As I prepare to depart from Nepal after three years, I am faced with an excellent opportunity to reflect. I have visited over 40 districts, and witnessed Nepali citizens making great progress to recover from a devastating earthquake and restrictive blockade. I have also seen Nepal adopt a new constitution, hold local and national elections, and successfully seat a democratically elected government.
Nepal is at a point of tremendous opportunity, to transform its economy into a globally competitive, and in this transformation, the government, businesses, and ordinary people all have a role to play. But first, Nepal must answer a basic question. Will Nepal continue as it always has, or will Nepal make a transformational jump to an economy of the future?
Nepal’s economy itself is currently an impediment to economic growth. It is small scale and with fundamentals not suited for the acceleration needed to reach middle-income status. Although Nepal’s nominal GDP is up almost $4 billion in the last year, the average per capita income is still just $850, the lowest in South Asia.
Incomes remain low because sectors that are thriving, like agriculture and carpets, are low wage, low productivity, and low return sectors. Further, remittances comprise approximately 30% of Nepal’s GDP, and an import-heavy, consumption-led economy continues to drive Nepal’s trade deficit higher and drain resources away from investment.
Despite these realities, Nepal has huge potential to achieve more rapid and sustainable growth. Nepal’s hydropower industry has an estimated 40,000 megawatts of commercially viable potential. The agriculture sector employs almost 66% of the population, and amounts to almost 29% of GDP. The tourism industry is poised to become a powerful new addition to the economy. Although Nepal currently ranks 117th globally in terms of tourism as a percentage of GDP, foreign tourism in Nepal between January and June of 2018 is up 13% from last year.
But potential alone is not enough to transform Nepal’s economy. Nepal has to tap into non-traditional, higher value, higher wage, export-focused sectors to break from the old mould. New industries like commerce, information technology, creative industries, light manufacturing of components and electronics, and agricultural processing.
According to the World Bank’s Ease of Doing Business Report, Nepal ranks 105th in the world. Nepal must resolve numerous infrastructure constraints, and improve workforce competency to achieve this transformation.With a clear understanding of the current state of economic affairs, what specifically will hold Nepal back?
In one word, risk. Nepal cannot hope to transition to a middle-income economy by 2030 if it does not address several critical risks that arrest its economy. First, Nepal must face corruption directly. Currently, the economy is hobbled by restricted markets, cartels and syndicates, and rent-seeking behavior patterns in both the public and private sectors.
Second, Nepal currently has insufficient banking oversight, and provides limited access to capital. For example, borrowers have to produce $3.6 for every dollar borrowed as collateral. The global average is $2. This is unacceptable and will continue to arrest meaningful economic growth if left unchanged.
Third, Nepal continues extensive practices that result in the social exclusion of women and other groups. Numerous international studies relying on objective data have shown unequivocally that the failure to successfully and systematically bring women fully into the economy will retard the pace of economic growth.
Finally, Nepal has an unattractive investment climate. The investment that does occur in Nepal is of the wrong kind that does not go to higher value sectors, it exacerbates corruption, and it continues to drive an import-led economy.
Simply put, progressive, stable, and lucrative growth toward a middle-income economy depends on attracting both domestic and foreign investment and allowing for competitive innovation. So how does Nepal attract those investors? First and foremost, by committing to having predictable, consistent, and enforced laws and procedures that are not based on subjective decisions and personal relationships.
In addition, Nepal must commit to maintaining an independent free market, unrestricted by cartels. Government monopolies and sectoral restrictions only serve to crowd out investors who are already not attracted. This means the government must adjust its approach to a future of managing, rather than controlling, the market.
Nepal must also adopt and enforce protections for intellectual property rights. It must make all processes affiliated with foreign investment streamlined, transparent, and accessible: improve regimes for registration, taxation, and licensing of new businesses created by foreign investment. Immigration and visa processes, policies, and proceduresmust remove unnecessary and cumbersome barriers for foreign investors.
But recognition of badly needed reforms is not enough. The reforms implemented must transcend the merely adequate in order for Nepal to be globally competitive. The Foreign Investment Act, for example, is an opportunity to set Nepal up to be not merely competitive in the global economy, but to be a progressive participant and leader of the economy of the future. Though the draft legislation contains many admirable points, if it is to be an effective vehicle for attracting foreign direct investment, it must adopt several critical improvements.
It must provide for automatic approval of foreign investments based on clear and objective criteria. Removing barriers to entry is the first step in convincing foreign investors to enter a new market. The legislation must ensure foreign investors’ access to capital markets. Without clear access to capital markets, foreign investors will be wary of investing heavily in high-value sectors. It must facilitate reinvestment in existing business, because the true value of attracting foreign direct investment arises when that foreign investment begins to facilitate perpetual and self-sustained domestic business. It must allow for unlimited repatriation of foreign investment and earnings. FDI will not exist in any meaningful way if the investors cannot repatriate their earnings.
The legislation must also outline predictable and dependable dispute resolution and arbitration processes, allowing for international dispute resolution. Foreign investors will not spend money in Nepal if they know that their ventures will not be protected by predictable laws and international business norms. Finally, the legislation must eliminate problematic restrictions in key areas, like agro-business and e-commerce.
Nepal has several key advantages upon which to build: low unemployment, manageable debt, available resources, and low spending habits. In fact, Nepal has an established practice of not spending all of its available budget! Nepal can, and should, take full advantage of any opportunity to tie itself into the growing regional economy of South Asia. Perhaps one of the strongest attributes of Nepal is the willingness of a wealthy donor community to engage in developing Nepal’s self-reliance, specifically in terms of enhancing sustainable economic growth and improving the investment environment. Nepal must remember, though, development assistance is not about dependency; it is about sustainable and inclusive independence.
The new government brings great potential for political and policy stability, as well as the time to implement policies that no other government has seen in Nepal in a generation. So far, the new government is saying the right things. It is recognising the need to increase foreign investment, stem the reliance on a remittance-supported, consumption-led growth model, protect intellectual property, and expand infrastructure and regional connectivity. But we still need to see a concrete manifestation of the government’s words. Mostly, I am hopeful because of the creativity, innovation, and ingenuity of Nepalis, who see the potential of the country and are playing an active role to realize it, despite all the challenges.
Nepal must not only envision the economy of the future but also create an environment for a transformational jump. The government has a role to play to draft, pass, and implement reforms, while keeping its own rent-seeking and control-impulses at bay. The private sector and ordinary citizens also have an obligation. Only a multi-faceted, consultative approach will push Nepal toward its goals of a prosperous, progressive, and self-reliant economy of the future.
Excerpts from speech by outgoing US Ambassador Alaina B Teplitz at NEF Talk on 24 July.