Back in 2020, when the economy was ravaged by the Covid-19 pandemic, the Tourism Ministry proposed a two-day public holiday as a measure to stimulate the then decimated tourism sector.
While the government did not implement that measure then, it has recently come into implementation but this time to achieve a directly opposite effect—to reduce the burgeoning import of fuel that is threatening Nepal’s external sector stability. So, does the two-day public holiday reduce consumption or increase it? This kind of ad-hocism in Nepal’s policymaking has been its persistent feature. If Nepal is serious about achieving its ambitious growth and development goals, significant reforms are needed to remedy the inconsistent, incoherent, and ambiguous policies, a result of poor policymaking practices.
Absurd logic
We don’t deny that reducing the working days may have significant benefits, especially to employees’ productivity and well-being, as evidenced by several studies which show that more working days do not always equate to higher productivity. However, the rationale that it will reduce fuel consumption sounds absurd.
Furthermore, the government had no evidence that this was going to reduce fuel consumption. They have not even come up with any estimates of reduced fuel consumption due to this measure. Moreover, the bureaucrats and their army of advisors certainly are aware that the current crisis (if it could be called so) emanates from excessive consumption (both public and private) that has fueled imports and Nepal not having enough foreign currency to pay for those imports. Providing one extra day off would mean more time for leisure, which would mean households will go out and eat out and spend more money and fuel and so on. This policy could have worked to boost the economy if the problem was squeezed demand but the problem at present is the excessive demand that has made the nation’s import bill unsustainably high.
There is no doubt that fuel prices have become unsustainable and measures need to be introduced to address the prices. During a recent event, the minister for the Ministry of Industry, Commerce and Supplies was quoted as saying that the federal government is undertaking necessary preparation to open up petroleum products import and distribution for the private sector. The deregulation, he claimed, would provide relief to Nepali consumers who are facing an unprecedented surge in the cost of living. However, that is yet another absurd proposition if one goes into the details. Sure, increased competition is desirable and can lead to more efficient outcomes if anti-competitive practices can be curtailed (which, however, is doubtful in Nepal, but this is beside the point we want to make in this article).
Nepal will have to look into ways to reduce imports or increase export. The policymakers have no concrete plan for that.
But, it is not the lack of competition that is the reason for current spikes in fuel prices. The current surge in fuel prices has its roots in geo-political tensions (particularly the Russia-Ukraine war) and the supply chain crunch caused by the pandemic. Depreciating Indian Currency (with which Nepali Rupee is pegged) against the US dollars has further compounded the sky-rocketing fuel prices. Moreover, high taxes levied on the import of petroleum products contribute significantly to higher domestic prices. In such a situation, how will the entry of private importers bring down the price of petroleum products? And will that not risk instituting private monopoly in place of state monopoly?
These are just a couple in the series of misaligned policy prescriptions that the government is adopting as a solution to the current economic woes of Nepal. These kinds of ad-hoc policy decisions that are populist in nature but may fail to substantially tackle the cause of the economic troubles are more likely to do harm than good.
Not learning from Sri Lanka
There should have been a lesson learned from the ongoing economic crisis in Sri Lanka. The Sri Lankan troubles have been dominating the airwaves in Nepal for the past couple of months with think pieces and chats dissecting the situation to draw parallels with or find dissimilarities between the two South Asian countries.
Although it is quite evident that Sri Lankan problems stem from years of mismanagement, it is also undeniable that the Rajapaksha government and its ill-timed and misjudged decisions expedited the island country’s downward spiral. The Rajapaksha administration, drenched in nepotism and crony capitalism, decided to cut tax rates when the country was in dire need to expand the revenue base and abruptly banned the chemical fertilizer import without considering the impact on agriculture. These actions were not only ignorant but dangerous too.
The danger right now is not the inactivity or indifference but the overzealous reaction without proper assessment of the situation. The foreign exchange reserve is depleted and Nepal only has reserves to support about six months of goods and services import. The concern right now is what will happen if international fuel and food (rising food prices are not being given as much attention in Nepal as it should warrant) prices and dollar appreciation do not abate? Is there a proper plan with the government to tackle such a grim prospect? The government could reduce the extra taxes and duties levied upon petroleum products for the time being. However, revenue administration is more fixated upon petroleum products as the major source of revenue. Thus it seems unlikely that the government will agree to review duties on petroleum products. Nearly one-third of the price that Nepali consumers are paying for petroleum products goes to the government as taxes. In the first ten months of the current fiscal year, import duties on petroleum products made up to 26 percent of the total import duties, according to the customs data. Extreme dependence on duties collected at the borders has long been criticized but the government has not made serious efforts to diversify the tax base.
Populism and ad-hocism in policymaking is, however, not a recent phenomenon but a regular feature. For instance, the government decided to make the testing of pesticides on imports of fruits and vegetables mandatory in 2019, but the necessary laboratories and even the clarity on what parameters were to be tested were, interestingly, absent. Consequently, the government retracted its policy in a span of mere 18 days, causing public uproar. Such misjudged policy approaches (no matter the good intentions) show that the policy-making body is disconnected from the ground realities. The policies are designed and announced without giving serious consideration to the logistics of implementation. In the aforementioned case of vegetable import, the government could have first tried to establish the laboratories before imposing the bans.
Currently, there is a growing voice demanding subsidization of electricity as an alternative to fuel and authorities quoted in the media reports also support this idea. However, considering the existing power infrastructure and dependence on the Indian import of electricity, is the existing power infrastructure able to meet the consumption demand if people switch to electricity for cooking and to power the transport vehicles?
Dangers ahead
There are economic signposts that indicate challenging times ahead for the country. Nepal cannot afford to rely on remittance from migrant workers to keep the country afloat and will have to look into ways to reduce import or increase export. However, it does not look like the policymakers have a concrete plan for that. The recently announced government’s plans and programs include promoting ‘made in Nepal’ initiative to encourage domestic production. However, beyond the tagline, it is silent on what will entail Nepali industries to produce quality products. The government needs to be cognizant that for the private sector in countries like Nepal to prosper, the state needs to be heavily involved and be ready to invest in supporting infrastructure that facilitates and promotes innovation and other necessary non-market related institutional support. It would be much harder to tackle these challenges and prevent the country from sliding into an economic crisis without deft policymaking.
Hence, we hope that good senses prevail and the government makes sincere efforts to correct its policymaking practices. Most importantly, the government and its advisors need to avoid a top-down approach and comb the challenges persistent at the micro-level and design policies responsive to those challenges.
Dikshya Singh and KshitizDahal are researchers at South Asia Watch on Trade, Economics and Environment (SAWTEE).
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