split the Civil Aviation Authority of Nepal (CAAN) into two separate entities — a service provider and a regulator. Nepal needed the restructuring to ensure a “clear separation of authority between service providers, operators and the regulatory authority” in order to improve air safety, ICAO said.

Back in 2009, during a safety audit by ICAO, Nepal had committed to work on legislation to split CAAN. However, 13 years later the proposed legislation remains in limbo.

Nepal has a poor aviation safety record. According to the Aviation Safety database, there have been 27 plane crashes in Nepal over the past three decades, 20 of them over the last 10 years. In May 2022, a Tara Air plane crashed in the mountainous Mustang district of Nepal, killing all 22 passengers and crew members, including six foreigners.

The European Commission (EC) imposed a blanket ban on Nepali airlines entering European airspace in 2013 after eight British nationals were killed in a Sita Air plane crash in 2012.

The rugged mountain terrain, a lack of investment in new planes, and poor infrastructure have contributed to dangerous air travel in Nepal. However, Nepal’s aviation governing structure shares some blame too.

CAAN is both the service provider and regulator in Nepal. That has engendered a conflict of interest, especially when it comes to safety regulations.

This prompted the EC to insist on CAAN splitting into two separate bodies before it considers lifting the ban on Nepali airlines. EU Ambassador Nona Deprez unequivocally stated that passing the bills to split CAAN is a “prerequisite” for Nepali airlines to be removed from the “air safety list.”

Nepali policymakers recognize the need to split CAAN. Since 2007, successive governments have put forward plans to end the dual functioning of the aviation regulator. Each government has expressed a commitment in bilateral (with the EU) and multilateral forums to split CAAN and urged the EC to revoke the ban. A subcommittee of the parliamentary International Relations Committee led by former Prime Minister Madhav Kumar Nepal even directed the government to split CAAN, saying it was mandatory.

Besides improving safety, restructuring CAAN has other tangible benefits for Nepal and Nepali aviation.

First, it will likely lead to the EC removing Nepal from its “air safety list,” opening European skies to Nepali airlines. It would boost revenue for Nepal’s struggling national carrier, Nepal Airlines. Nepal Airlines could not carry out chartered flights to the EU during COVID-19 rescue missions. As a result, the airline lost a big chunk of potential revenue, besides affecting the government’s ability to rescue Nepalis stranded in European countries during the pandemic.

Second, a restructuring would provide a shot in the arm to Nepal’s tourism industry. Around 15-20 percent of tourist arrivals to Nepal are from EU member countries. In 2019, almost a quarter of a million tourists from the EU visited Nepal. Nepal has announced a “Visit Nepal decade, 2023-2033” to revive the tourism sector. Without safe air services, the primary mode of transport for inbound tourists, the tourism decade cannot be successful. Nepal’s poor air safety record and the EU’s ban dissuaded many potential tourists from visiting Nepal. That would change if Nepal sets in motion the necessary changes to make flights safe.

Finally, the issue provides a litmus test of Nepali leaders’ commitment and delivery. Every government since 2007 has committed to and “prioritized” CAAN’s restructuring, but none have delivered.

On March 1 this year, the parliament secretariat included two aviation bills, the Civil Aviation Authority of Nepal Bill and the Air Service Authority of Nepal Bill, on the agenda for the meeting of the House of Representatives scheduled for the following day. However, then-Minister for Civil Aviation Prem Bahadur Ale did a volte-face and requested the parliament secretariat to hold back the bills. Some employees of the aviation regulator were opposed to the planned restructuring, he claimed.

The bills have not made any headway in the House of Representatives since, although the National Assembly, Nepal’s upper house, passed the bills unanimously.

On July 31, Jeevan Ram Shrestha, who succeeded Ale as aviation minister, said that Nepal would not immediately accept the EC’s condition and that CAAN would be restructured “according to need and at the appropriate time.”

Analysts attribute the lack of progress in passing the bills to the vested interest of some office holders and foreign airline operators. The existing system allows CAAN’s director-general to issue tenders and oversee compliance while issuing regulations governing the issues of licenses to airlines and crews. These officials would not want to give up this power.

Meanwhile, other international airlines have gained market share and revenue at the expense of Nepali airlines. Ale and Shrestha’s dilly-dallying shows the deep reach of such vested interests.

Going forward, the path for the government could not have been more straightforward. Yet vested interests have reigned over the common sense measure for 15 years. Shrestha’s statement provides little hope of a change to the status quo.

Domestic Updates

The Maldives is at a high risk of dollar reserve depletion by 2023. The primary causes are Covid-19’s impact on the tourism industry, soaring global fuel prices, and rising borrowing costs. Maldives has USD 829 million in reserve. However, the national debt, at USD 5.9 billion in 2021, has ballooned to USD 6.4 billion in the first quarter of 2022.

Minister of Finance, Ibrahim Ameer, assured that the Maldivian finance is in better shape now than in the last three years. The economy is growing with the arrival of tourists. The Maldives is expected to grow at 13-18 percent in 2022.

Regional Engagement

Maldives and India conducted the second joint hydrographic survey of Maldives, covering 6500 nautical miles. The survey is critical for the Maldives to update the Navigational Charts/Electronic Navigational Charts for ship safety in several areas of Maldives and enhance Blue Economy. The first phase of the survey started in 2021. Some of those areas were not surveyed since 1853.

The joint survey resulted from India’s policy of supporting the Maldives to set up Hydrographic facilities. India provided the Maldives with hydrographic survey equipment in 2021 and 2022. The joint survey will enable economic development, defence, security, coastal zone management, environmental protection, and scientific research.

Global Engagement

President Ibrahim Mohamed Solih sought approval from the parliament to join the International Islamic Trade Finance Corporation (ITFC). Maldives is not a member of ITFC. Yet, ITFC has provided financial assistance to the Maldives since 2005. ITFC aims to advance trade among members of the Organization of Islamic Cooperation (OIC). The Russian invasion of Ukraine has adversely impacted Maldivian tourism. The two countries jointly accounted for 14 percent of tourist arrivals between January to March of the current year. Despite this, Maldives condemned the Russian invasion of Ukraine at the United Nations General Assembly (UNGA) vote. Furthermore, the Maldives has reiterated its firm belief in principles of respect for sovereign states and sovereign equality. Yet, Maldives has taken a cautious approach to enforcing the sanctions imposed by the West in the aftermath of Russian aggression in Ukraine.

Domestic Updates

In late May, India announced a ban on wheat exports. New Delhi intended to secure the supplies for the nation amidst rampant inflation and a disrupted global supply chain caused by the Russian invasion of Ukraine. India accounts for just one percent of global exports and thus has only a regional impact. India banned the exports of sugar earlier. It has not yet banned rice exports and is considering exporting wheat to select regional nations.

India continues to face a slow but steady ‘fourth wave’ of the novel Coronavirus pandemic, with new cases climbing fast. The country counted over 4,000 new cases for the first time in the last three months. Amid the domestic crisis of the COVID-19 pandemic, India has earmarked USD 26 billion to curb rising prices and record inflation.

Regional Engagement

India has extended financial aid assistance to economically-decrepit Sri Lanka by deferring loans worth USD 1 billion. In addition, India sent energy supplies (diesel) to Sri Lanka. The economic downturn of the latter has led to political and social crises. As a result, Colombo lacked essentials such as food, fuel, and medicines in May.

Prime Minister Narendra Modi visited Lumbini, the birthplace of Gautam Buddha in Nepal. Modi offered prayers at the sacred Maya Devi temple on the occasion of Buddha Purnima. India views Nepal from the prism of being within its geostrategic ambit and desires to reduce Chinese influence in Kathmandu.

India appointed ambassadors to Nepal and Bhutan in May. Following PM Modi’s visit to Nepal, the Ministry of External Affairs announced the appointment of Naveen Srivastava. He is known as a strong China hand and handled the East Asian Desk before being appointed Nepal ambassador. Ambassador to Bhutan appointee Sudhakar Dalela is also an old China hand. The appointments reflect New Delhi’s efforts indicate that China views its neighborhood from a security perspective and intends to counter Chinese influence in the region.

Global Engagement

Modi embarked upon a trip to Japan to attend the Quad Leaders’ Summit on 23 May. Modi spoke of India’s role in the maritime domain as the Quad made progress on maritime domain awareness (MDA). He described Quad as a ‘force for good’.

However, the Quad continues to remain divided on Russia. India is reluctant to criticize Russia, India’s time-tested strategic partner. Amid the ongoing conflict, India-Russia bilateral trade has witnessed an exponential rise. India is not just purchasing cheap oil from Russia but is also procuring other commodities such as fertilizers. Moscow is now the fourth-highest supplier of crude oil to New Delhi. As two major powers, India and Russia are consolidating their traditional partnership through an enhanced trade relationship that is only bound to grow. India also continues to have a different position in Moscow than the European Union. India’s Minister of External Affairs, S. Jaishankar, was quite critical of European hypocrisy over procuring oil from Russia to meet India’s needs. He said that Europe’s purchases of oil from Russia far outweigh India’s. However, the Quad is firmly united in its view of the global threat posed by rising Chinese influence.