Nepal’s industry slowed by conflict, politics and energy crisis

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Over the past three decades, only 746 large production plants have been established in Nepal, vividly reflecting how the decade-long Maoist insurgency, ensuing political instability and power cuts have crippled the growth of the manufacturing sector, according to a recent official report.

According to the 2019 National Industry Survey released Friday by the Central Bureau of Statistics, the number of large manufacturing establishments has increased by a meager 17.46% in 27 years.

Between the census years 1991-92 and 2018-19, the number of large factories in Nepal increased from 4,271 to 5,017. The lagging growth of the manufacturing sector has been one of the main factors pushing Nepalese to choose jobs abroad, according to experts.

The study shows that the number of large manufacturing establishments fell to 3,557 in 1996-97, coinciding with the start of the Maoist conflict.

The figure fell to 3,213 in 2001-02 when the Royal Massacre took place and the insurgency was at its height.

Experts say the economy reacted instantly to the comprehensive peace accord signed between the government and Maoist rebels in 2006, with the number of large factories rising to 3,446 in 2006-07.

In 2011-2012, there were 4,076 production plants in the country when the infamous load shedding dampened the country’s manufacturing sector.

“It’s very, very slow growth,” said economist Puskar Bajracharya.

There were three reasons for the slow growth: a high-cost economy, lack of adoption of modern technologies, and unfriendly policy towards investors.

“The private sector has failed to introduce modern technology,” Bajracharya said. “The government has also ignored the need to encourage the private sector.” Moreover, industrial policy was not conducive to boosting investment, he said.

“Industrial policies were very encouraging when Nepal adopted a liberal economy in the early 1990s. This led to industrial growth, but it has not flourished since then.

The employment rate has also stagnated over the years. The survey report shows that the manufacturing sector generated only 64,707 jobs in three decades.

The number of people employed in large manufacturing enterprises was 223,463 in 1991-92.

Employment in the manufacturing sector fell to 196,708 in 1996-97.

It continued to decline over the next decade reaching 191,853 in 2001-02 and 177,550 in 2006-07. Things started to look up in 2011-2012, with manufacturing employment reaching 204,360.

It rose to 288,170 in 2018-19.

Dinesh Shrestha, vice president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said political instability in the country was crippling the manufacturing and industrial sectors.

“The political situation is still unpredictable. We don’t know what will happen next,” he said.

“Powerful business houses have a lot of influence in policy-making; and therefore policies are designed to benefit a certain group rather than promote industrial development as a whole,” Shrestha said.

“The excise duty imposed on sponge iron is one example. There are many others,” he said.

“In the early 1990s there was a growth in large-scale manufacturing due to the tax exemption provisions. The political system then became so haphazard that there was no trust between government and investors. “Shrestha said.

“A huge investment is required to set up a large-scale industrial unit, and due to uncertain politics, investors are not taking risks,” Shrestha said.

“Potential investors still find Nepal a risky place to invest. It is more difficult to exit the country than to enter it. This shows how difficult it is to do business in the country.”

According to the survey report, the input cost of large manufacturing sector, which was 20.94 billion rupees in 1991-92, reached 625.72 billion rupees in 2018-19. Input cost is the total cost incurred to create a product or service.

The cost of production, which was 33.09 billion rupees in 1991-92, rose to 861.05 billion rupees in 2018-19.

Exit cost refers to the cost of the product or services to determine the selling price as well as the total profitability of the product or service as well as a profit margin percentage on the product or services, according to wallstreetmojo.com.

With a total of 15,871 factories, the food industry tops the list of manufacturing establishments, followed by clothing with 11,587 factories, according to the report.

The food industry is one of the top 10 industries with an added value of Rs 71.9 billion.

Nepalese industry only utilized 38.5% of its capacity, mainly due to low market demand, competition from international products, insufficient raw materials and insufficient resources and skilled labor.

Looking at bank loans, 60% of small manufacturing establishments did not take out loans or lines of credit, while 45% of large manufacturing establishments took out loans.

Agriculture, forestry and fishing are among the highest contributors to gross domestic product at 23.95 percent. The contribution of the manufacturing sector to GDP is 5.65%.

The Central Bureau of Statistics said it collected data from 16,145 industrial enterprises to prepare for the survey.

The manufacturing sector has the largest number of employees with 346,143 people.

The number of employees in the supply of electricity, gas, steam and air conditioning is 17,238.

There are 12,587 employees in water supply, sewerage, waste management and sanitation activities; and 5,719 employees in mines and quarries.

These four industry sectors make payments totaling Rs 107.89 billion to their employees annually.

Payments in the manufacturing sector total 95.77 billion rupees. Annual electricity, gas, steam and air conditioning payments amount to 6.92 billion rupees.

Payments for water supply, sewage, waste management and sanitation activities amount to 3.40 billion rupees. Payments in mines and quarries amount to 1.80 billion rupees.

Out of the total input of 846.7 billion rupees, the manufacturing sector has the highest cost of entry of 745.6 billion rupees due to the price of raw materials.

And out of the total production cost of Rs 1.2 trillion, the manufacturing sector has the highest production cost of Rs 1 trillion, according to the survey.

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