Friday, April 21, 2017

Congested TIA, tourist arrivals and poor infrastructure

Tribhuvan International Airport (TIA), the sole international airport in Nepal, is too congested now
  • Handling 420 flights (100 flights by foreign carriers) daily (2x the number five years ago) 
  • 20 domestic and 28 international airlines use it daily
  • International terminal designed to handle 1,340 passengers per hour. But it is handling 2,700 passengers per hour.
  • 12,000 staff working in three shifts
  • 1.75 million passengers used domestic flights in 2016
TIA is facing severe space crunch as the demand for parking space (due to the increasing number of domestic as well as international airlines) has far outstripped supply. There is a project to upgrade/expand runway, terminal spaces and other infrastructure at the TIA so that it can handle more passengers. However, the project is struggling to pick up pace. An international contractor’s contract was terminated because it could not perform as per the schedule. Like every large scale infrastructure, this one is also affected by poor project planning and implementation, procedural delays at the bureaucratic level, and political infringement. There is a plan to construct an international airport in Pokhara under Chinese assistance (loan), but it hasn't picked up much pace lately.  Similarly, a project related to the expansion of domestic airport, which will eventually become Gautam Buddha International Airport, ran into trouble due to cash shortage arising from slack performance by a local sub-contractor, which was hired illegally. 

Here is a report from TKP:

The subcontract was extended to Nirvik Chitrakar (Khanal), son of former premier and senior CPN-UML leader Jhala Nath Khanal; Raju Gurung, a local goon and UML orter; Furbha Sherpa, a UML-affiliated contractor; Shakti Dangol, a close relative of UML leader Khanal; and Manjit Rai, a UML cadre from Ilam, leader Khanal’s constituency.
The subcontractors were appointed to supply construction materials, labourers, fuel and heavy-duty vehicles. It is said the Chinese contractor handed over money to subractors to execute these tasks without any paperwork. Initially, the subcontractor hired workers, and suppliers to provide construction materials, fuel and heavy-duty vehicles. But after the subcontractor fled, the Chinese company has been forced to foot the bill of the subcontractor.

In 2016, 753,002 tourists (15% of them Indian) visited Nepal, up form 538,970 recorded in 2015, when catastrophic earthquakes hit Nepal.  In 2012, 803,092 tourists visited Nepal. The average length of stay is 13.2 days. The government is aiming to welcome one million visitors in 2017.

Tuesday, April 11, 2017

Sustaining high growth rate in Nepal

It was published in The Kathmandu Post, 10 April 2017.

The prospect of a rosy economic outlook for FY2016-17 dominated headlines and discussions over the past two weeks. Some political analysts and commentators were quick to attribute the cautiously optimistic outlook to the work of the coalition government. Targeting the upcoming local elections scheduled for May 14, the major political parties will construct narratives around this rosy economic scenario to best suit their agenda. 

However, before being carried away by the party-centred narratives, it is necessary to note that such economic forecast is always conditional on key factors moving in the intended direction. It is also necessary to distinguish between autonomous drivers of growth and the ones that can be directly attributed to the government’s efforts. Importantly, the focus should be on implementable strategies to sustain a high growth rate. 

Bright prospects

The previous government had set a target of 6.5 percent for gross domestic product (GDP) growth and 7.5 percent for inflation in the FY2017 budget speech. Considering the dip in economic activities in the FY2016 that resulted in a GDP growth of only 0.8 percent, the target was ambitious but not entirely impossible given the expected large base effect and favourable monsoon rains. In general, base effect refers to the tendency of achieving an arithmetically high rate of growth when starting from a very low base. Hence, simply the normalisation of economic activities disrupted by the crippling embargo and the lingering impacts of the earthquakes would have generated a high growth rate. 

In its 2017 Article IV consultation report, the International Monetary Fund (IMF) revised its growth forecast showing an increase of 5.5 percent. Similarly, in its biannual Macroeconomic Update, the Asian Development Bank (ADB) also made an upward revision of its earlier forecast and estimated GDP growth to hover between 5.2 and 6.2 percent. On an average, it expects GDP growth to be around 5.6 percent.

Meanwhile, the Central Bureau of statistics (CBS), the official government agency in charge of national account estimates, will release its own provisional growth estimate later this month by analysing available data up to the first seven to eight months. The CBS will revise its FY2017 growth estimate in the next fiscal year and then finally provide an actual estimate in FY2019. A general trend is that the actual estimate is lower than the provisional estimate. A GDP growth of over 6.1 percent will be the highest since the FY1992.

Although the point estimate is slightly different among these agencies, the underlying reasons for the upward revision of growth forecasts are similar. The events observed in the first seven months or so and the expected direction of key factors in the remaining five months form the basis for such forecasts.

First, the above average monsoon rains and timely availability of chemical fertilisers have resulted in a bumper agricultural output, which according to the Ministry of Agricultural Development will be at record levels. It constitutes about 33 percent of GDP and is a significant driver of GDP growth. While monsoon rains are beyond the government’s control, a smooth supply of chemical fertilisers and, to some extent, maintenance of irrigation facilitates are definitely affected by its actions.

Second, industrial output, which registered a negative growth last year, is expected to be robust. The modest increase in capital spending (in level but not in absorption rate) and post-earthquake reconstruction activities will boost mining and quarrying as well as construction activities. Furthermore, the substantial improvements in electricity supply and its management and a favourable investment climate thanks to the notable work of the Ministry of Energy and the Ministry of Industry respectively will significantly boost manufacturing activities.

Finally, the addition of electricity from small hydropower projects as well as some improvement in the collection and distribution of water will boost growth of the electricity and water sub-sectors. These four sub-sectors collectively constitute the industrial sector, which is expected to grow at one of the highest rates in recent decades. This is where this coalition government’s actions are most visible and commendable.

Third, services output, which constitutes about 52 percent of GDP and has been the most stable and largest contributor to growth, is expected to be higher than the last two years, but not as high as in FY2014. The main reasons are the deceleration in remittance inflows and expectations of political instability in the Tarai region.

These headwinds will likely be offset by tailwinds expected from the normalisation of supplies and tourism activities, local elections-related expenses and a slight uptick in demand following the disbursement of housing grants in the last two quarters. Although the government’s direct contribution in services sector growth is marginal, it is nevertheless visible from its performance in the sub-sectors of education, public administration, defence and health care. The proactive role played by the Ministry of Health under Gagan Thapa will be especially noticeable in the improved performance of the health sub-sector.

Government’s contribution

Overall, the most notable contributions of this coalition government are that it gave continuity to the contentious budget introduced by the previous government and then made commendable efforts to reinvigorate economic activities— especially through stable electricity supply, acceleration of post-earthquake grant disbursement, nudging the line ministries to scale-up the pace of capital spending (including Melamchi project related works), improving investors’ confidence and making remarkable improvement in the health sector.

That said, a larger contribution to the overall growth will still come from two key exogenous factors: monsoon rains and remittance-backed demand in the services sector. Optimistically higher growth would depend on the government’s efficacy in budget execution and fewer hassles in administrative procedures in the remaining months.

This sort of seemingly one time spurt in growth does not mean that the economy has changed its structure and will sustain high growth in the coming years. We are miles away from reaching a stage where we can sustain a high growth rate and bring about a rapid and meaningful economic transformation. The favourable monsoon rains and remittance-backed demand of imported goods are the default factors that help maintain an average growth of about 4 percent. Achieving and sustaining growth of over 7 percent requires consistent and committed political leadership, a competent bureaucracy and inclusive institutions.

Saturday, April 8, 2017

USD 666.2: Per capita consumption in FY2016 in Nepal

Interesting data from Annual Household Survey 2015-16 (CBS hasn't yet uploaded the report on its website).

Per capita consumption
  • Per capita consumption: NRs70,680
  • Per capita consumption in urban area: NRs101,659
  • Per capita consumption in rural area: NRs52,007
  • Per capita consumption increased by 8.8% between FY2015 and FY2016
Household consumption
  • Average household consumption: NRs322,730
  • Average urban household consumption: NRs431,337
  • Average rural household consumption: NRs248,893
  • Average household expense on food: 53.8% 
  • Total household consumption: NRs1,825 billion
Consumption inequality
  • Per capita consumption expenditure of the top 10 percent is almost 11 times more than per capita consumption expenditure of the bottom 10 percent.
  • Per capita average spending by those in the top 10 percent: NRs243,535
  • Per capita average spending by those in the bottom 10 percent: Rs20,556
  • Average urban household spending on food: 44.9%
  • Average rural household spending on food: 59.8%
Average household size in rural and urban areas is 4.8 and 4.2, respectively.

Exchange rate in FY2016: USD1 = NRs106.1

Friday, March 31, 2017

Upbeat business scenario owing to improved power supply

This piece is adapted from Macroeconomic Update, March 2017, Vol.5, No.1, Asian Development Bank, Nepal Resident Mission.

The business community and the public are enthused by the government’s drive to end load-shedding. An inadequate supply of electricity is considered the most binding constraint to economic activities in Nepal. The existing efforts to end load-shedding through administrative and management overhaul is a welcome move. These positive measures should now also be channeled into reforming the overall energy market, including legislative and institutional reforms. 

The uninterrupted power supply has lowered cost of production for small and medium enterprises as they don’t have to invest in expensive alternatives such as diesel generators and inverters. Similarly, big firms are also generally pleased with limited hours of power cuts instead of unscheduled and longer hours of power cuts in the previous years. Most industries are now running at over 80% capacity compared to 50% capacity utilization in the previous years. Industrial outputs such as cement, iron and steel that are crucial for post-earthquake reconstruction are manufactured at record capital utilization rates. These efforts are having some positive effect on overall economic growth and inflation. Efforts to sustain the uninterrupted power supply would further boost economic activities in the coming years, lower pressures on prices of goods and services, and enhance the cost competitiveness of Nepalese goods and services.

As of the first week of March, the peak energy demand was estimated to be around 1253 MW. The total supply is about 857 MW, of which around 45% is imported from India. The load management efforts geared toward achieving allocative efficiency and efforts to plug in system losses are yielding positive results as evidenced in the last few months. For long-term solution, electricity generation has to increase to match the latent demand. Water and Energy Commission Secretariat (WECS) estimates that the total installed capacity requirement stood at 1721 MW in 2015 and is expected to be in excess of 3000 MW by 2020. By 2030, the installed capacity requirement to meet demand is projected to be over 10,000 MW. Construction of more medium and large-scale run-of-the-river and reservoir type projects need to be commissioned soon so that they are completed on time to catch up with the projected increase in electricity consumption, which at present is one of the lowest in the region.

Nepal Electricity Authority (NEA) has its priority already cut out in the medium-term to supply uninterrupted power. These include: (i) continue with efforts to achieve allocative efficiency; (ii) plugging leakages (estimated to be around 25%) arising from electricity theft and system losses; (iii) maintain and expand transmission and distribution lines for smooth distribution of power from surplus to deficit areas; (iv) increase generation by accelerating completion of ongoing projects and initiating new ones; (v) expedite signing of power purchase agreements with private sector developers; and (vi) continue efforts to overhaul administrative, financial and management functions. Currently, NEA leads the pack in terms of the highest net losses among the 37 public enterprises. Its losses in FY2015 was about 0.6% of GDP. The long-term need is to have separate entities for generation, distribution, transmission and trading of electricity. The strong support by the Ministry of Energy to the reforms measure initiated by the management of NEA is reviving hopes of a financial, functional and administrative turnaround of NEA.

Wednesday, March 29, 2017

Nepal: FY2017 Macroeconomic Update

Here is the executive summary and FY2017 growth and inflation outlook adapted from ADB Nepal's Macroeconomic Update, Vol.5, No.1.

Macroeconomic Update

1. Despite suppressed services output because of the deceleration of remittance inflows, a bumper agricultural output, prospects of a pick-up in post-earthquake reconstruction in the last two quarters of FY2017 and an improving investment climate warrant an optimistic growth outlook than the previous update. The above average monsoon rains and the smooth availability of agricultural inputs, particularly chemical fertilizers, is likely to significantly boost agricultural output. Similarly, the notable improvement in power supply, the resumption of manufacturing activities following the lull after the earthquakes in 2015 and supplies disruption in 2016, and pick up in post-earthquake reconstruction works are expected to boost industrial output. The deceleration of remittance inflows and a marginal effect of the demonetization of higher denomination currency notes in India will likely suppress services activities from its potential level. However, services output is expected to be higher than in the last two years. Overall, tailwinds from the expected acceleration in post-earthquake reconstruction, a slight uptick in demand following the disbursement of housing grants and the election related expenditures may negate the headwinds from the demand dampening effect originating from deceleration of remittance inflows, demonetization shock in India and some degree of political instability in the Terai region. However, there still remains uncertainty over the intensity of these opposing forces. Hence, gross domestic product (GDP) growth (at basic prices) is forecast to grow between 5.2% and 6.2% in FY2017.

2. Although FY2017 budget was announced one-and-a-half month before the start of the fiscal year on the expectation it will provide enough time to plan for procurement and approvals, the expenditure performance till the first half of the fiscal year is not encouraging. The monthly expenditure pattern is similar to the ones seen in the previous years. Actual spending was just 26.2% of the planned spending by the first half of FY2017, the same as in the first half of FY2015 but lower than 30.2% in the same period in FY2014. Actual recurrent spending was 35.4% of planned recurrent budget, higher than 30.9% in the first half of FY2015. However, capital spending was just 11.3% of the planned capital budget, lower than 12.6% and 13.5% in FY2015 and FY2014, respectively. It is very likely that actual capital spending will heavily bunch in the last quarter of FY2017, indicating a persistently weak budget execution capacity of the government. The Ministry of Finance has outlined a series of measures to expedite capital spending.

3. The mid-year revenue mobilization stood at NRs277.6 billion, which is 49% of the total revenue (tax and non-tax) target for FY2017. It is about 69% higher than the revenue mobilized in the first half of FY2016. As a share of total targets, customs, value added tax (VAT), excise and income tax mobilization up to mid-year stood at 60.4%, 45.4%, 54.2% and 50.1%, respectively. Import-based revenues accounted for about 62% of total revenue in the review period. Overall, tax and non-tax revenue target for FY2017 looks achievable primarily because of the surge in imports following the supplies disruption last year. However, a downside risk to achieving the target is the slowdown in import of vehicles because of liquidity crunch in the last few months.

4. Inflation averaged 5.8% in the first half of FY2017, sharply down from 9.4% in the corresponding period in FY2016 and 9.9% in FY2016. The downward correction of prices following the highs during and after the crippling supplies disruption was expected as supplies gradually normalized (narrowing down the gap between demand for and supply of goods and services) along with the favorable monsoon (which boosted agricultural output), improved power supply (which is exerting downward pressure on cost of production) and substantial cooling off of prices in India. Food and non-food inflation averaged 4.2% and 7.1% in the first half of FY2017. Considering the normalization of supplies, rosier prospect for agricultural output, continued low fuel and commodity prices, subdued inflation in India, and lower than expected pace of post-earthquake reconstruction efforts so far, inflation in FY2017 is expected to undershoot the government’s target and hover between 6.0% and 6.5%. A deterioration of political situation is a major downside risk to the forecast.

5. Despite a significant increase in net domestic assets, a slowdown in net foreign assets of the banking sector led to a marginally lower growth of money supply (M2). M2 increased by NRs180.9 billion by mid-January 2017 (against the level in mid-July 2016), up from NRs169.8 billion compared to the corresponding period in FY2016. Net foreign assets grew by 4.7% (NRs45 billion), down sharply from a 18.7% growth rate (NRs139.7 billion) in mid-January 2016. The deceleration of remittance inflows contributed to the slowdown in building up of net foreign assets. The increase in M2 was reflected in the 5.1% growth of narrow money (M1) and 15.9% growth of time deposits.

6. The banks and financial institutions (BFIs) mobilized NRs144.4 billion (reaching a total of NRs2,161.2 billion) in deposits in the first six months of FY2017, higher than NRs100.9 billion mobilized in the corresponding period in FY2016. This translates into a growth of 7.2%, up from 6.0% in the first half of FY2016. Meanwhile, total credit (loans and advances) of BFIs increased by 11.0% (NRs208.5 billion) in the first half of FY2017, up from 4.3% growth in the corresponding period in FY2016 (NRs65.9 billion). The short-term interest rates remained higher than in the corresponding periods in FY2016, reflecting the liquidity crunch in the financial sector. The weighted average deposit rate of commercial banks was as low as 3.29% in mid-August 2016 and rose to 3.98% by mid-January 2017. Meanwhile, the weighted average lending rate was 8.88% in mid-August 2016 and rose to 9.31% by mid-January 2017.

7. The country’s external situation weakened as import growth outstripped export growth and remittance inflows decelerated. In the first half of FY2017, balance of payments surplus drastically decreased and current account balance was negative. The balance of payments surplus decreased to $419.6 million from $1.3 billion in the corresponding period in FY2016. The merchandise trade deficit widened to $3.9 billion, much larger than in the previous corresponding periods. This and deceleration of remittance inflows contributed to the current account deficit of $10.1 million, down from a surplus of $1.5 billion in the corresponding period in FY2016. The capital and financial accounts saw increases in net surpluses. Gross foreign exchange reserves increased from $9.7 billion in mid-July 2016 to $10.0 billion by mid-January 2017, sufficient to cover about 12.4 months of import of goods and non-factor services.

FY2017 growth outlook

8. Despite suppressed services output because of the deceleration of remittance inflows, a bumper agricultural output, possibility of a pick-up in post-earthquake reconstruction in the last two quarters of FY2017 and an improving investment climate warrant an optimistic growth outlook than in the previous update. The above average monsoon rains and the smooth availability of agricultural inputs, particularly chemical fertilizers, is likely to significantly boost agricultural output.

9. Similarly, industrial output will be robust following a negative growth last year due to the four-and-a-half month long crippling supplies disruption. Specifically, the notable improvement in power supply and the resumption of manufacturing activities following a lull after the earthquakes in 2015 and the supplies disruption in 2016 will underpin a robust manufacturing sector growth. Meanwhile, the expected pick up in reconstruction of houses and settlements (in line with the latest acceleration in grant disbursement by National Reconstruction Authority [NRA]) will support growth in construction and mining and quarrying activities. Furthermore, addition of electricity from small hydropower projects this year will support growth of electricity, gas and water subsector. Increase in capital spending in the last quarter is also expected to boost construction, manufacturing and mining activities. 

10. The deceleration of remittance inflows and a marginal effect of the demonetization of higher denomination currency notes in India will likely suppress services activities from its potential level. The growth of migrant workers is expected to fall in FY2017 as well because of the slowdown in investment in the major overseas employment destinations (following the impact of low oil prices in the last several years), resulting in deceleration of remittance income. Consequently, wholesale and retail trade activities, the largest contributor to GDP growth after agriculture, are not going to be as robust as in FY2014 although the expected growth in FY2017 will be higher than in the last two years. The demonetization shock, which has already affected economic growth and inflation in India, has marginally affected remittance inflows from India, trading activities and investment in micro and small enterprises along the border areas. The marginal effects may linger until the normalization of the currency demand and supply in India. On the other hand, a surge in visitor arrivals, which had remained subdued in the last two years, will boost tourism activities. Additionally, the local elections, which are scheduled for 14 May 2017 related spending7 will boost consumption demand and will likely compensate for the dampening effect of deceleration of remittance and marginal effect of demonetization in India.

11. Overall, tailwinds from the expected acceleration in post-earthquake reconstruction, a slight uptick in demand following the disbursement of housing grants and the election related expenditures may negate the headwinds from the demand dampening effect originating from deceleration of remittance inflows, demonetization shock in India and some degree of political instability in the Terai region. However, there still remains uncertainty over the intensity of these opposing forces. Hence, GDP growth (at basic prices) is forecast to grow between 5.2% and 6.2% in FY2017. Specifically, the lower forecast is based on the assumption of a dented services sector growth and an agricultural output growth normally registered during times of favorable monsoon rain. The higher forecast is based on the assumptions of a stronger-than-expected agricultural output growth and less-than-expected deterioration of political situation as the local elections day approaches. A more definite forecast (i.e., a point estimate) will be available in Asian Development Outlook 2017, which takes into account the latest data and information available. Compared to the estimate in August 2016, the latest forecast revises upward the outlook for agricultural and industrial sectors.

FY2017 inflation outlook

12. In addition to the normalization of supplies, a rosier prospect for agricultural output, continued low fuel and commodity prices, subdued inflation in India, and lower than expected pace of post-earthquake reconstruction efforts in the first half of FY2017, inflation is revised downward from the forecast in our previous update. A faster decline in prices of perishable and daily consumable goods as well as consumer durables largely accounted for the downward revision of inflation forecast for FY2017. Specifically, more than anticipated bumper agriculture harvest— thanks to the above average monsoon rains and the smooth availability of agricultural inputs, particularly chemical fertilizers— and faster than expected deceleration of consumer prices in India (partially contributed by the demand shortfall arising from demonetization shock in November 2016) played a critical role in such a forecast revision. Furthermore, the notable improvement in electricity supply this year has also decreased cost of production for business and household enterprises. That said, rise in international fuel prices and political disturbances—especially in the Terai region, as local elections, which are scheduled for May 14, approaches— may exert upward pressures on general prices of goods and services. The other likely sources of upward price pressures are direct and indirect election related expenses as political campaign intensifies and a demand boost arising from the expected acceleration in post-earthquake reconstruction works in the remaining period of this fiscal year. 

13. Considering these factors, headline inflation in FY2017 is expected to undershoot the government’s target and hover between 6.0% and 6.5% (Figure 15). A substantial moderation of prices of cereal grains, pulses and legumes, ghee and oil, spices and vegetables will exert downward pressures on overall food prices and contribute between 2.2 and 2.4 percentage points to the forecasted overall inflation. Similarly, non-food and services prices, which account for 56.1% weight in the CPI basket, are also expected to cool off on account of either stabilization or moderation of prices of consumer durables and utilities. It is expected to contribute between 3.8 and 4.1 percentage points to the overall estimated inflation. A deterioration of political situation is a major downside risk to the forecast. A more definite forecasted point estimate is available in Asian Development Outlook 2017, which takes into account the latest data and information available.

Tuesday, March 21, 2017

Rapid economic transformation in Nepal

It was published in The Kathmandu Post, 20 March 2017

Implementing the vision would require consistent and committed political leadership, and a competent bureaucracy

Kenichi Yokoyama & Chandan Sapkota

Nepal has set a long-term vision to graduate from the Least Developed Country (LDC) category by 2022 and attain a prosperous, middle-income country status by 2030. The National Planning Commission is leading efforts to chart a bold and time-bound economic development roadmap to attain these goals. In this regard, the remarkable economic transformation of several Asian economies in a matter of a few decades provides important lessons for Nepal in its quest to achieve rapid, sustainable and inclusive economic growth. 

Economic structure

So far, Nepal’s economic transformation is not supported by growth-enhancing structural change. Economic structure and labour have shifted from low productivity agricultural to low productivity services, bypassing the industrial sector. In 1984, agricultural, service-based and industrial  sectors accounted for 61 percent, 26 percent and 13 percent of gross domestic product (GDP) respectively. Currently, while the agricultural sector accounts for 33 percent and the service sector a whopping 52 percent of GDP, industries account for just 15 percent of GDP. In effect, there is a gradual deindustrialisation since the industrial sector peaked at 23 percent of GDP in 1997.

Consequently, GDP growth has been low and volatile, depending mostly on the monsoon rains and remittance-fueled consumption demand in the service sector. Per capita GDP growth averaged just 2.6 percent in the last three decades, reaching $746 in 2016. Similarly, real annual GDP growth averaged 4.2 percent in the last three decades. GDP growth was above 8 percent in two instances only: in 1981 and 1984. In 1994, it grew by 7.9 percent. The economy has to grow by an average 8 percent each year to achieve its goal of becoming a middle-income country. 

Asian experience

The Asian experience—for instance the cases of Japan, Hong Kong, Singapore, Thailand, and Malaysia—provides valuable insight to initiate rapid structural transformation

These economies invested heavily in fundamentals and guided the economy with a clear vision, resulting in rapid and sustained economic growth. Initially, the structure of the economy was transformed by increasing the size and dynamism of the industrial sector. Agriculture played an important role by increasing labour and land productivity, stimulating growth in backward and forward linkages such as agro-processing, and releasing labour to help industrialisation. These were supported by stable fiscal and monetary policies that were occasionally unorthodox, and an investment-friendly policy regime. These strategies led to a sustained high growth rate. 

Furthermore, they invested heavily in infrastructure as a foundation for production and trading, prioritised human capital formation, fostered technology transfer, and strengthened institutions. This enhanced and sustained economic competitiveness and high per capita income levels. These measures were crucial in boosting productivity and value addition in the industrial sector, and in diversification and sophistication of productive services such as financial and IT systems. Here, well-planned and developed urban infrastructure was a critical catalyst.

In essence, pragmatic industrial promotion strategies along with access to markets, capital and technologies of more advanced economies helped these economics to rapidly take-off and boost per capita income. A clear and pragmatic development vision, incremental reforms to boost critical physical and social infrastructure, and strong institutional fundamentals and ownership underpinned this transformative process. 

Lessons for Nepal

The global investment, trade and financial regimes are different now compared to the times when these economies were taking-off and growing at high rates. As a latecomer, Nepal doesn’t have the same privileges, untapped potential and preferential market access opportunities. However, it does have significant opportunities to spur high growth by catering to the needs of the growing internal and favourable external markets through hydroelectricity, light manufacturing goods, high value agriculture products, tourism, and information technology development. Overall, raising productivity across all sectors will be the key. 

Note that enhancing per capita income to a middle-income level will be conditional on the correct positioning of micro and macro fundamentals. Faster catch-up is easier at this stage if productivity of agricultural and industrial sectors increases rapidly. In particular, a competitive manufacturing sector, which produces tradable goods, absorbs more labour, provides sustained sources of income and boosts entrepreneurship, is essential to move up the ladder of industrialisation. 

Nepal could point the macro fundamentals in the right direction by increasing the quantum and quality of investment in agriculture, transport, energy, urban development, education and skills, and healthcare. Nepal could also make progress by controlling inflation, improving governance and rolling out private sector friendly reforms. Some of these measures are an integral part of the government’s “second generation reforms”. However, the lack of effective implementation of policies and timely budget execution are subduing growth potential. Similarly, the micro fundamentals that need to be addressed are labour relations, land reforms, and anti-competitive practices, which are fostering inefficiencies and stifling growth opportunities in all sectors.

As the backbone of the economy, agriculture supports growth and livelihoods and lowers price volatility. Thus, enhancing land and labour productivity is crucial for a meaningful transformation. Productivity could be increased by using new technology and shifting traditional cropping practices to more high value added activities such as livestock, fruits, vegetables and agro-processing. It should be supported by transport networks, development of value chains, credit flows, irrigation and marketing.These call for well-structured programming and implementation of the Agriculture Development Strategy.  

Following the enhancement of agriculture, strengthening the industrial sector is vital for generating meaningful jobs and accelerating growth. Provisioning of infrastructure and supportive policy and institutional reforms are critical. Also necessary are pragmatic industrial promotion strategies, which could range from import replacement and export promotion that hinge on increasing domestic value added and employment, to establishing functional industrial zones and economic corridors. A range of industrial and trade policies/strategies are periodically updated and approved, but their effective implementation is not getting much attention.  

Nepal has a latecomer advantage in the light manufacturing sector, which normally absorbs semi-skilled labour force—similar to the workers who migrate overseas. Hence, it could get spill over demands from countries where wages are rising fast, provided that factors that supress competitiveness such as inadequate power supply, high cost of transport, and labour relations are addressed. Nepal could then gradually produce sophisticated goods that require higher knowledge, management skills and technology transfer. This would also complement high productivity services, ie moving from trading businesses to IT services, travel and tourism, and educational and healthcare services. 

Government’s role

The government has an important role to play in providing critical infrastructure, addressing market failures, designing a growth-enhancing tax regime, and implementing business-friendly policies to usher in a meaningful structural transformation. It also needs to enhance both the quantum and quality of public capital spending to over 8 percent of GDP annually. Given the sound fiscal space, though Nepal doesn’t have a shortage of funds until medium-term, a dearth of capacity to fully execute the budget and finish projects on time may prove problematic. 

Implementing the vision of a rapid economic transformation would require consistent and committed political leadership, and a competent bureaucracy. This would form the institutional fabric that helps translate good economics into good politics with economic development as the core theme. It ensures shared prosperity, makes reversibility of policies costly, enhances individual’s and firm’s confidence in the economy, and encourages the bureaucracy to provide faster and better service delivery.

With an appropriate mix of macroeconomic strategies, financial arrangements, smart project execution, and supportive institutions and policies, it is reasonable for Nepal to be upbeat about the possibility of a meaningful economic transformation and attainment of the long-term vision.

Yokoyama is Country Director of Asian Development Bank, Nepal resident mission; Sapkota is an economist. Views expressed in this article are personal

Saturday, March 4, 2017

Nepal: Huge investment pledge and a new financial sector reform loan

Foreign and domestic investors pledged investment commitment (at this stage its "letter of intent" [LOI]) totaling NRs1,445.5 billion (around $13.5 billion) at the Nepal Investment Summit held on March 2-3 in Kathmandu.  The investors showed interest in hydropower, hotels, metro rail, airlines, tunnels, tourism, energy, agriculture, infrastructure, mines and financial sector.
  • China: $8.3 billion (airport, highway, tunnel, water supply, hydropower, railways, road, smart grid)
  • Bangladesh: $2.4 billion (food and construction)
  • Japan: $1 billion (hydropower)
  • UK: $1 billion (energy, agriculture, infrastructure)
  • Sri Lanka: $500 million (hydropower, solar, wind)
  • India: $317 million (investment bank, solar, steel plant, tourism, industrial and biomedical, )
  • Nepal: $11.5 million (pulp and paper, construction, manufacturing, agriculture)
The last such investment summit was organized back in 1992. The investment summit had a broad support from across the political parties. 

The big question is: What is the government going to do (or what different is it going to do) to translate these commitments into actual investment? The government doesn’t have a plan yet. But, they are going to start working on it immediately by setting up sectoral committees to follow up on the pledged investment.  

The World Bank is providing $100 million Development Policy Credit (the third in a series of program loans) to enhance financial sector development; restructure and consolidate the financial system; strengthen the legal and regulatory framework for crisis management, banking and insurance supervision and payment systems; and enhance the governance and transparency of the banking sector.

Here is a the latest Financial Sector Development Strategy (FY2017 - FY2021) approved by the government.