Monday, September 3, 2007

What's obstructing private sector growth?

  • WTO is investigating on the US and Mexican allegations that China is providing illegal subsidies for a range of industries.
  • Future of Doha round of WTO talks is still uncertain because India, Brazil and other developing countries are accusing bigger economies of being protectionist.
  • When Nepal government decided to buy only Nepali products - to promote domestic industry and private sector as a whole -- even if it is 10 per cent more expensive than the imported ones, the decision could not be 'fully implemented' because of some unknown reasons.

At some time or the other, all big economies of the world have protected and are still protecting their private sector either in the name of quota or subsidy or tax-break. “In contrast, Nepali private sector is given a step-brotherly treatment,” blame industrialists.
As a result, even after seven decades of the existence of Biratnagar Jute Mill - the first industry established in Nepal in 1993 BS - industrialisation has headed nowhere in the country.
One reason behind lack of industrialisation is the private sector's indifference towards industrialisation, blames the government. Private sector's involvement in manufacturing has been negligible. In addition, those interested in industry could also not sustain in a long run as they could not create and promote market.
Nepal embarked on a periodic development planning exercise as early as 1956, but it failed to realise the importance of private sector and market- oriented policy till late 80s. After 1990, the perception changed as the government brought in a liberal policy giving much greater role to the private sector.
However, although open market policy gave a major role to the private sector, it could not really push forward the growth of the overall sector. No doubt, it helped industries like education and health, and the financial sector including banking, financial institutes and aviation and transport to grow.
In the ninth Five-Year Plan (2054-2059 BS), the production of export-oriented industries declined. From the industrialisation point of view, the ninth five-year plan was a complete disaster. Nepal was once almost self-sufficient in sugar. But now, more than 30 per cent of the total sugar demand is being met by imports. The private sector blames the government policy for the increasing dependency on import.
Given the size of its economy, Nepal can take advantage from the small-scale industries instead of big industries. The best thing Nepal can do to promote private sector is commercialisation of agriculture and promotion of industries like tea, coffee, jute, sugar, cigarette, dairy, leather-based products, herbs, in which Nepal has competitive advantage in comparison to India and China.
The private sector is small and it lacks competitiveness. Building its competitiveness can not only increase export, but also help displace import and narrow trade deficit with India and China, Nepal's two largest trade partners. After Nepal became a party to the global and regional trade regimes like WTO and SAFTA, it has become much more important for the private sector to build its competitiveness.
Private sector also needs to expand output capacity and improve its efficiency through adoption of innovative measures. “Traditional management system, and rent-seeking practice instead of innovation is hampering the growth of private sector,” says Dr Hemant Kumar Duwadi, private sector expert at the FNCCI, the umbrella body of private sector.
“Insecurity, unpredictability of situation, and increasing non-business risks are other serious hurdles,” he says adding that labour problem, implementation and inconsistent government policies, lack of basic infrastructures like road network and communication has also impeded growth of private sector. High cost and irregularity of electricity, red-tape, lack of market diversification and frequent bandhs have also hit private sector development hard.
Private sector development is also necessary to address the current problem of unemployment. Private sector is the largest employment provider. “We need to create half-a-million employment over the next few years,' says Rajendra Kumar Khetan, an industrialist. “Private sector has provided more than a million employment and only investment-friendly environment can create another half-a-million employment,” he adds.
Therefore, in order to create a favourable environment to achieve private sector-led growth, the government must focus on removing impediments to private sector development. An effective promotional package like Nepal brand or Nepal Inc is a must, especially for export-oriented industries.
“Nepali lokta paper and Nepal Tea are now exported under Nepal brand,” says Sameer Khanal, a private sector expert at GTZ, an INGO that is helping in identifying, creating, promoting, expanding and innovating the market.
Exports, led by carpets and garments, had once greatly expanded. But the growth could not be sustained. Thus, private sector development needs a long-term strategy. As a first step, the major actors must have a consensus on the role of the private sector.
Liberalisation in itself is not the end; it can enhance the capability of the private sector bringing capital, technology and knowledge, by which the overall objective of economic development could be achieved. But in Nepal's context, this is highly controversial.
Government has also encouraged the private sector to invest on infrastructure project under B-O-T and B-O-O-T schemes. However, it has remained only in papers. Apart from these, public private partnership approach has also been recognised and used as a beneficial approach to implement development activities and provide services to the people.
Economic diplomacy is also an important tool in open, global market but Nepal has failed in this as well. Unless a country is economically independent, it cannot survive as a sovereign nation. And private sector development is a key to economic independence. Sooner or later Nepal must come to a consensus on economic agenda for the private sector development. Private sector should be developed as a focal point for the entire economic activities and the role of government should be confined to that of policy-making, monitoring and facilitating only.

What's in Tenth Plan?
The core objectives of the Tenth Plan for the industrial sector is to accelerate the pace of industrialisation through increased participation of private sector and to create additional employment in both rural and urban areas to reduce poverty. The main strategies to achieve these objectives are:
Improving policies to attract domestic and foreign investment,
Strengthening the role of SMEs in national production and improving the overall industrial environment
Tariffs will be further rationalised, and existing policies and Acts relating to foreign investment and industrial development will be revised
Upgradation process of SMEs through technological improvements and policy of sub-contracting will be further accelerated
Incentives to improve backward linkages of industries will be continued
Information technology development will be given emphasis.
The effective implementation of these policies and activities during the Tenth Plan will help improve industrial competitiveness, expand industrial production and employment generation, and raise the contribution of the industrial sector to GDP.
Measures will also be taken to attract more foreign investment, along with appropriate technology, particularly in areas of comparative advantage in order to enhance competitiveness. As noted, policy and legal framework will be improved in line with the market economy; administrative mechanisms will be streamlined and made more efficient; and necessary physical infrastructure and human resource development will be undertaken. Ensuring macroeconomic stability (thereby assuring repatriatibility of capital and dividends) and a stable financial system will also help in this regard.

Factors contributing to low price competitiveness and productivity:
Inadequate mechanisms and incentives for firms to acquire new technology
Weak infrastructure
Unfavourable business climate

Diversification of export trade in terms of both destination and product.
Establishment of inter-linkages between trade and industry.
Equity in the distribution of benefits of liberalised trade policy between small and cottage industries, and large industries.
Maintaining balance between labour interest and private sector development.
Mobilisation of public resources for infrastructure development.
Stability and predictability of the policy environment.
High dependency on unorganised commercial sector.
Inadequacy in entrepreneurship and professional maturity.
Establishment of inter-industrial linkages.
Identification of private sector investment.
Establishment of standard accounting practices and transparency in business transaction.
Procedural simplification to minimise transaction cost.
Establishment of mechanism for risk management.
Transparency in the regulatory mechanism of the government.
Comprehensive tax reform to widen tax revenue.
Participation of worker and deprived section of the society in economic life through employment generation.
Stability and predictability of policy environment.
Establishment of standard accounting practices and transparency in business transaction.
Developing good corporate governance leading towards instilling professionalism in the private sector activities.

Private banks are on swing
One sector - within the private sector - that has seen tremendous growth in the post-1990 liberal economy period is the banking sector. For long, Nepal Bank Ltd (NBL) and Rastriya Banijya Bank (RBB) were the sole players in banking field.
When liberalisation opened the doors for private banks, they rushed to the market with new innovation that immediately caught the fancy of consumers. Currently, there are almost 77 financial institutions, two dozen development banks, and almost equal number of commercial banks.
To support and make the banking sector vibrant, the government also started financial sector reform programme in 2002. The objective of the programme was to develop a healthier financial sector which intermediates funds more efficiently and effectively for the benefit of all the segments of the society and in a manner that supports private sector development, increased investment, and faster growth.
“In a small country like Nepal, banks can play more vital role in private sector development and economic development as a whole,” says Radesh Pant, managing director of Bank of Kathmandu and president of Nepal Bankers' Association (NBA).
The sector has generated more than 10,000 employments. “Not only that the sector has multiple effects in creating more employment,” Pant says adding that most of the employment opportunity created by private sector is because of banks' investments.
Banking is probably the largest and best sector in the private sector at present. However, experts claim that commercial banks are over-crowded in a small economy like Nepal. “But it's a natural process,” Pant feels. “In a long term, they will build up their competence level, if they want to exist.”
With growth, the sector has also attracted competition not only from home but also from abroad. According to the WTO norms, After 2010, international banks can open their branch in Nepal. Nepali banks have to compete with the global banks then.
How can Nepali banks survive in such a tough competition? “The management needs to be more professional and have a long-term strategy. Five years down the line or ten years down the line, where they want to see themselves; will they be concentrating on SMEs or merchant banking or any other sectors,” clarifies Pant.
The competition will eventually force banks to go for Merger and Acquisition (M&A). But many a bankers are mentally not prepared for it. “Market will take care of everything,” he adds.
Vibrant banking sector not only helps itself, it also helps other private sector to develop. Now, all the financial institutions have to publish provisional financial statements within a month and audits are compliant with International Accounting Standards (IAS), which has also boosted the confidence of depositors.
The more professional central bank becomes, the more confidence can it build among investors and depositors. Thus, the financial sector reform programme has a major task of reengineering the NRB to make it more efficient in monitoring aspect.
Some bankers think that the NRB is unnecessarily strict. But whether people like it or not, it has to be more stricter to safeguard the interest of the investors, depositors and for the sound financial health of the country.
Only a well-regulated financial sector can facilitate sustained economic growth, fostering a robust and vibrant financial market. Revamping research and financial monitoring strength and enhancing the capacity of NRB, the regulatory authority, to oversee an operated banking system are prime objectives of the series of reforms. And boosting a supervision capacity of NRB is a must.

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