Thursday, March 29, 2012

A development bank of the BRICS

In the latest BRICS summit head in New Delhi, Prime Minister Manmohan Singh, Chinese President Hu Jintao, Russian President Dmitry Medvedev, Brazilian President Dilma Rousseff and South African President Jacob Zuma decided to move on setting up a development bank to mobilize "resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, to supplement the existing efforts of multilateral and regional financial institutions for global growth and development".

We have considered the possibility of setting up a new Development Bank for mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, to supplement the existing efforts of multilateral and regional financial institutions for global growth and development. We direct our Finance Ministers to examine the feasibility and viability of such an initiative, set up a joint working group for further study, and report back to us by the next Summit.

On trade:

We will continue our efforts for the successful conclusion of the Doha Round, based on the progress made and in keeping with its mandate. Towards this end, we will explore outcomes in specific areas where progress is possible while preserving the centrality of development and within the overall framework of the single undertaking. We do not support plurilateral initiatives that go against the fundamental principles of transparency, inclusiveness and multilateralism. We believe that such initiatives not only distract members from striving for a collective outcome but also fail to address the development deficit inherited from previous negotiating rounds. Once the ratification process is completed, Russia intends to participate in an active and constructive manner for a balanced outcome of the Doha Round that will help strengthen and develop the multilateral trade system.

We agree to build upon our synergies and to work together to intensify trade and investment flows among our countries to advance our respective industrial development and employment objectives.We welcome the outcomes of the second Meeting of BRICS Trade Ministers held in New Delhi on 28 March 2012. We support the regular consultations amongst our Trade Ministers and consider taking suitable measures to facilitate further consolidation of our trade and economic ties. We welcome the conclusion of the Master Agreement on Extending Credit Facility in Local Currency under BRICS Interbank Cooperation Mechanism and the Multilateral Letter of Credit Confirmation Facility Agreement between our EXIM/Development Banks. We believe that these Agreements will serve as useful enabling instruments for enhancing intra-BRICS trade in coming years.

Also this excerpt from The Economic Times:

The development banks of the five countries signed a master agreement on extending credit facilities in the local currency and the BRICS multilateral letter of credit confirmation facility agreement in the presence of their leaders at the Taj Palace Hotel here.

The participating banks include the Export Import Bank of India, Banco Nacional de Desenvolimento Economico e Social (BNDES) of Brazil, State Corporation Bank for Development and Foreign Economic Affairs of Russia, China Development Bank and Development Bank of South Africa.

The master agreement is aimed at reducing the demand for fully convertible currencies for transactions among BRICS nations, and thereby help reducing the transaction costs of intra-BRICS trade.

The confirmation facility pact envisages confirmation of lines of credit on receipt of a request from the exporter, the exporter's bank or the importer's bank.

The pacts are expected to scale up intra-BRICS trade which has been growing at the rate of 28 per cent over the last few years, but at $230 billion, it remains much below the potential of the five economic powerhouses. BRICS has set a target of $500 billion by 2015.

Reasons why Nepal should not ban Gurkha recruitment in foreign armies

It was published in Republica, March 28, 2012, p.6.

Un-feathered cap

Due to the dearth of job opportunities and low wages, thousands of people, mostly youths, seek employment abroad each year. Historically, people sought employment in the Indian and British armies and the Indian states close to the border. Lately, the government is trying to ban Nepalis from joining foreign armies. Their reason for doing so is as ludicrous as it can get and it reeks of a populist agenda trying to capitalize on the fluidity of the current popular sentiment and political and institutional foundation.

Without a credible backup plan, banning recruitment of Gurkhas in foreign armies on baseless grounds will hurt the economy, foster discontent among particular ethic groups, and erode one of the widely known and admired identities of Nepal. Apart from the Mount Everest, Gautam Buddha and mystic mountains, the Gurkhas have been one of the major entities giving Nepalis a reason to hold their heads high even though time and again the corrupt and whimsical acts of political leaders have tarnished that very identity.

Recently, the Office of Prime Minister and Council of Ministers directed the Ministry of Foreign Affairs and other line ministries to implement recommendations of Nepal’s Foreign Policy in Changed Context: 2068, which among others argued for the eventual ban on recruitment in foreign armies. On December 26, 2011, the Parliamentary Committee on International Relations and Human Rights (PCIRHR) had unanimously endorsed the report. The reason for this nonsensical recommendation is that the political leaders think employment in foreign armies has barred the country from holding its head high.

Furthermore, the report states that the recent decision of the British government to provide citizenship to Gurkha soldiers has put the country at a loss. Note that following a popular campaign led by Gurkhas and actress Joanna Lumley, the British government agreed to let Gurkha veterans who retired before 1997 settle in the UK. Earlier, the High Court in London delivered a verdict in favor of providing an automatic right of residency in the UK for Gurkhas who left the army before 1997. Nepalis have served (and are still serving in some of them) in armed forces of India, Hong Kong, Brunei, Singapore, Malaysia and the US, among other countries. They are also employed as private security personnel of renowned personalities in the world. For the record, there are around 3,800 Gurkhas in the British force and 30,000 in the Indian Army.

Trying to halt recruitment of unemployed Nepali citizens in foreign armies defies a sound understanding of historical and economic foundations of why such things happen in the first place. Impressed by the valor of Nepali fighters against the invading forces of British East India Company, the British government signed a peace pact with the Rana rulers and opened up avenues for recruitment of Nepali citizens in the British army in 1816. Since then the Gurkhas have earned an unparalleled prestige for Nepal. They have been honored with the best awards, including the coveted Victoria Cross, for their bravery in battlefield. Recently, Sargent Dip Prasad Pun of the Royal Gurkha Rifles was presented with Conspicuous Gallantry Cross for his outstanding bravery for single-handedly fighting off up to 30 Taliban insurgents in Afghanistan. As stories of Pun’s bravery were covered all over the world by mainstream and social media, Nepal’s name followed automatically. Isn’t that a reason to hold our heads high?

Furthermore, if the political leaders find it embarrassing that our unemployed citizens are getting gainful employment and stable source of high income by joining foreign armies, then why are they not feeling the same when a large number of Nepalis are flocking to the Gulf for employment under harsh conditions? Around two million migrants are currently working in foreign countries and over 20,000 legally leave the country each month for employment. They are working in horrendous condition and at much lower prices. Their plight, rights, and work conditions and work have been the subject of multiple media stories and documentaries. Aspiring migrants are forced to pay high fees to manpower agents here, and after reaching their work destination their passports are confiscated by employers, restricting their mobility and barring them from joining another company that would pay higher wages. Some of the Nepalis workers in the Gulf languish in prisons waiting for their country’s representative to show up to assist them in returning to their country. At times, relatives are seen crying their eyes out while waiting for delivery of dead bodies in coffins at Tribhuvan International Airport. Doesn’t this actually bar us from holding our heads high? We have never heard of such stories about the Gurkhas.

Economically, the income earned by Nepalis working in foreign armies has been a major source of foreign exchange income. Nepal gets around Rs10 billion each year in payment related to the British Gurkhas. The income received by Nepal related to Gurkhas in the Indian security forces is substantially higher. In comparison to the income from tourism and interest on investment abroad received by Nepal, the forex contribution by Gurkhas weighed substantially higher up until 1996, when migrants started going en masse to the Gulf as a result of the bloody Maoist insurgency. Since then though the direct contribution of remittances related to migrants in the Gulf and other employment destinations has been skyrocketing, the income contribution of Gurkhas is not insignificant. First, almost all the income and pension of Gurkhas come through formal channel, which is something the government is tirelessly trying to promote with respect to money sent from foreign employment destinations. Second, the indirect benefits received by districts from where most of the Gurkhas hail are tremendous.

The British and Indian governments have been investing a huge sum of money in social welfare of the relatives of Gurkhas and their hometown. They have invested in agriculture, healthcare, education, and infrastructure, among others. Additionally, the foreign policy and development assistance of the countries where Gurkhas are serving are one way or the other tied to the very fact that we have our men contributing towards the defense of their countries.

The government has recently prioritized foreign employment and has taken a slew of measures to both control illegal workers and promote legal workers heading to the Gulf. In terms of prestige, working condition, and income earned, the Gurkhas fare far better than the workers in the Gulf. If the government cannot promote employment in foreign armies as it is doing for employment in the Gulf, then it should not at least crush dreams of youths who want to become soldiers in foreign armies that guarantee a stable income and attractive facilities. Let the people choose what they want to do legally, i.e. non-promoted employment in foreign armies or promoted employment in the Gulf. Don’t get me wrong here. For the economy, the money sent by both Gurkhas and those working in the Gulf and India is equally important given our precarious macroeconomic situation. Any decline in growth of remittances will derail our economy as it nearly did in 2008/09 when the decline in growth of remittances put balance of payments in the red, busted the real estate and housing bubble, and triggered a liquidity crisis.

Overall, the recommendation by PCIRHR to restrict Gurkha—probably the earliest Non-Resident Nepalis (NRNs)—recruitment is wrongheaded, which also exhibits their ignorance and poor understanding of our history and economy. There is no doubt that Gurkhas have helped and are helping us to hold our heads high. Importantly, without ample job opportunities at home that can match income and other facilities that foreign jobs provide, people will always prefer the latter one. The parliamentary committee and the government should not try to restrict people’s choice of safe and gainful employment abroad if they cannot ensure one here.

[Published in Republica, March 28, 2012, p.6]

Wednesday, March 28, 2012

Bangladesh is the next hot spot in RMG sourcing. What about Nepal?

Due to declining profit margins and capacity constraints in China, investors are looking at other lower costs countries for ready-made garments (RMG) investment, production and sourcing. A recent survey by McKinsey found that 86 percent of the chief purchasing officers (CPOs) in leading apparel companies in Europe and the United States planned to decrease levels of sourcing in China over the next five years. McKinsey surveyed 28 European and US chief purchasing officers at leading apparel companies from September to November 2011. They account for US$46 billion in total apparel-sourcing value and 66 percent of all apparel exports from Bangladesh to Europe and the United States. McKinsey also conducted a telephone survey of more than 100 local suppliers.

CPOs identified Bangladesh as the next hotspot because the “country’s ready-made-garment industry identified solid apparel-sourcing opportunities there”. The top hotspots indicated by CPOs are Bangladesh, Vietnam, Indonesia and Cambodia. RMG exports of Bangladesh accounted for 13% of GDP and 75% of total exports (of US$15 billion) in 2010. McKinsey forecasts export-value growth of 7 to 9 percent annually within the next ten years, suggesting that the market will double by 2015 and nearly triple by 2020.

Our survey of chief purchasing officers found that European and US companies that focus on the apparel market’s value segment plan to expand the share of their sourcing from Bangladesh to 25 to 30 percent by 2020, from an average of 20 percent now. Midmarket brands, which generate about 13 percent of their sourcing value in Bangladesh, plan to increase that share to 20 to 25 percent over the same period. While growth in current product categories will drive some of the increase, 63 percent of the chief purchasing officers said that they want to expand into more fashionable or sophisticated items, such as formal wear and outerwear.

What is so attractive in Bangladesh?

  • Attractive prices
  • Competitive price levels due to increase in efficiency to offset rising wage costs (labor cost is expected to rise by 30% in the next three years. Wages were raised for the first time in 2010 after revision in 2006)
  • Supply capacity to produce RMG. The McKinsey study notes that “with 5,000 factories employing about 3.6 million workers (of a total workforce of 74.0 million), Bangladesh is clearly ahead of other Southeast Asian suppliers in this respect.” Indonesia has about 2450 factories, Vietnam 2000, and Cambodia 260 factories. Bangladesh’s exporters are known for supplying good quality and large order sizes for the value and lower mid-market. They are now expanding into more value-added services.
  • Favorable trade agreements: EU-GSP rules on duty-free imports of garments to include products with two-stage processing made sourcing from Bangladesh more attractive.

However, challenges remain in Bangladesh for apparel companies seeking to investment in Bangladesh.

  • Infrastructure: Transportation bottlenecks leading to inefficient lead times for garments and delay deliveries to customers. Energy supply is also a concern, but the government has prioritized improvement in this area. Lead time for sea freight is increased by about ten days due to the lack of a deep-sea harbor. Productivity at Chittagong port suffers from inefficient processes (such as manual processing), limited crane capacity and strikes.
  • Compliance: labor and social-compliance issues; environmental compliance being also looked upon by purchasing officers
  • Supplier’s performance and skilled workforce: Suppliers’ productivity must improve to mitigate the impact of rising wages (and also to close gaps with other sourcing countries); lack of investment in new machinery and technologies; insufficient size of skilled workforce (middle management)
  • Raw materials: Lacks a noteworthy supply of natural or artificial fibers; dependence on imports creates sourcing risks and lengthens lead times
  • Economic and political stability: Political unrest, strikes, and the ease of doing business are major concerns for investors. In the survey, about half of the chief purchasing officers interviewed stated that they would reduce levels of sourcing in Bangladesh if its political stability decreased.
  • Realizing the potential: Government, suppliers, and buyers need to work together to realize the potential of Bangladesh’s ready-made-garment market.

What is changing in China?

  • Labor shortages: Workers in costal regions are moving on to more attractive industries and better jobs, creating shortage of labor for RMG sector.
  • Increase in wages: Wages in coastal areas are rising amidst tight labor supply market.
  • Capacity limit for western buyers: Chinese producers are switching to serving the rapidly growing and more profitable domestic market. The government is supporting more value-added industries to rebalance the economy. It means Western buyers are reaching their limits in sourcing RMG from China.

Nepal versus Bangladesh

Now, this presents a problem for the already troubled RMG sector in Nepal. Nepal’s RMG export was Rs 11.12 billion in 1999/00. In 2010/11, it reduced to Rs 4.08 billion (total export was Rs 64 billion). The average annual growth of RMG exports over 1999/00-2010/11 was –1.89%. The growth rate of RMG exports declined for five consecutive years beginning 2003/04. Looking at the numbers in the table below and the choice of investors (i.e. Bangladesh), Nepal’s RMG industry’s prospect look gloomy. Unless we fix the supply-side and structural constraints, our RMG industry is further doomed. See an earlier post for the reasons for the downfall of Nepal’s RMG industry.

Nepal's export of RMG
Fiscal year Rs billion Growth rate
1998/99 8.15
1999/00 11.12 36.44
2000/01 11.62 4.50
2001/02 7.96 -31.50
2002/03 12.02 51.01
2003/04 10.22 -14.98
2004/05 6.72 -34.25
2005/06 6.58 -2.08
2006/07 4.71 -28.42
2007/08 3.32 -29.51
2008/09 4.35 31.02
2009/10        3.76 -13.61
2010/11        4.08 8.67

Nepal sends RMG to mainly USA (19.58% of total RMG export in 2010/11), France (16.59%), UK (14.93%), India (10.64%), Germany (8.80%), Japan (4.98%), Canada (4.42%), Italy (3.95%)and Spain (3.28%). With slowdown of import demand in almost all of these countries (save India), there is a high possibility that our RMG exports will further suffer, if corrective measures to boost factor cost and retail price competitiveness are not taken immediately. Meanwhile, Bangladeshi exporters see China, India, Australia, Brazil and South Africa (along with traditional destinations such as Germany, US, Japan, UK, and Canada) as new destination markets. Looks like Nepal is competing in similar product range (with Bangladesh enjoying more efficiency and productivity) in similar destination markets. Nepal is bound to lose to Bangladesh.

Our RMG businessmen are hoping that investors will come to Nepal to exploit the expanding opportunities in India and China. However, most of the CPOs feel that Bangladesh is the next hot spot sourcing country. Even Pakistani investors are flocking in to Bangladesh to set up RMG factories. Bangladesh borders India and has better transportation and transit links than Nepal has with India. It could use both ground transport as well as sea transport. Bangladesh’s bilateral trade with India is also increasing rapidly. So, the optimism regarding increase in investment in RMG industry as booming India is close to Nepal, which is shared by businessmen and policymakers alike, might be a little bit more exaggerated.

Furthermore, it has dedicated export processing zones (EPZs) and SEZs—something Nepal lacks. Bangladesh has less labor problems than Nepal. Power shortage is not as acute as it is here. Bangladesh’s overhead wages is two times lower than in Nepal (and still the stupid Maoist-affiliated trade unions go on repeated strikes demanding more perks and facilities, which might result in the closure of the few remaining MNCs!). Bangladeshi producers are more innovative than Nepali producers.

Now, here is a ray of hope. Though the CPOs favor Bangladesh in the region, they are also thinking of shifting a large share of their sourcing value away from China in the next five years to Pakistan, Nepal, Bhutan and Southeast Asia as well. If Nepal could address the above mentioned constraints on time, then may be we could draw in the attention of some of the CPOs to our economy.

Sunday, March 25, 2012

Indian investment in Nepal

Here is a fairly detailed reporting on Indian investment in Nepal and troubles faced by Indian investors. The post below is adopted from an article in The Economic Times.

India Inc in Nepal: Has the political will to woo Indian investment come back?

Last month, Hindustan Lever subsidiary Unilever Nepal remained shut for two weeks after its workers put up demands related to pay hikes and more perks. The trade union, affiliated to the Maoists, had locked the factory gates to press for their demands.

The management could reopen the factory only after an assurance from Nepal's prime minister Baburam Bhattarai to a delegation of Unilever representatives and other business leaders of the Federation of Nepalese Chamber of Commerce and Industries (FNCCI).

But the consumer goods giant is not the first company to face a difficult terrain in Nepal. Back in November 2008, Colgate Palmolive India announced its decision to move out of Nepal and transferred its shareholding in the subsidiary to Nepal-based Everest Hygiene Products, for an undisclosed amount.

This followed unrest at the factory, with angry workers attacking the general manager on fears of job losses. The Colgate Palmolive subsidiary, which was set up in 1998, had been facing problems rising out of the decade-long agitation by Maoist insurgents and had discontinued production of toothpaste at its Hetauda factory, way back in 2005.

Troubled History

India Inc's journey in the Himalayan kingdom has, in fact, been a tortuous one. Surya Nepal, the ITC joint venture, which started operations in Nepal in 1986 and is one of the largest private sector enterprises there, shut down its garments factory in eastern Nepal following prolonged labour unrest last year.

Indian infrastructure giant GMR, which is part of a consortium setting up a 900-MW hydroelectric project in Nepal, also faced an attack at its project site by suspected Maoist militants while the Manipal group's medical campus in Pokhara was hit by a junior doctors' strike, last year.

Indian companies are present in various sectors in Nepal including infrastructure, hospitality, FMCG, electronics and education.

According to a survey by Federation of Indian Chambers of Commerce and Industry (Ficci), strikes, extortion and threat to life and property have hit Indian investors and the business community. Industries have also been badly affected by acute shortages of power and raw materials, the study found.

"The difficulties faced by Indian joint ventures in Nepal emanate in a large measure from the turbulent political developments in the country, especially since 1996, when the Maoist insurgency began. Some Indian JVs have had to close their operations," says Jayant Prasad, Indian ambassador to Nepal. Other challenges include poor power infrastructure and connectivity, high fuel costs and in some cases labour union action.

Time to be Upbeat?

But despite militant trade unionism and the onslaught of Maoists, Indian companies in Nepal enjoy big commercial and social advantages. And that is probably the reason why there are efforts within the business community on both sides to leverage these pluses. Indian managers and business leaders who have been in Nepal point out that it feels more like home than a foreign country. "The friendliness and warmth of the Nepalese people makes it feel like home.

A strong political resolve to allocate more priority to industry and use it as an enabler to solve the socio-economic issues is the way ahead," says Udayan Ganguly, Dabur India's business head for Nepal, Bangladesh and Sri Lanka.

For sure, the times are changing for the better. The Nepalese government has accelerated the process to integrate former Maoist guerillas as well as frame a new constitution. Business confidence is likely to pick up on the back of these steps.

Last week, Bhattarai, who is from the Unified Communist Party of Nepal (Maoist) summed up the new sense of confidence by stating at an Indo-Nepal business forum that "democracy plus hydropower equals the new Nepal".

Industry bodies in both the countries such as Confederation of Indian Industry, Ficci, FNCCI and Confederation of Nepalese Industries are taking steps to jointly address many of the problems faced by businesses in Nepal.

"Such partnerships will help domestic industry and MNCs and will also strengthen economic ties between India and Nepal. Often the problems they face are caused because of political reasons and can be addressed through long-term economic solutions," says Binod K Chaudhary, who is member of the constituent assembly and parliament of Nepal. He is a third-generation businessman of Indian origin whose family emigrated to Nepal from Rajasthan.

Still an Uphill Climb

With the governments of both the countries taking small steps towards encouraging cross-border trade and investments, Indian Inc is now more upbeat about Nepal. "The country offers huge potential and opportunity in many sectors including agri and food processing, hydropower, cement, education, travel and tourism," says Sanjiv Keshava, managing director, Surya Nepal.

For him, non-availability of a skilled workforce due to the extremely high migration from Nepal to South Asian countries and West Asia is another problem to be grappled with. Surya Nepal, however, is in the country for the long haul and is investing in a second factory and exploring the possibility of setting up a hotel.

There are signs of an improved business environment. Independent power producers were given survey licences for hydro projects for over 8,000 MW five years ago, following international competitive bidding.

Most of these licences are held by Indian companies. Even if licensing were to be granted to Indian firms for the development of between 1,500 MW and 2,000 MW, it could attract over $2 billion investments within a short span of four to five years.

But the Nepalese government has to do much more to fast-track steps to improve the investment climate. Foreign investments in Nepal have been low - a meagre $300 million in the past 25 years from India.

And that is 44% of the total foreign investments. Worse for Nepal, prospects for Indian JVs have improved in other neighbouring countries such as Bangladesh and Sri Lanka and Indian industry has a wider choice in the region. Just saying, "Swagatam, daju" may not help.

Business Register

ITC : Surya Nepal Pvt Ltd is an Indo-Nepal-UK joint venture, which started operations in Nepal in 1986. SNPL, a subsidiary of ITC Ltd, India, is among the largest private sector enterprises in Nepal.

SNPL's business includes manufacture and marketing of cigarettes and readymade garments along with garment exports. Their total turnover is over $100 million.

Dabur: Dabur Nepal Pvt Ltd was set up as an independent group company in 1992. The company reported a total turnover of Rs 525.47 cr in 2010-11 In 2010, the company faced raids by the Nepal government on allegations of stocking contaminated juice.

GMR: A consortium comprising GMR Energy Limited, GMR Infrastructure Limited (GIL) and Italian-Thai Development Project Co has signed a MoU with the government of Nepal, for developing the 900 MW Upper Karnali hydro electric project in Nepal. The plant is scheduled to be commissioned by the end of 2016.

In 2011, GMR's project site in Karnali was attacked, looted and a log cabin was torched.

Unilever: HUL has set up a subsidiary in Nepal, Unilever Nepal Limited (UNL), and its factory represents the largest manufacturing investment in the Himalayan kingdom.

The UNL factory manufactures HUL products such as soaps and detergents for the domestic market and exports to India.

Last month, Unilever Nepal remained shut for two weeks after its workers put up various demands.

Asian Paints: Asian Paints (Nepal) Pvt Ltd is the leading paint company in Nepal. The company started operations in 1985 in Nepal and has a manufacturing facility at Hetuada industrial estate with a capacity to manufacture over 8,000 kl of paints annually.

Manipal Group: Manipal College of Medical Sciences (MCOMS), Pokhara, opened in 1994 with an MBBS degree programme. The 700-bed Manipal Teaching Hospital (MTH), Pokhara was inaugurated in 1998 MCOMS is affiliated to Kathmandu University. The college is a collaboration between the Manipal Group and the Nepal government.

In 2011, the college was hit by a strike of junior doctors. The strikers, loyal to the Maoists, alleged pay disparity.

Saturday, March 24, 2012

Tourist arrivals by month in Nepal

So, which month of the year does Nepal welcome the highest number of tourists? Its October, which accounted for 13.18 percent of total visitors in 2011. It is followed by November (11.34 percent), August (9.70), March (9.18 percent), and December (8.16 percent). The total (provisional) tourist arrival in 2010 and 2011 was 602,855 and 735,965 respectively. By the way, the number of tourists has increased in all months in 2011 compared to the months in 2010, thanks to the increasing inflow of Chinese tourists. Here is a related article on Nepal Tourism Year 2011.

Tourist arrivals by month in 2010 and 2011

Here is the number of tourist arrivals via the main entry points:

Tourist arrival (entry points), 2011
Entry point Arrival Departure
TIA (Air)         544,985          612,845
Bhairahawa         129,427          122,351
Kodari            53,536            35,590
Kakarvitta              5,049              4,265
Kanchanpur              1,628              1,328
Birganj              1,025              1,189
Nepalganj                  271                  405
Dhangadhi                    44                    38
Total         735,965          778,011

Now, where do you think should the government upgrade tourism infrastructure? Undoubtedly, the only international airport and the border points from where a high number of tourists enter Nepal. The infrastructure and services inside and outside of the airport is pretty horribly despite paying premium prices when compared to the cost of using similar infrastructure, services, and security in other developing countries. No wonder Nepal’s tourism industry is uncompetitive and ranked 112 out of 139 economies in the latest Travel & Tourism Competitiveness Index (TTCI). In terms of tourism infrastructure (including hotel rooms) and ground transport, Nepal ranked 130 and 135, respectively, out of 139 economies in TTCI 2011. In terms of safety and security in tourism industry, Nepal ranked 127 out of 139 economies. Meanwhile, with appropriate infrastructure and services industry, the border areas (mainly Bhairahawa for Indian tourists and Kodari for Chinese tourists) can see robust tourism activities and expenditure before the tourists embark on trips to popular tourist destinations in the country.

Friday, March 23, 2012

The cost of informality in economy

Here are excerpts from an interesting piece on the increasing size of informal economy. Informal companies have substantial cost advantage by avoiding taxes and regulations, which in turn offsets the cost of their low productivity and small scale production. Informality is highest in services sector, particularly retail business.

Diana Farrell, director of the McKinsey Global Institute and a principal in the San Francisco office, argues that informality stifles economic growth (reducing tax receipts of governments, which then must raise the tax rates imposed on formal businesses) and productivity by keeping companies subscale and unproductive (operate at just half the average productivity level of formal companies in the same sectors), and aid companies to take market share from bigger, more productive formal competitors (as the cost benefit of avoiding taxes and regulations often amounts to more than 10 percent of the final price). Farrell argues that the assertion that informal businesses might grow and join the formal economy is a myth.

Btw, the size of shadow economy/informal economy in Nepal in 2007 was 37.5 percent of GDP.

Anyway, below are excerpts from the MGI’s analysis on informality:

MGI found that the substantial cost advantage that informal companies gain by avoiding taxes and regulations more than offsets their low productivity and small scale. Competition is therefore distorted because inefficient informal players stay in business and prevent more productive, formal companies from gaining market share. Any short-term employment benefits of informality are thus greatly outweighed by its long-term negative impact on economic growth and job creation.

Informality is among the most seriously misunderstood of all economic issues. Informal companies evade fiscal and regulatory obligations, including value-added taxes, income taxes, labor market obligations (such as social-security taxes and minimum-wage requirements), and product market regulations (including quality standards, copyrights, and intellectual-property laws). Evasion varies by sector and by the nature of the business: informal retailers tend to avoid paying value-added taxes, informal food processors to ignore product quality and health regulations, and informal construction firms to underreport the number of employees and hours worked.

For many people, the informal economy means street vendors and tiny businesses, and it is true that informality is pervasive among small, traditional concerns with low levels of technology, scale, and standardization. But it is hardly unknown among larger, modern enterprises in developing countries, where MGI has found informal supermarket chains, auto parts suppliers, consumer electronics assemblers, and even large-scale industrial operations.

The extent of informality varies from industry to industry. It is greatest in service businesses such as retailing and construction, in which companies are often small in scale and geographically dispersed, making it easier to avoid detection. Revenues come from individual consumers and are difficult for auditors to verify. Labor costs are a significant share of total expenses, so companies are tempted to underreport employment. In one country, MGI found that construction workers ran away from sites when government inspectors appeared.

For similar reasons, informality in manufacturing industries is more prevalent in labor-intensive sectors such as apparel and food processing than in capital-intensive ones such as automotive assembly, cement, oil, steel, and telecommunications. Even so, some very large industrial and manufacturing companies operate informally. In India and Russia, for instance, local governments force local power companies to provide free energy to some businesses; subsidies such as these allow informal businesses to continue operating.

Reasons for informality:

  • Legal obligations—a result of poorly staffed and organized government enforcement agencies, weak penalties for noncompliance, and ineffective judicial systems.
  • High cost of operating formally: red tape, high tax burdens, and costly product quality and worker-safety regulations all prompt businesses to operate in the gray market.
  • Social norms: In many developing countries, there is little social pressure to comply with the law. In some, many people see evading taxes and regulations as a legitimate way for small businesses to counteract the advantages of large, modern players.

How to control informality?

  • Strengthen enforcement: (regulatory loopholes are less important than strengthening enforcement). So, beef up government's audit capabilities; make court system effective so that tax evaders are caught in net; don’t give tax amnesties (more incentive to evade tax if there are repeated amnesties); hike penalties for tax evaders; partner with payments providers such as banks and credit card companies to increase the number of monetary transactions
  • Eliminate red tape: Streamline the regulatory burden and reduce red tape; simplifying the tax code
  • Cut taxes: Reduce and redistribute the tax burden to help slow the growth of informality; raise collections from  informal enterprises

Thursday, March 22, 2012

Metro, flyovers, airport, and oil supply in Nepal

New initiatives to address binding constraints to growth in Nepal.

New plan for Metro Railway of 66-km network, 5 lines, 31 stations in Kathmandu. Bhoj Raj Poudel writes “the proposed 66.1-km network comprises 31 stations in total -- including transfer and ordinary stations. The main terminal of the metro will be located at Ratnapark, says the report, which is yet to be approved by DoR.” Let us hope that this project will move ahead as planned.

Construction of Baneshwor flyover within this year: Om Astha Rai writes:

The DoR has already approved one of the four basic designs of a flyover prepared by Soil Test and AVIYAAN. "We are now preparing the DPR of Baneshwor flyover," says Dr Suman Baidya, an engineer with Soil Test and AVIYAAN.

"Before finalizing the DPR, we will also calculate the estimated cost of the whole project. As per the basic design, which was approved on March 5, the Baneswhor flyover will be 17 meters wide and 340 meters long.” The Kathmandu Valley Raod Expansion Project (KVREP) is currently building a 10-lanes road connecting Tinkune with Maitigharmandala. The Baneshwor flyover, the design of which is compatible with the new map of the upgraded Tinkune-Maitigharmandala road, will have four lanes.

Btw, 115,000 vehicles, mostly motorized two wheelers, pass through Baneshwor intersection every day. Similarly average of 6,200 pedestrians cross Baneswhor junction during peak hour.

Meanwhile, another corrupt twist:

Pokhara airport MoU signed before calling construction bid

In a clear case that raises question over government´s impartiality on bid invited to develop regional international airport in Pokhara, Finance Minister Barsha Man Pun was found to have signed a memorandum of understanding (MoU) with China CAMC Engineering Co, committing to support it win the tender.

The fact surfaced when Nepali Congress lawmaker Dip Kumar Upadhaya circulated the MoU at a meeting of parliament´s Public Accounts Commitee (PAC) which called to grill Tourism Ministry and civil aviation authority officials over the controversy created by short deadline to bidders.

The MoU also availed by Republica commits that "the government of Nepal shall provide CAMC the solid and substantial support" in a tender that Civil Aviation Authority of Nepal (CAAN) would call for Engineering, Procurement and Construction (EPC) contract for the regional international airport. The MoU is undersigned by Pun on behalf of Nepali government and Lui Shengcheng, regional general manager of China CAMC Engineering.

The deal was signed on September 20, 2011 at Ministry of Finance in Singh Durbar, and Energy Minister Posta Bahadur Bogati and Chinese Ambassador to Nepal Yang Houlan have also signed it as witnesses. It was following the deal that MoF had instructed CAAN to invite the bid for developing the regional airport.

A good development:

Govt for ending IOC's monopoly in Nepali oil market: Milan Mani Shrama writes:

In a bid to cultivate competition in petroleum exports to Nepal, the government is mulling over requesting India to allow it import fuel from any Indian oil marketing companies along with the present supplier - Indian Oil Corporation (IOC).

Presently, Indian Oil Corporation (IOC) holds supply monopoly in the Nepali market.
Ministry of Commerce and Supplies (MoCS) is pushing the issue through Nepal Oil Corporation (NOC), which is presently holding talks with the IOC to review the bilateral Petroleum Supplying Agreement that expires on March 31.

“As existing bilateral agreement signed in 2007 already allows Nepal to import fuel from any countries, we see no point in India limiting oil supply authority to IOC alone,” said a highly placed MoCS official. If required, we will also hold talks with India at the higher governmental level, said Lekh Raj Bhatta, Minister for Commerce and Supplies.

The government is raising the issue after Bharat Petroleum Corporation Limited (BPCL) - another state-owned oil marketing company (OMC) of India - formally approached the ministry, expressing interest to export petroleum products to Nepal.

This is not the first time BPCL showed interest to export fuel to Nepal. The company in 2010 had approached the Indian government to end IOC´s monopoly in exports to Nepal and open it to all oil marketing public sector undertakings.

Also BPCL is not just one company that is eying Nepal´s petroleum market. In late 2009, Essar Group -- a private petroleum group of India -- too had approached the MoCS for opening imports from private Indian suppliers as well.

Targeted food subsidy could work in South Asia

A latest working paper (Food Price Escalation in South Asia: A Serious and Growing Concern) by Bruno Carrasco and Hiranya Mukhopadhaya of the ADB states that “a spike in the cost of food staples like rice and wheat could push tens of millions more people into extreme poverty in South Asia but food subsidies targeted at the very poorest in the region would help them cope with still-high prices”. Low income households in South Asia spend more than 50 percent of their budget on food. It also notes that while Nepal and Sri Lanka would be less affected, although a further surge in wheat prices would be especially painful for Sri Lanka, which is completely dependent on imports of the staple and has already seen prices hit historical highs in recent years.

Note that an earlier study (Global Food Price Inflation and Developing Asia) by ADB showed that a 10 percent increase in food prices will increase the number of poor people (in millions) living below US$1.25-a-day by 3.8, 0.01, 22.8, 6.7, 0.6, 3.5, and 0.2 in Bangladesh, Bhutan, rural India, urban India, Nepal, Pakistan, and Sri Lanka, respectively.

The following factors are driving poverty elasticity and may contribute to differences in elasticity indices across countries: (i) the higher inequality, the lower the price elasticity of
poverty and hence the smaller the impact on poverty ratios for any given increase in food prices (ii) the distribution of income just under the poverty line (more people just under the line, the larger the elasticity), (iii) the higher the base level of food prices, the larger the elasticity as for example a 1% change in price at $10/unit has a larger impact than 1% change in prices at $5, (iv) the level of GDP/capita with smaller elasticity for countries with higher incomes, and (v) country specifics such as the effectiveness of social security systems and other safety nets, and other cultural institutions captured by a country dummy.

Reasons for rise in food prices and inflation:

  • Mostly short-term weather shocks and costlier oil account in past few years
  • Rapid population growth
  • Changing food consumption patterns linked to higher incomes (especially in India)
  • Stagnating agricultural output

They recommend subsidizing the cost of food for the most poorest and vulnerable ones by government without putting an excessive burden on government spending. Now, that is the challenge faced by all developing countries, isn’t it? The big question is how to strike a balance between extending subsidies (temptation is always high to increase such programs for political gains) and fiscal position (more subsidies mean increase in fiscal deficit in the absence of high growth of revenues that can offset the increase in expenditure due to subsidies).

Other recommendations include boosting agriculture productivity, develop agriculture support network (infrastructure investment in irrigation and water resource management, early warning systems of flood, farm to market roads, storage facilities, and ICT for disseminating market information), getting prices right (by avoiding distortion of price signals), focusing on sustainable solution [??] (avoiding short term restrictive trade policies), effective use of monetary policy (mainly contractionary policies), and promote regional cooperation (operationalize SAARC Food Bank).

Anyway, Bangladesh has the highest weight of food on CPI. The weight of food on CPI is 42 percent in Nepal.

Food Weights in CPI (%)
Afghanistan 61
Bangladesh 58.8
Bhutan 31.7
India 46.2
Maldives 33.3
Nepal 42
Pakistan 40.3
Sri Lanka 45.5

[Here is a draft paper I wrote on high food prices and its impact on South Asia. Presentation slides here and a related article here].

Wednesday, March 21, 2012

29.8 percent of population below poverty line in India in 2009-10

According to the latest figures released by India’s National Planning Commission, the headcount poverty in India was 29.8 percent in 2009-10 (rural 33.8 percent and urban 20.9 percent). This is a 7.3 percentage points decline in headcount poverty between 2004-05 and 2009-10 (rural poverty declining by 8.0 percentage points and urban poverty declining by 4.8 percentage points). According to Census 2011, India had total population of 1.21 billion (rural 68.84 percent and urban 31.16 percent).

Meanwhile, the WB’s US$1.25 a day estimate puts India’s headcount poverty at 37.37 percent in 2008, down from 41.64 percent in 2005 (a 4.23 percentage points drop). When I checked the data, the WB did not compute India’s total poverty at US$1.25 a day in 2010. Anyway, it has estimates for rural India and urban India for 2010. The headcount poverty at US$1.25 a day in rural India and urban India was 34.28 percent  and 28.93 percent in 2010.

Poverty in India
NPC_March 2012 WB_Feb 2012
Poverty (%) - national poverty line (MRP method) Poverty (%) - US$1.25 a day
Total Total
2009-10 29.8 2008 37.37
2004-05 37.2 2005 41.64
1993-94 45.3 1994 49.4
Rural Rural
2009-10 33.8 2010 34.28
2004-05 41.8 2005 43.83
1993-94 50.1 1994 52.46
Urban Urban
2009-10 20.9 2010 28.93
2004-05 25.7 2005 36.16
1993-94 31.8 1994 40.77

  • Poverty ratio in Himachal Pradesh, Madhya Pradesh, Maharashtra, Orissa, Sikkim, Tamil Nadu, Karnataka and Uttarakhand has declined by about 10 percentage points and more. But, in Assam, Meghalaya, Manipur, Mizoram and Nagaland, poverty in 2009-10 has increased. Some of the bigger states such as Bihar, Chhattisgarh and Uttar Pradesh have seen only marginal decline in poverty ratio, particularly in rural areas.
  • In rural areas, Scheduled Tribes exhibit the highest level of poverty (47.4%), followed by Scheduled Castes (SCs) (42.3%), and Other Backward Castes (OBC) (31.9%), against 33.8% for all classes. In urban areas, SCs have HCR of 34.1% followed by STs (30.4%) and OBC (24.3%) against 20.9% for all classes. In rural Bihar and Chhattisgarh, nearly two-third of SCs and STs are poor, whereas in states such as Manipur, Orissa and Uttar Pradesh the poverty ratio for these groups is more than half.
  • Nearly 50% of agricultural laborers and 40% of other laborers are below the poverty line in rural areas, whereas in urban areas the poverty ratio for casual laborers is 47.1%. In the agriculturally prosperous state of Haryana, 55.9% agricultural laborers are poor, whereas in Punjab it is 35.6%.

The latest Economic Survey 2011/12 released by India’s Ministry of Finance states that GDP growth rate for 2011/12 is estimated at 6.9% (factor cost at 2004-05 prices). The Indian economy is expected to growth at 7.6% in 2012-13 and 8.6% in 2013-14. Here is more. In South Asia, Bangladesh, followed by India, has the highest proportion of poor people below the poverty line of US$1.25 a day.

Here is a discussion on the poverty rate in Nepal. For Nepal, the poverty headcount at $1.25 a day (PPP) was 24.8% in 2010 [7.4 million people] and 53.1% in 2003 [13.9 million people]. It was 68% in 1995 [14.7 million people]. The headcount poverty rate based on national poverty line in 2010/11 was 24.82 percent. The poverty estimate by WB and NPC is very close in the case of Nepal. But, the one in India is quite different. The WB estimate shows that there are more people living below US$1.25 a day than India’s national poverty line (monthly per capita of IRs 672.8 in rural India and IRs 859.6 in urban India—or IRs 22.4 in rural India and IRs 28.7 in urban India ). As per Tendulkar Committee recommendations, the state wise urban poverty lines of 2004-05 are updated for 2009-10 based on price rise during this period using Fisher price indices. The state wise rural-urban price differential in 2009-10 has been applied on state specific urban poverty lines to get state specific rural poverty lines.