National 4 (Spotlight Weekly)

‘The Gulf War's duration will determine the extent of its impact on Nepal’

— Dr. RABINDRA K. SHAKYA

Dr. RABINDRA K. SHAKYA, a well-known former bureaucrat, is currently senior economic advisor in the Ministry of Finance. Dr. Shakya has spent almost all of his civil-service career undertaking various responsibilities at the National Planning Commission. After completing his term as NPC member-secretary, Shakya was appointed to his current post two years ago. As Nepal is facing a new economic crisis following Gulf War II, Dr. Shakya, who has wide knowledge of the various five-year plans implemented in the country, spoke to KESHAB POUDEL on various current issues. Excerpts:

After a long tenure at the NPC, you are now working as senior economic advisor in the Ministry of Finance. How do you look at the state of the Nepalese economy?

The Nepalese economy is now in the process of change in a positive direction. During the first six months, the economic performance has been really good in various sectors. For instance, we have seen very positive signs in GDP growth rate. Despite the previous hostile situation, we are expecting the GDP growth to be around 2.5 percent. Economic indicators have shown that the overall inflation will be within desirable limits. There are indications of economic stability.

How do you see the gap between revenue generation and expenditure?

The gap between revenue generation and expenditure has been gradually reduced. Nepal's foreign exchange reserve has increased over the years. The country's foreign exchange reserve will sustain imports for about eleven months. All these are indications that the Nepalese economy is heading in a positive direction. However, one has to be very cautious in interpreting the information that is available at the moment. Whatever negative implications have been shown in the Nepalese economy is not the creation of one year, as the trend has been negative for quite a long time.

How can the Nepalese economy benefit from an improvement in the law-and-order situation?

With the improvement in the law-and-order situation, we are expecting a conducive environment on the economic front. When people perceive that the law-and-order situation is improving it will help us to accelerate economic policies and programs. More money will be spent on development programs. The circulation of money will boost the economy and an increase in investment will accelerate the national economy. This is the reason why we expect GDP to grow by 2.5 percent. Once again, the major determinant will be the extent of the improvement in law and order.

Don't you think Gulf War II and rise in the prices of petroleum products will affect the economy?

In fact, the Ministry of Finance has done some research in order to gauge the impact of the war on the Nepalese economy. War is an ugly business that defies all rational expectations. Projections will be determined by the pattern of the war. The impact of war is always severe, particularly in the petroleum sector. The Nepalese economy largely depends on external factors. The war has an impact on the flow of funds into Nepal. Foreign aid is likely to decline; prices are likely to increase.

What specific impact would you foresee on the market?

The rise in the prices of petroleum products will have an impact not only on the import of POL but also on manufacturing output. Many industries depend on imported chemical and petroleum products. With the rise in fuel prices, transport cost increases along with production cost. Every enterprise will increase prices. Several other areas and sectors, including agriculture, will be affected. We have already read in newspapers of the decline in the number of people working in the Gulf region.

As a large number of Nepalese are working in the Gulf region, how will the war affect remittances?

Many people who are already in the Gulf countries are insecure. With the changes in the pattern of foreign labor, it will have an impact on remittances. The figures show that Nepal secured more than 22 billion in the first six months of the fiscal year. If the normal situation prevail, the amount is bound to increase. Nepal will also suffer in terms of foreign trade. Foreign trade has shown some recovery in the last few months. We suspect that it will decline and our import from India will increase. Nepal's trade deficit with India will further increase. As Nepal's trade with other foreign countries fall, the trade deficit between India and Nepal will increase. The growing trade deficit will have a great impact on the Nepalese economy. There are many impacts on the economic sector.

With the announcement of the government-Maoist cease-fire, the tourism industry felt a sigh of relief. How vulnerable is tourism to the fallout of the Gulf War?

Tourism is another area where one can see a major impact. With the announcement of the cease-fire, our tourism industry has seen some progress. But the war will once again hit the sector. Since more than 80 percent of tourists travel by air, the reduction of flights will reduce the number of tourists. The Iraq war will reduce the mobility of the people. The drastic effect will be on tourists who want to visit Nepal. Tourism industry will thrive in a condition of peace and security. Since the war seems likely to continue for many months, potential tourists may postpone their visit until the return of normalcy. When war affects the global tourism market, it will affect Nepalese market as well. These are some of the areas that will be affected by war. The extent and duration of the war will determine the precise nature of the impact. If war goes on for a long time, the effect will be more widespread and vice versa.

After a long delay, the government has privatized Butwal Power Company (BPC). How many public enterprises (PEs) are now in the pipeline of privatization?

The economic reform program announced by the government has a target of privatizing eight PEs. Out of them, the BPC has already been privatized. The privatization of the BPC was delayed for quite a long time. The privatization of the BPC is a significant development. Several other PEs are in the pipeline. The government has decided to liquidate Birgunj Sugar Mill and is taking steps to liquidate Himal Cement Factory. You can see advertisements in the local newspapers inviting the private sector to take charge of Bhaktapur Brick Factory. There are several others and we are assuming that more than eight PEs will be privatized by the end of current fiscal year. The progress made in the area of privatization is quite remarkable.

Why was the privatization process delayed for such a long time?

There are certain processes in privatization, since a high-level committee is there to take the initiative. The committee is composed of various political parties, experts and government officials. The difficulty in the committee is to come to an agreement. Since every political party has its own agenda, the decision process was often hampered by political ideology. The meetings almost always ended without any conclusion.

At a time when there is a debate over inviting competition in the supply and distribution of petroleum products, how do you see the possibility of privatization of Nepal Oil Corporation?

Economic principle says competition will reduce prices. If anything is working along the line of monopoly or a single institution is given the monopoly rights, there will be monopoly of market and prices, demand and supply. If there is more than one institution to supply such commodities, it will reduce the prices and improve the supply situation. Sooner or later, the government has to make some kinds of arrangement to allow private-sector participation in acquiring and distributing petroleum products.

How do you explain the state of revenue generation?

The government has been making every possible effort to increase revenue collections. Given the economic situation, we have already collected revenue worth Rs.23.5 billion in the last six months against the target of Rs.57 billion. We are expecting that toward the end of the fiscal year, revenue mobilization will increase and meet the target. Following the announcement of cease-fire, the country has witnessed positive progress in economic activities. Despite our vigorous effort, there will be certain shortfalls, which will still be manageable.

What steps is the government taking to rehabilitate and reconstruct infrastructure damaged during the seven-year Maoist insurgency?

There are certain plans and programs included in the government's annual budget. Some organizations have already started rehabilitation and reconstruction works in the areas of power, communication and roads. These are the areas the government's forthcoming budget will address. As we move along, the government with its limited capacity has tried to restore the infrastructure destroyed during the past seven years.

Poverty alleviation is one of the main targets of the Tenth Plan. Has the government allocated funds to meet the target?

Poverty alleviation is only objective of the Tenth Plan. The Ministry of Finance will allocate budget in conformity with the objective of the plan in the areas of poverty alleviation. As a companion volume of the Tenth Plan, it will come up with the medium term expenditure review. The Ministry of Finance's major responsibility is to come up with programs that will translate the actions laid down in the Tenth Plan. The Tenth Plan and the budgets will go side by side. We have to follow the objectives and targets set by the Tenth Plan.

Since the World Bank has upgraded Nepal's lending position from low case to base case, does Nepal have the institutional capacity to take more money?

This is a very good indication of the fact that Nepal's implementation capacity has improved over the years. That is precisely one of the reasons the World Bank has upgraded Nepal's position from low case to base case. If Nepal can accelerate its implementation capacity and qualify for this facilitation of international community, I cannot say why Nepal cannot increase the institutional capacity. Nepal has everything to enhance its implementation capacity.

What is required to make our economic policy dependable?

Politics should not intervene in economic matters. As long as politics influences economic decision making, it would be impossible to achieve economic development. Had we allowed a functioning market as determination of market force, the country would not have had to see many economic crises. Although international prices of oil products have gone up by many folds, the decision to increase the prices was delayed because of political intervention.