Post-lockdown comeback for Nepal’s industries

Despite unreliable electricity, dependency on imported raw materials, and lack of skilled labour, a new report paints an optimistic picture as Nepal’s economy kick starts again after the pandemic.

For its first ‘Industry Status Report’, The Confederation of Nepalese Industries (CNI)  interviewed almost 20,000 employees spanning 47 industries in the agriculture, energy, manufacturing, and service sectors from mid-April to mid-July. CNI says it hopes the report will serve as a tool for evidence-driven policymaking.

“In a low-middle income country like Nepal, with limited resources and multiple policy priorities, the opportunity costs of mismanaging resources are dire,” says Nirnaya Bhatta at CNI, who is also a policy consultant with the World Bank Group. “Data and analysis, rather than rhetoric, should be the basis of any development discourse.”

The current fiscal year has seen an 8% growth in revenue, largely due to the ongoing recovery from the pandemic. The energy sector saw an increase of 82% in sales growth  and remained at an impressive 81.5% capacity utilisation.

On average, however, the industry capacity utilisation across the four sectors was only 64.8%. Yet, the industrialists remain undeterred with 83% responding that they were ready to make new investments in the first quarter of the coming fiscal year, indicating their confidence in the economy recovering from the pandemic.

Almost 95% of respondents in agro industries and manufacturing say that their products are competitive in the market in relation to imported goods.  The only exception was in companies manfacturing electrical wire and accessories who indicated that their products were not competitive at all with imported items.

However, the report does prove the reliance of Nepali industries on imported raw materials. Both agro and manufacturing sectors say they source over half their required raw materials from abroad. Such dependency leaves these industries vulnerable to unforeseen changes such as blockades, and sudden currency swings.

The report also points out a lack of government support and incentives. In the manufacturing industry, there was an average of 10.7% import tariffs on raw materials – compared to only 5.8% average tariffs on imported finished goods. This disincentivises local businesses since importing finished goods is cheaper and requires far less capital investment.

The ecosystem the industries have to function in has also presented setbacks in multiple stages of the production process. On average, the industries experienced 8.8 power outages a week compelling almost 70% of the respondents to use generators. This has led to a 4.9% increase, on average, of monthly costs to these industries.

Similarly, transportation and storage also pose significant problems, especially in the agro-industry where the report found one-fifth of goods produced were damaged during domestic transportation and storage, leading to food waste.

The report then transitions into the energy sector and Nepal’s prospects for decarbonisation to meet its Nationally Determined Contribution to address the climate crisis. Most of Nepal’s carbon footprint is from household fuel burning, so reducing emissions by transitioning to electricity is critical to making Nepal’s of net zero by 2050.

Nepal doubles carbon footprint, Nepali Times

Electricity sales grew an average of 7% per year from 2013-2015, and after the end of power cuts grew to 20% between 2017 and 2019. Professor Amrit Nakarmi, who is on the Advisory Panel of the Energy Development Council, says in the report: “We have to put in place the right incentives for households, industries, and transport systems to adopt cleaner forms of energy… reducing emissions at the household level is critical to achieving Nepal’s goals of a low-carbon based economy.”

Presently, 60% of Nepal’s power generation comes from the private sector, which is leading the way in energy.

“Unbundling the NEA (Nepal Electricity Authority) and making a more efficient and stronger power sector through privatisation is the need of the hour,” says Ashish Garg of the Independent Power Production Association of Nepal (IPPAN).

Nepal currently imports Rs36 billion worth of LPG, much of which is for household use. Switching to electricity-based cooking would not only result in Nepalis using the cleanest and cheapest form of energy for cooking but would also help tackle the large deficit the country is in.

Gyanendra Lal Pradhan, chair of the Energy Development Council at CNI says that double-digit economic growth is only possible through the aggressive development of domestic hydropower.

The deficit can be tackled by cross-border power trade in which Nepal’s hydropower surplus can be exported to India. Pradhan also suggests providing loans at a base rate for peaking run-of-the-river and storage-based hydropower projects. Since these projects take decades to build, a steady stream of financial capital should be made available to ensure their timely and effective completion.

“Hydropower has high environmental dividend, irrigation and flood-control benefits, and 90% value addition in the country. Why not reap the transformational benefits associated with hydropower development? With the right commitment for the future, hydro-based electricity can power the nation,” Pradhan concludes.

Read also : Nepal’s first hydropower from a glacial lake, Kunda Dixit