The government, in the first week of October, formed a high-level commission to recommend comprehensive reforms aimed at revitalising Nepal’s struggling economy. The commission’s mandate includes identifying critical challenges, proposing actionable solutions and charting a path for sustainable growth. Led by former Finance Secretary Rameshore Khanal , this eight-member commission is responsible for recommending second-generation reforms and advising the government on various facets of economic restructuring. The commission is now holding consultations with the business community, government agencies, academia and intellectuals to gather their suggestions. It plans to engage with all relevant stakeholders. Mukul Humagain of New Business Age, sat down with Khanal to discuss the commission’s priorities, its roadmap for addressing urgent economic issues and the anticipated impact of its recommendations on Nepal’s future. Excerpts:

Nearly 30 years after the landmark reforms of the 1990s, the government has established a high-level commission to drive a new wave of reforms. Could you elaborate on the commission’s mandate and objectives? Do you think this is the most significant reform initiative undertaken since the first-generation reforms?

The reforms initiated in the 1990s are referred to as "first-generation reforms" because they marked the beginning of a transformative shift in Nepal's economic policy. Prior to this, much of the economy was closed off—private sector involvement was heavily restricted, trade was tightly controlled and key sectors like air services, banking, hydropower generation were off-limits to private players. Even in industries where private entry was technically allowed, businesses faced extensive regulatory hurdles, including strict licensing requirements.

The first-generation reforms lifted many of these barriers, opening nearly all sectors to private players and allowing foreign investment, albeit with some restrictions. This wave of reforms was indeed a "big bang" in terms of its impact, driving significant economic growth, job creation, and industrialisation. As a result, the industrial sector's contribution to the economy rose to around 13%, while trade expanded, with exports and imports reaching about 45% of GDP. Trade deficit narrowed and exports to overseas countries increased.

Subsequent reforms—though less dramatic—continued in areas like taxation, customs, capital market, health and education. In 2001, new laws like the Income Tax Act and Customs Act were introduced. These new laws took away discretionary powers of tax officers, and self-assessment and voluntary compliance became the new norm. New capital market regulatory laws and institutions were created. Significant reforms were introduced in public financial management. However, these changes did not have the same sweeping impact as the initial reforms, partly due to internal conflict, political instability and capacity constraints of public institutions to effectively guide the market. This called for a new wave of comprehensive reforms—often labeled as 'second-generation reforms'. Rather than being a distinct new phase, these reforms aim to build upon and deepen the structural changes introduced during the 1990s and refined through subsequent efforts over the past three decades.

The government has tasked this commission with a broad mandate: to analyse all aspects of the economy, propose measures to achieve higher, resilient and sustainable economic growth, generate employment and economic opportunities, reduce poverty, and enhance Nepal’s competitiveness in the global market.

How do the current reform initiatives differ from those of the 1990s? What key priorities will your commission focus on and recommend to the government?

The reforms of the 1990s were relatively straightforward—simply opening the doors to economic activity was sufficient to stimulate growth. Today’s challenges, however, are more complex, arising from entrenched practices and a lack of coordination. For example, syndicates continue to restrict access to certain markets, such as transportation. While state-imposed barriers in the 1990s could be dismantled through direct government action, today’s issues often stem from policy gaps and inter-agency coordination failures. For example, even with a hydropower license, developers face hurdles such as local opposition to land acquisition or delays in environmental assessments from the Ministry of Forest. Overcoming these barriers requires more than government policies—it calls for coordinated efforts across multiple stakeholders.

Another difference is the public’s growing distrust in Nepal’s public institutions, which are widely perceived as failing to deliver essential services. This is particularly evident in sectors like health and education where weak regulatory oversight persists. While it is not necessary for the government to manage all regulatory bodies directly, there must be effective institutions to ensure the quality of services provided. When these institutions are ineffective, it increases economic costs, fosters rent-seeking and creates opportunities for corruption.

Third difference lies in enhancing the competitive strength of Nepal’s manufacturing sector while introducing smart protection measures. In the early 1990s, Nepal’s customs rates were high, offering domestic industries a cushion against foreign competition. This period, especially from 1990 to 2003, was a golden era for reforms: liberalisation attracted investment, and customs protections spurred rapid industrial growth. However, after Nepal’s accession to the World Trade Organization (WTO) in 2004, customs protections waned which weakened the competitiveness of domestic industries. To support our manufacturing sector, we must adopt smart protection measures that comply with international, regional, and bilateral agreements while helping industries thrive. We should also focus on making these industries competitive in global and regional markets.

The fourth is the political environment. From 1992 to 1995, Nepal experienced three years of political stability, an era even recent majority or two-thirds governments have struggled to replicate. The government of that time was regarded as honest and proactive. For example, the Prime Minister openly promoted international investment which resulted in the establishment of several manufacturing industries and medical colleges, etc. A senior official from that era recounted how approvals and facilitation for foreign investors were expedited. One foreign investor, after receiving approval within four hours of negotiations, expressed disbelief, thinking it was too good to be true without any bribery. The then Minister of Industries had to reassure him that the approval was legitimate and he could begin work immediately—such was the governance of that time. Over the years, governance has deteriorated. Today, investors frequently complain that approvals granted by one agency are often challenged or delayed by another, leading to project delays or even cancellations.

Finally, a leap of faith is required. The way political parties finance their operations and election campaigns today demands huge financial resources, often provided by interest groups. This financial dependency obligates parties to favor these groups, influencing public policy and fostering crony capitalism. To counter this, we need to develop and implement measures that drastically reduce election campaign expenses and ensure that political party operations are financed through state coffers.

We must also address a few fundamental questions. Why do Nepalis often succeed abroad and not within the country? Why do youths choose to leave Nepal in search of opportunities rather than finding ways to excel at home? Why are Nepalis known as disciplined and productive workers overseas but exhibit the opposite tendencies here? Are restrictions on the ownership and mobilisation of certain factors of production still relevant? The answers to these questions can provide valuable insights into the reforms Nepal needs.

For meaningful economic reform, issues of corruption and political financial management must be addressed. Without tackling these challenges, broader economic changes will be ineffective. If corruption and lack of opportunities continue to drive people out of the country, any reforms will remain ineffective. Reducing corruption is essential not just for economic growth but also for rebuilding trust in the political system and fostering national prosperity. If the government is truly committed to reform, meaningful change is still possible.

The 1990s reforms led to the privatisation of public enterprises (PEs). Will this commission recommend privatising another set of PEs many of which are still operating at a loss?

Privatisation is often misunderstood here. It should be seen as creating equal space for the private sector. In sectors where the private sector excels in delivering superior goods and services, there is little justification for government involvement. This may sometimes necessitate divesting government ownership. However, in other cases, the government may retain its role to guide the market and set benchmarks for fair business practices. Therefore, privatisation should not be equated with the sell-off of public assets.

However, when the government operates alongside private players, there must be no policy bias towards state-owned entities. At the same time, inefficient state entities may be detrimental to healthy growth of the market. It would be better to dispose of such enterprises. The government has other responsibilities that require resources and attention which the private sector cannot address. If the private sector is considered more efficient at allocating resources, why should the public sector continue to remain in the market?

A wave of democratisation spurred a surge in multilateralism in the 1990s. Today, however, states increasingly leverage economic interests for strategic goals, as seen in India’s approach to Nepal’s hydropower exports and the US-China tensions over semiconductor technology. Will you be taking these geopolitical factors into consideration when making recommendations?

Absolutely! Geopolitical factors are pivotal in shaping economic policies. While both India and China are Nepal's important economic partners, Chinese investments in hydropower have occasionally introduced geopolitical complexities. Although these investments contribute to economic growth, they can sometimes strain regional relations.

A glaring example is India’s response to Nepal’s rising palm oil production by imposing a quota system. This demonstrates how geopolitical dynamics directly affect Nepal’s economic activities. We often hear reports of delays or denials in standards approvals for Nepali products by Indian regulatory bodies, limiting access to Indian markets.

The commission is fully aware of these realities and works to anticipate potential reactionary policies from neighboring countries. Through scenario planning and strategic foresight, it aims to navigate these geopolitical challenges while fostering balanced relationships with Nepal’s economic partners.

Are further reforms needed to address restrictions in certain areas of Foreign Direct Investment (FDI)?

Barriers to FDI still exist in Nepal, and the underlying reasons are clear. Nepal is a young nation, with a significant portion of its youth workforce seeking employment abroad, particularly in consulting firms. Instead of losing this talent, why not encourage these firms to invest in Nepal with 100% foreign ownership? This would generate domestic job opportunities and help retain the youth workforce within the country.

FDI should not be viewed merely as a financial inflow. Some segments of the private sector argue that Nepal has sufficient domestic competence in certain industries and that the local financial market can meet capital needs. However, this perspective is flawed in most cases. FDI brings much more than capital—it brings management skills, global best practices, technical expertise, and, most importantly, access to regional and international market networks.

For example, a Chinese company can navigate the Chinese market and its public institutions more effectively than a purely Nepali firm producing the same thing. The same applies to Indian companies in their domestic market. Multinational companies have huge networks and knowledge bases that, over time, can significantly benefit local businesses. We should use FDI to gain strategic advantages while simultaneously preparing domestic firms to compete globally.

A well-functioning economy depends on effective regulatory bodies, yet in recent times, ours have fallen short of expectations. Will you be recommending to address concerns like ensuring regulatory autonomy and promoting transparency and fairness in the appointment of their leadership?

Yes, these are critical issues. Take the Securities Board of Nepal (SEBON) as an example. When the Public Service Commission assumed responsibility for selecting employees up to a certain level, corruption in appointments dropped significantly. However, top leadership positions are still often filled through political decisions. In many institutions, ministries directly oversee these appointments, creating opportunities for influence and favouritism. For instance, Nepal Telecom, despite being a public enterprise, operates as a commercial entity. Why, then, should the ministry be involved in appointing its chief?

What if these appointments were entrusted to an independent body? This could ensure fair, merit-based selections. Consider the appointment process for the Governor of the central bank, where a panel comprising the finance minister, a former governor, and an expert recommends candidates. Yet, manipulation often occurs at this stage. Transferring this responsibility to an impartial entity could minimise politicisation and ensure only qualified individuals are appointed to key positions.

It is essential to address this issue for reforming regulatory institutions and enhancing their efficiency. Depoliticising appointments will preserve their autonomy and ensure that they can effectively fulfil their mandates.

Will this commission also suggest some radical ideas such as allowing Nepalis to invest abroad?

We will discuss this issue with an open mind. Among our factors of production, labour is the most critical, yet it continues to leave the country in an uncontrolled manner. Additionally, many Nepalis working abroad are withholding remittances and investing their earnings outside Nepal rather than channelling them back into the domestic economy. In today’s globalised world, if Nepal positions itself as an attractive investment destination, capital will naturally flow in. At the same time, it is crucial to recognise that capital outflows should not be unnecessarily restricted.

In 2009, when Dr Baburam Bhattarai was the finance minister, this issue was raised in a Cabinet sub-committee meeting. However, before a decision could be made, we faced a balance of payment (BoP) deficit, and the idea was shelved. Despite this, the proposal sparked significant discussion.

Currently, many individuals use indirect means to invest and earn abroad without legally routing their funds. Nepalis have established restaurant chains in Europe, construction firms are engaged in international projects, and IT companies are expanding their services overseas. In sectors like adventure tourism, Nepali companies have demonstrated technical competence. We need to explore how we can facilitate their legal operations abroad and support their global expansion. It’s time for an open dialogue on these issues and propose right policies.

(This interview was originally published in December 2024 issue of New Business Age Magazine.)