Leveraging public debt for fiscal sustainability

 The Nepalese economy, which was slowly returning to normalcy in the aftermath of Covid-19, has been dealt a heavy blow by the ongoing liquidity crisis, supply disruptions created by the Ukraine War, depletion of foreign reserves, and rising interest rates and inflation. The nation has taken several measures to check the deterioration of economic indicators by restricting or banning certain imports, introducing a tighter monetary policy, and so forth. The tensions exhibited by the macroeconomic indicators could stretch into the foreseeable future if thought-through reforms are not brought about.

Macro-fiscal challenges

Five years of federalism have seen the federal budget expand by 36.29 percent on the fiscal front. However, capital expenditure has only grown by 20 percent over the same period. As a result, government revenue has consistently hovered around 20.92 percent of GDP. Between 2017 and 2021, average capital spending as a percentage of capital expenditure remained at 67.12 percent. This shows that citizens generally pay a higher share of their income in taxes, but only a smaller fraction is directed toward capital expenditure. And even though the debt level looks safe at the moment (38.25 percent of GDP), in the lack of fiscal disciplinary measures, it could go to unsustainable levels in little time. Therefore, correcting the economy in the short run is not the only matter of concern for Nepal. There are multiple macro-fiscal challenges that cannot be looked at in isolation.

This article focuses on the challenges and some possible ways forward, focusing more on the latter. At present, some of the key challenges on this front are: i) discrepancies in the grants transfer mechanisms, ii) lack of a clear framework for public debt in the federal context, iii) insufficient leveraging of public-private partnerships, iv) inefficient and inefficacious public procurement provisions and practices, and v) weak state-owned enterprises that are draining the treasury.

Policy reforms with implementation

Grant transfer mechanisms need to be made more transparent and efficient to incentivise sub-national governments to spend well. The current grant transfer mechanism has limitations regarding its ability to do so. A potential improvement to the current mechanism could be to give a higher weight to performance on fiscal equalisation grants, revisit existing revenue-sharing frameworks, and tie up other non-discretionary grants with objective performance standards to build an incentivising environment for sub-national governments. It should also be ensured that the mid-term development plans connect with fiscal budgets through sound “mid-term fiscal frameworks” and “mid-term expenditure frameworks” to ensure consistency and predictability in the government's priorities.

In terms of public debt, the debt framework should be improved to enable governments to leverage it better while preserving fiscal sustainability. Public debt offers an alternative means to finance the country’s appetite for increased expenditure since raising taxes are less-preferred instrument from a political point of view. Public debt can yield positive results for the entire economy if done right. However, that also requires debt-financed expenditures to be tracked and reported to the public promptly. As the constitution of Nepal assigns many expenditure powers to the sub-national governments, public debt could be a crucial factor for them to deliver development. Continuing the spirit of federalism would also mean devolving powers related to debt management to sub-national levels. The same is not adhered to by the current framework. This highlights the centralised tendency of the federal government.

Additionally, having one federal institution administer and manage debts of all levels of government could result in delays. Hence, a new structural framework that could yield better coordination between various government bodies while enabling sub-national governments to operationalise their public debts could add value. Furthermore, as public debt continues to grow in Nepal, servicing those debts needs to be thought out carefully, and provisions like hedging to mitigate potential market risks should be built further into the existing legal framework.

Public-private partnerships can release fiscal space at sub-national levels. To leverage them, the Ministry of Finance needs to take the lead in developing the “fiscal commitments and contingent liabilities framework”. Nepal then must ensure that all projects go through the fiscal commitment and contingent liabilities assessment before they are approved. Approval should be subject to the assessment showing a positive effect, or at least a neutral effect, on the country’s balance sheet.

Public procurement policy and practices should be improved in a way that they support infrastructure development. Sub-national governments need to be made able to practice procurement as per their local contexts instead of following federal legislation. This means enabling local governments to develop their legislation instead of just the regulation based on federal legislation. This is also important because following the current procedures as mandated by the federal legislation has been seen to push the project implementations late into the fiscal years, resulting in most of the spending happening in the last quarter, thereby compromising the quality of work.

Finally, weak state-owned enterprises should undergo structural reforms to lower their burden on the government, allowing it to focus on other priority areas. The eighth-periodic plan of the government of Nepal has pointed out the inefficiency of public enterprises due to overstaffing, political intervention and lack of accountability. The same challenges have been identified by later research as well. Therefore, the government of Nepal should explore structural reform alternatives like privatisation, management contract, strategic partnerships, etc., depending on the nature and appraisal of non-essential service-providing enterprises. As has been witnessed before, reform plans will be met with many political challenges from stakeholders like political leaders, labour unions, and special interest groups. Therefore, the government should engage and look to educate and secure the buy-ins of all of these groups.

Conclusion

If implemented, benefits of the said reforms will accrue to the Nepalese economy in the form of incentives for sub-national governments to focus on local needs and aspirations, improved resource-sharing frameworks between the federal and sub-national governments, improved efficiency of government spending, and freeing up of the fiscal space at sub-national levels. Similarly, aligning the annual budgets with the periodic development plans through the “mid-term fiscal framework”, “fiscal rules”, and “mid-term expenditure framework” will ensure that programmes are put in the budget based on national priority instead of on an ad-hoc basis based on the interests of the policymakers. Furthermore, when merged with increased incentives for government actors, this will help significantly improve the budget implementation records of the federal and sub-national governments.

When national priorities guide the budgets and the expenditure capacities of federal and sub-national governments are improved, the taxpayers' resources will be spent on meaningful areas. Every area of government spending has a default trade-off of whether to scatter resources and secure inept results or focus on a few key areas and create an impact therein. As clear legal frameworks to pool resources from the public and private sectors are laid out, it will enhance Nepal's capacities to make targeted spending on not just infrastructures but also on education, health, and social protection, laying a foundation for development.

This article was initially published in The Kathmandu Post on November 14, 2022. The author can be reached at pramodrijal3@gmail.com

Coming clean on energy in South Asia

Progress towards a renewable energy-driven economy continues to face a predictable stumbling block globally—over-reliance on the use of fossil fuels. Despite the great advances made in the renewable energy sector, both the developed and developing economies are reluctant to switch to renewable sources due to concerns it may detract them from their growth targets.

In South Asia, big economies like India, Bangladesh and Pakistan rely mostly on fossil fuels, including coal, diesel and gas-powered thermal plants which generate most of their electricity. The World Bank’s Sustainable Energy for All database shows that India has only a 36 percent share of renewable sources in its energy consumption, while the same for Bangladesh is 34 percent. Pakistan has less than 30 percent renewable sources in energy. On the other hand, smaller economies like Nepal and Bhutan have a bigger share of renewable sources in their energy consumption. This is not necessarily due to high generation of renewable energy, but rather due to increased reliance on traditional biofuels, like wood, dung, crop residue and charcoal, for cooking and heating purposes in the rural areas.

Diminishing coal reserves

With rapid urbanisation, there is a steady rise in the domestic consumption of electricity for cooking, heating, and more recently, transportation across South Asia. Besides this, growing industrialisation in the region means annual demand for electricity will only increase in the future. It can only be ironic then that most of the electricity produced in the region is from fossil-fuelled plants.

In India, most of this comes from thermal plants that produce approximately 64 percent of the total electricity consumed. India’s rich coal mines are depleting while 269 thermal plants across the country continue to pollute the air and soak up India’s scarce river basins. The fact that thermal plants in water-scarce Maharashtra state have been shut down for months due to lack of water points to an urgent need for India to strike a balance between its energy security, water security and international commitments on reducing emissions. A 2019 study conducted by the International Centre for Integrated Mountain Development (ICIMOD) has linked high emission of greenhouse gases in South Asia with accelerated melting of Himalayan glaciers and changing monsoon circulations and distribution of rainfall in the region.

Luckily, there are silver linings pointing towards gradual improvements globally, following the Paris Accord on reducing the impacts of climate change. Both the developed and developing countries are slowly but surely making efforts to increase the ratio of clean energy sources in their overall production and consumption. Solar and wind technologies, in particular, have seen great improvements over the past decades. The price of generating electricity from solar and wind technologies is gradually decreasing, and they have now become as cost-efficient as hydropower. However, while solar and wind can prove useful complementary sources, they cannot become a reliable alternative as demand for electricity is not subject to the availability of sunlight or steady wind flow. This means clean and reliable hydroelectricity produced by countries like Nepal and Bhutan can offer a viable alternative for the South Asian region.

According to a report published by the Central Electricity Authority of India, the states of Bihar and Uttar Pradesh have a combined power deficit of 588 megawatts, which peaks during the evenings, especially in the summer. Increasing domestic and foreign investments in these states indicate that they will require more electricity in the coming years. Hence, timely investment in cross-border energy infrastructure will go a long way in ensuring that these Indian states do not miss out on their growth potential. The Power Trade Agreement signed between India and Nepal sometime back will enable India to import the required electricity from Nepal and meet its increased demand.

Bangladesh’s need to switch to renewable energy sources is even more urgent. Thermal plants powered by coal, diesel and natural gas account for 93 percent of the total electricity generated in the country. In 2018, Dhaka admitted that its natural gas reserves which help to produce more than 60 percent of the country’s electricity may be gone within the next decade. For this reason, Bangladesh aims to increase the power consumption from renewable sources to 10 percent by next year, and continue to expand it in the following years. Unlike India, Bangladesh has less potential to expand its renewable energy sources through solar and wind technology, due to lack of sufficient open spaces. Therefore, importing hydroelectricity from Nepal using Indian transmission systems offers a more viable alternative. Bangladesh’s interest in Nepal’s hydropower sector is, therefore, timely and will benefit both countries. The two countries have already signed an agreement to this effect with informal conversations with India expected to make progress in the coming days.

Environment of trust

Long-term energy cooperation between Nepal, India and Bangladesh could prove to be an attractive prospect for all three countries. For landlocked Nepal, it offers a lucrative market and opportunity to balance its trade deficit while for both India and Bangladesh, it offers a secure line of supply amid uncertainties in their domestic energy markets. But mere technical feasibility and complementary needs will not be sufficient. There has to be a political environment of trust among the participating countries that can encourage the private sector to invest in such a project. Recent diplomatic tensions between India and Nepal over disputed border territories certainly do not help this cause. Both India and Nepal need to bilaterally resolve any irritants that could jeopardise their mutual economic and strategic interests.

Robust energy trade between Nepal, India and Bangladesh will not only reduce the carbon footprint in South Asia, but it will also help to create many clean jobs that can contribute to reverse out-migration of thousands of people from these countries. India and Bangladesh have an opportunity to come clean on their energy dilemma, and the good news is they need not look further than Nepal for an answer.

(This article was initially published in The Kathmandu Post on October 6, 2020. The author can be reached at pramodrijal3@gmail.com )

Why BIMSTEC countries should now take a decisive step towards renewal energy?

The combined population of BIMSTEC countries exceeds 1.5 billion, which makes the region potentially one of the largest consumers of electricity in the world.The booming economy of the member States, over the recent years, has steadily pushed their energy requirements. But the high consumption of energy has come at an equally high costs, that of air and water pollution from the burning of large quantity of fossil fuels, which have also led torapid deforestation, erosion and contributed to global warming. The emission of carbon and other green-house gases has resulted in poor air quality, melting of ice-caps in the Himalayas and unprecedented health-risks in each of the member States. However, the situation does not have to remain so bleak, when technological breakthroughs and inter-connectedness among economies provide us with sufficient opportunities to collaborate for a better future.

At the moment, the energy market in many BIMSTEC countries is characterized by low per capita consumption, but the demand is increasing along with rapid economic growth. And, given that the world is quickly running out of its limited supply of nonrenewable energy, amid increasing environmental concerns associated with it, BIMSTEC has arrived at a juncture where a decisive step towards investing in renewable energy sources has become essential. Luckily, the options are quite on the brighter side here. BIMSTEC countries Myanmar, Bhutan, Nepal and North Eastpart of India have an immense potential in the form of untapped hydropower. These countries have some of the largest rivers in the world, which flow down from steep Himalayan region and can be harnessed to produce abundant clean and renewable energy. The electricity produced can then be exported to other member countries like Thailand, mainland India and Bangladesh, which have surging demand from booming economy.

Even when we talk about domestic consumption, there is no shortage of demand in countries like Nepal and Myanmar, where the electrification rate is at around 57 percent, the lowest in the region. The growing population and less per-capita energy consumption is indicative of low job creation in the economy, leading to manpower flight in these countries, bruised by many years of conflict. As the countries overcome active phase of conflict and the economy is in resurgence, the demand and consumption of energy will continue to grow.

Besides hydropower, the BIMSTEC region is also blessed with abundant sunlight throughout the year. There is a boundless opportunity of harnessing solar power for renewable energy generation, as technological breakthroughs make costs of tapping energy from this source cheaper by each passing year.Thailand has undoubtedly emerged as a leader in this regard and is showing us the way, with policy changes that have subsidized energy tariffs and significantly brought down costs of solar-components. Although renewable energy remains less than 2 per cent of Thailand's total energy consumption, the production of solar energy has gone from less than 2MW to about 1300MW in 2014 and 3000 MW in 2017.

Securing energy future of the region is crucial to growth of BIMSTEC, but it will require commitment and collaboration among the member States, to create an integrated market which can effectively bring down investment and production costs of renewable energy, through the economies of scale.

BIMSTEC power grid agreement is a kind of a low hanging fruit which encapsules the seed, to the idea of a regional power arrangement. While we are negotiating transmission lines and other major issues, we need to go ahead with discussions regarding policy harmonization and set ourselves a realistic time-frame against achievable milestones. This will require a roadmap for action and decision making in the respective countries. We also have to establish a regulatory arrangement that will ensure consistency and clarity in cross border power trade transactions. Investing in such an energy infrastructure for BIMSTEC region would not only transform economies of the member states, but also bring peace and harmony in the region due to inter-dependence and mutual cooperation. This issue of clean energy cooperation would be taken up seriously among BIMSTEC countries, as we have everything to gain from it and hardly anything to lose.

Energy trade has already proved crucial infostering political and diplomatic relations among member states. Bangladesh's relationship with India and Myanmar'srelationship with Indiaare good cases in point. This relation could be further strengthened by harnessing hydropower in India's Arunachal Pradesh, exporting thus produced electricity to Myanmar, Bangladesh and to rest of India through Bangladesh. Such cooperation produces synergy that is helpful in other bilateral and multi-lateral cooperation.

Energy trade could also be a major area of cooperation among India, Nepal, Bhutan and Bangladesh. Bhutan is currently exporting over 75 per cent of its hydropower generation to India and earning large sum of its revenue. Bangladesh already imports 660 MW of electricity from India and is looking to up that figure to 1000 MW in the coming years. However, the rate at which both of these economies are growing, eventually they will look for more. Unleashing Nepal and Bhutan’s renewable energy potential could then, prove crucial in mutual economic growth of all four neighbors. After India, Bangladesh's plan to invest in hydropower projects in Nepal and Bhutan is indeed an important development in this regard. It is also a win-win situation for the participating countries, because huge investments required for such projects may be a constraint for a sole investor in many cases.

For instance, Indian firm GMR has been struggling to manage huge investment required for ambitious Upper Karnali (900MW) hydroelectric project. If a Bangladeshi company joined hands with GMR to invest in the project, complete it successfully within estimated time and transmit to Bangladesh using Indian transmission system, it will be historic achievement. This is just one among many exciting prospects, mutual and clean energy cooperation among BIMSTEC members could hold.

The deeper integration among BIMISTEC countries through renewable energy cooperation will make us depend more on our own markets for trade and growth. The existence of complementarities in production and exports of renewable energy among BIMISTEC countries holds the potential for a win-win cooperation. In this integration, India will become a gateway to other South Asian economies such as Nepal and Bhutan. Similarly, Bangladesh can become a hub around which infrastructure of the eastern region of South Asia will be realized.

When BIMISTEC countries complement each other perfectly in terms of resource and technology, it will lead to stable and secure energy supplies, which can promote sustainable growth throughout the region. But this will be gradual process, which will require all member states to take the first decisive step in the direction.To begin with, a shift towards the use of low-carbon energy resources and diversification of the energy mix are required to enhance energy security, reduce environmental impacts, especially air pollution, and meet global commitments pertaining to climate change. Addressing these energy challenges must be an integral part of the implementation of the 2030 Agenda for Sustainable Development, including ensuring access to affordable, reliable, sustainable, and modern energy for all.

The vision of a green energy integration will bring great benefits for all participating nations, and boost our collective regional economy. As economic and environmental costs of using fossils fuels get expensive,timely investment and shift towards renewable energy like hydropower and Solar, along with other sources like wind, geothermal and biomass will ensure clean and healthy future for the region. Only a decisive step towards renewable energy can help secure the BIMSTEC region, by preventing problems such as energy shortage and chronic health effects on the population, as well as reducing our carbon foot-prints to fulfill global commitments.

(This article was initially published in New Spotlight Magazine on Aug 16, 2018. The author can be reached at pramodrijal3@gmail.com )

Strengthening Connectivity In BIMSTEC Region For Greater Prosperity

Southeast Asian nations have achieved great prosperity within the last few decades, through an outward-looking economic strategy and intra-regional integration under the ASEAN, with member countries participating in the regional production network. However, the neighboring South Asia stagnated due to its inward-looking growth strategy, and the lack of infrastructure which results in low trade integration and regional connectivity within the region and beyond.

India's 'Look East' policy, which was formulated and implemented since 1992, is probably among early attempts made by a South Asian economy to integrate itself beyond the region. In 1996, Thailand responded with its own 'Look West' policy, formulated for mutual benefit through co-operation in trade and investment, science and technology, agriculture, tourism and education. Under the incumbent Prime Minister Shree Narendra Modi, India has taken a decisive step in the direction with an 'Act East' policy.

Currently, India, Nepal, Bhutan, Bangladesh, Sri-Lanka, Myanmar and Thailand are cooperating multilaterally through BIMSTEC platform. It aims to increase trade and connectivity between South Asia with South East Asia, particularly by integrating India's North Eastern region, Bangladesh, Nepal and Bhutan with neighboring East Asian markets.

If we go back about seven decades in history, South Asia had one of the most developed transport networks in the region. Until the end of the British Raj, the sub-continent trade thrived on the extensive network of highways, waterways and the railway links. But, after the geo-political changes in the region, there was a gradual disruption of this connectivity throughout the second half of the last century. Today, the highways, waterways and the railway links stop at the national border, dividing the region with high walls and fences even in absence of natural barriers. National security and domestic foreign policies dictate, relegating the issues of cross-border socio-cultural linkages and, traditional economic and trade relationship among the markets of people across the fences. As a result, South Asia today is one of the most underdeveloped corners of the globe, a home to the largest population living below the poverty line.

There is lot to gain from mutual cooperation and integration of economies in this region. The free flow of goods, services, labor, knowledge and capital within the BIMSTEC countries can dramatically reduce costs of factors of production, minimizing risks and challenges often faced by big businesses in the region. The collective market can enhance competition, innovation and build complementary trade relations among the nations. The rising middle class population, one of the biggest in the world, offers a lucrative market that could reduce external shocks due to instability in the global market.

The interdependence among BIMSTEC countries have been increasing, especially between India and Bangladesh, India and Nepal, India and Bhutan, Bangladesh and Myanmar and Myanmar and Thailand. There exists a complementary relationship between these countries in energy, trade, investment and market access.

Over the last decade, the hungry Bangladeshi economy has been growing at a stable rate of 6 per cent. Naturally, the surge in the FDI leading to rapid expansion of manufacturing sector has created an energy deficit in the country, and the demand for power will only increase in the coming years. These industries employ hundreds of thousands skilled, semi-skilled as well as unskilled labor, who have together formed a backbone of Bangladesh's new economic prowess. The unemployment rate has remained at a relatively stable rate over the last decade, bringing macro-economic and political stability.

Therefore, Ministry of Power, Energy and Mineral Resources of Bangladesh has been seriously considering energy imports from the neighborhood to keep its economic engine running. It has recently signed Power Trade Agreement (PTA) with Nepal to import renewable energy. Bangladesh has proposed to invest USD 1 billion in Nepal's hydropower sector to import thus produced electricity for its own consumption. Nepali side has welcomed this proposal as the existing hydropower generation potential in the country is much more than Nepal's consumption capacity and will need an international market. But that alone is not sufficient. A successful trans-boundary energy trade requires convergence of energy policies among neighboring countries. This means, countries that host trans-boundary energy transmission infrastructure must set aside their narrow diplomatic pursuits and political differences, and work closely to help develop necessary infrastructures for the connectivity.

Bangladesh and Nepal do not share common international border, and will therefore need to use transmission system of India to trade electricity with each other. During Bangladesh’s Prime Minister Sheikh Hasina’s visit to India in April 2017, the latter expressed its commitment to play facilitative role in transferring electricity from Nepal to Bangladesh. This commitment by New Delhi would also be in consistence to Framework Agreement for Energy Cooperation signed by SAARC member countries, including India, during the Kathmandu Summit in 2014. The framework agreement requires member countries to guarantee non-discriminatory transmission access for cross-border electricity trading among other member states. Bangladesh is already keen to import electricity which will be generated from the under construction Upper Karnali Hydroelectricity Project (900 MW) which is being developed by India's GMR company. Both, Bangladesh and Nepal are establishing power trading companies in their respective countries to facilitate energy trade in the near future.

The convergence of economic policies of Bangladesh, Nepal and India, especially in the areas of energy, trade, transportation and communication could unleash immense potential to integrate the sub-region for mutual benefits. In this regard, the growing economic interdependence between India and Bangladesh could act as a fulcrum, possibly for entire BIMSTEC region, bringing prosperity and peace to people living in this block by harnessing human and natural resources.

For India, a well-developed energy market in Nepal also offers an opportunity to expand its manufacturing sector, shifting the industries that consume large amount of electricity and water into Nepal's government hosted Special Economic Zones (SEZs). Thousands of skilled, semi-skilled and unskilled Nepali men and women, migrating to Malaysia, Qatar, Saudi Arabia, UAE and other countries, could instead prove an attractive and competitive workforce for Indian industries in Nepal.

For Nepal, the money earned from energy trade as well as hosting Indian industries will not only help to bring down trade deficit and improve balance of payments, but also increase its stagnant growth and create new jobs in the economy, which will help to reverse migration of the manpower.

The energy cooperation between the two countries will help India in meeting its demand during the peak hours in the summer, when the melting snow-fed rivers of Nepal offer peak energy generation potential. By promoting its energy consumption in favor of renewable sources, India will reduce dependence on thermal and nuclear power plants. This will significantly reduce India's carbon foot-print, contributing to fulfilling its international commitments on Nationally Determined Contributions (NDCs), including Paris Accord.

Bangladesh already imports 600 MW of electricity from India and is looking to up that figure to 1000 MW in the coming years. There is also a plan to build an oil and gas pipeline between the two countries that will further boost mutual cooperation between two emerging economies. Additionally, there is a plan to set up a pipeline from Numaligarh refinery in Assam, which will boost supply of diesel into Bangladesh.

Meanwhile, there is also an ambitious plan to lay 6900 km pipeline that will bring in Myanmar’s natural gas into India and Bangladesh. The project promises to bring mutual benefits to all three countries. In the long-run, the project will spurt new discoveries of natural gas reserves in Myanmar, since the limited natural gas reserves in Shwe region is not sufficient to sustain long-term supply. This is because, the gas reserves in Shwe region is already being extracted to supply to China under their bilateral trade agreement.

Similarly, land transport is another important factor in accelerating deeper economic cooperation among Nepal, Bhutan, India and Bangladesh with Myanmar and rest of South-East Asia, as it reduces the cost of international movement of both goods and passengers. The concept of Asian Highway and Trans-Asian Railways, connecting Bangladesh, China, India and Myanmar could be crucial for mutual economic benefits in this region. The huge expansion of roadways and railway networks in India and Bangladesh already offers basic infrastructures for establishing an intra and inter-regional transport connectivity. The recent announcement by Prime Ministers of India and Nepal to build railway links from Raxaul to Kathmandu will only contribute to expanding this connectivity. Additionally, there was an agreement to open up inland waterways between India and Nepal, which will give the latter additional access to sea that will boost up trade and investment. Once Nepal is connected to Bangladesh and South-East through these means of transportation, it will open a new market for both Nepal and other BIMSTEC countries. There will be greater flow of goods and services within the region, particularly inflow of Buddhist tourists from Myanmar, Thailand, Laos, Cambodia, Vietnam and other countries into Nepal. Additionally, Nepal will benefit from greater possibility of foreign investment, which is much needed for kick-starting stagnant growth and creating jobs in the country which has suffered from a decade of violent conflict and another decade of political instability.

It is indeed a pity that this potential has largely been untapped and the land connectivity within BIMSTEC region remains fragmented. Changing the mindset of political leadership in respective countries, to support the strengthening of transport linkages for smooth movement of people, goods and services across the BIMSTEC region will be fundamental to unleashing the immense potential that we, as a region hold. It is a good news that the present Indian government has pushed 'Act East' Policy which will contribute to this vision and goal. The trilateral highway, which is under construction and connects India-Myanmar-Thailand is expected to be completed by 2019. It will boost trade, commerce, and tourism ties of South Asia with South East and East Asia. The highway will also be crucial for the development of India's North Eastern states, which strategically borders countries like China, Nepal, Bhutan, Bangladesh and Myanmar- but has largely remained isolated from India's development mainframe.

The Jamuna Multi-purpose bridge, also known as Bangobandhu bridge, which was constructed in 1998, is located strategically on the Asian Highway and Trans-Asian Railways, which when fully developed could connect Bangladesh, India and Pakistan, with South East Asia in the East and with Central Asia, West Asia and Europe towards the west. The bridge could also offer an additional viable access to sea for Nepal and Bhutan, through a land route to the port of Chittagong. It will reduce increasing pressure in Kolkata port.

India has denied transit facilities to Nepal and Bhutan for sending their goods overseas through Bangladesh, and Bangladesh has also denied transit access for efficient movement goods to and from India's North-East. If these barriers are removed, it would enable India, Bangladesh and the all the BIMSTEC countries to trade goods across the region at much lower costs. India will be able to cater to its North Eastern population more efficiently, while Bangladesh could benefit from substantial freight and port charges from Chittagong and Mongla ports. This integration of the transport network alone could increase intra-BIMSTEC trade by several times!

Similarly, Western Myanmar, which has a border with Bangladesh, is separated from the rest of Myanmar by the Arakan Mountain range. The hinterland of the Chittagong port could be stretched up to the foot of the Arakan Yoma. The road will help to reestablish the historic link between Ghumdhum on the Bangladesh side and Tumbro on the Myanmar side. This traditional trade route, could then eventually be connected with the Asian Highway (AH) that links upto Southeast Asia. And finally, the proposed bridge over the Palk Strait between Talaimenhar in Sri Lanka and Dhanuskodi in Tamil Nadu will complete the connection of the BIMSTEC region.

The deeper integration between South and Southeast Asian economies through BIMSTEC will make them depend more on their own markets for trade and growth. There will be increased intra-regional trade within South Asia and South-East Asia as well as boosted inter-regional trade between the two. Collectively, the participating economies will benefit from induced trade and reduced dependence on distant markets, cushioning them from the external shocks of global economy. The existence of complementarities in the production and exports of goods and services between the two regions also holds the potential for a win-win cooperation.

But, in this integration of the BIMSTEC countries, India's North East region will become a gateway to other South Asian economies such as Nepal and Bhutan. Similarly, Bangladesh can become a hub around which reconstruction of land links connecting transport infrastructure of the eastern region of South Asia will be realized. Bangladesh once had a major highway linking central India with both north Bengal and north-east India. The revival of this historic trade route would provide north-east India access to the sea through the Bay of Bengal and integrate its market with Bangladesh, making this less-developed region an important trade link within South Asia and beyond. The Chittagong port could be built up as the nodal point for handling the region’s trade.

If and when realized, this vision of integration among BIMSTEC countries will produce great benefits for all participating nations, boost our collective economy, and create a single largest market in the world. And this is completely doable, with just a little political will on all sides. For much of the last century, nations and governments in this region have engaged in a diplomacy that was driven by a military security interests. This has come at a great human cost: poverty and lost opportunity for development. We must all work to change this, and ensure our respective governments engage in a diplomacy that centers around human security, through greater trade and economic integration in the BIMSTEC region.

(This article was initially published in New Spotlight Magazine on Aug 16, 2018. The author can be reached at pramodrijal3@gmail.com )

More power to Nepal-Bangladesh ties

Bangladesh is growing at an average rate of six per cent for the last decade with relatively stable political environment. New industries and international business ventures have contributed to healthy manufacturing sector, establishing thousands of industries across different parts of the country. These industries employ hundreds of thousands skilled, semi-skilled as well as unskilled labour, who have together formed a backbone of an emerging economy. Naturally, Bangladesh's economic hunger has led to a sharp increase in its energy consumption and the demand for electricity is growing faster than any time in the nation's history. A study called Bangladesh National Conservation Strategy suggests, by 2030 the electricity demand in the country will be around 34,000 MW. 

Currently, Bangladesh generates over 15,379 MW of electricity; mainly through gas fired thermal power plants, which will gradually decrease after 2018. Therefore, Bangladesh government formulated Power System Master Plan that has given sufficient attention on importing renewable energy from neighbouring countries as it is not possible to produce clean energy on large scale due to lack of appropriate land. There is still a shortage of around 10,000 MW, which could double over the next decade as the industrial structure changes from labour to energy intensive and it is hoping to become a member of High Income Countries by 2041.

In order to fulfil its energy demand, it imports 600 MW of electricity from India and has signed a Power Purchase Agreement with India to import additional 60 MW from Tripura state. Similarly, a joint venture company of India and Bangladesh is developing 1,320 MW thermal power station in Bangladesh. There is already a plan to build an oil and gas pipeline between India and Bangladesh that will boost mutual cooperation between these countries, and another ambitious plan to lay 6,900-km of pipeline that will bring in Myanmar's natural gas to both the countries. The projects promise to bring the two South Asian economies closer, by fostering mutual interdependence. This is good news for Nepal, which is looking to expand its energy market in South Asia.

Despite Bangladesh's aggressive pursuit for economic growth, the government in Dhaka is also under pressure to reduce its dependence on fossil fuel to increase contribution of renewable energy sources for both long-term energy security and environmental sustainability. The rate at which the economy of Bangladesh is growing, and the importance being put on clean source of energy, will eventually prompt Dhaka to look towards Nepal and Bhutan to fulfil its clean energy deficit. This will not only fulfil Bangladesh's energy demand but also protect it from vulnerability due to climate change due to greenhouse gas emission. 

Ministry of Power, Energy and Mineral Resources of Bangladesh has already shown interest in importing electricity from Nepal by sending an official letter to Ministry of Energy in Kathmandu, for signing a mutual Power Trade Agreement (PTA). Bangladesh has proposed to invest $1 billion in Nepal's hydropower sector to import thus produced electricity for its own consumption. The Nepali side has welcomed this proposal as the existing hydropower generation potential in the country is much more than Nepal's consumption capacity and will need an international market. But that alone is not sufficient. A successful trans-boundary energy trade requires convergence of energy policies among neighbouring countries. This means, Nepal needs to engage closely with India for facilitating trans-boundary energy transmission infrastructure and help develop necessary infrastructure for the connectivity. 

As Nepal and Bangladesh do not share common border with each other, they need to use transmission system of India to trade electricity with each other by paying wheeling charges. During Bangladesh's Prime Minister Sheikh Hasina's visit to India in April 2017, India has shared its commitment to play facilitative role in transferring electricity from Nepal to power hungry Bangladesh, though there is no written document. New Delhi's position is in consistence to Framework Agreement for Energy Cooperation signed by SAARC member countries during Kathmandu Summit in 2014. The framework agreement provides non-discriminatory transmission access for cross-border electricity trading. Bangladesh is already keen to import electricity which will be generated from the under construction Upper Karnali Hydroelectric Project (900 MW) which is being developed by India's GMR company. Both, Bangladesh and Nepal are establishing power trading organisations in their respective countries to facilitate energy trade in the near future.

After the convergence of economic policies of Bangladesh, Nepal and India, a lot of positive initiatives have been taken in the field of energy cooperation, transportation, communication and other sectors to integrate the sub-region for mutual benefits. The growing economic interdependence between India and Bangladesh could act as a fulcrum in this region, possibly entire SAARC region, bringing prosperity and peace to people living in this block by harnessing human and natural resources. 

With closer cooperation, Nepal, Bangladesh and India can unleash unexplored avenues of economic integration through greater connectivity via highways, waterways and railways. This sort of integration not only increases interdependences, it also helps to foster mutual trust that guarantees peace and development. In the long-term, the cooperation among these countries has the potential to lift a large section of population from poverty, setting the sub-region into higher growth trajectory.

(This article was originally published in The Himalayan Times in February 25, 2018, and can be reached at http://epaper.thehimalayantimes.com/textview_7000_3142_4_1_20_25-02-2018_71_0.html) (It was reprinted in The Daily Observer, Bangladesh as an op-ed in March 4, 2018, and can be reached at http://www.observerbd.com/details.php?id=125551) 

On the Brighter Side

Nepal and India must keep energy sector away from their geopolitical calculations and cooperate for an energy sufficient future.

There has been much written and said about Nepal's rich water resources and its potential for harnessing electricity. Hundreds of rivers flowing down from the Himalayas can produce upto 83 GW, which not only fulfill the national energy needs but can also help in meeting the demand of neighboring nations. However, given the disappointing generation capacity of the country over last two decades, Nepal has had to import nearly 50% of the electricity from India, instead.    

In the last two years alone, Nepal imported a significant amount of electricity from India to overcome 12-16 hours of power-shortages which had brought the industries to a grinding halt, contributing to unemployment, inflation and mass exodus of skilled workforce to other countries. Dramatically, in the last 12 months industrial output has increased and the costs in the service sector has gone down. This has significantly cut the inflation rate and contributed to creation of new jobs in the economy, especially the industrial sector.

The industrial output is estimated to increase by 9.7% in the current fiscal year, according to the survey report released by Ministry of Finance of Nepal. Additionally, availability of electricity has played a key role in promoting entrepreneurship and business activities with the surge in registration of productive and energy depended industries. This shows growing confidence of private sector in the economy and has contributed to healthy economic growth rate projection of 6.79% for the current fiscal year.

The demand for electricity in a growing economy like Nepal varies from hour to hour and month to month due to shifting pattern in electricity consumption for households and industrial needs. Similarly, the availability of electricity from various sources such as hydro, wind and solar plants also depends on seasonal changes due to availability of water in the rivers, flow of wind and number of sunlight hours respectively. Until we attain a stable and surplus supply of electricity from bigger projects in the pipeline, such variations and gaps between demand and supply side could have significant impact in our resurgent economy.   

An analytical study, Economic Benefits from Nepal-India Electricity Trade, by Integrated Research and Action for Development (IRADe) has taken this into account and suggests, Cross Border Electricity Trade (CBET) between Nepal and India can benefit both countries as Nepal can import electricity from India until it can overcome the deficit, and can export the electricity back to India when the construction of its ongoing mega projects from public and private sectors will be completed, as projected by 2025. This is a mutually beneficial arrangement for the two neighbors who have lot to depend on each other for.

For India, an economically strong Nepal will not only create a viable market for its goods, it will also be an attractive destination for shifting its industries which consume large amount of electricity and require competitive workforce. Importing surplus electricity from Nepal will also further help to relieve pressure on its energy hungry economy.     

For Nepal, the money earned from energy trade as well as hosting Indian industries not only helps in decreasing trade deficit and improving balance of payments, but also in increasing gross domestic product (GDP) and creating new jobs in the economy, which will help to reverse migration of skilled manpower.

The energy cooperation between the two countries will help India in meeting its demand in the peak hours, once Nepal starts exporting the electricity. India can then balance its energy generation in favor of renewable sources, reducing dependence on huge thermal and nuclear power plants. This will significantly cut down carbon emission and contribute to India's international commitments on Nationally Determined Contributions (NDCs), including Paris Accord. 

However, to realize the boundless possibilities in energy cooperation between Nepal and India, crucial steps must be undertaken. The most prominent being, a political consensus at the domestic front within both the countries, and at the bilateral level. This means, keeping energy trade away from immediate diplomatic and geopolitical calculations. The conventional understanding that Indian interest in Nepal's hydro-power sector is guided by its strategic needs rather than energy requirements, must change for better. India can demonstrate this by investing in cross-border transmission lines and reaching out to Nepal's private power producers. 

Lack of transmission system has been one of the biggest bottleneck in facilitating cross-border electricity trade, and it is more expensive and challenging than the construction of a hydropower project due to its linear nature. Nepal and India have planned to build three different cross-border transmission lines, but have only managed to complete only one, which stretches from Dhalkebar to Muzzafarpur. Other transmission projects such as Butwal-Gorakhpur and Lumki-Bareli have remained stagnant due to land acquisition, right of the way and environmental and social concerns on both Indian and Nepali side. Both countries need to step up efforts to effectively deal with these issues without further delay.

Nepal must do its homework sincerely by expediting necessary policy reforms in the energy sector to attract both public, private and international investments. The government formulated New Hydropower Policy in 2001 to address some policy related issues, but it has yet to formulate a New Hydropower Act. As a result, we have several constraints like, a state monopoly in the construction of transmission lines in Nepal. It is necessary to have a multi-buyer/seller model to create level playing fields for all and increase efficiency in the supply chain, for both domestic consumption as well as for exports. 

Secondly, it is utmost necessary to harmonize policy, the legal and regulatory framework as the current policy and legal frameworks are primarily designed with the objective of utilizing domestic resources. As a result, they have limited provision for utilization of resources at the regional level. It causes significant challenges for financial institutions, developers for making the investment in the regional utilization of energy resources. 

At the regional level, both India and Nepal should lobby to form a competitive power market in South Asia for power trading, instead of participating governments dictating their terms, which is often guided by their geopolitical interests rather than market rationale.  A regional power sector master plan could prove very effective in ensuring energy security in South Asia, by bringing together countries that have potential for surplus generation but lack sufficient investment capacity, and the growing energy hungry nations that can help boost production in these countries and benefit from energy trade. A smart energy diplomacy is the future.

(This article was originally published in The Himalayan Times in June 25, 2017, and can be reached at http://epaper.thehimalayantimes.com/detailimageviewer.php?id=2487&boxid=3275&cid=3&mod=1&pagenum=1&pagedate1) 

Attracting Foreign Direct Investment in Nepal

The countries of Latin America, South-East Asia and Africa were initially reluctant toward foreign investment and consequently pursued a policy of import substitution until the 1970s. However, after the introduction of structural adjustment programs, many countries opened up their economies. The countries of Eastern Europe and the former Soviet Union have also liberalized their economies during the process of transition from state-controlled economies to market economies during the 1980s and 1990s. Many low income countries of the world have formulated policies to adopt Foreign Direct Investment (FDI) in order to increase economic growth and human development. Nepal also took some measures to allow FDI in the country for economic growth, such as formulating the appropriate policy and act in 1992. Nepal is in dire need of both market seeking and non-market seeking FDI because there lies a huge market for both kinds of FDI. However, the data taken from Department of Industry (DOI) shows that the flow of FDI in Nepal is not so impressive because only $95 million was attracted in the period of 21 years.

There are several factors that contribute to attracting such low volume of foreign investment in Nepal. Political and policy level instability is considered one of the main reasons because it is the pre-requisite for bringing any sort of investment. There are various bureaucratic hassles that discourage potential investors to start their business ventures in Nepal. It is even very difficult to register a company and get business visa. In addition to this, getting approval for FDI is also lengthy and cumbersome. That is why most of the Non-Resident Nepalese (NRN) bring money in the form of hundi and make investment in their projects. Although, it is illegal, they are compelled to do so to do business in Nepal. Brining money through these channels does not reflect the true financial position of a country. Besides this, financial institutions loose a large amount of money that can be earned in the form of service and other fees.

The recently introduced minimum threshold for FDI creates a hurdle for bringing such investment as investors want to start a small business in the beginning and if it works, then scale it up. Foreign investors have a hard time getting information as well because they cannot get comprehensive information from a single authority. The different officials of various ministries interpret policies and acts in different ways, either because they are unaware of the exact policies or so that they can find avenues for petty corruption. In addition, the process is very time consuming. Foreign investors have been known to lose patience during the approval process and have diverted their investment elsewhere even after getting approval. During the repatriation of profit, investors face similar administrative hassles and bureaucratic delays.

If the concerned authorities create an automated system wherever possible, the problem of delays and corruption will be resolved to some extent. It could accelerate rate of approval of FDI and also aid in repatriation of profits, consequently attracting further investment in future.

(This article was originally published on 30th May, 2013).