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Possible Investment Climate 2007-09
- By Madhukar S.J.B.Rana
A pundit of peace and conflict studies — the Brussels-based International Crisis Group (ICG) — believes that (see December 15, 2006 report), despite the successful Janandolan II of April 2006, Nepal ’s situation with its transition process can best be classified as ‘unchanged’ (i.e. not a ‘deteriorated situation’ nor an ‘improved situation’). One needs to underscore that this prevails even after the historic Comprehensive Peace Agreement (CPC) signed on November 21, 2006 by the seven party alliance (SPA) and the Maoists.
Indeed, peace may have been achieved but security hasn’t. Security has actually deteriorated precisely because the state of Nepal is unable to re-establish law and order owing to weak governance generally; and the complete lack of local governance specifically.
The weakness has been compounded by the glaring inter-party battles for the spoils from executive appointments at each and every level in the innumerable vacant public posts. That further places the national bureaucracy in a Catch 22 situation where merit is grossly sacrificed in the name of ‘inclusion’. And all this exasperated by the malfunctioning National Security Council which never meets. Hence continuation of the dual-state administration where the government taxes, on one hand, and the Maoist militia resorts to extortions, abductions and intimidation, on the other, yet refusing to allow the internally displaced to return to their homelands
In the above political scenario, it is hardly to be expected that the investment climate would be fine. As a matter of fact, it is most probable that the transition phase lasting until the formulation of a new constitution and the state’s restructuring will have to over-ride many challenges such as free and fair elections to the Constituent Assembly; complete arms decommissioning and dismantling of parallel governments; enforcement of the rule of law with full civil rights; providing complete political space to all political parties to be able to voice dissent; safeguarding individual liberty from encroachment by organised groups though an efficient, effective and independent judicial system.
In general, the source of conflict is poverty. If poverty is not reduced substantially, in the shortest period of time, the seed of future conflict is guaranteed in the wake of the post-conflict rise in popular expectations, unmet aspirations and dashed hopes. And poverty can only be eradicated with economic growth, social development and gainful employment of the labour force.
Realising this basic truth, the Finance Ministry and the Planning Commission have opted for an ‘expansionary fiscal policy’ as adopted by the budget of 2006-07. Doubtless, they will do more of the same thing in 2007-08 and 2008-09. Unfortunately, such a fiscal strategy is doomed to be fiscally irresponsible as it seeks to expand investment in the public sector based on aid finance with all the limitations on its absorptive capacity and in-built inefficiencies and inherent mal-practices.
Increasing capital expenditure by 32 per cent and recurrent expenditure by 21 per cent in 2006-07 by jacking up the budget deficit from 1.8 per cent in 2005-06 to 3.2 per cent is dangerous for its impact on interest and foreign exchange rates and macro-economic stability, if investment by the private sector is stagnant or declining.
Pressure on the already weak Nepali rupee, when its parity to the Indian rupee is fixed, will result in capital flight compounded by the uncertain economic policy on economic freedom and households’ rights to property. Not to mention the erosion of export and import substitution prospects.
Liberalisation policies ushered in after Janandolan I will face risks of reversal with such heavy emphasis on the public sector to implement the investment plan to produce a 5 per cent GDP growth rate as targeted. If taxes are increased in any form, then, one can imagine the fallout on the business climate and investor psychology with such regressive policies. The demand for the Indian rupee will be so high as to make the Nepali economy a ‘virtual Indian economy’ with a massive rise in the circulation of the Indian currency in Nepal . Add to this the possibility of convertibility by India and we wonder where our economy will really be with whatever comparative and competitive advantage.
(Rana is a former Finance Minister of Nepal )
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