DFID's bilateral programme in Nepal - International Development Contents


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.


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© Parliamentary copyright 2015
Prepared 27 March 2015