Sunday, November 13, 2011

Policy implementation paralysis in Nepal

[This was published in Republica, November 12, 2011, p.6]

Policy implementation paralysis

Here is a snapshot of the current state of our economy: Economic growth is stagnant at under 4 percent, well short of fiscal budgetary targets and the Three Year Interim Plan. A lack of job opportunities in the domestic economy is compelling over 20,000 workers to seek employment abroad every month. General prices of goods and services have been stubbornly sticky at near double-digit level. The fragile financial sector and real estate activities have not recovered yet. The manufacturing sector is shrinking, productivity is declining, competitiveness of Nepali products is eroding in the international market and imports are ever-surging, which has resulted in widening of the trade deficit. Expenditure growth is higher than revenue growth and the growing saving-investment gap has led to inflow of foreign aid worth 25 percent of budget. High inflow of remittances has precariously balanced the economy right now.

All of these have occurred not because we lack good policies, but because there is laxity in implementing existing policies and enacting new ones that will directly stimulate economic activities.

Anyone trying their hands at innovative and entrepreneurial stuff, those who are actively looking for job opportunities and those frequenting local retail stores might have realized that the current state of economic affairs is simply unsustainable. Unfortunately, most of our political leaders and policymakers, far removed from the concerns of the regular folks, are unaware of the fact that the status quo is unsustainable. It is high time they acknowledged that new reforms and effective implementation of the already enacted ones are vital to break the economic impasse.

Thus the government should focus on effectively implementing the enacted economic and trade reforms and formulate new ones that directly address the constraints to growth of key sectors. Equally importantly, it should also ensure that the implementation of reforms is overseen by qualified and informed policymakers and political leaders.

Our economy will remain competitive only if we align production and employ resources in such a way that output base gradually shifts from production of low value added goods to high value added goods. It will lead to an increase in growth rate, job opportunities, revenue, production level, and foreign reserves as our export items gain deeper foothold in the international market. For this to happen, the economy needs to undergo structural transformation along with the enhancement of productivity.

In its latest Article IV Consultation with Nepal, the IMF also argued that Nepal needs to enact structural reforms to raise productivity and growth. It maintains that macroeconomic stability and managing financial sector risks are the two most challenging tasks right now. Given the current state of our economy, it expects real economic growth of 3.8 percent in 2011/12, which is revised downward from its preliminary estimate released in August. It means that economic activities are expected to slow down even more than what was projected few months back.

Now, to check further slowdown in growth (which is expected to remain below 4 percent till 2015 with the current state of affairs) and maintain macroeconomic stability, we need meaningful implementation of structural and policy reforms. It means controlling unproductive expenditure, raising revenue, increasing exports and decreasing trade deficit, maintaining sound balance of payment, controlling high inflation, addressing supply-side constraints, and ensuring soundness of the financial sector, among others. Without effectively implementing the already enacted reforms and adopting new ones that will generate high growth and employment, all of these economic challenges will remain unaddressed. Sadly, the existing laxity shown by policymakers and political leaders on this front is costing us dearly in terms of lost industrial output and eroding competitiveness of our exports.

For instance, as outlined in the Industrial Policy 2010, the government has been unable to implement ‘no-pay-for-no-work’ policy and one-window facility to all industrial woes. Similarly, the same policy document promises easy exit from business for promoters, freeing them from long-term labor and other liabilities. Unfortunately, all of these also remain unrealized as is evidenced by the difficulty in exiting the market by the labor strike stricken Surya Nepal’s garment manufacturing unit in Biratnagar. The policy implementation paralysis is leading to protracted industrial disputes, high cost of production resulting from power cuts and high labor costs, and numerous supply-side impediments. These are eroding investors’ confidence In our economy. Worse, labor cost in Nepal is already the highest in South Asia. The total annual labor cost is US$ 1889 per year in Nepal while the figures for Bangladesh, India, Pakistan and Sri Lanka are US$ 789, US$ 943, US$ 1052 and US$ 1619, respectively. Additionally, the parliament has not yet passed the Special Economic Zones (SEZs) Act at a time when the construction of first SEZ in Bhairawa is nearing completion. Without this bill to operationalize SEZs, approximately Rs 1 billion worth of investment will go down the drain. Moreover, the government has not also been to implement various export promotion and industrial policies that have been enacted since 2009.

It is no surprise that the eroding competitiveness of our economy is vividly reflected in recent comparative studies. First, the global competitiveness report shows that Nepal is one of the most uncompetitive economies in South Asia, ranking 125 out of 142 countries. Nepal’s labor market efficiency is ranked below that of other factor-driven economies. Worse, Nepal’s infrastructure ranking is the second worst out of the 142 economies. The business community thinks that government instability—followed by inefficient government bureaucracy, policy instability, corruption, and lack of infrastructure among others— is the most problematic factor for doing business. Second, according to the latest Doing Business report, the cost of starting business (37.4% of income per capita) in Nepal is far higher than the average for South Asia (21.6% of income per capita). In terms of export facilitation, there has not been any improvement in the last couple of years. It still takes 9 documents, 41 days, and US$ 1960 to export a container.

Third, according to the latest Gallup poll, the Nepalese people feel that a lack of political leadership and corruption are the main factors preventing economic growth. In the survey, 64% of respondents who were dissatisfied with the current economic conditions said that a lack of political leadership was the main factor behind poor economic performance. Almost the same percentage of respondents felt that corruption is impeding our potential economic growth path. It shows that a lack of political will to project economic agendas before political agendas, misinformed political leaders at the helm of decision making bodies, and corruption are the main reasons for the policy implementation paralysis.

To address the macroeconomic problems and economic hardships faced by households, there is no option other than to increase productivity and competitiveness of our economy by seriously implementing the already enacted reforms and introducing new ones aimed at boosting growth and employment. The laxity in implementing agreed policies and half-hearted commitment to enact needed reforms is not helping to resolve our economic woes.