4 Economic Development
39. Nepal's low economic growth rate, unemployment,
poverty, and income inequality reflect the deeper divisions within
the country. With a GNI/capita of around $709, Nepal is the 23rd
poorest country in the world and has a very poor business environment
with an uncompetitive and unproductive private sector. Remittances
are a main growth driver: with strong remittance flows equivalent
to 25-33% of GNI. People need jobs urgently to give them confidence
in longer-term stability.
40. But, DFID informed us that opportunities exist
to stimulate growth through greater trade with India and China,
through tourism, and from untapped hydro-power, agriculture and
forestry resources. DFID argued that to unlock these Nepal needs
to address the fundamental constraints to inclusive growth: poor
and insufficient infrastructure, poor industrial relations and
labour market rigidities, political uncertainty, and a policy
environment which fails to give private entrepreneurs-both Nepali
and foreign-the confidence and incentives to invest in the country's
future and provide much-needed employment.
41. According to DFID the potential for growth is
there, if it can be harnessed. Nepal has the potential to grow
much faster, 7-8% per annum, levels which it will need to achieve
very soon if it is to have any hope of meeting the required income
measure for exiting LDC status. Annual growth between 2010-12
was around 4.4% with the domestic economy continuing to underperform
substantially.
DFID's programmes
42. DFID's approach is to support a private sector
led growth strategy to increase the rate of GDP growth per capita.
This strategy includes economic reform, market development, rural
infrastructure and skills programmes. To support economic reforms,
DFID is moving from what it describes as 'the transactions-based'
Centre for Inclusive Growth to a strategic set of interventions
under "a single programme umbrella focused on improving Nepal's
economic governance with three main areas":
1. Supporting private and public investment in
infrastructure and supporting the Investment Board of Nepal's
deal-making capacity for large privately funded and growth enhancing
infrastructure.
2. Supporting the implementation of economic
policies that improve the investment climate and the predictability
of the policy environment.
3. Maintaining financial sector stability and
addressing the risk of a financial sector collapse by working
with the government, IMF and World Bank on a support package to
help the Central Bank and Ministry of Finance manage Banking sector
risks more effectively.
43. DFID Nepal is also working with businesses and
government to expand the private sector in tourism and agriculture
and create 230,000 jobs, particularly for women and excluded groups.
This includes placing 44,000 (two thirds for women) into jobs
through DFID's innovative skills programme.
44. DFID recognises that the rural poor in Nepal
lack the physical access they need to markets. They are continuing
to invest in rural infrastructure in more remote areas of Nepal
creating, they claim, 7.5 million days of employment and building,
upgrading and maintaining over 4,000km of rural roads. They argue
that this will connect more than 800,000 people to markets and
support more than 40,000 farmers to increase their incomes from
growing higher value crops.
45. DFID Nepal's Market Development Programme is
intended to improve the incomes and growth for poor and disadvantaged
people in key sub-sectors within agriculture and other rural markets.
DFID has committed £14.54 million to this programme.
46. DFID has also provided support for the Investment
Board of Nepal (IBN) which promotes economic development by 'creating
an investment-friendly environment by means of mobilising and
managing public-private partnership, cooperative and domestic
and foreign private investments, for making the process of industrialisation
orderly and rapid, for the development of infrastructure and other
sectors to create employment opportunities, and to offer meaningful
contribution to poverty alleviation'.
47. DFID sees its approach as working in the short,
medium and long term:
Short term: improving roads to allow access
to the country's poorest and most marginalised groups, especially
women, and increase their resilience to economic, health and climatic
and other shocks.[28]
DFID's Access to Finance programme aims to improve financial access
to 8,000 enterprises and provide new access to financial services
to 400,000 people by 2018.[29]
Medium term: strengthening Nepal's markets
so that they become more productive and efficient and widen economic
opportunities including increasing access for small businesses
and households.[30]
Long term: improving structural issues
from political uncertainty and policy dysfunction, a lack of energy,
a poor road system and economic reforms to develop the economy
and generate higher wages and higher skilled jobs.[31]
HYDROPOWER AND THE INVESTMENT BOARD
OF NEPAL
48. Many consider the key to Nepal's future prosperity
is in hydropower and in particular two projects which is it is
hoped will begin within two years. This could harness US$6 billion
in investment from overseas developers and investors.[32]
Currently Nepal generates about 760 megawatts of hydropower. The
World Bank thinks it could have 40,000 to 83,000 megawatts of
potential hydropower, which is phenomenal and could be transformational
not just for Nepal but for the whole of southern Asia—China
and India too—and for the world's climate-change objectives
for that matter as well. During our visit, we heard that major
hydropower projects have foundered in the past because of politics
and political instability, but it now seems possible that the
schemes will go ahead.
49. DFID is proud of its support for the Investment
Board of Nepal which it argues has been a key factor in the development
of the two hydropower schemes. The Minister said:
'One of the strengths of DFID is its risk appetite.
We were there investing and building the Investment Board in terms
of getting those high-powered, well-educated, experienced young
people to come back to Nepal and work for the board.'[33]
50. Adam Smith International, which has been working
on the project, informed us:
DFID Nepal has chalked up some huge successes
this year, which are likely to have a transformational impact
on the lives of Nepali citizens. For example, the CIG project
has radically enhanced Nepal's economic prospects by liberating
the country's hydropower potential. It has already secured Nepal's
two largest ever foreign investments: the $1.4 billion public-private
partnership concession to develop the 900MW Upper Karnali hydropower
project, signed in September 2014, and the $1.1bn 900MW Arun 3
project agreement, signed in November 2014. As a result of this
work, Nepal is on track to deliver another two mega-hydropower
projects by mid-2015. Together these four projects are expected
to deliver some $17bn of financial benefits to Nepal.[34]
On the other hand, Thomas Bell thought that the recent
very large hydro-power investments might have come about largely
thanks to circumstances relating to India and its relations with
Nepal.[35]
51. Recently, the United States has become involved
in the projects and CEO of the Millennium Challenge Corporation
visited Kathmandu while we were there. Mr Swayne assured us that
US involvement in this venture was positive and that the coordination
of UK and US efforts were unlikely to be a problem:
"I suggest to you that the Americans coming
on board and other people building up builds the credibility of
the board to the extent that the political establishment more
properly recognises its strength and importance and pushes through
the agenda that is now being driven to secure the independence
of the board from the political process."[36]
52. There are still technical issues and design issues
to be addressed. During our visit we heard concerns that the hydro-power
schemes would not also be used for water storage, which would
be a real advantage in view of the shortage of water supplies,
especially in the Kathmandu valley. Mr Swayne informed us that
feasibility studies were being undertaken:
The board, now having signed the deals that they
have, are doing detailed scoping and feasibility studies, and
that is the proper place to attend to the other benefits that
might flow from these projects. There is a huge scoping exercise
now taking place into how water storage and irrigation can piggy-back
off the principal driver, which is hydropower. [37]
TOURISM
53. Nepal has great tourist potential with a landscape
ranging from the lowland jungle and wild life of the Terai to
the extraordinary beauty of the Himalaya. Added to this are an
array of world heritage sites comprising inter alia ancient
temples and palaces. Moreover, the country lies between China
and India with large and fast-growing middle classes, providing
an ever-expanding market for Nepal's tourist industry.
54. DFID has recognised the potential of tourism
and the jobs it can bring. DFID has a number of schemes, as described
above, which seek to promote the industry. Yet much needs to be
done if the industry is to realise its potential. We questioned
DFID about changes which need to be made. During our visit to
Pokhara we were struck by the waste and litter round the lake
which did not meet the expectations of tourists, western or Asian
Mr Swayne agreed:
I went to the same lake…It was gopping.
If there is to be an expansion of tourism in Nepal, it must be
preceded by very significant investment in waste management….The
Asian Development Bank has now produced a report on this, and
I hope that we are going to see some action in that respect.[38]
The IBN is also addressing the issue.
55. DFID provided more detail about its work to support
tourism, including the market development programme, which builds
on work done earlier on the Himalayan trail, enabling local people
to adapt their accommodation and catering to the standards that
might be expected by tourists. The wider DFID Nepal portfolio
of programmes also has an impact in this area: tourists use the
local roads funded by DFID and the access to finance programme
is providing funds for small and medium-sized enterprises, some
of which will be in the tourist sector. 'Work on the blockages
that prevent economic development at the policy level… are
as relevant in the tourist sector as they are in other sectors
of the economy.' In summary:
Part of it is about enabling the broader economy
and context to be suitable for tourism development and part of
it is targeting very specific interventions within tourist areas.[39]
We also asked whether CDC might invest in tourism
in Nepal, but the Minister thought this was not a matter for him.[40]
Conclusions and recommendations
56. We commend DFID for providing technical support
for the Investment Board of Nepal when no other donors were willing
to do so. Nepal seems about to construct two major hydro-electric
schemes which will help address the country s chronic power shortages.
If traditional political problems are overcome and these schemes
are successful, the Nepalese economy could be transformed and
DFID could begin to develop an exit strategy, perhaps within five
years of their successful completion. We note the technical
and design issues are still being considered and recommend DFID
urge the Government of Nepal to ensure water storage is included
in such schemes.
57. Nepal has huge potential to benefit from tourism
and the jobs it brings. We welcome DFID's support for this industry
in the Nepal Market Development Programme and recommend it expands
this area of its work. We further recommend that CDC assess the
potential for investment in tourism in Nepal.
28 Error! Bookmark not defined. Back
29
Error! Bookmark not defined. Back
30
Error! Bookmark not defined. Back
31
Error! Bookmark not defined. Back
32
Error! Bookmark not defined. Back
33
Error! Bookmark not defined. Back
34
Error! Bookmark not defined. Back
35
Error! Bookmark not defined. Back
36
Error! Bookmark not defined. Back
37
Error! Bookmark not defined. Back
38
Error! Bookmark not defined. Back
39
Error! Bookmark not defined. Back
40
Error! Bookmark not defined. Back
| 
