The cumulative impact of the earthquake, over 100 days of strike in the Tarai and 60 days of Indian blockade has brought Nepal’s economy down to its knees. According to the Nepal Rastra Bank, the economy could contract one percent if the blockade persists till mid-January. Meanwhile, the shortage of fuel has stalled all development activities. Against this backdrop, Mukul Humagain and John Narayan Parajuli spoke to former Nepal Rastra Bank governor and the new National Planning Commission (NPC) Vice-Chairperson, Yubaraj Khatiwada, on the state of the economy, the government’s ability to provide fiscal stimulus and the role of the NPC in reconstruction.

Last week, the government forecasted that for the first time in three decades Nepal’s economic growth could be negative. Can you describe the current state of the economy, particularly after the Indian blockade?

There is certainly a risk of zero growth. But let us hope that the blockade will not continue for the entire fiscal year. As soon as the trade flow is normalised all economic activities could revert back to normalcy. We will only incur losses in a couple of areas such as agriculture if farmers planting winter crops do not get fertilisers in time. But other activities such as services and manufacturing could pick up. However, if the impasse continues for the entire fiscal year we could witness negative growth.

Having said that, hotels along with manufacturing industries have operating costs. They have to pay interest and principal on the loan they have borrowed from the bank. The bigger challenge will be to help these sectors go back to normalcy.

What if this blockade continues? What are the tools that the government has in order to help the economy, the public?

There are two major constrains for the economy to revert back to normalcy. First, the availability of energy and second, the availability of raw materials for industries. We can smoothen the supply of petroleum products through alternative channels.

But with regards to industrial raw material we must turn to our largest trading partner. As those products are exported by India, it is their loss as well. As this blockade is not in favour of either of the countries. So, the trade relations with India must be normalised at any cost.

Many have argued that the white paper issued by the Ministry of Finance does not provide immediate solutions to the current crisis. For instance, it does not mention anything about importing fuel from China despite ongoing talks.

The white paper describes the current status of the economy and the key challenges we inherited from the previous government. It is not a document which lists government activities. But having issued the white paper in an abnormal situation, the Finance Minister just wanted to flag some of the issues. The white paper is only indicative of what the government intends to do. In a few days, we will perhaps share the detail of the projected works in the white paper with interested stakeholders.

In terms of finding alternatives to fuel supply from China, many wonder if the government is fully committed to doing so. Most people are confused due to the discussion on taxes and prices.

It is not just the people, even we are confused. We thought the deal would be finalised yesterday [Friday]. We have been clearing the road in both Rasuwagadi and Tatopani. But the trade deal with China is the first of its kind, perhaps for our northern neighbour too. China does not usually export petroleum; it is instead a net importer. We will see how the technical issues will be resolved along with taxation. Moreover, since Nepal Oil Corporation (NOC) is a business company, if the prices are higher than what they are currently selling for in the market, they might also like to seek government approval for either changing the prices or topping the cost.

About 10 years ago, you had led a study on reforming the NOC. Should the government continue to allow the NOC to function this way? We have been hearing of talks to restructure the NOC Board or of forming an advisory board led by an ex-bureaucrat.

I don’t want to comment on the NOC because it is the Ministry of Supplies and its Secretary who deal with it. But having spent several years studying the organisation, I know about the mismanagement and the pursuit of vested interests within the NOC. It is an open secret. At times, politicians have also helped mismanage the institution. We now have an opportunity to put things in order. The government should also realise that the NOC is a business organisation. We cannot ask it to buy fuel for Rs 200 a litre and sell it for Rs 100. We need a cost-covering mechanism. Still, we need to make the NOC more professional and less political. At the same time, the NOC should keep its responsibilities to the people in mind while running a business.

Meanwhile, businesses are demanding a stimulus package to help them get back on their feet. Is the government in a position to do so?

If it were a normal recession, we could have provided a stimulus package. Our banks are flush with funds and interest rates are low. But we are talking about a cash-constrained business environment at the moment. So, financial tools will not work. With regards to fiscal instruments, fiscal stimulus comes from tax concessions and if the government injects money into the private sector. But the government does not have the capacity to provide tax rebates at the moment because it is not collecting revenue as per its target. The government could expedite its development programmes to stimulate the economy through reconstruction works and other ongoing development programmes. But our reconstruction works and development activities are held up because we do not have fuel. There is no mobility of people at project sites and some of the infrastructures destroyed by the quake are yet to be restored. Due to this, even if the government were to increase expenditure, it would be a challenge to stimulate the economy.

The NPC has been asked to take over reconstruction works for the time being. What are your priorities?

Well, let me make it clear that the NPC has been temporarily asked to do only a couple of things, not to perform all the tasks of the Reconstruction Authority. The previous government mandated the NPC to come up with rules and codes, standards for reconstruction and also to distribute Rs 200,000 to the quake-affected. The previous government had also allocated about Rs 91 billion for the Reconstruction Authority. But only Rs 17 billion has been approved. The remaining Rs 74 billion has not been allocated to any ministry.

Given this situation, the NPC has been asked to distribute the money to respective ministries, approve theirprogrammes and monitor their implementation. Our other task is to coordinate with the donors. We are currently working as a nodal point to coordinate the activities of the development partners so that there is no duplication. We are also working on supplying manpower for reconstruction activities. Our work is the ‘software’ part where we come up with plans, policies and monitor their implementation. The line ministries—the Ministry of Housing and Urban Development, Ministry of Local Development, Ministry of Education, Ministry of Health and even Home Ministry—will conduct reconstruction works based on the budget they have received. After the Reconstruction Authority is formed, even the policy, planning and monetary responsibilities will be shifted to it.

So is Nepal on the verge of losing the assistance pledged by donors in the International Conference on Nepal’s Reconstruction because of the delay in forming the Reconstruction Authority?

I do not think so because most of the donors are in the process of devising programmes and reaching an agreement with the concerned ministries. The European Union has mentioned that it would like to see the Authority in place for budgetary support. Perhaps their main concern is to ensure that the money they have provided to the government as fungible resource is not used somewhere else.

Even if the Reconstruction Authority is in place, it cannot do everything on its own; it has to work with the ministries. Even after the amendment of the Reconstruction Bill, I would expect most of the activities to be implemented through the line ministries themselves who know about their areas of work. I think the government took the right decision to bring all the ministries on board to carry out the projects.

When will the government begin disbursing the Rs 200,000 to those who lost their houses in the quake?

Well, the previous procedure passed by the Cabinet had some limitations. First, the money was to be distributed through bank accounts. But there are no banks in many areas where money has to be disbursed. Second, the money must be spent on building houses which are modeled by the Ministry of Housing and Urban Development. Third, the money was to be distributed in four installments. We have tried to simplify the whole procedure which will perhaps be passed by the Cabinet in a few days. By next week, the money will be transferred straight to the Ministry of Local Development which will transfer it to the District Disaster Relief Committees and then be distributed to the people. We must also relieve the people of the compulsion to open bank accounts. Even if banks existed in affected areas prior to the quake, they will take time to start functioning. I think we will be able to hand money to the people within the next couple of weeks.