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Skype conversation with Chandan Sapkota, researcher at South Asia Watch on Trade, Economics and Environment

 After doing a G+ hangout in March with Chandan Sapkota, I knew that a follow up conversation was important especially in the backdrop of May 27. There are so many questions that are being raised now and I was keenly interested to hear his thoughts on the state of Nepal’s economy.

On June 2nd, 2012, we talked and here’s a summary of our conversation.

How is Nepal Investment Year 2012/2013 going?
Nepal Investment Year 2012/2013 is not going anywhere. Right now even domestic investors are wary of what to do with their money. Nepal Investment Year 2012/2013 was supposed to run from July 16 2012 to July 16 2013. The Investment Board was just given authority to hire staff and the six months leading up to now there was not much going on. I mean why would people want to invest in Nepal. First, there are no perquisites such as infrastructure, the cost of production is high and there is no guarantee that you will get an expected rate of return for your investment. The constitution was needed but now without it there is so much uncertainty.

Was it wise to launch Nepal Investment Year 2012/2013 and Visit Lumbini Year 2012 when the country was facing political gridlock and massive bandhs?
I am pessimistic about the Nepal Investment Year 2012/2013. I don’t even think the election will be held on November 22 because for that there needs to be a consensus government. It could be 8-10 months from now by the time the election takes place. With the pressure from private sector to announce an investment year, the government followed suit. There was no preparation for this. In an ad hoc basis, the Investment Board was handed over the responsibilty to make it a success. There never was and is a sincere commitment to make investment year a success.
As far as the Visit Lumbini Year 2012 goes, we do not know how much budget they have, and who is on the steering committee etc. I mean there are some people from NTB promoting the Visit Lumbini Year 2012 in various US cities.

More remitted money means more foreign exchange reserves. The gross foreign exchange reserves have increased by 35.3% to Rs 368.1 billion due to increases in remittance and service receipt. What does that mean for Nepal?
For citizens, the gross foreign exchange reserves do not mean anything. For the economy, high foreign exchange reserves mean the capacity of country to finance imports for certain months and the ability to pay foreign investors in foreign exchange if they want to repatriate income. High foreign exchange reserve is usually a sign that the economy is in a good shape. But, in our case, it has come about without any policy changes or effort by policymakers. We have to thank the depreciation of rupees against dollar and high remittance inflows.

How can we encourage more capital investment from remitted money so we can avoid the Dutch disease?
The capital formation rate from remitted money is just 2.5%. In terms of using that money for investment, investors need to get confidence that they can gain a rate of return. I also believe that our consumption habit has to change. Currently the daily consumption is 78.9%.
There are areas where individuals could invest in such as agriculture. There are certain items that are only available in certain parts of the country like honey, ginger or cardamom.
Currently 55.8% of the households get some sort of remittance. In Nepal an investment requires a lot of capital. Also Nepal has one of the highest wage overhead costs in South Asia. You have to arrange living for employees, sometimes even allowing employees to attend rallies for different causes on work days. Also our competitive advantage in cheap labor is fast eroding.

How much damage does a bandh cause to our economy in a day? Do bandh organizers realize this cost and hindrance to our national image?
A bandh causes about Rs 1.92 billion and Rs 1.96 billion damage per day to the economy. That data is from 2010. I had written a blog about that a while back. However the cost of bandh differs from a day-to-day basis. A bandh that goes on for two days does not cost twice the damage, there is actually a slight decrease in the amount of damage.
It is actually illegal to organize a bandh and you have to get permission from the government. But, it has become a virus in Nepal, which we cannot get rid of.

How much effect does Ma Pa Se haves on the economy? Can we create a win-win situation for this?
We will find this data in 2 months when the Ministry of Finance comes up with Economic Survey 2011/12. Our GDP is based on 15 sectors and hotel and restaurants are one of them. It contributes 1.78% to GDP. We will find out from the report how much effect it has had on the hotel and restaurant sector.
To create a win-win situation, I believe the government could utilize breathalyzers that measure the blood alcohol content. Right now the machines we currently have are not that effective.