By Sid Verma
As Nepal emerges from the shadow of bitter conflict, economic revival takes centre stage. But policies are as yet far from clear
When Maoist rebels from the jungles of Nepal were sworn into government on April 1, the country’s public watched in hope of a final end to a brutal insurgency that has bled the Himalayan nation and its economy for over a decade – and twatched too for the start, however tentative, of peaceful democracy.
“We have come to a new place to create a new Nepal,” Maoist chief Prachanda, whose nom de guerre means “terrible” or “militant”, was quoted as saying at the time.
Now, in the run-up to elections on June 20, observers are asking what it will take for an apparent political milestone to translate into an economic turnaround for the beleaguered nation.
Raghab Pant, a Nepalese economist and former minister of planning, says the pivotal challenge is whether the Maoists can transform themselves from a militant organization running extortion rackets into a peaceful and tolerant democratic force. “No progress can be made on economic growth or development until we know what will happen after the elections in June,” he points out.
The former rebel Maoists – who still feature on Washington’s list of foreign “terrorist” organizations – recently applied for the status of a political party ahead of the crucial June elections. Yet for all their political rhetoric over the past 20 years and their new position in government – they took five ministerial posts in the 22-member cabinet in April – their attitude towards foreign investment remains ambiguous at best.
Krishna Mahara, the new Maoist information minister, has already overturned an earlier ban on outside investment in the media sector. Investors are entitled to feel much trepidation – after all, the group still justifies violently targeting businesses for extortion.
As time goes by
The hope is that, as the Maoists become increasingly integrated into the political mainstream, their economic policies will become more outward-focused – out of pragmatism if nothing else. After all, the group will have to rub shoulders in the cabinet with reformists such as finance minister Ram Sharan Mahat, who hopes to take Nepal’s growth rate to 5% this year by cutting defence spending and luring foreign investment.
Hassan Zaman, assistant chief economist for South Asia at the World Bank, calls on the Maoists to make their economic agenda transparent and outward-orientated: “There is a need for clarity over their position: the private sector needs to be re-assured on property rights and foreign investments,” he says. “Labour laws also need to be more flexible.” With such improvements in the policy environment, Zaman says 5-6% growth is achievable in the next two years, up from just over 2% in recent years.
But it’s a big stretch. Bishnu Pant, assistant chief economist at the Asian Development Bank, says the country’s macroeconomic woes are “compounded by rampant corruption, limited access to foreign financiers and inflexible labour regulations.” Moreover, Pant says, the government is incapable by itself of tackling the myriad economic problems it faces.
Agriculture accounts for 40% of GDP, making the economy highly vulnerable to environmental threats such as poor crop growth. Moreover, 80% of the population live in rural areas where security concerns have hampered development spending. The ADB points out that many of its projects have been disrupted and that the institution is often forced to negotiate with the Maoists. As a result of this, the country’s manufacturing sector [TK – which accounts of X of the country’s exports] has been hard hit – garment exports, for example, slid by 35% in 2005-06.
In contrast, remittance flows surged 49% to $1.3 billion in 2006 – a reminder of seven million people who have fled the country. This inflow has helped offset the wider trade deficit and injected much needed liquidity into the banking sector. Raghab Pant is eager to point out the upside of remittances to Nepal’s fragile economy, but he is also well aware that “no country in the world has developed on remittances alone.”
Instead, Pant says Nepal should “harness its strengths” – in particular, in hydropower. With powerful rivers flowing south through the Himalayas, the country has significant potential for energy generation – a fact that is also attracting interest from investors in India and the US.
Investment experience
The problem is investor sentiment. Last year, US-based Panda Energy International, the principal sponsor of one of Nepal’s biggest projects – the $98 million Bhote Koshi power project – pulled out following a long-running dispute with Nepal Electricity Authority. The government body had failed to pay the firm’s dues since May 2001.
John Zamlen, the company’s vice-president for business development, says: “Investors go in there knowing full well government-owned entities always have problems honouring contracts.”
Cairn Energy, an oil exploration firm, has also run into complications, this time in the southern Terai region – the latest part of the country to succumb to conflict. There, demands for independence have led local ethnic groups to block off trade with India, while launching a violent campaign against Maoists.
“The government has been very supportive, anxious to attract investment,” says Simon Thomson, commercial director at the firm. “But we have been gridlocked for 1 1⁄2 years, much longer than expected ... we have no idea when we can start operating and what will happen.”
The hope – both at home and abroad – is that, with the prospect of political stability, consensus on economic policy can also be reached.