Nepal's experience in achieving its MDGs is a lesson in innovation and action in conflict, peace and political instability.Nepal learned unique and valuable lessons not just to its own future development thinking but to that of other countries. Nepal’s efforts to achieve its MDGs passed through three distinct contexts: instability, conflict, and transition. When the Millennium Declaration was made in September 2000, Nepal was a fully functioning democracy propelled by the great energy released by an open and liberal polity initiated in 1990. At that time, under normal conditions, Nepal prepared the Tenth Plan to serve as its first medium-term strategy for reaching its MDGs. However, before the plan had been completely implemented the country plunged deeper into an armed conflict.
On the whole, Nepal moved forward with its main objective: to protect past achievements and keep pushing efforts to achieve its 2015 MDGs. The NPC, the apex body for national development and resource planning, adopted the MDGs as its planning framework for guiding the entire national development process. Its medium-term (three- and five-year) national development plans, have links with the MDGs. In this context, the issues of post 2105 development agenda are being discussed and debated around the globe at various levels. This is the time for opening the discussions at the country level and following could be the opportunities and challenges for Nepal in the context of post 2015 development agenda.
Stagnation in Infrastructure:
Poor reliability and access to power are the most serious infrastructure bottlenecks to growth. Increasing access to electricity in a timely and cost-effective manner is one of the most significant development challenges facing Nepal today. Efforts to reduce the 16-hour load-shedding during the dry season have been unsuccessful. Ironically, Nepal has one of the largest untapped hydropower resources in the world – an estimated 83,000 MW of hydropower potential.
Poor physical connectivity has been another major challenge to Nepal’s development efforts. Its road density is one of the lowest in South Asia. Over one-third of the people in the hills are more than four hours away from an all-weather road. In addition, 15 out of 75 district headquarters are yet to be connected by road. The quality of the road network is also poor – 60 percent of the road network, including most rural roads, cannot provide all-weather connectivity.
Foreign Direct Investment
Preoccupation with the prolonged political transition has overshadowed economic issues. As a result, inadequate attention has been given to reforms that could improve the investment climate, stimulate growth, and create more private-sector jobs.
Net Foreign Direct Investment (FDI) in Nepal averaged only 0.1 percent of GDP as compared to an average of 1.9 percent for low-income developing countries. Investments in Nepal are constrained by a challenging regulatory and legal framework for foreign investment, poor governance and accounting practices, weakness in the domestic banking sector together with lack of a swap market for the Nepali rupee, poor implementation of property rights, and heightened political uncertainty. In addition, the country’s logistical limitations, absence of supporting infrastructure, and the relatively smaller size of projects constrain investments, especially in the manufacturing sector.
Given that productive agriculture is a crucial element of inclusive growth, enhancing the efficiency of irrigation systems will continue to be critical to increase agricultural productivity, incomes, and rural livelihoods beyond 2015.
Increasing access to secondary education (grades 9-12) remains a major challenge, as evidenced by the disturbingly low net enrollment rate of 24 percent at this level. More than half of primary students do not enter secondary schools, and only one-half of them complete secondary schooling. In addition, fewer girls than boys join secondary schools and, among those who do join, fewer complete the 10th grade. While there has been substantial progress on health indicators, malnutrition remains very high. About 47 percent of children under 5 are stunted, 15 percent wasted, and 36 percent underweight. Although there has been a declining trend for these rates over the past five years, they remain alarmingly high.
Though it faces enormous challenges, Nepal is not without some significant assets. The evidence is compelling that the strength behind development in Nepal is highly concentrated at the community level. Success stories abound, from forestry user groups and women’s groups to community-based programs in rural drinking water, rural roads, micro-hydropower generation and community management of schools. Many of the truly community-owned efforts demonstrated great viability even during the height of the conflict. Where a supportive framework has been created for communities to undertake such activities, there have been impressive development successes.
Vulnerability to Climate Change
Nepal is highly susceptible to climate change risks and ranks 11th in the world in terms of vulnerability to earthquakes. Climate change is expected to intensify Nepal’s already pronounced climate variability and increase the frequency of climate extremes such as droughts and floods.
Generation of Employment
In its Least Developed Counties Report 2013, UNCTAD argues that the number of young people of working age in Nepal is currently increasing by 550,000 a year (465,000 in 2005), and by 2020 it will climb to 633,000 a year. The report recommends improving GDP growth via: the generation of employment, particularly work that pays a stable living wage and has safe employment conditions for investment to develop the capacities of economies to produce broader varieties of goods, and goods of greater sophistication and higher value.
The report states that employment grew by 2.7% per annum during 2000-2012, higher than the average population growth of 1.7% but below GDP growth of 4%. Sector-wise employment breakdown shows the following: Agriculture accounted for 71% of total employment, down from 75% in 2000. Industry accounted for 12% of Nepal's total employment in 2013, up by 2% compared to 2000. Services accounted for 17% of employment in 2013, up by 2% compared to 2000.
Regarding remittance inflows, which amounted to an estimated 25.5% of GDP in FY2013, the government will have to urgently explore how to better channel remittance to productive usage as almost 80% of it is used for daily consumption by households. Nepal cannot ride against the tide and will have to learn to live with high and persistent remittance inflows. The only option now is to leverage remittance to productive usage such as: (i) investment in infrastructure (including energy); (ii) high value agriculture production; (iii) commercial agricultural activities; (iv) industrial sector investment; and (v) high value service sector activities, among others.
Rationalizing Recurrent Expenditure
Nepal’s recurrent expenditure is rising so fast that the impressive tax revenue mobilization (15.3% of GDP in FY2013) is nearly equal to recurrent expenditures (15.2% of GDP in FY2013). Nepal needs to rationalize expenditures as well so that unproductive and wasteful expenditure items and subsidies are properly addressed. Some of the measures may include: (i) timely and full budget; (ii) higher quantum of capital expenditure allocation and quality spending as well; (iii) rationalization of recurrent expenditure by taking out unproductive expenditure items from the Red Book; (iv) focused expenditure plan to address the binding constraints to inclusive growth; (v) rationalization of subsidies, particularly fuel subsidies; (vi) trimming the number of public employees, especially redundant staff hired without a specific work plan and due to pressure from political leaders; and (vii) reforming, including privatizing, the inefficient state-owned enterprises. Meantime, the tax net needs to be broadened instead of increasing cumulative tax rate each year.
Meaningful Structural Transformation:
A meaningful structural transformation to sustain a high and sustainable growth would require a strong industrial sector and high value added agriculture and services sector activities, with an employment-centric strategy to absorb the surplus labor. To promote higher productivity, high value-added production and high income generation, the agriculture sector requires adequate and appropriate commercialization, provision of necessary infrastructure and technology to link with the industrial sector, and promotion of agribusiness activities such as agro-processing, storage, and warehousing, among others. Similarly, for high productivity and value added services sector activities, there needs to be strong backward and forward linkages with the industrial sector along with the narrowing of skills gap required in the market, increase in R&D investment to promote innovation, and investment in education and health sectors to boost the capacity of the economy to sustain progress and prosperity. This would partly position and help sustain the industrial sector as an engine of inclusive growth.
Controlling High Inflation
With the government’s failure to clamp down on inflation, which is hovering above 8% since FY2009, people have built up expectations that prices will not come down in the near future (or say embedded expectations at a higher base). Inflation above 8% is becoming a ‘new inflationary normal’. For comparison, inflation was as low as 2.4% in FY2001. High inflation erodes people’s purchasing power, renders production uncompetitive, and discourages investment. It also forces government and firms to revise up wages, irrespective of the gains in revenue and productivity. In real terms, it makes people poorer in the absence of a proportional rise in income.
Governance is a never-ending issue. Transparency International repeatedly ranks Nepal as one of the most corrupt economies. According to the Enterprise Survey 2013, about 51.3% of firms expected to give gifts to secure government contract. Also, there is hardly any crosscheck on the quality of assets created with government (alternatively, tax payers') money. About 44.7% of manufacturing firms identified corruption as a major constraint in 2013. Major public sector reforms, along with strengthening of the anti-corruption body, are needed. Good governance and transparency of financial transactions have to be exemplified right from the political parties’ level to the lowest rungs of government bureaucracy and the private sector.
Purushottam Ghimire, Joint Secretary and Focal person of UNDESA, worked in National Planning Commission Secretariat, Government of Nepal. Ghimire could be contacted via email: firstname.lastname@example.org