Nepal's economy is the 136th freest, says US think tank

October 02, 2019

Prahalad Rijal, The Kathmandu Post, October 15, 2019

The report says that Nepali courts are generally reliable, but they remain vulnerable to political pressure, bribery and intimidation.

Despite marginal improvements in labour freedom and fiscal health over the past three years, Nepal remains a mostly unfree economy in terms of regulatory efficiency and investment freedom, the 2019 Index of Economic Freedom revealed.

The survey executed by Washington-based think tank The Heritage Foundation ranked Nepal as the 34th economy out of 43 economies in the Asia-Pacific region, and the 136th country out of 186 economies worldwide, with a lower degree of economic freedom below regional and world averages, and a few spots below Sri Lanka, India and Bangladesh in South Asia.

“Foreign investment has been hampered by political uncertainty, a history of statism, and a difficult business climate. Property rights are undermined by an inefficient judicial system that is subject to substantial corruption and political influence,” said the think tank.

The report which gauges four parameters—rule of law, government size, regulatory efficiency and market openness—says that Nepali courts are generally reliable, but they remain vulnerable to political pressure, bribery and intimidation.

“And despite some streamlining of the process for launching a business, other time-consuming requirements reduce the regulatory system’s efficiency.” Cronyism, a burdensome approval process and a lack of transparency are other impediments identified in the index.

The index appears amid fears of slowed economic growth owing to a drop in manufacturing and foreign direct investments, despite government claims that it has improved the investment climate by reforming a dozen laws over the year.

During the Investment Summit in March and the recent Infrastructure Summit, government officials said Nepal had improved the investment climate by amending labour and technology transfer laws, creating a single-window system to facilitate foreign investors, easing processes pertaining to profit repatriation and setting up a currency hedging fund.

But months after the announcement, figures show that the country’s investment outlook remains bleak. As per Nepal Rastra Bank, the inflow of foreign investment plummeted 25 percent to Rs13.07 billion in the last fiscal year from Rs17.5 billion in 2017-18.

According to the Department of Industry, industry registrations fell to 436 in the last fiscal year from 498 in the previous year, the total committed investment dropped to Rs282 billion from Rs350 billion in the previous year, and foreign direct investment pledges also nosedived to Rs24 billion from Rs56 billion.

Among the investment proposals worth Rs900 billion approved in 2018, only three infrastructure projects—a cable car at the pilgrimage destination of Muktinath, a cement plant and waste management project—entered into agreements and understandings with Investment Board Nepal.

Analysts say an improper mechanism to share business risks, legal impediments and a lengthy profit repatriation process has harmed investor confidence.

“Foreign developers and investors have trust issues with governance as Nepal has lengthy processes requiring a recommendation from various bodies before an investor can repatriate profit,” said Semata Dahal, an advocate. “Also, laws on dispute resolution and arbitration are not firmly set as court reversals of decisions made by arbitrary tribunals are frequent.”

According to Dahal, the lack of clarity of hedging against foreign currency fluctuations and ad hoc implementation of hedging policy by Nepal Rastra Bank has also put the country in a tight spot.

The recent confrontation between the Energy and Finance ministries over the terms of hedge fund contribution of government entities and foreign developers in the 600 megawatt Upper Marshyangdi hydel scheme held by Chinese developers and Butwal Power Company also suggests the same.

Despite three successive years of high gross domestic product growth, Nepal has failed to realise improvements in the ease of doing business measured by the World Bank. A recent preliminary assessment made by the multilateral agency shows that Nepal has failed to secure a spot in the list of 20 economies that have improved in the ease of doing business.

The reports have come at a time when domestic industry associations and multilateral lenders have cited the need to increase public-private partnership and attract foreign investment to meet the target economic growth of 9.6 percent in five years.

As per the Confederation of Nepalese Industries, the funding gap in capital projects in the four priority sectors of energy, transport, urban development and water and sanitation is estimated to be between $77 billion and $136 billion.

“To fill this gap, there is a need to expedite public-private partnership at home and attract investments from abroad,” said the confederation. “The currently available financial instruments and modalities for investment in infrastructure are not adequate.”

As per the Nepal Development Update prepared by the World Bank, Nepal needs infrastructure investments of 10 to 15 percent of the gross domestic product annually for the next 10 years, and the success of these investments will depend on the timely implementation of investment-related legislation that meets good practices.