Finance Minister Swarnim Wagle presented the principles and priorities of the upcoming national budget in Parliament last week to unanimous endorsement. The focus was on good governance, digital service delivery, connectivity, human capital development and economic reform.
But as much as Wagle wants to present a transformative budget, he must factor in the impact of the West Asia war, Nepal’s LDC graduation deferral, and unnecessary meddling from the PMO.
His RSP manifesto set a target of 7% annual growth (from the present 4%), to raise per capita income to $3,000 (from $1,660 now) and expand the economy to $100 billion over the next five years (from$46 billion today). But the World Bank and others project a more modest 5.5% growth, and the goals for per capita income look unrealistic.
“The government has focused on transparency and the rule of law, and while those are important, increasing the capacity of the private sector is crucial,” explains Posh Raj Pandey of the South Asia Watch on Trade, Economics and Environment (SAWTEE). “Our targets for the digital economy are too ambitious, there are still 20% of people below the poverty line, and the new government hasn’t really taken climate mitigation and adaptation into account.”
Concerned over stagnant growth in recent years, the government is preparing to ask the United Nations to defer graduation to middle-income status once again, this time by three years.
Nepal was first eligible for graduation in 2015 after meeting thresholds for the Human Assets Index (HAI) and the Economic and Environmental Vulnerability Index (EVI) but not the Gross National Income (GNI) per capita criterion. The government chose to postpone the graduation following the earthquake that year.
Bangladesh similarly postponed its graduation from 2026 to 2029 citing recent political transition, severe export and trade losses due to rising global protectionism, and the conflict in West Asia.
Economist Pushkar Bajracharya recalls, “I was the one who proposed graduation from the LDC by 2030 right after the new Constitution." There was a new government in place, a lot of hope but we made a mess of it all, misutilised resources. We must graduate but Nepal will lose concessional loans and other facilities after graduation.”
Nepal also stands to lose preferential access to global markets, relaxed international trade rules and concessional foreign aid upon graduation. The graduation will mean less climate funding and negatively impact exports from small enterprises to the European market.
However, the World Bank, Asian Development Bank and the IMF which together provide 70% of concessional loans to Nepal do not consider LDC status but per capita income. LDC status also does not determine bilateral development aid, and Nepal never utilised the WTO’s LDC services waiver, among others.
Biswash Gauchan at the Institute for Integrated Development Studies (IIDS) said this week that deferral will further increase Nepal’s dependence on foreign aid at a time when international development funds are being diverted to defence.
“Remittance is the largest single contributor to poverty reduction in Nepal but it is now time to think beyond remittance. What we need is capital, which, together with FDI and technology will lead to development,” Gauchan said.
He says since the investment climate is not conducive, Nepal must tap into diaspora capital to fast-track growth by wooing well-off overseas Nepalis by meeting their demand for dual citizenship.
Posh Raj Pandey agrees that attracting foreign investment in the current environment will be near impossible: “We have a historically lowest interest rate and highest liquidity which means the private sector has no confidence. If a Nepali who understands the country hesitates to invest here, why would foreigners?”
Finance Minister Wagle says he is committed to economic reform aimed at restoring private sector confidence and creating an investment-friendly environment. But his own government is working at cross-purposes by arresting prominent CEOs and captains of industry. Not just will there be less investment, but the arrests are leading to capital flight.
In the short term, the only way to attract FDI is to clean up and simplify the process of getting permits. In the mid to longer term, policy stability is a must to manage resources like hydropower, and encourage IT exports.
Says Pushkar Bajracharya: “The investment climate hasn’t improved at all, there is still much suspicion and looming uncertainties which is not good management and governance, which is a prerequisite for business.”