2016: A year when signs of recovery emerged

First sign of feelgood factor trickled in when the govt presented budget on May 28, one and a half months ahead of beginning of new fiscal year

Kathmandu, January 1, 2017: 2016 would probably be remembered as a year when the country’s economy finally started seeing signs of recovery after a year in doldrums.

2015 was the worst year for Nepal since the restoration of democracy in early 1990s, as twin disasters-devastating earthquakes of April and May, and Indian trade blockade imposed in the fourth week of September 2015 that halted supply of everything from daily essentials, raw materials to petroleum products-sent the economy into a painful tailspin.

The initial days of 2016 did not look promising either, as the Indian government did not show signs of lifting the trade embargo. That problem formally came to an end in the second week of February, albeit rumours about chances of the Indian government reversing its decision continued to hit business and investor sentiment.

The first sign of feelgood factor finally trickled in when the government—as per the provision in the brand new Constitution promulgated in September 2015—presented the annual budget in Parliament on May 28—one and a half months ahead of the beginning of the new fiscal year. This raised hopes for timely spending of public funds earmarked for physical infrastructure, lack of which has kept private investment at bay and prevented the country from fully tapping its economic potential.

Since then other encouraging signs have also emerged: a good monsoon, which is expected to raise agricultural and thereby economic output; steady supply of electricity, which has eased problems down the supply chain to cottage, small and medium enterprises; inflation which has cooled down to almost a decade low of 4.8 percent; and tax and nontax receipts that have surged by over 80 percent.

“Considering the point from where we began, we ended up in a much better position by the end of 2016,” said Swarnim Wagle, member of the National Planning Commission. “These developments indicate the country’s economy will grow by around 5 to 6 percent this fiscal year, [as against the 14-year low growth of 0.8 percent recorded in the last fiscal year].”

One of the dramatic changes that the country saw in 2016 was near eradication of hours-long power outages, which had crippled the industrial sector. The steady power supply has given a big relief to cottage, small and medium enterprises that generate a big chunk of the jobs in the country.

The credit for leading this crusade against load-shedding goes to Kulman Ghising, who was appointed as the managing director of Nepal Electricity Authority (NEA), the state-owned power utility, in mid-September.

Under his leadership, NEA has stopped supplying electricity to energy-guzzling industries through dedicated feeders during peak power consumption hours from 5 pm to 8 pm. This basic load management strategy rather than hike in power generation or imports helped the country to address almost-a-decade-long energy crisis.

It is not known whether this technique will continue to work in the future. “But…. I will not give up trying,” Ghising recently said.

Nonetheless, even if his attempts fail, sincere effort made by him to make load-shedding a history has already raised the bar for those who want to lead NEA in future.

“Steady power supply is a yardstick of predictability and stability, and is crucial to lift the confidence of investors seeking opportunities, especially in the manufacturing sector,” said Wagle.

The manufacturing sector’s contribution to the economy has been falling over the years, largely because of power shortage and labour-related problems. Yet labour issues, lately, have started becoming less of a problem, as workers have stopped resorting to harsh measures such as shutting down production plants for days as in the past.

If problems related to energy supply can also be resolved by adding more electricity to the grid, the country’s manufacturing sector can make a complete turnaround.

It is said a country should not disregard the manufacturing sector even after achieving higher growth rates for a sustained period of time, because it has the ability to create jobs for the mass. Also, the sector is also not constrained by the size of the domestic market, because a tiny country can produce goods for the entire world.

To support manufacturing firms, and the entire industrial sector, the government introduced new Special Economic Zone Act and Industrial Enterprises Act in 2016. Focus should now be laid on early passage of the Labour Bill, which once signed into law is expected to further address labour issues.

Also, the Foreign Investment and Technology Transfer Bill, which is believed to make business climate more favourable for foreign investors, should be endorsed as early as possible.

Nepal desperately needs more investment, both domestic and foreign, to give a lift to the economy, which is struggling to recover from a long spell of sub-par growth of around 4 percent per annum in the last one decade.

But to attract private investment, public investment must go up. This is because private investors generally expand to places where there is proper infrastructure such as road and energy networks. But the government has continuously failed to build these infrastructure, despite allocating huge sums for capital expenditure.

The government, for instance, has allocated a capital budget of Rs311.9 billion for this fiscal year. But till the end of December, it has not even spent 9 percent of that amount.

Such a poor performance in capital spending has been reported at a time when the budget was presented in Parliament one-and-half months prior to the beginning of the new fiscal year, and spending authority was given to all the ministries on the first day of the current fiscal year.

Similar problem has also cropped up in the National Reconstruction Authority, which so far has not even completed distribution of first instalment of housing grants to those who lost houses during earthquakes of April and May.

Many were expecting higher reconstruction spending to give a lift to the economy. But so far focus has only been laid on housing reconstruction, whereas not much works have been conducted to restore the social sector infrastructure-such as school buildings and health posts-and heritage sites.

As spending in these areas has not gone up, the government’s savings has soared to around Rs196 billion. As huge chunk of money is locked inside state coffers, some of the banks and financial institutions are now experiencing liquidity crunch.

“If the government cannot ramp up spending, it can create a mechanism and channel government’s savings towards financial institutions facing liquidity crunch,” Sanima Bank CEO Bhuvan Kumar Dahal said.

One of the reasons for liquidity shortage is uptick in demand for loans with the rise in confidence of borrowers following the end of the Indian trade blockade. The other is decline in growth rate of remittance income.

In the first four months of the current fiscal year, remittance income grew by 7.8 percent (to Rs232.1 billion). In the same period last fiscal year, remittance income had jumped by 19.4 percent.

Drop in remittance income, coupled with surge in imports in the aftermath of the end of the trade embargo, however, has not hit the country’s current account and balance of payments, which are still in surplus.

“These developments show there are still grounds to be optimistic, because remittance income-despite being on shaky grounds-has not recorded a negative growth. This indicates consumption and services sector will not suffer,” said Wagle, adding, “If we can end the political deadlock and hold local elections, investment climate will be much more favourable in the country.”

By Rupak D Sharma