Siddartha Mainali on Nepal’s Macroeconomic Woes: Post Pandemic Recovery, Challenges and Recommendations for the Future

[00:00:10] - [Speaker 0]
Namaste and welcome to Pods by PEI, a policy discussion series brought to you by Policy Entrepreneurs Inc. My name is Shriya Rana. In today's episode, we have PEI colleague Aslesh in conversation with Siddhartha Maynali on Nepal's post pandemic recovery and the current macroeconomic scenario. Siddhartha is an economist with research interest in areas of macroeconomics, agriculture economics, financial inclusion, sustainable finance and ESG. He has experience working in the financial services industry and holds a PhD in economics from Peking University.

[00:00:44] - [Speaker 0]
A seasoned research professional, he has led several projects pertaining to the academic and development sectors. Aslesh and Siddharth discuss the impact of COVID-nineteen on Nepal's economy and its post pandemic recovery. They explore the macroeconomic issues faced by Nepal economy during the unprecedented days of the pandemic, along with the external shocks that followed. They also review possible fiscal and monetary policies to manage the current economic challenges and its structural limitations. We hope you enjoyed the conversation.

[00:01:14] - [Speaker 1]
Welcome to the show Siddharth. It's great to have you here.

[00:01:17] - [Speaker 2]
A pleasure of mine.

[00:01:19] - [Speaker 1]
So in today's episode, we discussed the impact of COVID-nineteen on the Nepali economy and the post pandemic recovery of Nepal. Also, want to discuss the current macroeconomic scenario of Nepal.

[00:01:31] - [Speaker 2]
Sounds like an interesting discussion.

[00:01:32] - [Speaker 1]
I want to start off the conversation by briefly discussing the impact of COVID-nineteen on the global economy. So what were the major economic challenges faced by the developed and developing countries? Could you discuss the structural limitations of developing countries that may have made the impact of COVID nineteen relatively severe for them?

[00:01:53] - [Speaker 2]
Thank you, Asles. I mean, to begin with, I think globally speaking, there was a major onslaught of a supply disruption besides health issues that countries over the world faced at that moment. I think the logistic nightmare has, smoothened out to a certain extent right now, but then there is still a lot of congestion in the global supply system. As you'll see, a major exporter, China, has just done away with COVID restrictions in this particular year. And major ports in China such as Tianjin, and I could speak of ports in Guangdong province and all, have now begun to export in massive numbers around the world.

[00:02:35] - [Speaker 2]
And this might add to more congestion in the near term, but we would expect this to smoothen out in the medium to long term. Speaking of developing countries, I think there are quite a lot of structural issues present in mostly, I would say, poor countries because you could classify even China as a developing country. So I would like to emphasize upon the term poor in this particular context. And I think the major issue of these countries first when it came to the pandemic and recovery thereof was issues to do with governance. While getting medical attention in these countries was difficult, issues to do with corruption and all further delayed these processes.

[00:03:14] - [Speaker 2]
Furthermore, the severe acute lack of capital in this particular country is caused due to economic disruptions, also slowed down the recovery process to a large extent. Other than that, these countries are were also lacking in areas of research, in the STEM fields in particular. So as a result, they had to completely rely on buying vaccines from abroad, and this also led to a capital flight from these countries to the richer part of the world, I would say.

[00:03:42] - [Speaker 1]
Bringing the conversation to Nepal now. So as a result of COVID nineteen, for first time in around forty years, Nepal faced a negative growth rate. And nevertheless, the economy kind of has recovered from that, and you can see a positive growth rate in the following years. And in the last fiscal year, World Bank projects is to be around 5.8%. Can you elaborate on what kind of post recovery policies that were implemented in Nepal so as that we've reached to this scenario?

[00:04:14] - [Speaker 2]
If you'd ask me where this money ended up, the answer is plain and simple. The money lent in the pretext of different productive sector loan products actually ended up in the speculative market. This was reflected by a booming real estate and a stock market during that period. Windfall gains and speculative income have the tendency to suit up market demand in nonessential and luxury items. And that was what happened in Nepal's context.

[00:04:37] - [Speaker 2]
For an import based economy like Nepal, this was obviously fulfilled through imports. In fact, the momentary obstruction in imports during the heat of the pandemic led to a massive rebound in imports in the post pandemic period. Also, the economy has had to face the brunt of multiple economic shocks. We had the COVID nineteen pandemic, and now the Russia Ukraine conflict has led to high inflation on the back of burgeoning petroleum prices and common edibles such as food grade oil. Naturally, this sort of our imports bill.

[00:05:09] - [Speaker 2]
This led to a high rate of decay in Nepal's foreign exchange reserves and prompted the Central Bank to introduce a contractionary monetary policy for this fiscal year. To sum it up, this has signaled a clear shift away from a focus on economic growth to a more balanced approach going forward. I would say this was a timely and a required stop gap measure. We have seen that foreign exchange reserves have recovered to comfortable figures. The reasons for these are numerous.

[00:05:37] - [Speaker 2]
Firstly, import controls have proven quite effective. Secondly, remittance has increased on upon the rebounding of foreign labor market and the diversion of informal sector remittance to the formal sector due to a lack of import demand. Thirdly, we could also consider the slight increase in tourism to be a good positive sign as far as forex reserves are concerned. But these have come at the cost of lowered aggregate demand and growth in the economy.

[00:06:06] - [Speaker 1]
So I want to further probe into the Nepali context. Specifically, you've highlighted various issues that the Nepali economy has been facing given the supply chain disruptions, rising energy prices, rising costs of petroleum. Given the economic slowdown in the current fiscal year, how does Nepal revive its growth trajectory in the shorter run maybe?

[00:06:30] - [Speaker 2]
Right now, it would be correct to say that the focus is on balanced economic growth. There is a vital need for the government to increase capital expenditure. In the short term, bank interest rates are expected to reduce in the next two fiscal quarters. Lower interest rates is expected to create demand, especially in some sectors, which have taken a massive hit, such as automobiles, which are import based, of course. With import control measures already removed, lower interest rates are likely to induce an import growth.

[00:07:01] - [Speaker 2]
Import growth will also lead to an increase in the demand for informal channels of remittance, such as hundis and nawalas. I think the pressure on our Forex of reserves is likely to remain in the short to medium term. It is very challenging times for the Central Bank. My expectation is that the Central Bank will continue to closely monitor external accounts as they have always done so, and intervene wherever necessary with appropriate macroprudential measures in the short to medium term period.

[00:07:29] - [Speaker 1]
So you did bring out points around the Hundis and Aoala, so I'll bring the conversation slightly to a different direction. I want to talk about remittances. The impact of remittances we can see in the growth of Nepal has been significant. During the COVID nineteen pandemic, we were expecting the remittances to go down significantly, but that didn't happen. And the revival of remittances inward remittances has been rapid.

[00:08:00] - [Speaker 1]
So how much of the re economic revival of Nepal can be attributed to remittances?

[00:08:08] - [Speaker 2]
To begin with, I'd like to say that although people couldn't really move out of Nepal during the COVID nineteen pandemic period, at least during the onset period, I would say, but there was a large float population of levers from Nepal. Workforces from Nepal were already in labor destination markets. Although they were affected, work was still going on. The economies were still running. The economies hadn't come to a standstill, I would say.

[00:08:34] - [Speaker 2]
So they were still sending money to Nepal, and because, Nepal did not really have input pressure during the COVID nineteen pandemic period, we saw that the forex reserves actually increased to a large extent during that time. But after the pandemic period or rather after vaccinations came through and, the pandemic came into control, the labor market actually rebounded. A lot of people left Nepal again to the extent of which there was a time when, there were as many as 50,000 people leaving Nepal in a single day, and that led to a rebound in the inflow of remittance. The current inflow of remittance, the large growth in remittance that we are witnessing, as I mentioned earlier, is also because there's been a diversion of informal sector remittances to the former channels. That is to banks and, remittance companies that are arriving in Nepal as of the moment.

[00:09:26] - [Speaker 2]
Nepal, as we all know, is quite dependent on remittance inflows. It actually drives a lot of consumer demand in Nepal. And as you to answer your question, I would say a lot of our recovery, at least when it comes to consumer spending, when it comes to bolstering the loan market and all, when it comes to buying of electronics, when it comes to construction at the household level, remittance has a lot to contribute in those matters.

[00:09:53] - [Speaker 1]
So now we can take the conversation into discussing the current so called liquidity crisis because you mentioned loan markets. I'd like to bring in the conversation about the current lack of liquidity in the banking sector. So even though in recent months, as you pointed out, the interest rates have been decreasing, the borrowing rates for businesses is still quite high. So how does the government or how does the central bank tackle this situation that businesses are not being able to use the available capital in the market?

[00:10:33] - [Speaker 2]
Let me begin by getting into trends in history. As you'll see, the banking industry in Nepal has actually faced recurring episodes of shortages of loanable funds. I would stop short of calling it a liquidity crisis. There's a difference between those two. Banks are still looking.

[00:10:50] - [Speaker 2]
Otherwise, you wouldn't be able to withdraw your money from banks. Checks are still clearing. Payments are still happening. Currently, the banking industry has the capacity to inject more than 200,000,000,000 rupees of loans in the market. That is considering, average CD ratio, industry CD ratio of 86%.

[00:11:07] - [Speaker 2]
However, this is expected to exhaust within a couple of months in the event that the loan market should rebound. Historically, this is a market which has portrayed loan growth even at massive interest rates of 17 to 20%. This was the context around 02/2011, 02/2012. Currently, the real issue is lack of demand for loans in the market due to high interest rates, which is coupled with high inflation rates. It would be safe to say that the purchasing power of households with fixed income has decreased due to inflation, and this has led to the postponement in the demand for retail loans.

[00:11:43] - [Speaker 2]
Similarly, segments were relatively liquid have been presented with a slew of annuity based products to invest in. I'm talking about households with savings. Some of these products actually promised doubling of principal amounts invested in certain time periods. And, I mean, this is new for the Nepalese banking industry per se. My belief is that people have taken the opportunity to invest in these products rather than buy a new car or construct begin constructing a new home, for example.

[00:12:12] - [Speaker 2]
What I'm trying to say is people have actually postponed their consumption decision due to lucrative investment opportunities presented to them. And when these are actually coupled up with long term maturities. As you will see, these products have maturities extending from five to ten years even. So banks are actually locking capital in the systems for quite a long period. In the past, you would only see fixed terms, fixed deposits and term deposits, which would actually pay interest, which is quite liquid in a monthly or a quarterly basis.

[00:12:45] - [Speaker 2]
People were actually free to spend this money. They were actually free to utilize this money in consumption decisions, in buying decisions. But then the issue with annuity products is even the interest earned from the principal amount is actually capitalized. So this has actually held back capital in the banking system. And like I said before, led to postponement of investment or consumption decision.

[00:13:11] - [Speaker 1]
So as you pointed out, at the current scenario, there seems to be a reduction in aggregate demand or we can say postponement of aggregate demand. So to generate additional demand, how can the government tackle this scenario, or how can the central bank bring in reforms to tackle this?

[00:13:32] - [Speaker 2]
In the short term, the central bank has already intervened with measures to reduce the interest rate spread of banks, to be particular, commercial banks. I think the spread, to be more clear, the spread is the difference between the weighted average rate returns on assets and liabilities of banks. And as the regulation goes, banks are actually required to reduce interest spreads on their portfolios from 4.4% to 4.2% by mid April, and then subsequently to 4% by mid July of this fiscal year. So the spread is actually going to be the effective spread is actually going to be 4% by the end of this particular fixed fiscal year. So this is obviously going to transform into lower interest rates for borrowers.

[00:14:21] - [Speaker 2]
Similarly, in the medium term, banks could look to diversify their income sources. Barring a few banks, a majority of banks in Nepal rely on interest income. I think there needs to be a shift in the structure of income for banks. There needs to be a massive shift to commission based income and fee based income. I think there are plenty of opportunities in transaction banking, payments, and digital banking that could lead to such a scenario.

[00:14:52] - [Speaker 2]
Also, think banks need to diversify the sources of deposits of funds. Some banks are currently pursuing external commercial and borrowing as an alternate means. These would be direct loans from the likes of multilateral institutions, bilateral institutions, and investment firms. Most of the banks in Nepal are actually sourcing funds from development banks, bilateral developed banks, multilateral development banks, well as investment vehicles registered in advanced markets. In the longer term, I think we need to create a conducive environment for the growth of capital markets.

[00:15:31] - [Speaker 2]
A vibrant secondary market for the trading of capital market instruments is a must. Similarly, I think, currently, the financial market, the sub market is actually dominated by banks and financial institutions. There needs to be a change in that particular structure. We really welcome real sector companies, manufacturing outlets, and so forth in the financial markets. There is to be a lot of IPOs.

[00:15:57] - [Speaker 2]
What I'm trying to basically say is companies in the market, established in the markets, establishments in the market should actually look to alternate resources of funding their investments. To be frank, the government has a lot in its hands.

[00:16:12] - [Speaker 1]
Given that the government has a lot in its hands, and I'd also say the central bank itself has a lot in its hands. So we looking at the recent trends, the Nepal Rastra Bank's claim on banks and financial institutions is predicted to be over five times the pre COVID levels. Could you elaborate on what this implies specifically for the banking sector?

[00:16:40] - [Speaker 2]
This implies several things. I think you're probably referring to the fact that an Arabic claims have actually risen exponentially Yeah. Since the pre COVID levels. I think, it was about seven point four eight billion Yep. During COVID, and then this increased to, I think, round about $122,000,000,000 in fiscal year end twenty twenty one and further increased to about $270,000,000,000 now.

[00:17:05] - [Speaker 2]
Right? Yeah. Yeah. Okay. But this this actually implies several things.

[00:17:09] - [Speaker 2]
To contextualize, the government is borrowing heavily to fulfill the fiscal deficit. Ideally, this should have been utilized for capital expenditure only. But, unfortunately, in our case, much of this internal borrowing is actually being used to fund current expenditure too. Also, banks in Nepal are investing heavily in government securities due to a mandatory requirement. With increased capital volumes on a year over year basis, they are capable to invest larger amounts with the government every year.

[00:17:43] - [Speaker 2]
Banks are also currently sort of alternative avenues due to the lack of demand for loans, and they're placing funds in central bank instruments. It's as simple as that. And now to come to the main point. The current dynamics has also created an opportunity for arbitrage for banks. How this work is banks normally place government securities in order to borrow from the central bank at the bank rate or the policy rate.

[00:18:10] - [Speaker 2]
In Nepal's case, banks have been presented with the opportunity where they can make an easy income on interest rate by borrowing from the Central Bank at a lower interest rate and reinvesting those figures in government securities at a higher interest rate. This is also a major reason why the claims of the central bank on banks has actually risen exponentially in the immediate period.

[00:18:37] - [Speaker 1]
So it's only an alternative route for banks to make more profits.

[00:18:42] - [Speaker 2]
Exactly. Exactly.

[00:18:44] - [Speaker 1]
That is very interesting. You've pointed out an interesting dynamic in your last answer. We're talking about the lack of fiscal discipline in Nepa. We can see that most of the internal revenue goes on utilization for recurrent expenditure rather than capital expenditure. And for the capital expenditure, we have borrowings from mostly loans now.

[00:19:07] - [Speaker 1]
So what are the underlying factors that has led to Nepal being in this situation?

[00:19:15] - [Speaker 2]
I mostly blame internal inefficiencies to begin with. As you'll see, we have a large bureaucracy that the government is located to. Similarly, we have large, security forces too. The government actually is also spending a lot on so called social security benefits, which is increasing year on year. Similarly, there's been a trend where governments are actually announcing a lot of populist programs, mostly targeted towards elections.

[00:19:47] - [Speaker 2]
In Nepal's context, I think to a certain extent, the political structure that we've adopted. This particular structure is proving to be very expensive for Nepal. We need to cut down on costs. There needs to be ousterity measures in Nepal. There's a requirement to take hard decisions.

[00:20:07] - [Speaker 2]
I think much of this boils down to political stability in the country. Nepal is a country which is actually polarized on the basis of politics right towards even to the grassroot level. However, the need of the hour is that there needs to be a national consensus when it comes to economic policy. Hard decisions need to be taken. Someone has to do it.

[00:20:30] - [Speaker 2]
Someone or the other has to do it. I know this is there's quite a lot of risk for policymakers when it comes to taking decisions like this. You tend to really, you know, get in the negative books of a lot of status and segments in society. However, this is an absolute must for Nepal as of the moment. I think, the right approach in our context would be to take these hard decisions and to remove the inefficiencies.

[00:20:55] - [Speaker 2]
As I said, we need to introduce ostro duty measures. We need to do over with facilities. We need to do over with grandeur. We need to be we need to start be behaving like a developing nation that we really are. We may be a whole nation, but like I said, let me repeat that again.

[00:21:14] - [Speaker 2]
We need to get away with grandeur, we need to reduce. We need to reduce on facilities, and we need to introduce a lot of austerity measures when it comes to, especially, maintaining a bureaucracy, maintaining government officials of other sorts, and maintaining the political class.

[00:21:39] - [Speaker 0]
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[00:21:52] - [Speaker 0]
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[00:22:23] - [Speaker 0]
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[00:22:34] - [Speaker 1]
So these issues that you've pointed out mainly focus on the recurrent expenditure. But how do you look at the dismal capital spending that Nepal has in looking at the last five years?

[00:22:50] - [Speaker 2]
I think when it comes to capital expenditure, I think foremost, it's important that governments are fund on time. There are right people placed at ministries at the right time. Contractors in Nepal's context particularly need to be paid on time. And when contractors are actually paid on time, this money actually trickles down into the economy, into the grassroots through laborers, through associated economies around projects. What I'm trying to say is Nepal's capital expenditure should be infrastructure driven.

[00:23:21] - [Speaker 2]
We have that right. But then these projects need to be completed on time. And for that to happen, contractors should be paid on time. We should be able to reform our procurement procedures. Other than that, I think we need to smoothen our logistics so that these projects actually commence in time, conclude on time, and lead to the benefits as soon as possible.

[00:23:47] - [Speaker 1]
Now I'd like to turn our attention to a very recent policy dilemma that the central bank and the government faced. NEPA imposed a luxury good ban on April 2022, which extended till December 2022. This kind of did recuperate certain foreign exchange reserves as you pointed out in the beginning. However, this has led to a reduction in our internal revenue collections. Basically, we can see that last month, the government had to downsize its budget by 13.5, I.

[00:24:29] - [Speaker 1]
$240,000,000,000 Nepali rupees. So how does the government or how does the central bank create a balance between maintaining the foreign exchange reserves while also having a significant amount of revenue collections?

[00:24:49] - [Speaker 2]
I'm sorry to say this, but I think, Ghazalis, there is no easy answer to this. If we look at Nepal's context, I think, successive governments have pursued populist policies, like I mentioned before. It would be quite correct to say that the budgets in all of these instances were actually inflated to begin with. It is quite unfortunate that we have leaders who rely on brand of soul manship and personal gain rather than concrete long term national benefit. Well, having said this, keeping a balance between healthy external accounts and adequate revenue is a challenge in Nepal due to several structural issues, structural issues which can only be fixed with multiple years of long term planning.

[00:25:27] - [Speaker 2]
Well, there could be some possible ways to actually increase internal revenue sources. Think one of them at the individual level is to increase the tax net. See how tax policies promote a self declaration system. There's a need to reform tax disclosure processes at the proprietorship and partnership levels. These include professional firms, such as law firms, accountancy firms, medical clinics, off licenses, and so on.

[00:25:58] - [Speaker 2]
I think at the broader level at the from the macroeconomic perspective, at customs level, there's a need to control on the invoicing. First is, the government will have to come up with a slew of measures and to also to come up with a mechanism to control Hundi practices in labor destinations. I think remittance inflows should be provided with even higher premium interest rates on deposits in the banking system. Right now, there's a premium for 1% provided to remittances. I think I'm I'm of the personal opinion that should be further increased.

[00:26:28] - [Speaker 2]
And also, the cost of remittance transfers through banks should be minimized to the extent possible, as Nepal's banking channels for remittances is actually considered among the most expensive for fund transfers within South Asia. Think in the longer term, Nepal needs to boost economic activities. For this particular purpose, I think, it is best to answer this from the perspective of new structural economics. To summarize, I think we need to figure out what our competitive advantages and competitive advantages are. In my personal opinion, in Nepal's case, this could be the tourism industry, for example, mostly in the services side.

[00:27:14] - [Speaker 2]
So that would include tourism, like I said, and certain portion of the gig economy. For example, those providing accounting services, coders, software developers, quote specialists, machine learning specialists, data analysts, those operating animation studios. All these sectors could actually bring a lot of capital into the country. Similarly, we could also attempt to incentivize and bring in outsourcing companies into Nepal to operate in our domestic economy. Similarly, I think, I'm also of the opinion that for power exports to actually fructify, it is absolutely necessary that we actually bring in Indian investment into our power sector.

[00:28:06] - [Speaker 2]
I think what we're doing with our own project and its related casket projects and a few other projects that have been awarded to Indian developers is the way ahead. Because when we pull in Indian developers into a power sector, this is automatically going to lead to a market to sell that generated electricity into. It's as simple as that. And now I think what is also important is the fact that, we can have companies here. We cannot always rely on foreign companies to do our work for us.

[00:28:40] - [Speaker 2]
And if we were to establish companies, it is quite important that we get into strategic alliances with foreign companies. That is to bring their expertise into Nepal, to train our managers, our technicians at the individual level, and to have that translate into institutional capabilities. What I'm simply saying is to begin with imitation and then gradually move on to innovation. I'd like to stress upon the word gradualism. Why I am saying gradualism is because these things don't happen overnight.

[00:29:18] - [Speaker 2]
It might be decades before these things actually fructify.

[00:29:22] - [Speaker 1]
So, obviously, we are going to require a lot of capital if you are to do things that you've mentioned. So how important is it to bring changes to our foreign direct investment policies, which we have at the moment?

[00:29:41] - [Speaker 2]
When it comes to FDI, I think Nepal has everything in place. Now don't get me wrong. What I'm trying to say is Nepal has the policies in place, but implementing those policies is another story. We have layers and layers of bureaucracy that FDI investors, would be investors, still have to go through in order to actually ensure that they have a project up and running in Nepal. As some investors actually said with me, it's actually absolutely impossible to actually invest in Nepal without a local partner.

[00:30:15] - [Speaker 2]
Now in many contracts around the world, even in India, a lot of countries abroad, Korea, Japan, all places, I think working with local investors is always a good idea to come out of the complexities. But what I'm trying to say is, I think, even when it comes to repatriating profits, when it comes to repatriating dividends, there's quite a lot of delay in Nepal's processes and systems. So what I'm trying to say is while we have the institutions to facilitate FDI in place, we also need to ensure that these institutions are actually efficient and serving the purpose that they have been established

[00:30:52] - [Speaker 1]
for. Given that you've pointed out various inefficiencies and issues regarding attracting FDI into Nepal. Can remittances be an alternative solution?

[00:31:06] - [Speaker 2]
That's a very interesting question, Hosgesh. As far as our demographics is concerned, our median age is about 25, which means at least your and my generation is safe. What I mean to say is I think we have about another fifteen to twenty years in which time the the current population, the way it's structured, will continue to send in remittance into Nepal. Having said this, we still need to figure out new destinations, segments that we can send our labor force into. For example, there's quite a lot of, Nepalese, citizens actually working in The Middle East in the services industry, especially retail.

[00:31:48] - [Speaker 2]
That would be a good sector to get into. There's quite a few Nepali people actually working in the financial industry abroad, in The Middle East, in countries like Rwanda, Uganda, as far as even Myanmar, Cambodia, Vietnam, I hear, Papua New Guinea even. And I think when it comes to new destinations, this Nepal Nepali level force has actually made inroads into places, such as East Europe. They're actually going into temporary visas with temporary visas, work visas into places such as The UK, even Japan. South Korea is a good destination.

[00:32:28] - [Speaker 2]
We are actually also in the cusp of sending in medical professionals to places like Japan, even places like The UK, for example. So I think, we need to keep exploring new avenues. We need to keep exploring new destinations as well. This is the only way we can secure sustainable flow of remittance in this country for the next two or three decades or so.

[00:32:51] - [Speaker 1]
So interesting that you pointed out various avenues that the Nepali population is looking into to increase remittances inflow, which is acting as an alternative source of investment. What other sectors do you see that can bring in further investments into Nepal and can increase the rate of economic growth?

[00:33:19] - [Speaker 2]
I've mentioned that Nepal's focus needs to be in the services sector before. And within the services sector, I think tourism has a great potential, we've always been speaking about it. We have large markets to the North and the South, for example, but then what we're really lacking in is infrastructure. We cannot have someone traveling 200 kilometers from government to to go through through such dangerous road conditions out for eight hours for a short distance. We really need to boost our infrastructure quality.

[00:33:50] - [Speaker 2]
We really need to bring in a lot of tunnel highways. We need to bring in expressways. There needs to be more connectivity, regional airports. We need to look into connecting regional cities in India, in China, for example. We need to further diversify our products.

[00:34:11] - [Speaker 2]
We can always rely on Lumbini, Pohra, Kathmandu, and Chitwan for all of our tourism needs. And believe me, tourists don't come to Nepal simply for adventure only. We we we should be able to attract tourists for other other reasons, or other facts too. For example, I think we have a real potential when it comes to filmmaking in Nepal. That is one sector.

[00:34:37] - [Speaker 2]
Tourism as a brand in Nepal could be promoted from the perspective of spirituality too. So there needs to be alternative products. We need to rebrand our tourism in that particular manner. Now having said that, I think one of the major hindrances to bring in tourists from third countries besides India and China and Nepal is the cost of flying into Nepal. Nepal is poorly connected.

[00:34:59] - [Speaker 2]
Well, believe me, Nepal is poorly connected, and aviation fuel prices in Nepal are among the highest in the world. So if you have somebody with the potential to spend a lot in Nepal, actually fork out twice the amount for the airline ticket that they booked to fly into Nepal, It's natural for them to actually spend less when they are here in the destination itself. And it's also important that we preserve our tourism assets. We cannot destroy our tourism assets in the name of development. Development needs to be sustainable.

[00:35:36] - [Speaker 2]
Whatever development we actually ensure in areas of tourism, for example, needs to actually take into community needs into account. The community should actually be inserted. They should be brought in to the development process itself. Other than that, we should try and promote the opening of more international hotel chains in Nepal. And also, we should also focus on improving our national flag carrier.

[00:36:09] - [Speaker 2]
There should be course sharing arrangements between Nepali International Airlines and other airlines around the world to to bring in more tourists into Nepal.

[00:36:20] - [Speaker 1]
So you've highlighted various policies that can reform the tourism sector, but one important thing was investment in infrastructure that is required. Recently, Nepal has built two new in international airports, but we can see they're being utilized very scarcely. So given that these infrastructures were built utilizing foreign debt, and given that the in the past ten years, we can see a rising debt scenario, especially of external loans. How sustainable is this practice if you're talking about the long run?

[00:37:05] - [Speaker 2]
I think to begin with, I would say we're lucky because we're poor. We're poor, and because we're poor, we actually attract a lot of soft loans. So as long as the loans that we receive have low interest rates, it's not much of a problem. And the fact that we're a developing country actually aids in this scenario. As far as infrastructure is concerned and connectivity is concerned, think, the two airports that you mentioned, Raju Laporte planning.

[00:37:38] - [Speaker 2]
But as like I said, think infrastructure is not for the short term. Whenever you build infrastructure, you should actually take into account scenarios for the next fifty years, for example. And you should also put in facilities where you can actually create expansions if required. When it comes to the stock of foreign debt in Nepal, it's pretty low. Okay?

[00:38:01] - [Speaker 2]
Nepal is currently the third most, favorable location when it comes to debt statistics in South Asia. The current debt to GDP ratio is slightly over 40, out of which 21% is domestic debt. So when it comes to foreign debt, Nepal is still in the lower side. But then, like I said, not all of these infrastructure and connectivity projects need to be funded by foreign capital. We still look to alternative ways to raise capital, and then a prerequisite for that would be to develop the capital market.

[00:38:34] - [Speaker 2]
I think the most ideal situation would be if we could use remittance money for our development activities. I think the government has floated remittance bonds for that, but unfortunately, they've been very poorly subscribed. So there needs to be a lot of awareness campaigns. So if you could somehow divert remittance inflows into development activities for a certain returns to beneficiaries, that would be the ideal situation. Or otherwise, if we actually you know, in the near future, if Nepal gets promoted to middle income status, if you are no no longer developing country, that in that particular context, it could be quite difficult to manage the stock of debt.

[00:39:18] - [Speaker 2]
But I don't see that happening in the near to medium term. Even if such a scenario should occur, it would actually occur in the longer term. And then I think to conclude on this particular point, I would say a lot of planning needs to get into making infrastructure, building infrastructure. And I think, in my personal opinion, properly planned infrastructure outweighs the benefits outweigh the negatives in the longer term.

[00:39:46] - [Speaker 1]
Now that we are coming towards the end of our conversation today, we have discussed various issues, various challenges that, our economy is facing. You've also pointed out various policy solutions. So, to end the conversation, do you have any final recommendations, policy recommendations for Nepal for the longer term growth?

[00:40:09] - [Speaker 2]
I think, Nepal is a very unique country, in the sense that we're landlocked. I think for Nepal to really develop in the longer run, the focus should be on getting land linked. We should be able to invest a lot in connectivity projects. And this would not only be on infrastructure, not only on physical projects, but also on digital connectivity. I think we can really focus on the four sectors that I've mentioned before, which fall within the services segment for longer term growth in Nepal.

[00:40:42] - [Speaker 2]
I think for now, when it comes to pressures on foreign exchanges and all, it is these four sectors that should be relied upon to relieve the country of those pressures. Let me recollect those sectors for you. I said tourism is one. We should focus more on repentance. We should focus on reviving a gig economy and outsourcing sector.

[00:41:09] - [Speaker 2]
And then finally, we should also try and export as much power as possible. If you can focus on these facts, if you can have the institutions in place, and like I mentioned before, let me reemphasize, we have the institution in place. If they are actually doing what they're what they're established for or if they're actually functioning in an efficient manner is something else, We really need to focus on strengthening our institutions. And if we can get these things in place, then Nepal should be in a trajectory to grow economically and socially in the longer term.

[00:41:50] - [Speaker 1]
On that note, we conclude today's episode. Thank you, Sudhara, for being here and being part of Pods by PEI.

[00:41:57] - [Speaker 2]
Thank you, Aslijd, and I'd like to thank PEI for having me here today.

[00:42:03] - [Speaker 0]
Thanks for listening to Pods by PI. I hope you enjoyed a sleecious conversation with Siddhartha on Nepal's post pandemic recovery and the current macroeconomic scenario. Today's episode was produced by Nejan Raik with support from Saurabh Lama, Khushi Hang, Shidon Kansakar and Ridesh Sapkota. The episode was recorded at PEI Studio. Editing and sound mixing done by Ridesh Sapkota.

[00:42:26] - [Speaker 0]
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[00:43:00] - [Speaker 0]
You can also visit pei.center to learn more about us. Thanks once again from me, Shia. We will see you soon in our next episode.