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Nepal's economy has big mountains to climb

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18 January 2012 10:28

Nepal's Ambassador to the US, Shankar Sharma, sits down with Pacific Forum CSIS fellow Eddie Walsh (@aseanreporting) to discuss rebuilding Nepal's economy and prospects for South Asian trade.

Do you think that there remain lingering doubts in the international community that the Maoist conflict is really over? More to the point, do you think you still need to reach that tipping point for outside investors to have the confidence to make the investments necessary to achieve your growth targets?

When we see and compare the situation today with early-2009, the situation has improved. But, once we have the constitution completed and promulgated, we will have a much better situation for investors. We definitely will have higher growth rate. There was a big leap when the peace agreement was signed so we hope for the same when the constitution is promulgated.

The US Department of State recently lifted its travel warning on Nepal. How important is the lifting of the warning for Nepal's economic and strategic interests?

This is important for a number of reasons. There has been significant progress in Nepal in terms of the security situation and political violence. For some people who want to go to Nepal in large groups, there were still concerns. For example, students from universities whose parents might have objected. Now that the travel warning is over, we will probably see an increase in Americans visiting Nepal.

When you are looking at improving the economy, you have mentioned in the past that Nepal wants to move away from remittances. How then are you going to raise more in taxes and how do you plan to pay down your debt?

The tax collection has been very substantial. Our target over the last couple of years was to increase tax collection by 0.5% of GDP per annum. That has largely been achieved. Secondly, many multilateral agencies are starting to give grants rather than loans starting in the early 2000s. That has reduced the debt to 32% from 62% of GDP in 2003. The budget deficit, which is audited by the IMF/World Bank, has gone done from 7% in the 80s and early 90s to 3.5% of GDP. Even during the armed conflict, Nepal had very good macroeconomic stability and indicators have improved significantly.

The main problem is to increase GDP growth rate. During the armed conflict period, we had only 3.5% growth rate per annum. It has improved slightly but not dramatically. We have the capability to very easily increase it to 6-7% with the resources available within the country. But, because of political instability, we are lagging behind. So, we want to see more improvement, especially in agriculture, hydro power, and tourism. We also want to be the centre for outsourcing of services, especially from India and China.

Nepal maintains its currency peg with India. Do you see any changes to this arrangement arising out of your increased focus on other export markets, particularly China as a result of your upcoming improvements to your infrastructure links with Tibet?

The reason that Nepal has a currency peg with India is because of the trade and investment relationship and day-to-day economic transactions because of open borders. India remains the largest investor in Nepal at 2/3 of our trade. The people who are in the east, west, and south who are along the open borders benefit from that. So, I think that we will maintain it.

The Institute for Defence Studies and Analyses in India recently published a piece outlining the political cost of Nepali Prime Minister Baburam Battarai's signing of a landmark Bilateral Investment Promotion and Protection Agreement (BIPPA) with India. Do you see broad domestic political consensus for the Indian BIPPA moving forward and why do you think that such a backlash occurred in the first place?

Nepal is politically heterogeneous at this time. I am sure there is opposition that wants to make a point on it. But, this is not the first BIPPA. Nepal has already done BIPPAs with other countries and intends to do more beyond India. If we do not protect investment in the country, how can we promote investment in Nepal? We have some problems with political stability, electricity, and labour. But, the whole point here is that it has improved. We need to see things in perspective. The Maoists, the party who were outside the political system, are leading the government and have been instrumental in signing the BIPPA agreement.

But, even within the Maoist party, there has been dissension on the BIPPA. Is there even political cohesion in the party running the country at this point and what does that mean for investment?

It is not just on the BIPPA; there are so many other issues within the party. I think there are problems in major political parties. But, the bigger the party, then we will see it more often. And, it comes out in the papers explicitly, I guess. But, we also have internal party problems in other political parties. What we have to see is how much support other political parties have for BIPPA. All of the political parties are supporting it and the Government has already done it. It is the political decision of the country, not one political party.

During the armed conflict, it was difficult for Nepal to focus on regional free trade initiatives. Now that the conflict is over, free trade promotion could be an impetus for economic growth. From Nepal's perspective, how is regional free trade in South Asia progressing? And, do you see any major breakthroughs on the South Asian Free Trade Area (SAFTA) in the next few years?

Even after the implementation of SAFTA, we have not seen a huge improvement in free trade. We should not be limited to this small amount. It can be expanded to investment areas and the service sector. We need to do more to reduce sensitive items to improve trade in the region. So much more can be done. Pakistan has agreed to give most-favoured-nation status to Indian goods. That will have a significant impact in improving intra-regional trade. If India and Pakistan have better relations, SAFTA will benefit.

We also remain focused on the WTO Doha round. There are few remaining issues in the non-agriculture sector. We would like to see the services area, especially labour, included in the future because we are the net exporter of labour in certain sectors. Negotiations have begun in that area. As one of the least developed countries, we also would like to be given special and differential treatment extended to more areas to see if aid for trade can help Nepal remove the supply constraint.

Extended discussions from the interview can be found here and here. Photo by Flickr user rajkumar1220.

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