By Madhukar SJB Rana

Promote Local Bond Markets through People-Public-Private Partnerships (4Ps)

A national bond market is eminently needed to generate greater savings and investment for economic growth and employment, especially at the district/ municipal level through local initiatives. PPPP-projects that are commercially viable should be allowed to raise their capital by floating municipal bonds against firm pledges of fixed annual interest payments by the concerned people-public-private partnerships. This will provide ample opportunities for local banks and financial institutions to invest local savings locally— rather than sending them to Kathmandu (or elsewhere across the border).

To safeguard the interest of local banks and local financial institutions they should be represented on the Board of Directors, if they so desire, either as independent members in the said Board or as a separate body in the form of Executive Advisors representing the creditors duly empowered with veto rights over Board’s decisions-- but subject to Compulsory Arbitration in the event of disputes.

Naturally, when the national bond market is so under-developed it may be considered foolhardy to even think of local bond markets. Nevertheless, given the on-going global financial crisis, Nepal, along with all development nations, must begin to think out of the aid box, so to speak. Bond markets are a way out; just as negotiating ‘debt write offs’ with donors.

It is estimated that in South Asia only 20% of GDP is accounted for by South Asia’s bond market, as compared to 45% by equity markets and 35% by bank assets. Contrast this with South Korea whose bond market is 114% of GDP!

And why not this measure if one desires to arrest the informal capital outflows that never comeback and to tide over the idle dollars balance lying with the Nepal Rastra Bank to more productive uses? Long term financing is the need of the hour for investments in the acutely needed economic and social infrastructure in Nepal (e.g roads, railways, metros, hydro and solar energy, power lines, warehouses and cold storages, technological universities, resorts hotels, modern hospitals catering to health tourism, SEZs, EPVs, EPzs to promote exports and import substitution in manufacturing etc).

Promote Local Stock Markets through Private Venture Capital Companies
State owned banks and financial institutions should be privatized as “it’s not the business of Nepal Government to do business”. Fears will naturally mount with employees of such institutions as to their future. The experience and skills in finance of those whose service will become redundant should be harnessed innovatively. A possible innovation is to create locally-based Venture Capital Companies (VCCs) to buy and sell equities of local businesses locally. In this way, proprietorships and partnerships can be upgraded into private or public limited companies gradually –and the informal sector encouraged to turn formal with new possibilities for debt and equity finance. These VCCs could also serve as business consulting enterprises to harness Nepal’s local entrepreneurial spirit from amidst all classes and castes.

These VCCs can be created as private or public limited companies jointly owned by shareholders (say national and local governments, banks and financial institutions, individual promoters and also its employees), who should raise their capital from their own investments in sufficient manner to be able to meet the cost of operations; as well as raise debt finance to the extent of 40% of equity holdings. This debt finance can be drawn from a National Venture Capital Fund (NVCF) initially created by the Ministry of Finance where interested companies should be required to submit competitive bids for the loan of the funds from NVCF.

It is expected that this innovation will help boost rural small industries and businesses as well as promote a culture of equity transactions that will contribute to stopping land fragmentation due to inheritance portioning. Through this financial innovation family members will see the benefit of equitization of their land holdings as commercial businesses (rather than engaging in partition of land into uneconomical parcels as now prevails to the detriment of the local economy).

Deepen Debt Market and Enhance Monetary Independence

Three innovations are suggested:
(A) (1) Encourage lease finance (note: the fear of revenue loss must be weighed against the social costs of youth unemployment and alienation; further, the fact is that small businesses are not paying income taxes as yet) to benefit, in particular, the youth employment in the film, media and sports businesses; (2) small businesses engaged in logistic management—the structural weakness of a mountain economy ( in such areas as cold storage, warehouses, construction, auto-repair workshop that suffer from low productivity due to lack of capital investment and modern technology; (3) information technology (IT) businesses; (4) foreign employment loans and education loans for youth especially; (5) acceptance of second mortgage financing provision by banks and finance companies; and (6) allowing access to Indian stock and bond markets for investments as well as mobilizing Indian portfolio investments and FDI--- on a balanced basis , if need be, by each bank or FI to safeguard from net capital outflows.

(B) Negotiate with India to go into a managed flexible exchange rate system for the provision by them to Nepal of the required Indian Rupees credit to bring equilibrium in the balance of payments; hedge against currency speculation and deal with the likely inflationary impact on basic commodities on account of depreciation of Nrs through compensatory fiscal and monetary policies to subsidize imports and import substation agriculture production and industries. This will have the salutary impact by curtailing imports, promoting exports and further import substitution in the agriculture and manufacturing sector. Tourism will boom. Without an industrialization process, found mainly on forest and agro-industries, Nepal will not be able to be a modern developed economy: which it should strive to be by 2030 with 20% share of GDP.

(C) Government to refrain from creating an Asset Management Company in the public sector. It is bound to be self defeating and worse than the disease with the rampant graft and corruption that is guaranteed in such a state monopoly. As an alternative, encourage banks, with suitable incentives, to open their own private asset management companies for their asset securitization.

- (Former Finance Minister Rana is currently a professor at SAIM)