Enabling environment key to development

An enabling business environment is key to a country's development, according to a Japanese economist.

"An enabling business environment — that includes political stability, policy stability, domestic savings channelled to investment besides grants and foreign investment, investment in human capital, and collaboration among stakeholders — could help a country move ahead in the development path," said Prof Ryokichi Hirono of the Seiki University.

"Political and policy stability are key for investors, whereas the savings of the people is a must as only foreign aid will not be enough to help any country develop," he said, adding that investment in human capital will help create a human resource pool to support economic development.

But collaboration among the five stakeholders — government, business people, labour, consumer society, and academia — is also key in monitoring policy implementation, said the professor. "The private sector could play a good role by insisting on policy stability to create an investment friendly environment."

The domestic private sector had tried to boost the morale of the business community by proposing the Investment Year, said president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Suraj Vaidya.

"The campaign will not only help boost the morale of domestic investors, but also foreign investors," he said, adding that the private sector is planning a slew of visits to attract investments from various countries once the Investment Board comes up with concrete projects in a couple of months. "Investments will help generate employment in the country," added Vaidya.

As more Nepalis are going abroad for employment, the country needs to create more employment back home, said Prof Hirono, adding that the remittance from migrant workers should also be utilised in production.

He also urged for the creation of an investment fund from the remittance received. "The major chunk of remittance has been used for consumption that has increased imports," said Hirono, who is leading the Japanese Overseas Development Assistance (ODA) evaluation team to Kathmandu currently.

Japan was the second largest bilateral donor after the United Kingdom in Nepal in fiscal year 2010-11, according to the Finance Ministry.

United Kingdom ($92.1 million) was followed by Japan ($58.7 million), India ($50.7 million), the US ($48.5 million) and Norway ($32.8 million) in fiscal year 2010-11, the Donor Cooperation Report of the ministry revealed.

Japan with 5.4 per cent stood fifth — after the World Bank, Asian Development Bank (ADB), United Nations (UN), and United Kingdom (UK) — among the sources of aid disbursement in Nepal in fiscal year 2010-11, when the country received a total of $1.08 billion aid disbursement from donors.

However, Hirono suggested that the effective utilisation of aid by the government, private sector, and non-governmental organisations, might increase ODA from Japan. "Accountability and transparency will help increase ODA," he added.

Japanese ambassador to Nepal Kunio Takahashi, on the occasion, said that there has not yet been any official decision on the increment of ODA, but both sides should simultaneously increase cooperation with each other.

 

Nepal-Japan bilateral trade

Fiscal Year — Export — Import

2006-07 — Rs 559.45 million— Rs 3,228.97 million

2007-08 — Rs 488.05 million — Rs 6,148.08 million

2008-09 — Rs 572.65 million — Rs 6,111.18 million

2009-10 — Rs 554.15 million — Rs 6,267.57 million

2010-11 — Rs 652.35 million — Rs 3,957.91 million

(Source: Trade and Export Promotion Centre)

FNCCI to host CACCI conference in October

Federation of Nepalese Chambers of Commerce and Industry (FNCCI) will host the 26th annual conference of the Confederation of Asia-Pacific Chambers of Commerce and Industry (CACCI) in Kathmandu on October 3-5.
About 300 business leaders from 27 countries of the region will participate in the three-day jamboree.
FNCCI is hosting the conference during Nepal Investment Year 2012-13 to attract Asia-Pacific investors, said former president of FNCCI Pradeep Kumar Shrestha. "It will provide investors the opportunity to personally judge the investment environment in the country," he said, adding that it is the best opportunity to market Nepal to potential investors.
According to him, the conference will have a special session about investment opportunities in Nepal on the second day. "Investment Board and FNCCI will highlight potential investment sectors in the session," he said. "We have requested prime minister Dr Baburam Bhattarai to chair the session."
The government has identified seven sectors including energy, tourism, agriculture, transportation and infrastructure projects as potential sectors. Investment Board has been preparing 60 projects in seven different sectors.
Similarly, the conference will provide site seeing of tourism spots and conduct a golf tournament to encourage participants to invest in tourism. "We will also provide face-to-face interaction facilities between Nepali and foreign investors," said coordinator of the conference Om Rajbhandari.
Prominent international speakers and business leaders will address the conference that emphasises on 'a vision for shared prosperity.' They will highlight the investment environment along with returns in the country, he added.

YES 2012 on August 16-17
KATHMANDU: Nepalese Young Entrepreneurs' Forum will organise the Young Entrepreneurs' Summit — YES 2012 — in Kathmandu on August 16-17. The summit will encourage youths to start their own business and become entrepreneurs, said president of the forum Sameer Thapa. According to him, about 400 young entrepreneurs will share their experiences and knowledge in the summit. About 50 students will also participate in the summit. We are including them to build a pool of future entrepreneurs, he added.

Private sector can accelerate growth

The private sector has the resources and can garner additional resources internally as well as externally only if doing business is convenient in these regions. "However bureaucratic hassles, barriers, unpredictable policy framework and political rivalries are sure to vitiate the investment-friendly climate, said entrepreneur Jagadish Prasad Agrawal addressing Regional Conference Asia on Quality of Growth: Approaches to Inclusive Development in Asian Societies.
In the conference organised by Deutsche Gesellschaft fuer Technische Zusammenarbeit (GTZ) -- German Federal Ministry of Economic Cooperation and Development (BMZ) and the Planning Commission of India recently in New Delhi, he also stressed on the rule of law.
The latest economic survey mentions that of the 30.85 per cent population below the poverty line, 78 per cent are from the agricultural sector, 47.1 per cent from the hilly regions and 45.4 per cent from the Tarai, Agarwal pointed out adding that the rural sector accounts for approximately 95.3 per cent of the total population below the poverty line despite Nepal's four-decade history of planned development.
"It thus devolves on the private sector to continue forcing economic agenda to the forefront of national discussion for development and for enhancing its own capability and acceptability among the public about its role in bringing about balanced development of backward regions," he added.
Nepal's major problem is not that of unemployment but of under-employment. One-third of the total working population is under-utilised. Poultry, fishing and dairy development are such professions which can not only supplement their income at their own place but also provide food security without involvement of transport costs.
"Locally generated income builds capability to save, spend and participate in local developmental efforts. An integrated approach linking these sectors to commercialisation of agriculture is called for. Despite huge pouring of investment in the last 40 years, the agricultural sector continues to be primitive. Productivity is low, farming practices are outdated and there is no linkage with agro-processing industries," Agrawal said adding that the private sector has always advocated commercialisation of agricultural sector through corporate involvement via contract farming.
However, labour reform, labour productivity and self-employment are some of the issues of human resource development that have remained non-priorities in the development process. "It is imperative that the state create a unique comparative advantage for these backward regions by converting pockets of deprivation into targeted economic development zones exempt from taxes and regulations for a limited period of time. A combination of cheap electricity, cheap labour and cheap transportation cost for a limited period can transform these less developed regions of Nepal into flourishing blocks of affluence within a very short time," he said. One big advantage Nepal enjoys is that the markets exists on both sides of the country for any product and services within 200km of the production base.
However, the foremost issue is political stability which alone can generate confidence and facilitate private investments, Agrawal said in the three-day conference where around 17 Asian countries participated.

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

Challenges
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.