"There Is A Need To Debate The Issues Of Economic Restructuring Of The State"
– Prof. Dr. Bishwambher Pyakuryal
Professor Dr. Bishwambher Pyakuryal is an eminent economist. He spoke to SANJAYA DHAKAL about the pertinent economic issues facing the country at this juncture. Excerpts:
There are talks of introducing federalism in the country. What do you think will be the fiscal implications of such move?
Unfortunately, we have not had extensive debates on the economic aspect of federalism. Everyone is content talking about political restructuring of the state but not the economic restructuring, which is equally important. There are some vital issues that must be debated before going for federalism. They include the exact nature of relations between the center and the state/province; means of exploiting and distributing natural endowments; ways of adjusting the various ecological divisions with different economic opportunities and so on.
Do you think federal units will be economically sustainable in our country?
There are various problems. Basically, over two-third of revenue goes to the central level at present. The volume of resource availability and capacity of our institutions and manpower are not going to change overnight just after the introduction of federal units. At present, the practice is such that the central level Ministry sends both resource as well as officers to carry out local level initiatives. Take for instance the internal resource generation capacity of the local bodies. In the five years between fiscal years 2057/28 and 2061/62, the center gave the grant of Rs 19.29 billion to the local bodies, whereas the latter could generate roughly Rs 1.5 billion on their own (through royalties, tourism fees, registration fees etc). Even the report of the Auditor General exposes this huge gap between their capacity to raise internal resources and their dependency on the center. This has led to the loss in their capabilities.
What specific problems will arise in terms of their efficiency?
Clearly, there is a high dependency of local bodies on center at this point. They are losing capability as well. Their source of income is insignificant. And there is a big problem on their skills. There is not even good record-keeping system. These factors must be taken into consideration. We cannot simply divide the nation into federal units without enabling them with financial muscle. In a new structure, rights and responsibilities of the units must be set clear.
One and a half years have passed since Nepal entered into post-conflict phase. Has there been the much-promised peace dividend?
It is debatable whether we can actually call this period a post-conflict since we can see continuation of decentralized violence by various groups. I have not seen any peace dividend as yet.
How do you read the economic achievements so far?
At a time when we are talking about regional and global integration of economy, Nepalis are facing obstructions in movement from hill/mountains to terai. This is not an indication of cessation of conflict. Anyway, there has been estimation on best and worst case scenarios for Nepal. It is said that between 2007 and 2011, Nepal will attain 2.9 percent of growth if the conflict continues like now. If the conflict deteriorates (worst case), the growth could dip below 2 percent whereas if everything becomes alright (best case), then the growth will reach 4.88 percent.
What about the specific achievements or failures?
Although the economy looks stable, there are some serious problems lurking behind. One alarming aspect is the level and nature of capital expenditure. The government is upbeat about the huge increase in capital expenditure – which at first glance looks very positive development. But if you dig a little below the surface, you will find disturbing causes for the rise in capital expenditure. In fact, the capital expenditure has increased not because of investment in development sector but due to increase in non-productive expenses. For example, there has been huge expenditure on building and maintaining the cantonments. Likewise, the government is making huge amounts of payments to the Nepal Oil Corporation (NOC). The government has said that the capital expenditure has increased from 38.2 percent last year to 51.3 percent this year – but this is largely due to such unproductive spending. I think the government ought to have passed Special Act from the parliament to spend such huge amounts on those sectors.
How do the macroeconomic indicators look?
The inflation rate, which was at 9.1 percent in 2062, has come down in 2064 to 4.5 percent. However, in 2062 the high inflation was caused by hike in price of petroleum products. But, now the inflation rate has been suppressed by continuing with the subsidies on the fuel price. So, this is a suppressed inflation. I have already told you about the nature of increase in capital expenditure. Exports have declined, which is quite natural given the incessant bandhs, power shortage, labor unrest, insecurity, unfavorable investment climate and so on. Imports have increased but only the imports of luxurious goods have increased.
Can you elaborate on the export-import situation?
In the first eleven months of the fiscal year 2063/64 (2006/07), exports grew only by 0.8 percent compared with 2.9 percent growth the previous year. Last year, exports to India had grown by 5.5 percent but this year (first 11 months) it grew only by 2.8 percent. Likewise, exports to third countries grew by 2.8 percent last year and by only 2 percent in the first eleven months of this year. Imports have slightly increased. But the bulk of the increase in import is due to growth in import of vehicles and parts – that, too, luxurious cars and not the service trucks, which would have indicated growth in transport sector, electrical equipment, computer parts, telecom, medicines etc.
How come the consumption has increased, then?
The consumption has increased due to increase in earnings from service sector, financial sector as well as remittance. Because of remittance earning, the foreign exchange reserve had been growing. But this year, the forex reserve declined by 1.68 percent while it had grown by 23.3 percent last year. This decline has largely been caused by appreciation of Nepali currency vis-à-vis US dollar. In the last one year, the value of dollar has depreciated by 13.3 percent (from Rs 73.45 per dollar in mid-June 2006 to Rs 65.4 per dollar now). The pressure on Indian currency is also growing. This year, the central bank has already spent US dollar to purchase Rs 57.36 billion worth Indian currency. Last year, the central bank had purchased Rs 39.27 billion worth IC by selling dollar.
Since you are also a member of the board of directors of the Nepal Rastra Bank, can you tell us about the financial sector reforms particularly in reference with the two state-owned banks?
The financial sector reforms program is going on fairly well. Of the two banks, Rastriya Banijya Bank (RBB) and Nepal Bank Limited (NBL), the latter is doing better now. But still there are problems in the Non Performing Asset (NPA) level. One thing I would like to clarify here is that in our agreement with the World Bank and the International Monetary Fund (IMF), we have pledged to continue reforms in these banks till they are ready for privatization. At this moment, the political situation does not permit us to go for privatization of these banks. Therefore, reforms will have to continue till we are ready to privatize them. In NBL, we have decided to bring in new management team with one or two top level foreign consultants recruited through IFA along with homegrown management team of Nepali professionals.
