Kathmandu: When the Nepali Congress led the government in the early 1990s, it opened the economy to the private sector and also invited foreign investments. The government adopted economic liberalization, and brought several policies for reforms in social and economic sectors.
During that time, Dr Ram Sharan Mahat was one of the key players to lead the first generation reforms. As the Vice-chairman of the National Planning Commission at that time, Dr Mahat played a crucial role in bringing significant improvements in Nepal’s economy with higher growth and to reduce poverty.
As the government is preparing to bring the budget for the next fiscal year, Nepal Live Today caught up with Dr Mahat, who has served as the Finance Minister in many governments after 1994, to talk about various economic issues. Excerpts:
With the benefit of hindsight, what do you feel you overemphasized in the 1990s and what areas did you underemphasize?
The era of the 1990s witnessed multi-party liberal democracy. The new economic policies were introduced during the time of Nepali Congress’s first elected government led by Girija Prasad Koirala.
The liberal democracy paved the path for introducing liberal economic policies. Owing to the need of economic liberalization, the introduced liberal economic policies focused on using the overall sections of the society in every nook and corner of the country, to achieve the best possible results in economic growth.
Moreover, the liberalization policy was expanded to include private capital and entrepreneurship, domestic capital, as well as foreign and domestic investment. Apart from the private sector, NGOs, cooperatives and community sectors were also given space.
We also introduced a new law that helped in liberalizing the cooperative society to address poverty alleviation and any other means possible for improving the living conditions of low-income communities. But back then most of the enterprises were creating a huge burden on the economy itself. They were making huge losses, and hence they were transferred to the private sector.
To improve the quality of governance, you must strengthen institutions at various levels.
This is not just the example of Nepal, but it has happened throughout the world. Even in communist countries that believed in nationalization and socialization as means of production, everything was owned by the government but privatization began. Around 50,000-60,000 factories and companies were privatized in the Soviet Union, Russia, and China, as well as other countries that believed in socialism, such as the United Kingdom, which was governed by the Liberal Labour party.
In Nepal, these areas were given access to the private sector. The government’s income rose as a result. As a result of increased private sector investment, the government began to collect more taxes, resulting in increased revenue.
The main objective of the government was to reduce poverty. The number of people living in poverty has decreased significantly in recent years. Around 49 percent of the total population in the country in 1991 was below the poverty line. Now, it has gone down to around 15-16 percent, which is one of the good advantages. Education and social sectors have also made very good progress.
In the infrastructure sector, we had a total of 7,000 kms of roads in the country in 1990, including both rough and improved roads. Now, it is more than 90,000 kms. Only nine percent of the population had access to electricity back in those days. Now, more than 90 percent of the population have access to power.
A United Nation’s report published in 2010 shows Nepal as one of the ten developing low income countries making good progress in the social sector. Nepal was in a difficult position as the country suffered huge loss from the decade-long armed conflict. Even under such difficult conditions, Nepal made good progress in the social sector. So there was an appreciation by the international community as well for the outcomes of reforms introduced in 1990.
So, in the spirit of 1990’s reforms, what would you prioritize today?
The government itself is creating problems in the last few years. The government has huge and ambitious targets with limited resources. Sometimes it looks very artificial because they cannot implement them well. There is also a huge budget deficit. The government announces projects with a huge budget, which cannot be actually implemented. In addition, non-productive industries and current expenditures result in a greater portion of the budget being used. Also, the government has started to rely more on deficit financing. As a result, Nepal’s public debt is increasing.
When I left the Finance Ministry five years ago, the outstanding national borrowing was around 25.65 percent of the GDP. Our total outstanding credit was less than 26 percent of the GDP. Now, it has gone up to 38 percent. The national borrowing has increased a lot, with a huge burden created upon future generations. This is not only the result of huge expenditures on the administrative expenses. There have been huge expenses on unproductive sectors.
Why do you think that our borrowing keeps increasing so much? If you look at the development budget, we are never able to spend all of it. Why do you think that happens?
Because the focus has not been on institution building. They lack the capacity to implement the government’s programme. To achieve the targets announced by the government, institutions must be strong.
We have three levels of government, and they have different mandates. They are overlapping and the duplication of the functions is happening because of excessive centralisation at the federal level. So, there is a lot of debate and conflicts between governments regarding their authority.
The purpose should be more on overall development of the country, and overall returns out of the investment, rather than favoring cadres. We must learn to rise above parties and affiliation.
Our policies often aim to reach sky high, but when you look at the implementation part, there is really nothing that we can share with pride. Why does this happen?
Because there is a lack of quality and good governance in Nepal. So, to improve the quality of governance, you must strengthen institutions at various levels. There is duplication and overlapping of authorities at various levels. As a result, the government is recruiting more people than needed in the administration. A high-level Administration Reform and Monitoring Committee had some recommendations to streamline the administrative structure. It had said that the central government should have a small number of ministries because it was taking over many roles that had previously been assigned to provincial and local governments.
The Committee suggested that ministries have to be merged or reduced. Hundreds of development committees should be merged or reduced.
The Committee has made various recommendations for reducing the administrative structures. But, the government has not implemented any of those recommendations yet. Instead, the government has been creating more offices, and favoring their favorites.
The administrative structure is also not based on meritocracy. There is instability in the administrative structure as well. The frequent change and transfer of staffers without giving them continuity is common.
In terms of appointment of officials, the administration and the constitutional bodies are seen to be favoring political cadres. The appointment depends more on parties and affiliations, rather than merit in our country. Because of such practices, institutions have become weak, and institution building is not taking place in our country. What is required at this time is the strengthening of institutions at all tiers of the government.
It seems the pandemic is going to ravage our economy. In this situation, what do you think the government and private sector should focus on? How should they work together to save the economy from collapsing?
The government should focus on developing and improving health infrastructures. At the moment, the primary focus of the government should be ensuring Covid-19 vaccine for all the people. Whatever limitations are there in the health sectors should be improved and emphasized. The government should provide relief to those losing their jobs.
There must be emphasis on economic policy, and measures must be implemented to revive the economy.
The government is coming up with budget for the next fiscal year in a month. As a former Finance Minister, what do you think are areas the government should focus on?
The details can’t be discussed, but in general, the budget should focus more on sustainable development, addressing the problem that the country is facing. The government has a tendency to focus more on populist activities, spending more on distributive expenditure, rather than creating more and more economic opportunities, or income generating opportunities.
Emphasis must be on sustainable development, rather than on populism to get more votes. Current expenditure and administrative expenditure must be reduced, which is increasing at a significant rate. There must be a proper expenditure management. Wherever the government is making investment, the capital investment from the public sector must be managed efficiently, with high returns.
At the moment, Nepal’s capital output ratio is very high. So, there must be more emphasis on efficiency, resulting in generating income through public expenditure. The recurrent expenditure is about 64-65 percent of the GDP, and the capital expenditure about 23-24 percent only.
Whatever has been spent has also not been effective. So, there is over capitalization of capital expenditure, which creates lots of leakage and corruption.
You are also at the forefront of the economic policy development of Nepali Congress. What makes Nepali Congress stand out in terms of economic policies, compared to other political parties?
What is necessary now is the proper management capacity in this country. Serious improvement is a must in the management. So, the emphasis should be on improving the quality of governance at every level and it is the focus of the Nepali Congress.
If you could just take time and envision a better Nepal in the next 10 years’ time, how would you envision Nepal?
Nepal has a lot of comparative advantages. We have a good potential in the agricultural sector. Similarly, the potentiality of water resources is very high. Similarly, the potential in the tourism sector is also very high, and there are many other sectors as well, which we must take the best advantage of, with proper management and proper allocation of the resources as well as by establishing proper implementation capability irrespective of parties and affiliations. The purpose should be more on overall development of the country, and overall returns out of the investment, rather than favoring cadres. We must learn to rise above parties and affiliation.