Budget Watch: Series 5

With the democratic changes that we are experiencing currently, I personally see a great opportunity for the government to put the economic development agenda on track. A good regulatory environment with sound corporate governance and healthy investment climate are important for macroeconomic stability, sustained economic growth and prosperity. A strong financial sector plays a vital role in channelling funds to productive investment projects and promoting economic efficiency.In the current context, I believe, top priority in this budget has to be given to infrastructure development to spur the much needed economic growth, generate jobs and reduce poverty. With adequate infrastructure, business value chains across the country can be made sustainable and economic pockets developed in various parts of the country - especially in the rural areas. Economic activities today are fundamentally dependent on access to financial services.In order to enhance economic development and further strengthen the financial sector, it is pertinent that the current budget encompass the following:
· Need to foster the establishment of an Infrastructure Development Institution (IDI) promoted by commercial banks and multilateral agencies by way of the government's equity participation and assigning IDI to be the facilitator of Infrastructure Development.
· Need to enhance access to finance throughout the country by allowing banks to establish micro finance institutions and service centres. In this regard, Micro Finance Act needs to be amended and implemented.· Remittance plays an effective role in reducing poverty. Therefore, government needs to promote and facilitate remittance through formal channels.
· Corporate governance of other sectors needs to be strengthened by strictly adhering to universally acceptable accounting standards and codes for full transparency and disclosures.· Secured Transaction and Bankruptcy Act needs to be implemented at the earliest to enhance credit quality and control.
· To strengthen the financial sector for sustainable competitive market, government needs to promote and strengthen Credit Information Bureau (CIB), Credit Rating Agency, Asset Management Company, Debt Recovery Tribunal (DRT) and Commercial Benches.
· Our capital market is not yet mature — the size of capital market instruments and players are very limited. In this scenario, investors' trust in the Nepali capital market is a must. Therefore, government should empower Securities Exchange Board of Nepal (Sebon) and Nepal Stock Exchange (Nepse) to enhance and promote efficient capital market.
· To compete now and beyond the year 2010, Nepali financial institutions will have to embark on consolidation to build not only financial capacity but to promote domestic reach and competitiveness through shared skills. As such, any legal hurdle in M&A needs to be addressed and simplified. For example, tax treatment of M&A and treatment of staff redundancy etc.
· Competition in domestic banking system has not only become fierce but is dangerously moving towards unhealthy competition. As a result, government needs to revise the licensing procedures to create a healthy investment climate. In developing countries like Nepal where capital markets are less developed, a healthy banking sector is a must for avoiding financial crises, attracting foreign investment, and providing the private sector easy access to finance.
· Tax rates for financial intermediaries need to be lowered to 25 per cent from the current level of 30 per cent to bring it at par with those applicable to manufacturing and other industries.
· There has been a spate of bank robberies including physical assaults on financial sector staff. Therefore, policies such as 'zero tolerance' need to be introduced to enhance the security of those working in the financial sector, among others.

Radhesh Pant
President,
Nepal Bankers' Association