Unfavourable business climate stunts growth of firms

Kathmandu, November 16

Here is something to ponder on: Firms aged 25 years or more in Nepal are only 50 per cent larger than firms aged less than five years. Now compare these World Bank figures with those of the United States, where firms aged 25 years or more are over seven times larger than those aged less than five years.

This comparison clearly shows that Nepali firms are stunted. The growth of a majority of Nepali firms has stalled because they ‘avoid undertaking large-scale, risky investments’, as business climate is not favourable here, according to the latest report jointly published by the World Bank and the International Finance Corporation, a private sector lending arm of the World Bank Group. In other words, many firms here are small because they choose to remain so.

It is therefore not surprising that only 18 per cent of Nepal’s formal firms employ more than 20 people, which is low compared with other South Asian countries such as Bangladesh, India, Pakistan and Sri Lanka, says the Country Private Sector Diagnostic titled, ‘Creating Markets in Nepal’, unveiled today in Kathmandu.

The 100-page first joint report by the WB and the IFC speaks of constraints holding back growth of private firms in Nepal and provides tips to improve private sector competitiveness. The report also identifies priority sectors — hydropower, tourism, agribusiness, education, health and IT — ‘where greater facilitation of the private sector could have major impact on Nepal’s growth trajectory’.

In fact, the sectors identified by the report, the problems it has identified and recommendations it has laid to overcome the challenges are not entirely new. Most of the policymakers and senior government bureaucrats are aware of them. Yet, the report has tried to gather scattered information and recommendations and put them in one place, which makes it easier for people to get a complete picture of the current situation.

Nepal’s development has long been held back because of decade-long insurgency, a prolonged peace process, rapid changes in governments, protests, acute shortage of electricity and policy instability.

Finally things are looking up, as the country has held three levels of elections, implemented federal system of government to devolve power and responsibilities, and installed the most powerful government since the 1990s, ending years of political instability.

The challenge today, in the new, more stable political environment, is to make the process of designing and implementing policies more effective and broadly representative, says the report. These efforts can attract investment and spur inclusive growth.

“Simpler regulations, better infrastructure, stronger institutions, and more developed human capital can open the doors to investment,” IFC Regional Vice President for Asia Nena Stoiljkovic said.

Many factors have been deterring investment in Nepal. But the most critical among them are governance and infrastructure, as they are creating a high level of economic uncertainty for firms, says the report.

Nepal’s global ranking in governance, such as rule-of-law and the control of corruption, is very low. The country has also failed to implement many of the new laws, which is also a problem related to governance. On the other hand, Nepal’s global ranking in infrastructure, which takes into account transport network density, digital access, electricity consumption per capita, and transmission losses in the power sector, does not fare any better.

“Nepal faces the governance challenge of making the process of policy design and implementation more effective and responsive to the interests of ordinary firms and individuals,” says the report. “This will be the key to increasing the ease of doing business and sustaining productive partnership between the government and the private sector.”

The problems related to governance have also affected public spending, which has delayed construction of many infrastructure projects.

“With key sectors such as tourism and agribusiness being highly reliant on connectivity, strengthening infrastructure is the other critical challenge for private sector development,” says the report.

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