NATIONAL 4 - (Spotlight Weekly)

‘Security Threats Seen By Potential Investors May Not Be Real’

— DR. RAM SARAN MAHAT

The Finance Ministry recently concluded its mid-term review of this fiscal year's budget. In which areas you will be focusing on the basis of its findings?

As indicated by the mid-term review, the area where we have to be more alert is on the question of government expenditure. The regular expenditure of the government has been rising very fast. The liabilities of the government in future will increase further. The government has very little control over the expenses such as wage bill, pension, security expenses, debt services, etc. So, this is the most worrisome part of our finances that the Finance Ministry is concerned about. Arresting the tendency toward increased public liability in future will be my main preoccupation. Something to that end will be announced in the next budget.

The Public Expenditure Review Commission (PERC) has also made some recommendations to cut down unnecessary government spending. What will the government do to implement them?

If the present trend of public expenditure continues, it will simply be not sustainable. Regarding development expenditure, we have thousands of small projects where resources are scattered. So, we need to consolidate them. We have to prioritize the development projects so that you can get better returns on the investment you make. There are other recommendations about public sector and expanding private enterprises (to which we will give due attention).

Will you continue to present the budget weeks before the end of the fiscal year?

Yes, we will stick to the time table as in the last year, that is, we will present the budget well in advance so that it could be approved by parliament before the end of the fiscal year. Then we will have a whole year to implement the budget. Though this year's budget was presented quite earlier there were slippage, decisions were not taken in time. Appropriate modalities were not decided in time, contracts were not awarded in time, institutional frameworks were not created in time. The result was that activities could not be implemented as scheduled. We expect to bring about improvements in this scenario. The implementation schedules of various development projects will be decided well in advance so that these activities can be implemented in a timely manner. Most importantly, the problem is that most of the construction-related activities take place at the end of the fiscal year, which is very unhealthy thing. I will see to it that this doesn't happen next year. All the construction activities will have to be completed by the third quarter of the fiscal year so that the last quarter of the fiscal year is devoted mainly for monitoring and evaluation. That will ensure better quality in the development projects.

The business community has been complaining of the deteriorating law-and-order situation and growing incidents of attacks.

Of course, we are taking this issue very seriously. There have not been any recent attacks on industrial houses. There were one or two cases some time back, but there have been no such cases of late.

The government has mobilized army personnel to check illegal trade. Is it a short-term measure? And, what could be its security implications?

Of course, it is a short-term measure. We are not using the army per se to control cross-border smuggling. We are using them as our customs guards. We have a provision of customs guards. At the moment they are not properly trained and properly equipped. As a result of which this group was not able to control the cross border smuggling. As a result there have been customs leakage and all that. So we requested the army to provide their personnel on a temporary basis who could be mobilized as customs guards. Their total number is between 400 to 500. This group will be there for a maximum period of three months and we may ask for another group to do the same job unless we create the customs guard. The experience shows that they have been very effective. But it is too early to pass a judgment. There are security implications in the sense that cross-border crimes and criminal activities have come down drastically. Other than that there is no security concerns in a broader context.

For the last few years, the privatization process has come to a virtual standstill. Do you have any plans to re-start this process?

Even in the past, we made several attempts to privatize public enterprises. But this is not an easy thing. Privatization has a lot of socio-economic, political and labor implications. The first phase of privatization was a smooth affair. But we encountered various problems in the course of implementing privatization program in the second phase. It is not for lack of government commitment but because of some practical problems. Look, for example, the privatization of Nepal Tea Development Corporation. It too so long as one or the other problems continued coming up. You can't do privatization in a mechanical fashion. But on the whole we want to go faster and we are going in that direction. But the pace in which to move in that direction is not entirely in the hands of the government. In a democracy everything should be done in accordance with law and building consensus. That is why it can't be a quick affair.

Some export-oriented companies are complaining about the problem related to duty drawback. Will you take some steps to address the problem?

Certainly, I will give more attention to resolve the problems related to duty drawback system. I have already asked the concerned people to pay serious attention to this problem. I hope we will be able to find some solution to this problem in the near future.

Is the government serious about the declining foreign investment scenario?

Of course, this is a problem. We will do everything to make the situation favorable to foreign investors. Part of the problem is due to perceived security threats as seen by the potential investors, which may not be necessarily true. By and large, economic activities have not been affected because of the Maoist problem. We are aware of these issues.

What could be the impact of the recent Indian budget on the Nepalese economy, especially due to provisions related to labor and liberalization of foreign trade regime?

We are studying the likely impact of the Indian budget. As and when necessary we will have to make necessary adjustments in our policies. Even then I feel that we still have some fiscal incentives (to offer to the investors). We haven't completely lost the comparative advantage that we have. We still have more incentives such as fiscal incentives, access to foreign exchange, Open General License etc. Labor is one issue where India has gone one step forward. This is something where we need to look into seriously.

Exactly a year ago, the government had made commitments at the Nepal Development Forum meeting in Paris about kick starting the second generation of reforms. But things don't seem moving in that direction. Would you comment?

We are very much committed to economic reform programs. Only a few days back, I organized a meeting of our development partners in my office in which we reiterated our commitment for second generation of reform programs. So we are very much on board.

What could be the impact of the reinstatement of Dr. Tilak Rawal as the Governor of Nepal Rastra Bank in the proposed banking sector reforms?

Things will go as usual. I hope every thing will be fine and there will be no let up and no slow down in the reform process. In fact, this is a government program and everybody who joins the government will be fully committed to this process.

Now to switch over to the political issues, how do you view the ongoing feud within your party that has led to non-performance of the government?

The feud is partly power struggle, partly a result of some past prejudices and hang-ups. So, I hope the solution to this feud lies in proper power balance and reconciliation. I agree that this feud has partly affected the quality of governance. If there are complaints about non-performance of the government it is partly related to our intra-party feud.

The people abroad now seem to have formed a very negative image about the functioning of the democratic system in our country. Who do you think should be blamed for this scenario?

First of all, I don't agree with this perception. Every young democracy has to pass through such phase. After the restoration of democracy a decade back, people's aspirations have been quite high and the governments haven't been able to perform according to their expectations. When they see problems, they see misuse of power, a wrong impression is created. Especially among the Nepalese intelligentsia, whether within the country or abroad, there is lot of negativism as is the case in the society. People tend to see wrong things almost everywhere. Many good things have also happened over the last 10-11 years. Issues like corruption were hidden in the past and also because of the fact that other countries have progressed much faster than us there is a feeling of disenchantment. We all have to share the blame and those who are in power will have to share more.

As a leading personality among second generation Nepali Congress leaders, would you personally come out in the open?

I am not in a hurry. I believe in works. I am a man of conscience. I am a dedicated worker of my party and believe in well-being of my country. I believe in hard work and also believe in destiny.

How do you see the role of the Speaker and Prime Minister in the non-functioning of the Parliament?

If anybody's responsible for the present stalemate in the House, it is the opposition. Mainly it is the main opposition party that has taken a totally irresponsible position by physically obstructing the process of the House. It is totally undemocratic and unconstitutional. If they think that the Prime Minister is corrupt, let them ask for more power against the Commission for Investigation on Abuse of Authority (CIAA). The government is extending full cooperation to them in conducting investigations. The disruption of house is only unfortunate. They are strengthening the hands of those forces that don't believe in the constitutional process. If they are against the government, why don't they introduce a no-trust motion, why don't they hold debate in the parliament, bring motion of public importance motion, call attention motion etc. There are enough procedures in the parliament to bring the government to book. I believe the Speaker has enough ammunition in his hand to conduct the house. Perhaps, he doesn't want to create an ugly situation in the House and still wants to persuade the opposition.

Now that the law and order situation has deteriorated so badly and the Maoists are advancing quite fast, don't you think the Prime Minister should resign?

I agree that the law and order situation is deteriorated. But as long as Prime Minister Koirala enjoys a majority in parliament, you can't throw this government out. Of course, the response of the government to the Maoist threat has been inadequate. But I know that there is no popular support for the Maoists. They have forced people to support them out of intimidation and force. So, we need to use all our power in a coordinated and unified manner to address this problem.

‘New Guidelines Will Ensure Transparency’

—Dambar Prasad Dhungel

DAMBAR PRASAD DHUNGEL, is the Chairman of the Securities Board, Nepal (SEBO). The board is responsible for regulating the capital market in the country. Dhungel spoke to SANJAYA DHAKAL on the recent upheavals in the stock exchange and their likely impact on the country’s capital market. Excerpts:

How do you assess the overall condition of the capital market in the country?

Before focusing on the capital market only, we have to look at the impact of this market on our national economy. From this perspective, I think our capital market still has a long way to go. But, then, the overall condition of our market is indeed very positive. From a modest beginning of Rs 13 billion market capitalization in 1993/94, it has reached to Rs 50 billion (with paid up value up to Rs 7 billion to 8 billion) in 1999/2000. The floatation of shares, too, has increased. The investor attraction is also on the positive side. There are around 300,000 capital market investors in the country. Recently, when there was a demand for Rs 50 million worth of capital, investors pumped in over Rs 2 billion. Therefore, it is clear that investors are willing to invest if anybody comes up with suitable projects.

A sharp decline was witnessed in the NEPSE index in February 28 and there have been further slumps in successive weeks. Is this fluctuation a sign of instability in the stock market?

To better understand the reason for the current swings, one has to study the circumstances. A year ago in April/May the NEPSE index stood at around 333.61 points. The following months saw a rise in the index as the country witnessed positive market indicators in the form of swelling investor confidence, the second-tier reform initiatives by the government and other investor-friendly activities. After the central bank asked the commercial banks to raise their capital base to Rs 500 million (minimum), it pushed the share prices further as investors predicted that the banks would issue bonus and rights shares to match that level. All these matters pushed the share prices to the peak of 545 in November. The subsequent months witnessed a gradual decline in the index as most of the banks completed their general meetings and some did not issue bonus or rights share as expected. In the month of Falgun (February/April), the index began to take plunge after plunge, leading to the single-day fall of 22.71 points on February 28. There is a certain cycle to the rise and fall of the market index. So you cannot say there is instability as such. It is all the result of different market mechanisms.

Following the fluctuation in the NEPSE index, the SEBO has introduced new guidelines on securities registration. What are its salient features?

The guidelines are a timely and relevant improvement on the provisions and conditions for registering and issuing securities. These guidelines will come into effect from the new year 2058. We believe these guidelines will be able to protect the interest and rights of investors by making the whole process of issuing securities more transparent, simple and well-managed. The special features of these guidelines include the observation of at least one-year track record of a company that wants to go public, encouraging companies to issue different instruments of securities like debentures and preferential shares, clarifying the provisions for issuing premium shares, increasing the minimum number of shares that can be applied for by investors to 50 (from the present 10), promoting the formation of mutual funds, making issue managers more accountable, encouraging under-written shares and many more. We have focussed on the primary market because once listed, these companies will enter the secondary market, too.

During the February 28 incident, some investors charged that the share prices came down because of "cornering and rigging" by brokers, stock exchange officials and people with inside information of commercial banks. What do you say?

Well, I cannot deny or accept this totally. Our system is an order-driven one. A buyer can order shares only after making it in writing. So it is not possible to sway the market based on some sort of whim. Every order is recorded and the stock exchange is closely involved in the financial transactions. Our stock exchange is not controlled by brokers. It is a government institution. Our stock exchange officials are not there only to operate the market but also to develop it. However, I do not claim that our system is flawless. We are evolving so there may not be the desired level of transparency. Take for instance, the bank transfer — which allows the transaction to take place without revealing the identity of buyers and sellers. Likewise, we also find the same client making both buying and selling orders. This type of transaction has to be transparent. We, at the SEBO and NEPSE, are looking into these aspects to ensure more transparency. As far as price fixing/formation is concerned, you will find that on February 28, only 22 points dropped and that, too, in the share prices of a few banks. It is not a case of a single institution losing significantly. Had that been the case, the reasons could have been grave. It is, therefore, hard to support the "cornering and rigging" theory. However, we concede that there is a lack of investment advisor to instil rationality among our investors and guide them, who are not experienced in the ways of capital market as such. In our system, the price base of shares is fixed by competition among written orders placed by buyers/sellers. If there is a thin intensity of competition, one or two big parties could always play the market. But how do you verify it? Apart from being more vigilant, we can do nothing. We have to ensure that the intensity of competition remains high.

It is said our market is dominated by uninformed investors, resulting in speculative trading. How can we improve this situation and induct more institutional and informed investors?

We have to improve the education and consciousness level. Given the short history of our capital market, the level of consciousness is definitely inadequate. Our market is dominated by retailers. That is why we are calling for an institutional mechanism to give authentic advice to small and marginal investors. Rating agencies and investment advisors are necessary. That apart, all the market players need to work towards helping the investors. Recently, the government reached an agreement with Asian Development Bank (ADB) on corporate finance governance, which, hopefully, will be launched by next year. The objective of this program is to improve the corporate finance scenario by ensuring transparency, accountability, improve regulations and information flow. In the same direction, we have revamped the existing Securities Exchange Act. Likewise, we are working to improve the Company Act and the Institute of Chartered Accounts Act. Furthermore, this program also aims to build the capacity of institutions like NEPSE, SEBO. Privatizing the stock exchange will also be mulled. These apart, there are provisions to reform the market infrastructure by forming a central depository system, developing insolvency proceedings and so on.

Why is the NEPSE dominated by financial institutions?

There are five sectors in the NEPSE — banking, financial, tourism, manufacturing and industrial. Not that we don’t have other sectors. But their track record is not good and hence, they are not visible. Maybe the industries need to restructure themselves to become attractive. The visibility and transparency of other sectors is poor. There is no debate about their problems. But if you look at the history, there are reasons to be happy. Only few years ago, there were no hotels listed at the NEPSE. Now, we even have an airlines. In India, the information technology sector has a big hand in improving the profitability to the capital market investors. The same thing should happen here, too. I am sure there will be a gradual improvement in the attraction of the NEPSE.