Dr. Prakash Sharan Mahat
As we are in the process of preparation of annual budget, it is very timely and relevant to address huge resource gap in the development finance. We need enormous resources for financing SDGs, meeting infrastructure gap, addressing climate change challenges and attaining inclusive, broad-based and sustained economic growth.
The conventional wisdom has been that the responsibility of managing development finance lies solely with the government, based on the association of positive externalities, market failure and public goods.
However, the successful mobilization of innovative financing tools in similar economies such as Blended Finance, Green Bonds and Green Loans, among others, has taught us to share the state responsibility of resource mobilization by other actors including Development Finance Institutions and Private Institutions. The underlying principle, however, remains the same – collaboration to maximize development impact and increase welfare of the people.
Be that as it may, collaboration requires coordination and a streamlined discussion on how to increase the inflow of funds in the country. The macroeconomic data for the first nine months of current fiscal year, recently released by the Central Bank, does indicate that inward FDI flow is miniscule, at 34 million USD, compared to USD 142 Million USD in the same review period last fiscal year.
However, our monthly remittance inflow stands at about USD 700 Million and foreign exchange reserves at USD 10.9 Billion, sufficient to cover the prospective merchandise and service imports of 9.4 months. Let me inform you that the inflow of international finance has been historically low and quite volatile.
We are member of the WTO. We have adopted liberal economic policies for more than three decades. Our current account of balance of payments is convertible. Our currency is pegged with Indian rupees but for rest of the convertible currencies exchange rate is market determined.
Nepal is managing its macro economy with sufficiently focus on stability and resilience. With comfortable level of foreign debt and absence of any commercial international bonds, it is relatively safer from short term shocks and volatility as manifested by Nepal’s resilience in the global financial crisis of 2007.
This has been proven to be a structural advantage to the country when major global financial events have not much impacted Nepal significantly. Despite all these strengths, I am just wondering what went wrong and we have not been able to bring in innovative financing to complement financing needs of the country?
My first concern is “Are we adequately communicating the positive macroeconomic story of Nepal to global community?”
Nepal creates positive story
Nepal has neither defaulted debt servicing in history, nor has any international company been denied of the facility to repatriate profits. This creates an extremely positive story – our credit history as a country is tremendously positive. We would need to highlight this in the international financial markets.
Additionally, Nepal also has a very healthy external debt profile. Our debt to GDP ratio remains sustainable, with annual foreign debt servicing obligations less than 1% of our GDP. This structural advantage did shield us well last year when the South Asian region was facing pressures due to a rise in commodity prices and some countries had “twin deficit” problem. Nepal had no stress due to external debt obligations at comfortable level.
Another extremely positive aspect of Nepal is the young population with high potential demographic dividend and the digital shift we have seen post COVID. The median age of Nepal is under 26years of age and the National Planning Commission forecast is that the demographic dividend would remain in the country until 2050. We still will be having a young population that would be supporting the economic activities of the country for the next 25 years.
Our challenge would be to optimize the advantage of the resources we have. Currently, we are not fully capitalizing this strength and it is a fact that we have more than 3 million migrant workers in foreign employment, it is somehow supporting our economy in the form of remittances which also has not been adequately channelized into productive sector investments.
Lastly, our immense potential for sustainable finance including renewable energy is an example to the world. Innovative financing tools would also mean benefitting from global structures that reward net zero initiatives. This also needs to be brainstormed further.
Focus on returns of project investments
My second concern is “Are we focusing on returns of project investments?”
Nepal is in a process of Sovereign Credit Rating, which has been delayed due to COVID we are considering to resume the process so that investors would have much confidence to make investment decisions. It has been well established that when talking to foreign investors, the major point of focus would be around the return of investment.
Additionally, since we have not been rated, the return of investment would need to cover the perceived risk premium in addition to the risk-free rate of return so that there would be a return enough to match the opportunity cost of investing on other countries.
Currently, Foreign direct investment into Nepal accounts for only 0.3 percent of funds flowing to South Asia. We are committed to resume the process of rating and to carry out other associated reforms to make conducive environment of investment.
Making projects profitable
Our focus should now shift to making projects profitable so that there are opportunities to involve the private and development sectors to create a collaboration. Metrics such as the internal rate of return and the return on risk weighted assets invested in a project should be driving discussions and attracting investors.
These studies should be readily available with our project banks, who would be having opportunities that enable the country to drive national pride and strategic projects.
My third concern is innovative finance should not be simply repackaging of existing resources, should be ‘additional’ resources. Similarly, it should be country driven, resource allocation process be nationally owned and should not undermine national institutions.
Before I conclude, let me focus on few potential areas of our comparative advantage. That includes Tourism, hydropower, agribusiness and IT among others. These sectors ensure attractive rate of returns. Government of Nepal stands ready to make conducive environment and making competitive policy arrangements to promote investment in those sectors. We wish to collaborate with private sector in developing feasible financing instruments in the coming days.
(Based on the speech delivered by Finance Minister Dr. Mahat at the International conference on Financing for Nepal 2023)