After elections, Nepal back on frontier market investor radar
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 a border closure with traditional ally India two years ago, Nepal is back in view, having just completed local and national elections won handily by the leftist alliance of the nominal Communist and Maoist parties.
According to initial results, the alliance took control of six 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 the coalition’s 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 that 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 citizens, continue to advocate for more rights and support under the charter, but the incoming administration, to be headed again by veteran former prime minister K P Oli, has vowed to be more inclusive both of ethnic and income groups and neighbors in the subcontinent.
In his 2015 term, Oli signed trade and investment agreements with China, and recently signaled that a stalled hydropower joint venture may go ahead to diversify from historic Indian dominance.
In his victory speech, K P Oli promised ‘never-witnessed private-sector cooperation’ alongside a higher social-spending agenda, as the sleepy Nepal Stock Exchange index stayed flat after the poll awaiting concrete economic growth and reform breakthroughs
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 after the 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.
Oli 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 gross domestic product 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 more than one-third of output were destroyed, the World Bank estimated. This month it approved a US$300 million credit to follow on the $200 million approved in the quake’s immediate aftermath, to pick up the pace for the more than 350,000 residences still slated for rebuilding.
Economists 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 compared with other low-income economies, in the view of the International Monetary Fund’s latest Article IV report in March.
The IMF 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 Nepalese currency’s peg with the Indian rupee was praised as a “transparent anchor” as demonetization fallout continues to hit local households and firms, but Nepal 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 IMF and regulatory officials, with plans to modernize prudential standards and enforcement for lending, securities and insurance.
On the stock exchange, this month 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 for at least another few months waiting for clearer weather before mounting a daring expedition.