COVER STORY (Spotlight Weekly)

At The Lowest Ebb

Political instability, deteriorating law and order and frequent 'Nepal bandhs' are going to create a deadly cocktail in which no business can survive. Restoring business confidence is a long process which must be initiated before it is too late.

By BHAGIRATH YOGI

It was a colorful scenario on Sunday morning. Thousands of people, including top government officials, opposition leaders, prominent businessmen, professionals and people from various walks of life had gathered at Tundikhel, near Shahid Gate, in the capital on January 7 to take part in a "peace rally." Organized as per the call of an all-party meeting at the initiative of the main opposition UML and brought together at the initiative of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the nearly two-hour-long 'silent rally' that passed through major thoroughfares of the capital carried a very simple and straightforward message: "As an ethnically diverse country Nepal needs social harmony. Peace and stability is essential for economic development."

Businessmen at the peace rally : for social harmony and industrial security, unity is must

Two weeks after violent protests in the capital that claimed the lives of five people, concerned citizens took to the streets, albeit peacefully. "The rally was also a way of telling people that you can convey your message in a peaceful manner," said Pradip Kumar Shrestha, the FNCCI president, who looked happy with the overwhelming response to the peace rally. "You don't need to adopt violent means or call 'bandhs' to put your demands or pressure the government," he said.

Only if a section of Nepali political leaders had listened. Only a week back, a group of Nine Left parties had called a two-day-long `Nepal Bandh' (nationwide shutdown strike) on January 1 and 2 coinciding with the beginning of the New Year. The parties called the `bandh' demanding the resignation of Home Minister Ram Chandra Poudel, holding him morally responsible for the deaths of five people, including two minors, in police firing during the violent protests late last month.

Poudel did not oblige. But the government formed a high-level commission to investigate into the violent protests on Christmas Eve in the capital to protest against the alleged remarks by a young Indian actor, Hrithik Roshan. Roshan said he had never made any such comments that could harm Nepali sentiments. The protests that were 'carefully' orchestrated against businesses owned by Nepali businessmen of Indian origin and Indo-Nepal joint ventures had already caused huge losses.

"Property worth nearly Rs 50 million belonging to business community was destroyed during the riot," said Rajendra K. Khetan, ex-officio vice-chairman of the FNCCI and the president of the Marwari Youth Forum. "The national economy has suffered a loss of an estimated Rs 500 million due to the violent protests."

More than physical losses, the sentiments of the business community got hurt in a way incomparable to the past. "Though our forefathers had come to Nepal nearly 800 years ago, those who came here from Marwad in India within the last 200 years are known as Marwaris," said Shanker Kedia, a prominent businessman and social worker. "We are first Nepalis, only then Marwaris. This is our 'janmabhoomi' as well as 'karmabhoomi.' Those who want to spread hatred against a peaceful community like Marwaris want nothing but disintegrate this country."

People are at a loss to explain why vested interest groups targeted business communities of specific origin in Kathmandu. But it was obvious that some unscrupulous elements were out to harm industries and business, both domestic and joint ventures, taking benefit of the lax security environment.

"The government is committed to provide adequate security to businesses," Prime Minister Girija Prasad Koirala assured industry leaders who called on him in the aftermath of the violent protests in the capital. "The government will take all measures to bring the situation under control."

Within a week of this assurance from the chief executive, around one dozen armed people attacked the godown of Balaji Petrochem Industries in Birgunj and set it on fire early Saturday, causing a damage of an estimated Rs 50 million to Rs 60 million. According to Vice President of Birgunj Chamber of Commerce and Industry Satya Narayan Agrawal, owner of the factory, the armed gang had assaulted the security guards at the factory and tied them up before setting it on fire. A day later, unidentified persons threw a 'petrol bomb' at Jayasawal Wood Industry in the same town destroying properties worth around Rs 1.4 million in the fire. "About a month ago I had received a threat call from people claiming to be Maoists," said Ramchandra Prasad Kurmi, manager at the industry.

Sources said rebels belonging to the underground party were targeting those businesses that refused to pay them "donations." Attacks within industrial district of Hetauda and godowns of Surya Tobacco and other factories in Simara seemed to be motivated from larger motives.

"The government has failed to provide security to business and industry," FNCCI President Shrestha told SPOTLIGHT Tuesday before flying to Birgunj to assess the situation. "Such incidents have taken place despite the local business community's initiatives to set up 'mobile security force' in Birgunj. If we have to take up the entire burden of security on our own, why should we pay taxes to the government?" he asked.

Unfortunately, as the law and order situation was deteriorating in the country, the ruling Nepali Congress was involved in its never-ending internal feud. The dissident group within the Nepali Congress registered a no-trust motion against Koirala at the Nepali Congress parliamentary party last month even before the Kathmandu streets could return to normalcy.

Experts warn that political uncertainty, indifferent bureaucracy, deteriorating law and order and frequent 'Nepal bandhs' are going to create a deadly "cocktail" in which no business can survive.

"Businesses can develop and economy prosper only when there is a guarantee of peace and stability," said Dr. Govinda Bahadur Thapa, an economist at the Nepal Rastra Bank. "The present environment of insecurity and instability has had serious impact upon all the sectors of the economy." (See: Box)

The effect of prolonged instability is already being seen in the market. "There is massive slackness in the market and sales have slashed down significantly. Investors (both domestic and foreign) have put on hold their investments and existing industries are also facing crisis," said Mahesh K. Agrawal, former president of Nepal Chamber of Commerce. "As the farmers are not finding adequate price to their produce in the market, the demand for goods and services has declined. The mobility in the economy is quite slow."

Dr. Thapa also agrees that aggregate demand in the economy has declined at the moment. "As the wealth created in the aftermath of open and liberal economic policies adopted by the government has been concentrated in very few hands and there are no new avenues of employment, popular resentment is growing," said Dr. Thapa. "The government, too, has failed to ensure judicious distribution of wealth and create new job opportunities."

It is common knowledge that such a situation is always volatile in nature that can burst even at a rumor, as was the case last month. As political parties fail to put aside their differences and create an environment conducive for economic development, public disenchantment is likely to grow further.

"No political party has focused on economic agenda over the last one decade," said Troths. "They have been too busy with their political games."

One of the positive aspects is that, though belatedly, Nepali private sector has started to assert itself. At the call of the business organizations including FNCCI, ruling Nepali Congress announced that it will never organize shutdown protests in future irrespective of whether it is the in the government or in opposition. The main opposition, Unified Marxist-Leninist party, fell short of making such commitments but went a step forward by making it clear that it did not support the two-day long bandh called by the Group of Nine Left parties early this month. The party condemned the elements willing to give rise to communal violence in the country and vandalism that took place on December 27

"Reactionary forces, in an effort to create uncertainty and confusion in the country, are utilizing the present disenchantment. All Nepalis should be alert about this," the party said, in a statement.

Business communities agreed. "Acts of terrorism, intimidation and creation of a sense of insecurity in industry and business will adversely affect the economy," said Nepal Chamber of Commerce, in a statement. It also urged all responsible forces and political parties to think about the consequences of such violence.

With the formation of a majority Nepali Congress government after general elections in May 1999, Nepali business community, as well as the society at large, had anticipated a stable government, long-term policies aimed at a sustainable, high growth and their effective implementation. The economy registered a growth of more than six percent last year and similar growth has been forecast this year. The ruling Nepali Congress, however, failed to provide a sense of stability to the people. Prime Minister Krishna Prasad Bhattarai was forced to resign amidst a rebellion from within the party after completing only nine months in office. Prime Minister Koirala, who replaced Bhattarai, has been facing dissidence from day one.

"Business, especially investment, needs a climate of confidence, order and predictability. Once the confidence in future is shaken further, investments will be put in cold storage, if not totally abandoned," said Padma Jyoti, former president of FNCCI. "A few bumps are expected in a developing country like ours. But a consistent pattern of disorder, mismanagement and violence with no improvement in the offing will finish Nepal as far as foreign investment is concerned. Even Nepalese investment will shy away from

value adding long-term sector and divert to less risky quick business." (See: Interview)

And, if the present situation continue to prevail, this may happen sooner than later, warn leading business people. "Around half a dozen multi-national companies are considering their withdrawal due to rigid labor laws and lack of industrial security," Prabhakar Shumsher J. B. Rana, President of the Soaltee Group, told reporters Monday.

Foreign investors, too, insist that these issues are quite important to attract foreign investment. "Overall economic environment, industrial security and labor related issues are quite important for any investor," said Sandip Ghose, managing director of Nepal Lever Limited (NLL), a subsidiary of Hindustan Lever Limited. "Once you destroy the industrial culture, nobody comes back."

We need not go too far to see what happens when the industrial environment is disturbed. The then Indian government provided tough security to the industries and businesses in Punjab in the eighties amidst fatal assaults from Sikh militants. As the government could control the insurgency over a few years, industries continue to thrive there. But, in West Bengal, where the Communist government itself encouraged 'hartals and bandhs,' most of the industries packed their bags and never returned.

The situation in Nepal may not be that bad but it is at a critical juncture. Irresponsible acts on the part of the government, opposition parties or businesses themselves would hurt the economy most. The daylong shutdown of their hotels by hotel owners last month, amid a controversy over the issue of introduction of 10 percent service charge as demanded by the hotel workers, did not send positive signals to international travelers.

"Tourism is the most sensitive sector and it gets hurt when there is any instability," said Dr. Thapa. Reports said the number of tourists visiting Nepal by air declined by more than 10 percent in recent months. It was mainly due to decline in the number of Indian tourists in the aftermath of hijacking of New Delhi-bound Indian Airlines aircraft on the Christmas Eve in 1999. Analysts say recent media reports regarding violent protests in Kathmandu and the message that Indian tourists and businesses are not safe in Nepal might result in further decline in the number of tourists.

Officials say the government is quite aware about protecting businesses and safeguarding the tourists. "These reports are quite exaggerated," said Deputy Prime Minister and Home Minister Ram Chandra Poudel. "Nepal is still a safe destination for tourists and investors."

The government, political parties and private sector need to work hand in hand to create a conducive environment where economy could grow. The main responsibility, of course, lies with the government which was elected to the office promising to maintain law and order in the country and economic well being to the people. Of course, restoring business confidence is a long process. But it can be shattered overnight, as was the case last fortnight.

‘Nepal Can Gain From Its Strengths If Politicians Stop Messing Up Everything’

— PADMA JYOTI

Industrialists may have different hobbies. But for PADMA JYOTI, former president of the Federation of Nepalese Chambers of Commerce and Industries (FNCCI), weekends, too, come with reading and writing assignments. Known more as an academic than a businessman, the vice-president of the SAARC Chamber of Commerce and Industries is worried by the latest developments in the country. The chairman of Jyoti Group spoke to BHAGIRATH YOGI on Sunday. Excerpts:

How do you assess the fact that the recent violent protests also targeted businesses?

We have had many bandhs in Nepal in recent times, but the last protest took an uncharacteristically ugly turn. What we saw is not at all in keeping with the true character of the Nepali people, who are tolerant and peace loving. This was disturbing. Every right thinking Nepali condemns such behavior. Apart from the physical vandalism and the economic losses resulting from closure of business, the psychological shock was greater this time than in the past. It exposed our fragility for which we ourselves are mostly responsible. I don�t agree that the alleged remarks of a film actor were the reason. Pent-up frustration with the state of the country and anger with all unfair treatment meted out to us when sparked by a few instigators just exploded. It was directed as much inwards as outwards. But all loss has been Nepal�s. Business, especially investment, needs a climate of confidence, order and predictability. Once the confidence in future is shaken further, investments will be put in cold storage, if not totally abandoned. A few bumps are expected in a developing country like ours. It is normal and can be taken in stride. But a consistent pattern of disorder, mismanagement and violence with no improvement in the offing will finish Nepal as far as foreign investment is concerned. Even Nepalese investment will shy away from value adding long-term sector and divert to less risky quick business.

What could be the fallout of such protests and frequent bandhs?

Let me deal with the bright side first. One positive fallout is the realization by all segments of our society of the folly and danger of such self-destructive behavior. Most political parties, a cross section of the citizens and civil society suddenly woke up. The outpouring of feelings for harmony, peace and brotherhood are encouraging signs. Genuine nationalistic feelings of unity of the country also surfaced. The surprisingly overwhelming response to the call for a peace march by FNCCI this week is an example. Now we should try to channel these positive feelings into constructive and lasting areas. Next, let me mention the negative aspects. We have to realize that continuation of divisive politics, infighting, senseless violence and mindless pursuit of selfish interests will push Nepal into an abyss. Constant vigilance by all citizens is absolutely necessary. A New Year is a good time to make resolutions. Let all of us make a few personal resolutions to work diligently without only politics in mind in our respective fields and resolve to make a few sacrifices to accommodate each other. The time has come to think deeply about the epidemic of bandhs in our society. People are fed up. To start with, let us declare a bandh-free year, I am sure that the results will be happy for everyone. We should also draw up norms for bandhs to bring some order and accountability. I am preparing some suggestions for consideration by everyone.

What has been the impact of political instability on our economy and businesses?

This is our biggest tragedy. In spite of a majority ruling party, the public perception is that of chronic political instability. The common citizen does not sense that all wheels of the state are moving in unison. His faith in the capability of the government to manage affairs is shaky. These are not pleasant things to hear or say, but this is what the man on the street feels today. For healthy growth of business also, this is very harmful.

In such a situation, don�t you think investors -- both domestic and international -- will lose confidence?

I would not go to the extent of saying that it is the end of the world for investors. Shaken for the moment, yes, but if we can provide an assurance that we are taking steps to take matters under control, investor confidence can be restored. In the end, economic potential and viability is what determines investment. Nepal has strong points and competitive sectors. I only wish that we, especially the politicians, do not make a mess of everything we attempt to do.

What should be done to regain investor confidence?

What needs to be done first is to fulfill promises we have made to the investors in the various acts. Nothing is more damaging than finding out that the government does not implement what it says. Secondly, bring accountability in decision making in bureaucracy. No one seems to be under anyone�s control. Most agencies seem directionless. The ministers have to provide good leadership and become better managers of their jobs. Checking the cancer of corruption from spreading should be at the top of the agenda. Finally, politicization of every segment of society must be stopped. For example, most of the organizations of teachers, workers, students, farmers, even professionals, are a front for political parties. Instead of being concerned with their main job, they have become tools of parties to be used for political aims. We are fast losing a work culture where loyalty to the institution for which we work, and to the work that provides us our livelihood is paramount. Merit, productivity, efficiency, hard work are not the measuring yards any more, but political muscle, use of coercion, divisive tactics are taking over. For example, can anyone today take a decision based on performance or ability of a worker in any industry? I am afraid not. What can you expect except mediocrity and more politics from such enterprises in future? This kind of culture will doom our economic sector, which has to face competition from the world.

How would you evaluate the implementation of the 2000/01 budget so far?

I don�t have the figures with me to make a factual analysis. But I wonder where does anyone have time out of politics to monitor and take corrective steps? I heard complaints from FNCCI representatives to the Revenue Advisory Board that many suggestions are made but none implemented. To make a subjective comment, I do not think that the business community is happy with the business environment this year. It is true that some initiatives in the right direction have been started, but what can one minister, one planner or one expert do? The entire government machinery has to get behind any effort. FNCCI calls it a lack of economic vision and wants to see that all political parties give an economic agenda.

Is Nepal's private sector ready for global competition at a time when we are trying to enter the World Trade Organization (WTO)?

I had a chance to visit the WTO recently. I realized how little I knew about it. In our part of the world, perception of the WTO has been like that of seven blind men, each touching a different part of an elephant and then describing the beast. I am afraid this is especially true of our business community. However, let me offer some consolation. We are not alone in this ignorance; 80 percent of the 110 countries that signed WTO agreements in Marrakesh in 1994 did not know what they were signing.

The time to debate whether to join the WTO or not is wasted time. Do we want to get in and row the boat with the world or sink by staying out all alone in the world?

WTO principles cannot be faulted. Yet there is so much to learn in the complex maze of rules and regulations. For countries like ours, it is a bitter reality that the rules are already framed without our participation. Even though the WTO looks like a lion�s den, we have to get inside and try to influence the lion not to eat us alive. We have to get inside the WTO to negotiate important provisions critical to our needs, especially under the Integrated Framework for LDCs. There is simply no other way.

What about the proposed South Asian Free Trade Arrangement (SAFTA)?

SAFTA is a regional initiative. If we proceed according to the schedule, the SAFTA draft agreement should be finalized by the end of this year. But the parent body SAARC itself is on hold politically at the moment. Even after we resolve that knot, some sectors of the business community are bound to have concerns about the effects of SAFTA. Some restructuring is inevitable which will be somewhat painful in the short run. But SAARC Chamber believes that in the long run without co-operating with and opening to each other our region cannot hope to prosper in this world.

‘Aggregate Demand in the Economy Has Declined’

— DR. GOVINDA BAHADUR THAPA

Vice Principal at the Bankers� Training Center at Nepal Rastra Bank, Dr. GOVINDA BAHADUR THAPA, keeps a close watch on latest trends in Nepal�s economy. He spoke to SPOTLIGHT on related issues. Excerpts:

What will be the economic impact of the recent violent protests and frequent �bandhs�?

It will have a serious impact, especially on the tourism sector. Hooliganism in the heart of the capital will not send a positive message. Businesses can develop and the economy can prosper only when there is a guarantee of peace and stability. The present insecurity and instability have had a serious impact on all economic sectors.

Are there signs of slackness in the economy?

Aggregate demand in the economy has declined. As wealth created in the aftermath of the government�s open and liberal economic policies has been concentrated in very few hands and there are no new avenues of employment, popular resentment is growing. The government, too, has failed to ensure judicious distribution of wealth and create new job opportunities.

What could be new areas of investment?

With the commissioning of new power projects in the private sector, a message has gone that we now have excess power. This might discourage potential investors in the hydropower sector. If we could create an environment for long-term investment, then we could invite investment in the infrastructure sector. Given the volume of vehicle traffic to and from Kathmandu, we may need another road, besides the Banepa-Sindhuli road, within a few years. Investment has not come to the Hetauda-Kathmandu tunnel road. But for all this, we must have stability at the political and policy level.

How serious is the unemployment problem?

An estimated 300,000 people enter the job market every year. But we don�t know what are they doing. Most are illiterate, unskilled and partially employed in agriculture. Whatever jobs have been created over the last decade have gone to urban, educated youth. Majority of them may have gone to India or abroad in search of jobs. As the present policies of the government are not creating and expanding jobs, there is a situation of chaos.

Could a six-percent economic growth rate be sustained this year?

Except agriculture (production of paddy, to be specific) no sector of the economy has expanded. Tourist arrivals have declined. We are yet to get figures from liquor industries but production of cement, sugar and cigarettes have declined. In international trade, exports to India are encouraging but there is a negative growth in exports to third countries. The government-owned banks are in the doldrums. Credit from banking sector to the private sector has failed to pick up. We can�t anticipate progress in most economic sectors.

How can the situation be improved?

Our political leaders must practice self-criticism. If they are really committed to the country, democracy and people, they must give up their traditional way of governing.