Nepal’s Framed Frontier Expedition
After disappearing from early emerging market investor radar screens in the 1990s with a prolonged plunge into civil war and political instability, followed by an epic earthquake and border closure with traditional ally India two years ago, Nepal completed local and national elections won handily by the Leftist alliance of the nominal Communist and Maoist parties. According to initial results they took control of six out of seven provinces and 70% of parliament, crushing the Nepali Congress formerly in power and an array of fringe opponents including anarchists and royalists. Workers abroad in the Middle East and Asia, whose remittances account for one-third of output, did not vote despite court authorization, but likely would have reinforced the pro-left margin since their campaign focused mainly on infrastructure development and economic modernization rather than revolutionary rhetoric.
Following provisions of the new constitution no-confidence motions, a staple of the previous system which resulted in endless cabinet and government reshuffles, will not be allowed for two years to offer unaccustomed calm. Lowland Madhesis among the country’s poorest continue to advocate for more rights and support under the charter, but the incoming administration due to be headed again by veteran Prime Minister K.P.Ohli has vowed to be more inclusive both toward ethnic and income groups and subcontinent neighbors. In his 2015 term in he signed trade and investment agreements with China, and recently signaled a stalled hydropower joint venture may go ahead to diversify from historic Indian dominance. In his victory speech he promised “never witnessed private sector cooperation” alongside a higher social spending agenda, as the sleepy Nepal Stock Exchange index stayed flat post-poll awaiting concrete economic growth and reform breakthroughs.
Nepal’s Chambers of Commerce and Industry have been dubious in the absence of an “implementation framework” for the socialist economy enshrined in the constitution, amid talk of double taxation at the federal and provincial levels to cover increased social welfare payments. Ohli and his team plan public-private partnerships for large projects and small business, commodity and tourism promotion without specifying policies, as capital flight may spike while the vacuum lasts according to critics. They also worry about an expected rise in domestic borrowing, which has been capped at 5% of GDP annually, and favoritism toward cooperatives associated with ruling coalition leaders. Independent economists argue that the government should focus on better managing earthquake reconstruction after 650,000 homes and over one-third of output were destroyed, the World Bank estimated. In December it approved a $300 million credit to follow on the $200 million in the event aftermath, and pick up the pace for the over 350,000 residences still slated for rebuilding. They urge renegotiation of ventures such as the $2.5 billion dam suspended with the Chinese over contract irregularities on more concessional rather than commercial terms, even though foreign debt is low unlike other low-income economies, in the view of the IMF’s latest Article IV report this March.
The Fund described Nepal as “trapped in a low growth and investment equilibrium,” with GDP expansion averaging 4% the past decade as a regional laggard. Inflation and the fiscal deficit are under control, but state banks and enterprises got almost 2% of GDP in equity support in recent years which should be curbed, the analysis advised. Decentralization under the new constitution could raise budget risks, and without electricity tariff adjustment power supply will stay compromised, it added.
On monetary policy the Indian rupee peg was praised as a “transparent anchor” as demonetization fallout continues to hit local households and firms, but it has been “overly accommodative” with annual credit growth reaching 30% to spur recent tightening. The central bank introduced an interest rate corridor in 2016 to keep medium term inflation within the 7% target range, and uses repos as a liquidity instrument, with banks experiencing shortages around the election period. Financial sector reform was jointly identified as a priority by the Fund and regulatory officials, with plans to modernize prudential standards and enforcement for lending, securities and insurance. On the stock exchange in December the government revived a pledge to divest its 35% ownership and finalized rules for margin trading, but frontier market investors after decades out of the action will hold off at least another few months for clearer weather to mount a daring expedition.
