Humans are responsible for climate change: Berkeley Earth

The latest analysis of land-surface temperature by Berkeley Earth shows that the rise in average world land temperature is approximately 1.5 degrees C in the past 250 years, and about 0.9 degrees in the past 50 years. And, to the relief of IPCC, they claim that humans are responsible for the increase in temperature especially in the last 50 years.

It notes:

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The annual and decadal land surface temperature from the BerkeleyEarth average, compared to a linear combination of volcanic sulfate emissions and the natural logarithm of CO2. It is observed that the large negative excursions in the early temperature records are likely to be explained by exceptional volcanic activity at this time. Similarly, the upward trend is likely to be an indication of anthropogenic changes. The grey area is the 95% confidence interval.

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Richard A. Muller, a professor of physics at the University of California, Berkeley writes in the NYT:

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The Conversion of a Climate-Change Skeptic

By RICHARD A. MULLER

CALL me a converted skeptic. Three years ago I identified problems in previous climate studies that, in my mind, threw doubt on the very existence of global warming. Last year, following an intensive research effort involving a dozen scientists, I concluded that global warming was real and that the prior estimates of the rate of warming were correct. I’m now going a step further: Humans are almost entirely the cause.

My total turnaround, in such a short time, is the result of careful and objective analysis by the Berkeley Earth Surface Temperature project, which I founded with my daughter Elizabeth. Our results show that the average temperature of the earth’s land has risen by two and a half degrees Fahrenheit over the past 250 years, including an increase of one and a half degrees over the most recent 50 years. Moreover, it appears likely that essentially all of this increase results from the human emission of greenhouse gases.

These findings are stronger than those of the Intergovernmental Panel on Climate Change, the United Nations group that defines the scientific and diplomatic consensus on global warming. In its 2007 report, the I.P.C.C. concluded only that most of the warming of the prior 50 years could be attributed to humans. It was possible, according to the I.P.C.C. consensus statement, that the warming before 1956 could be because of changes in solar activity, and that even a substantial part of the more recent warming could be natural.

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With more emphasis, again, from their research:

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The historic temperature pattern we observe has abrupt dips that match the emissions of known explosive volcanic eruptions; the particulates from such events reflect sunlight and cool the Earth’s surface for a few years. There are small rapid variations attributable to El Nino and other ocean currents such as the Gulf Stream. The gradual but systematic rise of 1.5 degrees C is best explained by the record of atmospheric carbon dioxide, measured from atmospheric samples and air trapped in polar ice.

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Here is a related video:

Farmers get 40-50 percent of retail price of veggies

The market distortion created by middlemen is not a surprise in a developing country like Nepal where the government lacks monitoring and supervision capabilities and political parties indirectly abet middlemen, who provide them with a strong financial and support base. Here is more on market distortion created by middlemen in Nepal.

The apparent incoherence in retail prices, farm prices and output is market manipulation by middlemen or agents, who act as monopsonist and monopolist. About 1,000 metric tonnes of vegetables enter the Kalimati Fruit and Vegetable Market during the season and about 600-700 metric tonnes in the off-season from Dhading, Kavre and Nuwakot .

So, how much of the retail price does farmers get? Here is an interesting piece in The Himalayan Times:

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Farmers sell us their products at a 10 per cent profit during season, but it goes up to 20 per cent in off-season, he added. Overall, a farmer's share in the retail value of vegetables sold in Kathmandu is 40-50 per cent. The remaining 50-60 per cent cost is added during the supply process.

Local collectors — who collect vegetables from farmers and sell to suppliers — take less than others in the supply chain. Their margin is around five per cent.

Transportation usually adds 10 per cent to the cost of vegetables produced in neighbouring districts. In the process, a supplier has to bear at least five per cent hidden costs. "Suppliers have to bribe police, feed local goons, and pay taxes to District Development Committees (DDC)," said president of Fruits and Vegetable Wholesalers' Federation Khum Prasad Ghimire.

All DDCs have been taking a tax of Rs 500 for a pick up van and Rs 1,500 for a truck, he said showing bills issued from Kavre and Dhading DDCs. "It's an illegal tax and we are fighting against it at the Supreme Court," he said. Retailers have been earning more from the vegetable business. Their share is about 15-20 per cent of the retail price of vegetables. "It needs to be cut down to a maximum of 10 per cent," said member of Kalimati Fruit and Vegetable Market Development Board Ujjawal Karki.

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Earlier, a government committee headed by the chief secretary brought out a report claiming that high rent inside the Kalimati Fruit and Vegetable Market plays a key role in vegetable price hike. Obviously, the association has refuted the claim by arguing that the price hike is due to short supply arising from drought in March-May and high veggie prices in India.

NEPAL: What is in the Monetary Policy 2012/13 for you?

As with previous tradition of brining out monetary policy after the fiscal budget is announced, Nepal Rastra Bank (NRB), the central bank of Nepal, rolled out Monetary Policy 2012/13 yesterday. Monetary policy doesn’t draw much attention like fiscal budget because its reach is limited to the banking sector (whose reach in turn is limited to few sectors that can contribute very little to enhancing productive capacities), is constrained by fixed exchange rate between Nepali rupee and Indian rupee, and supply-side constraints whose remedy is beyond its reach.

Few highlights from monetary policy:

• Targets for FY 2012/13:
• GDP growth: 5.5 percent
• Inflation: 7.5 percent
• Money supply growth: 15 percent
• Deposit growth: 15.1 percent (Rs 1160 billion)
• Credit growth to private sector: 16 percent
• Forex reserve: ability to finance 8 months of imports
• Policy changes:
• CRR increased to 6 percent for commercial banks, 5.5 percent to development banks, and 5 percent to finance companies. Earlier, it was 5 percent for all BFIs.
• Bank rate increased by one percentage point to 8 percent
• Deposit insurance of up to Rs 300,000 from Rs 200,000.
• Deprived sector lending by BFIs increased by 0.5 percentage points. Commercial banks, development banks and finance companies need to lend 4 percent, 3.5 percent and 3 percent of their respective loan portfolio to the deprived sector.
• Refinancing rates for agriculture and hydropower lowered to six percent from seven percent. BFIs to initially issue loans under the facility at rates of up to 9 percent.
• Refinancing facility to migrant returnees on loans take for commercial purposes.
• National Financial Literacy Policy and Financial Sector Development Strategy to be formulated. Financial Stability Unit to be set up at the central bank and it will bring out Financial Stability Report.
• For overseas travellers, foreign currency facility for each travel increased to US$2500 for public and US$5000 for entrepreneur. Earlier, there was a cap of US$5000 for a year.
• Commercial banks allowed to invest up to 30 percent of the amount parked in agency banks abroad in low risk instruments such as call deposit and certificate of deposit.
• Interbank lending transaction set at maximum of 7 days.
• PAN number mandatory while taking loan more than a set limit.

Few observations:

• The main change that could affect the public the most is the increase in CRR (cash reserve ratio). It means that banks this fiscal year need extra money as idle cash/reserve, which will affect credit flows. The NRB argues that the objective of the hike in CRR is to mop up excess liquidity (estimated at Rs 100 billion). However, this policy might run counter to growth and lending targets. Importantly, there is a chance that BFIs might lower deposit rates and hike lending rates. This is not what the central bank wants though.
• About growth and inflation targets, lets just say that it is beyond the NRB’s reach to meaningfully influence both these variables. First, growth rate next will get affected due to potential decline in agriculture production (thanks to late monsoon and shortage of fertilizers) and globally food prices might increase. It will affect both growth rate and inflation.
• Lowering refinancing rate is a good move to channel credit to priority sectors. But the present provision to acquire such loans for six months only virtually makes it useless. It takes time to realize returns from investment and six months is too short a period for this purpose. It might be useful to traders, but will probably not make a dent on lending to priority sectors.
• BFIs have been eagerly waiting for the so-called interest rate corridor, which sets a band for interest rates to fluctuate. Well, it seems it won’t come anytime soon as the NRB is still working on it.
• There is a confusion over what exactly is the NRB trying to achieve? It has little traction on growth and inflation targets. It could ease lending to priority sectors and limit credit to unproductive sectors. It has already done so in real estate and housing sector. But, BFIs are not probably going to ease lending rates now even if they have excess liquidity. They will simply lower deposit rates and either maintain present lending rates or hike it on new loans. Interest spread is going to widen.
• Looks like the central bank is in a fix. Whatever it does, there will always be unhappiness. If it wants to fuse bubbles arising from easy credit, then it is unpopular among investors. If it wants to redirect lending to productive sectors, then it is unpopular among BFIs. If it wants to have a grip on growth and inflation, then it is constrained by limited banking reach and its impact on real variables, and the pegged exchange rate.

Does what (how) you export (produce) matter?

Some economists had argued that the level of sophistication of exports determines the income level of a country and its growth rate. Importantly, the level of economic complexity indicates the nature of future economic growth and the ability to produce new goods and move from low-value added to high value-added goods. Sophistication comes from either increasing the quality of currently produced goods or from a move into new and more sophisticated products.

Now, there is a new twist to this line of argument. In a recent book (here is related paper and presentation), Maloney and Lederman argue that “we probably need to spend more time thinking about How rather than What goods are produced.” The reason: Countries exporting homogenous goods (natural resources) have heterogeneous performance. For instance, both Nigeria and Norway export oil, but Norway is doing far better than Nigeria. Similarly, both South Korea and Mexico promoted hi-tech production, but the former has been far successful than the latter. Furthermore, in a globalized world where global supply/value chains are so fragmented, attributing export of final product to a single country might not give the real picture of production process spread over a range of activities in many countries. They argue that production of similar products contributes in varying degree to development in different countries. In fact, “about half the differences in industry skill premia at a country level can be attributed to the composition of the export basket, but the other half are due to country specific factors.”

They advocate “horizontalish” policies that maximizes the benefits from existing products and creates background for production of new ones. In other words, rather than jumping to production of new products, first focus on harnessing the potential benefits from existing products:

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[…]will help get the most out of existing products and lay the foundations for the emergence of new ones.  These may include raising the level of human capital, promoting product quality upgrading, reforming the national innovation system, and improving infrastructure, which benefit a wide range of existing and potential products but which wouldn’t require choosing particular sectors to support.

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They argue that horizontalish policies:

• Resolve innovation related market failures (both old and new goods)
• Resolve barriers to the emergence of new goods and improvement of old ones
• Coordinate policies strategically

Gender-wise increase in wages of agriculture and unskilled workers in Nepal

Be it due to migration (leading to short supply of labor) or increasing demand for workers or adjustment of wages in line with the rise in cost of living, the fact is that wages for agriculture and unskilled workers are increasing. Importantly, in the agriculture sector, both men and female saw equal increase in wages in 2010/11. Wages for both gender increased by 32 percent. Meanwhile, in regular daily unskilled work (jyami), male saw higher increase in wages than female (29 percent and 25 percent respectively). Earlier, female wage increase outstripped the increase in wage of male (except in 2008/09).

The increase in wage is higher than overall inflation. For instance, 2010/11, overall inflation was 9.4 percent (with food and non-food inflation at 14.66 percent and 5.39 percent), much lower than the increase in wages.

Notice that food prices have consistently outstripped overall inflation after 2004/05 (the base year for CPI). In overall CPI index, the weight of food and beverage is 46.82 percent and that of non-food and services is 53.18 percent. The interesting thing is that despite having a lower weight on overall index, food prices have dragged it higher (it is also influenced by inflation in India and global petroleum prices, which justifies a third of the variability of domestic prices). No wonder food prices have increased drastically in the retail market. More on inflationary dynamics in Nepal here.

Few things to note here.

• The overall increase in wages might be due to wage adjustment with inflation, shortage of workers (mostly due to migration for unskilled work overseas and increase in leisure time allocation arising from rise in income, thanks to remittances), and high demand for unskilled labor in agriculture and construction sectors.
• Though both male and female have seen similar increase in wages, it doesn’t mean that their actual wages are same, i.e. growth of wages is different than actual wages. In terms of actual wage, female’s might be catching up with male’s. That said, wage growth disparity for both gender is leveling off.
• Mean daily wage in agriculture sector increased to Rs 170 in 2010/11 from Rs 75 in 2003/04. Mean daily wage in non-agriculture sector increased to Rs 263 in 2010/11 from Rs 133 in 2003/04. It shows that mean daily wage in agriculture sector increased more than in non-agriculture sector (127 percent and 98 percent respectively) over the same time period.
• The base year for inflation is 2005/06 and that for wages is 2004/05.
• More research is needed on the changing dynamics of wages for both gender, its causes, sustainability and implications for development and growth.

Who benefits most from rural electrification?

Khandker et al. (2012) study the impact of rural electrification in India and find that rural electrification leads to higher time allocation to studying, increase in supply of labor and household expenditure, and reduction in poverty level, but most of the benefits are enjoyed by wealthier rural households (due to higher consumption and more diversification of electricity service).

Below is an abstract of their working paper:

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This paper applies an econometric analysis to estimate the average and distribution benefits of rural electrification using rich household survey data from India. The results support that rural electrification helps to reduce time allocated to fuelwood collection by household members and increases time allocated to studying by boys and girls. Rural electrification also increases the labor supply of men and women, schooling of boys and girls, and household per capita income and expenditure. Electrification also helps reduce poverty. But the larger share of benefits accrues to wealthier rural households, with poorer ones having more limited use of electricity. The analysis also shows that restricted supply of electricity, due to frequent power outages, negatively affects both household electricity connection and its consumption, thereby reducing the expected benefits of rural electrification.

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They find that “the money households with electricity spend on kerosene equals what they pay for unreliable electricity service, not accounting for the loss of productivity and appliance damage due to power outages, suggesting that access without reliability may be counter-productive.”

Nepalese policymakers need to read this statement twice. Erecting electricity poles and connecting new houses with wires devoid of regular power supply is not going to be helpful. The focus should be on generating more hydropower. In Nepal’s case the shortage of electricity is leading to drastic increase in demand for diesel and LPG.

Policy barriers to international trade in services

Borchert, Gootiiz and Mattoo (2012) find that “some of the fastest growing countries in Asia and the oil-rich Gulf states have the most restrictive policies in services, whereas some of the poorest countries are remarkably open”. Furthermore, they also find that professional and transportation services are among the most protected in both industrial and developing countries, while retail, telecommunications and even finance tend to be more open. Furthermore, OECD countries are found to restrict transportation services and movement of natural persons as service suppliers.

Below is part of their paper’s abstract:

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[..] An illustrative set of results suggests that trade policies matter for investment flows and access to services. In particular, restrictions on foreign acquisitions, discrimination in licensing, restrictions on the repatriation of earnings and lack of legal recourse all have a significant and sizable negative effect, reducing the expected value of sectoral foreign investment by $2.2 billion over a 7-year period, compared with "open" policy regimes. In terms of access to services, credit as a share of gross domestic product is on average 3.3 percentage points lower in countries with major restrictions on the establishment of foreign banks as compared with those that only impose operational restrictions.

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The paper comes with Services Trade Restrictions Database (STRD) that provides comparable information in five service sectors, particularly the policies that affect international trade in services (mostly foreign providers):

• Financial services (banking and insurance)
• Telecommunications
• Retail distribution
• Transportation
• Professional services (accounting and legal)

It covers the supply of a service through cross-border delivery (Mode 1), establishing a commercial presence or FDI (Mode 3) and the presence of a natural person (Mode 4). But, it excludes consumption abroad (Mode 2) and subsectors such as business processing services (outsourcing) and policies affecting international movement of less-skilled workers (immigration). They assess policy regimes based on five broad categories:

• completely open, i.e. no restrictions at all
• completely closed, i.e. no entry allowed at all
• virtually open but with minor restrictions
• virtually closed but with very limited opportunities to enter and operate
• middle category of regimes which allows entry and operations but imposes restrictions that are neither trivial nor stringent

Furthermore, they assign a value to each of these five categories of regime on an openness scale from 0 to 100 with intervals of 25 (i.e. completely open gets zero and virtually open gets 25 and so on with 100 for completely closed ) and call the resulting score a STRI (final aggregation is done based on various weights given to each sub-sector depending on the services sectors’ standardized share in total services output for an average ‘industrialized’ country—see p.50, Table A.1). A value of zero indicates the greatest level of openness.

Based on the above methodology (see this paper for full methodology), the table shows how Nepal stands as of now. Based on the scoring method above, judge yourself the extent of ‘openness’ of Nepal’s policies related to services trade. Later on when I have time, I will upload a table showing how Nepal’s score compares with scores of regional economies. Overall, it looks like Nepal is relatively more open in Mode 1 than in other modes of service delivery/trade. A score of 100 indicates that Nepal is completely closing these sectors for trade as per its commitment during WTO accession.

Services Trade Restrictions Index
Nepal	Overall	Mode 1	Mode 3	Mode 4
Overall	42.9	36.66	42.06	85
Financial	23.2	33.5	25
Banking	23.1	12.5	25
Lending by banks	21.3	0	25
Acceptance of deposits by banks	25	25	25
Insurance	23.3	66.67	25
Automobile Insurance	32.5	100	25
Life Insurance	32.5	100	25
Reinsurance	5	0	25
Telecommunications	50		50
Fixed-line telecommunications	50		50
Mobile telecommunications	50		50
Retail	25		25
Transportation	56	75	48.86
Air Passenger Domestic			50
Air Passenger International	63.8	75	37.5
Road Freight Domestic	25		25
Rail Freight Domestic	100		100
Professional	76	33.33	75	85
Accounting and Auditing	50	50	37.5	62.5
Accounting	30	0	25	50
Auditing	70	100	50	75
Legal	93.3	0	100	100
Legal Advice Foreign Law	80	0	100	100
Legal Advice Domestic Law	100		100	100
Legal Representation in Court	100		100	100

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Here is another paper from the same authors where they look at landlocked countries’ comparative advantage in services trade. They argue that protection of services sector (telecommunications and air transport) by landlocked countries is not a smart policy because it is the one of the few sectors in which they have comparative advantage.They find that even moderate liberalization in these sectors could lead to an increase of cellular subscriptions by 7 percentage points and a 20 percent increase in the number of flights.

For more, see this previous blog post about services trade competitiveness of Nepal. Computing RCA index for Nepal’s exports of each services sector category reveals that Nepal actually enjoys comparative advantage in all of them (this despite the fact that there is trade deficit in three of the six sub-sectors).

	2008	2009	2010	2008	2009	2010
Product name	RCA index			Trade balance (US$ million)
Total services	1.52	1.47	2.23	-128.09	-136.86	-199.07
Transportation	0.37	0.59	0.63	-304.62	-233.07	-241.42
Travel	4.23	5.00	4.55	-45.93	-20.56	-58.09
Communications services	5.59	4.54	8.62	40.91	16.11	3.13
Insurance services	0.10	0.19	0.06	-29.79	-25.41	-29.59
Other business services	1.11	1.31	1.87	-6.41	35.79	63.25
Government services, n.i.e.	26.73	11.46	10.63	217.75	90.28	63.65

Source: Author’s computation based on ITC’s Trade Map database.

A review of Finance Minister Pun’s partial budget

It was published in Nepali Times online on July 16, 2012.

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Budget discord

After much disagreement over the size and nature of budget for fiscal year 2012/13, Finance Minister (FM) Barsha Man Pun finally unveiled, through ordinance, “The Bill for Authorizing Withdrawal and Expenditure from Consolidated Fund for the Services and Works, 2012” (simply a partial budget) on July 15. The expected expenditure is approximately Rs 161.24 billion, of which Rs 51.29 billion is earmarked for debt servicing and expense of constitutional bodies. The remaining expenditure of Rs 109.72 billion is equal to one-third of the revised expenditure estimate of fiscal year 2011/12.

 

It will be just enough to meet administrative expenses and to finance ongoing development works, which should be of the same expenditure sub-heads as of the last fiscal year. The tax structure and revenue collection will be guided by the Finance Act 2010/11, which means they won’t change until the full budget is unveiled. Moreover, the government is not allowed to use domestic and foreign loans to finance expenditure during this period. It will have to issue overdrafts as per Nepal Rastra Bank Act 2001 in case revenue collection cannot cover expenditure.

The partial budget does not include new programs except for Rs 3 billion for CA election, Rs 3.69 billion for payment to PLA combatants who chose voluntary retirement, and Rs 3 billion for the establishment of proposed Directorate of Nepal Army. Understandably, the opposition has objected to such ad hoc allocations. Visibly unhappy with the way he was compelled to unveil a partial budget, FM Pun defended his track record and outlined, in his budget speech, what he would have done if a full budget were allowed. He mentioned populist programs like 100 days of employment guarantee to unemployed, free education up to 10+2 level for dalits, allowances to elderly and handicapped people, cultural centers, allowance to girls to attend school and universal insurance, among others.

FM Pun boasted that the economy—particularly growth rate, balance of payments (BoP) and foreign exchange reserves—had performed better during his tenure than previous years. According to government’s projection, the economy grew at 4.6 percent in 2011/12, up from 3.9 percent in 2010/11 and 4.3 percent in 2009/10. Let us be clear that this happened not due to any special effort by the government, but due to favorable monsoon and availability of agriculture inputs, which increased paddy production and pushed agriculture growth rate to 4.9 percent, the highest in the last four years. While the growth rate in service sector remained unchanged at 3.6 percent, industry sector grew at just 1.6 percent, which is lower than 2.9 percent in 2010/11.

It points to the fact that the major constraints to robust industrial activities were not addressed. In fact, the industrial sector is still crippled by power cuts, lack of affordable raw materials and qualified human capital, persistent labor problems coupled with expensive workforce (Nepal has the highest wage overheads in South Asia), strikes, lack of R&D and innovation, and policy implementation paralysis. No wonder gross fixed capita formation as a share of GDP was 19.6 percent, the lowest in the past decade. There is no improvement in cost competitiveness and efficiency of the industrial sector. Unsurprisingly, due to lack of adequate inventory and production hassles in export-oriented sectors, Nepal could not take advantage of weakening of Nepali rupee against major currencies.

Meanwhile, during the first eleven months of 2011/12, BoP surplus and forex reserves reached a record Rs 113 billion and Rs 427 billion respectively. It has resulted not from any novel government policy and structural change in the way the economy is functioning, but because of high remittance inflows and net transfers. There are still worrying signs in the economy: inflation is still high (government’s projection of 8 percent for 2011/12 is gross underestimation), trade deficit is widening, industrial woes are persistent, recurrent expenditure is rising, fiscal deficit is increasing, financial sector troubles are not sorted out, and some inefficient state-owned enterprises continue to drain taxpayer’s hard-earned money.

Given that this is just a special arrangement for revenue and expenditure, there is no relief program for the public, who are hammered by rising cost of living. Similarly, the troubled industrial sector—the most important sector for generating high and sustainable growth and employment opportunities—is also not getting immediate relief. The grand plan for Nepal Investment Year 2012/13 is now out of gear and completion of development works will be delayed.

Against this backdrop, the best the caretaker government could do is to create good industrial relations, maintain investor’s confidence and earnestly implement the ongoing projects by plugging leakages. Importantly, the primary focus should be on sustaining growth rate given the impending impact of late monsoon and fertilizer scarcity during planting season.

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NEPAL: Macroeconomic highlights from Economic Survey 2011/12

Major highlights (related to macroeconomy) from Economic Survey 2011/12. Let me point at the outset that the figures for 2011/12 are preliminary estimate based on the first eight months data of the fiscal year.

Economic activities:

• Real GDP growth was 4.6 percent, up from 3.9 percent in 2010/11 and 4.3 percent in 2009/10. Thanks to good agriculture production (it might not happen next year due to late monsoon and shortage of fertilizer during peak planting season). Agriculture sector grew at 4.9 percent, industry sector 1.6 percent, and service sector 3.6 percent. Industry sector slowed down this year compared to last year. It is also the most important in terms of generating employment and boosting sustainable growth rate.
• Per capita GDP was US$735, up from US$712 in 2010/11. Per capita disposable income was US$931.
• As a share of GDP, consumption, domestic savings, GFCF and gross investment were 90 percent, 10 percent, and 19.6 percent and 32.8 percent.
• Inflation is projected at 7.7 percent, down from 9.6 percent the previous two years. Frankly, this is bogus. The domestic supply-side constraints and initial rise in international fuel prices (and also the depreciation of rupee against dollar, which makes imported goods expensive) have upped market prices. Vegetable prices have risen by more than 50 percent. There is no way inflation will remain at 7.7 percent. I am not trusting this projection.

Economic Survey 2012	2011/12P	2010/11	2009/10
Real GDP growth (%)	4.6	3.9	4.3
Agriculture	4.9	4.5	2
Industry	1.6	2.9	4.1
Service	3.6	3.6	5.8
Per capita GDP (US$)	735	712	610
Per capita disposable income (US$)	931	876	759
Consumption/GDP	90	91.4	88.5
Gross Domestic savings/GDP	10	8.6	11.5
GFCF/GDP	19.6	21.2	22.2
Gross investment/GDP	32.8	32.5	38.3
Total population (million)	27	26.6	26.3
Inflation % (CPI)	7.7	9.6	9.6

Public finance:

• Revenue and expenditure growth were higher than last year’s. However, expenditure growth was higher than revenue growth. This is not sustainable. No wonder, budget deficit  reached 4.2 percent of GDP from 3.6 percent of GDP in 2010/11. Note that the total revenue contains domestic revenue and foreign grants. Nepal is getting increasingly dependent on foreign aid to finance development activities and also to meet capital expenditure.
• Foreign aid as a share of development expenditure has always been high. The highest was 86.53 percent in 2004/05. Total foreign aid in 1975/76 was Rs 0.51(grant Rs 0.36 billion and loan Rs 0.15 billion) and in 2009/10 it was Rs 49.76 billion (grant Rs 38.55 billion and loan Rs 11.22 billion). In 2009/10, total actual expenditure and total tax revenue were Rs 259.69 billion, Rs 179.95 billion. Development expenditure was Rs 151.02 billion in 2009/10.
• Recurrent expenditure increased by 50.8 percent, up from 12.8 percent in 2010/11. Meanwhile, capital expenditure decreased by 41.7 percent. This means that the government is unable to spend money in the stuff that is essential in creating strong base for economic growth. Domestic revenue is not enough to finance recurrent expenditure. This is bad financial planning and management.
• Debt servicing (principal and interest) increased by 19 percent, up from 5.4 percent in 2010/11.
• As a share of GDP, total revenue, tax revenue, total expenditure, recurrent expenditure, capital expenditure, foreign aid (grant plus loan) were 15.5 percent, 13.2 percent, 13.5 percent, 16.5 percent, 4 percent, and 5.4 percent respectively.

Economic Survey 2012	2011/12P	2010/11	2009/10
Revenue growth (%)	20.5	11	25.4
Expenditure growth (%)	23.8	13.7	18.2
Recurrent expenditure growth (%)	50.8	12.8	18.2
Capital expenditure growth (%)	-41.7	19.5	23.5
Principal payment growth (%)	14.7	-6.6	-2.1
Debt servicing (principal & interest), %	19	5.4	5.3
Revenue/GDP	15.5	14.6	15.1
Tax/GDP	13.2	12.6	13.1
Expenditure/GDP	23.5	21.6	21.8
Recurrent expenditure/GDP	16.5	12.4	12.7
Capital expenditure/GDP	4	7.9	7.6
Debt servicing (principal & interest)/GDP	2.3	2.2	2.4
Foreign aid (grant + loan)/GDP	5.4	4.2	4.2
Budget deficit/GDP	4.2	3.6	3.5

Financial sector:

• As a share of GDP, domestic credit, private credit, money supply and fixed and savings deposit were 65 percent, 52.7 percent, 69.2 percent and 53 percent. All of these except for domestic credit are an increase from last year.

Economic Survey 2012	2011/12P	2010/11	2009/10
Domestic credit/GDP	65	66.6	66.7
Private credit/GDP	52.7	53.1	53.5
Money supply (M2)/GDP	69.2	67.3	68.8
Fixed and saving deposit/GDP	53	51	51

External sector:

• Merchandise exports and merchandise imports increased by 14.8 percent and 15 percent respectively. Trade deficit increased by 15 percent. Again, exports growth has been lower than imports growth. Here are the reasons why exports of Nepal are declining.
• As a share of GDP, merchandise exports, merchandise imports and trade deficit were 4.7 percent (same as last year), 29.2 percent (increase from last year), and 24.5 percent (increase from last year). Compare these with the figures in 2001/02: exports, imports and trade deficit were 10.1 percent, 25.3 percent 15.1 percent respectively of GDP.
• As a share of GDP, tourism income and remittances were 2 percent (higher than in 2010/11, but lower than in 2009/10) and 21.2 percent (higher than previous years).
• Current account balance was 2 percent of GDP (it was negative the past two years). Balance of payments was Rs 80 billion (higher than previous years). Reason: higher remittance inflows and net transfers.
• Forex reserves have reached Rs 386.96 billion, which is enough to finance 9.2 months of merchandise goods import and 8.3 months of goods and services import.
• Nepal’s exchange rate against US dollar depreciated by around 10 percent to US$1= NRs 79.4. Still Nepal is unable to boost exports (no inventory of goods to take advantage of weak rupee).

Economic Survey 2012	2011/12P	2010/11	2009/10
Merchandise exports growth (%)	14.8	5.8	-10.2
Merchandise imports growth (%)	15	5.8	31.6
Trade deficit growth (%)	15	5.8	44.6
Merchandise exports/GDP	4.7	4.7	5.1
Merchandise imports/GDP	29.2	28.9	31.4
Trade deficit (merchandise)/GDP	24.5	24.2	26.3
Tourism income/GDP	2	1.8	2.4
Remittance/GDP	21.2	18.5	19.4
Current account balance/GDP	2	-0.9	-2.4
Balance of payments (Rs billion)	80	2.2	-3.3
Forex reserves (Rs billion)	386.96	272.2	268.9
Goods import finance by reserves (months)	9.2	8.4	8.7
Goods and services import finance by reserves (months)	8.3	7.3	7.4
Exchange rate (US$/NRs )	79.4	72.3	74.5

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State of public enterprises (PEs):

• Out of 37 PEs, 21 generated profit and 14 were in loss. Two (Nepal Engineering Consultancy Services Center Limited and Hydropower Investment and Development Company Limited) did not conduct any business. [Question: Why are defunct PEs still sucking out taxpayer’s money?]
• Net profit decreased by 36.7 percent to Rs 6.67 billion in 2011/12. The top profit making PEs were Nepal Telecom (Rs 12.12 billion) Agriculture Development Bank (Rs 2.36 billion), Rastriya Banijya Bank (Rs 1.76 billion), Rastriya Beema Sansthan (Rs 1 billion) and Civil Aviation Authority (Rs 742.6 million).
• The top loss making PEs were Nepal Electricity Authority (Rs 6.09 billion), Nepal Oil Corporation (Rs 5.11 billion), Nepal Oriend Magnesite (Rs 428.8 million), Janakpur Cigarette Factory (Rs 218.1 million), and Nepal Drugs Limited (Rs 198.9 million).
• PE gave Rs 49 billion in dividends to the government, of which Rs 5.5 billion was contributed by Nepal Telecom.
• Reasons government officials give for the dismal performance of PEs: political interference, overstaffing, unproductive human resources, bureaucratic hurdles in the procurement process and slow pace of modernization.