Interview | Nepali economy will certainly rebound from this fiscal year: Finance Minister Dr Prakash Sharan Mahat

"To bring in more private investment, including foreign direct investment (FDI), we must reform our investment regime."

Pushpa Raj Acharya

  • Read Time 6 min.

When Dr Prakash Sharan Mahat took office as Finance Minister of the country in April 2023, the overall economic indicators were not in a positive direction. Five months after his appointment, Dr Mahat claims that the country’s economy is now heading in a positive direction. Pushpa Raj Acharya of Investment Board Nepal recently spoke to him on a range of issues including the current economic situation, productivity problems, unemployment issues, capital expenditure bottlenecks, and climate budget among others. Excerpts:

What actions has the government taken to bring the economy back on track and accelerate economic activities?

The government has initiated crucial interventions for improving investment climate through reforms, boosting the confidence of the private sector to encourage them to further inject investment in the productive sector, improving the quality of public spending, control of red tape/corruption, and bringing efficiency in service delivery, among others. Against the current backdrop, these interventions will definitely deliver positive results. External sector stability with sound foreign exchange reserves will give confidence to the actors of the economy. Remittance inflow has witnessed significant improvement. Increase in tourist arrivals will help in the rapid recovery of the tourism sector that has been shattered due to the Covid pandemic for quite a long time. Timely monsoon might boost agriculture output and this is critically important to feed the people in the context of surging import duties and import ban from food exporting countries. We are self-sufficient in hydroelectricity generation and not only are we becoming an energy surplus nation, but we are also exporting energy to India. With this evidence, we can foresee that the Nepali economy will certainly rebound from the ongoing fiscal.

How does the government plan to address the rooted structural problems of the economy including low-productivity, unemployment and nosediving growth?

The problems lying in the economy in terms of low productivity, unemployment and nosediving growth require fresh investments. To bring in more private investment, including foreign direct investment (FDI), we must reform our investment regime. The Budget for FY 2023-24 has given top priority to reforms in the investment regime. Legal, administrative and procedural reforms have been given top priority. Reforms are a continuous process and it should not stall at any cost. Some of the reforms do not require financial backing. We have classified these reforms and will execute them gradually. A transparent legal regime provides a smooth procedural environment that in turn improves the investment climate. The manifold impact on the economy caused by the pandemic will be addressed and the economy will be lubricated through reforms. We have already started witnessing an improvement in the investment regime.

Questions have always been raised about the government’s budget execution capacity. What are your strategies for change on this front?

Government spending will gather pace based on our budget execution guidelines. We have had several rounds of interactions and discussions with relevant ministries and I am hopeful and confident that our spending performance will improve in the coming days. I admit that there has been inaction and the pace of work is rather slow. We always wait for the end of the fiscal year to get work done and that attitude must change and change fast. We have been strictly informing all the stakeholders that we must change our style of work for efficient delivery and align resources for productive capacity enhancement of the economy. Similarly, the investment climate, including availing credit, should be improved at the private sector level.

High cost of funds is considered to be the major barrier to expanding private sector investment, creating jobs and boosting productivity. What are the government and central bank doing to minimize this high cost of funds mainly driven by the high lending rates?

It is true that the quantum of investment is not as expected. The interest rate on lending is still high and the percentage of non-performing loans is going up, which means the capacity of banks and financial institutions to mobilize loans is shrinking. I hope Nepal Rastra Bank (NRB) will seriously think about this issue. Considering the requirement of fresh investment, the current interest rate has to be rationalized for credit expansion. The dismal credit expansion in the previous fiscal squeezed the potential of private sector expansion and their contribution to growth and jobs. I have been told by the central bank that it has been proactive towards improving the lending atmosphere. On the other hand, bankers also have to cooperate to minimize the interest rate spread keeping in mind the profit they have made in the last several years. All the stakeholders must contribute to improving the economy during these turbulent times by motivating fresh investments in every sector of the economy. I am confident the investment climate will improve at the private sector level.

There have been challenges in meeting the revenue collection target since the beginning of the month. Do you think the revenue collection target is rational considering the challenging economic situation at the moment?

We are doing homework to broaden the tax base and make the tax system more prudent and efficient to meet the revenue mobilization target set by the fiscal budget. I do admit that the problems also lie within the taxation system and we are doing our best to address the shortcomings and make it more scientific, efficient and relevant as well as bringing more taxpayers within the tax net.

The lower public spending has deteriorated the foreign aid absorption capacity. Again, the government has not been able to mobilize climate related aid from the international community.

Regarding this, I have had a series of meetings with multilateral and bilateral development banks and development finance institutions, among others. We will be able to mobilize foreign aid that we have estimated in the fiscal budget 2023-24 by improving government spending. We are also trying to bring in resources from the Green Climate Fund (GCF) and other climate-related funds. Development partners and developed countries must support Nepal to cope with climate change challenges and save our snow-capped Himalayas which are the source of water for billions of people of this region. Rapid melting of glaciers in the Himalayas and glacier lake outbursts could pose a serious challenge to our habitat. On the other hand, climate change induced disaster could cause colossal loss of lives and property. We have already started experiencing climate change impacts on agriculture and forest outputs, and health, which are a dire threat to the vulnerable and marginalized communities. As Nepal’s share in global carbon emission is only 0.06 percent, we must be compensated for the loss we are bearing due to the carbon emitting nations. Streamlining of climate financing will help countries like Nepal to cope with the climate change induced challenges as well as achieve the target of net zero carbon emissions by 2045 as promised at COP26.

Nepal at present has comfortable foreign exchange reserves. How is the government thinking of utilizing this in production and job creation?

People should look at the opportunities we have and invest in them. People have to be innovative and look for new avenues. But we have a herd mentality. If someone is making money in a particular sector, everybody starts doing the same business. There is a dearth of people with an entrepreneurial mindset. We want those who are living outside the country like the non-resident Nepalis (NRNs) to come and grab the opportunities by investing their skills, capital and technology in Nepal as we have a sound investment climate at present.

Sovereign credit rating facilitates the flow of foreign direct investment and avails financing from the international market. Why has the process of country rating stalled?

The Ministry of Finance has already initiated the process. It might have stalled due to the Covid 19 pandemic. We will proceed with it in the near future.

How is the government attracting the private sector to invest in infrastructure under the public-private partnership (PPP) modality?

There are also prospects to mobilize foreign direct investment in infrastructure including export-oriented projects with bankable project Development Agreement (PDA) and we are doing this through Investment Board Nepal. For domestic consumption too, hydroelectricity development is exceptional and that is due to the bankable Power Purchase Agreement (PPA) from the sole power off-taker–Nepal Electricity Authority. That sort of modality might attract the private sector. We also welcome the private sector to enhance the quality of public services like health, education and transport, among others, under the Public-Private Partnership (PPP) modality. We are also encouraging private investments in the manufacturing sector. Information technology is another promising area where there is a lot of new talent emerging. We have provided a 50 percent income tax waiver for the IT sector. At the same time, we have also allowed IT professionals and firms to utilize some of their foreign exchange earnings to procure technology and for marketing purposes.

The fiscal budget 2023-24 has mentioned about hosting the Nepal Investment Summit. How have the preparations for the summit been going on?

The government has announced plans to host the Nepal Investment Summit. We need adequate preparations for that and we have already started organizing preparatory events through the Office of the Investment Board Nepal. Considering the dire need of investment in the country, we are going to host the Nepal Investment Summit to tap potential investors as we have found that the interest of the international community to invest in Nepal has been growing. Hosting the summit just for the sake of it is not important.

‘We are hosting the Nepal Investment Summit to tap potential investors as we have found that the interest of the international community to invest in Nepal has been growing.’

The important aspect is whether the commitments translate into real investment. Rather than commitments, we will focus on credible and serious potential investors to realize more investments in the country. Along with credible investors from the private sector of potential source countries, we will invite the heads of government from the major FDI source countries and also the key representatives from multilateral development agencies.

[The interview was first published in IBN Dispatch, an official publication of Investment Board Nepal.]