Friday, January 13, 2012

Recommendations of Nepal’s PM’s Economic Advisory Council

Main priorities as suggested by the PM’s Economic Advisory Council are as follow:

  • Tourism
  • Real estate outside Kathmandu
  • Agriculture
  • Infrastructure
  • Energy
  • Scientific and technical research

A total of 18 big projects under these sectors have been recommended by the council with targets of a double-digit growth rate and generation of 200,000 direct and indirect jobs. The private sector has been given high priority to launch the projects. Meanwhile, it has recommended the government to give tax holidays to private companies and encourage them invest in infrastructure.

Some of the recommendations:

  • Encourage private sector (those wholly owned by Nepalese or having investment of more than 49 percent in airline company) to bring in new wide body aircrafts (at least 4 of them). The council has estimated that it will not require additional energy, increase foreign reserves by Rs 6 billion annually, bring in additional 240,000 visitors, and generate Rs 12 billion annual revenue. Direct and indirect employment gains will be over 25,000 yearly.
  • Establish 100 room five start hotels in Bhaktapur, Janakpur and Lumbini. Encourage establishment of three start hotels in places other than Kathmandu, Lalitpur, Bhaktapur, and Pokhara.
  • Construction of cable cars and other tourism infrastructure.
  • Encourage real estate and housing spending in major cities outside of Kathmandu and Lalitpur.
  • Government, community and cooperatives to invest in agriculture and apple farming. Give training to farmers and encourage banks to give loans to agriculture sector.
  • Construct East West Highway and associated roads, Kathmandu Nijgadh fast track, international airport in Nijgadh, and regional airport in Pokhara.
  • Expedite construction of hydro projects with domestic investment. Give priority to projects that can generate electricity in the next two years.

A good list of projects and priority sectors. I am waiting for the full document to be available on the PMO’s website. Any big project that can be completed on time and that can have a positive impact on economic activities and employment generation should be promoted right now. But, we have to deal in a measured way so that the limited resources are used to tackle the most binding constraints in short term as well as long term.

I would like to see the sectors, projects, and incentives recommended by the council to be in line with the priorities to be set by Investment Board, and those outlined in Industrial Policy 2010 and Trade Policy 2009 (also Nepal Trade Integration Strategy 2010 and Three Year Interim Plan 2010/11-2012/13). Why so? Because it will create a consolidated effort to promote similar industries and offer coherent incentives by all government agencies. For too long projects are not implemented because of incompatible priorities and incentives offered by different government agencies to same group of sectors or investors.

Also, let us be very targeted in prioritizing and sanctioning new projects. For instance, let us first focus on constructing an international airport in Pokhara, where land is already acquired and soil testing is being done by the Chinese government. If tourism promotion is the most viable option right now given our infrastructure and supply constraints, then let us try to do things that will generate biggest bang for a buck. We already have a regional airport in Pokhara that is handling regional traffic flows pretty well.

The private sector does not have and cannot generate the required amount of money for investing in big projects that takes years to yield returns. The government has to foot most of the bill (may be provide subsidized credit to them instead of wasting it on NOC and NEA).

Real estate prices in major cities outside of the Valley is already too high. Further encouraging real estate and housing spending there is not a sensible step (apart from pacifying the disgruntled political activists who were reaping easy money from escalating real estate prices). It will be yet another episode of unproductive investment financed by remittances and facilitated by easy policies of the government. It is not going to work except for increasing revenue as a result of more land transaction and the usage of the excess liquidity in the banking sector to inflate prices outside of the Valley.

Emphasis on construction of hydro projects and road network is a good one. Even if no work happens in the foreseeable future, it has to be reiterated again and again. The inadequate supply of infrastructure is the most binding constraint to economic growth. Build more roads and hydro projects, connect more places with markets and production sites, and facilitate internal as well as external trade (and production).

Promotion of industrial activities should be coordinated with promotion of exports sector. It will not only generate more reserves but also increase employment and substantially contribute to growth. While doing so, we should also promote industries (by staying within the boundary of WTO commitments and the available policy space for us to maneuver industrial policy to promote industrialization) that can compete with imported goods.

At the end of the day, things will work only if there are enabling conditions for enterprises to foster. Some of these are good industry-labor relations, enough power to power up machinery, no strikes both on streets and in industries, comfortable fiscal space to finance incentives and concessionary packages, good governance, easy flow of credit at low interest to key sectors, and enveloping industrial sector from the fallout of nonsensical endless political bickering.