31 July - 6 Aug 2015 #769

Jump-starting the economy

... but strong leadership and an independent Reconstruction Authority needed first
Sarthak Mani Sharma

At a meeting this week organised by the Asian Development Bank (ADB) to review the effectiveness of its loans and grants to Nepal, the Manila-based institution’s Director General Hun Kim couldn’t hide his frustration about delays in project implementation. That concern is now also spreading to the speed and effectiveness of proposed assistance for earthquake reconstruction.

“We will suspend, even cancel loans now,” Hun bluntly told the gathering. For proof of just how slow things are to get off the ground in Nepal, one needn’t look beyond the Melamchi Water Supply Project. The project was first conceived three decades ago and has been under construction for 15 years. But only half of the 26 km tunnel to augment Kathmandu Valley’s water supply has been completed. Progress in other ADB projects in hydropower, airports and highways is also slow with much of the allotted money still undisbursed.

The fear is that the same problems will plague reconstruction activities. After the Conference on Nepal’s Reconstruction on 25 June, many expected the pledged $4.4 billion to speed up earthquake rehabilitation and jump-start Nepal’s stagnant economy.

But more than three months after the earthquake and a month after the conference, the Reconstruction Authority has not even been set up yet because of a dispute between the NC and the UML about who should get to head the reconstruction agency and who should replace the chief secretary when he retires. The government presented an ambitious budget earlier this month, but there are no concrete plans in it to expedite spending.

To be sure, most countries show accelerated economic growth after a disaster because the construction boom ends up injecting cash into the economy. But for that to happen, the right policies have to be in place for job creation, providing incentives to investors and curbing corruption. Which is why the ADB’s economic growth forecast has actually been lowered from 5.1 per cent to 4.5 per cent.

This year’s budget has a 140 per cent increase from last year in planned capital spending, which is crucial to growth. However, because of corruption and chronic mismanagement, up to three-quarters of the development budget year after year remains unspent, and it has become a tradition that 60 percent of the budget is spent hastily in the last quarter of the fiscal year.

Chandan Sapkota, an economist at the ADB, says change is needed: “The usual way of doing business must end. Bureaucratic hassles, including a lack of coordination within and between ministries, must be dealt with. There must also be sufficient planning and readiness to implement projects.”

Finance Secretary Suman Sharma says his ministry has made arrangements to ensure that the budget is fully utilised this year. “Those projects which have not started work until the second quarter will be ended, for example. The surrendered budget will be reallocated to other performing projects,” he told Nepali Times.

The budget is just one challenge for the government. Managing inflation will be another critical test. Because of heightened investment activity, supply-side constraints and the government’s plans to distribute cash grants to victims of the quake, inflation is expected to rise. This year, Nepal Rastra Bank plans to cap inflation at 8.5 per cent, an ambitious target. In recent years, the inflation rate has stayed above 8 per cent, and the only reason it was lower than in the last fiscal year was because of plummeting oil prices.

Although some macroeconomic indicators are sound, trade and investment don’t look promising. Even before the earthquake, exports experienced negative growth and imports were 11 times higher than exports. The current account surplus, almost singlehandedly sustained by remittances, will now decrease or even turn into a deficit mostly because of an increase in demand for construction material. Manufacturing has taken a hit, both because there is a shortage of labour and because there is reduced foreign demand. More than 20 hydropower projects have been damaged because of the quake, and this will add to the economic woes.

Few of the business-friendly policies presented in last year’s budget have been implemented. The term ‘socialism-oriented’ economic model in the draft constitution has also spread disquiet among private investors.

However, the lessons from Sri Lanka, Indonesia and Thailand after the Asian tsunami 2004 prove that countries don’t just recover from disasters but actually experience an economic boom. Says Kenichi Yokoyama, ADB’s Nepal Country Director: “All that is required is a mix of strong leadership and concrete changes.”

Read also

Ruin in the rain, Sahina Shrestha

The lost decade-and-half

Economy first

Aftershocks in a migrant economy

It's the economy

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