Capital concerns

Forceful countercyclical measures are needed to put the economy back on track Capital concerns

Achyut Wagle

Published at : December 11, 2018

Updated at : December 11, 2018 10:44

The Nepal Stock Exchange (Nepse) Index witnessed a double digit growth last Sunday, after a free fall of 85 points in thirty days. It is rather ironic that the rise was attributed to relay sit-in protests by the investors in stocks demanding the resignation of Finance Minister Yuba Raj Khatiwada. The index had steadily fallen from about 1,400 to 1,200-level over the period of ten months since the majority communist government took over last February. But it actually started crumbling down after it broke the psychological floor of 1,200-mark a month ago.

Investors argue that the ‘wait and see’ phase is now over. Due to the government’s nonchalant behavior in general and the finance minister in particular, the problems of Nepal’s capital market have appallingly aggravated. The finance minister’s weird comments related to the secondary market—that have often gone beyond context and rationale—have further dented the confidence of the investors, both old and new.

Two weeks ago in a public speech, Khatiwada claimed that laws that ensure the private land ownership rights in Nepal are the main impediments to the economic growth and prosperity of the country. This was tantamount to the government’s true intentions of infringing upon private property rights. Just a couple of days ago, he equated the ‘bleeding’ in the secondary market with the ‘loose motion of a teething baby’ which suggests that the problem is not worth the government’s attention.

Last week, however, finance ministry instituted a committee under the leadership of one of the deputy governors of Nepal Rastra Bank (NRB) to recommend measures to address the problems of the secondary market. On the one hand, the step was considered mere window dressing than an initiative that reflected true intentions to solve the problem. On the other, it has already mired in jurisdictional controversy at its very outset. Generally, the capital market is under the regulatory jurisdiction of the Securities Board of Nepal (SEBON). Whereas, money and banking related issues are dealt by the central bank. But the finance minster’s decision to constitute a committee headed by a deputy governor of NRB has apparently irked SEBON officials.

In a subtle retort, SEBON came out with an elaborate press statement on Sunday, December 9, enumerating its ‘efforts achievements’ aimed at improving Nepal’s capital market. It included some recommendations on what the government should do in the immediate future to extend the reach of the secondary market in line with the federal restructuring of the nation.

This is an intended preemptive communication to what the committee in question could possibly come out with.

As it is, there is very little hope from the committee since the problem is rooted in the government’s overall negative approach to the entire capital market—which is reflected in several policy and institutional hiccups. One such policy is a bigotry capital gain tax. The current finance minister not only increased the capital gain tax for Nepali investors from 5 to 7.5 percent, the same is levied at 25 percent to non-resident Nepalis and other foreign investors who, apart from domestic players, are the only resourceful potential investors in the market.

Liquidity

The NRB raised concerns over the moral suasion of the interest rate ceiling of 12 percent on the term deposit of the commercial banks. And last week, the interest rate offer on the bank deposits crossed the 13.5 percent mark for the first time in Nepal’s commercial banking history. Despite this, banks are still scrambling to find sizable deposits coming to their accounts. This is absolutely ominous.

Sensing the impending dire consequences in the economy, the umbrella organisations of entrepreneurs and industrialists—such as the Confederation of Nepalese Industries (CNI)—are quick to put forth a formal appeal to the government to rein in interest rate overshooting. As rightly indicated by the CNI statement, the liquidity crunch and the interest rate that is spiraling up unsustainably will have a direct bearing on the industrial output and, thereby, overall economic growth.

The liquidity problem in Nepal’s banking system doesn’t seem to have a quick fix even if we employed the right instruments within convincingly predictable policy frameworks. The trust on the political system and the ruling political force will be supportive in creating a congenial business climate.

When a majority communist government was formed in the country last year, potential investors of every hue waited to gauge the policy paradigm of the new government. But, now ten months in office, the government has apparently failed this

crucial test on trust. Investors are ultimately forced to ask for resignation of the finance minister and, still, the prime minister is allegedly turning a deaf ear.

Needless to say, in a country like Nepal, government is the largest consumer of goods and services. With federalism, the constitution has empowered all three tiers of the governments—federal, provincial and local—to procure goods/services to, in turn, produce better public goods.

But, unfortunately, the capital expenditure of the entire economy is only six percent of the allocation in the first quarter of the current fiscal year. This is one of the key reasons behind the current liquidity crisis as the funds could not flow into the financial market from the government exchequers. The federal government in several trivial pretexts didn’t enable the provincial and local governments to expend the funds. Nor did it provide basic legal as well as bureaucratic support required at the sub-national and local levels.

The Inter-State Council meeting—provisioned in the constitution as a mechanism to resolve political conflict between the provinces and also between the province and the centre—took place ten months after the government assumed office.

There are many outstanding political, legal and administrative issues between the centre and the provinces waiting to be resolved. The two-day meeting was naturally dominated by these issues. Perhaps, the best outcome of the meeting was that Prime Minister KP Oli vowed to make the federal polity a success.

This however, did not mean that the lower levels of the government were automatically capacitated to manage their public finance, to speed up the development expenses and ensure transparency in the process. This means, the scope of easing the liquidity situation by increasing the government expenditure appears very limited in the short run. And, the government does not seem to have an alternative strategy at hand, either. Without forceful countercyclical measures, no small experimentation is likely to put the economy back on track. Before anything else, the liquidity crisis needs to be resolved.

Wagle tweets at @DrAchyutWagle

Achyut Wagle
Achyut Wagle holds PhD in economics and is currently a professor at the Kathmandu University School of Management. He is an econo-political analyst, writing for The Kathmandu Post for many years.