Why the private sector is spooked
The market has gone into a tailspin as the private sector awaits the Communist government's economic roadmap
The Rastra Bank has injected Rs15 billion in new currency notes since mid-February, which is the highest amount ever pumped into the economy in just one month.
But the share market has hit a new low, remittance is down to alarmingly low levels despite migrant workers earning more overseas, and despite the promise of economic upturn.
At the core of the crisis is the new united Communist government’s inability to clearly state what its economic policy is. There is hope for growth and development, but there is also fear for tighter regulations.
On 15 February, when UML Chair KP Oli was sworn in as new prime minister, there was Rs461 billion in circulation, and the Rastra Bank topped it up. But where has the money vanished?
The NRB officials say businessmen and traders here are hoarding currency, because they still don’t trust Indian currency after India's demonetisation drive in 2016. The demand for Indian bills has plummeted -- from INR500 million to INR150 million a day.
But that is not the only reason. Nepali businessmen and traders are dealing more in the informal economy, and even channeling funds into India fearing tighter measures at home.
After the Left Alliance won a landslide in last year's elections, the share market has crashed 300 points. Big players in this sector are fast divesting, and mutual funds are stagnant.
A trader told Nepali Times: "Those who had been simultaneously running businesses in Nepal and India are slowly withdrawing from here."
The number of outbound migrant workers has declined, but it is still higher than returnees. Their salaries have increased in most countries in recent months, but remittance inflows have been going down except for a slight growth in January.
Analysts suspect migrant workers’ earnings are coming through illegal channels like ‘hundi’ paying their families here in Nepali currency. Hundi operators are abetting capital flight, and aggravating the credit crunch.
Prime Minister Oli's party won a landslide in last year's elections on the promise of economic growth. But he is finding it difficult to reassure investors. At a South Asian business conclave in Kathmandu last week, Oli said his government will partner with the private sector, but looks like there is a lot of nervousness.
Oli's selection of Finance Minister Yuba Raj Khatiwada and Industry Minister Matrika Yadav did not reassure the private sector. Both are considered market unfriendly. Khatiwada has already upset businessmen by introducing a new measure to fix customs duties to supposedly discourage tax evasion.
Shekhar Golchha, Vice Chair of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), says: "The private sector is suspicious of the Communist government because of its political ideology, but we should wait until it unveils its economic roadmap."
“When Malaysian Ex-Prime Minister Mahathir Mohamad visited Kathmandu in 2014, I asked him about the essence of the Malaysian model of development. His reply: "The State acted as a facilitator, encouraging the private sector to accelerate economic growth."
In Nepal, I was given the runaround for four months to have an Environment Impact Assessment approved. If the government wants to encourage the private sector to drive economic growth, it must end this rent-seeking culture. The private sector may have its own flaws, but it is the real players in any economy.”
Vice Chair, FNCCI
“There are as many as 26 laws that regulate Nepali industries and businesses. Can we not just have one integrated law? The private sector is often accused of running cartels to earn more profits, which may be true to an extent. The government must do away with syndicates, but the entire private sector should not be painted with the same brush.
Nepal has seen the rise of the new rich in the last two decades of political instability. They have always had an easy access to the power corridors, and have been allowed to plunder resources. The new government must stay away from them.”
Hari Bhakta Sharma
Chair, Confederation of Nepalese Industries
“The end of the political transition is encouraging, but the new government must clearly tell us what role it expects from us, how it intends to partner with us and what it will do to remove policy hurdles. We are in a state of wait and see. The government has always been keen to increase revenue collection. It has done little to help us. We face a lot of bureaucratic hassles even to obtain approval for a simple commercial advertisement of our products. Now we hear that some local governments are imposing more taxes on local industries and even shutting down some banks. That only increases our fear.”
“More than 500,000 Nepali youth enter the labour market every year. Only 20% of them get jobs within the country, only 7% them in the formal sector. The base of a digital economy has been created in Nepal, and the government must capitalise on it. It must promote e-commerce to control tax evasion and reduce the size of information economy.”
“If the government views the private sector as an engine of economic growth, it must trust us. The government should facilitate business, not get into it itself. That is our job. We finally have a stable government, and many industrialists and businessmen are encouraged to invest more. But a lot will depend on what the new government's economic policy will be, and how it will engage us.”
Crunching the numbers on credit, Ramesh Kumar and Sikuma Rai
Bottom-up approach, Siddhant Raj Pandey
Banking crisis explained, Suman Joshi