Nepal Economy Hindered by Political Uncertainty

May 11, 2011

By Katherine Loh, Nirjan Rai

In a recent edition of the Himalaya Post, Anil Shah, CEO of Mega Bank – one of Nepal’s largest commercial banks – wrote an op-ed that laid out five pillars of sustainable economic development for Nepal. Shah underscored the need for political stability as a condition for future success of each of these five pillars of growth. Yet even as he wrote, Nepal’s lawmakers were – and still are – debating whether to extend the term for the Constituent Assembly beyond May 28, which would further delay the promulgation of a new constitution. This is the second time they’ve done so. Nepal remains trapped in the same political gridlock it has been in since 2005 when political parties agreed to an end to a decade-long civil war. Shah closed his op-ed with a question: “Will political stability give way to economic change or will economic change give way to political stability?”

Nepal's government has officially declared 2011 as Nepal Tourism Year, but political uncertainly has affected hotels and locals who rely on tourism. Photo by Jon Jamieson.

The country’s economy languishes as foreign and domestic investors await signs of political stability to make a move. Businesses, banks, and private citizens stagnate while one political stalemate after the next unfolds. The Nepal Stock Exchange (NEPSE) Index stood at 413.98 as of May 9, down nearly 18 percent from this time last year, bank profits have slowed as people downgrade their confidence in the banking system, and a liquidity crunch is unfolding with interest rates rising, even while the real estate sector experiences a sharp fall. In a recent interview on Nepal’s financial sector, Ashoke SJB Rana, CEO of Himalayan Bank Ltd and newly elected president of the Nepal Bankers’ Association, noted the fact that investors had been socking funds away in real estate while shying away from relatively riskier, but more productive, areas such as development projects, tourism, health, and education. And though 2011 has officially been declared Nepal Tourism Year (the government set an ambitious goal of attracting one million tourists to Nepal in 2011), just last month a Maoist trade union protesting a hotel employee’s dismissal took over a well-known resort lodge in Pokhara, one of the top tourist destinations in Nepal, resulting in the hotel having to relocate all 120 of its guests to other hotels throughout the city.

As a result of Nepal’s political instability, a mood of uncertainty prevails, dampening entrepreneurial activity and the macroeconomic environment across the country. This uncertainty clings not only to the national mood, but makes its way down to the sub-national level too. In the district of Parsa, some five dozen small and big industries situated in the Birgunj-Pathaliya Industrial Corridor area have remained closed for the last two years due to labor disputes, leaving 20,000 workers without jobs. Large factories like Annapurna Textile, Puja Soap and Chemical, and Aarati Soap remained closed during this time, according to the Birgunj Chamber of Commerce and Industry. There is a sense that the local authorities concerned have not taken any initiative to reopen the closed factories. Rising unemployment and workers disaffected with their government leadership have fed into the cycle of social tension and insecurity.

At the same time, there are small glimmers of hope that Nepal holds not only the brakes, but the keys to its own success. Earlier this month, in the same city of Pokhara, we sat in on a public-private dialogue (PPD) organized by The Asia Foundation. PPDs are a useful mechanism to help put appropriate regulatory reforms in place and to remove constraints to private sector investment and growth. The private sector – particularly micro, small, and medium enterprises (MSMEs) – is one of the main engines of sustainable economic growth in Nepal, providing employment opportunities, technological innovation, and flexibility and competitiveness to the overall economy. When their ability to grow is hampered by business environment constraints, economic growth, market efficiency, and poverty reduction efforts overall are also constrained. PPDs serve as venues – often where none exist or do so only inadequately – in which key stakeholders, including local entrepreneurs and other private sector actors, local business associations and Chambers of Commerce, civil society organizations, and government officials can come together to build coalitions for reform.

In Pokhara, they were doing exactly that. The chief of a local community fisheries association, the Association of Fewa Fishermen, raised an issue about how to pursue an investment in the production of a small fish fry (a term used for baby fish in fish farming), which can be nurtured and grown for the local fish market. Currently, the National Fisheries Research Centre in Pokhara does the job, but if the fishery association were to receive appropriate training and obtain access to finance to invest in lakeside land and aquaculture equipment, the local association would be able to take over fish fry production, and also enable the Research Centre to shift its responsibilities to other endeavors. Nepal currently imports 90 percent of larger grown fish and pays a premium to do so. If local fishers, like the Association of Fewa Fishermen, can take on this work instead of the government, and increase domestic production while decreasing the price for fish, it’s a win-win solution for Nepali fishermen and consumers.

In fact, the fishermen have long had this idea. The problem was that they were ill-equipped to act on it. They did not know what resources were at their disposal to assist them, whom to turn to obtain information on access to finance, what lands were available, or at what price. The PPD process provided them a venue to convene all the stakeholders at one table – the District Development Committee, the District Agricultural Development Officer, scientists from the Research Center, and the local branch of a microfinance bank, the Nirdhan Uthan Bank – and gather all the information at once. There are more steps to take before the fishermen reach the goal of growing their own fish fry, but these dialogues have given them a good start, proving that obstacles can be overcome and positive change can take place.

Katherine Loh is the program fellow for The Asia Foundation’s Economic Reform and Development Program based in San Francisco, and Nirjan Rai is a program officer in The Asia Foundation’s Kathmandu office. They can be reached at [email protected] and [email protected], respectively. The views and opinions expressed here are those of the individual authors and not those of The Asia Foundation.

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