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May 2018 Interview

Published on: 2018-05-13 11:36:36     462 times read    0  Comments
 “Preparation of capital budget rationally and executing it efficiently are the two long-ignored basic factors of budgeting in Nepal”

If the politicians in power are to be believed, Nepal has entered a phase of economic development and prosperity after the three tiers of elections held last year.  The country has started its exercise in federal governance and Nepalis are now looking at the horizon for a better future after, seemingly, an end to years of political wrangling and instability. Veteran politician and economist Dr Prakash Chandra Lohani has been closely observing if the new government is living up to its commitments in good governance, higher economic growth and prosperity of the nation. Lohani, who is also the chairman of the Unified Rastriya Prajatantra Party (Rastrabadi), is regarded as a personality with straightforward views in politics and economic matters. He has held several high portfolio ministries in finance, labour and transportation, housing and physical planning, foreign affairs and agriculture in the past.

In an interview with Sanjeev Sharma and Sabin Jung Pandey of New Business Age, Dr Lohani shares his thoughts on the current discourse on prosperity, challenges posed by corruption, political mismanagement, fiscal indiscipline in government and bureaucracy, economic constraints and ways to overcome them along with the future prospects for the federal system in the country. Excerpts:

How do you view the ongoing discourse on prosperity in the country? 
Although there is no alternative for Nepal but to march towards prosperity, let me tell you why the word ‘prosperity’ has become a catchphrase. After the fall of the Rana regime in 2007 BS, accountability and supremacy of people became the two most important aspects for democratic governance. The first aspect was based on the principle that the government must be accountable about the use of resources to the people who are the rightful owners of the state resources, while the latter stressed that legitimacy to rule the country requires public endorsement which is obtained through elections. It was the time when people gradually started realising that economic development is their innate right and that the state must be able to either deliver or facilitate it.

The concept has been firmly established at present becoming one of the instruments for political legitimacy. Just winning an election no longer serves as the right to rule the people. Election is merely an instrument that allows people to mandate certain political parties to achieve prosperity for them.  People expect government to deliver as well by mobilizing the state power and mechanisms. Just like in an agent-principal relationship, it has now become the duty of the agent to deliver to the principal what they have been promised, where the government is the agent and people are the principal. 

At present, hopes for a prosperous country have gained tremendous momentum among Nepalis. They have seen how the world has changed and where Nepal stands in terms of development. It is typical to compare Nepal with the rest of the world and question how these differences have occurred. A common belief is that Nepal’s politics and Nepali politicians are the reasons behind our failures and rightfully so. In such a scenario, the agenda of prosperity has become imperative more than ever to secure political legitimacy. 

The past years were of lost opportunities for us, in terms of achieving prosperity. How and where did we miss them?
King Mahendra had used the economic development discourse to legitimise his takeover in 2017 BS. No preceding governments had used the discourse until then. He introduced discourses on economic development, corruption control, social transformation and eradication of untouchability to justify his takeover. To some extent, he succeeded. He established several import substituting industries by bringing in foreign assistance which can be regarded as a stepping stone in Nepal’s industrial development. Attempts were made to link agriculture with industries by setting up sugar and cigarette industries that encouraged sugarcane and tobacco farmers respectively. He even started work on infrastructure development such as the Mahendra Highway (now East-West Highway) and initiated public enterprises to deliver economic development to the people. He introduced the Land Act, 2021 with a view to reform the feudal land structure. Whether it succeeded or not can be a matter of debate. I don’t think anyone has initiated land reform initiatives of such scale, not even the ‘progressive revolutionaries’ of today. 

Later, political parties started making different promises related to economic development. They promised to upgrade Nepali roads to Asian highway standards and even bring in water from Melamchi to clean the entire roads of Kathmandu. Maoists were no exception in using economic discourse. The whole focus of their 46-point demand when they started their insurgency was to transform the political structure and eventually introduce economic development.

Having said that, we had gained massive political capital in 2047 BS that opened the doors for election as an instrument for political legitimacy but we lost that. We squandered that opportunity because many politicians and bureaucrats were too busy looting the state coffers. The continuation of corruption led to mounting frustration among the people whose tolerance level was gradually reaching saturation levels. Searching for those who could meet their expectations, people experimented with new leadership in each election after 2046 BS. To a certain extent, the Maoists benefitted from all this political upheaval, deep seated corruption and the mounting frustration among the people. 

After the 2006 democratic movement, ‘a new kid on the block’ emerged. People quickly turned up to try the Maoists and as a result it won the election massively. There was a hint of fear among the people but they also had hopes that they might deliver after all. People were fed up with political parties who proclaimed to be democratic and socialists but practiced crony capitalism at the end. 

Not so surprisingly, the Maoists lost the people’s mandate in a very short time. As I said earlier, when political parties promise prosperity, they should be able to deliver, at least some of it, at the earliest. People will turn against them in no time if they fail. 

In the recent election, CPN (UML) forged a collaboration with the Maoists which was a beneficial proposition for the rapidly shrinking latter. The idea of a union between two political parties appeared attractive to people who were fed up with fragmented politics. Apparently, people saw it as a better idea to experiment with since there was a promise of stability and prosperity as well. 

Realistically speaking, it is impossible to bring structural change in a short span of time. At least, in the beginning, we can clean those mess that are too visible. That conviction will generate hope that things will gradually change. After all, it is hope that keeps the world moving. Meanwhile, the government should also realise that people’s expectations are high but their tolerance level has shortened. Keeping a balance between expectation and the speed of performance is the key challenge I see right now. 

It would be too early to comment about the current government’s performance. But as they say morning shows the day, how convinced are you that the new government will deliver?
I am still in a wait-and-watch mode. There are new faces in the government who haven’t been tested yet including the finance minister and a few ministers from the younger generation. Prime Minister Oli is not a new face but it doesn’t mean he is incapable of having a new perspective on our past challenges which still exist.Transforming oneself with the changing times is one of the leadership qualities. 

The prime minister has been trying to display a similar personality, that of a changed man. He has been stressing that this would be his last political innings and his last opportunity to effect a real and desired change. Right now, I find him making the right kind of noises. Yet, there is still a lot of time to really evaluate his performance. We are yet to see how he will use his power after having brought the anti-corruption agency and revenue department under him, whether he will use it to threaten his opposition or use in the interest of the people. 

What will be your major criteria for the evaluation of the current government?
What I am really worried about is the growing corruption and fiscal indiscipline. In a country where there is corruption and fiscal indiscipline, crony capitalism grows substantially. Corrupt politicians, corrupt bureaucracy and corrupt businesses form an ‘iron triangle’ to exploit people. It creates small islands of prosperity in a sea of poverty.

We are yet to see how PM Oli will break the shackles of this iron chain. Our main concern here is on how PM Oli will respond to the three big corruption scandals related to cases in Ncell capital gains tax, Tax Settlement Commission (TSC) corruption and land acquisition of Nepal Oil Corporation (NOC). It is widely believed that the tripartite political nexus of Nepali Congress, CPN (UML) and CPN (Maoist Centre) have benefitted from the Ncell capital gains tax scandal. We are not against profit expatriation, but it is our right to tax capital gains from the profits earned in the country. If PM Oli is really the person who has transformed himself into this new anti-corruption avatar, we would like to see his stance on these corruption scandals which are classic examples of the iron triangle. 

Recently, I have been expressing my views on two dimensions of corruption that are horizontal and vertical. In vertical corruption, top to bottom unit in a hierarchy form a corrupt nexus. They arrange a setting where top to bottom officials collectively engage in corruption while the higher authority ensures a level of protection to officials at the top. There is an apt Nepali phrase for such type of corruption practice - ‘setting milaaune’ that carries its depth perfectly. In any political system, whether it is a multiparty or one-party rule, there are several horizontal units such as anti-graft body, parliamentary panels and courts which are responsible for providing oversight to the vertical corruption. If both vertical and horizontal units of a society are corrupt, then we have a mafia state. 

Nepal seems to be moving to the direction of becoming a mafia state. One of our appraisal criteria of PM Oli’s leadership is based on how he will prevent Nepal from becoming such a state. He has made commitments publicly to not involve in corruption, not allow anyone in the government to engage in corruption and will punish the perpetrators. But it’s been two months since the formation of the government yet he hasn’t spoken a word about the large scale corruption scandals and their perpetrators. 

Preparations for the new budget are currently underway. But it is often said that Nepal’s budgeting is worrisome. Don’t you think so?
It’s all adhocism with no proper planning. Recently, the finance minister in the White Paper mentioned that several unplanned projects have made their way in the budget. The document has also mentioned several other cases of corruption and has remarked that the state coffers were continuously looted by several governments including when his own party was in government and during the time he led the National Planning Commission (NPC). It also revealed that around Rs 510 million was spent against the election code of conduct. It should be investigated who made such expenses. I think the Commission for the Investigation of Abuse of Authority (CIAA) must investigate the matters mentioned in the White Paper. I hope that the upcoming budget will come out good as the current finance minister is a learned and experienced man. 

Aren’t the existing legal arrangements sufficient to control such practices?
There is a legal provision to restrict fund transfers over 10 percent from the original budget allocation. But in practice there has been no concern for the law. The decisions of the cabinet on budget reallocation grossly violate the established norms and laws in public finance. The government can decide what and how it wants much like the Rana prime ministers who used to do such things through their decrees.  This is what I would call an example of ‘neo-feudalism’. I think, our transition has not been from feudalism to capitalism. Instead, we have moved from feudalism to ‘neo-feudalism’ where political parties who are in power think that the state resources belong to them and they can do anything. We are yet to see whether PM Oli can move ahead against this culture. 

What do you think can be done to make the people in the government and bureaucracy accountable in terms of fiscal discipline?
We are not re-inventing the wheel. We need to consider the examples of countries such as Malaysia and see how they have maintained discipline in the government and bureaucracy and made them responsible and accountable. The implementation of the budget by many government bodies is ineffective and targeted outcomes are unsure due to the lack of accountability of the officials. They are the ones who have the responsibility to ensure that the money has been spent accordingly. Public enterprises have also been plagued by the lack of financial accountability which has ultimately been the root cause of their failure.  

When I was the finance minister in 1987, the ministry introduced the principle of Programme Budgeting. The idea was to include any programme in the national budget on the basis of an evaluation of financial and physical targets achieved by the programme in a one year time span. Under the arrangement, the programmes incorporate work plans for every three months and allocations of funds were made for the second phase only if the financial and physical targets were met.  Similarly, programme budgeting cells were established in all ministries. Under the guidelines of the cells, the ministries used to submit budget proposals for any programme considering the estimates, detailed project reports and work schedules for one year, and other aspects. When I left the position of finance minister, the system became defunct. The continuation of Programme Budgeting could have proven instrumental in terms of ensuring financial discipline as it would have bound the people in the government and bureaucracy to utilise the available resources carefully. 

In 2003, when I again become the finance minister, the ministry had formulated a programme for public enterprises. Under this, the entities were required to sign an agreement with the government. The enterprises were required to come up with their plans for one year. The government would provide support to the entities only after evaluating their plans on the basis of certain financial and economic parameters.  The heads of the entities would only stay in their positions if they agreed on the parameters and ensured delivery of their commitments.  This system had been implemented in 2-3 public enterprises and was discontinued after I left the ministerial position.  There needs to be proactive steps like these to improve and effectively execute capital budgeting of the government. Preparing the capital budget in a rational manner and executing it in efficient ways are the long ignored two basic factors of budgeting. And, ignoring these elements has allowed the nexus of the ‘iron triangle’ to exploit the state resources. 

Don’t you think a law in fiscal accountability like the ones practiced in many countries of the world has become necessary in the context of Nepal?
 I agree about the necessity of such an Act. Nevertheless, the implementation side of any law is the most important part. For instance, there is a clear breach of ceiling in the medical donations the government can make. No one takes responsibility no matter how much money is doled out by the government in the name of medical assistance. A general attitude prevails among the ministers and political honchos that they can use the state resources in whatever ways they like. This is a feudalistic attitude which in our context is neo-feudalism which has been established by the political parties in Nepal. The struggle against it is the biggest fight in the country at present. We are yet to see how PM Oli will go ahead against this culture.  

The White Paper presented by Dr Yubaraj Khatiwoda after his appointment as the finance minister has shown all major aspects of the Nepali economy to be in a precarious condition. Is the situation really that bad?
The White Paper has clearly shown that the government needs to tread with extreme caution in handling the country’s economy. The surging public debt indicates that the government coffers have emptied. The deteriorating conditions of government finances, difficulties in project management and rising fiscal indiscipline as mentioned by Dr Khatiwoda in the White Paper are all realities. Nonetheless, despite the efforts of the finance minister to remain objective, the document gives an impression of biasness as it has blamed the earlier governments for the difficult economic situation. 

I think the present day situation is primarily due to the misdeeds of successive governments over the last 12 years. This period has seen governments becoming more irresponsible in terms of prudent economic and fiscal management. The three major political parties that have ruled Nepal over these years have in fact “raped” the country economically. Now it is up to the prime minister and finance minister to live up to their determinations and correct the past mistakes.  

How can we realise the long talked of partnership between the government and private sector for the country’s economic development? 
Many bottlenecks need to be identified and removed if the government wants to forge and flourish such a partnership. For example, the ongoing expansion project of the Tribhuvan International Airport (TIA) has been marred with constant delays for the last 4-5 years due to 'variation' claims. This is the main bottleneck for the overcrowding of the country’s sole international airport hampering the inflow of tourists. The authorities should be able to find the reasons behind the project variations and act accordingly. If the condition of TIA is improved it can spur the opening of new hotels. Similarly, the bottlenecks that have been obstructing the construction of the long-planned Nijgadh International Airport (NIA) also need to be removed.  

It is important to build new airports like NIA, Gautam Buddha International Airport and upgrade the existing ones like TIA to realise the government’s ambition of welcoming five million tourists by 2030. If the government is able to construct the airports in the stipulated time, the private sector will come up front to invest in hospitality infrastructures including hotels and resorts. Likewise, the government should also come up front to ease the problems of investors while building hotels. This is how we can complement the efforts of both private and public sectors. Approaches like this can also help to uplift other sectors like agriculture and manufacturing. It is the duty and responsibility of the government to create a sound environment for others who are engaged in production activities. 

The economic growth rate target of eight percent is achievable if the government and all stakeholders stay true to their duties and responsibilities. Many countries in the world including our neighbours have attained higher economic growth primarily due to their honest considerations towards their own commitments. 

It is a big fortune for Nepal to be situated between the two largest economies of the world. Properly utilising this leverage can open gates of immense economic opportunities for us, be it in manufacturing or agriculture. The need of the hour is to have effective strategies to revive manufacturing activities in Nepal and establish import substituting industries. Years of political instability have contributed to the de-industrialisation of the country. Hundreds of rice mills in Nepal, for instance, have been closed over the years due to sluggish on Nepal agricultural productivity compared to neighbouring India. The main challenge here is to increase the agricultural productivity and competitiveness of agro products that have been declining every year. If we can do so, many rice mills and agro processing industries will automatically open. 

Doubts have been cast by various quarters about the future of the federal system in Nepal due to the existing constraints on financial sources for the newly formed provinces. What is the federal system’s future like?
The economic burdens in the country’s federal structure have not yet been deeply evaluated. Similarly, the role of provincial government is not yet clear, and one of the reasons for this is the absence of necessary laws. I have heard the federal government has already formulated model laws for provinces to define their role, responsibilities and functions.    

However, the new structure of governance at the rural level can be very effective. For the first time in our country rural areas have started exercising their own governments with legislative, judicial and executive powers. Now, villagers have begun receiving government services directly through the rural municipalities that used to be earlier delivered by authorities in district headquarters.   This spirit of “taking government close to the people” is significant and can be instrumental for the country’s socio-economic development. The new practice of rural government is much advanced than in India where the gram panchayats (village councils) have fairly limited authority. The newly introduced system is much like the county governments in the United States. As the system of governance is new, the rural governments need to be closely monitored to avoid mismanagement and misuse of resources. Lately, we have been hearing reports about the misuse of budgets by rural authorities at several parts of the country. These are teething issues that need to be addressed in the initial phase. I think it will take us another 5-7 years to settle the issues in the federal system of governance.  

The recurring problem of liquidity in the banking system has deepened at present. What do you think are the best possible solutions to this problem?
Basically, the problem of liquidity is due to the increasing demand and under supply of money in the banking system, and the sluggishness in the government’s capital expenditure being one of the reasons for it. Concentrating most of the development efforts at the eleventh hour of the fiscal year has been our major problem for years. It is important for the government to move away from this particular ‘tradition’ to ensure money circulates in the banking system for the whole year and to ensure good quality work.  Similarly, the aggressiveness of banks to increase their profit levels is another attributing factor for the shortage of loanable funds in the banks. It is the duty of the central bank, as the banking sector regulator, to stop the BFIs from taking unnecessary risks and to monitor if they are investing in priority sectors or not.  I hope the new finance minister who also has a very good track record as the central bank governor will make a sincere effort to tackle this problem.

The debate about productive and unproductive sectors in recent years has intensified causing polarisation. How can this discourse be concluded in the right manner?
It is difficult to term any particular sector or business as ‘productive’ or ‘unproductive’.  For example, consumption related activities such as buying vehicles, washing machines and many types of home appliances also help to raise productivity levels of people in this modern age. Nevertheless, we need to see if the BFI loans create jobs or help in promoting export and encourage import substitution or not. Tourism can be one such area as it creates jobs and increases foreign exchange. Rather than engaging in debates about productive and unproductive sectors, our focus should be on ways to create jobs, promote export and import substitution.

The new finance minister has concentrated his efforts in improving the tax system. How can the tax net be expanded in a better manner?   
There are several factors to consider when we talk about the improvement in the tax system. Extending the coverage of the existing tax net is important in this regard. Many incidents of tax evasions occur at micro levels that tax officials are not generally aware of. One way is through the extensive use of digital technology to monitor if the taxpayers are paying taxes accordingly or not. For instance, if the activities related to purchase and billing of businesses are directly connected to the central tax system, some loopholes in taxation can be closed.

 The size of the informal economy in Nepal is estimated to be over 40 percent of the country’s GDP. What is needed to be done to make it formal?
We need to first understand why people are engaged in informal economic activities. High profit levels, ease of operating businesses and relief from taxes are likely to be the main reasons for this.  So the government needs to think about how to make people from the informal economy join the formal system so that they can avoid risks such as legal prosecutions.  


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