FINANCE MINISTER WANTS TO ENSURE NEPAL QUALIFIES

C O N F I D E N T I A L KATHMANDU 002820 SIPDIS SIPDIS DEPT FOR SA/INS, EB E.O. 12958: DECL: 12/16/2015 TAGS: ECON ETRD PREL PGOV EINV EFIN EAID NP SUBJECT: FINANCE MINISTER WANTS TO ENSURE NEPAL QUALIFIES FOR WORLD BANK LOAN REF: KATHMANDU 2723 Classified By: Amb. James F. Moriarty, Reason 1.4 (b/d) Summary -------------- ¶1. (C) On December 14, newly-appointed Finance Minister Roop Jyoti agreed with the Ambassador that everyone should be worried about Nepal meeting its World Bank commitments to prevent Nepal's USD 100 million Poverty Reduction Strategy Credit II (PRSC II) loan from being jeopardized. He said that there was "no reason" he should allow that to happen. He assured the Ambassador that the government was moving ahead on three of the four conditions: market-based pricing mechanism for petroleum products, actions against loan defaulters, and the Labor Act. He was unclear about government plans to meet its fourth commitment, enacting the Governance Act. Jyoti emphasized that he hoped to use his time as Finance Minister to institute tax reforms and make the VAT HMGN's primary source of revenue. End Summary. Market-Based Prices for Petroleum Products -------------- ¶2. (C) The Ambassador urged His Majesty's Government of Nepal (HMGN) to fulfill its commitments on economic reform to ensure it retained its current status and eligibility for World Bank loans. Jyoti, who previously served as the Assistant Minister of Finance, agreed on the necessity and noted that HMGN would face a major crisis if its revenues plummeted as a result of World Bank action. He noted that there had been a reluctance to increase prices on petroleum products when Vice-Chairman Bista was in charge of the Ministry of Industry, Commerce and Supplies portfolio. However, he explained, the Ministry of Finance was not in a position to continue to bail-out the Nepal Oil Corporation. Although some in the bureaucracy did not understand a market-based pricing mechanism for petroleum products, he believed his promotion to Minister of State for Finance had boosted his credibility, and ability, to help get the change made. He predicted that HMGN would move fairly soon to make the prices geographically-market-based within Nepal, e.g. the price of diesel would cost less in areas with lower transportation costs than in other areas. Action to Get Defaulted Loans Repaid -------------- ¶3. (C) With respect to loan defaulters, the Harvard-trained Finance Minister argued that the goal should be the recovery of loans, not necessarily taking punitive actions against defaulters. He noted that many of the defaulters on the World Bank's list were limited partners in business ventures that had suffered because of the insurgency. He asserted that taking away the passports of such defaulters or suspending ownership transfer of their fixed assets would amount to switching total liability to the limited partners. He worried that the government would be in effect blackmailing the person to repay the loans. Instead, he was working on a way to reschedule and settle the loans. He indicated that he had discussed this with the IMF representative, who had accepted this approach if it brought results. Cabinet Has Approved The Labor Act, Unclear About Governance Act -------------- -------------- ¶4. (C) Jyoti said that the Cabinet had approved the Labor Act in its last meeting and sent it to the Bills Committee. He speculated that the Act, which would reportedly give industry more power to hire and fire employees and make Nepal more investment-friendly, might be passed as an Ordinance in a couple weeks. The Finance Minister admitted he still was not fully briefed on the Governance Act, which would reportedly give more authority to local government units to carry out development work. Focus on Tax Reform -------------- ¶5. (C) The Finance Minister stressed that he was interested in enacting fundamental tax reforms and making the VAT tax HMGN's major source of revenue. He acknowledged that this was the time to institute reforms because, with the lack of a Parliament, he really only had to convince one person - the King. He explained that enforcement had "not been correct" as it had been focused at the source; instead, the government needed to institute mechanisms to provide for enforcement at the retail level. If the retailers were paying their share of the VAT, they would start a virtuous cycle by insisting that their suppliers paid their share of the VAT. He told the Ambassador he planned to reform Nepal's lottery scheme and increase consumer awareness as part of his reform program. He hoped that by improving VAT revenue, HMGN could slash customs duty rates. The Finance Minister also stated that he planned to introduce an Ordinance mid-budget to correct some mistakes to improve revenue collection. He added that as a Minister, he had more clout within the bureaucracy. As one of the few trained economists in the Cabinet, he found others willing to accept his proposals. Jyoti noted that improving the tax system could help HMGN regain the business community's trust. Comment -------------- ¶6. (C) A successful businessman, the new Finance Minister seems eager to make a mark and institute needed reforms. He appears a true believer in giving market mechanisms the freedom to drive economic growth. On the political side, he is a staunch defender of His Majesty and a harsh critic of the political parties. MORIARTY