Billion-dollar gap

  • New Asian Infrastructure Investment Bank could help meet the funding gap in Nepal
Billion-dollar gap

Oct 27, 2014-

In 2009, the Asian Development Bank (ADB) and the World Bank estimated that developing economies in Asia would require a sustained investment of $9 trillion in physical infrastructure from 2010 to 2020 if they were to keep up with expected needs. Similarly, a World Bank study showed that Nepal alone will require $13-18 billion in investments in infrastructure from 2011 to 2020 if it expects to graduate from the status of a least developed country (LDC) to a developing one. Given this massive need, it is welcome news that Nepal was among the 20 countries that signed a Memorandum of Understanding on Friday to establish an Asian Infrastructure Investment Bank (AIIB) in Beijing.

Plans for the AIIB were first announced by Chinese President Xi Jinping and Prime Minister Li Keqiang at an October 2013 Asia-Pacific Economic Cooperation (APEC) meet in Bali, with an initial capital of $50 billion. By June of this year, the registered capital of the bank had been doubled to $100 billion—$50 billion from China and $50 billion from other partner countries. Though a Chinese-led initiative, the most heartening feature of the AIIB is that it has enjoyed broad support, not least from another Asian power, India. Nepal of course is one of the 20 countries that signed the MoU in Beijing.

With global investment in large-scale infrastructure led by the World Bank and the ADB, the AIIB looks to act as an effective complementary institution that will provide developing and underdeveloped countries with the much-needed cash. The AIIB can only benefit countries like Nepal, which, despite the influx of remittances, are in constant need of investments, both public and private. Remittance earnings, which is equivalent to 25 percent of Nepal’s GDP, is mostly used to meet basic needs. According to the Nepal Living Standards Survey 2010-11, about 80 percent of remittances is used for daily consumption, seven percent to repay debt, 4.5 to purchase property, 3.5 for education, and only 2.4 percent for capital formation. With little public savings, Nepal needs to rely increasingly on global lenders like the World Bank and ADB. But these banks are seemingly moving away from infrastructure and towards more concessional lending and knowledge sharing. According to the Organisation for Economic Cooperation and Development, net lending by multilateral development banks has been negative in five of the last 10 years. The AIIB could step into the gap left by the ADB and World Bank and provide the capital costs of infrastructure at competitive interest rates.

Given Nepal’s set goal of graduating to a developing country status by 2022 and the funds it needs to meet this goal, the presence of the AIIB should provide the country with another window to pursue loans to meet its investment gap. That said, we expect that the AIIB will work in tandem with the World Bank and ADB, given the latter’s expertise in infrastructure development in Nepal and the region. Nepal will thus have access to competitive interest rates and benefit from the complementary roles these institutions will seek to play in the country.

Published: 28-10-2014 09:01

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