Friday, January 26, 2024

Outmigration trend in Nepal: Absentee population, destination and reasons

Based on the population census data (see blog post on demographic dividend and structural transformation using the same dataset), this blog post highlights key features related to absentee population (basically those who outmigrated for more than 6 months). Overall, the total absentee population increased to 2.2 million in 2021, which is over 3 times the number in 1991 (before the Maoist insurgency). In 2021, absentee population was 7.5% of total country's population, up from 7.3% in 2011 and 3.3% in 2001. 

Most of the absentees were out of the country due to salary or seeking job (77.3%), followed by dependent (10.4%), and study or training (9.6%) among others. Historical trend shows that while the share of absentees in India are decreasing, especially after 1991, the share of absentees in the Middle East and ASEAN countries is increasing. Recorded remittance inflow was as high as 25.5% of GDP in FY2015 and FY2016. It decreased to 22.7% of GDP in FY2023. 

Increasing outmigration

Large scale outmigration and subsequent remittance inflows have been defining features of the economy. The total absentee population, defined as those absent from household and gone abroad for more than six months before the census date, increased to 2.2 million in 2021, which is over 3 times the number in 1991 (before the Maoist insurgency). Of the total absentee population in 2021, 82.2% were male and 17.8% female. The share of male and female migrants in 2011 (1.9 million total absentee population) was 87.6% and 12.4%, respectively, indicating the more outmigration is being popular among females as well.

Most of the absentees were out of the country due to salary or seeking job (77.3%), followed by dependent (10.4%), and study or training (9.6%) among others. The share of absentees who identified study/training or dependent has increased compared to 2011 (5.8% and 6.8% in 2011), indicating the preference for study or training abroad (consistent with the increase in ‘no objection’ letter for abroad study or training), and spouse or children following their partner or parents abroad.

About 30% of the absentees in 2021 were of the 20-24 age group, and 76% of the 15-34 years age group, indicating the most of the outmigrants are young and the most active among the working age population. The largest number of absentees are in the Middle East countries (36.7%), followed by India (34%), ASEAN including Malaysia (9.1%), and other Asian countries (5.7%) among others. Among the absentees in the 15-35 age group, 38.8% are in the Middle East, 29.8% in India and 9.8% in ASEAN (including Malaysia). 

Historical trend shows that while the share of absentees in India is decreasing, especially after 1991, the share of absentees in the Middle East and ASEAN countries is increasing. It reflects the liberalization in passport issuance, and various push factors such as the lack of opportunities at home (alternatively, the opportunities in destination countries), and the political instability including the decade-long insurgency. 

Migration destinations have been shifting towards advanced countries as well. For instance, the share of absentees in European countries (including the UK) increased to 5.1% in 2021 from 1.6% in 2001. In Australia (popular amongst students and skilled workers) and Pacific countries, it increased from 0.3% to 4.3% over the same period. In USA and Canada, it increased from 1.3% to 4.0% over the same period. 

Almost 95% of those who went to the Middle East identified job (salary/wage, seeking job) as the main reason for being absent. Similar is the case with ASEAN countries. About 75% of the absentees who were in India identified job as the main reason. In the case of Australia, 70.3% identified study or training as the main reason. In USA and Canada, this was 41.0%. 

About 32% of the absentees were out for 1-2 years, and 27.5% for 3-5 years. It means that about 70.5% of the absentees were out for less than 5 years. Another 25.9% were absent for between 6 and 24 years. 

About 70% of the absentees had education up to SLC level (grade 10), 17% intermediate, 5.3% graduate, and 1.9% postgraduate. 


Annual outmigration

Data from the Department of Foreign Employment (DOFE), which records those migrant workers that take labor permit to work overseas, shows that outmigration is picking up pace after continuous decline since FY2015. It decreased to just 72,081 in FY2021. However, as international travel eased and economies started opening, outmigration has increased to level (497,704) close to the peak outmigration in FY2014 (527,814). About 44.1% of the migrants went to Malaysia, followed by UAE (11.9%), Saudi Arabia (11.2%), and Kuwait (4.0%) among others. 

Recorded remittance inflow was as high as 25.5% of GDP in FY2015 and FY2016. It decreased to 22.7% of GDP in FY2023.

Monday, January 22, 2024

Structural transformation in Nepal: Employment, sectoral shift and labor productivity

Based on the population census and national accounts data (also see blog post on demographic dividend), this blog post highlights key features related to structural transformation (employment, sectoral shift in output). Overall, the share of employment in agriculture is decreasing, but the share of employment in services in increasing. Industry sector's share in employment is recovering, but it is still below the peak in 2001, after which the political instability along with the intensification of the Maoist insurgency, power cuts, and poor industrial relations decreased its share in employment and GDP. It started to recover in the last decade. 

The sectoral shift in GDP follows the pattern in sectoral shift in employment but the pace of change is not commensurate -- services sector value added GDP grew at a faster pace than its share in employment, and industry's share in employment decreased at a faster pace than the decrease in its share in GDP. It means that the largest sector in GDP and its expansion was not jobs centric.

Labor productivity barely increased between 2011 and 2021 and productivity growth was negative in all sectors, with the highest dip in industry sector. At the broad economic activity level, labor productivity was positive in mining and quarrying; manufacturing; and public administration, defense, education, and health, etc. Manufacturing’s share in employment and GDP has decreased, but labor productivity has increased. Construction’s share in employment and GDP has increased but labor productivity has decreased. Labor productivity in wholesale and retail trade has reduced but its share in employment and GDP has increased. 

Structural change: sectoral value added and employment.

The share of employment in the agriculture sector is decreasing but the share of employment in the services sector is increasing. However, the shift in employment does not match the pace of shift in sectoral value added. The population census includes those who were employed as well as those not usually active in the last 12 months before the census date in employment figures, i.e. they had performed any economic activity in the reference period.

1981: The share of agricultural value added in GDP was 60.9%, industry 12.4% and services 26.7%. The share of employment (as a share of those that had performed any economic activity in a reference period of the last eight months or 12 months before census date) in agriculture, industry and services sectors was 91.1%, 0.6% and 6.4%. The remainder did not state sectoral employment.

2001:  The share of agricultural value added in GDP was 36.6%, industry 17.3% and services 46.1%. The share of employment in agriculture, industry and services sectors was 65.7%, 13.4% and 20.7%. The remainder did not state sectoral employment. 

  • Note that between 1981 and 2001, while the share of both agricultural employment and gross value added decreased almost by the percentage points, the share of industry sector employment increased faster than the increase in its share in GDP (14.3 vs 4.9 percentage points). Meanwhile, services gross value added in GDP grew at a faster pace than the share of services employment. 
  • In essence, between those 20 years, the industrial sector exhibited jobs-centric growth.  

2011: The share of agricultural value added in GDP was 33.4%, industry 14.5% and services 52.0%. The share of employment in agriculture, industry and services sectors was 64.0%, 9.5% and 24.0%. The remainder did not state sectoral employment. 

  • Note that between 2001 and 2011, the shift in agriculture (as a share of GDP) was faster than the shift in agriculture employment (decrease by 3.1 percentage points versus 1.7 percentage points). While industry’s share in GDP decreased by 2.7 percentage points, employment in industry sector decreased at a steeper rate of 3.8 percentage points. Meanwhile, services’ share in GDP increased by 5.9 percentage points but employment increased by 3.3 percentage points. 
  • In essence, the industrial sector was not jobs centric as the decrease in employment was faster than the decrease in its share of GDP. Likewise, the gain in employment in the services sector was at a lower pace than the increase in its share of GDP.

2021: The share of agricultural value added as a share of GDP was 36.6%, industry 17.3% and services 46.1%. The share of employment in agriculture, industry and services sectors was 65.7%, 13.4% and 20.7%, respectively. The remainder did not state sectoral employment.

  • Note that between 2011 and 2021, pretty much the same trend held like in the previous decade, and the share of services sector in GDP grew at a faster pace than its share in employment, indicating that the services sector growth was not jobs centric.

So, what were the structural changes in the last 30 years, the period which endured the Maoist insurgency, the overthrow of the Shah dynasty, the transition to a federal democratic republic, catastrophic earthquakes, and COVID-19 pandemic. 

While the share of agriculture and industry in GDP decreased, the share of services sector increased. The share of employment in these sectors also followed the same pattern, but at a varying pace. The agriculture sector’s share in GDP decreased from 47.7% in 1991 to 25.8% in 2021. The industry sector’s share in GDP decreased from 17.5% in 1991 to 13.8% in 2021. However, the employment in this sector increased from 2.7% to 12.6% in 2021. Employment between 1991 and 2001 increased but as the political instability intensified, it decreased between 2001 and 2011 and then recovered between 2011 and 2021. The services sector’s share in GDP increased from 34.8% of GDP in 1991 to 60.4% of GDP in 2021. Employment in the sector increased from 15.1% to 30.0% of the total employed over the same period. 

The overall trend is that agricultural value added and agricultural employment followed almost the same pattern (decreased by 21.9 percentage points and 23.9 percentage points), but there was employment gain in the industry sector despite a decrease in its share in GDP (9.9 percentage point increase versus 3.7 percentage point decrease). The services sector GVA grew at a faster pace than employment in the sector (increase by 25.6 percentage points versus 14.9 percentage points).

What could be the underlying reasons for these changes? The rural-urban migration has impacted agriculture activities and employment. In the industry sector, the share of employment is the highest in construction sector (8.1% in 2021 compared to 0.5% in 1991), indicating the boom in real estate and construction activities that were driven by the inflow of remittances. The share of employment in the manufacturing sector declined from a high of 8.8% in 2001 to 3.8% in 2021. This sector was one of the most affected by conflict, and policy as well as political instability, leading to fast erosion of cost and price competitiveness to imported goods. In the services sector, most people are employed in the wholesale and retail trade and repair of motor vehicles and motorcycles activity (12.5%), which also is the largest services sector activity as a share of GDP. About 2.2% were employed in transportation and storage, and 2.9% in education. 

FYI, in 2021, about 8.6 million people were employed in the agricultural sector, 2.0 million in the industry sector (of which 0.5 million in manufacturing and 1.2 million in construction), and 4.5 million in the services sector (of which 1.9 million in wholesale and retail trade). It includes those who had done any economic activity in the reference period (employed [10.3 million] and those not usually active [4.7 million]).

The number of hours worked has also decreased. About 65.5% of those who did economic work worked for 6 months and above, 18.2% between 3-5 months, and 16.2% less than 3 months. In 1991, 91.3% of those engaged in economic work worked for 6 months and above, 6.0% between 3-5 months, and 2.2% less than 3 months. It may, again, reflect the increasing trend of outmigration among youths, who tend to engage in a particular economic activity as a stop-gap measures to sustain livelihoods while in Nepal, and then immediately leave for work or study abroad once opportunity arises. 

Most of the workers are in low productivity, low skilled occupations such as agriculture, forestry and fishery (50.1%) and elementary workers (23%). 

Of the 9.0 million people who did not do any economic work, 46.9% said it was because they were student, 21.9% due to household chores, and 11% due to old age.

Census versus Nepal Labor Force Survey (NLFS) III: These may be different from the estimates in NLFS III, which estimated population at 29 million in 2018 itself. The working age population was estimated at 20.7 million (around 71% of the estimated population). Among the 20.7 million people of working age, 12.7 million were not in the labor force (61.3%). About 8 million people were in the labor force (7.1 million employed and 0.9 million unemployed). The labor force consists of individuals who are employed and those that are considered unemployed. The unemployment rate was estimated to be 11.4%. 

On sectoral employment, NLFS III showed agricultural, industrial and services has 21.5%, 30.8% and 47.4% employment share. Compared to the census 2021 data, the share of employment in agriculture is lower, industry and services higher. It may be because the definition of employment is narrower in NLFS III— the new definition of employment includes only work performed for others for pay or profit, i.e., production for own final use is not considered as employment.

Labor productivity

Let us compare labor productivity (real GDP in census year/number of people who performed any economic activity as recorded in the census) at constant FY2011 prices. 

Overall labor productivity barely increased between 2011 and 2021. It was NRs157,028 in 2011 and NRs159,832 in 2021. Between 2011 and 2021, labor productivity growth in all sectors (agriculture, industry, and services) was negative. 

At the disaggregated economic activity level, labor productivity was positive in mining and quarrying; manufacturing; and public administration, defense, education, and health, etc.

Comparing labor productivity and share of employment, we see that labor productivity in wholesale and retail trade has reduced but its share in employment and GDP has increased. Manufacturing’s share in employment and GDP has decreased, but labor productivity has increased. Construction’s share in employment and GDP has increased but labor productivity has decreased. Finance, insurance, and real estate activities share in employment and GDP has decreased, but labor productivity has increased. In fact, within it as well, it is real estate business activities, and professional and technical activities that are driving this activity’s high labor productivity.

Wednesday, January 10, 2024

Population structure and demographic dividend in Nepal

Based on the population census data, this blog post highlights key features related to population, and its structure and evolution. Overall, the population growth rate is declining, working age population is increasing, dependency ratio is decreasing, and new entrants to the labor market are almost peaking. The demographic dividend may not last long unless the enabling policy and institutional environment are created along with investments in critical physical and social infrastructures. Gradually, new entrants to the labor market will decrease, dependency ratio will increase (as 65 years and above population increase), and working age population will shrink. It will not be an ideal situation for a country with low per capital income and the vast untapped opportunities.

Population structure

Population growth is slowing down. In 2021, the population of Nepal was 29.2 million (of which 49% are male and 51% female), up from 26.5 million in 2011. However, the population growth rate was 0.92% between 2011-2021, down from 1.35% between 2001-2011.

The number of households is increasing but the average household size is decreasing, indicating the increase in nuclear families (or the decrease in joint families). There were 6.7 million households with an average household size of 4.4 in 2021. These were 5.4 million and 4.9 in 2011, respectively.

Urban population constituted 66.2% of total population, up from 63.2% in 2011. Note that the definition of urban area was changed after the country adopted a federal structure of governance. The number of urban municipalities increased from 58 in 2013/14 to 293 in 2017/18.

Madhesh and Bagmati provinces each have 21.0% of the total population, Lumbini 17.6%, Koshi 17.0%, Sudrupaschim 9.2%, Gandaki 8.5%, and Karnali 5.8%.

The highest populated districts are: Kathmandu 6.6%, 4.0% Rupandehi, 3.7% Morang, 3.3% Kailali, 3.1% Jhapa, and 3.1% in Sarlahi.

Literacy rate has increased, but there is wide gender disparity. Among males 10 years and above, 83.6% are literate, but it is just 69.4% among females. These were 75.2% and 57.4%, respectively, in 2011.

Demographic dividend

The working age population (15-64 years) is increasing, reaching 65.2% of total population in 2021 or 19 million people. The population below 15 years of age is decreasing (reaching 27.8% of total population or 8.1 million people) but those 65 years and above are increasing (reaching 6.9% of total population or 2 million people). In 1991, these were 54.1% and 3.5% of the total population, respectively. 

The increase in working age population also means that the dependency ratio is decreasing (from 84.7% in 1991 to 53.3% in 2021). Dependency ratio is defined as the dependent population (0-14 years plus 65 years and above) per 100 productive population.

The declining population growth rate and dependency ratio, rising life expectancy along with declining fertility and child mortality, and gradually peaking working age population indicate that Nepal may be hitting the unique point where it could exploit this demographic change to spur economic growth (or demographic dividend), i.e. more people to work and fewer people to support. 

Seizing this opportunity would require reorienting policies to facilitate a meaningful structural transformation, whereby high-value added sectors (such as industry, high value agriculture, ICT, travel and tourism, healthcare, education) dominate the economic structure, resulting in higher jobs-centric and inclusive growth and higher productivity. Adequate supply of affordable and competitive hydroelectricity, better connectivity including logistics network, human resources development through investment in education and healthcare, social protection, and political as well as policy stability would be critical for that.  Else, this demographic bulge will continue to be a burden to the economy, resulting in large-scale outmigration for work or study overseas. The benefits of a demographic dividend are not unconditional.

Given the decreasing population growth rate, this could also be an indication that the working age population will soon peak because the population below 15 years of age is decreasing. The 65 years and above population will gradually increase, burdening the public social protection scheme. 

New entrants to the labor market

About 2.0% to 2.5% of the total population enter the job market annually. In 2021, about 607,128 entered the labor market (basically those who turned 15 years old in 2021). There were already 18.4 million population in the job market (basically those between 16-64 years old). About 246,944 exited the job market (basically those above 64 years of age). In 2011, 652,525 youths entered the labor market. 

The lack of adequate job opportunities or better career prospects and higher wage premium abroad are some of the push factors for large-scale outmigration of working age population. More on this specific topic in the next blog post.  

Tuesday, October 17, 2023

Airport, Debt and Development

An interesting article on Pokhara International Airport, financed with Chinese loans and built by Chinese firms, in the NYT. Key highlights from the article included below: 


The expensive airport, built largely by Chinese companies and financed by Beijing, was a diplomatic victory for China and a windfall for its state-owned firms. For Nepal, it was already an economic albatross, saddling the country with debt to Chinese creditors for years to come.

Nepal had sought to build an international airport in Pokhara since the late 1970s, hoping that it would catapult the city into a global tourist destination. But the project had stalled for decades, mired in political turmoil, bureaucracy and money problems, until China stepped in.

After the airport’s construction, Beijing began declaring that it had been part of the Belt and Road Initiative, President Xi Jinping’s signature infrastructure campaign, which has doled out an estimated $1 trillion in loans and grants around the world. This designation, which Nepal has quietly rejected, has thrust the airport into the middle of a diplomatic tug of war between China and India.

The Pokhara airport highlights the pitfalls for countries that import China’s infrastructure-at-any-cost development model, which spins off money for Chinese firms, often at the expense of the developing country.

In Nepal, China CAMC Engineering, the construction arm of a state-owned conglomerate, Sinomach, imported building materials and earth-moving machinery from China. The airport, built to a Chinese design, is packed with security and industrial technology made in China. Chen Song, China’s ambassador to Nepal, said it “embodied the quality of Chinese engineering.”

But an investigation by The New York Times, based on interviews with six people involved in the airport’s construction and an examination of thousands of pages of documents, found that China CAMC Engineering had repeatedly dictated business terms to maximize profits and protect its interests, while dismantling Nepali oversight of its work. This has left Nepal on the hook for an international airport, at a significantly inflated price, without the necessary passengers to repay loans to its Chinese lender.

In 2011, a year before China officially agreed to lend the money for the airport, Nepal’s finance minister signed a memorandum of understanding to support CAMC’s proposal, before any bidding process had even started. The Chinese loan agreement allowed only Chinese firms to bid on the work. CAMC’s winning bid of $305 million, almost twice what Nepal had estimated the airport would cost, raised the ire of some Nepali politicians, who called the price outrageous and the bidding process rigged. CAMC then lowered the price about 30 percent, to $216 million.

China and Nepal signed a 20-year agreement in 2016; a quarter of the money would be an interest-free loan. Nepal would borrow the rest from the Export-Import Bank of China, a state-owned lender that finances Beijing’s overseas development work, at 2 percent interest. Nepal agreed to start repaying the loans in 2026.

The initial construction budget had earmarked $2.8 million for Nepal to hire consultants to make sure CAMC was abiding by international construction standards, according to documents. As the project went on, the Chinese firm and Nepal lowered that allocation to $10,000, using the money elsewhere.[...]There was also no paperwork ensuring the quality of Chinese-made building materials or information on the Chinese vendors providing the components. [...]The contractor was able to inflate the cost of the project — to double the market rate, by his estimate — and “quality had been compromised.”

CAMC squeezed more money from the project while eliminating oversight. China’s Export-Import Bank, which had provided the loan, had appointed China IPPR International Engineering, a consulting firm, to track the quality, safety and timetable of the construction while ensuring that Nepali officials were satisfied with CAMC’s work. The consulting firm and the construction company are subsidiaries of Sinomach, a machinery giant ranked in the Fortune Global 500. The potential for conflicts of interest became even more pronounced in 2019 when CAMC acquired IPPR, turning it from a sister company into a direct subsidiary. The fees to pay IPPR came from Nepal, as part of its loan from the Chinese bank.

A 2014 feasibility study commissioned by CAMC projected that the airport would be able to repay loans from its profits. That forecast, however, was based on an estimated 280,000 international passengers traveling through the airport starting in 2025. As of now, there are no international flights.


Thursday, September 21, 2023

Macroeconomic stability and structural transformation in Nepal

It was published in The Kathmandu Post, 19 September 2023.


Macro struggle and transformation

Latest data from fiscal year 2022-23 indicate a challenging economic landscape. While the external situation has improved and the banking sector is gradually emerging from a recurring liquidity crunch, fiscal and real sectors are under stress. Specifically, the large current account deficit and depleting foreign exchange reserves reversed course, and the availability of loanable funds in the banking sector improved along with the declining interest rates and sizable liquidity. However, gross domestic product (GDP) growth decreased while fiscal deficit, public debt and inflation increased.

It gives the impression of an economy struggling to maintain macroeconomic stability, especially after the onset of the pandemic. The effect is compounded by the unresolved structural issues affecting economic and social transformation for a long time.

Macroeconomic stability has been challenging due to external and internal reasons. Exogenous shocks, such as the Russian invasion of Ukraine and the ensuing effect on fuel and commodity prices have increased trade costs and inflation. Monetary tightening in the developed countries has depreciated the Indian rupee, to which the Nepali rupee is pegged. These are negatively affecting Nepal’s external sector performance. In response, the Nepal Rastra Bank tightened monetary policy, and the government banned the import of certain goods that were draining foreign exchange reserves. These were internal policy choices in response to the exogenous shocks—the interaction of both has affected macroeconomic performances.


Mixed performance

The cumulative effect is seen in the 2022-23 macroeconomic data. GDP growth is estimated to have dropped to 1.9 percent from above 4.5 percent in the last two fiscal years. This is primarily due to the contraction in both public and private investment and a slowdown in consumption and exports. In fact, public and private fixed capital investments are expected to contract by 20.2 percent and 55.9 percent, respectively, reflecting not only lower public capital spending but also dismal private sector investment. Manufacturing, construction, retail and wholesale trade activities—which account for about 28 percent of GDP—have also contracted.

The fiscal performance of the federal government was worse than expected. The contraction in revenue mobilisation and grants amidst high expenditure levels widened the fiscal deficit to over 7 percent of GDP, up from about 5.4 percent in the last fiscal year. According to the latest data from the Financial Comptroller General Office, tax revenue decreased by 12.1 percent and grants by 22.5 percent in 2022-23. It primarily reflects the sharp decrease in imports, in particular, as trade-based tax collections account for nearly half of the total tax revenue and economic slowdown in general. The government increased domestic and external borrowings to bridge the revenue and expenditure gap, pushing total outstanding debt to 41.3 percent of GDP in 2022-23. It was just 22.5 percent in 2014-15. Domestic debt servicing nearly doubled in 2022-23 due to high interest rates on government bills and bonds. The interest rate on 91-day treasury bills averaged 9.5 percent, the highest since 1997-98.

Monetary sector performance was broadly in line with expectations as tight monetary policies dampened credit growth. Deposit grew faster than credit (12.3 percent versus 5.5 percent) owing to a surge in remittance inflows and high interest rates. However, the high-interest rates and slowdown in aggregate demand discouraged private sector investment, resulting in private sector credit growth of just 4.6 percent compared to 13.3 percent in the previous fiscal. The weighted average deposit and lending rates reached 8.2 percent and 12.6 percent, respectively—the highest in the last decade. Inflation increased by 7.7 percent, the highest since 2015-16, owing to high fuel and commodity prices.

External sector performance, the main target of policy choices in the last two years, fared better. The current account deficit sharply decreased to 1.3 percent of GDP from 12.6 percent in 2021-22. It was mainly due to a drastic drop in imports (nearly 10 percentage points of GDP) and a pickup in remittance inflows, amounting to 22.7 percent of GDP. Foreign exchange reserves also increased to cover 10 months of import of goods and services, up from 6.9 months in 2021-22.

Structural issues

Beyond the short-term effects, this volatility or sharp readjustment of macroeconomic indicators points to unresolved structural issues that must be addressed through legal, regulatory, policy and institutional reforms. These structural issues should not be masked by the rosier economic outlook for 2023-24 compared to the last fiscal.

The vulnerability to exogenous shocks will continue to compound until a meaningful structural economic transformation. For instance, shifting from low- to high-value-added sectors with increasing productivity and employment opportunities will require less reliance on remittances for growth, poverty reduction, revenue mobilisation, banking sector liquidity and external sector stability. A high inflow of remittances supports high consumption (over 90 percent of GDP), which is fulfilled by imported goods and services without adequate domestic output. Foreign exchange earned from remittances is used to finance imports. Large-scale outmigration and remittances have been critical in reducing poverty, propping up real estate and housing businesses, and facilitating internal migration from rural to urban areas.

The government must ramp up capital budget execution to fund critical physical and social infrastructure and services and promote private sector investment to lay the foundation for a meaningful structural transformation. Capital budget execution, which averaged 61 percent in the last three fiscal years, is affected by prolonged government procedures leading to approval delays and coordination failures, structural weaknesses in project preparation, including inadequate consideration for climate change and natural hazards, and allocative inefficiency. The government needs to increase capital budget execution by addressing these constraints and also secure additional resources to improve overall capital expenditure. Amidst stagnating revenue growth and high fiscal deficit, they must rationalise recurrent expenses and reform loss-making public enterprises to create extra fiscal space to boost capital expenditure. The quality of capital spending is also crucial as it was hastily spent in the last quarter of the fiscal year when about 54 percent of actual spending or disbursement happens. In 2021/22, capital spending, a share of GDP, of federal, provincial and local governments was 4.4 percent, 2.2 percent and 3.4 percent, respectively.

Structural issues related to the financial sector—particularly, perennial asset-liability mismatch and the impact of high credit growth on the productive sector and aspired structural transformation—need rethinking. This might require reorientation of the monetary policy, addressing long-term structural issues in addition to short-term credit flows and interest rate volatility. To boost output and exports, overall productivity needs to be enhanced by lowering the cost of doing business, which will incentivise private sector investment and increase industrial capacity utilisation. 

Wednesday, July 19, 2023

Ghost contracting in Nepal

According to a recent ADB report, the smaller the size of the contract, the greater the problem of ghost contracting in Nepal. The situation in urban and water sectors in 2018 regarding  ghost contracting was as follows:

  • 100% in contracts worth less than $5 million
  • 100% in contracts valued between $5 million and $10 million
  • 70% in contracts valued between $10 million and $20 million
  • 63% in contracts greater than $20 million

In transport sector, ghost contracting was 100% in contracts valued between $10 million and $20 million in 2018. It was 33% in the case of contracts valued above $20 million.

The situation improved a bit since 2018 in urban and water sector. In 2021, it found ghost contracting in:

  • 100% in contracts worth less than $5 million
  • 67% in contracts valued between $5 million and $10 million
  • 50% in contracts valued between $10 million and $20 million
  • 50% in contracts greater than $20 million

In transport sector, since all contracts were given to foreign companies only, there were no ghost contracting in 2021.

FYI, ghost contracting refers to non-execution of contract by a winning bidder, who allows a subcontractor to manage, administer and implement the contract. It is typical in cases where a foreign bidder forms a joint venture with local contractors. The foreign bidder, upon winning the bid and signing the contract, disappears from contract execution. No international expertise is used and sometimes it does not even provide cash flow support. It not only delays project execution but also affects quality and portfolio performance.

Monday, June 26, 2023

Medium-term power deal between India and Nepal

On 23 May 2023, Nepali and Indian authorities signed a 5-year (medium-term) agreement that will allow Nepal to sell an additional 200 MW of hydroelectricity to India. This is in addition to the 452.6 MW that Nepal already has permission to sell to India. More electricity export to India will mean more export revenues to Nepal. The new agreement applies to wet season only (from June up until November). In June 2023, during PM Dahal's visit to India, Nepali and Indian PMs agreed to a long-term energy deal, which targets 10,000 MW of electricity import by India in 10 years.

Excerpts from The Kathmandu Post:

The state-owned power utility and NTPC Vidyut Vyapar Nigam Limited (NVVN) of India signed an agreement on May 23, paving the way for the Indian company to purchase 200MW of electricity from Nepal for five years. The agreement was reached between the two sides just ahead of Prime Minister Pushpa Kamal Dahal’s state visit to the southern neighbour from May 31 to June 3.

The five-year agreement which the authority describes as a ‘medium-term’ power sale deal, means that the power utility will be securing the market for its 200MW of power. This deal is outside the existing quota of 452.6MW.After the Indian government approves a list of hydropower projects that Nepal has forwarded for exporting electricity under this mechanism, the selling will begin. Based on an agreement reached with NTPC Vidyut Vyapar Nigam Limited (NVVN), the prices the NEA will be receiving will be modest. The NEA will receive a net tariff of INR 5.25 (Rs8.40) per unit after trade margin, transmission losses and transmission charges.

Nepal has been selling its excess power in India’s day-ahead market since November 2021. The prices in the market fluctuates on a daily basis so the NEA’s sales income changes accordingly. The southern neighbour has so far allowed Nepal to sell 452.6MW of power in the Indian market.