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“At this stage nobody wants to make challenging decisions”
Dr. Yuba Raj Khatiwada, who left the membership in the National Planning Commission (NPC) recently after a reshuffle in NPC and came back to his parent organisation, the Nepal Rastra Bank, shares his thoughts about the current economic situation of the country. Excerpts from the interview:
How do you feel leaving NPC without completing your tenure?
I joined National Planning Commission (NPC) in November 2002 and served there for about three years - quite a long period considering the political instability in this country. As such there is no fixed tenure as a member of NPC. You could be dismissed a day after you are appointed. I was prepared to come back to the Nepal Rastra Bank (NRB). I was relatively happy to serve so long at NPC and in leaving it I feel relieved as there were limitations in the way we wanted to carry out the work. It is teamwork between the Central Bank, the Ministries and the NPC. There should be a coherence of ideas among the three- if your views do not synchronise; you find it a bit uncomfortable to work. I cleared the way for those who want to run the country in a different way.
Do you think the latest change in NPC is politically motivated?
I don't think so. Every time there is change of government, there is change in NPC as well because, though NPC is a professional organisation, it has to translate the political agenda of the government into economic programmes. That is why NPC members are also supposed to have the political-economic perspective of development. If the government has a new political agenda, and if it wants the political agenda to be translated into economic programmes, it should be free to choose a new NPC team of its liking. This is more of a governance issue, not political.
One major problem frequently cited in Nepal's development planning is the lack of coordination among the planning and execution agencies though the NPC has the Secretaries of the key government Ministries as members. What exactly were the coordination problems that you observed as an NPC member?
There are two types of coordination problems - one vertical, another horizontal. The former is between lower agency and upper agency or between the departments and the Ministries or between the ministries and the cabinet or the NPC. The horizontal coordination means among the Ministries and among the departments. I see much more problems in inter-ministerial coordination than in the vertical one. The problems are not always institutional. Also the personal grudges and differences bring about coordination problems. If I don't like the secretary of another ministry, I don't make a phone call. I just write a letter which is filed for several days and the reply is delayed. That kind of problem happens even within the NPC and the line ministry. I used to find the NPC asking them to furnish some information by writing a letter. That could have been done over one simple phone call. But they don't do it.
What are the basic problems that stopped bureaucrats and politicians from making prompt decisions?
There is mistrust and misunderstanding between the politicians and the bureaucracy. Ministers do not trust the secretaries and secretaries view ministers as those who are in their post for a few months alone. So, the secretaries do not want to make decisions and burn their fingers as the new government would initiate actions against the secretaries for their previous decisions.
Some well-performing secretaries were transferred to different ministries a number of times. The Ministry of Commerce, Supplies and Industries saw three secretaries in two years time. The Ministry of Tourism got four secretaries changed in two years. As a result, decision-making is postponed. Ministers are mostly concerned about security issues, not the economic crisis. In NPC, we used to discuss more about economic issues and less about political issues when I first joined NPC. There were frequent performance reviews of the annual economic programmes of the government. Later on, the frequency of holding meetings grew slimmer and at times we didn't have review meetings even for months. But it was natural, because people were dying and counter-insurgency measures had to be taken very seriously.
How serious do you find the present government about the economic issues?
As an employee of the Central Bank, I have certain disciplines to maintain. Remaining within the limitations, what I can say is that much more prominence has to be given to economic issues than what is presently given. There should be a strong coordination among the managers of economy - the Central Bank, the Ministry of Finance and the NPC. They should be closely watching the areas which should be improved to at least ensure a 3 percent growth. Even attaining a 3 percent growth is formidable in this situation.
One expected measure from the government in the situation ongoing for the last couple of years was to clear some big investment proposals and help them to come to fruition in a speedy manner so as to dispel the negative perception about the economy. Why was not the government able to do so?
Big investments do come in if there is a stable political environment where you have industrial security and predictability of the government policies. For the last two or three years the private sector confidence has somehow diminished because of the frequent change of the government and sometimes the threat of policy reversals. Clearing new proposals is a problem at this stage when the bureaucrats are shying away from making bold decisions. Even if they work in a credible way there is always the threat of a number of types of Commissions challenging their decisions. At this stage nobody wants to make very challenging decisions. If things are to be done by any discretion, you don't want to take risks associated with such decisions, because, these days, everybody would try to find some loopholes in your decisions and try to take actions against you. So, bureaucrats are not making bold decisions. Ministers are not making bold decisions simply because most people in the government are dwelling more on the political side, not on the economic side. Take the case of BOOT. When we were choosing a number of BOOT projects, the ministry people didn't want the private sector to be involved in major constructions. Even if the private sector was invited, the response of the private sector was also not so good. Even if there are some proposals, it's very difficult to make decisions. Take the case of the electric railway from Hetauda to Kathmandu. There are a number of proposals and you have to negotiate with them. The law, too, has such provisions. But can you negotiate on a big project at this difficult political situation? Normally, what I observed was that people have the tendency to defer decisions.
Would you mind elaborating on the electric railway issue?
A fast-tract connection from Kathmandu with the Terai/Mahendra Highway by any means - roads, railway or ropeway - is an urgent task before the government. We wanted to have the tunnel to be constructed under private sector initiative. In the meantime, we were talking about the Bagmati corridor road as well. We couldn't do either of them. There was a proposal to construct an electric railway too. In a very big project like this, you cannot always expect many bidders. Sometimes, there can be one and sometimes a couple of them. Sometimes you have to negotiate. That provision is present in the BOOT Act as well but the decision makers shy away from negotiating a big business deal in a difficult political atmosphere. That is why the BOOT Committee went in to form a technical committee to decide on it. This has caused more dilly-dallying. We wanted the Dhangadi airport to be constructed with private sector support but we had to de-list it from under BOOT as there wasn't sufficient participation from the private sector. Low enthusiasm is shown by the private sector. They have put in their proposals but they do not seem to be very serious about those projects.
How did you find the private sector? What are their strengths and weaknesses?
Our private sector is just evolving. It does not have a long history. In general, it is very much supportive of the policies and programmes that the government wants to introduce. They are working in close coordination with the government. But the problems are in the leadership. Sometimes they think that the government should lead the economy and we think that the private sector should be leading the whole process. In another instance, they think that the government just makes the private sector participate in the decision-making process but in reality the decisions are always taken by the government alone. But to really participate in the decision-making process, the private sector also needs to work hard to make very credible suggestions. They have to rise above their petty personal business interests or sectoral business interests and they should be talking about the national interests. I have found limitations in a number of private sector organisations on that count. When I was talking with them about the fate of the garment industry, I was getting two types of information from the private sector. Some were not so worried about the post-quota situation. Others were very much concerned. I couldn't understand why such a difference though being in the same business.
There are some other issues like the quality control of the products. Some would say that is their prerogative. Take the case of pashmina. Some are weaving with machines and some are hand knitting. When I asked them why they are making machine-made shawls, they would say, "It is consumers' choice. Who are you to control us?" There are a number of issues where the private sector is totally divided. Consider the case of defaulters on bank loans. The private sector organisations are defending the defaulters. I told them that they are wrong and that they cannot raise the status of their organisation by such activities. They should rather support the government to push away the defaulters from the whole system.
As the investment opportunities within the country have now shrunk considerably due to the security situation, some private sector people and the banks have been seeking permission to invest their funds abroad. Why should not their demand be granted?
This demand has been there for the past couple of years. A number of points can be raised against this demand. First, Nepal is a capital scarce country. Of Rs.100 earned, we save only Rs.12. And we are investing Rs. 26 or more. So, Rs. 14 is to be financed from external saving. That saving has a cost. If you are borrowing it, you have to pay an interest cost and a foreign currency exchange rate cost. If foreign private investment is coming in, that takes a lot of money in terms of dividend, interest etc. Can you afford to invest abroad at a time when you have such saving-investment gap? Second is the issue of currency convertibility. Nepal, so far, is under capital control. There is a law that says Nepali individuals and firms cannot invest abroad. Therefore, for an investment abroad, first a policy decision has to be made to make Nepal open for capital account convertibility and then the legislation has to be changed. But before that we should think about whether it is wise to encourage investment abroad at a time when there is a need for more investment within the country. Yes, that can be considered if foreign investment is coming in. If Nepali investment goes abroad without foreign investment coming in, this is going to be a one-way traffic. Banks are already making short-term investments abroad. This was allowed about six-eight years ago. That was a controversial decision. Banks collect money from the small savers in Nepal and they are investing that on US treasury bills. It implies that the poor Nepalis are financing the US fiscal deficit. It is very ridiculous. This decision was made at a time when the country was making huge external borrowings, even commercial borrowing. That was not wise of us and I had raised some reservation on it. However, a thought prevailed that we should let banks earn some profit. As the country had some excess liquidity at that time, we thought that if the banks were forced to bring in that money it would have created more liquidity which would have led to further monetary expansion and inflation. That's why the Central Bank kept mum initially. Banks started making investments abroad and their agency balance reached to the tune of Rs. 30 billion sometimes. Even today banks have maintained about Rs. 25 billion worth of agency balance and most of it is invested abroad. Now the banks want to make a long-term investment. Before making the decision in this regard, I would like to study the foreign currency liability portfolio of the banks. If it is short-term liability (i.e. in terms of foreign currency deposit or in terms of LC liabilities), it is risky to allow them to go in for long-term investment. Whether the banks will be earning foreign exchange all the time is quite uncertain. They might even incur a loss some of the times. How can they fulfil their payment obligations if they are investing for the long-term? For this reason, I would say banks have to be very careful about it.
There is always potential for the banks to invest their money in the country itself in a more profitable business. Once you open up the avenues for external investment, their effort to find new areas of investment would definitely slacken. But as a matter of principle it is true that you should be allowed the opportunity to invest from where you get maximum returns. That should be the destiny in a free market economy where you don't want to have any capital control. That's the agenda of the future and we should be preparing for that stage. But that needs much more infrastructure and other reforms. Right now, the issue is that once our money goes out, it doesn't come back.
Banks have huge liquidity as they are unable to invest in different sectors. So, they are just doing retail lending. How can that liquidity be utilised?
The last two years have been exceptional for the banking industry. The remittance was coming in and the demand for credit was slow. Banks were shy to make new investment also because two large banks were restructuring themselves. They didn't want to go in for aggressive lending. They put their money in treasury bills and other government papers. If you count their investment in government papers, liquidity would seem to be very high. But that is not going to be a long-term phenomenon. There are signals that the deposit collection is going slow, the low interest rate is helping the banks increase lending and perhaps very soon the excess liquidity problem would not be seen in the economy. Then there are concerns on the banks' lending behaviour. They are choosing conventional lending only. Many banks are focusing on the same clients, the same sectors and are not trying to diversify their portfolio. Very recently, banks are going in for consumer lending. They have not yet tried venture capital or any other long-term investments.
But there is no venture capital law.
They can still do it. They can become promoters of companies by putting promoter's share. But they are not putting their money in long-term investments and fixed investments. They are only going in for working capital. When there is no fixed investment, the room for working capital investment gets limited. It's a question of a portfolio mix. Banks should try to have a wider portfolio mix, find new areas of investment and do more realistic risk analysis. They cannot view every client as a risk client. These days fear psychosis is seen in the banking system. The uncertainty of the economy might be preventing banks from aggressive lending. They rather want to have high liquidity, though it means low profitability. This is the result of the country's political situation. I think this will be over very soon. The recent suspension of property rights for some time sent jitters across the private sector. Once that right was restored, some economic activities started taking place again. If a few fundamentals like property rights, strong and fair judiciary, predictability and credibility of the economic policies are in place and they are continued, the private sector might come up with more investment proposals. And banks should also be liberal enough to help them.
With the NLSS-II out, reporting a reduction in the poverty to a level targeted by the 10th Plan, do you think the 10th Plan now needs to be rewritten?
We said that we would be reducing poverty from 38 percent to 30 percent during the 10th plan period. That means we were trying to reduce poverty by eight percent over five years. We targeted 30 percent as the benchmark data available when preparing the plan was 38 percent. Had the data shown 31 percent poverty, we would have set the plan target below 25 percent. So, we can say that we achieved the target but still what we have to understand first is that one Nepali in every three is still in absolute poverty, not able to meet even the minimum dietary requirements. So, the challenge is still there. Second, even if we have been able to reduce absolute poverty, human poverty is still very much acute. Half the population cannot read or write. An equal number is malnourished.
These human poverty indicators show that there are more challenges, which the remaining period of the 10th plan has to address. Nepal is not yet a medium human development level country. Although the human development report 2004 cited Nepal as graduating to become a medium HDI country, the subsequent study that NPC and UNDP carried out in Nepal does not support it as it puts the index below 0.5. Unless we lift the country to medium HDI by enhancing the literacy and health facilities, we cannot remain satisfied. Moreover, even though the average national poverty figure is now 31 percent, there are certain regions and social/ethnic groups where poverty is above 45 percent. For our colleagues in NPC who want to continue with the 10th plan, I would suggest that the programmes should now be focusing on those pockets where poverty is still very high.
So, refocusing is necessary. Rewriting is not absolutely necessary.
The NLSS-II results also indicate that the conflict might have actually helped in reducing the poverty by encouraging migration and entrepreneurship. How is your reading?
The poverty report itself has highlighted this issue. Carefully chosen policy decisions were behind this achievement First, very importantly, we had a sustained rise in agricultural income in the last seven to eight years - by about 3.5 percent, which we had never before attained. The commercialisation of agriculture along with a number of other factors was instrumental in poverty reduction. Remittance is yet other factor, which reached about 1/3rd of the households. Third is the role of community organisation, NGOs, local government bodies that mobilised people to a great extent in creating infrastructures. Micro-credit institutions, saving and credit cooperatives are working very strongly. They also contributed in terms of creating opportunities for employment. Macro-economic policies were also instrumental. We maintained the inflation low - not more than 4 percent, compared to 10 percent earlier. Trade also helped. After 1996, exports increased significantly till 2002. That was instrumental in creating jobs in trading and industrial sectors. Upcoming economic activities, which we cannot so far measure in our national accounting system, like the activities of the user groups - forest users' groups, water users' groups etc. - were also important. On the whole, a number of activities were instrumental in reducing poverty.
Another interesting conclusion being drawn by some people is that as the experiment with foreign employment has paid good dividends for the country, Nepal as a member of WTO should now focus in WTO negotiations on liberalising the labour movement. What is your opinion?
We should be definitely working for that. But it is a very serious agenda because movement of people is different from movement of capital. There are cultural, social, ethnicity and citizenship issues that change the whole social, demographic atmosphere. Capital doesn't change them. So countries will be hesitant to make labour mobile as compared to capital. But we should try to have more room for the labour to work. Jobs can be outsourced. It's not that we have to send everybody abroad.
While in NPC one of the major responsibilities you were given was to suggest petroleum sector reforms. Recently, the government is reported to have decided some measures in this direction. How practical and complete are these measures in your opinion?
Petroleum is one of the very sensitive sectors for the politicians to make decisions because this sector has been a distorted sector for decades. While I was in NPC, I headed a committee formed for formulating petroleum pricing policies and suggesting it to the government. I struggled hard during my tenure with all the Finance Ministers and the Ministers for Industry, Commerce and Supplies to make the petroleum prices realistic. I am happy that I was successful on most counts. The only thing I couldn't do was to make the government introduce automatic pricing system for petroleum products. I had given a formula to the cabinet. The cabinet adopted it but somehow the formula couldn't be implemented by NOC.
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There are a couple of issues on petroleum products. First, when the international prices are high they are supposed to be high in Nepal as well. But since India as well is a distorted market, we wouldn't see Indian prices changing as per the international prices. When international prices are high and Indian prices low, critics would say, ‘The prices in India have not gone up, so why should we be paying more?’ When India raises the prices at a time when international prices are low, again they comment that international prices are low, so rise in prices here is illogical. Take the case of LPG. India was subsidising more than Rs. 200 per cylinder of LPG and selling for less than Rs. 500. We were selling for Rs. 800 - Rs. 850. Even then we had to bear a loss of Rs. 100 or Rs. 150 per cylinder. So, LPG seems to be a product responsible for major loss of NOC. But LPG is a product for which the consumers are not low-income people. That is why the government might have thought to deregulate the sector first with LPG, which indeed was the official policy for long. But that is not sufficient. We should try to introduce the private sector in the petroleum business. That needs at least two things. First, a Petroleum Regulatory Act. So far as there are government representatives at NOC, there is no need for any regulatory framework. They manage everything. But when the private sector comes in, you need a strong regulatory body. Second, prices should be corrected. You are cross-subsidising the products. For example, the cost of diesel may be around Rs. 45 but is sold at Rs. 40- Rs. 41. This is being subsidised not by the government but by the previously accumulated profit of NOC. In future, maybe this loss will have to be met by the tax paid by the people. This subsidy is not going to encourage the private sector to come into this sector. And you have to eliminate cross-subsidies like kerosene being sold on a quota basis and free-market basis cross-subsidising quota kerosene by petrol. If you do away with this subsidy, kerosene will be more expensive than petrol. Can the country make such decisions whereby kerosene, which is supposed to be consumed by the low-income group to be expensive than petrol, which is consumed by the high income group? That sort of decision and its implementation needs longer time, at least a couple of years.
While in the NPC you were nearly appointed the governor of NRB. But now you have come back to NRB at a much lower position. How does it feel and what are your plans?
I went to NPC fully prepared to come back to my earlier position at NRB any time. I was in deputation from the Central Bank and receiving my salary from the Central Bank. I was nurtured by the Central Bank to be a member of NPC. That was a great honour given to me by the Central Bank. I felt very proud to come back to my institution, which helped me rise to that level. And the coming back was quite comfortable and warm, just like coming back home. There was an occasion when my name was recommended as the governor of the Central Bank. I thank the recommendation committee for the recognition. Now I am the executive director of the Central Bank. So, the recommendation has lost its validity now because another person is the governor now with the same recommendation. I believe the cabinet made a considered decision. I have no grievances. Maybe I have to show my capability further to garner further support.
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