Sunday, April 20, 2014

Third highest remittance inflows (% of GDP) to Nepal in 2012

According to the latest Migration and Development Brief No.22, official remittance inflows to Nepal reached 24.7% of GDP in 2012, which makes Nepal the third largest remittance recipient in the world. Migrants remitted an estimated US$5.2 billion to Nepal in 2013 (equivalent to about 25% of GDP). The amount of remittance outflows was just US$50.3 million in 2012.

The average growth of remittance inflows over the last five years has been around 14%, boosted by both the increased number of migrant workers leaving the country and the higher incentives to send more money back home as a result of the depreciation of Nepali rupee against major convertible currencies. Increased remittance inflows are greatly boosting banking sector liquidity in FY2014, leading to a situation where BFIs are increasingly investing in near zero interest bearing T-bills in the absence of good investment projects. More on remittances in Nepal here and here.

Top remittance recipients

As a share of GDP in 2012, the top five remittance recipients were Tajikistan (51.9%), Kyrgyz Republic (31.4%), Nepal (24.7%), Moldova (24.6%) and Samoa (23.5%). In 2010, Nepal was the sixth highest remittance recipient in the world.

In US$ term, India received $70 billion in 2013, followed by China ($60 billion), the Philippines ($25 billion), Mexico ($22 billion) and Nigeria ($21 billion).

In South Asia, while India received the highest amount of remittances, Nepal was the highest recipient as a share of its GDP. As a share of total remittance inflows to South Asia, India receives about 63.2% and Nepal 4.7%.

Remittance inflows
2013e (US$ million)
Share of GDP, 2012
Sri Lanka

  • The WB estimates remittance inflows to development countries at $404 billion in 2013, up 3.5% from 2012. It is expected to grow by an annual average of 8.4%, increasing total remittance inflow to developing countries to $436 billion, $473 billion and $516 billion in 2014, 2015 and 2016, respectively.
  • South Asia is expected to see remittances growth of 6.6%, 7.3%, and 7.5% in 2014, 2015 and 2016, respectively, increasing remittance inflows to $118 billion, 127 billion and 136 billion over the same time periods.

Friday, April 18, 2014

Fishing sector in Nepal

Fishing sector in Nepal is growing (though not at a faster rate given the growing internal demand). Its share of GDP reached 0.62% in FY2013, up from 0.48% in FY2002. There is a huge and growing domestic demand for fish, which is taken as a substitute for meat products (even by some vegetarians I know of!). Nepal’s fish import was over NRs2.7 billion in FY2013 (about NRs1.45 billion from India and NRs1.29 billion from PRC).

With targeted and adequate support from government and development partners, fishing sector has the potential to be a good showcase for (i) import substitution, (ii) commercialization of agriculture, and (iii) source of jobs.

[Fish farm in Chanauli, Chitwan]

Currently, the government is providing some subsidies (for instance, electricity cost is half the normal rate per unit = about NRs 4 per unit), which needs to be better targeted and perhaps continued (given the fact that one of the countries from where Nepal imports fish heavily subsidizes its agriculture sector). The fish culture and research centers of the government need upgrading along with efficient operations. The fish farming sites strategically located around the country have to be connected by road network. Furthermore, there has to be better and more storage facilities.

Relevant capacity building of fish farmers would help in optimizing land utilization around fish farms (= further commercialization plus diversification of income source). Affordable access to finance and better linkages between farm-gate and wholesale/retail centers are two never ending constraints. All these basic initiatives could help Nepalese fish farmers produce better fishes and compete with relatively cheaper imported fishes.

[We enjoyed fresh fish curry during a recent trip to a fish farm in Chanauli, Chitwan. The farm is owned by one of my friends who recently quit business journalism to start commercial fish farming.]

Monday, April 14, 2014

Taming high inflation in Nepal

[This blog post is adapted from Nepal country chapter of Asian Development Outlook 2014. The FY2014 and FY2015 outlook here.]

Average inflation has surpassed 9% in each of the past 5 years except for FY2012, when it was only slightly less. Inflation at 12.6% in FY2009 was the highest in the past 2 decades, largely driven by 17.4% rise in the price of food, which occupies a 46.8% share of the consumer price index basket. Since then, food inflation has slowed but remains high, averaging 11.7% in the past 4 years. Similarly, inflation for other items and services has surpassed 9% in the past 2 years. Taming high inflation, which erodes consumers’ purchasing power and makes producers less competitive, is one of the country’s major macroeconomic challenges.

Inflation in Nepal tends to move in tandem with inflation in India, which is Nepal’s largest trading partner and with whose currency Nepal has pegged its rupee. According to a study by the International Monetary Fund, inflation in India and international oil price movements account for about one-third of the variability in Nepal’s inflation. Moreover, after FY2007 inflation became more responsive to changes in international oil prices and the nominal effective exchange rate. Food price inflation, which has contributed about three-fourths of all consumer price index inflation in recent years, is more responsive to spillover from oil price movement and India’s food inflation. The impact of international oil price movements seems more pernicious because a rise in petroleum product prices is quickly felt in the price of chemical fertilizers and transportation. Monetary factors affect both food and nonfood inflation, but their effect tends to fade away quickly.

Other factors that have driven inflation in recent years are weak currency, wage pressures, and supply-side constraints. The depreciation of the Nepalese rupee against the currencies of its trade partners has inflated costs not only for final goods but also for imported raw materials and intermediate goods. Furthermore, 161 products, mostly industrial raw materials, are imported from India in exchange for US dollars. Supply-side constraints such as power outages, transportation bottlenecks, and market price distortions imposed by middlemen and syndicates have also played major roles in keeping inflation high. These factors appear to have intensified since FY2007, when inflation in Nepal started to diverge from its usual path in tandem with inflation in India. Syndicates’ arbitrary hikes in transportation costs and the widening gap between farm gate prices and retail prices— estimated to be at least 40% in the case of fresh vegetables— have propped up high inflation.

Though the government has banned syndicates and anticompetitive practices, enforcement remains weak. Effective market supervision and monitoring are needed to rectify market distortions. Another need is to check inflationary expectations by ensuring prudent fiscal and monetary policies. A way to diminish inflationary expectations would be to remove uncertainty over supplies of motor fuel and cooking gas. Appropriate steps to boost agricultural production would also help meet market demand and limit the impact of imported inflation. Taming inflation requires that financial policies and structural bottlenecks alike be effectively addressed.

Friday, April 11, 2014

Effects of remittances on Nepalese economy

This post is adapted from a feature story published on Al Jazeera's website. For more on remittances in Nepal, see earlier blog posts.

Remittances have been responsible for poverty reduction, increase in foreign exchange reserves, and caused dependency.

Solukhumbu, Nepal - During a community meeting in an unlit concrete building perched on a mountain terrace, Dom Kulung stands to address the small crowd.

He points at a fellow 20-something man and instructs earnestly: "Once we are educated here, if we leave, we must return with the intent to develop our community."

The message is received well enough with nods. But then Kulung twists the logic a bit: "We don’t need money. We cannot just send money back from Malaysia or India or Gulf countries. That isn’t solving the problem. Money is not enough."

Some in the crowd appear puzzled - others relieved.

Cheskam is among the most remote communities in Nepal - one of the world’s poorest countries - several days walking from the nearest road. Residents in this area traditionally made a living by farming or walking three days to Mount Everest for seasonal work as porters on mountaineering expeditions.

But in the past decade, those traditional sources of income have been eclipsed by an opportunity to make good money, fast, by traveling abroad to work.

Nearly 1,500 Nepalis migrate abroad for work each day. At least 2.2 million Nepalis work abroad – and that figure is believed to be an undercount as many more cross the open border with India regularly.

Last year they sent back about $4bn, nearly a quarter of the country’s gross domestic product.

While the outflow of labour and inflow of money has had undeniable impact, some analysts warn of the toll such changes are taking on the country’s economy - both at the household level and for the country as a whole.

“You can’t find an aspect of any Nepal citizen’s life these days that is not touched by remittances,” said Chandan Sapkota, an economist with the Asian Development Bank in the capital Kathmandu.

Remittances have been responsible for poverty reduction, increase in foreign exchange reserves, and the expansion of banks and financial institutions.”

But, he warned: “The money from remittances is an enormous cushion for Nepal - until something bad or unexpected happens.”

‘Double-edged sword’

A 2011 World Bank report called this cushion the “vicious policy cycle of large remittance” in Nepal, and warned that “no country has ever succeeded in sustaining growth and job creation on remittance alone”.

Jagannath Adhikari, a poverty and economic development analyst, called remittances and migration “a double-edged sword for Nepal,” pointing to a 2011 report he authored on the impact of labour out-migration on rural Nepal.

“There are real dangers in over-dependence on labour migration and remittances,” said Adhikari. “But the adverse impacts or the possible dangers are not that obvious and thus are not discussed.”

Yurendra Basnett, a research fellow at the London-based Overseas Development Institute (ODI), said “The current state of mass migrant out-flow is a reflection of the complete collapse of Nepal’s economy.”

The majority of Nepali labour migrants who travel through official channels go to Malaysia, or Gulf countries such as Qatar and the United Arab Emirates, to work in factories or on construction sites.

While watchdogs such as Amnesty International and Human Rights Watch have highlighted abhorrent working conditions there, other observers say the roots of abuse lie at home in Nepal.

“The underbelly of the remittance success story is that there are few people drawing lines between the horrible conditions these workers can face in their destinations and the conditions at home,” said Basnett.

Basnett, who is an economist, argued that: “The people migrating into these conditions are acting as rational actors - yes there is coercion and manipulation in some cases, but ultimately we have to connect the lack of opportunities at home to the horrid conditions abroad.”

Despite poor work conditions abroad, the number of Nepalese seeking to migrate is holding steady.

‘Dutch disease’

“The money coming in from work being done outside the country has led to an explosion in consumer demand - so much so that the domestic markets cannot provide everything the buyers want. So we see imports increasing,” said Sapkota.

Sapkota has warned of the potential onset of “Dutch disease” as a result of remittances in Nepal, a situation where a substantial spike in revenue from a single industry can have adverse impacts on the rest of the economy.

“A lot of this money coming into the country is being earned outside the country, and being spent on products that were manufactured outside the country - not really contributing to Nepal, per se, much at all,” he said.

The evidence of the negative impact of a remittance boom, Sapkota said, is obvious throughout the country.

“Remittances have driven up tax revenue to the point where the government has operated at a surplus despite lagging behind in the basic infrastructure developments - such as roads and electricity - that would encourage investment in Nepal in the first place,” he said, pointing to increased tax revenues from imported goods, which are purchased with remittance income.

According to Adhikari, Nepal’s reliance on remittance money has had a range of dangerous effects.

"Dependence on remittances and confidence that the in-flow will remain so high means that if there is a shock in terms of decline in that money, the country’s economy will have no way to cope," he explained, also pointing to productive labour Nepal lost with so many people working abroad.

Basnett put the blame squarely on the "rent-seeking elite class running the country".

“There is a lot of apathy when it comes to updating Nepal’s economic policies because the people in charge are making a lot of money off of how things are running now by extracting resources that they haven’t directly earned,” he said, adding Nepal’s economic policies have not been updated since 1992.

He called migration a “safety valve” for decision-makers. “Remittances that come back feed into the system through taxes and by temporarily pacifying the people on the receiving end of the money.”

Beyond returns

But others argue remittances mean more to Nepalese society than just the cash that flows in.

“So much more comes back from migrant labour than just money,” said Drupad Choudhury, programme manager for the International Centre for Integrated Mountain Development (ICIMOD) in Kathmandu. “Remittances are flows of more than just cash - they bring information, ideas, and trends, and all of these things can influence life here in Nepal.”

For example, an experimental project was recently launched to examine whether remittance in-flows could influence building codes in Kathmandu. Nepal’s sprawling capital carries the highest seismic risk in the world and a major earthquake would kill hundreds of thousands, in part because of explosive population growth and a remittance-fueled ungoverned construction boom.

But the implications could go beyond material impact as well.

“Because migrant workers come from such a range of backgrounds - class, ethnicity, geography, and so on - and then return home having seen the world, having earned some money, my hope is that this flow will fundamentally change political vision,” said Basnett.

“A farmer who a generation ago would have had his political views shaped by interactions in his own rural district, and maybe a few trips outside to other parts of Nepal, now has exposure to Kathmandu, to the abuses of the migration system, to an understanding of what rich countries are like. And that will all inform what he thinks of Nepal’s leaders and the demands he makes on them,” he said.

But until policy changes improve the domestic investment environment, migrant labourers and the money they earn and send home will continue to operate according to what Sapkota calls “a scheme of sweet pain”.

“The system as it is today is sweet for the government time and time again and painful for the people who are doing the work,” he said.

Wednesday, April 9, 2014

An interesting theory on inequality: Wealth gap (including inherited) will be the main issue in the long run

An interesting review of Thomas Piketty's Capital in the 21st Century by Matt Yglesias at Vox.

The main point is that: Wealth to income ratio & rate of return on capital to GDP growth ratio are increasing = Top very few already wealthy are getting wealthier and wealthier = Widening inequality

Matt summarizes:

[1] The ratio of wealth to income is rising in all developed countries.
[2] Absent extraordinary interventions, we should expect that trend to continue.
[3] If it continues, the future will look like the 19th century, where economic elites have predominantly inherited their wealth rather than working for it.
[4] The best solution would be a globally coordinated effort to tax wealth.
Highly concentrated income was in the hands not just of the top 10 or 20 percent of households but the top 1, 0.1, or even 0.01 percent. [...]The dynamic towards wealth inequality is built into capitalism rather than any one country's economic policies. [...]In the long run the economic inequality that matters won't be the gap between people who earn high salaries and those who earn low ones, it will be the gap between people who inherit large sums of money and those who don't. [...]Piketty says we are headed for a world of patrimonial capitalism where the Forbes 400 list will be dominated not by the founders of new companies but by the grandchildren of today's super-elite.

Basically, inherited wealth + higher retention of income from the use of factors of production make wealthy folks even wealthier. Looks like an accumulative process that kick-starts entrepreneurship up to a certain threshold but then widens income inequality after that threshold is breached. Finding a fine balance/non-static equilibrium may be the trick now (= at least some form of progressive redistribution without stymieing entrepreneurship). Piketty advocates a global wealth tax.

Thursday, April 3, 2014

Infrastructure gap in South Asia: Between 6.6% and 9.9% of GDP per year

A latest World Bank report argues that South Asia faces infrastructure gap (transport, electricity, water supply and sanitation, solid waste, telecommunications and irrigation) of between US$1.7 trillion and US$2.5 trillion (at current prices) until 2020 [US$1.4 and US$2.1 trillion at 2010 prices]. 

In terms of GDP, it amounts to between 6.6% and 9.9% per year (spread evenly over the years until 2020). Overall, infrastructure investment in South Asia was 6.9% of GDP in 2009. Infrastructure investment in India accounts for, on average, 79% of total investment in South Asia. Nepal’s share is just 1%, second lowest to Bhutan’s 0.2%. To close the infrastructure gap, the report suggests going for a mix of investment in infrastructure stock and implementation of supportive reforms.


In terms of access to infrastructure services in Nepal, 47 per 100 people had telecom access (2011), 75% of population had electricity access (2010), 35% of population had access to improved sanitation (2011), 88% of population had access to improved water (2011), total road network was 0.8 km per 1000 people (2008), and 54% of roads were paved (2008). Nepal’s telecom access per 100 people was the lowest in South Asia. These provide an indication of how large the unmet infrastructure demand is.

The report shows that Nepal faces a financing need of between 8.24% and 11.75% of GDP per year until 2020 (at 2010 prices). The cumulative investment requirement over 2011-2020 (at 2010 prices) is estimated between US$13 billion and US$18 billion. 

Specifically, the financing needs to bridge the infrastructure gap are as follows:
  • Transport: 2.32% to 3.49% of GDP
  • Electricity: 3.34% to 4.46% of GDP
  • Water supply and sanitation: 1.08% to 1.62% of GDP
  • Solid waste: 0.24% to 0.30% of GDP
  • Telecom: 0.27% to 0.40% of GDP
  • Irrigation: 0.99% to 1.48% of GDP
  • Total: 8.24% to 11.25% of GDP

A 2010 ADBI study showed national investment need of about US$1.3 billion per year until 2020. As a share of GDP, it amounts to around 8.48% of GDP. Sector-wise investment need was 1.65% GDP for transport, 0.59% GDP for electricity, 5.14% of GDP for ITC and 1.10% of GDP for water and sanitation.

Nepal’s existing infrastructure investment hovers around 5% of GDP. There is a need to scale up investments especially in electricity and transport as the inadequate supply of these are the most binding constraints on growth.

Some of the policy recommendations proposed by the study are as follows:
  • Rehabilitate and maintain existing assets
  • Reform service providers and ensure financial/operational sustainability (no political interference and appropriate incentives to perform efficiently)
  • Establish solid legal, policy and regulatory frameworks (including PPPs)
  • Decentralize service provision
The report assesses the infrastructure gap using a four-step process: (i) where a country is today (infrastructure investment as a share of GDP); (ii) where a country would like to be at a given point in time; (iii) financing and policy options available at present to march towards the goal; and (iv) the remaining financial gap that will be needed to be bridged.