Have we already achieved MDG target on poverty?

In a latest policy brief, Laurence Chandy and Geoffrey Gertz of The Brookings Institution argue that the MDG target on halving global poverty may have been already achieved in 2008. Using household survey data, they come up with new poverty estimates, which are lower than the World Bank’s estimate.

They estimate that between 2005 and 2010, the total number of poor people around the world fell by nearly half a billion people, from over 1.3 billion in 2005 to under 900 million in 2010. Looking ahead to 2015, extreme poverty could fall to under 600 million people—less than half the number regularly cited in describing the number of poor people in the world today. Their estimates show that as of 2010 less than 16 percent of world population remained in poverty, and fewer than 10 percent will likely be poor by 2015.

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The sharpest fall in poverty has occurred in Asia, mainly because of the rapid growth in India and China. South Asia is estimated to have 145.2 million poor people in 2015, much lower than in Sub-Saharan Africa which is expected to have 349.9 million poor people. Nigeria is expected to have the highest number of poor people (95.9 million) in the world in 2015.

Poverty (US$ 1.25 a day)	Number of poor people (millions)			Poverty rate (% population)
Region	2005	2010	2015	2005	2010	2015
East Asia	304.5	140.4	53.4	16.80%	7.40%	2.70%
Europe and Central Asia	16	8.4	4.3	3.40%	1.80%	0.90%
Latin America and Caribbean	45	35	27.3	8.40%	6.20%	4.50%
Middle East and North Africa	9.4	6.7	5.4	3.80%	2.50%	1.90%
South Asia	583.4	317.9	145.2	40.20%	20.30%	8.70%
Sub Saharan Africa	379.5	369.9	349.9	54.50%	46.90%	39.30%
World	1,337.80	878.2	585.5	25.70%	15.80%	9.90%

Between 2010 and 2015, India is expected to see 367.7 million people rise above poverty; 23.8 million for Bangladesh and 8.5 million for Pakistan. The poverty landscape is going to change four years from now. In 2015, India, Bangladesh and China are expected to have 88.1 million, 33.2 million, and 48 million, respectively, people in poverty. As mentioned above, Sub-Saharan Africa will have the largest number of poor people, with Nigeria having the largest of any country.

Reduction in number of poor people (millions)
	2005-2010	2010-2015	Total
India	230.4	137.4	367.7
Bangladesh	18.9	23.8	42.8
Pakistan	14.6	8.5	23.1
China	153.1	50.1	203.3

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What is driving reduction in the number of poor? Rapid and sustained growth in the developing world, especially India and China led to such a remarkable reduction. Their estimate also takes into account the impact of global recession on poverty. China and India are responsible for three-quarters of the reduction in the number of world’s poor.

They find that while 20 percent of the world’s poor lived in fragile states in 2005, this share is rising sharply and will exceed 50 percent by 2014. They argue that “with the majority of the world’s poor expected to be living in fragile states within the next three years, poverty is likely to increasingly be viewed through a security and governance lens, with potentially important ramifications for rich-world policies on poverty reduction.”

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Here is how their estimate differs with that of the World Bank:

Percentage of the population living under $1.25 a day in 2015
	Chandy & Gertz	World Bank
East Asia	2.70%	5.90%
China	0.30%	5.10%
Europe and Central Asia	0.90%	1.70%
Latin	4.50%	5.00%
Middle East and North Africa	1.90%	1.80%
South Asia	8.70%	22.80%
India	7.00%	23.60%
Sub Saharan Africa	39.30%	38.00%
World (developing only)	9.90%	15.00%

Land distribution and inequality in West Bengal

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This paper uses data from a household survey to estimate changes in land distribution in rural West Bengal between 1967-2004 and decompose these into contributions of different factors. There was a substantial drop in land per household and land per capita, while within-village inequality rose. The latter was associated mainly with rising landlessness induced by high rates of household division for marginal and small landowning households. Conversely, division of large landowning households reduced inequality. We find a significant indirect effect of the tenancy reform (Operation Barga) on inequality, as it reduced division rates of small landowning households while raising those of large landowning households. The land titling (patta) program also reduced inequality by reducing landlessness. Land markets were highly active, and were mildly equalizing. The inequality reducing effects of land reforms and land markets were dwarfed by the rising inequality and landlessness induced by division of small landowning households and immigration.

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Full paper by Pranab Bardhana, Michael Lucab, Dilip Mookherjee, and Francisco Pino here. Seems like inequality was reduced by breaking away landholdings of large landowning households and by implementing land titling program. But, inequality and landlessness also increased as smallholding lands (and immigration) were further divided. The latter effect overshadowed the former gains.

Nepal’s Monetary Policy for FY 2011-2012

I forgot to post it even though I wrote it few days back. So, here it is, my take on the monetary policy for fiscal year 2011-2012.

Major highlights:

• CRR to be 5 percent (decrease by 0.5 percentage points)
• Growth rate target of 5%
• Inflation target of 7%
• BoP surplus target of Rs 5 billion
• Forex Reserve targeted to finance at least 6 months of imports
• Broad money supply target 12.5%
• Domestic credit growth target 13.7%
• Credit growth to private sector target 14%
• Banks deposits growth target of13 percent growth, up by Rs 87 billion to Rs 756 billion
• Bank rate (policy rate) unchanged at 7 percent. The penal rate, which NRB has been charging while issuing finances to the BFIs, has been left unchanged at 3 percent of over 91-day Treasury Bill rate or bank rate, whichever is higher.
• NRNs allowed to open dollar account.
• Foreign exchange facility raised to US$ 2,500 at one instance and up to US$ 5,000 in total in a year by showing relevant document (mainly passport). NRB has also allowed Nepalis returning from foreign country to carry up to US$ 1,000 on behalf of Nepalis residing abroad for giving it to their family members back home.
• Deprived sector lending for BFIs increased by 50 basis points. Commercial banks, development banks and finance companies would need to lend 3.5%, 3% and 2.5% respectively of their total loan portfolio to the deprived sector.They will need to raise such loans by 50 basis points every year for the next three years.
• The central has bank agreed to let BFIs issue loans in foreign currency in priority sectors like hydropower and infrastructure.
• Intensify actions against willful defaulters that took loans of Rs 10 million or more from BFI
• To strictly enforce prudent corporate governance in the BFIs and punish players that flout its norms
• Legal actions against borrowers that use loans, taken for one stated purpose, to run different unproductive businesses
• Loans of Rs 1.5 million at zero interest rate to the micro-finance institutions--the category D financial institutions--if they opened branches in 9 remote districts where access to finances is pretty low.

More highlights here. Here is the full text in Nepali language.

Quick comments:

• A sudden decline in BoP deficit and a surplus of Rs 1 billion due to reimbursement of foreign aid (grant and loan), pension of Gurkhas, and government expenditure is expected for FY 2010/11. The deficit was around Rs 12 billion in the first eleven months of FY 2010/11.
• Bringing down CRR by 0.5 percentage points will not solve the liquidity crisis, whose roots lie in the number of BFIs, which meant that the more they are, the more money they need to keep up their deposit and loan targets.
• GDP growth, inflation and BoP targets are very unlikely to be achieved. These targets are follow up of the targets mentioned in the budget. It is NRB’s religion to do that. But, it should be more honest in advising the government on what can be achieved and what not. GDP growth target is hard to achieve due to loss in productivity and power outages and other non economic constraints. High and sticky inflation has more to do with supply-side constraints and the NRB can do very little to tame it. Partly, it is also due to rising food prices, which are unlikely to come down. BoP target is hard to achieve because we are in the same mess as we were two years ago.
• It is very disappointing that the NRB has not brought clear policy framework to incentivize BFIs to go for merger or acquisition. Nepal’s financial sector needs consolidation and the BFIs will not do it on their own and will wait till the last moment when the NRB will be forced to step in.
• The bank rate should have been lower (it should be always lower than inter-bank rate). Since inter-bank rate is very high, it would not hurt to lower bank rate below 7%. The lower the bank rate, the higher will be credit withdrawal by banks from NRB. This would have reduced strain in short term liquidity in the market.  
• Emphasis on channeling credit to deprived sectors and in rural areas is noteworthy of this monetary policy.
• Overall, it is a weak policy that will do very little to bring Nepali economy out of the mess it is in right now.

Where is all the money going?

Prithivi Man Shrestha reports that a large portion of the aid money that comes in the form technical assistance (TA) is unaccounted for in Nepal.

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According to the OAG report 2011, of the total Rs 17.19 billion received by the country as technical assistance in the fiscal year 2009-10, it is not clear where 87.43 percent (Rs 15.02 billion) of it went. Of that aid, 6.3 percent was spent for consultants, 3.57 percent for goods and 2.70 percent went for trainings and seminars. “It is necessary to make such aid transparent by classifying the programme and areas it goes to,” the report states.

Of the total 75 agreements signed in 2009-10, a total of 67 were related to 22 ministries, but there was no information on eight agreements and the amount spent, according to the OAG.

The government’s policy is to reduce the size of the TA by enhancing the capacity of civil servants, but the size of the TA reveals that donors still don’t believe in the capacity of Nepali civil servants.

“Multilateral donors including the World Bank and the Asian Development Bank and even bilateral donors prepare most of the project documents themselves by using the TA,” said Kailash Raj Pokharel, under secretary at the Finance Ministry. “We have been preparing such documents for small projects only.”

Officials said that the size of the TA remained so big as donors didn’t trust the capability of Nepali bureaucrats. The amount peaked this year with the inclusion of most of the possible projects operating in the country. Not only the size of the TA but also the number of TA projects peaked this year to reach 229 from 96 a year ago.

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Usually, TA is used to pay for consultancy services, purchasing goods and equipment and trainings and seminars. Most of it goes to the donor countries themselves though it gets reported as being received by recipient country when they report such figures to OECD and their own governments. In Nepal, donors have pledged Rs 45.23 billion for ongoing technical assistance (TA) related projects. This is half the total foreign aid (grants and loans) estimated for the fiscal year 2011-12.

Given the interest of donors in promoting their own personnel (in terms of employment) and capital (in terms of using resources sourced from their countries)—this is important to their citizens—it is understandable that the size of TA might not go down or halted at all. In doing so the donors also do care (or they should) about results on the ground, i.e. whether their effort has produced intended results, which is doubtful most of the time. Most of the donors’ expertise is in brining ‘experts’ to write reports. They have very little knowledge of what works on the ground. Else, more than US$ 12 billion that Nepal received since 1960 would have made a significant dent in an economy whose size is just US$ 12 billion. To further fine-tune their interest (and Nepal’s to some extent) the donors have their own development strategy paper, which should have largely adapted the National Planning Commission’s actual paper.

That said, aid has made good impact on education and health sectors. No doubt about that. In other sectors such as promoting trade, assistance has been restricted to writing reports on how best to implement a given agenda or a product. Most of the money is spent on studies, seminars, and conferences—all of which will involve personnel and capital from the donor countries at some stage. Some of the money goes back. Some stays back in the form of short term employment and reports that detail how best to implement a strategy or tackle constraints.

The irony is that substantial aid to actually tackle the identified constraints hardly comes from most of the donors (save the WB, ADB, India and China). Our policymakers and stakeholders are pretty clear on the constraints, but still reports are written to identify the constraints, which are actually identified by talking to policymakers and stakeholders in the first place. The baseline is that if we already know what the constraints are, then why not pump in resources (monetary, human, technical) to tackle them directly, and not waste money in writing yet another report that adds very little value to the already overfull stock of knowledge. Money should not be wasted in writing reports unless they are essential to guide policy in changed and evolving circumstance. Leave that to the academicians and policy wonks. The donors and policymakers should focus on projects that gives the biggest bang for buck, which is in the interest of the citizens of the donor countries and recipient country. And, in the case of Nepal, we already have such projects identified since a long time. One reason they are not implemented could be that the donors cannot cough up enough resources to make them happen in reality. Other might be that the government is simply not caring too much to implement them.

Mainstreaming trade in Nepal: Trade policy, agricultural policy, and industrial policy compared

A brief (Policy Brief 6-- Nepal)  published by the FAO evaluates mainstreaming of trade by reviewing three different policies supporting trade (the trade chapter in the Three Year Interim Plan 2007-10 which was Nepal’s PRSP, Nepal Trade Policy 2009, and Nepal Trade Integration Strategy 2010); three on agriculture (National Agriculture Policy 2004, agriculture chapter in the PRSP, and Agri- business Promotion Policy 2006); two on industrial policy (industry chapter in the PRSP and Nepal Industrial Policy 2010); and one food security policy (food security section in the PRSP). Below are the main points from the brief.

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Policy papers show considerable consistency on vision, goals and orientation – On the whole, there is considerable consistency on the overall vision, goal and orientation of policies (e.g. contribute to growth and poverty reduction, inclusiveness, market-led growth, liberal economic and trade policies, increased role for the private sector). They also indicate a strategic shift towards supporting value-chains as a whole rather than concentrating efforts at the primary production end as was the case in the past.

But the 2009 trade policy focuses exclusively on exports and thus misses out on some broader development issues that trade policy needs to address – The trade chapter of the PRSP identified as one fundamental problem the trade sector’s weak linkages with the domestic economy and raw materials, but provided no analysis or guidance on how this would be reversed. Indeed, many of Nepal’s prominent export products that developed during the past 2-3 decades are heavy users of imported raw materials. Nepal’s 2009 trade policy and 2010 integration strategy, both with exclusive focus on exports, also largely miss out on this “quality” of trade issue. For example, there are no serious analyses on what policies and incentives would encourage export-oriented industries that use local materials and have strong linkages. The exclusive focus of the trade policy on exports is one reason for missing out on these issues because many of the issues are related to importables, notably the food and agro-industry sub-sectors. These include, for example, the structure of import tariffs and protection, including tariff escalation, and incentives to import-competing industries. These are also important development issues for the agriculture and industrial policies. A trade policy is not an export policy and needs to be balanced in looking after the needs of all productive sub-sectors.

The desire to promote priority export products likely to be undermined by weak mainstreaming process – While the trade chapter of the PRSP did not have a list of priority products, 19 such products were identified in the 2009 trade policy (and a similar list in 2010 trade integration document). This approach to focusing resources on selected products is consistent with similar practices in other countries. But the process needs to be improved considerably. First, it is not clear why the lists in the two trade papers that came within two years are not identical. Second, the 2010 industrial policy did not refer to the list in the 2009 trade policy and has its own list of priority products, but covering almost everything and thus undermining the very notion of priority. Third, agricultural policy does not have such a list, although both trade and industrial policies list many agricultural products. The experience with Nepal’s 1995 Agricultural Perspective Plan, which took a similar approach of listing priority products is not positive, in large part due to lack of mainstreaming across policies. No attempt has been made in the trade or other policies to learn from that experience. There is thus a real risk that support to priority products – in whichever policy document they belong to – might continue to remain weak.

Should Nepal’s PRSP be designed differently? - Nepal designated its 11th development plan as the PRSP. Being similar in design to the previous periodic plans, this differs considerably from the PRSPs in most other countries. While there are some advantages, having 20 or so separate, stand-alone sectoral chapters also comes with disadvantages. One is the challenge to ensure that policies at the sectoral and macro level, including trade policy, are mainstreamed consistently. In this format, mainstreaming essentially depends on the ability of the National Planning Commission to ensure coordination and synergy. The studies note several weaknesses on this. A related problem with this format is that there are often two policy documents – the chapters of the PRSP and respective national policies. Maintaining consistency between these two sets of papers appears to be a challenge. An alternative format to the traditional plan is the focused PRSPs like those in Ghana and Tanzania, for example.

Lack of baseline statistics on product-specific support is a serious handicap for prioritizing trade support measures – While policy papers specify priorities (e.g. export products), it is hard to discuss prioritization and resource reallocation for lack of disaggregated statistics on public outlays and incentives/subsidies. This is the situation across the board – from agricultural research, provision of industrial and export incentives, to commodity development. In trade policy and elsewhere, provisions are made for one or more incentive schemes, typically involving subsidies, and yet it is no where explained how these policies were determined nor if these schemes were effective in the past. With the increasing focus on value chains, statistics on outlays along the chains have also become essential, but are mostly missing currently.

The process of stakeholder consultations needs strengthening - Stakeholder consultations are increasingly being organized. But the quality of these meetings needs strengthening. In Nepal’s case, participation of the private sector from the business and industry side has been strong but is lacking on civil society, farm organizations and independent analysts. The more serious issue is with the effectiveness of such meetings. Typically, not having prepared evidence-based briefs on the issues being debated and circulated in advance, stakeholders’ inputs are limited. Interestingly, similar weaknesses were noted for meetings of inter-ministerial committees and task forces. In some cases, even important ministries have been missing altogether, e.g. the Ministry of Agriculture is not even represented in the high level Boards created in the 2009 trade and 2010 industrial policies, despite the fact that at least half of the targeted priority products are agricultural.

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Population, Poverty, and Sustainable Development

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There is a very large but scattered literature debating the economic implications of high fertility. This paper reviews the literature on three themes: (a) Does high fertility affect low-income countries' prospects for economic growth and poverty reduction? (b) Does population growth exacerbate pressure on natural resources? and (c) Are family planning programs effective at lowering fertility, and should they be publicly funded? The literature shows broad consensus that while policy and institutional settings are key in shaping the prospects of economic growth and poverty reduction, the rate of population growth also matters. Recent studies find that low dependency ratios (as fertility declines) create an opportunity for increasing productivity, savings and investment in future growth. They find that lower fertility is associated with better child health and schooling, and better health and greater labor-force participation for women. They also indicate that rapid population growth can constrain economic growth, especially in low-income countries with poor policy environments. Population growth also exacerbates pressure on environmental common property resources. Studies highlight the deep challenges to aligning divergent interests for managing these resources. However, part of the pressure on these resources can be mitigated by reducing the rate of population growth. Although family planning programs are only one policy lever to help reduce fertility, studies find them effective. Such programs might help especially in the Sub-Saharan African region, where high fertility and institutional constraints on economic growth combine to slow rises in living standards.

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Read the full paper by Das Gupta, Bongaarts and Cleland (2011).

Third global review of Aid for Trade

The WTO release third global review of Aid for Trade (AfT). The report basically details the increase in AfT, its ‘effectiveness’ in Cape Verde (graduated from LDC club in 2008), Rwanda (top performer in Doing Business ranking), and the role of EIF in mainstreaming trade at national level and utilizing AfT. AfT assists developing countries to increase exports of goods and services, to integrate into the multilateral trading system, and to benefit from liberalized trade and increased market access. The assumption is that effective Aid for Trade will enhance growth prospects and reduce poverty, as well as complement multilateral trade reforms and distribute the global benefits more equitably across and within developing countries.

The main highlights:

• In 2009, aid-for-trade commitments reached approximately USD 40 billion, a 60% increase from the 2002-05 baseline. Other official flows to trade-related sectors doubled to reach USD 51 billion. Half of all aid for trade is provided in grant form, mainly to the poorest developing countries. 
• Disbursements have been growing steadily at 11-12% for each year since 2006 - reaching USD 29 billion in 2009 - indicating that past commitments are being met.
• Aid for trade to sub-Saharan Africa increased by 40% to reach USD 13 billion and Africa now receives the largest share among the different regions.
• The outlook for aid for trade is stable: last year in Seoul, South Korea, G20 leaders committed to at least maintain, beyond 2011, aid-for-trade levels reached over the years 2006-08. But some OECD countries are confronted with large budget deficits and find it difficult to respond adequately to the higher demand for aid for trade. Fortunately, there are positive signs that South-South co-operation continues to grow.

The wholly positive outlook of this report is not totally consistent with the five country study on the effectiveness of AfT carried out by SAWTEE and ICTSD. The country reports are forthcoming. I write a blog later on comparing this report with the country reports, which is more exhaustive and rigorous than the WTO report.

Is export-led growth dead?

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This paper traces the rise of export-led growth as a development paradigm and argues that it is exhausted owing to changed conditions in emerging market (EM) and developed economies. The global economy needs a recalibration that facilitates a new paradigm of domestic demand-led growth. Globalization has so diversified global economic activity that no country or region can act as the lone locomotive of global growth. Political reasoning suggests that EM countries are not likely to abandon export-led growth, nor will the international community implement the international arrangements needed for successful domestic demand-led growth. Consequently, the global economy likely faces asymmetric stagnation.

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Here is the full working paper by Thomas Palley. He concludes that we should abandon strategies aimed at attracting export-oriented foreign direct investment and institute a new paradigm based on a domestic demand--led growth model. Otherwise, the global economy is likely to experience asymmetric stagnation and increased economic tensions between emerging-market and industrialized economies.

Well, export-led growth strategy might be so for emerging markets and industrialized countries, but might be equally relevant to LDCs as it was for the now emerging markets. Canuto, Haddad and Hanson (2010) argue that the slack in demand in developed countries is filled up by the rising demand in emerging markets (including BRIC), leading to expansion of South-South trade. The middle-income countries are driving export diversification of low-income countries.The export diversification index (concentration index) of low-income countries has seen an improvement of 10 percent between 1997 and 2007 (this means exports moving from being spread evenly across four products to seven products; note that three sectors namely petroleum products, food, and iron and steel accounted for 76 percent of low-income countries’ trade between 1998 and 2006). This means that low-income developing countries will continue to rely on developing countries for export growth. They argue that this shift is leading to export-led growth 2.0. Export-led growth model is not really dead for low income countries.

Evolution of economic development theory

Here is Justin Lin’s chart:

More on Lin’s New Structural Economics here.

Nepal’s FY 2011/12 budget: Finance Minister Adhikari’s disappointing budget

A review of the budget for FY 2011/12 presented by Finance Minister Bharat Mohan Adhikari to the parliament on July 16, 2011. Here is a summary of the budget.

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Adhikari’s disappointing budget

Like last year, the drama during the presentation of the budget for fiscal year 2011/12 to the parliament by Finance Minister Bharat Mohan Adhikari was no less shameful and humiliating. Last year, the then Finance Minister Surendra Pandey’s was manhandled and his briefcase snatched and smashed by UCPN (Maoist) affiliated parliamentarians. This year the budget speech was delayed due to obstruction by the United Democratic Madhesi Front (UDMF), which argued that their demands were not incorporated in the budget. Meanwhile, Adhikari and his team leaked the budget to journalists and then later on in the website of Ministry of Finance before he even finished reading the full text. The budget speech brought to end the series of drama involving white paper and supplementary budget, and the furor created by cooperatives biased program and policies.

Instead of commenting on the various programs and handsome allocation for social sector and various marginalized communities and groups, I will focus on the macroeconomic challenges that the budget is addressing or should have addressed. It has largely failed to do so.

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Budget allocation for FY 2011-2012
	Rs, billion	Percent of total budget	Percent increase from last FY
Total expenditure	384.9	100	13.91
Recurrent	266.61	69.27	40.09
Capital	72.61	18.86	-43.95
Financing (loan & share investment)	25.38	6.59
Principal repayment	20.3	5.27	10.21
Development expenditure	202.56	52.63	13.41
General administration expenditure	182.34	47.37	14.47
Total Income	317.83	82.57	12.71
Revenue	241.77	62.81	11.60
Principal refund	5.93	1.54
Foreign grants	70.13	18.22	7.33
Deficit	67.07	17.43	19.96
Deficit financing	67.07	17.43	19.96
Foreign loans	29.65	7.70	33.38
Domestic borrowing	37.41	9.72	11.07
FY 2011-12 full annex

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Let us start with some basic statistics. The mammoth expenditure plan is 14% higher than last year’s budget and 25.67% higher than the revised estimate. Of the total Rs 384.9 billion expenditure, recurrent expenditure accounts for 69.27%, capital expenditure 18.86%, financing (new addition to the budget’s expenditure heading) 6.59%, and principal repayment 5.27%.

The total income (earlier it used to be total revenue) to partially finance the expenditure is estimated to be Rs 317.83, which is 82.57% of total budget and 12.71% increase from last year. Of this income, revenue would account for 62.81% of total budget, principal refund 1.54% and foreign grants 18.22%.

This leaves a hole in the expenditure-income balance sheet of around Rs 67.07 billion, which is 17.43% of total budget and 19.96% increase over last year. This deficit is to be covered by foreign loans and domestic borrowing accounting for 7.70% and 9.72% of total expenditure respectively.

Based on expenditure allocation, education sector is top priority, followed by local development, and physical planning and works. While it has addressed some of the issues in the social sector, which is usually done in every budget, it has failed to address our pressing macroeconomic challenges: low growth rate, high inflation, balance of payments deficit, ballooning trade deficit, eroding competitiveness of our economy and its productive capacities, slump in manufacturing sector, and liquidity and banking crises. These should have been prioritized more than the obsession with cooperatives, which are seen as a panacea to all the problems in every sector or product. The budget should ideally focus on what gives us the biggest bang for buck to resolve the above mentioned economic challenges.

First, the size of the budget is ever-increasing without having much impact on the economy. Before increasing its size, we should analyze if last year’s budget targets were met. GDP growth rate was expected to be 4.5%, inflation 7% and BoP surplus of Rs 9 billion. None of these targets were achieved. In reality, GDP growth rate is expected to be 3.5%, inflation is still hovering around 10%, and BoP deficit is to be around Rs 12 billion. Without any concrete plan to resolve the thorny issues in non-agricultural sector, FM Adhikari expects growth rate to be 5%, inflation below 7% and balance of payments (BoP) to remain positive. There is no vision to realize these targets and by looking at the existing plans they won’t be realized. Worse, it might be even exacerbate them.

The sheer increase in the size of the budget without corresponding increase in capital expenditure and the increase in salary and allowance of civil servants by 30.39 - 42.86% will exert inflationary pressure on the already high and sticky price level. In fact, capital expenditure has been slashed by at least 24% (if you exclude financing, it would be around 44%) to accommodate for salary hike and various pet projects of the political parties. This will not add to productive capacity of the economy but fuel up prices, which will most probably be double-digit for the whole year.

Second, there are hardly any specific programs to promote exports, whose decline along with ballooning imports have widened trade deficit to unsustainable level. This is also contributing to BoP deficit. Apart from half-hearted revenue incentives such as tax breaks and promise to enact Industrial Enterprise Act in line with Special Economic Zone Act, which is yet to be tabled in the parliament despite completion of necessary homework, there isn’t much for the exports sector. It says that export promotion incentives will be based on Nepal Trade Integration Strategy (NTIS) recommendations, which are to be further recommended by the concerned ministry. In fact, the budget for ‘mainstreaming industry, trade and service sector’—one of the seven pillars of our economy as identified by the National Planning Commission— is allocated Rs 7.24 billion only. The budget is ignoring the dire need to revive exports and manufacturing sectors.

Third, instead focusing on the second point mentioned above, FM Adhikari has wrongly diagnosed the economic challenges and focused in promoting cooperatives in virtually all sector and products. Various grants, concessional loans, and custom incentives are given to cooperatives by arguing that they will not only help in employment generation and to make economy self-reliant, but also to increase exports and in import substitution. This policy to sideline the private sector and encourage cooperatives to encroach in its terrain with the help of distorted policy will further affect economic growth and the ailing industrial sector. In fact, several of the promises made to the private sector in last year’s budget remain unfulfilled.

Fourth, the budget is inconsistent with Three Year Plan 2011-2013, which aims to achieve 5-6 percent growth rate, lower absolute poverty to below 21 percent, generate 200,000 jobs, and encourage private sector to invest 64 percent of the needed investment of Rs 359.3 billion. Looking at the way private sector has been sidelined and its genuine demands unaddressed, the budget will neither help to attain the kind of investment needed to realize the goals of the interim plan nor will achieve growth rate above 5%. The budget simply is not in sync with previous medium term policies.

Fifth, the budget has relaxed cap in disclosing sources of income while purchasing vehicle, shares, real estate and housing. Similarly, NRNs and foreigners are allowed to invest in share market and housing sector. This will help to address liquidity crunch to some extent. However, by doing so it has postponed the inevitable, i.e. restructuring and consolidation of the BFIs. Furthermore, the incentive for merger in the form of waving of registration fees is not enough to consolidate the financial sector. Importantly, a real danger is that the increased domestic borrowing (Rs 37.41) to finance deficit might mop up the already scarce liquidity from the market. This might crowd out private investment and further intensify liquidity crunch.

Sixth, foreign aid (grants plus loans) accounts for almost 26% of total budget, an increase by 13.9% over last year’s budget. Since the government was unable to mobilize even last year’s target, increasing target for this year is not going to be fruitful. Importantly, this target has been raised even after conceding in the budget that foreign aid absorption capacity is eroding. Similarly, the higher revenue mobilization target is not going to be realized if the failure in doing so last year is any indicator. Revenue collection in FY 2010/11 is to fall short by almost Rs 10 billion of the targeted Rs 216.64 billion.

Overall, the budget lacks focus and vision, and is biased toward cooperatives. This is a listless budget with no tooth to make real impact on productive capacity and to address the most pressing macroeconomic challenges.

[Published in Republica, 2011-07-17, p.6]

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Nepal’s budget for FY 2011-2012

After much drama Finance Minister Bharat Mohan Adhikari has finally presented the budget to the parliament. Here are some of the stuff as I read from the budget speech.

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• Expenditure: The size of the budget is Rs 384.9 billion, almost 14% higher than last year’s budget (and 25.67% higher than revised estimate). Recurrent expenditure is Rs 266.61 billion (69.27% of total budget). Capital expenditure is Rs 72.61 billion (18.86% of total budget). Financing, which is a new addition to the expenditure-revenue sheet, is Rs 25.38 billion (6.59% of total budget) and principal repayment is Rs 20.3 billion (5.27% of total budget).
• Development expenditure is Rs 202.56 billion (52.63% of total budget) and general administration expenditure is Rs 182.34 billion (47.37% of total budget). The former is an increase by 13.41% and the latter 14.47% from last year.
• Income: The total income of the government is expected to be Rs 317.83 billion, which is 12.71% higher than last year’s total revenue projection. Total revenue is expected to be Rs 241.77 billion (11% increase over last year), principal refund Rs 5.93 billion and foreign grants Rs 70.13 billion (17.43% of total budget).
• Deficit financing: The difference between total expenditure and total income is budget deficit, which is Rs 67.07 billion. This is expected to be covered by Rs 29.65 billion foreign loan and Rs 37.41 billion domestic borrowing. Deficit financing is 17.43% of total budget and it has increased by 19.96% from last year.

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Budget allocation for FY 2011-2012
	Rs, billion	Percent of total budget	Percent increase from last FY
Total expenditure	384.9	100	13.91
Recurrent	266.61	69.27	40.09
Capital	72.61	18.86	-43.95
Financing (loan & share investment)	25.38	6.59
Principal repayment	20.3	5.27	10.21
Development expenditure	202.56	52.63	13.41
General administration expenditure	182.34	47.37	14.47
Total Income	317.83	82.57	12.71
Revenue	241.77	62.81	11.60
Principal refund	5.93	1.54
Foreign grants	70.13	18.22	7.33
Deficit	67.07	17.43	19.96
Deficit financing	67.07	17.43	19.96
Foreign loans	29.65	7.70	33.38
Domestic borrowing	37.41	9.72	11.07
FY 2011-12 full annex

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• The Finance Minister argues that his budget will be able to “accelerate economic growth and ensure equitable development by increasing investment in public, private and cooperative sectors and by bringing dynamism in the economy.”
• Expected growth rate of 5%, with inflation 7% and BoP to remain positive.
• Education (Rs 63.9 billion) is the top priority, followed by local development (Rs 44.5 billion) and physical planning and works (Rs 43.9 billion).

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Few points from the budget:

• Public service delivery: market monitoring to check artificial rise in prices; improving supply system and service delivery by establishing Fair Price Shops. Against cartels and obstruction of supply; address food insecurity in remote areas; upgrade of existing SAARC Food Security Storage and National Food Security Storage; implement recommendation of High Level Committee to reform supply of petroleum products
• Development program in remote areas: capital subsidy for agriculture, herbs and fruits production, collection and processing through cooperatives in Kalikot, Jumla, Humla, Mugu, Dolpa, Jajarkot, Achham, Bajhang, Bajura and Darchula; economic, social infrastructure and services in Karnali and nearby districts; ‘One Family One Employment’ program in Karnali to be expanded gradually to other areas as employment guarantee-- focus in those areas with low human development index and infrastructure such as Jajarkot, Achham, Bajhang and Bajura;
• Agriculture sector: increase in subsidy in fertilizer and seeds; land pooling to increase production and productivity; several specific products focused incentives and subsidies
• Cooperatives: “Cooperatives in Villages, Employment at Every Household” program; to be established as strong pillar by building economic base and utilizing local resources, capital and labor; seed money to cooperatives run by women; concessional loans; assistances to tea cooperative; establish National Cooperative Federation by giving Rs 10 million; concessional loans to cooperatives investing in micro-hydro power projects of up to 1MW.
• Infrastructure: money for many highways feasibility studies; expedite construction of postal highway; fast track highway; repair and reconstruction of bridges; expansion of railways
• Energy crisis: Hydropower Development and Investment Company with paid up capita of Rs 8 billion already registered; master plan on hydropower development; study and implementation of reservoir projects; request NRNs to invest in hydropower project of 100 MW; extension of national grid and transmission line; too many slogan filled programs
• Irrigation: construction of canals and irrigation facilities; mostly in Terai;
• Employment: collateral free loan facility of up to Rs 200,000 per person under Youth Self Employment Program; skill based and professional training programs; youths to be incentivized to work in call centers, medical transcription, account, service business; trade union education program; training to remitters to enhance skill; remittance income to be mobilized according to investment proposal drawn out by a high level task force
•  Tourism: airport upgrade; Nepal to be established as model tourism country of the world within 15 years; exploration of new tourist destinations; infrastructure and tourism service development in 17 destinations; modern conference hall to be built in Butwal;
• Private sector development: PPP model to be promoted; security in industrial zones and declare them as zone of peace; international investment forum to be held to attract investment in industries having comparative and competitive advantage; separate electricity feeders to be installed in Biratnagar, Birgunj, Kathmandu and Butwal-Bhairawa to address load-shedding problems; Industrial Enterprise Act to be enacted; lump sum capital subsidy for the import of machinery and capital goods by group of more than 100 people returned from abroad after engaging in similar works; support for floriculture business; Rs 100 million for Women Entrepreneur Fund; custom duties exemption in import of machinery for alternative energy;
• Financial sector and capital market: disclosure of income source while depositing a sum of over Rs 1 million; disclosure of income if on purchase of vehicle worth more than Rs 5 million and real estate more than Rs 10 million; capital gains tax decreased; NRNs can invest in housings and share market; foreigners can purchase flats and apartments of over US$ 200,000; supervision and monitoring of saving and credit co-operatives with annual transactions of more than Rs 50 million; action against willful defaulters; incentives for merger in the form of waving of registration fees;
• Export promotion: special facility to exporters of tea, coffee, cardamom, herbs, unseasonal vegetable products; drying and packaging facility to be made available; upgrade certification laboratory; expedite construction of dry ports at border points; recommendation by concerned agencies for implementing NTIS to pursued; herbs processing plants; work toward implementing SEZs
• Planning: NPC to prepare a 20 year long term plan for socio-economic transformation; results of Census 2011 to be quickly published; agriculture census next year; third party evaluation of foreign aid funded projects; FM to head a monitoring team for monitoring projects of over Rs 150 million;
• Public enterprises: CEO and GM of PEs to be selected through open competition;
• Public service: Salary increased between 30.39% and 42.86%.

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• Revenue policy: Tax incentives to domestic and foreign investors to attract investment in hydropower and infrastructure development; promoting production oriented, import substituting and export oriented industries; broadening revenue bases by expanding tax net; control revenue leakage;
  • Voluntary disclosure of fixed and movable properties to Inland Revenue Offices by paying certain percentage of tax; declare MRP of imported goods at customs point to avoid under-invoicing; increase in excise rates on alcohol, beer, cigarettes, and tobacco products; only persons with PAN number will be eligible for registration process of land and house transactions;
  • Tax exemption for tomato ketchup firms that are run through cooperatives; reduction of flat rate custom duty on LCD, Plasma and LED equipment brought by Nepalese passengers returning from foreign employment; VAT concession to Jute firms on the import of materials; reduction of capital gains tax by 50% on the income from sales of house and land; CGT in shares reduced (for entities 10% and for individuals 5%);
  • Exemption of income tax for first ten years for hydro-power projects commencing construction within August 24, 2014 and starting commercial production by mid-April 2018; extend deadline for merger among BFIs and waiving of land registration fee; 
  • Income tax exemption of 90 percent will be given to any of the special and information technology industry employing 300 or more Nepalis. Similar income-tax exemption of 80 percent will be given to any special industry employing 1,200 or more Nepalis directly. An exemption of 80 percent in the income tax will be given to any special industry which employs more than 100 Nepalis with at least 33 percent of them women, untouchable and differently-abled persons.

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Comments:

• This is a directionless budget. Our macroeconomic challenges (low growth rate, high inflation, balance of payments deficit, ballooning trade deficit, eroding competitiveness of our economy and its productive capacities, slump in manufacturing sector and liquidity and banking crises) are hardly been addressed. In fact, an impression that one gets is that all these will be resolved by promoting cooperatives (this was already hinted in Program and Policies for 2011-2012). In fact, the budget is placing cooperatives above the private sector and it essentially is a cooperatives’ budget as was mentioned in the white paper. Neither in white paper nor the program and policies did FM Adhikari mention these macroeconomic challenges with emphasis. He has been very cosmetic in pointing them out loud and clear. And, his budget lacks vision in addressing these issues. 
• Cooperatives are seen as a solution to the macroeconomic problems faced by the country. It is not a good idea. Even balance of trade deficit is being considered to be addressed by promoting cooperatives.
• Note that due to increasing pressure from other political parties to fund their pet projects under various names and the decision to hike salary of civil servants, recurrent expenditure has shot up by almost 40.09% from last year’s allocation. Meanwhile, this was made up by reducing capital expenditure by at least 43.95% (or 24.36% if you choose to include capital and financing expenditures). It is bad for the economy and does not add much to productive capacities. In fact, it will very likely increase inflation even higher.
• The way the size of the budget is increased will not add much productive capacities and will most probably put upward pressure on inflation. Also, since the revised total expenditure for FY 2010/11 is estimated to be Rs 306.27 billion against budget allocation of Rs 337.9 billion, this year’s allocation would also not be spent as envisioned.
• This allocated amount of development expenditure is not going to be spent given present conditions. Neither was last year’s development expenditure spent (which partly contributed to the liquidity crisis).
• Generating the revenue target is not going to be possible if the current trend is anything to go by. The MoF was unable to collect the projected revenue of Rs 216.64 billion of last year’s budget; it is estimated to collect only Rs 206 billion. I don’t understand why Finance Secretary Baskota is so ambitious. (He did accounting gimmick by including unspent budget as revenue. I think after so much of repudiation from experts and lawmakers, he has corrected the mistake.) It must be that since expenditures could not be brought down, they increased target for revenue mobilization (now total income).
• The increase in domestic borrowing by 11.07% from last year’s budget will mop up liquidity from the market, essentially crowding out private sector investment and worsening liquidity crisis.
• Foreign aid accounts for 25.9% of total budget (Rs 99.78 billion--just sum up foreign grants in total income heading and foreign loans from deficit financing heading). It is an increase by 13.9% from last year. Since the country was unable to even mobilize last year’s total aid, why so much of expectation this year? Absorptive capacity of foreign aid has also been decreasing.
• No concrete steps to curb inflation except for monitoring markets. In fact, inflation will exacerbate due to FM Adhikari’s budget.
• Insufficient and ineffective incentives for merger of BFIs. The relaxation on disclosure of sources of income will not aid much to alleviate the liquidity and banking crises.
• No concrete plan to spur growth rate higher than the usual 3-4%. No explanation how the growth target of 5% and inflation target of 7% are to be reached. FM Adhikari is clueless on this one.
• How on earth will balance of payments (BoP) will be positive from negative of around Rs 12 billion right now without decreasing trade deficit and increasing the growth rate of inflow of remittances. No clue about how to promote exports except for mentioning that it will be based on NTIS 2010 recommendation by the concerned ministry. In fact, of the seven pillars of state growth and development, mainstreaming for industry, trade and service sector is getting only Rs 7.24 billion (up from Rs 4.81 billion last year). Some income tax incentives to companies in SEZs is not going to work when we actually don’t have SEZs and an Act on this regard.
• Overall, this is a lifeless budget with no tooth to make real impact on the productive capacity of the economy and to address the most pressing macroeconomic needs of the country. It is instead a cooperative promoting, ambitious but directionless, and distributive budget. It does not even adequately acknowledge the macroeconomic problems. A budget is not a political tool to hand out taxpayers’ hard earned money!