“Economy in trouble but no need to panic yet”

Nepal’s media has been rife with comparisons between Sri Lanka and Nepal.

Madhu Kumar Marasini, Secretary at the Ministry of Finance dispels doubts as Nepalis raise questions about the state of the economy.

Nepali Times: Is Nepal going to be a Sri Lanka? 

Madhu Marasini: Nepal’s economy cannot be compared to Sri Lanka. Nepal has historically mobilised enough resources to prevent itself from going bankrupt.

As of January, Nepal has foreign exchange reserves worth Rs11.71 trillion, while the national debt stands at about Rs40.5 billion, which means we are able to pay interest on foreign loans. Whereas, Sri Lanka has Rs7 billion national debt against Rs2 billion in foreign reserves.

The nature of foreign loans taken by Nepal is also different from Sri Lanka, in that Nepal hasn’t taken out large loans or loans with high interest. Moreover, Nepal collects 23% revenue on its GDP, which becomes government spending.

However, what has happened in Sri Lanka has lessons for Nepal, what kinds of loans to take, to what extent tax should be exempt, and the consequences of indiscriminate grants.

Read also: How not to be a Sri Lanka, Editorial

Why doesn’t the government have policies to address foreign exchange reserves, lack of liquidity, and inflation?

Nepalis living abroad sent significant remittances back home during the pandemic, this meant our foreign reserves remained unchanged compared to pre-Covid days not because our exports increased. So when the worst of the pandemic was over and economic activity resumed, imports surged to meet rising demand, putting pressure on our foreign reserves.

At present, we have discouraged the import of luxury goods to reduce the pressure on foreign reserves.  Additionally, remittance accounts are now being given 1% more interest, and non-resident Nepalis can open remittance accounts by simply depositing $1,000 virtually.

The hundi remittance network was shut off during the Covid lockdowns. Nepali banks have been encouraged to expand services abroad so that remittance can come through official channels. We are also discussing setting quotas for overseas Nepalis that enable them to obtain shares in companies that facilitate remittances officially.

As far as the liquidity of the banking sector is concerned, credit flow increased although deposits did not go up significantly and has exceeded Rs4.7 trillion, while the size of our economy is Rs42.66 trillion.

Demand for loans increased as economic activity picked up after the pandemic. The refinancing services provided by Nepal Rastra Bank (NRB) also increased loans, whereas concessional loans also saw a significant rise. We have proposed increasing interest rates on loans to reduce demand. Moreover, the local elections have increased public and private spending as well as the budget, which is expected to ease liquidity crises.

It would be better to set up stricter rules for loans now, lest Nepalis have to give up their property and livelihoods to the bank in the future due to bad debts.

Lastly, we have set a 6% inflation target, but that will be challenging to maintain. Because inflation is not just unique to Nepal— it is the result of the disruption of the global supply chain. Demand has grown significantly in the wake of the pandemic, and has been exacerbated by Russia’s invasion of Ukraine— particularly the price of fuel. Rising  fuel prices have a domino effect, leading to an increase in transportation and industry costs, as well as commodity prices.

At present, there seems to be little coordination between the Finance Ministry, the NRB, and the National Planning Commission.

The Ministry of Finance, the central Bank and the Planning Commission have been holding discussions to assess the economy and find solutions to problems. We believed increased imports would mean increased economic activity, but our foreign exchange reserves could not sustain that. Additionally, we also could not have predicted global crisis such as Russia’s invasion of Ukraine.

There were other inconsistencies in the economy. For example, there is a widespread misuse of loans, Nepalis have been taking out agricultural loans to invest in real estate.  There has been increased spending in luxury goods, and instances of smuggling gold and silver to other countries. This created a perfect storm even as we were working on a long-term economic plan.

Has the government failed to curb the flow of uncontrolled debt?

In retrospect, it would be fair to say that Nepal’s policies regarding credit flow have been liberal to the detriment of the country. Credit flow needs to be controlled, because the increase has not had a positive effect on product expansion or economic growth. There is excessive monetisation in Nepal, which the 2008 global financial crisis taught us is risky.

The agricultural credit that we prioritised and subsidised has been unproductive. Questions have been raised about NRB’s capacity to oversee the payment of such loans. There is a need to increase the capacity to supervise and monitor credit flow.

How will the import control policy be effective when it simultaneously impacts the source of government revenue?

The NRB has urged banks to maintain discipline while distributing loans to make them accountable, and has suggested to tighten the import of luxury goods for the time being, not halt them altogether. The decision whether to stop or continue imports lies with the government, not the NRB.

What is astonishing is that the demand for imports and loans should decrease across the world as interest rates on loans increase, but that has not been the case in Nepal. Which is why we are thinking of employing financial tools and not monetary ones. However, we are trying to find a middle ground, as there is the risk of a double whammy to the economy if both revenue as well as foreign exchange is lost.

Read also: Ukraine crisis hits Nepal economy hard, Ramesh Kumar

What if imports continue to grow at the current rate while foreign exchange remains unchanged?

Yes but the problem is not unsolvable. This monsoon, we will have upwards of 800MW of surplus electricity. This is an opportunity for us to transition to electric transport and industry.

Furthermore, as our ability to repay our debt increases, development partners will not provide grants, but loans. This will further increase our national debt in the coming years. Failure to take advantage of our agriculture, hydropower and tourism sector to increase domestic production will indeed lead to another crisis in the near future.

Why has not there been any initiative to check tax evasion?

Ours is a liberal economy, and as such, the government always seeks honesty rather than control. Yes, the hundi network may have led to low invoicing at customs. But due to VAT, those evading taxes will most probably be caught by the time they reach the market even if they are able to avoid paying tax at customs.

Nepal’s tax rate, considering its GDP, is higher than other Asian countries. The system that is in place is working, and it is strong.

Shouldn't the government be more frugal?

I agree that the government has not been disciplined in its spending. But the expansion of our local governments has increased expenditure in recent years.

The Finance Ministry has issued an austerity policy against the establishment of new organisations, the operation of gatherings and seminars, foreign trips by authorities, and more. However, the onus of its implementation does not lie with the ministry alone, but with all government bodies.

Read also: State-sponsored economic crisis, Editorial

If the budget cannot be implemented efficiently, doesn't it make sense to change our spending system?

Yes, the current system needs to be changed. While we prepare the budget, the focus now should be on completing existing projects rather than adding new ones that we lack manpower and resources to undertake.

However, ad hocism will prevent us from making improvements to our expenditure. Indeed, we had consulted with the other ministries and set a target spending of 10% of the budget every month after September this year, but no one followed through, and eventually, all the criticism fell on the Finance Ministry.

What does the forthcoming budget offer in order to tackle the current economic crisis?

Traditional budgets do not work in times of crises, and the forthcoming one will have to reflect that fact. We will need to begin with the effective implementation of federalism, in that we will decentralise expenditure so that provinces and local governments implement necessary projects. The finance minister is clear on this.

Secondly, agriculture, tourism, hydropower, and entrepreneurship will be prioritised in order to increase domestic production, improve exports and discourage imports to stimulate the economy.

How will you dispel doubts about Nepal's economy?

The economy runs on confidence. Comparing our economy to Sri Lanka and perpetuating fear will get it into more trouble. The macroeconomic indicators of our economy remain positive.

The government is not in favour of creating havoc in the market by unnecessarily stopping imports and creating an environment where Nepalis have to line up to buy consumer goods. But Nepalis should begin buying Nepali goods, and should be disciplined enough to reduce the consumption of foreign luxury goods.

We have learned that the economy will not be sustainable unless we increase our capacity to produce. Moreover, our exports are much less than imports.

The economy is not in a favourable position, but there is no need to panic. We are not in a crisis, and we will not be in the future. The government’s short-term policies haven’t made the economy any worse. Our problems will not be solved overnight, but we have taken the initiative to find necessary solutions.

Translated by Shristi Karki from the original interview in Himalkhabar.