Nepal 'mostly unfree' economy due to corruption, lack of investment freedom

Nepal's economic freedom ranking has dropped to 149^th in the 2014 from 141^st in the 2013 index making it the 'mostly unfree' economy.

Nepal’s economic freedom score is 50.1, making it the 149th freest economy – in the 2014 Index – among the 178 economies, as its score decreased by 0.3 point since last year due to decline in investment freedom and freedom from corruption, though the country has seen modest improvements in business freedom, monetary freedom, and the control of government spending, the annual report published by The Wall Street Journal and a US-based think tank The Heritage Foundation.

Nepal is also ranked 34th out of 42 countries in the Asia–Pacific region, as its score remains far below world average of 60.3 points.

Nepal was first graded in the 1996 Index, and its economic freedom score since then has been largely stagnant, declining overall by less than half a point, the report said, adding that improvements in four of the 10 economic freedoms, including freedom from corruption, business freedom, monetary freedom, and trade freedom, have been more than offset by deterioration in other areas, particularly a 25-point decrease in investment freedom.

Nepal is considered 'mostly unfree' economy throughout its history due to a statist approach to economic management and development is a serious drag on business activity. "A lack of transparency, corruption, and a burdensome approval process impede much-needed private investment and production," it said, adding that property rights are undermined by the inefficient judicial system, which is subject to substantial corruption and political influence.

The index is calculated by the aggregate score of four of the freedom indicators rule of law, limited government, regulatory efficiency and open market. The four freedom indicators has 10 sub-indicators.

Under rule of law, Nepal could not fare well due to endemic corruption in politics and government. "Many members of the legislature have been accused or convicted of corruption in the past, but high-level officials are rarely prosecuted," it said, adding that graft is particularly prevalent in the judiciary, with frequent payoffs to judges for favorable rulings, and in the police force, which has been accused of extensive involvement in organised crime. As a result freedom from corruption score has dropped to 21.3 points, whereas score of property rights has also not improved and stood at 30 due to lack of effective protections for property rights.

Likewise, fiscal freedom (85.9) and government spending (89.6), the two sub-indicators under the limited government, have seen improvement. "The top individual income and corporate tax rates are 25 per cent," the report said, adding that other taxes include a value-added tax (VAT) and a property tax. "The overall tax burden is 12.6 per cent of gross domestic income. Government expenditures are steady at around 19 per cent of GDP, and public debt is about 33 per cent of the domestic economy."

But the government’s ability to produce a budget has come into question because of political instability, it added.

The regulatory efficiency, there are three sub-indicators, of which score of labour freedom has decreased to 43.8 but business freedom (58.5) and monetary freedom (76.3) scores have seen improvement. "Bureaucracy and a lack of transparency often make business formation and operation costly and burdensome," it said, adding that business start-up is now more streamlined, but obtaining necessary licenses continues to be time-consuming. "But labour regulations are rigid, and restrictions on work hours remain stringent. The government provides extensive subsidies to the state-owned electricity and oil companies."

The fourth and most important freedom indicator open market also has three sub-indicators, of which only one trade freedom has increased score to 61. Investment freedom score decreased to the lowest of five points, whereas financial freedom score remained static at 30 points. "Nepal’s average tariff rate is 12 per cent," it said, adding that tariffs are a significant source of government revenue. "Consumers are not allowed to import used products. Foreign investors face government screening and a challenging economic environment. The financial sector remains fragmented and government ownership and influence in the allocation of credit remain substantial," the 20th edition of the index revealed, adding that economic freedom once again on the rise. "Much of the momentum lost during the past five years has been regained and the global average economic freedom score in the 2014 Index is 60.3, the highest average in the 20-year history of the index. The average is 0.7 point higher than last year and a 2.7 point improvement from 1995.