When Prime Minister KP Oli expanded his cabinet on Monday, he chose mostly old faces who have been ministers before — except economist Yuba Raj Khatiwada.
Ishwar Pokharel, Ram Bahadur Thapa and Matrika Yadav have all been ministers in the last decade. Khatiwada served as Nepal Rastra Bank (NRB) governor and National Planning Commission (NPC) Vice Chair in the past, but he had never been a minister. Neither is he an elected member of parliament.
Oli appointed Khatiwada as Finance Minister, sidelining many aspirants for the post including Pokharel who eventually joined the government as Defense Minister.
Khatiwada’s appointment as Finance Minister has been hailed by many as the right step taken by Oli towards saving the economy, which is in dire state in monetary, fiscal and macroeconomic terms. But others fear Khatiwada’s appointment as finance minister and his eagerness to regulate could negatively affect the real estate and capital markets.
As the news spread about Khatiwada’s appointment on Monday, the share market dipped. Despite the new Communist government promising the much-needed political stability, the Nepse index had not really gone up, which share market analysts say was partly because of rumours that Khatiwada would introduce socialist measures as finance minister.
Khatiwada is an advocate of the state acting as a regulator to the free market. In almost every one of his speeches or interviews, he has said: “Liberalism is not anarchism”. Which is why he has a reputation for being an ‘anti-liberal’ –- or even ‘a socialist’.
When Khatiwada became the head of the Central Bank in 2010, Nepal’s real estate market was witnessing the biggest boom ever. Banks were investing up to 60% of their credit reserves in real estate, causing land prices to soar. Khatiwada imposed a cap on real estate loans, bursting the real estate bubble. Speculators who had invested heavily in land for quick profits suffered, but the middle-class which wanted to buy land to build houses heaved a sigh of relief.
Bankers even called Khatiwada an ‘authoritarian’ committed to reverse Nepal’s liberal economic. Nearly a decade later, banks have found ways to circumvent the NRB cap, and the real estate market is witnessing another bubble. Khatiwada is expected to take some drastic measures to regulate banks, restrict capital flow into the real estate market.
The economy is now at an even worse condition than it was when Khatiwada was NRB governor. The trade deficit has hit an all-time high, there is the double whammy of current account and balance of payments deficits, remittance is down. The budget deficit has hit Rs 78 billion.
So Khatiwada has a high peak to climb. In an interview with Himal Khabarpatrika last month, he said: “The state must increase its role to regulate the free market which can sometimes be cruel and unfair.”
It is easy to predict some of the measures that Khatiwada will take, but Nepal’s economy is in such bad shape that even he may not be able to save it.