Now that the elections are over, and the race to form the new government is in full swing, let’s look at the economic challenges that lie ahead for the new government. A good understanding of these challenges is important to formulate a realistic yet inspirational economic plan for the next five years to grow Nepal’s economy and create job opportunities for Nepali youths.
Two major challenges
The new government faces two types of challenges: (1) immediate macroeconomic challenges that need to be addressed within the first few months in office and (2) medium to long-term structural challenges that are important to address for economic prosperity and job creation. Many of these challenges are well-known, thus I will focus more on the solutions.
Immediate macroeconomic challenges mainly include dwindling foreign exchange reserves, rising inflation (food and oil prices), increasing interest rate (borrowing rate), worsening fiscal balance (lower revenue and higher expenditure) and deteriorating current account balance. Some of these problems are symptoms of larger structural challenges, but issues surrounding inflation and interest rates are more immediate. At the outset, it is important to note that Nepal Rastra Bank’s recent tightening of monetary policy was much needed in light of creeping inflation.
Consumer price inflation stood at 8.08 percent in mid-July 2022, compared to 4.19 percent a year ago. Global rise of fuel and food prices, supply chain disruptions and devaluation of Nepali Rupees against the US dollar have all contributed to inflationary pressures. Rising inflation in Nepal hurts the poor the most. Prices of ghee and oil, milk products and eggs, and pulses and legumes have all increased in the range of 10 to 23 percent.
Many central banks in the region, including Nepal Rastra Bank, have started hiking rates to curb inflation and safeguard financial stability. The NRB’s newly launched Monetary Policy 2079-80 has introduced further measures to tighten monetary policy to curb rising inflation. It projects ‘broad money supply’ and private sector credit to grow by 12 and 12.6 percent respectively. This is a lower growth target for both money supply and private sector credit compared to the expansionary policy during the pandemic. But these types of measures are welcome given the prospects of rising inflation.
Due to the monetary tightening by NRB, borrowing cost has increased for businesses and small enterprises. This is to be expected. If there are small businesses that have been hurt, the government can introduce targeted measures aimed at MSMEs. These should be carefully designed to promote industries that are export oriented, and linked to the global value chain. Another objective to protect MSMEs is because these are the source of over two-third of jobs in Nepal. But, in the name of protecting MSMEs, the NRB should not be rolling back tighter monetary measures.
As a small economy Nepal needs outward orientation to enable Nepali firms to access markets and achieve ‘economies of scale’. To be more successful in foreign markets, Nepal needs to be more competitive.
In general, addressing immediate macroeconomic challenges will require coordination between the Nepal Rastra Bank and the Ministry of Finance. What we have learned from the Covid-19 pandemic is that neither monetary policy nor fiscal policy by itself can protect an economy from output contractions, job losses and financial turmoil. Successful policy response requires monetary and fiscal policy to create space for each other to function properly.
Going beyond the immediate concerns, Nepal’s structural challenges all lead to one outcome of grave concern: Chronic lack of job opportunities in Nepal. To address this number one challenge, we need to revive Nepal’s manufacturing sector. But we need to do this in a sustainable manner. We don’t have to follow in the footsteps of countries that contributed to environmental degradation while growing and creating jobs.
If Covid-19 pandemic has taught us anything, it is that there is a strong link between the environment and public health. Recent research has shown that all known pandemics, including Covid-19, have been caused by animal microbes that spillover to humans. This happens because of contact with wildlife in areas where land-use change is prevalent. Rapid and unplanned urbanization, deforestation and environmental degradation make Nepal susceptible to future pandemics.
The new government needs to leverage the role the private sector could play in Nepal’s development. Without thriving industries and a dynamic business sector, no country has ever become rich. A government doesn’t make a country richer, but it can create an enabling environment for it to become rich. It is the private sector that determines how the economy grows and what types of job opportunities are created.
Green investments, green jobs
Nepal should emphasize on creating not just any job, but ‘green jobs’. According to the International Labor Organization (ILO), a UN agency based in Geneva, green jobs reduce the environmental impact of enterprise and economic sectors, and include jobs that protect ecosystems and biodiversity; reduce energy, materials and water consumption; decarbonize the economy; and minimize or avoid generation of all forms of waste and pollution. With the broad objective of job creation in mind, in the medium to long-term (2 to 5 years), Nepal will need to focus on three key areas.
First, we need green investments to enhance Nepal’s resilience to climate change and create “green jobs”. These include investments in green infrastructure, including urban planning and development. It also includes investments in water, sewage and drainage related infrastructure.
There are plenty of ideas from countries in Asia, particularly from China’s recent experience. What we lack is the willingness to follow through and implement those ideas.
Second, we need policies to enhance Nepal’s economic competitiveness and revive the manufacturing sector. Investments in roads, highways and airports will allow industries to grow and reach markets. The new government will need to refocus in industrialization, leveraging Nepal’s recent successes in cement, iron rods and light manufacturing.
Third, we need investment in people. A renewed focus on education, with an emphasis on quality, particularly of higher education and training. If Nepal wants to attract foreign investments and grow its industries, it is critical we have a skilled workforce to enter new jobs and occupations that are emerging.
I will elaborate on these three key areas below.
(1) Green investments to enhance Nepal’s resilience to climate change and create “green jobs”
COP27 global climate talks took place at a time when increasingly frequent and intense weather events have become alarmingly more regular. Countries like Nepal are very much on the frontline when it comes to climate change. In fact, Nepal contributes only about 0.027 percent to global greenhouse gas emissions, but it is highly vulnerable to the impacts of climate change. Nepal is also vulnerable to seismic risks, and its monsoon climate and mountainous topography leaves the country vulnerable to weather-induced hazards like soil erosion and landslides.
Unplanned growth in Nepal has also been exerting tremendous pressure on the natural environment. Urban development has been characterized by excessive groundwater extraction, air and river pollution, and conversion of fertile arable land and groundwater recharge areas into built-up areas. The new government will need to invest in better planning and coordination to address these challenges and develop better early warning systems. It needs to invest in disaster preparedness and enhance its capacity in providing relief and rebuilding. Most importantly, urban development and public investments should focus on building green and resilient infrastructure.
Nepal can introduce a public works program aimed at tackling climate change, preserving our national parks, cleaning our rivers and lakes and creating ‘green jobs’. In fact, the Prime Minister’s Employment Program (PMEP) can be turned into a “Green Jobs Program.” We can re-think the PMEP to create not only low-skill labor intensive jobs, but also middle-skill and high-skill ones.
Private sector participation in this type of “Green Jobs Program” is essential for its success. Small and medium size enterprises can be given special preference with conditions on job creation. Nepal’s wildlife conservation and forestry department should be given more resources to hire more staff and employ more workers on the ground.
A recent World Bank Study on the Kali Gandaki Watershed Project in Nepal showed that large green public works programs can create jobs across the skills-spectrum. Well-designed forest and watershed management can benefit a range of economic sectors including agriculture, hydropower, roads, water supply and disaster risk management. The cost-benefit analysis done by the World Bank showed that the benefits of the program outweighed the costs. There is evidence that green public works programs can create fiscal multipliers several times larger than the investment itself.
A massive and nationwide “Green Jobs Program” can be a gamechanger for Nepal. In the short run, it will provide much needed employment for Nepal’s youth and create income multipliers in different sectors. Jobs can be created in sectors such as waste management and recycling, sustainable agriculture and food production, sustainable forestry, manufacturing and supply chain management, energy supply and efficiency, biodiversity and ecosystem preservation. In the medium to long run, it will generate higher revenues, especially in the tourism sector, while achieving sustainable growth for the broader economy.
(2) Policies to enhance Nepal’s economic competitiveness and revive the manufacturing sector
Economic transformation has not arrived in Nepal, not in any meaningful way. If we look at Nepal’s economic performance in the last 25 years, the good news is that labor is moving away from agriculture. But the bad news is that these movements have been not to industries but to services. Worse news is that they have been moving into low productivity and low pay services. Most go into the informal sector. Those who are able to afford recruitment fees go abroad to enter employment.
The competitiveness of Nepal’s private sector in today’s global economy is limited. Nepal’s private sector is small, with a large degree of informality and lack of innovation. Most firms are small, operate in the informal market space, and have limited economies of scale and profitability. Only about 18 percent of Nepal’s formal firms have more than 20 employees. Rates of entry of new firms is low. Most firms do not grow as they age, which suggests that they are not making investments that would increase their productivity or product quality. Very few firms in Nepal engage in trade or ‘technology transfer’ with foreign countries. Use of ICT and modern technology is relatively low across the private sector.
Nepal’s manufacturing sector has the lowest productivity in South and East Asia. It is lower than in Bangladesh, Cambodia, and Myanmar. It is much lower than in countries like Indonesia and the Philippines. Nepal’s worsening export performance is directly linked to the low productivity and competitiveness of its private sector.
Nepal is not a large economy therefore we need outward orientation for Nepali firms to access markets and achieve ‘economies of scale’. But to be more successful in foreign markets, Nepal needs to be more competitive. Quality of products we export needs to be high at competitive prices. Raising productivity of our industries is critical. Good enabling environment can be created by the government in the form of better transport and trade logistics, access to electricity and IT connectivity.
Without quality infrastructure, the private sector cannot prosper. Indonesia under the first term of President Jokowi understood this well. So did the Philippines under President Duterte with his ‘Build, Build, Build’ program. Both countries focused on building roads, railways, bridges, and metro lines. Not ‘view towers’, which are nothing more than ugly eye sores propping up across Nepal. Both the Indonesian and the Filipino presidents understood that without good physical infrastructure, attracting FDI and increasing private investments would be very difficult. FDI inflows to the Philippines hit a record last year, and in Indonesia FDI has increased in the last few years.
In order to promote movement of labor from agriculture to industry, we need to have a better business environment. On paper, we have made good progress in this area, as evidenced by the World Bank’s Doing Business Ranking. We have moved up the ranks, and some argue we should aim to rank higher than India next year. But if we look at our FDI inflow and growth in industries, there is not much reason to celebrate.
We should measure our ability to improve the business environment by looking at how many firms have entered the market in the last five years. The next government should measure its performance by looking at how many new firms entered the manufacturing sector, how many firms managed to get ‘technology licenses’ from abroad in a given fiscal year, how many firms entered the export market and how many firms entered new markets. Our development objectives should be realistic, but we need to measure success and failures, so that we continue to improve our performance.
Another way of promoting movement of workers and other factors of production from agriculture to industry is to have an industrial policy focused on a few key growing sectors. Focusing on agri-processing, light manufacturing, IT services and high value tourism makes sense. Revival efforts of Nepal’s agribusiness sector should focus on our niche export products–tea, herbs, specialty garments and processed food products–with a concerted industrial policy to support these sectors.
(3) Investments in people
To raise Nepal’s competitiveness, it is critical to invest in people. Quality of education is low at all levels of education. Yes, enrollment numbers have been going up, but this is not an indicator of better human capital. Graduates with no employable skills will not make Nepal competitive. As Indonesia has done under the second administration of President Jokowi, Nepal will need to focus on human capital development to enhance its economic competitiveness.
The new administration can focus on the following key ‘supply side’ interventions to improve employment prospects of graduates: (i) better quality of primary and secondary education, which provide the foundation for higher education and TVET programs; (ii) partnerships between TVET institutions, universities and private sector in all seven provinces of Nepal; (iii) promotion of degrees and programs in agribusiness; (iv) promoting programs in STEM (science, technology, engineering and mathematics) fields and (v) inviting foreign universities to establish ‘satellite campuses’ in Nepal by providing fiscal incentives.
As with the ‘demand side’ that focuses on increasing FDI and attaining robust private sector growth, there are several other supply side interventions. One thing to keep in mind is the clear goal of the ‘supply side’ policy to improve the quality of education and training in Nepal. If the quality of ‘human capital’ is good, FDI inflow will also increase. IT services is a growing area, and Nepal will need to invest in generating high-quality graduates in large enough numbers to attract global firms in business process outsourcing (BPO) and knowledge process outsourcing (KPO).
One of the innovative ways to re-think higher education is to link it better with ‘labor demand’. If the construction sector is the biggest employer, let’s train overseers and engineers. If we want to develop large scale commercial farming, let’s provide degrees in agribusiness. If we want to revive the old manufacturing base in Biratnagar, let’s provide TVET training for workers to enter light manufacturing sectors such as shoemaking, garment, and wood and furniture. There are plenty of ideas from countries in Asia, particularly from China’s recent experience. What we lack is the willingness to follow through and implement those ideas.
Sameer Khatiwada is an economist at the Asian Development Bank. This article was initially published in Sejon Journal 2022.