Tuesday, September 13, 2011

Need for immediate relief for industrial sector in Nepal

This was published in Republica, September 12, 2011, p.6. Here is a piece on the same issue by Milan Mani Sharma of Republica.

Relief for industrial sector

At a time when the public’s confidence on bureaucracy and political leaders is ebbing down to arguably the lowest level after skyrocketing of hope following the 2006 revolution, the newly appointed Prime Minister Dr. Baburam Bhattarai’s team has announced a slew of “relief” measures to convince Nepali people that the new government feels and fathoms the desperation for tangible change. While some of the measures are consistent with the major party’s political agenda and are outright populist, they are nevertheless required in one form or the other. Pundits and talking heads can preemptively debate on the intention and nature of the relief package, but the application of these initiatives merit some time. Their success has to be judged against the intended objective and efficacy.

Now, as much as the public needs relief package, the industrial sector also deserves immediate measures to kick-start jammed growth engine and jobs creation. It needs immediate relief for two main reasons. First, due labor related problems and policy inconsistency, the investor’s morale and market confidence are pretty low right now, leading to withholding and withdrawal of investment plans. Second, due to lack of adequate supply of infrastructure and supply-side constraints, industrial output is declining and cost of production is rising, leading to low economic activities, stagnation in employment generation, and loss of competitiveness.

Unless the industrial sector gets the badly needed relief from these constraints, the dream of attaining double-digit growth—also reiterated by Finance Minister Barsa Man Pun as soon as he assumed office and trumpeted by the UCPN (Maoist) bigwigs multiple times– won’t be realized. High growth will not be attained just by customary assistance to agriculture sector—whose output and volatility largely depends on the monsoon— by offering fertilizer subsidies, investment in irrigation and promotion of agriculture cooperatives. High and sustained growth requires structural change and more reliance on industrial activities.

Unfortunately, our industrial sector— which constitutes mining and quarrying; manufacturing; electricity, gas and water; and construction sectors—has been consistently losing ground. Currently, its contribution to GDP is approximately 14 percent only. Meanwhile, manufacturing sector is fast losing strength, bringing down its contribution to GDP to 6 percent. Note that a strong and sustained growth of manufacturing sector means more jobs, stimulation of economic activities, and a high but less volatile growth rate. We just have to look at our neighbors—China and India—for example.

It does not come as a surprise that the dismal performance of industrial sector, particularly manufacturing sector, is also reflected in the export-oriented sector, one of the most important sectors through which our economy gets foreign exchange reserves. The latest annual macroeconomic data released by the central bank shows that total exports are estimated to be just Rs 64.6 billion in 2010/11, down from Rs 76.7 billion in 2008/09 but up from Rs 60.8 billion in 2009/10. When the data was released the authorities were quick to point out that exports have increased by 6.1 percent, which is higher than 5.4 percent growth of imports. There is nothing to be exuberant about on this one as the high growth rate of exports was relative to previous year when exports plunged by Rs 7 billion. A slight improvement when the base is too low obviously gives a larger bump in growth rate! Also, the relatively low growth rate of imports has to do with decrease in imports of certain commodities, thanks to restrictive policies imposed by the government.

The situation has gotten so worse that we cannot even finance our petroleum imports (Rs 75.07 billion in 2010/11) by exports revenue. Diversification of exported product and destination is not happening as our export basket is squeezing and we are increasingly dependent on India for both exports and imports. Overall, exports of goods and services have declined from as high as 27 percent of GDP in 1997 to less than 15 percent today. Meanwhile, imports of goods and services have exploded to 28 percent of GDP. This has resulted in total trade deficit of around 22 percent of GDP. Similarly, an estimated Rs 2.93 billion of balance of payments surplus following two successive years of deficit has more to do with a fluke of handsome transfers and reimbursements as our economic fundamentals have not changed much. Our current account deficit is still negative despite a surge in remittances.

You might be wondering how all these dismal numbers are related to the above-mentioned call for industrial relief. Well, persistent labor dispute, which exacerbated after the UCPN (Maoist) affiliated unions formally entered the industrial sector as an organized group plus the destructive activities of Young Communist League (YCL), hit investor and market confidence pretty hard. It led to closures of multinational companies and withholding of investment spending. The unruly activities of trade unions, which are run by people who care more about themselves and party leaders rather than job security and welfare of workers they claim to represent, was continuing even when the relief package was announced. Recently, it cost us Surya Nepal Private Limited’s Biratnagar-based garment manufacturing unit. The popular Fire and Ice restaurant in Thamel is the latest victim of few unruly trade union members who are trying to dictate management level appointment, which is beyond their jurisdiction and obligation. Furthermore, the inadequate supply of infrastructure (power and roads network) and other constraints such as policy inconsistency, security, and sporadic blockade of major trade routes are also contributing to withdrawal of investment, capital flight and closure of firms. Domestic investors are moving to service sector (save hotel and restaurants) that has relatively low union pressure and less cost of doing business.

These constraints are also identified as problematic factors for doing business in Nepal by the latest Global Competitiveness Report 2011-2012, which has ranked our economy as 125th most competitive (out of 142) in the world. We are ranked the lowest in supply of electricity and second worst in supply of infrastructure. The ranking is miserable in labor regulation, labor market efficiency, productivity, security, production sophistication, and innovation. The business sector thinks government instability is the most problematic factor for doing business, followed by inefficient government bureaucracy, policy instability, corruption, inadequate supply of infrastructure, and restrictive labor regulation.

It is leading to an erosion of our industrial capacity, without which growing at a steady 5 percent growth rate—let alone a double-digit rate—is impossible. Hence, the call and need for immediate industrial relief. A tentative relief package could be: taming labor militancy and smoothening industrial relations; policy consistency on key issues related to investment regime and sectoral support; effective end of syndicate; credit at low interest rate to key sectors where we enjoy comparative advantage consistent with our land, labor and capital resource endowment; emergency measures to supply power for at least two shifts in manufacturing plants; fast track endorsement of investment plans and lowering cost of doing business in Nepal; enactment of SEZ bill; and industrial security. These are doable and are not populist measures.

PM Dr. Bhattarai and FM Pun are well aware of these constraints and the challenges faced by the industrial sector. Now, they should at least make an effort to bring out industrial relief package to restore confidence of investors and markets. Of course, they will face resistance from their own party and other vested interest groups. But, it should be rightly confronted with as demanded by the emergency nature of our eroding strength of industrial sector.