Evolution of Economic

Reforms in Nepal
BIMAL KOIRALA
August 10, 2018
Economics of Transition

• The demise of Partyless Panchayat System in Nepal ushered in a new phenomenon in

economics, transition.
• The Collapse of Panchayat System in 1990 was, in a sense a twofold event.
• The country Nepal established multi party democracy allowing parties to restore political activities.
• Nepal had to rebegin with new economic and social policies and institutions.

• The econ transition brought increased political freedom but also econ and social depression.
• The degree of econ and political freedom in Nepal was quite low since 1960s. By the early 1990s, Nepal
enjoyed perhaps two-thirds of the political freedom of the developed, democratic nations of the world.
Nepal enjoyed results from Liberalization since early 1990s. Econ growth started again in Nepal by 1991-92.
* Economic and Social depression reemerged after 1995.
• This is an unprecedented process as no economy has ever moved from a comprehensively
controlled economy to a market economy
Initial Stage of Transition

• Capital flight
• Unsure State of Economy
• Confusion among Investors
*Minimal productive investment
• New capital only in trade and services
• Traditional enterprises struggle to survive
• WHY?
Response
* Liberalism has not failed
• It has not been tried
• Collapse is the result of failure to reform
• No effective bankrupcty
• State subsidies to loss-makers
• Absence of rule of law
• Inadequate corporate governance
Mode of Production in State Controlled
Economy
• Administrative-command system of redistribution
• Surplus appropriation by -state
• Non-monetary system of centralised bargaining of plan deliveries for
supply entitlements
• Bargaining lever is centralised control of supplies
Nepal’s History of Economic Policies
• Oligarchies/Fragile and State Controlled Economy (till 1951)
• Democratic and highly centralized state controlled economy (1959-
1961)
• Partyless and highly centralized state controlled economy- mixed
system (1961-1990)
• Democratic and Liberal State (1990- )
Democracy and Development
• No practical relationship
• Genuine Dictatorship : Korea, Singapore, Taiwan Led high growth
• Dysfunctional Governance in Democracy: India(1950-1990) – Low
Growth
• Communist China and Vietnam: Promising Economies
• Large and pro people Democracies: USA, West Europe and Japan-
High and speedy Development
Outcomes of the Application of Command
Economy
• Poverty and Disparity
• Poor Physical Infrastructure Development
• Low Investment
• Poor Revenue Generation
• Poor Social Infrastructures
• Aberrations in Businesses
- Govt. Excessive control
- Huge Deficit and Inflation
- Financial Repression
Overcoming the Backlashes
• Status Quo
• Reform with Gradual Pace
• Reform- Big Bang
Departure From Narrow Orthodoxy
• Unleashing state control on productive resources
• Speeding Infrastructure creation
• Consolidating Social infrastructures and creating human capital
• Removing constraints and barriers for PSD and investment
• Fiscal and Financial discipline
• Converting government to facilatator from controller
• Realizing PSD
Structural Adjustment Program
• World Bank and International Monetary Fund Note on Nepal’s
Economy
• Shadow Exchange Rate
• Huge Fiscal Deficit and Inflation
• Financial Repression
• Burdensome SOEs
• Dysfunctional Government
• Poor Revenue
• Low Investment in Growth Generating Sectors
Washington Consensus
• Fiscal discipline
• Tax reform (to lower marginal rates and broaden the tax base)
• Interest rate liberalization
• A competitive exchange rate
• Trade liberalization
• Liberalization of inflows of foreign direct investment
• Privatization and deregulation
• Secure property rights
Genesis of Economic Reforms
• 1980s,the root cause of the crisis was the large and growing fiscal
imbalance
• Large fiscal deficit emerged as a result of mounting government
expenditures, particularly during these half of the 80s.
• These fiscal deficits led to high level of borrowing by the
government from the NRB, IMF, World Bank. Government
expenditure in Nepal grew at a phenomenal rate, faster than what
government earns as a revenues. The subsidies grew at a rate faster
than government expenditures.
Genesis of Economic Reforms
• The Nepali economy was indeed in deep trouble.
• Lack of foreign reserves .
• Gold reserve was empty.
• Financial Repression
• Shadow Exchange Rate
• Parasite SOEs
• Dysfunctional Government

• The Government of Nepal decided to usher in several reforms that are

collectively termed as liberalization.
Triggering Factors
• Donor’s Pressure
• Economic Compulsion
• Peer Pressure
• Political Transformation
Economic Reforms
• Industrial delicensing and simplification and rationalization of tax
structure to promote investment and expansion.
• Liberal FDI regime to supplement domestic resources.
Current account convertibility to have a liberal trade regime.
Public sector disinvestment to ensure government does what it does
best.
WTO compatibility to plug into the global economy.
Reforms in Key Sectors - Industry
• Industrial policy has seen the greatest change, with most central
government industrial controls being dismantled.
• Repatriation Assured.
• Private Investment- not nationalized.
• Eased Registration Procedures.
• Incentives for establishment
Reforms in Key Sectors - Trade
• Import licensing was abolished relatively early for capital goods and
intermediates which became freely importable in 1991,
simultaneously with the switch to a flexible exchange rate regime.
Import licensing had been traditionally defended on the grounds
that it was necessary to manage the balance of payments, but the
shift to a flexible exchange rate enabled the government to argue
that any balance of payments impact would be effectively dealt with
through exchange rate flexibility
• .Deregulation in Trade
• Incentives for Export
Reforms in Key Sectors - Banks
• Operation autonomy to public sector banks and reduction of public
ownership up to 49%.
• Entry for Nepali private sector, foreign and joint-venture banks and
insurance companies. Reduction in reserve requirement ,disbanding
of administered interest rates, introduction of pure inter-bank call
money market and capital adequacy requirements and other
prudential norms.
The Route of Liberalization
• Devaluation to remove shadow exchange rate
• Relief for Foreign investors
• New Industrial & Trade policy
• Privatization of Public entities
• Banking and interest rate reform
• Reorientation of public sector
Composition of Nepali Economy
• Before 1985
66% from Agriculture
34% from Manufacturing, Trade and Services
After 1991
32% from Agriculture
68% from Manufacturing, Trade and Services
Gains of Liberalization
• Growth of services and trade
• Increase in FDI and domestic investment
• Increase in Foreign Exchange Reserves
• Multiplicity of service providers
• Increase in consumption and control over price
• Emergence of Private Sector
• High Growth
• More spending on Physical and Social Infrastructures
Losses from Liberalization
• Loss to Domestic units.
• Increase in unemployment
• Unbalanced Development and Lop sided growth
• Increase in Disparity
• Dualism Issue- not dealt
Overall Impact
• Growth Jumped
• Services sector widened
• Private sector emerged
-------------------------------------------------------------
• Unemployment increased
• Disparity increased
• Weak institutional growth hampered equitable development
Choices – As We Stand Now
• Stay the Course
• Stay the previous course, consolidate Gains and Move Forward with
Reforms
• Reverse Back
• Develop New Course
Push for Liberalization
• Growing interdependence of all processes of Economy
• Establishing of a global financial-economic area
• Information technologies - WWW
• Change in the state’s functions – vanishing of the national boarders
• Universality of the world – dissemination of the democratic system
and socio – cultural values
• End of Autarky
Way Forward – Improving “Home”
• Openness- Investment Climate Reform
• Consistency in Policies- “Stay the Course”
• Credible Leadership and stable government
• Widen opportunities for private sector
• Economic diplomacy
Global Integration (Globalization)
• Liberalization Fueled the Trade Integration Process
• End of Autarky/Self sufficiency
• Transformation of conventional Socialism
• Emergence of the school of interdependence
• Evolution in Information Technology
• Cultural Assimilation
Perceived Benefits of Globalization
• Reduced Cost of Transport
• Lower Trade Barriers
• Faster Communication
• Rising Capital Flows
• Intensifying Pressures for Migration
Debate on Globalization
1. Is globalization new or old?

2. Is globalization good or bad?

3. Is globalization really “global” or inclusive of all people?

Different Waves of Globalization
1. First Wave (1870-1914)
Retreat : 1915-1945
2. Second Wave (1945-1980)
3. Third Wave (1980-onwards)
Grim Truth
• Countries that do not have strong institutional framework, as well as
solid social policies and networks to cope with negative externalities
most suffer the negative effects of globalization.
• External factors, such as the global trading environment, are crucial
in creating greater opportunities or in posing constraints on a
country’s economic growth.
Seizing Opportunities
• “All boats rising” (for those who participate) but at different rates
• Raised incomes, though not equal
• More individual choice and freedom in the marketplace
• Costs of goods and services go down
Privatization
• General meaning
• reduction in the scale or scope of government, lower taxes, lower spending,
and deregulation are all aspects of privatization
• Specific meaning
• transfer of the ownership of assets and production of goods and services
from the governmental to the private sector.
• Transfer of ownership and or management, management alone, or any of
several other functions involved in producing a service.
• sale of state-owned assets and enterprises and the contracting out of public services to
private firms.
Privatization
• Privatization refers to shifts from the public to the private sector, not
shifts within sectors.
• conversion of a state agency into an autonomous public authority or state-
owned enterprise is not privatization,  
• conversion of a private non-profit organization into a profit-making firm also
is not privatization, Both of these intra sectoral changes might be described
as commercialization
• Commercialization is sometimes a preliminary stage to privatization
Types of Privatization
• Cessation of public programs and disengagement of government
from specific responsibilities  
• "privatization by attrition" when a government lets public services run
down
• Transfers of public assets to private ownership
• Contracting-out
•  Deregulation
Forms of Privatization
• Two explicit and direct forms of privatization:
• (l) disposing of state-owned assets, including land, infrastructure, and state-owned
enterprises, through sales, leases, or liquidation; and
• (2) substituting state-financed but privately produced services for state-produced services,
as in contracting out, the distribution of vouchers, and other forms of payment for private
provision.
• Two general forms of privatization policy
• (3) the disengagement of government from a sphere of service provision; and
• (4) the deregulation of entry into state-owned monopolies. terminating programs throwing
recipients on the market or private charity; gradually reducing access to services or their
quality so as to bring about a shift by consumers to private alternatives ("privatization by
attrition").
Privatization in Nepal
• 3 Units privatized before the enactment of Privatization Law
THANK YOU