Private Sector Emerging from Recession: Nepal's Economic Landscape in Transition

Nepal's economy has been volatile for the past four years, with the aftermath of COVID-19 still reverberating through its financial systems. While it appeared that the country was recovering from the pandemic’s impact, the deep economic scars remain evident. According to the data for the fiscal year 2080/81, the industrial sector accounted for only 4.86% of the GDP, the construction sector at 5.41%, and wholesale and retail trade at 13.84%.

The central bank’s statistics reflect a modest 5.8% increase in loan expansion, well below the target of 15%, highlighting the stagnation in private sector demand for credit. This is an indication that business investment has yet to recover fully, and entrepreneurs are hesitant to take on debt for growth.

On a positive note, Nepal’s foreign exchange reserves are at an all-time high of NPR 20.41 trillion, enough to cover imports for the next 13 months. This is a significant achievement, indicating that the government and state mechanisms are currently in good standing.

Current Economic Condition

The state was severely impacted by the COVID-19 pandemic, with businesses struggling to recover. For two years, many entrepreneurs found it difficult to regain their footing, and high interest rates on loans discouraged many from borrowing. The real estate market has also remained sluggish, as reflected in the land management and record-keeping departments' reports. However, the stock market is showing signs of recovery, reaching its highest point in the last three years.

For the fiscal year 2080/81, the government set a target of 11.5% loan expansion, but it fell short, achieving only half of that goal. In the current fiscal year, the government has set an even more ambitious target of 12.5%. If this target is met, economic growth projections suggest a 6% increase in GDP.

Challenges Faced by the Private Sector

Small businesses and cooperatives have borne the brunt of the economic slowdown. The original concept of cooperatives and microfinance institutions was to support these small businesses, but past abuses of these systems have led to mistrust. As a result, the general public has become reluctant to invest or take out loans, further hindering business growth.

Additionally, the government’s increasing pressure on businesses through higher taxes and inconsistent policies has created a discouraging environment for entrepreneurs. The introduction of arbitrary taxation under the Customs Act and the outdated Income Tax Act 2058 has only exacerbated the situation. As a result, many business owners have defaulted on loan repayments, and thousands have been blacklisted over the past three decades. Last year alone, 75,957 business owners were blacklisted, and 60% of those blacklisted were added in the last two years alone.

Policy Solutions and Path Forward

To end the economic stagnation, the government must prioritize policy stability and protection for the private sector. Collaboration between the state and private businesses is crucial for reviving the economy. Programs to reintegrate the skills of youth returning from foreign employment should be implemented, preventing them from seeking employment abroad while creating opportunities within Nepal.

The Nepal Chamber of Commerce also advocates for the promotion of exports and the development of self-reliant economic strategies. The establishment of an Asset Management Company to manage collateral for loans in banks and cooperatives is necessary. Additionally, amendments to the fiscal provisions of the Economic Act 2081/82, particularly regarding the valuation of imported goods, should be prioritized.

Addressing the Root Causes of Economic Challenges

The government’s reluctance to address issues such as tax evasion and inaccurate tax assessments has led to the disillusionment of business owners. Implementing comprehensive record-keeping systems and addressing issues around income verification is crucial to restoring confidence in the system.

The start of the current fiscal year brought hope to the private sector, particularly with the partnership between the two major political parties, the Communist Party of Nepal (CPN) and Nepali Congress. This coalition has ensured a stable government, which is key for economic policies to remain consistent and for encouraging investment.

Strategic Initiatives for Future Growth

The government has set ambitious goals for the next few years. The GDP growth target is set at 7%, with an aim to boost internal production and eventually increase exports. The retail and wholesale trade sector alone contributes 14% to the GDP, and increasing this contribution can lead to significant improvements in employment and business expansion.

Nepal is also focused on improving its per capita income, which is estimated to reach USD 1,500 in the near future. However, the long-term goal is to push this to USD 2,000, which will require significant structural reforms and increased investment. The budget alone will not suffice; effective utilization of national resources and infrastructure development are essential.

Trade Balance and Export Promotion

Nepal continues to struggle with a significant trade deficit, with imports accounting for 90% and exports just 10% of total trade. This poses a major challenge, and the Nepal Chamber of Commerce is pushing for a strategic plan to increase exports. The target is to boost exports by NPR 10 billion annually, which will involve the establishment of export houses in all seven provinces and the creation of international quarantine labs for export facilitation.

Moreover, promoting the processing, branding, and export of valuable resources like handicrafts, gemstones, and medicinal plants will contribute significantly to Nepal’s export capacity. To this end, the government needs to introduce an incentive system for exports, with a focus on value addition.

Conclusion: Navigating Nepal’s Economic Future

The private sector’s recovery will largely depend on the government’s ability to implement policies that foster trust and create an enabling environment for business growth. A combination of effective infrastructure, strategic export policies, and the proper management of labor force skills will help Nepal overcome its current challenges. With the right policy approach, Nepal has the potential to transform its economic landscape and create a more sustainable and self-reliant economy.