Interview with Mr. Rameshore Khanal, Former Finance Secretary

Mr. Rameshore Khanal is a former Finance Secretary, who has been observing macro-economic situation of the country. Mr. Khanal holds comprehensive knowledge on Nepal’s public financing, taxation, economic policies, private sector investment, and infrastructure development issues. Former economic advisor to the then Prime Minister Dr. Baburam Bhattarai, Mr. Khanal has been delivering comprehensive presentations on economic and financial issues in national and international forums. Talking to IBN Dispatch, Mr. Khanal says Nepal needs to define the development modalities and incentives of projects before showcasing them to investors.

How do you assess the economic impact of Covid-19 in Nepal?
Mainly, the impact of Covid-19 can be seen in employment and economic growth. Until late March, the impact of Covid-19 was slowing, with a decrease in the number of infections and deaths. However, infections have picked up in recent days. Given the situation, I do not see any possibility of the 4 percent growth projected by the Central Bureau of Statistics. Our economy has contracted by 12-13 percent over 16 months since the start of the pandemic. This has increased our concerns that the poverty level will climb to 25 percent. More than 5.7 million workers are employed in the informal sector: mostly construction, manufacturing, eateries, which have only been able to run at 30 percent of their capacity for the last several months. The prolonged lockdown is going to further affect employment, especially in the informal sector. Fortunately, overseas remittance has remained almost intact since overseas employers retained Nepali workers who were mostly engaged in works that are essential, even during the pandemic. However, Nepali workers in India lost their jobs amid the worsening pandemic.
Nepal needs to invest around NPR 2,025 billion annually to graduate to a middle-income country status by 2030. How do you think Nepal can achieve such a target?
This target is too high, given our existing capacity for investment. Last year we saw gross capital formation worth NPR 1,350 billion from the public sector, domestic private sector, and foreign investments. Nepal was already reeling under an investment deficit well before the effects of Covid-19. The target of capital formation worth NPR 2,025 billion annually to achieve middle-income country status can only materialize if we accelerate infrastructure development, construction activities, and manufacturing of construction materials. However, we cannot expect more investment than in earlier years as the impact of the pandemic continues.

Can Nepal increase investment; particularly FDI amidst Covid 19 challenges?
Foreign investors are looking for countries where supply chains, vital infrastructure, and associated logistics are strong. They are diversifying investment beyond traditional host countries like China and preferring emerging countries like India, Vietnam, and Cambodia amid the Covid-19 pandemic. However, the recent surge in Covid infections in India has checked this momentum, and investors are trying to switch to other countries beyond India. Nepal could have grabbed the opportunity to attract such floating investors had Nepal become an important part of the global supply chain and developed the necessary logistical infrastructure. Nepal is neither a key source of raw materials nor are we a globally influential supplier of manufacturing goods. As Nepal can’t immediately develop that capacity, Nepal will only be able to attract the desired FDI in the coming 3-4 years.

How can we deal with this adverse situation through alternative ways to boost FDI amidst Covid-19?
If we open up a hundred percent equity in some sectors, this will support shoring up FDI. We already have many sectors, including manufacturing and exports with 100 percent equity from FDI. However, insurance and banking are still restricted. We should waive the equity cap in private equity funds, mining, and banking so that it can pave the way for a higher volume of FDI through the presence of global banks in our country. We can take the example of Hong Kong and Singapore, where there is a hundred percent equity for FDI in the banking and financial sector. We should be liberal in opening up the agriculture sector and defense-related logistic productions for FDI, keeping in view the vast market in China and India. We also need to enhance our strength in infrastructure to ensure seamless connectivity to Indian and Chinese ports. However, these plans cannot be implemented immediately.
Immediate intervention needed from the government is employment generation for accelerating economic activities through consumption and income generation. Employment opportunities should be focused on rural areas where the impact of Covid is comparatively low. The implementation of infrastructure projects leads to employment opportunities for locals. The government should also simultaneously develop health infrastructures, robust treatment systems, and relevant researches through increased investment, and enhanced implementation capacity.

Despite the adverse situation, have you seen any opportunities presented by the pandemic in Nepal?
The pandemic offered two opportunities for the better. First, the tourism sector felt the importance of domestic tourists and offered handsome packages to local tourists, unlike in the past when locals used to be ignored. This changed marketing strategy is visible in many tourist destinations, including Pokhara, Chitwan, Lumbini, and some trekking routes where hotels targeted local tourists by providing low price offers on Nepali foods and Nepali style accommodations. Tourism entrepreneurs have realized that the backbone to Nepal’s tourism is domestic tourists and foreign tourists are only adding value. Second, online trading businesses have dramatically increased. The delivery business has significantly increased, and the trend has continued even when the impact of Covid-19 was slowing. Even tax payments and receipts are increasingly made through the online system. However, the industrial sector missed the opportunity to robotize unskilled work and switch to online systems.

What should be the government’s priorities and programs in the upcoming budget?
The government’s priority should be saving the lives of people, given the growing number of infections and fatalities. We can’t predict the future course of the pandemic. The government should focus its priority on accelerating the rollout of vaccines, along with an accessible treatment system. Secondly, we have to develop economic resilience, keeping in view the crises that emerges every few years. Fortunately, our economy is relatively resilient due to a survival-based agriculture-dominated economy that is less connected to global trade networks. But, it is time to diversify the economy beyond agriculture and other traditional sectors. The government should set out favorable policies and develop the necessary infrastructure to support the resilience of this sector. We have to prioritize sectors that are resilient even during the crisis. We need to explore the measures that bring down the cost of doing business, waiving unnecessary taxes, excise duties, and royalties to pave the way for the growth of associated sectors. For example, if we liberalize tax in the IT sector or telecom sector, associated sectors such as e-commerce, banking, financial services will grow with the prospect of collecting higher taxes. However, these measures are only not sufficient. In the long run, we need to encourage foreign investment to fill the investment gap of around NPR 700 billion annually given the requirement of NPR 2,025 billion. We need to remove FDI constraints through policy reforms and infrastructure development. We need to be liberal to attract FDI in every area, except for sensitive areas.

How are you evaluating Nepal’s private sector? How can they orient themselves toward industrialization?
Until the early 1990s, Nepal’s private sector was limited to a few corporate houses, which were protected by power centers. They were not established because of their business expertise and entrepreneurial capacity. With the inception of an open liberal economy in the country in the early 1990s, the government opened various sectors of the economy. However, it took years to witness the full-fledged involvement of the Nepali private sector in business in a newfound business environment. For example, we had to wait several years to see Nepali power producers and aviation operators thrive. The decade-long Maoist insurgency followed by prolonged political transition hurt Nepal’s FDI prospects. However, retail business, travel-tourism, financial services, IT, fashion business, media, and cinema making are among the fast-growing sectors.

Since you have held senior positions in the bureaucracy, what problems have you identified within the bureaucracy regarding the promotion of private investment in Nepal?
In the past, the general idea in bureaucracy was that the private sector is merely composed of profiteers. However, over time, the perception among government officials towards the private sector has gradually grown positive. Now government officials feel that the private sector is the major player in production, distribution, trading, services, and national revenue. As a result, the private sector has been represented in different government bodies, including the Investment Board and the Revenue Board. We need to change the overall mindset in bureaucracy. We need to encourage the private sector to invest, generate employment and contribute to revenue, by creating a favorable business climate because without the involvement of the private sector our economy cannot move ahead.

You played a key role in the creation of IBN. What would you advise IBN so that it can play an instrumental role in increasing FDI in Nepal?
In recent days, IBN seems to be more active and we want proactiveness from IBN to solicit investment for solid game-changer projects. However, IBN should build its capacity for timely procurement, facilitation, and development of projects to attract foreign investors. I think IBN should focus on preparing a list of projects and their studies before approaching prospective foreign investors and offer various incentives. Even the National Priority Projects have been much-hyped but not delivered in time. Hence, we need to focus on the delivery of projects by making a concrete project solicitation process.

You played a key role in the creation of IBN. What would you advise IBN so that it can play an instrumental role in increasing FDI in Nepal?
In recent days, IBN seems to be more active and we want proactiveness from IBN to solicit investment for solid game-changer projects. However, IBN should build its capacity for timely procurement, facilitation, and development of projects to attract foreign investors. I think IBN should focus on preparing a list of projects and their studies before approaching prospective foreign investors and offer various incentives. Even the National Priority Projects have been much-hyped but not delivered in time. Hence, we need to focus on the delivery of projects by making a concrete project solicitation process.

What are your thoughts on Public-Private Partnership (PPP) in Nepal? How can Nepal benefit from this modality? Or can you suggest any other modalities to best harness our natural resources through private investment?
In recent days, IBN seems to be more active and we want proactiveness from IBN to solicit investment for solid game-changer projects. However, IBN should build its capacity for timely procurement, facilitation, and development of projects to attract foreign investors. I think IBN should focus on preparing a list of projects and their studies before approaching prospective foreign investors and offer various incentives. Even the National Priority Projects have been much-hyped but not delivered in time. Hence, we need to focus on the delivery of projects by making a concrete project solicitation process. ♦