Wednesday, September 11, 2019

How did Nepali economy perform in FY2019?

Overview
  • Positive point: Three consecutive years of high GDP growth
  • Concerning points: Weak budget execution, revenue growth below target, inflation inching up (natural given high GDP growth), continued tight liquidity and high interest rates, large fiscal and current account deficits, lower FDI, depleting foreign exchange reserves (although at OK level)
  • Things to watch out for: Whether high growth rate is sustainable without significant improvement in public capital budget execution and higher private investment (domestic and foreign), structural and institutional reforms (procurement, land, environment, human resources and labor market, laws and regulations), and sound governance
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1. CBS estimated that the economy would grow at 6.8% (GDP at basic prices) in FY2019. At market prices, it is expected to grow at 7.1%. This marks three consecutive years of above 6% growth rate. In FY2019, bumper agricultural harvest and pickup in services sector activities contributed the most to the GDP growth. Specifically, agricultural, industrial and services sectors are projected to grow by 5.0%, 8.1% and 7.3%, respectively. Agricultural sector contributed 1.6 percentage points, industrial sector 1.3 percentage points and services sector 3.9 percentage points to the overall projected GDP growth of 6.8%. These projections are based on eight to nine months data.


2. Specifically, electricity, gas and water sub-sector is projected to grow at the fastest rate (12.4%, up from 9.8% in FY2018), followed by wholesale and retail trade (10.9%, down from 12.3% in FY2018), mining and quarrying (9.5%) and construction (8.9%). These indicate accelerated work in hydroelectricity generation and ongoing construction as well as pickup in reconstruction related activities (public as well as private housing and infrastructure). The high wholesale and retail trade activities are related to the burgeoning import growth and remittance income. Overall, robust agricultural output is underpinned by favorable monsoon and timely availability of agricultural inputs, and high services sector output is supported by wholesale & retail trading, tourism and real estate activities. Industrial sector slowed down a bit compared to FY2018.

3. On the expenditure side, GDP (at market prices) grew by 7.1%, up from 6.7% in FY2018. Consumption accelerated but public fixed investment (public GFCF) decelerated, indicating a slowdown in capital spending. A much higher increase in import and a slower increase in export meant that net export was negative.


4. On fiscal sector, capital expenditure absorption capacity continues to remain low despite the budget being unveiled one and a half month prior to start of FY2019. The government argued that it spent the first few months in designing spending procedures and directives, and laws related to investment promotion and procurement. It also said that small projects were delegated to local governments, but was not so forthright in delegation of spending and monitoring authority. This also contributed in low capital spending. Furthermore, delays in land acquisition, environment clearance, lengthy procurement processes, lack of inter-agency coordination, etc continued to bog down the extent and the effectiveness of public spending. As per the data from FCGO, actual capital spending is projected to be about 75.9% of planned capital spending. Similarly, actual recurrent spending is projected to be 84.6% of planned recurrent spending. Recurrent and capital expenditures are projected to be 20.6% and 6.9% of GDP, respectively. These were 23% and 7.9% of GDP in FY2018. FCGO used to publish monthly budgetary expenditure and revenue previously. Very strange that it is not publishing them on time these days (even quarterly public debt data are not published regularly). These are preliminary figures. Actual figures will probably show slightly higher recurrent but a bit lower capital expenditures. Also, there isn't much change in spending pattern too, with over 50% of spending bunching in the last quarter. 


5. Meanwhile, based on the latest revenue data published by the central bank in its macroeconomic situation report, revenue growth is estimated to be about 17.4%, much lower than the government’s target. Total revenue will be around 24.8% of GDP. The share of VAT is the highest (28.1%), followed by income tax (22.6%), customs (18.1%) and excise duty (14.2%) among others. Considering the expenditure under-performance and high level of revenue mobilization (although short of the target), fiscal deficit will likely be around 6% of GDP. A higher fiscal deficit is exerting pressure on current account balance too.



6. Annual CPI inflation averaged 4.6%. Here, note that usually the central bank computes annual average inflation as the average of monthly inflation, in which case it will be 4.7%. However, the central bank used the average of monthly CPI index to compute annual inflation for FY2019. Why to be inconsistent in FY2019 only (probably, to side with the lower inflation figure or just a mistake)? In any case, let us use the 4.6%, which is slightly higher than the inflation in FY2018. Both food and beverage, and non-food and services inflation increased in FY2019. In food and beverages, the highest increase in prices was that of alcoholic drinks and tobacco products (no surprise here as the government increased taxes and excise duty). In non-food and services, the highest increase in prices was that of housing and utilities, clothes and footwear, and transportation (higher fuel prices, depreciation of currency as well as strong consumer demand). 



7. M2 (broad money) expanded by 15.8%, driven by private sector credit growth. However, M2 growth in FY2019 is lower than the central bank’s target (and the one in FY2018) owing to the decline in net foreign assets. Overall credit to private sector expanded by 19.1%, lower than in FY2018.


8. Deposits at BFIs increased by 18%, lower than 19.2% in FY2018. Credit (loans & advances) grew by 20.7%, lower than 23.3% in FY2018. Deposits growth of all class A, B and C BFIs slowed down. Credit by development banks increased but that by commercial banks and finance companies decreased compared to the growth in previous year. However, credit growth of commercial banks was still higher than its deposit growth. Agriculture sector credit grew by 42.5% (primarily because processing of tea, coffee, ginger and fruits and primary processing of domestic agro products were included in agriculture  from October 2017. Prior to this, most of these were under production). Credit to construction sector grew by 22.2%. Similarly, credit to mining, transport equipment production and fitting (includes aircraft and aircraft parts); transportation, communications and public services (includes electricity), and consumable loan (includes gold & silver) grew at a faster rate than the previous year. However, credit to industrial production; metal production, machinery and electrical tools and fitting; wholesale and retail trade; finance, insurance and fixed assets (includes real estate); and service industries slowed down.  Of the outstanding credit up to mid-July 2019, the largest share (21.1%) is that of transportation, communications and public services; followed by agriculture, consumable loan, service industry, and construction, among others. 



9. The weighted average inter-bank rate has been increasing. At 4.2% in FY2019, the weighted average inter-bank rate is the highest since FY2011, when it was 8.4%. In mid-July 2018, it was 2.96%. It decreased for few months and then started to rise again, peaking  at 6.91% in mid-June 2019. In mid-July 2019, it was 4.52%. Similarly, 91-day treasury bill rate also followed similar pattern, reaching 4.97% in mid-July 2019. It indicates tight liquidity in the banking sector arising from two sources: (i) faster credit growth than deposit growth (to maintain profit margin banks had to increase loans after the sharp increase in paid-up capital); and (ii) lower than expected public capital spending. CRR and repo rates remained unchanged, but SLF rate reduced by 50 basis points in FY2019. SLF is the money BFIs borrow from NRB by keeping government bills as collateral for five days. Inter-bank rate refers to transaction among A & B, A & C, B &B, B & C and C & C class banks and financial institutions. 



10. Commercial banks have broadly adhered to the deposit and loan related regulatory requirements. Capital adequacy ratio stood at 13.51% as of mid-April 2019 against the minimum 11% (minimum CAR 10% plus 1% buffer). CCD was about 77.73%. NPL started to increase since mid-July 2018, reaching 1.67% of total loan in mid-April 2019. Interest rate corridor did not help much to lower interest rate volatility. FY2018 monetary policy changed the way to compute interest rate corridor (between 3% and 7%), with SLF rate being the upper bound and two-week term deposit rate being the lower bound. FY2020 monetary policy decreased these by 50 basis points.



11.  By mid-July 2019, 735 local levels (out of 753) have presence of commercial banks. Total number of BFIs licensed by NRB increased to 171 by FY2019 from 151 in the previous year. There are 28 commercial banks, 29 development banks, 23 finance companies, 90 microfinance financial institutions, and one infrastructure development bank. The number of class A, B and C category BFIs decreased, but the number of microfinance financial institutions increased from 65 to 90 last year. With the rapid expansion of credit and stricter enforcement of banking regulations, the number of blacklisted borrowers is also increasing—reaching 2,842 by FY2019, up from 1,335 in FY2018.

12. According to data from Department of Customs, in US dollar terms, exports increased by 10.3%, reaching US$ 862.6 million. The growth rate of export is lower than last year. Exports to India increased but exports to China and other countries decreased. Meanwhile, imports grew by 5.3%, reaching US$12.6 billion. The growth rate of import is lower than last year. Consequently, trade deficit increased much slowly than last year, reaching US$11.7 billion. India accounted for about 65% of Nepal’s exports and imports in FY2019. As a share of GDP, exports, imports, trade deficit and total trade were 2.8%, 40.9%, 38.1% and 43.8% of GDP, respectively. Export to import ratio was 6.8.


13. The largest export to India in FY2019 is a new entry—palm oil (US$91.8 million). Nepal does not produce palm oil but traders may be importing raw materials from third countries, process domestically to add at least 30% value, and then export it to India taking advantage of the preferential tariff. In fact, import of crude palm oil increased by 152.2%, reaching US$41.7 million. The second largest export item to India was polyster yarn, followed by jute goods, juice, cardamom and textiles, among others. Export of pulses, polyster yar, noodles, pashmina, handicraft goods, vegetables, jute goods, thread, and readymade garments grew by over 20%. The largest export to China are handicraft, woolen carpet, noodles and readymade garments. The largest export to other countries are woolen carpet, readymade garments, pashmina, pulses and herbs, among others. 



14. The largest import from India in FY2019 was petroleum product (almost US$2 billion), followed by vehicles & spare parts, MS billet, machinery parts, rice and medicine, among others.  Import of raw cotton, bitumen, fruits, textiles, readymade garments, molasses sugar, electrical equipment, and vegetables grew by over 30%. The largest import from China are telecommunication equipment, readymade garments, electrical goods, machinery parts, and television parts. The largest import from other countries are gold, aircraft spare parts, coal, crude soybean oil and silver, among others. 

15. The number of migrant workers continues to decline steadily after peaking in FY2014. Outbound migrant workers decreased by 32.6% because of a massive drop in outmigrants to Malaysia (9,999 in FY2019 versus 104,207 in FY2018). The government stopped issuing labor permits to potential migrant workers to Malaysia to implement the G2G deal, which ensures cost-free migration and labor rights. But, it is not implemented as expected. Moreover, outmigration for work to all major destinations except Japan, Afghanistan, UAE and Saudi Arabia decreased in FY2019. However, this has not lead to a decrease in remittance inflows probably because more migrant workers are using formal banking channel to remit income back home and that Nepalis residing or studying in developed countries are remitting more money back home. Remittance inflows reached US$7.8 billion, which is equivalent to about 26.8% of GDP.



16. A lower rate of import growth compared to export growth slowed down the deterioration of trade deficit. Remittance inflows decelerated (7.7% growth in FY2019, down from 10.5% in FY2018) but the country received higher grants than year, resulting in a marginal improvement in net transfers. With net transfers of 28.7% of GDP and net income balance of 1.2% of GDP, and trade deficit (goods and services) of 37.5% of GDP, current account deficit was 7.7% of GDP, slightly lower than 8.2% of GDP in FY2018. Balance of payments recorded a deficit of US$598.7 million, the first in the last nine years. Meanwhile, net FDI decreased by 31%, reaching US$116 million (0.4% of GDP). Gross foreign exchange reserves reached US$10.6 billion, which is enough to cover 9.4 months of import of goods and services. Nepali rupee depreciated by 0.02% against the US dollar in mid-July 2019 compared to the same period last year. 




Overall, here is a snapshot: 
  • The economy grew at over 6% for three consecutive years, thanks to bumper agricultural harvest, post-earthquake related reconstruction, stable supply of electricity and pickup in services sector activities. So, consumption accelerated but public investment slowed down. 
  • Public capital spending decreased but higher recurrent spending will lead to a fiscal deficit of around 5% to 6% of GDP. 
  • Inflation inched higher on account of higher food and non-food prices of goods and services. 
  • Broad money growth (M2) was below the central bank’s target. Credit expansion outstripped deposit expansion with construction and agricultural sectors receiving more loans than before. 
  • Retail deposit and loan interest rates as well as inter-bank rate increased, indicating tight liquidity situation in the banking sector. 
  • The number of migrant workers is decreasing but remittance inflows are increasing, suggesting more use of formal banking channel and higher remittance from non-traditional employment destination. 
  • There is not much change in composition of exports and imports. 
  • A lower rate of import growth compared to export growth slowed down the deterioration of trade deficit. This along with improved net transfers resulted in lower current account deficit than last year. 
  • Balance of payments slipped into the negative territory for the first time in nine years. 
  • Forex reserves are down but are enough to cover 0.4 months of import of goods and services. FDI inflows decreased.
  • Here is an earlier posts on FY2020 budget and FY2020 monetary policy

Saturday, August 24, 2019

Water pollution endangers economic growth

According to a new WB report (Quality Unknown: The Invisible Water Crisis), the release of pollution upstream acts as a headwind that lowers economic growth downstream. Specifically, when Biological Oxygen Demand (BOD) – a measure of how much organic pollution is in water and a proxy measure of overall water quality – passes a certain threshold, GDP growth in downstream regions is lowered by a third. Meanwhile, in middle-income countries – where BOD is a growing problem because of increased industrial activity - GDP growth downstream of highly polluted areas drops by half.

High chemical fertilizer use has long-term consequences including stunting. Nitrate exposure in infancy wipes out much of the gain in height seen over the past half-century in some regions and harms children even in areas where nitrate levels are deemed safe. While an additional kilogram of nitrogen fertilizer per hectare increases agricultural yields by as much as 5%, the accompanying run-off and releases into water can increase childhood stunting by as much as 19% and decrease adult earnings by as much as 2%. This suggests a stark trade-off between using nitrogen to boost agricultural output and reducing its use to protect children’s health.

This report also reveals that enough food is lost due to saline waters each year to feed 170 million people every day – that’s equivalent to a country the size of Bangladesh. Such a sizable loss of food production to saline waters means food security will continue to be jeopardized unless action is taken. More salt in the water means less food for the world.

So, what can be done about it? First, there needs to be a reliable, accurate and comprehensive information about water quality. Second, prevention is better than cure. Sunlight is the best disinfectant but legislation, implementation and enforcement to reduce water pollution are equally important. Third, investment in wastewater treatment and reduce preventable pollution.


Tuesday, August 20, 2019

Tinkering at the margin

It was published in The Kathmandu Post, 16 August 2019



The governor of Nepal Rastra Bank, Chiranjibi Nepal, recently unveiled the central bank’s monetary policy for 2019-20 fiscal year. Amidst persistently high-interest rates, liquidity crunch, unresolved structural issues including inherent operational and management vulnerabilities, and deterioration of external sector, the governor unveiled an expansionary policy to support the government’s unrealistic 8.5 percent growth target.

Many analysts had expected the central bank to take concrete measures to speed up the restructuring and consolidation of banks and financial institutions (BFIs). They were even planning actions like forced mergers. The idea was that this would result in efficient banking operations with lower management and operational costs, low interest rate volatility, innovation, and healthy competition. Instead, the central bank played it safe and prioritised an expansionary monetary policy. The concern over recurring bouts of a shortage of loanable funds and interest rate volatility remained on the backburner.

The central bank can influence interest rates charged to customers by BFIs and liquidity availability through conventional monetary policy tools that control the supply of money in the economy. For instance, lowering the cash reserve ratio—the minimum share of deposits that BFIs need to hold as reserves either in the form of cash or deposit with the central bank—frees up the funds available to the BFIs to loan out, and hence increases liquidity and lowers interest rates. Similarly, lowering statutory liquidity ratio—the share of deposits that BFIs have to maintain in the form of cash or approved assets and securities—also increases the money supply in the economy. Another measure is to change credit-to-core capital cum deposit (CCD) ratio threshold, which mandates the BFIs to lend a maximum of 80 percent of their deposits. The threshold for these remain unchanged in the monetary policy.

Volatile rates

Intending to lower interest rate volatility and improve monetary policy transmission, the central bank lowered thresholds for its interest rate corridor scheme. This sets a narrow band for the interest rate to fluctuate. The upper limit is lowered from 6.5 percent to 6 percent, repo rate (also called the policy rate) from 5 percent to 4.5 percent, and the lower threshold (term deposit rate) from 3.5 percent to 3 percent. It remains to be seen if this will actually lower retail interest rates because interest rates corridor, implemented since 2016-17, has not been much effective in reining in interest rate volatility.

The central bank has given continuity to directed lending to priority sectors including energy, tourism and agriculture. It has also boosted refinancing schemes, including lowering of interest rates for on-lending to priority sectors, and small and medium enterprises. Furthermore, it has extended the deadline to reduce the spread rate—the difference between deposit and lending rates—to 4.5 percent to mid-July 2020 instead of mid-July 2019. For BFIs that opt for a merger, the deadline is mid-July 2021.

These measures tinker existing regulations and accounting practices and hence address the underlying structural issues at the margin only. Furthermore, they may be insufficient to meet the core monetary policy targets—money supply growth of 18 percent, domestic credit growth of 24 percent and private sector credit growth of 21 percent, all higher than in the previous year. For instance, forcing the banks to maintain higher capital adequacy ratio plus countercyclical buffer (13 percent from 11 percent previously) will potentially lower their lending capacity and hence put upward pressure on interest rates, eventually slowing down credit expansion.

Credit crunch

The central bank has introduced two important measures to increase sources of deposits for BFIs and hence the availability of loanable funds.

First, it now allows BFIs to commercially borrow from not only foreign banks but also hedge and pension funds. Although this technically widens the sources of deposits for BFIs, it is unlikely that they will actively borrow money immediately from external sources due to risks associated with a higher cost of funds and the exchange rates.

Second, the central bank has mandated the BFIs to issue debentures or corporate bonds equivalent to at least 25 percent of paid-up capital. The expectation is that this will encourage BFIs to align their assets with their liabilities (i.e. discourage the tendency to use short term deposits to issue long term loans), and secure reliable sources of loanable funds in case they are close to the CCD threshold. If BFIs fail to meet this mandatory provision within this fiscal year, then they may be compelled to seek a merger. However, in the past, the central bank was too lenient. It repeatedly extended the timeline of what is supposed to be a mandatory provision (for instance, increased paid-up capital threshold, lower spread rate, and adherence to CCD threshold).

Regarding the external sector, the central bank has tightened loans to finance imported goods (especially vehicles) and the foreign exchange facility provided to Nepali citizens who visit abroad. Considering the deterioration of the balance of payments and depletion of foreign exchange reserves, the central bank is targeting to maintain reserves to finance seven months of imports. This is substantially down from barely two years ago, when reserves were large enough to sustain over ten months of imports. External sector stress will compound as exports, remittances and foreign investment growth stagnate or even decrease, but imports accelerate. The pegged exchange rate limits the central bank’s effectiveness to address external sector imbalance. Policy reforms to boost exports and foreign investment are crucial for this.

The success of the monetary policy will be judged in terms of how much interest rate decreases over time, sustainable credit expansion and lowering risks of asset-liability mismatch, further consolidation of BFIs and improved corporate governance, and external sector stability. Tinkering with productive sector lending has been a common feature of monetary policy, and this in itself will not help much to achieve the growth target.

Wednesday, July 31, 2019

Unemployment rate in Nepal is about 11.4 percent

Central Bureau of Statistics (CBS) published third edition of labor force survey few months ago. Unlike NLFS I and NLFS II, definition of employment is now narrower— the new definition of employment includes only work performed for others for pay or profit. So, production for own final use is not considered as employment. This is consistent with the 19th International Conference of Labor Statisticians in 2013. 

The changes in definition of employment mean that some of the employment and unemployment related indicators cannot be compared to the previous surveys. The survey covers general household information, current activities, current working hour, usual working hour, unemployment, past employment, and absentees. 

Here are the major highlights:

1. Population: About 38.7% of the population was below 20 years of age. About 63% reside in urban areas (note that the definition of rural and urban areas changed after the new local units were formed).The share of male in age cohorts between 20 and 49 is lower than that of female, indicating the male-dominated large-scale outmigration for work. The total population in 2018 was 29 million. 

2. Working-age population means individuals aged 15 years and older who are employed, unemployed, and not in the labor force. There were 20.7 million people of working age (15 years and older), and 40% of them were aged between 15-34 years. The share of individuals aged 15-24 is the largest among the unemployed people. Also, the share of the same age group is the highest among those who are not in the labor force. Labor force consists of individuals who are employed and those that are considered unemployed. The male to female ratio in the working age population is 100:125. But, among the employed, it is 100:59.

3. Labor force consists of individuals who are employed and those that are considered unemployed. 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 share of working-age population not in the labor force is above 50% in all the provinces— the highest 72.7% is in Sudurpaschim and lowest 52.9% in province 3. About 79.1% of the labor force did not have secondary education. 

4. Employed: Anyone of working age is considered employed, in any activity to produce goods or provide services for pay or profit,  if he or she had a job for at least one hour (“at work”) in the reference week, or is not at work due to temporary absence from a job or due to working-time arrangements (flexitime, leave, shift work, etc). Paid trainee is regarded as employed.

There were 7.1 million employed people. As a share of total working age population, it is about 34.2% (or employment-to-population ratio). Province 3 had the highest EPR (48.3%) and Sudurpsashim province the lowest (24.1%). The male EPR was 53.8% and female EPR 26.3%.

5. Unemployed: An individual is unemployed if he or she is completely without work but is currently available to work and is taking active steps to find work.  The reference period is unemployed in the last week but actively engaged in seeking job in the last 30 days and is available to start working in the next 15 days. 

The unemployment rate was 11.4% (about 908,000 people of working age)Unemployment rate measures that proportion of the labor force that is trying to find work The highest unemployment rate was among 15-34 years. About 21.4% of 15-24 years age group were unemployed and for 25-34 years age group it was 12.7%.

The highest unemployment rate was in province 2 (20.1%) and the lowest in province 3 (7%). Unemployment rate among working age male was 10.3% and among female it was 13.1%.

There is a wide gap between labor force (employed and unemployed) and  working age population. It indicates that a large section of the working age population in fact did not work in the reference week, either because they did not look for work or try to start a business in the four weeks preceding the survey, or were not available to start work or a business in the reference week. One of the reasons is that most households are self-employed in agricultural sectors and production is mostly used to sustain household consumption, i.e. not intended to be sold in the market to earn profit. Earlier editions of NLFS considered these individuals to be employed too (and hence the low unemployment rate). In a way, with EPR of 34.2% (that is the share of employed population to working age population), those not employed (unemployed and not in labor force) comes to be about 65.8% (ignoring the definition of unemployed for a bit).

6. Labor underutilization: Labor underutilization is a wider measure of unemployment that takes into account the potential labor force as well. Usually, labor force constitutes employed and unemployed working-age population. However, extended labor force includes labor force plus potential labor force (which basically are those unemployed individuals who express an interest in working but are limited by existing conditions to actively search for job or make themselves available). For instance, during an economic downturn unemployment rate increases sharply even though people are willing to work more and some people might just engage in self-employment. 

Of the 12.7 million people outside the labor force, 2.6 million should be considered as potential labor force as they were either seeking work or they wanted to work and are available— showing some form of attachment to the labor market. 46 thousand individuals were actively seeking work but were not available to work (unavailable job-seeker) and a further 2.5 million individuals wanted to work and were available to start working (available potential job-seeker). If we add these individuals to the usual definition of labor force, then we get an extended labor force (10.6 million). Therefore, extended labor force makes up about 51% of total working-age population

The labor underutilization rate based on extended labor force was 33.1%. If we further include the time related underemployed (those who wanted to work more hours) to the extended labor force, then labor underutilization rate comes to be around 39.3%.
  • Unemployment rate= [unemployed/labor force]*100 
  • LU2= [(time-related underemployed + unemployed)/labor force]*100
  • LU3= [(unemployed + potential labor force)/extended labor force]*100
  • LU4= [(time-related underemployed + unemployed + potential labor force)/extended labor force]*100
7. Sectoral employment: A majority of the 7.1 million employed individuals are in the services sector. About 30.8% are in industrial sector and the rest 21.5% in agricultural sector. The share of employed female in agricultural sector is higher than the share of employed male. It is the opposite in the industrial sector, but around the same in the services sector. 

As a share of GDP too, services sector accounts for about 50%. Within services sector, wholesale and retail trade related activities have 17.5% of the total employed population. The next big employer is manufacturing (15.1%), followed by construction (13.8%), and education (7.9%).

8. Formal and informal sector: About 62.2% of the 7.1 million employed individuals are working in the informal sector (agriculture, non-agriculture, and private households). Only 37.8% are employed in formal sector (agriculture and non-agriculture). 

Non-agricultural formal sector comprises of incorporated companies or establishments that are registered with relevant authorities, government or state-owned enterprises, and international organizations/foreign embassies. Meanwhile, non-agricultural informal sector comprises of enterprises that are neither incorporated nor registered with authorities. Employment in private households is also informal.

9. Informal employment: There is a need to make a distinction between formal and informal sector, and formal and informal employment. Even if an individual is working in formal sector, he or she may not have access to basic benefits. Informal employment includes employers, own-account workers and contributing family workers who are employed in formal sector establishments, as well as employees and paid apprentices/interns who do not have paid annual leave or sick leave benefits and whose employers do not contribute to their social security. 

Considering this definition of informal employment, about 84.6% of those in employment were informally employed. Specifically, 59.2% of formal sector employment was informal and 100% of informal sector employment was informal. Informal employment is widespread in all occupations except managers – professionals, technicians, associate professionals, clerical support workers, service and sales workers, skilled agriculture, craft and related trade works, plant and machine operators, and elementary occupations among others.  

10. Monthly earnings: There were 3.8 million employees and paid apprentices/interns who were paid in cash the last time they were paid in their main job. About 51.1% received payment monthly. Just 0.3 million of those who were paid in cash (or 14.7%) earned Rs25,000 or higher monthly. About 41.3% earned between Rs15,000 and Rs25,000 monthly.

The average monthly earnings was Rs17,809 and median monthly earnings was Rs15,208 (median is not sensitive to extreme values). More skilled jobs fetched more earnings. In all occupations, male earned more than female.

Some technical background: 
  • Like in NLFS I and NLFS III, the survey covers the entire country.  The sample size is 18,000 households (10,500 households from urban areas and 7,500 from rural areas). The sample design involved a two-sage probability proportional to size selection process— administrative wards were selected with PPS and then 20 households were selected by systematic random sampling method. The survey was carried out between 16 July 2017 and 15 June 2018 in three cycles (dry, rainy and winter). 
  • The administrative wards are the PSUs and there are 900 of them in NLFS III (375 from urban areas and 535 from rural areas). Municipalities are considered as urban areas. The reference period is a week before the survey for employment. For unemployed, the reference period is unemployed in the last week but actively engaged in seeking job in the last 30 days and is available to start working in the next 15 days. Unemployment rate measures that proportion of the labor force that is trying to find work.
  • Labor force participation rate measures the proportion of working-age population that engages actively in the labor market (either by working or looking for one). LFPR was 38.5%. Male LFPR was 53.8% but female LFPR was 48.3%.
  • Employment-to-population ratio, which measures the proportion of the working-age population that is employed, was 34.2%. About 48.2% of male of working age were employed compared to 22.9% of female of working age.

Saturday, July 27, 2019

Investment climate assessment and more flights between Nepal and China


In its latest assessment of investment climate in Nepal, the US Department of State argues that widespread corruption, cumbersome bureaucracy, and weak implementation of laws and regulations have generally kept investors at bay. The recently enacted investment laws and regulations— including FITTA, IEA, SEZA, PPP and Investment Act, revised Labor Act and IPR policy, among others  – have maintained institutional and procedural impediments to smooth business practices, dissuading all but the most risk-tolerant investors. 

The assessment notes that Nepal has considerable investment potential in hydroelectric power, agriculture, tourism, IT and infrastructure sectors. However, the country is attractive only to investors who are willing to accept inherent risks and the unpredictability of business operations. Significant investment barriers include:
  • Corruption
  • Limitation on operation of foreign banks, repatriation of profits, currency exchange facilities
  • Government’s monopoly in electricity (transmission) and petroleum distribution
  • Overseas migration and poorly trained workforce
  • Proliferation of politicized trade unions and syndicates masked as associations
  • Cumbersome and obstructive immigration laws and visa policies for foreign investors
  • Political uncertainty due to the continued disregard to addressing the political demands and discontents of political parties representing the Terai region
  • Security risk from insurgent groups that have persistently and pervasively using intimidation, extortion and violence
  • Poor connectivity due to mountainous terrain and poor infrastructure
  • Restrictions on the media and NGOs
The most troublesome barriers are corruption, bureaucracy, lack of implementation of existing procedures and requirements, and a weak regulatory environment. It states that “many of the corruption- or petty bureaucracy-based hindrances impeding the smooth conduct of business, however, remain unaddressed in the absence of pay-offs or personal interventions with cabinet-level officials”. 

Furthermore, “many foreign investors note that Nepal’s regulatory system is based largely on personal relationships with government officials, rather than systematic and routine processes.  Legal, regulatory, and accounting systems are not transparent and are not consistent with international norms”.

Nepal and China agree to increase weekly flights to 98
From The Kathmandu Post: Nepal and China signed a revised bilateral air services agreement on Friday, which will allow 98 weekly flights between the two countries on a reciprocal basis, an increase from the existing 70 flights per week. Of the increased 28 flights, Chinese carriers will have to operate 21 flights in and out of the two upcoming international airports—Gautam Buddha International Airport in Bhairahawa and Pokhara International Airport, according to Tourism Ministry officials who signed the agreement in Beijing.
The existing pact between the two countries allows flights to seven destinations in China: Beijing, Shanghai, Lhasa, Guangzhou, Kunming, Chengdu and Xi’an. In the revised pact, the Chinese side has agreed to designate eight new destinations for Nepali carriers, according to Pramod Nepal, an under-secretary at the Tourism Ministry. “Nepali carriers will be allowed to operate flights to any new destinations within China at the Nepali airlines’ discretion,” he said. 
Currently, five Chinese carriers—Air China, China Southern, China Eastern, Sichuan Airlines and Tibet Airlines—operate flights to Nepal. However, no Nepali carriers currently fly to China. The national flag carrier used to operate a service to the Japanese city of Osaka, via Shanghai, until 2008 under fifth freedom rights. In 2015, Nepal Airlines applied for landing permission at Guangzhou Baiyun International Airport, but its application is still pending.

Tuesday, July 9, 2019

Macro-criticality of social spending

Social spending plays a vital role in people’s lives, especially those of vulnerable, marginalized, and elderly. It an important part of inclusive economic growth and poverty alleviation strategy. It promotes financial security (to smooth consumption over lifetime) and social cohesion. 

According to the IMF, social spending covers (the first two are traditionally thought of as social protection):
  • Social insurance: financed by contributions or payroll taxes (such as public pension, health, unemployment, sickness and maternity leave 
  • Social assistance: financed from general government revenue (such as universal and targeted transfers, child benefits, active labor market policies
  • Public spending on health and education 
Social spending matters now more than ever because countries face a declining workforce but an increasing number of retirees (mostly in developed countries), negative effect of technology on work and wages for some workers with particular skills set, rising inequality (both income and opportunity), barriers to women’s labor force participation, and climate change, among others. 
  • Advanced economies need to strengthen their health and pension systems to enhance spending efficiency and to expand coverage.
  • Growing youth population and low women LFPR mean that emerging markets and developing countries have to absorb more women and youth into employment. Social benefit systems (and their financing) need to support, rather than disincentivize, their employability. For this education and training systems are critical.
  • Technological change is transforming labor markets as mobility of labor across sectors increases and flexible work arrangements (part-time and temporary work, self-employment) become popular. These bring in more volatility to careers and income streams. AI and robotics could render a range of skills redundant and disrupt labor market. Adaptable education and training are crucial for continuously upgrading skills, and these should be complemented by policies to facilitate labor market matching.
  • Climate change means increased risk from extreme weather events and natural disasters, severely affecting low-income and small island states and pushing many households into poverty. It will require enhancing capacity of their social safety nets. 
Therefore, social spending should be an integral part of macroeconomic policy. So how do we design the most effective social spending given fiscal space constraints? 

A recent IMF paper sheds light into this aspect.  Fiscal space is required to increase spending in education (free primary and secondary school education), healthcare (free basic healthcare), unemployment and elderly allowance, public pension, guaranteed minimum wage, etc.  These are also a part of SDGs and could be thought of as investment. These investments should be
  • Adequate (spending adequacy): Higher social spending is required to fill the gap in education, healthcare and social protection coverage— especially important to achieve the SDGs. It is crucial to successfully transition to more normal career/life choices or outcomes.  
  • Efficient (spending efficiency): High spending alone may not translate into high social outcomes. For instance, high education and health expenditure alone may not translate into higher graduation or enrollment and health outcome index. Such programs should not also create significant work disincentives, which could result in high unemployment and spending. Avoiding duplication of social spending programs is important to avoid high and inefficient administrative costs.
  • Financed sustainably (fiscal sustainability): Sustainable financing requires an appropriate balance between financing, revenue mobilization, and spending in social protection transfers and investment in education, health and physical infrastructure.
The IMF considers social spending to be “macro-critical” through these three key channels. Also, choosing either universal or targeted transfers should be country-specific (social and political preferences) but consistent with fiscal and administrative constraints. The IMF will design programs and conditionality by considering social spending needs too. It will help countries strengthen tax capacity, improve the quality of social spending, and address data and information gaps. 

Financing strategy could include effective strategies to improve tax compliance; progressive personal income taxes for higher income groups; effective taxation of corporate income; a broad-based consumption tax; efficient taxation of goods with negative consumption externalities such as fossil fuels, tobacco and alcohol; and plugging in tax evasion and avoidance. 

Here is link to the background papers for IMF's engagement on social spending. Case studies here.

Tuesday, July 2, 2019

Lack of testing labs, expenditure rush, no bailout for NAC and more


From The Kathmandu Post: The Ministry of Agriculture and Livestock Development has sought Rs250 million from the government to upgrade the existing plant quarantine facilities and chemical testing labs in a bid to make life easier for vegetable and fruit importers. The government has made it mandatory for imported farm products to be tested for chemical contamination, but none of the border points is appropriately equipped to conduct such checks. So samples of imported farm products have to be sent to one of the seven facilities in the country which have the proper equipment and personnel. For this reason, hundreds of trucks loaded with imported vegetables and fruits are stranded at the border as they wait for the test results to come back.

According to the Agriculture Ministry, plant quarantine facilities are available at 15 customs points--11 on the Nepal-India border (Kakarbhitta, Biratnagar, Bhantabari, Jaleshwor, Malangwa, Birgunj, Bhairahawa, Krishna Nagar, Rupaidiya, Gaddachauki and one more); three on the Nepal-China border (Tatopani, Lo Manthang and Kerung) and one at Tribhuvan International Airport.

Currently, the labs can only test imported farm products for disease. They lack the equipment and technical manpower to test for chemical residues in imported edibles. Tej Bahadur Subedi, spokesperson for the Agriculture Ministry, said they plan to train manpower for the quarantine labs besides installing the necessary equipment.There are Rapid Bioassay for Pesticide Residue Laboratories at seven locations--Kalimati, Birtamod, Malangwa, Nepalgunj, Attariya, Butwal and Pokhara. These labs can test for the presence of chemicals in vegetables and fruits, but they can test for chemicals only under two variants--organophosphate and carbamate.


From Kantipur Daily: ऐन र संसदीय समितिको निर्देशनविपरीत सरकारले बजेटको अत्यधिक रकम असारमा खर्च गरिरहेको छ । असारका १५ दिनको तथ्यांक हेर्दा दिनहुँ औसतमा साढे ४ अर्ब रुपैयाँका दरले बजेट खर्च भइरहेको छ । आर्थिक वर्षको सुरुका महिनामा खर्च नगर्ने र असार लागेपछि अत्यधिक खर्चिने प्रवृत्ति रोक्न यसै वर्ष संसद्को अर्थसमितिले अन्तिम महिनामा कुल बजेटको १० प्रतिशतभन्दा बढी खर्च गर्न नपाइने व्यवस्था गरेको छ । तर १५ दिनमै बजेटको ५.२१ प्रतिशत खर्च भइसकेकाले संसदीय समितिको निर्देशन र अन्य कानुनी व्यवस्था सरकारले उल्लंघन गर्ने निश्चित जस्तै छ ।

आर्थिक वर्षको मध्य अवधिका महिनामा मुस्किलले दैनिक डेढ अर्ब रुपैयाँ खर्च गरेको सरकारले असारका १५ दिनमै ६८ अर्ब ४६ करोड ९५ लाख रुपैयाँ सकेको छ । महालेखा नियन्त्रकको कार्यालयको तथ्यांकमा उल्लेख भएअनुसार १५ दिनमा खर्चिएको रकम साउन एक महिनामा खर्च गरिएको बजेटभन्दा ३८ प्रतिशत बढी हो । साउनमा २५ अर्ब ९० करोड रुपैयाँ खर्च भएको थियो ।असारे खर्चको विकृति विकास बजेटमा झनै बढी छ । साउनमा दैनिक केही करोड र त्यसपछिका महिनामा १ अर्ब पनि खर्च नगरेको सरकारले अहिले दैनिक औसतमा १ अर्ब १६ करोड रुपैयाँका दरले विकास बजेट सकिरहेको छ । यस वर्ष सरकारले ३ खर्ब १३ अर्ब ९९ करोड रुपैयाँ विकास निर्माणका लागि विनियोजन गरेको छ । यसको साढे ५ प्रतिशत अर्थात् १७ अर्ब ५१ करोड ७५ लाख रुपैयाँ असारका १५ दिनमा खर्च गरेको छ ।

खर्चमा सुधार हुन नसकेको वर्षौंदेखिको समस्या समाधान गर्न नयाँ संविधानमा जेठ १५ मै बजेट पेस गर्ने मिति तोकियो । नयाँ आर्थिक वर्ष लाग्नुपूर्व असार मसान्तमै बजेट पास भई साउन १ देखि नै अख्तियारी जान थालेको दुई वर्ष भइसकेको छ । संविधान र कानुनमा खर्च र असारे विकास रोक्ने व्यवस्थासँगै संसदकै विषयगत समितिदेखि सरोकारवाला निकायहरूले बजेट कार्यान्वयनका लागि दर्जनौं निर्देशन हरेक वर्ष दिन्छन् । यो विकृति रोक्न यस पटक प्रधानमन्त्री केपी शर्मा ओली आफैं अग्रसर भएका पनि थिए । उनले हरेक मन्त्रालयहरूको खर्च तथा अन्य प्रगति विवरण हेर्न एक सफ्टवेयर निर्माण गर्ने, त्यसका आधारमा मन्त्रालयहरूको मूल्यांकन गर्ने र सुधारका उपाय तथा निर्देशन दिने काम पनि गरे ।आर्थिक वर्षको सुरुमा हरेक महिनाजस्तै प्रधानमन्त्री ओलीले समीक्षा पनि गरे । समीक्षामा उनले प्रगतिमाथि असन्तुष्टि जनाउँदै ‘र, तर भन्न पाइन्न’ भन्दै प्रगति देखाउन निर्देशन दिएका थिए । तर अहिले उनको समीक्षाको काम नै रोकिएको छ । वर्षौंदेखिको यो प्रवृत्ति कम गर्न व्यवस्थापिका संसद् र सरकारका विभिन्न निकायले मापदण्ड, निर्देशन र कानुनमार्फत अंकुश लगाउने गरेका छन् । तर हरेक वर्ष उक्त नीति, निर्देशन तथा कानुनको उल्लंघन हुँदै आएको छ ।


From myRepublica: Prime Minister KP Oli has said the government will not inject funds in the crisis-ridden Nepal Airlines Corporation (NAC) under the existing circumstances. Speaking at the 61st-anniversary function of the national flag carrier in the capital, Prime Minister Oli said that the government was not going to make any more investment in the crisis-ridden airline company until it improves its performance. “In the current situation, the government cannot inject any money. Without good management and operation, I don't think the situation will improve only by doling out funds,” he said, putting reform of the NAC as a precondition for providing any more funds to the airline company. The statement by prime minister comes following recent requests by the NAC to the government to provide a bailout of Rs 20 billion.

The airline company currently has two wide-body and two narrow-body aircraft in operation. They fly to seven countries including India, Malaysia and Qatar. Although the NAC purchased two wide-body Airbus A330 jets last year, it has not been able to find new destinations. Against the expectations that the new flights will help in the turnaround of the loss-making company, it is struggling to increase flights and destinations. It even postponed its earlier plan to fly to Osaka of Japan from the first week of July, citing poor ticket bookings.
>>More from Kantipur here


From myRepublica: The result shows that there are 923,356 establishments out of which 462,605 (50.1%) are registered, 460,422 (49.9%) are not registered and 329 (0.04%) registration is unknown. The number of person engaged in these establishments are 3,228,457 persons where 2,012,237 (62.3%) are male and 1,216,220 (37.7%) are female. The final results are based on the new administrative area as of April 14, 2018 when the field enumeration was conducted, reads a press release issued by JICA Nepal.

More from Kantipur: नेपालमा सञ्चालनमा रहेका एक करिब आधा व्यवसायहरू आफू बसोबास गर्ने घरबाट सञ्चालन हुने गरेको सरकारी अध्ययनले देखाएको छ । सञ्चालनमा रहेका करिब ९ लाख २३ हजार व्यवसायमध्ये करिब ४२ प्रतिशत व्यवसाय यसरी सञ्चालन भइरहेका छन् । केन्द्रीय तथ्यांक विभागले सोमबार सार्वजनिक गरेको राष्ट्रिय आर्थिक गणनाको नतिजाअनुसार नेपालका ३ लाख ८६ हजार ३ सय २३ प्रतिष्ठानहरू आफू बसोबास गरेको घरबाट नै सञ्चालन भइरहेको छ । आफ्नो बासस्थानभन्दा फरक स्थानमा सञ्चालित प्रतिष्ठानको संख्या ३ लाख २३ हजार छन् । कुल व्यवसायमध्ये आफ्नो बासस्थानभन्दा फरक स्थानमा सञ्चालित प्रतिष्ठानको प्रतिशत ३५ छ । करिब ४ प्रतिशत व्यवसाय भने बाटो र सडकमा सञ्चालित रहेको अध्ययनले देखाएको छ । आधुनिक व्यापार मलमा २ प्रतिशत व्यवसाय मात्रै सञ्चालित छन् । अध्ययनको नतिजाअनुसार नेपालका अधिकांश व्यवसाय निकै सानो स्थानमा सञ्चालित छन् । ७६ प्रतिशतभन्दा बढी व्यवसाय ५ सय वर्गफिटभन्दा कम क्षेत्रफलमा सञ्चालित रहेको सर्वेक्षणको निष्कर्ष छ ।