South Asian growth prospect: Optimistic & pessimistic scenarios

Ejaz Ghani outlines two scenarios for South Asia: optimistic and pessimistic. Here are the major points:

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Optimistic scenario:

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• The optimistic outlook is based on the favourable structural trends including improved governance, the demographic dividend, the rise of the middle class, and the new faces of globalisation.
• All countries in the region have an elected government for the first time since independence. Governance has improved in two ways that will enhance the politics of democratic accountability. The first is the diminishing importance of identity politics, and the second is that the rates of incumbency – the likelihood of a sitting legislator or state government being re-elected – are down.
• The demographic dividend [=(working-age population)/(non-working age population)*100] will benefit growth not only through the swelling of the labour force, as the baby boomers reach working age, but also due to society’s ability to save more because working age happens to be the prime years for savings, and the increased fiscal space that will divert resources from spending on children to investing in infrastructure and technology.
• A massive shift towards a middle class society is already in the making. India’s middle class (daily expenditure of $10-$100 in PPP terms) will rise more rapidly compared to China, because Indian households will benefit more from growth than Chinese households, given the prevailing distribution of income. The size of the middle class will increase from 60 million in 2010 to more than one billion people by 2025. Growth, education, home ownership, formal-sector jobs, and better economic security are cause and consequence of an expanding middle class.

• The world has already benefited from global capital flows and trade in goods. It is now the turn of trade in services and migration. Technology has enabled services to be digitised, transported, and traded, long distance, at low cost, without compromising on quality. Trade in services are the fastest growing component of world trade during the last two decades. India’s service export is growing at a much faster pace compared to goods export form China.
• Global migration rates have been sluggish over the last 50 years. But this will change. Current demographic trends suggest a rapidly ageing population in OECD countries, and a young population in South Asia. This generates powerful incentives for labour mobility, as well as unique opportunities for improved global efficiency.

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Pessimistic scenario:

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• Growth in the region could be derailed by lopsided spatial transformation, lack of entrepreneurship, large informal sectors, high levels of conflict, gender disparities, and deep pockets of poverty.
• Rapid growth has produced billionaires in India. But, the broad character of the region remains agrarian and rural. This has more to do with the peculiarities of growth patterns -- services-led growth, which is more skill-intensive, compared to manufacturing-led growth, which is less skill-intensive, and the fragmented nature of transformation, than the pace of growth.
• Slow growth in manufacturing despite rapid GDP growth should by itself not be a worry, provided it is not in the way of growth in employment opportunities for unskilled and low-skilled workers at decent wages in industry and services so that these sectors still manage to rapidly pull the underemployed workers in agriculture into gainful employment.

• Entrepreneurship is central to job creation. But South Asia has too few entrepreneurs. While India has a disproportionately high rate of self-employment and many small firms, this has not as readily translated into as many young entrepreneurial firms as could be hoped. Yet there is no question that entrepreneurship works. Formal-sector job growth has been strongest in regions and industries that have exhibited high rates of entrepreneurship and dynamic economies.

• The informal sector remains overwhelmingly large and persistent. Around nine out of ten employees in India do not have formal jobs. What is worrying is that informal employment does not seem to disappear with rapid growth. There is a strong association between informality and poverty.

• South Asia has experienced high levels of internal conflict. Most countries in South Asia are currently immersed in, or are just emerging from, conflicts of varying nature and scope, ranging from the recently ended civil wars in Sri Lanka and Nepal and insurgency in Afghanistan and Pakistan to low-level localised insurgency in India. The result is human misery, destruction of infrastructure and social cohesion, and death. The knock-on effects are huge.

• India, despite reaching middle-income status, is home to the largest concentration of poor people in the world. More than one billion people lived on less than $2 a day in 2005 in South Asia. Nearly 250 million children are undernourished and suffer from hidden hunger. Child mortality and malnutrition levels are among the highest in the world. More than one third of adult women are anaemic. One woman dies every five minutes from preventable, pregnancy-related causes. The share of female employment in total employment is among the lowest in the world.

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How much is India’s software and IT services sector contributing to growth and development?

Countering the claims that India’s India’s Software and Information Technology Services (SWIS) has few forward linkages to Indian firms, uses few domestic inputs, has limited employment effects and prefer foreign clients to domestic ones, Grace Kite argues that this sectors contribution to the Indian economy is now “over twice as large as its share of GDP”, which includes its forward linkages to other firms and its overall demand stimulus. In the financial year 2010-11, it produced US$ 60 billion of output, accounted for a fifth of the country’s exports and employed 2.5 million employees.

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First, how has the domestic market for India’s software and IT services fared? Over 20 years through 2010-11, domestic sales have registered a compound annual rate of growth of over 27%. And since 2005-6, their rate of growth has significantly accelerated, so that it now equals the rate of growth of the sector’s export revenue. The increase in domestic revenue has averaged US$ 1.7 billion per year since that structural turning point.

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Kites estimated that between 2005 and 2008 the impact of the SWIS sector’s domestic forward linkages (financial services, communications and manufacturing) contributed an average 1.3 percentage points per year to the country’s total GDP growth. This represented, on average, about 15% of the total.

Furthermore, regarding backward linkages, Kites argues that in 2005-06, 84% of the combined inputs of SWIS, IT enabled services and business process outsourcing (ITES-BPO)were purchased domestically.

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Taking the direct effect of such purchases plus the indirect impact of the demand generated thereby for other products in the economy, estimates suggest that for every rupee spent on inputs by the SWIS and ITES-BPO sectors in 2005-6, another 0.6 rupee was generated somewhere else in the Indian economy. These combined direct and indirect effects accounted for 2% of India’s GDP.

What about the domestic effect of the consumer spending of SWIS workers? Estimates of this additional demand effect, both direct and indirect, have ranged between 0.6% of GDP (for 2005-6) to 0.75% of GDP (for 2008-9).

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Regarding employment generation, in 2005-6, for example, it was estimated that the SWIS sector (together with ITES-BPO) contributed indirectly to the creation of 3.64 million non-IT jobs.

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This total implies that for every worker employed directly in these IT sectors, jobs were created for an additional two workers in the Indian economy as a whole. The majority of these additional workers had much lower skill and education levels than those in the IT sectors.

The tight labour market for SWIS workers has also led to the rapid rise of educational institutions catering to the employment needs of this sector. India’s colleges and universities now turn out 300,000 technical graduates a year, more than any other country in the world except for China. Hence, employment in the educational sector has been significantly expanded.

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Overall, the sector’s direct impact contributed 4.6% of India’s GDP. The impact of the sector’s forward linkages contributed another 2.8% of GDP. And the effect of its backward linkages contributed an additional 2.7% of GDP. India’s Software and IT Services Sector accounted for 10.1% of India’s GDP in 2005-6. So, its total impact was more than double the size of its own output (i.e., 4.6%).

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There are good reasons to believe that these figures are significant under-estimates. The first reason is that the growth of the sector, as previously stressed, has been particularly rapid since 2005-6. Secondly, these estimates ignore the informal SWIS sector (namely, the effects of those firms not registered with the Indian government).

Lastly, these estimates do not account for indirect forward linkages, which are likely to be substantial. For example, if software and IT services help to improve health services or to enhance the provision of education, the indirect effects on labour productivity are likely to be significant.

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What caused the global financial crisis?

Justin Yifu Lin and Volker Treichel argue that it is not the global imbalances, but excess demand in the US that caused the global financial crisis. Here is an abstract of their recent paper:

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The world is currently still struggling with the aftermath of the worst economic crisis since the Great Depression. Following a description of the eruption, evolution and consequences of the global crisis, this paper reviews alternative hypotheses for the causes of the global financial crisis as well as their empirical evidence. The paper refutes the frequently voiced view that the global crisis was caused by global imbalances that reflected economic policies of East Asian countries. Instead, it argues that global imbalances were the result of excess demand in the United States, resulting from both the public debt in the United States arising from the Afghanistan and Iraqi wars and tax cuts and the overconsumption by households supported by the wealth effect from the housing bubble in the United States. The housing bubble itself was the outcome of the Federal Reserve's low interest rate policy in the aftermath of the burst of the "dot-com" bubble in 2001, the lack of appropriate financial regulation, and housing policies aimed at expanding the mortgage market to low-income borrowers. It was possible to maintain the large trade deficits of the United States for such a long period of time because of the dollar's reserve currency status. When the housing bubble in the United States burst, the global crisis ensued. The paper also analyzes why China's trade surplus increased significantly in general and with the United States in particular in recent years, and argues that this increase was caused by both the relocation of the labor-intensive tradable sector of East Asian economies to China and high corporate saving rates in China as a result of its dual-track approach to reform.

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What’s up with PM Bhattarai’s Immediate Action Plan?

Each time a new government comes in, it has now become a fashion to introduce new programs for transforming Nepal. PM Baburam Bhattarai unveiled a long Immediate Action Plan (or see this) yesterday that outlines what he thinks should be done rather than what can be done in reality given the existing political, economic and social structures. It looks like a budget speech. Let me focus on the economy aspects here.

A majority of of the programs are already been floated by previous governments. There is no need to give a different name to the already floated programs and include them in a supposedly new agenda of the government. Frankly, it would be better to just implement the programs of the previous administrations. Giving new names to old programs and adding a few new programs without any clue of how to attract capital required for such programs is just ludicrous. Attracting US$1 billion FDI in the next six months is just unbelievable when the total FDI last year was just US$39 million. All I can say is: Good luck, PM!

The prime minister argues that his government will try to execute some of the programs using the same budget for this fiscal year (about six months left for the next fiscal year to start). This is simply not going to happen because the amount will not be sufficient to launch all the programs loftily outlined by the PM. 

Investors are primarily concerned with political stability, law and order, security of their investment and returns from it, hospitable labor force and government bureaucracy, and less red tape. Consider the following points:

• It is not worthwhile to list all the economic programs (for “big push”) outlined by the prime minister. Read it here. It is too long and he is trying to do way too many things like the finance minister when he outlines fiscal budget.
• Political stability is a far cry. Prachanda is already trying to pull the plug of PM Bhattarai’s government. The uncertainty over longevity of this government means a disincentive (for fear of policy change) for investors to come here and invest. Solution: Let the bureaucrats decide on these policies and the politicians support them and may be tweak them a bit (to give breathing space for politicians, whom by nature are more self-interested than what Adam Smith imagined!). Evidence: See how Japanese and Thai economies are doing just fine even when government changes frequently.
• In order to unite capital, entrepreneurs and ideas, there should be effective property, contract, and business laws so that when whimsical government tries to change agreed terms and conditions, investors can drag them to court. This is one of the most reliable ways to entice investors to invest in this country. It would be better to focus on disciplining the politically affiliated, militant trade unions, ensure property rights (think of how you are going to return back the illegally seized properties instead of legalizing them), control corruption (first by political parties and leaders and then in bureaucracy), and bring out business friendly laws.
• The reasons why domestic investors are hesitant to invest in whatever capacity they can is because they lack easy access to capital and favorable investment climate. The money required for large infrastructure projects cannot be sourced domestically (it would take more than double the annual budget to construct a railway link from the East to the West of the country). The government could choose a handful of strong and able domestic firms that can execute such projects, guarantee and insure international loans taken by them (interest rate is low compared to domestic loans), give positively discriminatory licenses to competent firms only, strictly supervise them so that they achieve what they commit to do, control unruly labor unions and disruptive activities, and then see how it yields concrete result. Evidence: study how Park Chung-hee applied similar approach in South Korea after the coup in 1962 and transformed a struggling economy into an economic powerhouse in a generation. Also, read how the Japanese economy got transformed during the Meiji period.
• Bringing new program and policies each time a new government comes in confuses bureaucrats. Spare them from political wrangling and its fallout. Just stick to a plan that all can agree upon. Let the bureaucrats decide what that plan be. The political parties can work on brining legislation on this regard, help in executing and supervising the program and policies. Or, even if politicians want to bring new programs, make sure they are in line with the existing ones and one that can easily pass through the bureaucratic weaving across so many agencies. This Bhattarai led government could at least do this. Or, can they?
• It is sad to not see concrete programs for export promotion and industrial development. Where happened to the idea of Special Economic Zones? Here are some of the measure the government could look at to revive exports. And, what about addressing the myriad of supply-side constraints ailing the industrial sector? About diesel plant, how are we going to bring one in operation without putting further strain in NOC? Diesel plant is expensive and it will further put financial burden on NEA and NOC. It would be better to pour the alloted money in a mid-sized hydropower plant without any delay. Or guarantee that much of loan amount to private sector to execute such hydropower plant.
• One of the reasons why food prices are high and productivity low is due to the rigging of markets by middlemen. How about clearing them out so that farmers get the right price for their produce and an incentive to produce more?  Read this piece about how middlemen are distorting the food markets in Nepal.
• That said, I am positive about the emphasis on infrastructure development. It is the binding constraint to economic activities. We have to tirelessly reiterate this point even if no progress happens right now. Hopefully, at some point, a right time will be created when investors, government, labor unions, and public wholeheartedly back the idea of infrastructure development, that too massively. I don’t expect the present government to create a right environment for this even if it wants to. Nor do I hope that it will create a foundation for that. It is too fractured to do anything substantive because these programs require consensus among all stakeholders  (investors, political parties, labor unions, and public). The idea is good though. Here is a list of projects of national pride as outlined by the Bhattarai led government:
  • Kathmandu-Tarai Fast Track
  • Mid-Hills Highway
  • Regional airports in Bhairahawa and Pokhara
  • Detailed Project Report of Budhi Gandhaki within a year
  • Second international airport in Nijgadh
  • Tamakoshi Hydropower Project
  • East-West Electric Railway
  • Postal Highway
  • Melamchi Drinking Water Project
  • Open tracks for north-south highways in Koshi, Gandaki and Karnali
  • Sikta Irrigation Project
• The projections related to growth stimulus and employment generation are just a wild guess. For employment generation, my suggestion is to focus on the idea of Employment Guarantee Scheme (EGS) recently floated by the National Planning Commission. This program has the potential to employ about 431,388 people of households living below the national poverty line at the cost of 2.14% of budget (fiscal year 2011-12). It comes to around 1.29% of 2010-11 real GDP in producers prices. It is better to replace the Youth Self Employment Fund (funds have been misused by successive governments) with this one. Why not back the idea of EGS? It has been successfully implemented in India and several other countries.
• I like the idea of government sponsored think tanks. Here is my take on this issue. This one and some other programs are somewhat in line with the recommendations of the PM’s Economic Advisory Council. Good job!
• Above all, here is a simple idea for the Bhattarai led government to stay effective and relevant: just implement previously floated programs and resolve policy implementation paralysis. Enough with the leftists lofty talks and promises!

Evaluation of REDD projects: Lessons for future policy design and implementation

Here is the abstract of a recent research paper published in International Journal of Sustainable Development & World Ecology (authors: Hari Bansha Dulal, Kalim U. Shah & Chandan Sapkota). 

Reducing emissions from deforestation and forest degradation (REDD) projects: lessons for future policy design and implementation

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In response to the pressing global challenges of climate change, initiatives under the auspices of ‘reducing emissions from deforestation and forest degradation’ (REDD) have been implemented in over 30 developing and least-developed countries since 2005. The initiatives cover nearly every significant and vulnerable forest ecosystem worldwide. In this study we review six representative initiatives, two each from Africa, Asia and Latin America. Strength, weakness, opportunity and threat analysis is done to evaluate each initiative's policy framework, design, implementation and results thus far. The main policy and project implementation factors that appear to lead to effective and successful REDD project outcomes include having clearly formulated project design; governance, land tenure rights and capacity; equity and transparency; indigenous peoples' rights and knowledge; local–international coordination; and enhancing local and institutional capacities. Based on these findings, we provide recommendations for future REDD policy action and project implementation to make it work for the poor and achieve its intended goals.

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Real estate, housing and banking crises postponed in Nepal

[It was published in Republica, January 25, 2012, p.6]

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Crisis postponed

The slowdown in real estate and housing sector, which was enjoying unnatural growth thanks to high remittance inflows and easy credit from bank and financial institutions (BFIs), is affecting pretty much every aspect ranging from land transaction to restaurant and dance bar business to political donations. The investors and BFIs are increasingly worried about the future of this sector and banking industry.

Nepal Rastra Bank (NRB) has been gradually rolling out a number of corrective policy initiatives aimed at defusing risks faced by BFIs and real estate and housing sector. Meanwhile, Ministry of Finance (MoF) recently introduced a ‘relief package’ to prop up this still overheated sector. The short-term, trigger happy measures of the MoF will not revitalize the realty sector and the BFIs will still be in troubled waters. Importantly, it won’t address the core problems.

The MoF extended the deadline for reducing real estate and housing lending to 25 percent of total credit until mid-July 2013 and raised personal home loan threshold to Rs 10 million. Fearing excessive risk to BFIs, the NRB last year directed them to bring down their exposure to realty sector to 25 percent, from about 30 percent, of total loan portfolio. It also restricted personal home loan at Rs 8 million.

But, the BFIs were not in a position to comply with these directives and hence the NRB extended compliance deadline for few more months. Still, the BFIs were unable to adjust their loan portfolio according to the directives of the NRB. The MoF, on recommendation of High Level Financial Sector Coordination Committee, stepped in to provide a short-term reprieve to the BFIs and real estate sector.

Another important decision was to allow developers to categorize regular apartments as service apartments. This will modify composition of loan portfolio of BFIs by allowing them to change loan headings of apartments from real estate to service sector. Moreover, the MoF has decided to offer housing loans at concessional rates to all civil servants and office bearers of constitutional bodies. It is also mulling over opening the apartment sub-sector to foreigners.

These measures have reduced regulatory compliance burden of BFIs, indirectly encouraged them to lend more money to real estate and housing sector, and ultimately might help prevent further downslide in prices. But, they do nothing to address the core problems—unhealthy competition among too many BFIs and correction of overly inflated real estate and housing prices.

The rapid growth in the number of BFIs in the absence of proportional rise in depositor base and diversification of banking portfolios led to cutthroat competition in enticing depositors (institutional, government and individual) and borrowers. The BFIs competed unhealthily to attract depositors, who enjoy steady source of remittance inflows, by offering flamboyant and unsustainably high interest yielding deposit schemes. The little distinction in playing field for all categories of BFIs, which were allowed to swell to over 220 (including 31 commercial banks, 89 development banks, 79 finance companies, and 21 micro-credit institutions) by the NRB, amidst limited investment opportunities led to concentration of lending to one particular sector—real estate and housing.

To reap quick returns, the BFIs showed little prudence to appraise if the borrowers would be able to honor interest and principal payments on time. After all they have compulsion to lend (both short term and long term) more money in order to give returns on deposits to short term depositors, who are constantly in search of BFIs offering high interest.

Hence, money continued to flow to real estate and housing sector— estimated to be over Rs 120 billion—without much scrutiny, leading to multifold rise in their prices in matter of months. People took out loans to purchase inflated real estate and housing assets. Land transaction peaked at local land offices and investors and agents became millionaires overnight. But, it was just a bubble. It started to lose air when growth of remittance inflows slowed down in 2009 as a result of the global financial and economic crises. All of a sudden real estate and housing prices tumbled.

Half constructed buildings, unsold land plots, and ‘ghost apartments’ were apparent. The BFIs jacked up lending rates, further putting pressure on borrowers. They were unable to recoup interest and principal payments on time, leading to a liquidity crunch. Fortunately, with prudent interventions by the NRB, there is now liquidity surplus in the market.

Given this backdrop it is clear that the crises were engendered by unhealthy competition among BFIs and unnaturally high growth of real estate and housing prices. The postponement of deadline to meet the lending threshold to this sector will neither resolve the core problems nor avert a potential banking crisis. It will only delay the inevitable consolidation of BFIs and correction of real estate and housing prices. Furthermore, shifting headings of loans from commercial apartments to service apartments is a clever way to enable BFIs to comply with 25 percent loan threshold.

It makes no difference to borrowers’ ability to honor interest and principal payments on time and the BFIs’ ability to recoup them. The BFIs have already put up around 1000 units of land and housing for auction in the second quarter of this fiscal year. Even though the starting prices are below than what the BFIs would expect, they are still not finding buyers. The president of Nepal Finance Companies’ Association argues that as much as 75 percent of real estate sector borrowers are not honoring interest payments. At the end of the day, the loans might be stacked up in the non performing loans (NPLs) category of the BFIs. Note that high NPLs means unhealthy state of BFIs, which might require restructuring at the cost of taxpayer’s money or with donor’s assistance like it was done with the two largest state-owned commercial banks.

The plain fact is that there has to be consolidation of BFIs and correction of real estate and housing prices. The government has to offer adequate incentives for BFIs to go for merger and acquisition. When the entire future of banking industry is in line, we should not be quibbling over tax holidays, management positions, and overly high capital requirements.

Meantime, the banking industry should also diversify its loan portfolio, ensure sound corporate governance, introduce innovative packages and seek investment opportunities outside of the handful of traditional sectors. Taking stock of the paucity of investment opportunities for BFIs, the NRB recently outlined opportunities and made it mandatory by mid-July 2013 for them to lend at least 10 percent of total loan and investment portfolio to agriculture and energy sectors.

Regarding the real estate and housing sector, which contributes just over 8 percent to GDP, price correction is inevitable and the government has to let markets adjust to real price levels rather than trying to artificially prop it up. The political leaders and their financiers and supporters have substantial interest in this sector and without a rise in prices some of them will see their financial worth wipe off completely.

The MoF introduced ‘relief package’ not to correct markets, but to alleviate their hardship. There are even suggestions to prop up real estate and housing markets outside of the major cities. Other than pacifying party supporters and businessmen funding the political leaders, these measures will do very little to steer this sector in the right path. It is time to call off gambling in this sector and let markets determine the course this time.

[Published in Republica, January 25, 2012, p.6]

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Bhutan, Mongolia and Nepal: Contribution of natural resources to growth

Here is a highly recommended piece about Mongolia’s obsession with mining in the Gobi desert and its plan to reap benefits out of its sale. Mongolia is trying to exploit its natural resources and focus on something where it has comparative advantage on rather than getting bogged down on debate over resource rights and resource curse. It is doling out money to its citizen and is setting up a fund to channelize income from mining (just like Norway and Botswana are doing with earning from petro fuel and diamond respectively) to fund development activities.

While reading the article, I kept thinking about the sorry state of hydropower in Nepal, the victory of never-ending discussion and talks over actual construction and the apprehension of being dominated by big foreign investors (and the countries they represent). For someone who is always thinking of spurring growth, increasing exports, jacking up per capita income, and providing appropriate social protection to the needy people, all the objections and hindrances sound totally nonsense. Much has been written about Nepal’s hydropower potential. I won’t attempt to repeat them here—just Google it!

Let me give comparative stats and discussion (extracted from various sources) on Bhutan, Mongolia and Nepal—all are landlocked—and shed light on how the first two are successfully exploiting their natural resources on which they have comparative advantage and how the latter is lost in the never-ending debate, fear of domination by alien investors and smugness over the running waters.

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Mongolia:

• GDP size: $11.02 billion (PPP in 2010)
• Per capita income: $3,600 (PPP in 2010)
• Population: 3.133 million (July 2011 est.)
• Real GDP growth: 6.1% in 2010
• In the third quarter of 2011 Mongolia’s economy grew by 21% compared with the same period in 2010.
• More than 80% of its exports are minerals, a proportion expected to rise in a few years to 95%.
• Mongolia makes mining geologists salivate over its known riches and unexplored potential—for copper, coal, gold, silver, uranium, molybdenum, and on and on. Some 3,000 mining licences have been issued.
• The IMF expects growth to average 14% a year between 2012 and 2016. In 2013, the year production is due to begin in earnest at OT (Oyu Tolgoi, or “Turquoise Hill”), it is forecast to reach 22.9%. Others think it will be at least twice that.
• The project is a joint venture between the Mongolian government (34%) and Ivanhoe Mines of Canada (66%), which is in turn 49% owned by Rio Tinto, the mining giant that is managing OT and has put up most of the money.
• This mine will produce 450,000 tonnes of copper a year, making it one of the world’s five biggest mines, as well as being a big gold producer. And it will have a life of at least 50 years.
• From 2013 its sales will start adding an average of about five percentage points a year to the national growth rate up to 2020, when its impact on the economy will peak.
• By November last year over $3 billion had already been spent on OT, a figure that will rise to $6 billion by 2013 and $10 billion by 2020. For Mongolia, a $6 billion economy, this is enormous.
• Mongolian coal production is expected to increase from about 16m tonnes a year now to 40m by 2020 and 240m by 2040. Again China provides a ready market, but the mining boom has exacerbated Mongolian fears of a Chinese takeover by commercial stealth.
• Economists fret about a “resource curse”, or “Dutch disease”. […]For economists, the resource curse is a risk Mongolia has little option but to take. […] its comparative advantage is in commodities and mining services. There is no point in trying to compete in manufacturing with “the biggest factory on the planet” next door in China.

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Bhutan:

• GDP size: $3.875 billion (PPP in 2010)
• Per capita income: $5,500 (PPP in 2010)
• Population: 708,427 (July 2011 est.)
• Real GDP growth: 6.7% (2010)
• Bhutan has the potential to develop a capacity of 23,760 MW, of which only 5% has been tapped so far. Under the current year plan, the installed hydropower generation capacity is projected to rise from 1,488 MW in 2007 to 1,602 MW in 2013, with the planned commissioning of the 114 MW Dagachu hydropower project.
• The share of electricity (taxes plus dividends) in domestic revenue is expected to rise from about 43 percent in 2008/09 to over 53 percent by the end of the 10FYP. Hydropower exports constitute about two-fifths of total exports.
• The power sector generates the highest revenue, followed by tourism and banking sector. Hydropower contributes to more than 40% of domestic revenue.
• The first hydropower project (360 kW) in Bhutan was constructed on the Samteling Chhu in Thimphu. This mini-hydro electric plant was commissioned in 1967. During the 1970s, Bhutan and India began to look more closely into channeling the hydropower potential.
• Bhutan is exporting 1,200 megawatts to India and Bangladesh is also seeking power import from Bhutan.

• By 2020, the government plans increase generation capacity to 10,000 MW, about seven times the present level. To attain this goal, Bhutan and India have agreed to develop 10 hydropower projects together.

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Nepal:

• GDP size: $35.81 billion ((PPP in 2010)
• Per capita income: $1,200 (PPP in 2010)
• Population: 29.391 million (July 2011 est.)
• Real GDP growth: 4.6% (2010)
• Electricity demand-supply gap of around 400 MW
• Over 16 hours of load-shedding during dry season
• Power generation target has been revised to between 10000 MW to 20000 MW (in ten years time) depending on which political party is at the helm of power. These are just lofty talks with no concrete plan of action.
• Read more on hydropower woes here

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UPDATE (2012-01-26): Here is the PM’s economic adviser arguing that we should be thinking about generating hydropower first, not upstream-downstream benefits before the hydropower is developed. The benefit of providing enough electricity to the power hungry households and businesses  is far greater than the constant drumbeating of upstream and downstream benefits by some NGOs whose sustainability depends on opposing such investments on the pretext of environment damage and upstream-downstream benefits. These should be looked upon at and are important issues. But, I don’t think these come before we generate hydropower in the first place. Highly recommended write up by Rameshwore Prasad Khanal.

The impact of the EU debt crisis and global economic downturn on Nepalese economy

Here are some of the major points related to Nepal from a newly released Global Economic Prospects (GEP) 2012. The implications of the EU debt crisis and global economic downturn on the Nepalese economy is also discussed below. Here is an earlier post related to growth prospects of South Asia.

Nepal’s prospect:

• Law and order problems, and persistent and extensive infrastructure bottlenecks (electrical shortages are reflected in widespread load-shedding and unreliable delivery), reduced real GDP growth to 3.5 percent in FY2010/2011 (ending June-2011) from 4.6 percent in FY2009/10.
• GDP growth rate is forecasted to be the lowest in the region. In 2012 and 2013, GDP growth rate is forecasted to be 3.5% and 3.8% respectively. Considering fiscal year (July 16 through July 15), GDP growth rate is forecasted to be 3.6% and 4% in FY 2012/13 and 2013/14 respectively.

• Exports to the EU and the US might slowdown. Exports to Europe (in particular textiles and clothing) are more sensitive to a decrease in consumer demand. It will further affect industrial output (mainly manufacturing ones).
• Current account balance was estimated to be –2.9% of GDP in 2010, which is forecasted to decline to –2.7% of GDP and –2.3% of GDP in 2012 and 2013 respectively. The strong earning from tourism sector and remittance inflows is offset by widening trade deficit, partly tied to deterioration in terms of trade and domestic supply-side conditions. Terms of trade losses are estimated at about 4.3 percent of GDP for Nepal (1.9 percent of GDP for the region in aggregate)—(estimated January through September 2011 terms of trade impacts relative to 2010).

• Remittance inflows might take a hit (a decline of around 0.5 to 1 percent of GDP in case of moderate and severe crisis respectively) depending on the economic condition in the Gulf, affecting current account and balance of payments, consumption expenditure and import of durables.
• Inflationary pressure might continue.The upswing in prices reflects high international food and fuel prices, and imported inflation from India (as Nepal‟s local currency is pegged to the Indian rupee). Sustained elevated inflationary pressures have also led to a rise in inflation expectations.

• Foreign assistance might get a hit if fiscal consolidation in high-income countries results in cuts to overseas development assistance.
• Fiscal space has diminished when compared to 2007 level.
• These on top of the domestic supply-side constraints will impede GDP growth, exports and industrial output.
• The slowdown in global commodity prices (energy, metals, raw materials, minerals, fertilizers, and agriculture) might be a relief. But, with tensions rising in the Middle East, energy prices are going up North recently. Also, the continued depreciation of Nepalese rupee against major currencies (except the Indian rupee) will put further strain on retail prices (via the high import prices channel). Meanwhile, slowdown in demand for Nepalese exports in the EU and the US might mean a stunted exports sector, provided that it also fails to boost market pie in the Indian and regional markets.

• Exposure (investment) to a sudden withdrawal of European bank assets is relatively small (almost without any risk or negligible).

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Macroeconomic condition, 2008-2013
	2008	2009	2010	2011*	2012*	2013*
Real Expenditure Growth
1. GDP at market prices	4.8	5.3	4.5	4	3.5	3.8
2. Private consumption	3.9	3.9	4.9	4.9	4.1	4.1
3. Government consumption	6.9	13.1	17.8	13.5	10.1	9.3
4. Fixed investment	4	6	5.6	0.3	-0.2	3.2
5. Exports, GNFS	-1.4	17.5	34.4	22.1	9.4	5
6. Imports, GNFS	4.3	13.9	18.6	13.5	8.1	6
Contribution to GDP Growth
1. Private consumption	3	3	3.7	3.7	3.1	3.2
2. Government consumption	0.6	1.2	1.8	1.5	1.3	1.2
3. Fixed investment	0.8	1.2	1.2	0.1	0	0.6
4. Net exports	-0.3	3	6.6	5.4	2.7	1.5
Price Deflators
1. GDP at market prices	16.4	-6.2	17.8	5.3	4.1	6.1
2. Private consumption	14.8	-6.3	17.7	11.1	10.5	11.4
3. Exports, GNFS	17.4	-7.6	10.2	4.8	11.9	16.6
4. Imports, GNFS	19.6	-6.4	12.2	8.2	15.6	19.5
Share of GDP
1. Private consumption	76.6	75.5	75.8	80.5	85.6	90
2. Government consumption	10.3	11.2	12.1	13.7	15.5	17.2
3. Fixed investment	20.3	20.5	20.1	20.1	20.6	21.6
4. Change in stocks	9.2	9.5	8.1	7.3	6.7	6.2
5. Total investment	..	..	..	..	..	..
6. Exports, GNFS	16.1	17.7	21.3	24.8	28	31.1
7. Imports, GNFS	34.6	37.3	40.3	45.1	52.1	59.9
Memo
1. Nominal GDP (USD billions)	13	12.8	15.8	17.3	18.7	20.7
2. Population (millions)	28.8	29.3	29.9	30.4	31	31.5
3. GDP per capita, current USD	451.8	437.6	528.5	570	605.4	655.6
4. Real per capita GDP growth	4	2.4	2.6	1.7	1.8	2.4
5. USD Fx rate	64.9	76.6	74.6	75.4	75.4	73.7

Source: Global Economic Prospects 2012, World Bank; *Forecast for 2011, 2012, 2013