Economic Policy for Nepal

By: Bikal Dhungel

Nepal lack a feasible economic policy. The major political parties plan development projects according to their own ideology upon the pressure from their party members. There is no clear way forward. If there is one, it changes soon after another party takes over the government. There is no general consensus on what they want to perform and how. We can also say that there are only few people with economic knowledge. The aim of this article is to highlight something that will probably be good for Nepal. However, it is just an opinion with back up of evidences. A policy that work in one country might not work in another but this can be taken as a case study. So, the policies are:

1. Disciplined Fiscal Policy: This means, spending according to the capacity without placing burdens to future generation. Our mistakes should not place a burden to our children. Government can borrow now to pay back later but there should be a logical time frame and the payment should be held in periodic manner. Apart from infra-structural development, health and education, there can be no other longer term investment. So, only if it is really needed, long term borrowing should be allowed.
   
2. Tax Reform: In the present situation, only about 4% of Nepalese pay the tax. Most of them dont because they do not earn enough to pay, but others because simply they can avoid it. Due to lack of good monitoring system, it is difficult to detect such cases. Probably information technology can help. Other countries have already started digital payment system where it is easy to see electrical transaction and make people pay taxes. So, the first point is to bring people who are liable for tax into tax circle and second policy is to discuss how we want to organize it. Either we want a progressive taxes or we want a lump sump. I will not write my personal opinion here because it hasn't been studied enough yet which tax system is better for Nepal based on Nepalese context.
   
3. Practical interest rate and exchange rate mechanisms: Interest rate should be determined by the market. Exchange rate must be pegged with either Indian currency, as in the present or with Chinese Yuan. It is important to peg because otherwise the Nepalese currency will be too weak, it will devalue and will be worthless in international markets. As we dont have a competitive export sector, a devalued currency will reduce the purchasing power of Nepalese. It will make import more expensive and due to this, Nepalese market will see fewer foreign goods. Since Nepal trade more with India, pegging with IC is good. Moreover, India is also growing to be second largest economy in the world, it will lift up Nepalese currency until India wants to keep the peg. Still, it should not be fixed as permanent. There should be consultations periodically.
   
4. Tactical Trade Liberalization: Trade Liberalization basically means eliminating restrictions on trade or making export and import less bureaucratic or reducing taxes for imports. Internationally there is mixed evidence about trade liberalization. In some countries it has helped but in some it was a disaster. So, Nepal should reject 'one size fits all' policy and try to consider the local realities. Once Nepal develops small scale agri businesses, the government can place some form of restriction on vegetable imports to give a chance to small local industries to build up competitive advantage. But this should be limited in time. Government should simply look what kind of industries are growing, how much time they need to build up and how they can be lifted up. Such industries need protection in the initial phase for a certain time frame. The import of high-tech goods like advanced machinery should be tax free because they are efficient and have other positive externalities. It can be medical devices, machines used for production, automobiles that run with renewable energy etc. For export, Nepal can do less because it depends on the policy of receiving country as well. Export sector need support. It is a way to accumulate hard currencies and it creates job at home. Only regarding energy, it should be discussed how much to export because if Nepal itself is falling short of energy, it is not good to export it abroad even if the foreigners are paying more for this.
   
5. Privatization of State Firms with some exception: The state firms like Nepal Oil Corporation, Water Corporation, Airlines Corporation are among the most inefficient ones in country. A recent study showed, when 'Royal Nepal Airlines' had 19 airplanes, it had about 190 employees. Today, with only few airplanes, there are over one thousand employees, most of whom got job through political recruitment. This will cause a rise in personnel costs and the firm cannot generate profit. Moreover, the management also does not have incentive to run the firm efficiently. Property of a state means, nobody feels responsible for the actions. Who looses at last are the tax payers. Privatization is a key of efficient management. In advanced countries, except the military, railway, and few other sectors, no others will be state owned. But there are exceptions. In Nepal context, privatization seems to be a factor guaranteeing efficiency.
   
6. Reforming Property Rights and Patent Law: Without the security of one's property, the owners have a tendency to emigrate if it is a physical property or they have to bear costs of protecting it themselves by hiring security guards. Such actions are economically damaging. No one profits from this. Property Right should also be guaranteed for non physical goods like music, writings etc. Only if people are sure to get the fruit of their invention, they will involve in creating things. If I know that my song will be copied by a second person anyway, why should I spend time in it ? Intellectual property rights and physical property rights are determining factors of invention. In Nepal's context, especially the Maoist guerrillas have frequently claimed others properties as their, mostly with violent manners and this caused people to run away from place to place. The job of the state should be to protect its citizens property.
   
7. Inter-sectoral Reforms: As Economy is closely related with other areas like education and health, a disastrous health and education policy will impact the economy directly. When the work force are not educated well, they cannot participate fully in the economy. When the workforce is not healthy, they cannot participate fully. So, for a quality workforce, it is the job of a government to provide them with education and vocational training. Private sector can help in things like on the job training but the biggest role is of government. Also a social security system should be established. It should not default on financial ground because social security will have indirect effects and the positive externalities can be seen only in the future. Western European countries that introduced social security system in the mid 19^th century were much poorer than Nepal today. So, just financial constraints cannot to used to justify for not introducing it.
   
8. Building a capable state to implement its policy: Nepal does not lack good laws and regulations but the problem is in implementation and enforcement. Development projects frequently gets disrupted sometimes labours calling for unnecessary demands, sometimes the locals asking for higher compensation than planned and sometimes based on political grounds. Implementation of law also means in social sectors. There are fantastic anti-discrimination laws which bans caste discrimination or any other in the form of religion or class but they were never implemented properly. Without proper enforcement, better policies are useless. 
9. Sustainable Development: Development is not just achieving economic growth. Economic growth can also lead to inequality and political instability. Sustainable development means inclusive development where nobody is discriminated. SD also means development without compromising the future of our children which means our economic growth should not place burdens on environment so that our children have to face problems connected to it. So, supporting and encouraging Green Industries is important for sustainable growth.