It will soon be one year since Nepal’s youth-led protests led to regime change and an election in which voters placed infinite trust in a new post-ideological leadership.
Prime Minister Balendra Shah promised a lean and mean government to clean up the bureaucracy, deliver services, attract investment and create jobs. Even sceptics who believed that decades of mismanagement could not be solved in months wanted to give the RSP government a chance.
Investor sentiment had been badly dented by the arson and looting of 9 September after video clips of burning supermarkets and international hotel chains went global. There was great hope, even euphoria, that the RSP would move quickly to restore confidence with proactive policies.
But five months on, the optimism has largely evaporated in Nepal’s business community. The reason: the party and government are not on the same wavelength, ministerial actions are inconsistent, and key business figures are arrested without due process.
Following arrests of prominent industrialists, entrepreneurs, and bankers, NIMB CEO Jyoti Prakash Pandey was jailed for a loan-recovery auction of Smart Telecom’s assets, which the Nepal Telecom Authority (NTA) had seized after its license was revoked in April 2023. Warrants have been issued for other bankers.
The charge sheet alleges that the bank initiated the sale of state-controlled property, but the auction of Smart’s collateral assets was legal. There have been other arrests on similarly flimsy grounds.
“I can understand that they want to control corruption, but populist measures to get quick fixes by blatantly flouting the rule of law by apprehending business people and bankers are not going to go down very well in the long run,” says Siddhant Raj Pandey of Business Oxygen.
Pandey says that institutions that are meant to regulate the banking sector should be involved as the prime agency in such matters, not law enforcement.
Nepal’s businesses and financial sector are not without bad apples — there is profiteering, adulteration, exploitation, and political rent-seeking. But hounding business figures, raiding homes and jailing them without substantiation has cast a shadow on the economy.
Says economist Kalpana Khanal of the Policy Research Institute: “Detention without prior investigation or due process has set a bad precedent, instilling fear even among honest businesses. The crackdowns have made entrepreneurs more risk-averse and unwilling to invest in new ventures.”
All this comes on top of a prolonged shortage of cooking gas, inflation, and confusing new taxes that the Finance Ministry announced and the prime minister withdrew via a Facebook post. It does not paint the picture of a coherent government.
“There is a narrative that anyone who has earned significant money must have engaged in corruption and unethical practices,” notes economist Pushkar Bajracharya. “This dampens the entrepreneurial spirit, and ultimately decelerates the economy.”
Vandalism of businesses during the communal clashes in Madhes Province last month prompted the government to introduce the Private Investment Protection and Promotion Strategy, and revive the defunct Industrial Security Force. But that alone is unlikely to reassure investors.
Finance Minister Swarnim Wagle set an ambitious economic growth target of 7% for this fiscal year, while the World Bank, ADB, and IMF project a growth of up to 4.6%. The RSP’s ambitious goal of creating 1.2 million new jobs seems unattainable in the present climate. Almost 800,000 Nepalis obtained overseas labour permits last year.
The paradox is that macroeconomic indicators are robust: Nepal earned nearly $15 billion in remittances just in the first 11 months of the last fiscal year, and foreign currency reserves are sufficient for 16 months of imports. Banks are flush with cash, but credit expansion has stalled, and government capital spending is sluggish.
“If local businesses are not ready or don't feel that they can invest right now, they're not going to borrow, even though the cost of capital is at the lowest in many years,” explains Pandey. “And unless the local businesses start investing, you're not going to get serious investors from abroad.”
Most liquidity used to be invested in unproductive sectors like speculative real estate and securities, but recent lending curbs by the Nepal Rastra Bank and stricter land use laws have decreased borrowing. Meanwhile, manufacturing is operating at less than half capacity and industries cannot generate the cash flow needed to pay off older debts, increasing the amount of non-performing loans.
“Governments have historically facilitated policy-guided investments into the hydropower and cement sector,” Khanal explains. “The new political leadership must now identify other productive sectors like tourism or IT, and announce policy-guided incentives for the entire value chain.”
In a speech last week, Finance Minister Wagle encouraged the diaspora to confidently invest in Nepal, saying his government had removed regulatory red tape and introduced tax benefits to lure investment. But overseas Nepalis have heard that before, and it may not be enough when business confidence is so low.
That domestic, diaspora and foreign investors all in wait-and-watch mode may actually be a silver lining, says Bajracharya, because it means they have not completely given up yet.
But band-aid announcements will not restore confidence unless investors trust the leadership to guarantee political stability, policy consistency and remove the fear factor.
Bajracharya adds: “A growth-oriented environment needs stability not just in policy, but in action. The negative aspects of the business sector have been addressed, but there have not been enough measures taken to uplift the business spirit.”
Finance Minister Wagle asked investors to be patient because the impact of his regulatory reforms may take a few years to be visible. And that is the crux: Nepalis have waited too long, and want instant results from the party they elected.
Indeed, it has only been a month since the government’s economic strategy came into implementation, and it may be too early to expect miracles. Economist Kalpana Khanal’s conclusion: “This young government must be given the benefit of the doubt. But it must be willing to take sound advice from experts and communicate policies to the public.”