SANGAM

‘Budget should be practical, target oriented’
By Sangam Prasain

The count down for Nepalese budget for the fiscal year 2066/67 has begun. The 22-party interim coalition government is going to present the budget under the CPN-UML leadership in the second week of July 2009.
Nepalese Government has planned to achieve rapid economic growth by increasing agriculture activity putting a full emphasis to the business and economic sector and ensuring a business-investment friendly atmospheres to the private sector.
However, there are various hitches and obstacles hindering to speed up the economic growth, generating employment opportunities and improving the living standards of the Nepalese people.
At the crucial time, when Nepal’s Gross Domestic Product (GDP) growth rate is sliding downwards and the country is facing extreme power shortage, wide trade deficits, insecurity and many emerging problems the business community have come up with a common consensus that the government should focus on arresting further economic deceleration and offer favorable fiscal and monetary policy to revitalise and confidence build up of the private sector.
Corresponding with The Rising Nepal three private sector heads, Kush Kumar Joshi, president of Federation of Nepalese Chamber of Commerce and Industry (FNCCI), an umbrella organisation of the business communities along with Surendra Bir Malakar, president of Nepal Chamber of Commerce (NCC), Binod Chaudhary, president of Confederation of Nepalese Industries (CNI) voiced for improving investment climate, security situation, rule of law, good governance, ending bureaucratic hassles and providing relief and concessions in the duty structures for the reconstruction of Nepalese economy. Excerpts

The government is in the process of announcing a new budget. What are the expectations of the private sector?
Joshi: Private sector these days are seriously unsecured due to the political instability, which really encouraging the culture of strikes, the mass effect of this culture is making people completely unproductive and country is heading towards negative GDP growth rate. On top of that energy crisis, labour unrest are adding to negative growth. The government should focus on arresting further economic deceleration and offer favorable fiscal and monetary policy to revitalise and confidence build up of the private sector.
Coming budget should focus on improving investment climate in the country. Commitment for improving security situation, rule of law, good governance and bureaucratic hassles are the issue of high priority of private sector at the moment. Promulgation of new Industrial Policy, Foreign investment promotion policy, Commercial policy and Labour policy compatible with the regional and WTO agreement need to be addressed as soon as possible including the corresponding Act and rules.

Malakar: Nepal Chamber of Commerce expects the budget to be more practical and target oriented. We hope that the budget will incorporate more long-term projects and programmes which have lasting positive effect in economy rather than short-term benefits. Similarly, we believe this budget will focus on the development of rural areas and rural economy thereafter focusing on the creation of employment by private sector/industrial development so that younger generation does not have to migrate for better job opportunity.
Peace is requisite for economic development. Without sustainable peace, no business can flourish and without business, economic development is a distant dream.
The government has shown positive reaction to abolish the syndicate system and scrap ‘scrap tax’. So, we believe that this budget will finally announce the abolishment of these two systems and tax and provide relief to the citizens from spiraling prices and hindrances of supply of necessary commodities.

Chaudhary: In order to achieve a high growth rate we need external investments and our key sectors must perform well. Therefore, we expect the budget to facilitate the establishment of an investment friendly climate and focus on making the manufacturing, export, tourism, forest and agro based industry; hydropower, mines and mineral based industry sectors more vibrant.

Do you think that the upcoming budget will give priority to industrial and infrastructure development?
Joshi: We have been advocating higher public capital expenditure in developing basic infrastructure which facilitates development and investment climate in the country.
We have also greatly suffered from poor infrastructure in roads, airports, energy and irrigation. We are facing 16 hours load shedding a day, and we will face the same situation after the rainy season.
Industrial development is primarily concerned with employment opportunity, economic growth, and economic activities. At present, general export is declining, industries are closing down and real estate sector is in very critical condition. Thus, upcoming budget should give special focus to industrial sector’s rehabilitation and refurbishment by providing special package.

Malakar: Well, it has to. If the government wants the economic revolution in the country, then it should give priority to industrial and infrastructure development. And, we believe that the government will give its priority. In many fora and discussions, the government has expressed their commitments to work with the private sector in economic development, and we believe that government will stand on their vows and words.

Chaudhary: Keeping in mind the fact that creation of jobs on a large scale should be our priority and these are the sectors that can create more jobs. I am sure that these sectors will receive priority.

The business community has recommended for a multiple VAT system. How will this VAT system be more effective for the government to generate more revenues?
Joshi: Different surveys have indicated more than 50 per cent illegal trade is taking in the country mainly due to open border with India which causes loss in revenue not only in VAT but also in custom duty, excise, and income taxes. This situation has been encouraging unauthorised practices and discouraged healthy trade.

India imposes 4 per cent VAT in some items and Nepal imposing 13 VAT in the same items, has also encouraged unauthorised trade with India. There are also many items in Nepal which are exempted from VAT, therefore we recommended Multiple VAT system to bring equal level of playing field so that healthy tax system shall prevail. Our study and analysis shows that the multiple VAT system will result in increased revenue to the government.

Malakar: The flat VAT system has not been that much effective and has become one of the most contentious taxes in Nepal. Hence, the private sector has lobbied for the implementation of multiple VAT rates, so that it becomes the sole source of revenue and generates more revenue for the government.
Due to major complications in this flat VAT system, private sectors are not able to provide VAT invoices during each transaction. We believe, after the simplification in the VAT system and implementation of multiple VAT rates of 0, 1, 4 and 13, it would be much easier to issue invoices and the issuance of VAT invoices will also rise in numbers.

Chaudhary: The multiple VAT system will increase tax compliance and discourage informal trade which will ultimately result in greater revenue earnings for the Government in the long run. For the private sector, it will mean that their products will be a little bit more cost competitive.

It is said that economic scenario of Nepal has improved at the present. What is your view on this? Do you see any important role of the private sector in such an achievement?
Joshi: We have been hearing the revenue target have been achieved but other economic indicators are not in satisfactory situation. Till this date, government is not in a position to spend more than 33 per cent of total capital expenditure.
There is less than one percent inflation rate in India but in Nepal it is in two digits. Export is declining, real estate sector performance is going down, and no improvement in investment, economic activities and economic growth is seen. Private sector has been very worried and eager to improve the current meltdown situation. To improve the current scenario only private sector can not cope, hence, government should step in to act in a timely manner to reduce power crises, labour unrest and should facilitate and provide measures to create confidence in the private sector.

Malakar: I don’t think the overall economic scenario has improved in Nepal. Yes, certain aspects of the economy have certainly improved. In this regard, we can take the example of revenue collection. In the last nine months of this fiscal year the revenue collection increased by 39.3 per cent from the last year’s 25.1 per cent. Similarly, the export has also increased.
But what we have forgotten is that the business environment has been deteriorating every seconds and the confidence of business has been decreasing day by day. Whenever you leaf through the daily papers you will find the news of extortion, kidnappings, and attacks on the private sector as well as news of chakka jams, bandas and strikes. In this background, how can one say that the economic scenario has improved in Nepal?
Just recently, we heard that the rate of capital flight has increased by many fold and the amount of deposit in the international bank by Nepalese people has also increased. If, the economic scenario has been sound enough in Nepal, then how can more and more people deposit their wealth in other countries? Is this the sign of economic improvement?
Similarly, you can judge the economic condition of the country by the number of oversubscriptions that the IPOs have received. In every IPOs, there is always an oversubscription of more than 8-10 times. This shows that there is no investment environment in Nepal and that’s why people prefer low risk, low return investment.

Chaudhary: The increase in revenue collection, export growth, increase in Foreign Exchange reserves and a healthier Balance of Payment (BoP) are definitely encouraging indicators. The aviation, hospitality and other tourism related sectors are really doing well. We understand the housing sector is booming. The robust health of the banking sector and the increase in Stock Market Capitalisation are also encouraging.
However, equally worrying is the fact that some critical sectors like Carpet, Garment and Pashmina sectors are in bad shape. Due to the energy crisis as well as the regular bandhs, strikes, chakka jams and labour disputes manufacturing sector is not in a good shape as some of the industries are on the verge of closure.
Even during the height conflict period, we had a GDP growth rate of around 3 per cent. It is my belief that the private sector contribution was a major factor for this. Therefore, the role of the private sector will always be important in economic growth and development.

What do you think are the major economic challenges for the government and the private sector in the coming days? How could the Public Private Partnership (PPP) be more effective for higher economic growth?
Joshi: To repeat it again, security situation and absence of rule of law are a major challenge at present. Similarly, low economic activities, phenomenal power crisis, labour unrest, limited infrastructure facilities and investment climate are also major challenges.
Private sector are interested to expand investment in health, education sector and are ready to invest in infrastructure such as hydropower, highways and fast track roads, rope ways, airports. In such a situation, the government should by all means encourage the private sector investment with the PPP models which needs to look upon revision on government policy.

Malakar: The major economic challenges for government and private sector in the coming days will be the political stability in the country. Even though 22 political parties are in the government, the leading and one of the major party, UNCP (Maoist), is still in the opposition bench. Unless the national, consensus and unified government are formed, we doubt there will ever be a political stability in this country.
Similarly, the other economic challenge, I personally feel, is going to be the climate change. We have already faced some of the effects of climate change in agriculture sector and environment. Unless the government of Nepal does some thing to tackle this now, climate change is going to be the major headache for government as well as the private sector.
For a country like Nepal, PPP is the best model for economic growth and infrastructure development. But this model should be used effectively in order to reap more benefits; otherwise it will create lot of problems. I believe that the role and responsibility of both partners should be clearly and articulately defined before implementing it.

Chaudhary: Generating jobs and economic opportunities to meet the enhanced level of expectation of the common man, uplifting the rural economy in order to achieve an inclusive growth, tackling inflation and surging prices of essential commodities, managing fiscal deficits, directing remittances towards the productive sectors, attracting external investments needed to support high growth rate and funding of the much needed large development infrastructure projects.

PPP could be an effective model for growth in Nepal, provided the Government play the role of a facilitator and the private sector take the responsibility of good partnership.

Political transition, insecurity, power crisis and widening trade deficits have been the major obstacles to the business community. In such a situation, what sort of commitment does the business community expect from the government?

Joshi: All political parties should reach common consensus to formulate constitution as soon as possible to transform to a stable state from present lingering transition period and political uncertainty. I am of the opinion that all party should think and give thrust to national issues first rather than to petty issues. In order to reduce power crisis, we have been suggesting to the government to review licensing system, PPA process and provide state of art facilitation and environment to attract foreign investment which is highly needed to implement mega power projects.
On the front of reducing trade deficits, government needs to bring improvement in the indigenous industrial production climate and encourage export oriented and high value adding industries. Mechanism to implement and facilitate the operation of the long talked about Special Economic Zone (SEZ), Export Processing Zone (EPZ) and Private Export Houses (PEH) should be initiated in the upcoming budget.

Malakar: You are very right to note that political transition, insecurity, power crisis and widening trade deficits have been the major obstacles to the business community. And, to tell you, Nepalese private sectors have shown their resilience to work even in the worst situation. So, I think, business community will overcome such obstacles in the future also. But, what we expect from our government is to secure our rights to do business smoothly and in peace of mind.
We want to do business and don’t want to engage our time and mind in labour disputes because of the rigid labour policy; close our business because of some strikes, bandhs and road blockades; and take our investment away from here due to insecurity of ourselves and our investment. So, we expect the government to commit to end all these problems.

Chaudhary: The Government together with all the major political parties should come up with a common economic agenda and all should make a commitment to adhere to it and keep it in the centre stage at all times.

The government should take the initiative to convince all the political Parties to make a commitment to keep politics out of economic activities and the workplace. Government must strictly enforce the rule of law and keep the supply chain free of all obstacles and it should make a commitment to encourage the private sector to take the lead in the areas of economic growth and development.

How could Nepal’s economy be self driven by its own resources? Do you have any suggestions?
Joshi: Due to climatic and geo physical diversities, we are endowed with rich and perennial natural resources. Our serene valleys, mountains, plain areas, rivers, forests, horticulture, livestock and agricultural products command a large spectrum of opportunity and potentiality. Our economic development strategy and industrial sector development paradigm should be charted on the basis of our resources and competitiveness. High value agriculture products, herbal and non-timber forest products, tourism, hydro power generation, service sectors including medical education, hospitals, ICT etc., can be our forte. Consistent policies and longer term perspective should be the guiding road map to focus on development of these Nepalese niche products with competitive advantages.

Malakar: Nepal is very rich in natural resources like water, forests and minerals. But unfortunately, we have not been able to explore the possibilities and get benefit from these resources. Similarly, Nepal is rich in varied bio-diversity and we have deposits of mineral resources that can be economically exploited.
If Nepal wants to drive its economy by its own resources, then we need a long-term vision/programme and the commitment from all factors of the society. The government and the private sector cannot explore the possibilities of these resources on their own. Government and private sector need to work together to reap benefits out of these resources.

Chaudhary: Fully self driven may be a bit too optimistic. However, if we were to develop 10,000 MW hydropower within the next 10 years and develop at least 2,000 MW every year thereafter would be sufficient for driving our domestic economic growth as well as meeting export opportunities.
Similarly, we have to encourage and incentives to cement factories. We have enough Limestone, herbs and medicinal plants, mines and mineral in Nepal to make it self sufficient in cement.
We have to encourage people to utilise unused land for fruit plantations and orchards in the plains as well as mid – hills.