The 10th South Asia Economic Summit held in Kathmandu last month aroused hopes and aspirations as it discussed regional cooperation on many fronts, from promoting trade and investment to mitigating the risks of climate change. The National Planning Commission (NPC) was directly involved, along with Kathmandu-based regional think tank South Asia Watch on Trade, Economics and Environment (Sawtee). The main message from the summit was that, while the pillars of prosperity are shifting towards Asia Pacific from the West, South Asia has an important role to play as a dynamic and open society with a huge population dividend. 

An enabling environment

The government scrapped a $2.5 billion deal with China Gezhouba Group Corporation to build the 1,200 MW Budhi Gandaki Hydroelectric Project, which would be the largest in the country. The decision taken just before the scheduled parliamentary and provincial elections has spread the wrong message to the public. It has also generated conspiracy theories about the ‘relations’ of political parties with China and India. The country’s credibility has eroded as a result. Nepal needs foreign investment, and it can come from any country. We don’t have to worry whether it’s Chinese or Indian money as long as it helps to develop large-scale infrastructure. 

Nepal will require an estimated $15 billion for infrastructure development within the next few years, and another $20 billion for urban development. Multilateral development banks such as the World Bank, Asian Development Bank (ADB) and newly established Asian Infrastructure Investment Bank (AIIB) are funnelling new investments into Nepal, but they are not enough. The country now needs something more—a consistent inflow of private investment in the services and manufacturing sectors. Services and manufacturing can attract investment from domestic and foreign private parties only if the government ensures an enabling environment. This means quality connectivity infrastructure, policy clarity and consistency regardless of changes of government. 

While the second condition could be fulfilled by a stable government looking towards state prosperity, it is quite difficult to see how the first condition of quality connectivity infrastructure will be fulfilled. The question is about the massive funding needed to build connectivity infrastructure. At the same time, issues of governance and the expenditure capacity of our institutions and the technical capacity of the human resources remain.

The state mechanism is going to be bulkier and more expensive with the change from the existing unitary system to federalisation. The Finance Ministry has estimated that it will cost around Rs820 billion to establish office buildings and facilities for the local and provincial governments. Considering the huge amount of money needed, managing funding for municipal and scaled-up provincial level infrastructure is another question. 

It is not practical to expect local and provincial governments to secure funding for infrastructure development at this early stage of federalism. The central government has to support local and provincial governments so they are institutionally capable to function as soon as possible. The central government has to adopt policies that create an enabling environment for foreign investors to jump in to develop infrastructure projects. This will allow the government to focus on the core issues of institutionalising the achievements made so far in terms of federalising the country. The process has been more about political engineering so far, but now it will also require finance and technical capacity.

House in order

The country’s needs are beyond measure, and we have limited resources at our disposal. Nepal has to look towards both the south and north for support, not just financial support but also political support through which both China and India can help Nepal emerge from transition successfully. 

So, we have to be clear about what we want, and design our foreign policies accordingly. The first and foremost priority of our foreign policy at present should be attracting more foreign investment. Let’s revisit Deng Xiaoping’s time to get some nuggets of wisdom. In the early 1970s, the Nixon administration got closer to China to find potential ways to contain the influence of the former Soviet Union. This was phrased as America using the ‘China Card’ as a weapon against the Soviet Union. The then leader of China, Deng Xiaoping, was asked if the US was using the ‘China Card’; and his response was quite an answer to the world. He said that China wouldn’t be on the table but at the table. He continued saying that China didn’t want to be a card but a player. 

Nepal has to abandon this ‘card’ mentality. Nepal can neither be a card nor a player at the moment. It has to come out of the ground of regional geopolitics and get its house in order first. The challenges ahead are enormous, and we have to be serious. 

- Poudel is a consultant economist for the Nepal Resident Mission, Asian Development Bank