‘Investment in human capital must to improve private sector growth’

The private sector is one of the three pillars of Nepal’s economy. Yet, it has not grown in a desired way with mere 18 per cent of Nepal’s formal firms employing over 20 people, which is one of the lowest in South Asia. The subpar growth has hit Nepal’s economic growth as well. The World Bank and the International Finance Corporation recently published Country Private Sector Diagnostic, which assesses the constraints holding back private sector growth. The report has also identified six priority sectors — hydropower, tourism, agribusiness, education, health and IT — where greater facilitation of private sector could have major impact on Nepal’s growth trajectory. Rupak D Sharma of The Himalayan Times met Wendy Werner, IFC country manager for Nepal, Bangladesh and Bhutan, to discuss major stumbling blocks for private sector growth. Excerpts:

The report has identified six priority areas — hydropower, tourism, agribusiness, education, health and IT — which could play a key role in enabling Nepal’s economic growth. Policymakers and bureaucrats are aware of these priority areas and know these sectors can play a vital role in spurring growth. Yet, nothing has been done so far.

I wouldn’t say nothing has been done so far. But, yes, there is a lot more to do. Nepal is at early stages of (the latest round of) political and economic transformation. The IFC and the World Bank Group would like to take this opportunity to lend support to the country to create an environment to spur rapid growth in the private sector. Policy environment and an ecosystem of enabling services and products are important to remove constraints holding back the private sector’s growth. As you indicated, some of the sectors mentioned in the report as private sector growth stimulators are not new. But so much more can be done to improve performance of these sectors. For instance, Nepal is a fantastic tourist destination and it has the asset that visitors want to see. But every tourist who visits Nepal does not spend as much as tourists who visit other similar destinations that came out of war and conflict. So, Nepal needs to know its potential; chart a course to attract more tourists; and create a market that provides a lot of sustainable employment opportunities, and protects the ecosystem and natural resources. The idea is to build on what has been done and make sure investment made in various sectors delivers quality results.

Policymakers and senior government bureaucrats know what needs to be done to spur growth in six areas that the report has identified. But the problem is with delivery. Doesn’t this show lack of will?

The new government has not even completed its first year in office; and the country recently made a shift from unitary to federal system of government. We should remember that transition in Nepal’s government structure took place at a much faster pace than in many other countries. We also believe in the potential of Nepalis. Nepali people, especially those who have been working outside the country for many years, have very strong skill sets. We want to make sure that those skills come back and help in growth of Nepal’s private sector.

Political changes have definitely taken place rapidly here and Nepal finally has a stable government. But this stable government has not been functioning very well and the private sector is not very optimistic about the future. One of the reasons for this is lack of government’s trust in the private sector. What is your take on this issue?

I think we have to focus on improvements that have been made and changes that have taken place over the years as well. For instance, Nepal has prepared drafts of many laws, such as the Foreign Investment and Technology Transfer Act, and we are optimistic that they would be enacted soon. So, a lot of work has been done in the past few years, and we hope these works will continue in the coming months. The report that we recently launched will help the government identify the most important legal and regulatory changes that need to be made to open up newer markets. The report also tells where the public financing should be directed so that there is space for private investment and innovation to expand.

The IFC has been working to promote private investment and the private sector. What does the IFC have to say about the relationship between the government and private sector in Nepal vis-a-vis other countries where the organisation is working in?

The finance minister was recently in Washington, DC, where he met with many senior IFC and World Bank officials. The government really wants to encourage and support private investors. But it will take some time to figure out the right way to do that. So that’s where this report comes in and the government has welcomed the launch of this report.

So, IFC is satisfied with what the government is doing to promote private sector in Nepal?

There is still a lot to do. The report consists of a long ‘to do’ list for the government. For instance, Nepal needs to expedite investment approval process, open up more sectors for foreign investors and allow investors to acquire larger tracts of land. These things have been listed in the report for a reason because we think they are important for private sector’s growth. So we want to work with the government to help it revise the regulations in the right way. This will help open new areas for more investors, improve business confidence, spur innovation and bring in new technologies.

Your report says that most Nepali firms have traditionally remained small and avoided undertaking large, risky investments due to various uncertainties. Do you think this situation would change anytime soon given the problems related to access to finance, infrastructure and governance, such as corruption?

These improvements cannot be made in one go. It is a step by step process. We’ve noticed small businesses finding it challenging to make bigger investments in many emerging markets. So we are working with a number of banks here to help them expand their product offerings to micro, small and medium enterprises. We’ve also invested in an equity fund which focuses on small enterprises. We’re not saying our small equity fund will bridge the funding gap for small and medium enterprises, but it demonstrates that there are alternative ways to provide finance to firms. We’re also working to deepen the capital market so that banks can divert funds to smaller enterprises. So, I’m confident that each of these segments will grow, but it’ll take some time. We know Nepali people are very innovative and they’ve been able to adapt to many circumstances. So, I’m sure private sector will show that level of innovation when given the opportunity.

You’ve heaped praise on Nepalis for being innovative, but Nepal’s labour productivity, especially in manufacturing sector, is the worst among South Asian countries. Isn’t that a big problem for Nepal?

This is one of the reasons why the report has highlighted education as the priority area. Investing in human capital is a very important part of what Nepal needs to do to improve the growth of private sector. The report has said the private sector could focus on tertiary and vocational education, and let the public sector focus more on early-childhood, primary and secondary education.

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