Friday, February 16, 2018

Challenges for the new Oli-led government and more

CPN-UML chairman KP Sharma Oli was appointed prime minister on February 15, his second stint as PM (and 38th PM of the country). His government will face a number of economic challenges (including the fact that the mid-year FY2018 review doesn't indicate a rosy picture) over the medium term. Here are some of them:
  • Boosting investor confidence is crucial to increasing private sector domestic and foreign investment. In addition to updating a few remaining archaic laws and policies, the next government needs to fully implement the recently amended acts and policies regarding industrial enterprises, special economic zones, labor relations and export promotion.
  • Fiscal management will be challenging considering the expected large revenue-expenditure asymmetry at the federal, provincial and local levels. Unable to cover expenditure needs during the first few years, provincial and local governments will demand large transfers from the central government. Fiscal transfer and grants already account for 50 percent of recurrent spending. 
  • Fundamental policies and priorities of all tiers of government have to be synchronized to create a coherent plan and strategy for economic development. Additionally, revenue policies should not overlap so that businesses do not have to pay the same tax to both local and provincial governments.
  • Budget preparation and its execution by all tiers of government will also be challenging. Provincial and local governments do not have prior experience in preparing time-bound budgets and, more importantly, implementing them. They will rely more on fiscal transfer than their own revenue sources. The center should adhere to a rule-based fiscal transfer regime considering objective measures such as population, income per capita, area, state of infrastructure, governance, tax effort and fiscal discipline.
  • Reconstruction must pick up speed since very little has been achieved in the last two years. It needs to be made less political and more result-oriented. The prime minister could proactively monitor progress and resolve hurdles, especially those cropping out of intra- and inter-agency noncooperation.
  • Financial sector management will be crucial as well. BFIs are short of loanable funds because their CCD ratio was close to the regulatory threshold of 80. Credit disbursement growth is higher than deposit mobilization growth amidst remittance inflows continuing to decelerate and government capital spending stagnating like in the past. A tight lending scenario arising from BFIs misplaced operational practices and priorities, and government's inability to spend the money it collected as revenue calls for proactive and effective governance of BFIs as well as finding ways to unfreeze the credit market without distorting incentives (no moral hazards please). Else, credit to private sector will squeeze, which will impact economic growth prospect.
  • Managing the fallout of deceleration of remittance inflows. This will affect households, macroeconomy and institutions. 

Bibek Subedi writes in The Kathmandu Post: International Finance Corporation (IFC), the private sector lending arm of the World Bank Group, is in the final stages of floating bonds worth $500 million in local currency in Nepal. The multilateral lender has sought permission from Nepal Rastra Bank (NRB) to issue the instruments. IFC had obtained approval from the Finance Ministry to issue rupee bonds two years ago, but it could not do so due to lack of legal provisions. 

Last year, the Securities Board of Nepal (Sebon) amended the Securities Registration and Issue Regulation, and opened the way for international financial institutions like IFC to issue local currency bonds. Subsequently, IFC applied for permission at NRB to issue bonds worth $500 million in Nepali currency. After getting the central bank’s go-ahead, IFC will have to obtain permission from Sebon, the regulator of the securities market. IFC, according to sources close to it, is planning to invest the funds raised from the bond issuance in areas like hydropower and commercial agriculture, among others. Both institutional and individual investors will be allowed to purchase the bonds issued by IFC.