Double digit growth: Expectations and reality(THT October 11)

To achieve rapid growth, we need agricultural revolution, openness for foreign investment, investment-friendly industrial environment, facilities for business, corruption control and strict compliance with fiscal discipline
https://thehimalayantimes.com/opinion/double-digit-growth-expectations-and-reality/

The government in its plans and policies, presented on May 21, has announced to achieve a double digit growth in the next five years. The National Planning Commission (NPC) too has projected a growth of nearly 10 per cent in coming three years.

But under the current circumstances, how realistic are these expectations?

Nepal in 2017 cross edits growth ceiling to 7.9 per cent, highest in the decade, which followed one of the lowest growths of 0.6 per cent the previous year. The impact of the 2015 earthquake and five-month-long border blockade were the main reasons for the slow growth. As a result, a normal revive of the economy in 2017 caused high growth. This was largely due to a very low base value in 2016.

It is a must to understand that there were no miraculous achievements in 2017 to produce that high growth; rather it was simply the calculation formula which was based on
low base value of 2016. Looking at the decade’s trend, the country has experienced an average growth of 4.3 per cent.

When it comes to economic growth forecasts, no predictions are perfect, as they are based on assumptions which change with time. However, the International Monetary Fund has predicted a 5 per cent growth for 2018 (Economic Survey 2017).  The Asian Development Bank has estimated a growth of 4.9 per cent for 2018 and 5.5 per cent for 2019 (Asian Development Outlook 2018). Amid this, the NPC recently presented to the federal government a scenario of growth of 9.1 per cent and 9.5 per cent for the next two fiscal years—once again very high expectations.

Currently, the country is in economic crisis as displayed by major indicators. Our trade deficit is widening annually. In the first eight months of this fiscal year, the trade deficit has reached around 37 per cent of the Gross Domestic Product (Economic Survey 2018). This trend is very alarming for the GDP growth as it indicates a strong decline in our production capacity.

By the composition of GDP, the primary sector that consists of agriculture, forestry, fishery and mining holds about 28 per cent of GDP, which is the largest share among others. Unfortunately, this sector is declining year by year. But the incumbent government has no special programmes for agriculture uplifting. The only major agriculture support programme, as seen in the current fiscal budget, is “The Prime Minister Agriculture Modernisation Project” for which Rs 4.77 billion has been allocated.

This programme is a continuation from last year, but last year’s evaluation shows that it was a largely a failure. As a result, the agriculture sector in the current fiscal year has shrunk to 27.6 per cent. These facts indicate the primary sector of GDP is likely to decline in coming years as well.

The other two prominent sectors of GDP are wholesale-retail trade and real estate. Real estate is likely to dwindle due to various policy restrictions imposed by the current government. Trade that has flourished due to import will also be declining due to strengthening US dollar and decreasing earning from remittance that had boosted consumer economy in the country. However, all these downward trends can be changed if country can make some radical policy changes.

Growth rate while gives a handy indicator of economic development, it is not the whole story. Size of the economy matters a lot. The USA, the world’s largest economy, has GDP of $19.39 trillion, but a very low growth rate of about 1.5 per cent. This means, by next year it will add about $290 billion to its GDP. Now if we compare it with our economy, even if we get a 10 per cent growth next year, the total size of our GDP will be around $32 billion.

Further, per capita GDP is another important yardstick where we lag behind even when we compare it to our South Asian neighbours. Nonetheless, we do need a high economic growth to balance it with the rest of the developing nations.

As the incumbent government has been making a pitch for prosperity, it must focus on “prosperity which includes economic development”. We need economic growth to
sustain our increased regular expenses. In the current fiscal year, the total government expenditure has increased by 45.1 per cent. While the federal system, which is one of the most expensive systems, has increased the cost, lack of budgetary disciplines has also contributed to increase in government expenses.

In conclusion, under the current setup, as predicted by many international agencies, it is very likely that we will achieve only a nominal growth of around 5 per cent in the coming years. If so, it will be higher than the decade’s average, but lower than the expected double digit.

To achieve rapid growth, we need agricultural revolution, openness for foreign investment, investment-friendly industrial environment, facilities for business, corruption control and strict compliance with fiscal discipline. There is also an opportunity for Nepal to reap spill-over benefits from our two neighbours India and China—two giant economies.

We need rapid development in our technology, energy and infrastructure. This is possible only from investment in these sectors.

Investment conditions: Has it improved? Himalayan Times, March 6, 2015

"The historical flow of FDI in Nepal is very insignificant and low compared to some developing neighboring countries. We need to improve our 'Doing Business' conditions to attract FDI"

Government of Nepal has recently announced its achievements for the exemplary increment of Foreign Direct Investment (FDI) in the country. Ministry of Industry has shown 83 per cent increase in FDI in the year 2014 relative to 2013. Attraction of FDI shows better ‘doing business’ conditions in the country for industrial, business and service activities. Nice to hear that FDI in Nepal has increased to such a high amount. Does it indicate improvement in the investment conditions or is it a government’s camouflage?

Nepal as perceived now is in a fragile state. The manufacturing sector is wrecked with energy problems, lack of skilled human resource and faulty industrial policies. In such conditions it is quite surprising to have such an upsurge in FDI.

As reported, the FDI we got in 2014 was worth Rs. 44.97 billions of which Rs 34.73 billion alone was for hydroelectric projects that accounted for about 77 per cent. Also, it should include Rs. 37 billions as the bilateral investment of India that was promised during the visit of Indian Prime Narendra Modi. If so, this accounts for 84 per cent of FDI.

Also probable is the FDI figure announced by the government is only based on promise such as that from the government of India and not the actually invested amount so it depends on future investment conditions. A recently conducted nationwide survey of the manufacturing industries by the Central Bureau of Statistics, shows almost all investment environment of the country are at the depths of despair.

The survey report published by CBS in November 2014 shows the Global Competitive Index, Competitive Industrial Performance Index and Per-capita Manufacturing Value Added are all at the lowest compared to world value and lowest among the South Asian countries, including Bangladesh and Pakistan. The CBS finding is a recent one and the working environment of the country has not been enriched since then rather it has deteriorated.

The energy crisis of the country has become an irreversible problem of the last two decades having impact on almost all sectors – manufacturing, service and business. Due to this, the foreign investors are highly allured to invest in hydro projects. Now, there is a flood of new hydro projects in the country from small to mega projects like West Seti with the capacity of 750 MW and Upper Karnali 900 MW. Such hydro projects cost a lot. For example, the largest running hydro project of the country which is Kaligandaki A that generates 144 MW used investments of Rs. 50 billion. So the current FDI is sufficient only for a single hydro project.

The amount of FDI obtained or promised to Nepal, however, is very insignificant when compared with the chunk brought by some of our neighboring countries. According to UNCTAD report of 2014, China which is one of the mega FDI country in 2013, dragged FDI worth USD 123,911 million and India brought USD 28,199 million. In the same year, Bangladesh got FDI of USD 1599 million and the Maldives got USD 325 billion when, according to the UNCTAD report, Nepal got USD 75 billion only.

This was quite natural for Nepal, as the flow of FDI mainly depends on ‘ease to work’ conditions of that country. The Global Competitive Index of Nepal in 2013-14 ranked 117th among 148 countries when Bangladesh ranked 110th, Pakistan 133th and India 60th. A country is considered better with lower ranking. World Economic Forum overviewed some major problems for doing better business in countries, according to which at the top are problems of instability in government, corruption, inefficient government bureaucracy, inadequate infrastructure, policy instability and restrictive labour regulations. All of these problems are thriving day-by-day in the country. In such situations how could one expect to have better FDI flow?

In conclusion, the historical flow of FDI in Nepal is very insignificant and low compared to some developing neighboring countries. We need to improve our ‘Doing Business’ conditions to attract FDI. Secondly, although the FDI figure of the current year as shown by the government is high compared to last years, the FDI is confined mostly to projects like hydroelectricity which is highly expensive and needed by Nepal but not very labour intensive by nature.

Such projects have less spillover impact in the overall economy that means the profit is less spread over other industries and businesses as their construction rely on materials of high technology not made in Nepal. They are not even using the cement produced in Nepal.

So we should go to get FDI for more diversified industries, businesses or services. Lastly, the figure as shown by the government is highly dubious under the existing adverse situations. Even so, such camouflaging will not be the first time it has been done by any government.

The current unemployment rate quoted by the government as estimated from the labour survey of CBS shows that in 2011 the unemployment rate of around 2 per cent which strange whichever way it was calculated, when we find every day about 1500 youths are departing from the country for foreign employment. Such statistics are generally produced by the government when they need to hide their weaknesses. The famous quote from British Prime Minister, Winston Churchill “Lies, dammed lies and statistics” had also originated from similar circumstances during World War II