Friday, August 31, 2012

Share of Kathmandu valley in national economy

Ever wondered the share of Kathmandu valley (Kathmandu, Lalitpur and Bhaktapur) in the national economy? Well, it contributed between 23.4 percent and 31 percent (based on “reference scenario” and “alternative scenario” respectively) to national economy [that is, C+I+G+(X-M)] in 2010/11, according to this study by the central bank.

Since the total population of Kathmandu valley is 2.51 million (Census 2011 preliminary data or 4 million as assumed in the study considering temporary population as well), it means that a region with 9.44 percent (or 15 percent if temporary population is considered) of total population and less than one percent of total area contributes almost one-third of the total economic activities (considering alternative scenario). Reference scenario is based on published data sources (mainly NLSS III—and other surveys like CME 2006/07 and SSME 2008/09—for private consumption expenditure and investment, MoF data for government expenditure and investment, and customs data as well as field survey for trade) and field survey. Alternative scenario is based on reference scenario plus underestimated data (consumption of electricity and petroleum products) obtained from field survey.

The figure below shows the share of Kathmandu valley in respective components of GDP. The share of Kathmandu valley in total national consumption and exports is around one-fourth each.

Source: NRB, 2012; *alternate scenario.

Furthermore, considering alternative scenario, the share of Kathmandu valley in consumption of food, electricity and petroleum products is 19.8 percent, 29.2 percent and 30.7 percent respectively. Meanwhile, the share in consumption of LPG, petrol, diesel and kerosene is 60 percent, 46 percent, 16 percent and 38 percent respectively. With the huge share of consumption in the richest region that also has bureaucratic centers and most jobs, it is no surprise that there is some form of elite capture of subsidies meant for the poor in particular and for all in general. Sounds like an extremely off-target subsidy of all.

Regarding financial sector, while 60 percent of deposits originated in Kathmandu valley, the share in total credit was 44 percent. About 26 percent of total BFI branches are in Kathmandu valley.

Thursday, August 30, 2012

The effectiveness of policy briefs

Below is an excerpt from a very interesting paper on the effectiveness of policy briefs (which are basically an evidence-based specific topic focused writing that can be read and understood by people having some interest in the issues explored)  done by Beynon et al. at ODI. Read the full paper here.

[…]Most of the factors that influence research uptake are beyond the control of research communicators. But one factor that is within their control is the design and dissemination of the documents they produce for policy audiences. In particular, the design of their policy briefs.

[…]Using a randomised control design, this study explored the effectiveness of one popular research communication tool, a policy brief, and queried whether different versions of a brief bring about different results. We find that the policy brief had little effect on changing the beliefs of readers who held strong prior beliefs on entering the study, but had some potential to create evidence-accurate beliefs among readers holding no prior beliefs. Also, when it comes to beliefs, the impact of the policy brief seems to be independent of the specific form of the policy brief. However, different versions of the brief (versions that include a research Opinion with or without a suggestion that the opinion is from an Authoritative source) do achieve different results when it comes to prompting actions. We find that other factors internal and external to the brief (gender of the reader, reader’s self-perceived level of influence and the extent to which the reader feels ‘convinced’ by the brief) are also linked to action.

It should be pretty useful for NGOs and think-tanks that are wondering how to make their research effective at policy level (evidence-informed policymaking) as well as to influence public discourse on a particular issue.

Monday, August 27, 2012

NEPAL: Making sense of government data and where to find them

Here are few points that will help simplify your life if you are playing with and trying to make sense of the data provided by various government agencies in Nepal. Most of the data can be found in Economic Survey (ES) and Quarterly Economic Bulletin (QEB). These are helpful if you are trying to look at figures based on fiscal year. Alternatively, you can also use databases of ADB, WB and IMF.
GDP growth rate: It is better to compute real GDP growth rate yourself because if you use the government provided one, then you will notice that for 2000/01 the data is missing. It is because real GDP is computed with 2000/01 as base year. Compute real GDP growth rate using real GDP at factor cost/basic prices (at 2000/01 prices) for sectoral contribution. Compute GDP in producers prices (at 2000/01 prices) for growth rate usually used for normal purposes (the base year before 2000/01 differs).
GDP per capita: In some economic surveys you might find that GDP per capita growth for some years is higher than real GDP per capita (for instance, according to Economic Survey 2011/12 p.xxii, in 2006/07 real GDP growth was 2.8 percent but real per capita GDP growth was 6.3 percent!). It should not happen. To stay in safe side, compute your own figures. Use real GDP at factor cost (2000/01 prices) for the years you are looking at and divide it by total population in that year. The CBS provides an estimation of population in each fiscal year.
Trade: Use export and import figures from QEB. The ES keeps on messing up with data for 1985/86. You can get disaggregated export and import data based on SITC category. Better compute trade deficit on your own. Export and import data are available for Nepal’s trade with India and outside of India because almost 60 of Nepal’s trade happens with India. For disaggregated export and import figures, use TEPC’s database. If you want to access trade data disaggregated at various levels, then either use UN COMTRADE or ITC’s database (you will have to use mirror data for most of the years as reported figures are for 2003, 2009 and onwards only).
Exchange rate: Nepal has pegged its currency with Indian rupee. So, it hardly changes unless the government alters the peg, which hasn’t happened since 1993. For others, use annual average of buying and selling rates available in QEB. On February 12, 1993, the Nepalese rupee was made fully convertible on current account. Between June 1, 1983 and February 12, 1993, Nepali rupee was pegged with a basket of currencies. Prior to 1983, Nepali rupee was pegged and revalued or devalued depending on the situation.
Inflation: Use QEB. Compute inflation yourself from CPI data whose base year is 2005/06. Rural and urban inflation data are also available.
Gross domestic savings and gross national savings: Use ES. GDS is calculated as the difference between GDP and total consumption expenditure in the national accounts statistics., i.e. GDP at producer's prices (current) minus consumption. GNS is calculated as gross national income less total consumption, plus net transfers. Saving-investment gap = GNS-GCF.
Expenditure: Use ES. After 1998/99, total expenditure is divided into recurrent, capital and principal re-payment. Before that it was only regular and development expenditures. If you are looking for expenditure based on just regular and development headings, then regular expenditure = recurrent and capital=development.
Receipts: Use ES. It includes tax revenue, non tax revenue and foreign grants. Customs revenue contains imports, exports, Indian excise refund and others. VAT includes sales tax, entertainment tax, hotel tax, air flight tax and contract tax. Compute tax revenue as a share of GDP on your own (do not use total receipts as foreign grants and non tax revenue might distort the overall message!).
Foreign aid: Use ES. It has aid data disaggregated by type, sectoral flows and source. For country-wise aid commitment, see source books/white books. For a review of aid flows see Foreign Aid Co-ordination Division’s publications (particularly development cooperation reports). The OECD’s aid database also gives good data on ODA and Aid for Trade flows.
Migration: Use figures from the Department of Foreign Employment (DoFE), which gives you data since 1994/95. Gender disaggregated data is available starting 2006/07. The DoFE data covers only those who are given employment permits to work in foreign countries. It doesn’t include those going to India for work or going to other countries without seeking employment permits. A rough approximation of those going to India and other countries is available from ‘absentee population’ data in decennial censuses (from 1941 to 2011).
Remittances: Use remittances figures extracted from balance of payments table in QEB. This gives remittances recorded in foreign exchange only. Remittance income might include remittances in all currencies (i.e. Indian currency and others). Since Nepal has a pegged exchange rate with India and the Indian rupee is also used in the market for transaction purpose, recorded remittances in foreign exchange might understate the actual inflows. The household living standard surveys (NLSS I, II, and III) gives an approximation of remittances coming from different sources, including India. The WB’s remittances figures are also widely used.
Forex earning: Use QEB. Foreign exchange earnings come from remittances, tourism, investment income, exports, diplomatic source, foreign aid and miscellaneous.
FDI: Use FDI data from BoP table from QEB. For FDI commitment from different countries disaggregated by sector and employment, use Department of Industry’s industrial statistics year book.
Poverty and inequality: Either use NLSS (for national poverty line) or World Bank figures (for US$1.25 a day poverty line). Some use Multidimensional Poverty Index primarily used by UNDP in its annual HDR.
Social progress: For a comprehensive look at progress made since 1990, see MDG assessment reports. For other indicators, see NLSS I, II and III.
[Lastly, GDP at basic prices or factor cost = GDP at producers' prices or market prices - taxes + subsidies. GDP at factor cost is used for computing sectoral contribution to GDP; GDP at producer's prices/market prices (current) is used for calculating share of other variables.]

Friday, August 24, 2012

More load-shedding during the dry season

As a result of low monsoon rains and increasing demand (estimated to increase by around 100 MW each year), a large portion of Nepali households could see load-shedding hours going up to as high as 21 hours a day. It will have a severe impact on production and export competitiveness, trade deficit, investment, capacity utilization of existing firms, fiscal balance (more demand for diesel as it is subsidized) and inflation. Currently, electricity demand is around 1000 MW but supply is 700 MW during summer and 400 MW during winter. The number of new consumers is also increasing rapidly.

The government is trying to contain the damage and plans to limit power cuts to 12 hours a day. Here is the proposed plan as reported in Republica:

  • Construction of a 15-km transmission line to carry electricity from India during winter
  • Operating multi-fuel plants in Duhabi and Heatuda
  • Construct Khimti-Dhalkebar transmission line to reduce electricity leakage by about 10 MW
  • Control leakages
  • Buy more electricity from India during winter
  • Expedite work on hydro projects

These plans have come out of desperation. But, desperation alone won’t provide relief if the country cannot generate enough electricity in the first place. The reasons for this are simple: too much politicization of hydro sector and entrenched corruption and inefficiency. Willing investors from India are pretty much opposed by politicians from the most influential party (but are more than willing to import electricity from India though). Investors from other countries are simply waiting to secure the most lucrative deals. Meanwhile, the light bulbs of Nepali households are getting fewer hours of electron flows each year. It is unfortunate that the sector in which we have comparative advantage in production, and also in export, is being politicized to the extent that supply is at snail’s pace while demand surging far ahead.

Few comments:

  • Do whatever, the cost of production will increase next year and investment in non-resource sectors (i.e., primarily manufacturing, which produces the most gainful employment and bump in income with low volatility) will go down. Fiscal balance will get impacted as more hours of power cuts means more demand for alternative sources of energy (in our case, diesel). This will be compounded if the diesel plants are run and NEA will have to bear further losses. Imports bill will shoot up and trade deficit will further widen. A slight decrease in remittances growth will destabilize whatever macroeconomic stability we have right now.
  • Given the acute shortage of electricity in India itself, I wonder if they will be willing to increase exports to Nepal each year. In fact, other South Asian countries like Bangladesh and Pakistan also have deficit power production. With so much power potential and willingness of donors to construct cross-border transmission lines, Nepal has a huge opportunity to cater to this market. Sadly, it is not happening. Rather, our leaders are more willing to import electricity from India but oppose investment from Indian investors. It is simply illogical.
  • Controlling leakages is not as easy as it is said. It requires more funding for the supervision, regular maintenance of dilapidated transmission lines, and periodic repair of existing power plants that are operating below potential.
  • The state of Nepal’s infrastructure is already miserable, ranking Nepal as one of the most uncompetitive nations in South Asia. Business costs are already high. State of ICT is also pathetic. The only solution to these is to produce more electricity so that cost of production are down and investor’s confidence is boosted.

Monday, August 20, 2012

Will introduction of base rate help the troubled financial sector in Nepal?

Here is an article by Prem Khanal published in Republica yesterday. The entire article is copied and pasted below.

Second coming


Nepal’s financial system seems to have come full circle as it is headed towards the same bumpy path that ended with a banking crisis in 2010. A flashback: Between fiscal 2004/05 and 2008/09, Nepali economy witnessed a breakneck monetary expansion and the total money supply, during the period, increased by 17 percent on average, owing to hefty growth in remittance. As a result, bank deposits doubled to Rs 422 billion in four years and liquidity soared due to low credit demand, despite record low lending rates. The one-year deposit rate remained at 4 percent for almost five years whereas inflation was 7 percent on average.

The negative interest rate that shrunk depositors’ savings by at least 3 percent each year for five years became a great disincentive to park saving at banks. This along with low lending rate diverted depositors toward highly risky speculative investments. Four distinctly visible scenarios emerged during the period. First, those with moderate deposits, say more than Rs 1 million, managed additional financing from banks and invested in real-estate, mainly on land. The sudden rise in the demand of land increased its price and provided handsome returns for both individuals and lending banks. That not only prompted initial investors to invest even more by taking additional loans but also lured others looking for alternative investment avenues to avoid negative interest rate and secure high returns.

Banks were happy as they were easily securing monthly installments and confidence of real estate traders was at a high as they enjoyed hefty returns. Real-estate lending soared to Rs 25 billion in 2009 from Rs 1.4 billion in July 2006. However, the realty business started losing steam in the beginning of 2009 and real-estate bubble burst in early 2010, putting at risk Rs 100 billion worth of bank investments. Two years down the line, the banks are trying hard to recuperate.

Second, those without enough savings to invest in real-estate were initially lured by the share market, which witnessed a whopping expansion, as market capitalization as percent of GDP jumped to 52 percent in 2008/09 from 11 percent in 2004/05 and the number of listed shares increased by three-fold. The share market soon started showing irrational behaviors. Even the shares of the companies that had declared their inability to generate profit for at least five years saw their shares oversubscribed manifold. Similarly share prices of some new finance companies increased by up to four-fold, even before they had released their first audited financial reports. That phenomenal growth in turn made banks invest heavily in margin lending—lending against share certificates—which rose to almost Rs 9 billion in July 2009 from nowhere.

The manipulation in the share market spurred mainly by weak regulations was so alarming that the share prices of regional financial institutions, with capital of Rs 100 million, were for years being traded at much higher prices than that of national banks, whose capital were Rs 2,000 million. But share market soon started losing its shine following the slump in realty business, as ballooning realty sector was the main propeller of the stock market. The contraction of the share market was so rapid that market capitalization was squeezed to Rs 377 billion within a year from its peak of Rs 513 billion in July 2009.

Third, those residing in border areas of the southern planes where there was neither realty boom nor shining stock market for speculative investments, shifted deposits, worth billions of rupees, to Indian banks offering as high as 12 percent interest in one-year deposits. The bordering Nepali markets were so lucrative for the Indian financial institutions that they used to put advertisements on Nepali side, promising quarterly interest payments at doorsteps. The fact that Nepali banks operating in bordering cities witnessed an unexpected increment in collection of Indian currency after Nepali banks increased deposit interest rates in 2010 was a strong evidence that low interest rate was one of the major reasons for the huge capital flight to India during the period. In addition, low interest rate also created conducive environment for various networking and insurance schemes to penetrate into the bordering Nepali markets.

Fourth, those in the emerging towns making small savings either from the money they were receiving from family members abroad or from local business, but had no access to share market, were attracted by illegal pyramid-styled networking business that promised unnatural returns. The infamous Unity Life scandal in which innocent people from rural and emerging cities lost Rs 3 billion was a brilliant example of the level of risk savers are ready to take even for moderate returns.

Against these facts, the recent rapid decline in deposit interest rate that was as high as five percentage points is a clear early warning that Nepal’s financial system is warming up for return to the vicious circle that shook the very foundation of the banking system in 2010. As remittance income continues to rise against the background of slow credit demand, and with liquidity in banks building up to around Rs 40 billion, it leaves banks no alternative to lower deposit rates. They are sure to further bring down the lending rate that so far has declined by three percentage point on average. The deadly combination of low deposit and low lending rates once again can goad people towards risky speculative investments. Though chances of reemergence of a real-estate bubble in near future is slim given various restrictions enforced by the central bank, particularly on land, the economy will surely see bubbles on other sectors if the current vicious circle of low-deposit-lending is not broken.

But how? Global experience shows that implementation of a functional base rate or benchmark rate for lending is an effective tool to deal with the abovementioned problems, though it is also not without shortcomings. The practice of adopting base or reference rate has become a popular tool to reduce lending risks, particularly after the global financial crisis and many regional central banks like Reserve Bank of India, have successfully implemented the policy to avoid lending risks. Indian experience show that the base rate policy has been effective in controlling lowering of lending rate to some borrowers that come with right political or commercial connections but lack adequate financial backings and real entrepreneurship skills.

To its credit, Nepal Rastra Bank in its monetary policy for current fiscal year as vowed to introduce a base rate, a monetary mechanism that will fix the minimum lending rate below which banks will be not allowed to lend. Since banks themselves have to fix the lending base rate on the basis of major cost elements like cost of deposits, cost of maintaining the SLR and CRR, cost of operations, and profit margin on each quarter, it will improve transparency in the banking sector’s interest rate mechanism.

The introduction of base rate will not only open a new avenue for floating interest rate to borrowers, who currently have no option than to accept fixed rate, but also help the central bank to maintain a solid base to determine spread rate. Moreover, it will help peg the deposit rate at a certain level above the inflation rate so as to ensure minimum reward for depositors.

Comments: The article focuses on the rising spread rate and the various ways in which money is being used (real estate, share market, deposit in Indian BFIs, and pyramid schemes). He bats for introduction of base rate as one of the most viable solutions. But, then it is just a policy tool to stabilize lending and deposit rates within a certain band. It would have been even more revealing if the four main ways in which people are using money and the policy recommendation were linked with the core problems of the banking sector: intense (and unhealthy and non-innovative) competition among too many BFIs and lack of appropriate investment opportunities, which has in turn resulted in bubbles in certain sectors.

In January 2011, I had cautioned about the impending financial disaster and then in January 2012 I argued that the crisis is postponed (possibly) until mid 2013. The core problem is still there and few policy tweaks on the surface would only make a minor scar. Here is a long version of an analysis on the same issue. Also read this one.

Sunday, August 19, 2012

Nepal’s lost priority: Seeking more market concessions or boosting productive capacities first

Published in Nepali Times, Issue #618 (17 AUG 2012 - 23 AUG 2012).

Lost priority

Nepal can be more competitive by improving investment climate and upgrading infrastructure


Each time a Nepali delegation attends bilateral trade talks, one issue never changes: plea for duty free access and concessions. They seem to forget the fundamental factor that will enable us to export more is the ability to competitively produce goods and services in the first place.

It is not that tariff and non-tariff barriers are unimportant to increase exports. The fact is that these largely help in trade facilitation, whose importance is high only when we are able to boost production competitively. Sadly, this is not the case right now. Rather than begging for more concessions during trade talks, the primary focus should be on effectively tackling constrains faced by the industrial sector, improving investment climate, and then seeking bilateral assistance to enhance production efficiency. Otherwise, even if we get greater market access and concessions, we won't be able to fully utilise them.

For instance, at the Nepal-China Consultative Meeting on Monday, Nepal requested China to help decrease rising bilateral trade deficit, which reached Rs 45.7 billion in 2010-11, by offering favourable market access, among others. China already provides zero tariff facility to 4,721 export items of Least Developed Countries, including Nepal. Though some of the export items of interest to us are not included in that list, Nepal is simply unable to take advantage of the zero tariff facility on other goods. The reason is that even with such concessions our exporters are unable to competitively produce goods to compete with Chinese counterparts.

The only way China could help us narrow down trade deficit is by investing in the prerequisites for competitive production: supply of electricity and technology transfer in the agriculture and manufacturing sectors. Other than this there is very little China can do to decrease bilateral trade deficit because Nepal is rapidly losing the market pie to more competitive producers and is also importing more Chinese goods each year.

Similarly, during a meeting between commerce secretaries of Nepal and Bangladesh in July, Nepal asked Bangladesh to provide concessional market access to 146 products, to which the latter agreed in principle. Nepal has requested such concessions with almost all trading partners, including India and the US. The irony is that despite knowing that our producers and exporters will be unable to utilise such concessions without improvement in industrial relations and investment climate, we still plead for them by wasting resources and energy.

For instance, Nepal gets duty free access for almost all manufactured goods exported to India. Still we are unable to take advantage of it due to domestic production constrains. A case in point is the export of iron and steel, whose total import by India was $8.3 billion in 2010. Of this, Nepal's share was just 1.22 per cent. Note that Nepal gets duty free access to the Indian market like no other country. The minor non-tariff hiccups in trade with India don't fully account for our inability to increase exports there.

Nepal has an unsustainably high merchandise trade deficit (25 per cent of GDP). The rapidly increasing imports are primarily financed by remittances. Exports started declining rapidly after 2000-01, the same year the Maoist insurgency intensified, as a result of disruption in production and deteriorating investment climate. Driven by lack of employment opportunities, the same year also marked the beginning of the exodus of a large number of youths for overseas employment. It resulted in high remittance inflows (around 20 per cent of GDP). In 1997-98, income from exports constituted the largest share (37 per cent) of total foreign exchange earnings. Currently, while its share is less than nine per cent, remittances contribute a whopping 62 per cent to total forex reserve.

The high dependence on remittance financed imports as a result of low domestic output and uncompetitive exports is widening the trade deficit. To decrease the gap, there is no other option but to increase production and exports. What is barring us from doing so? Inadequate supply of infrastructure and poor investment climate are the two key factors.

First, firms are operating below potential due to insufficient supply of electricity and lack of workforce. Second, cost of production is rising due to the compulsion to run diesel guzzling generators and multiple hurdles along the poorly maintained trade routes. Third, poor investment climate arising from labour militancy, extortion, frequent strikes, disruption of supply chain, and high cost imposed by syndicates along with rising cost of doing business in general are eroding industrial strength.

These are making production uncompetitive and exacerbating our ability to utilise readily available market potential abroad. Solving these should be the first priority of our leaders instead of begging for market concessions during each bilateral trade talk. It is the responsibility of not only the Ministry of Commerce and Supplies, but all line ministries, political parties and the private sector.

Friday, August 17, 2012

Links of Interest (2012-08-17)

Links to (and excerpts from) some of the interesting news and papers.

Syndicates and distortions in Nepal (The Economist):

[…] “This is the main reason for their reckless driving,” said the nation’s top traffic cop. “There is a syndicate system, a cartel. The cartel is very powerful…it is very difficult to fight against them.”

High fares, poor services and an atrocious safety record are the result. In the past few weeks scores have died in bus wrecks on difficult mountain roads around the country. Drivers are said to joke that the driving licence is a “licence to kill”.

Last week the transport industry went on strike, throwing millions of daily routines out of joint. They were demanding that the government concede to 15 demands. The authorities had been willing to meet 14 of them.

[…]The transport cartels erect high barriers to entry (the right to ply a city route reportedly costs as much as a new minibus) and they enjoy the support of powerful politicians. “These are among the biggest donors to political parties and they send the most people to rallies and strikes,” says Chandan Sapkota of Satwee, an economics think-tank.

But what ails the transport sector is also the case in every other lucrative industry. Every political party is involved. The country has been run in the same manner through periods of royal autocracy and multi-party democracy alike.

Dutch disease starts to take toll on economy (The Himalayan Times): Also see this blog

“Remittance has financed imports, leading to an unsustainably high merchandise trade deficit, which has reached as high as 26 per cent of GDP,” another trade researcher Chandan Sapkota, said, adding that the remittance-financed high imports have also been crucial for revenue generation as over 50 per cent of total tax revenue is coming from consumption tax. The country’s import has increased by four times to Rs 419.57 billion — in the first 11 months of the last fiscal year — from Rs 125.5 billion in the fiscal year 2002-03.

[...] But remittance has also been responsible for the Dutch disease effect, which is the loss of competitiveness of non-resource tradable sector — exports sector — due to the appreciation of the exchange rate after substantial inflow of resources from one particular sector –– remittance, according to Sapkota.

Remittances and Dutch disease in Nepal (Karobar Economic Daily):

"रेमिट्यान्सले आर्थिक वृद्धिमा नकारात्मक असर परेको र बढ्दो निर्भरताले नेपालका लागि यो ‘डच–रोग’ बन्न लागेको एक अध्ययनले देखाएको छ ।

साउथ एसिया वाच अन ट्रेड, इकोनोमिक्स एन्ड एन्भायरोन्मेन्ट (सावती)का शोधकर्ता चन्दन सापकोटाले गरेको ‘नेपालमा रेमिट्यान्स : वरदान या अभिशाप’ विषयक अध्ययनमा रेमिट्यान्सले डच रोगको प्रभावलाई प्रेरित गरेको उल्लेख छ । लगानी वातावरण बनाउन नीतिगत सुधारमा ढिलो भइसकेको निष्कर्ष अध्ययनको छ ।

[…]“रेमिट्यान्स प्राप्तिले नेपाल पनि यही मानसिकताको सिकार भएको छ,” अर्थशास्त्री प्रा. डा. विश्वम्भर प्याकु¥यालले भने, “कुल गार्हस्थ्य उत्पादन (जीडीपी)मा २५ प्रतिशत योगदान रहेको रेमिट्यान्सको दिगो उपयोगमा जोड दिन आवश्यक भइसकेको छ ।”

उनले रेमिट्यान्सको नकारात्मक असर न्यूनीकरणका लागि आवश्यक कदम चाल्न ढिला भइसकेको पनि बताए । “जीडीपीमा कृषि र गैरकृषि क्षेत्रको योगदानको अवस्था परिवर्तन भए पनि कृषिमा निर्भरता घट्न सकेको छैन,” उनले भने, “कृषि क्षेत्रको उत्पादकत्व बढाउन रेमिट्यान्स उपयोग गर्न सकिन्थ्यो ।”

नेपालले संक्रमणकालीन अर्थतन्त्र व्यवस्थापन गर्न नसकेको प्याकु¥यालले बताए । “रेमिट्यान्स प्राप्तिले शोधनान्तर बचत र विनिमय सञ्चितिका सूचकमा मात्र जोड दिए बृहत् अर्थतन्त्रलाई सम्हाल्न गाह्रो हुन्छ,” उनले भने

Determinants of Donor Generosity: A Survey of the Aid Budget Literature

[…]aid inertia, the donor country’s GDP per capita, the existence of an independent aid agency, and colonial history have a robust and quantitatively relevant impact on countries’ aid efforts. Among the potential substitutes for aid, remittances exert a robust effect. Excluding year fixed effects, political globalization, Russian military capacity, peer effects, aid effectiveness, and government debt also play a significant role.

What explains political institutions? Evidence from colonial British America

[…]In a recent paper (Nikolova 2012), I argue that institutional change depends on labour market conditions: elites opt for liberal representative institutions when labour is scarce, and vice versa. I use a unique data set covering a period of relatively rapid change in representative institutions in the thirteen British American colonies from their very establishment to the American Revolution. In contrast to theories arguing that inequality is the primary determinant of the quality of political institutions (Boix 2003, Acemoglu and Robinson 2005), I show that liberal representative institutions may arise even in cases of high inequality, as the positive impact of labour scarcity outweighs the usual negative relationship between inequality and democracy. The relative fluidity of political institutions in this setting and time period also questions the validity of arguments linking institutions to historical persistence. In terms of implications for contemporary countries, the theory predicts that as autocratic regimes – such as China – face more binding labour constraints, democracy will be more likely to emerge.

[…]My analysis emphasises the importance of labour market structure in addition to inequality in explaining the evolution of political institutions in colonial British America. But just how relevant is the political experience of these colonies for explaining more recent institutional change? Female enfranchisement in Western Europe and the US coincided with the end of the First World War, which made male workers scarce (see Braun and Kvasnicka 2011). Similarly, countries with a labour shortage in particular occupations have point-based immigration schemes that grant citizenship and the associated political rights to qualified candidates. For instance, Canada and Australia have special programmes giving permanent residence to highly skilled immigrants. Therefore, the findings of my research provide a different angle to the debate in the literature on what pushes institutional change.

The fiscal cost of trade liberalisation

[…]Our argument is not that trade liberalisation is bad per se. In the long run a fall in tariffs will have a positive impact on welfare as it increases the efficiency of the tax system. However we point out that the net effect will always be negative for countries which are trapped in a low tax-capacity equilibrium, precisely those countries which were characterised by low revenue collection even before they decreased tariffs. We indeed observe that nearly a third of countries which experience a fall in trade tax revenues never recover the lost revenues through other means in our sample. Other countries will suffer from a short-run loss, but will be better off in the long-run.

Technical aid on public sector financial management has always been the poor parent of official development aid (OECD 2010). Both the evidence and the theoretical framework we develop point to the need to increase efforts to improve developing countries’ capacity to raise taxes. Our model suggests in particular that the gains from trade liberalisation can be obtained by investing in tax capacity. Building more efficient tax administrations in developing countries may lead them to open up to trade as they will no longer need to levy tariffs to raise revenue, though other protectionist motives for raising tariffs may be at play.

Top tax payers in Nepal are the banks (The Kathmandu Post) – It says a lot about investment climate and remittance inflows!


The service sector has emerged as the biggest income tax payer to the government even as the manufacturing sector have been reeling due to infrastructure- and labour-related problems.

Among the top 10 companies that were the highest income taxpayers last fiscal year 2011-12, only Surya Nepal could make it on highest taxpayers’ list this year. All the other companies are from the service sector with as many as seven banks and two telecom operators making the list.

Wednesday, August 15, 2012

KFC, Pizza Hut closure: A setback for foreign investors in Nepal

KFC and Pizza Hut in Nepal, operated by Devyani International Nepal, closed down the fast food outlets for indefinite period following militancy shown by ad-hoc committee of All Nepal Hotel and Restaurant Workers Union-Revolutionary (ANHRWU-R), the Maoist (Baidya faction) party affiliated trade union which was trying to register one at the Department of Labor.

This should not have happened especially this year, which the Maoist-led coalition government declared as Investment Year (irrespective of its relevance after the partial budget unveiled in July). The manufacturing output has already nosedived due to supply-side constraints, including labor related disputes. Its contribution to GDP is just below 6 percent. Merchandise exports remain below 5 percent of GDP.

Things are not completely clear right now:

  • The management says some workers trying to open union beat up managerial staff and gave threats to their life.
  • The workers (especially leader of the protesting folks) argue that nothing of the sort alleged by the management happened. They were just trying to register a union.

Few comments:

  • Before the truth comes out, it will be hard to say who is right.
  • Based on past experiences, the workers (especially those from unions who are dictated by political party bosses) have faulted badly. Read here and here. Also, remember this time when the unions stroke a deal with the industrialists to not go for strikes for four years. What happened to that commitment?
  • According to the Nawaraj Bhatta (president of the ad-hoc committee of ANHRWU-R), a team of 66 staff members had applied for the registration of ANHRWU-R at the Labor Office on August 7. But, some workers were surprised that their names appeared on the list without their consent. Is there any room for doubt that some rigging did happen?
  • As a result of the dispute, 180 workers have become unemployed. They were earning at least Rs 20,000 per month (this is higher or equal to what Nepali migrant workers usually get for unskilled jobs in Malaysia and the Gulf). The management is adamant that it will stick to “no work, no pay”—something that will flare the fight between the two seemingly warring sides.
  • In these kinds of tussle, the unions usually presume that the management will ultimately yield to their demands because of the high fixed cost (sunk cost) and interference by political leaders. However, in the case of international investors we have seen it quite clearly that this gamble won’t work. Evidence: remember how Colgate Palmolive and Surya Nepal Private Limited’s (SNPL) packed shut down production and left the country. You guess who is on the losing side?
  • The policy inconsistency of government and stance inconsistency of trade unions (that have been using extralegal means to press their demands) are bleeding the industrial sector. Vested interests of trade union bosses and their bosses of political parties are actually costing dearly not only the industrial sector but also the jobs of naïve workers, who are in a mirage that they are truly represented by their union leaders and politicians (most of whom are past their retirement age). Closing down Surya Nepal cost 650 direct and 1400 indirect employment.
  • Read this article that explains how labor militancy is leading to strike-unemployment cycle. This statement is even valid right now: “If you have lost a job, are potentially going to lose, or cannot get one in the market, then blame the outrageous, militant youth wings and the politicians who incite the unions to go on a destructive path.” Read this article that explains the disconnect between outrageous labor demands not matched by labor productivity. Unions need to match up the increase in wages by productivity. While wages increased by multiple folds in the last decade, labor productivity increased by just, on average, 1.10 percent.
  • The bottom line is that this is a very unfortunate development. The faster the government resolves it, the lower will be the damage. Too bad it happed just when FDI were starting to increase after years of close disappointing performance.

Saturday, August 11, 2012

Linkages between trade and climate change

Here is how trade contributes to climate change: The reduction in average tariffs in major export destinations and the booming trade has also increased production and economic activities. This means it has also increased GHG emissions, which are the major causes of climate change as humans are mostly responsible for the increase in temperature especially in the last 50 years.

In a new research note (the above figure is extracted from the same paper), Canuto and Onder provide that three ways through with trade intensity affects emissions.

  1. Increased trade means increased production, which means increased emissions—scale effect
  2. Greater specialization on production and export of goods might lower or increase emissions depending on the production structure, i.e. if it is polluting or non-polluting economic activity (think of coal and hydroelectricity respectively)— composition effect
  3. Technology transfer might promote ‘cleaner’ ways to produce goods— technique effect

Here, 3 would reduce emissions; 2 would result in neutral outcome as, theoretically, if everyone specializes in production where they have comparative advantage, then one might focus on emission boosters and others emission reducers, leading to existing levels of emissions; 1 would increased emissions.

The questions faced by policymakers is: How to boost prosperity without increasing emissions and the lowest cost possible? Looks like 3 is the best option but then it might not be fully financially and technically viable when viewed from developing country perspective. The added cost of adopting such method of production at the country level (i.e. without international common standards) would mean decrease in price competitiveness and loss of export markets. Hence, the unwillingness of rapidly growing economies to comply with strict emission reduction standards.

Canuto and Onder argue that “trade may help mitigate climate change, as long as the temptation to resort to inappropriate trade policies is avoided.” For this, implementation mechanisms need to be very explicitly well defined in multilateral agreements. To make trade and climate change policies compatible, they say:

[…] multilateral investigations are necessary for jointly accepted trade and climate policies. Careful and detailed definitions of implementation tools and procedures are crucial in preventing the undesired protectionist consequences of trade policies.

Regarding Nepal’s emissions level, here are some stuff from a previous blog post:

As expected, emission levels are very low in Nepal. But, annual temperature change between 2045-2065 (relative to the control period 1961-2000) is projected to be higher than in even Bangladesh, China, India and the USA. Hot days and warm nights are expected to increase by 2.5 days and 8 days respectively between 2045-2065 (relative to the control period 1961-2000).

The figure below compares CO2 emissions, projected annual temperature change and projected change in hot days/warm nights (2045-2065).

And, here is how climate change will impact agriculture production and trade in South Asia:

Climate change affects agricultural yield, which in turn has a strong bearing on economy and livelihoods. It alters comparative advantage in the trade of agricultural goods. Due to an expected decline in yields, potential restrictions on food trade and food- price inflation, food insecurity might increase. Against such a backdrop, apart from attempts to reduce agricultural as well as non-agricultural emissions and smoothen trade flows, adequately funded and concerted adaptation measures have to be implemented in South Asia.

Wednesday, August 8, 2012

Nepal ranks 79 out of 105 countries in food security

The EIU has come up with a new global food security index by considering three factors (corresponding weights in brackets): affordability (40%), availability (44%), and quality and safety (16%).  The 1996 World Food Summit defines food security as the state in which people at all times have physical, social, and economic access to sufficient and nutritious food that meets their dietary needs for a healthy and active life.

Out of the 105 countries, Nepal’s overall rank is 79 with a score of 35.2 (low rank and high score are better). The overall index is composed of 25 indicators related to the three main factors. The table shows ranking of South Asian countries with the most favorable conditions for food security. Its no wonder that Nepal’s ranking is the lowest in the region in terms of affordability given that the food prices have been higher than non-food prices (see this blog post, and also this, this and this paper).

The report notes that Nepal’s major strength with regards to food security are

  • Nutritional standards
  • Volatility of agricultural production
  • Agricultural import tariffs
  • Food safety (most run by multilateral agencies and NGOs)

And major weakness are:

  • Public expenditure on agricultural R&D
  • Food consumption as a share of household expenditure
  • Gross domestic product per capita
  • Diet diversification
  • Protein quality
Rank Country Score Rank Country Score
62 Sri Lanka 47.4 61 Sri Lanka 45.6
66 India 45 70 India 38.4
75 Pakistan 38.5 78 Bangladesh 33
79 Nepal 35.2 79 Pakistan 32.9
81 Bangladesh 34.6 91 Nepal 22.6
Rank Country Score Rank Country Score
52 India 51.3 56 Pakistan 55.5
58 Sri Lanka 49.2 70 Sri Lanka 46.8
71 Nepal 43.8 73 India 44.2
81 Bangladesh 37.6 74 Nepal 42.6
82 Pakistan 37.4 92 Bangladesh 30.4

Overall, the top five countries having the most favorable conditions for food security are the US, Denmark, Norway, France and Netherlands.

Affordability is composed of sub-indicators namely food consumption as a share of household expenditure, proportion of population under global poverty line, gross domestic product per capita, agricultural import tariffs, presence of food safety net programs, access to farmer financing. In affordability, the US, Switzerland, Netherlands, Norway and Australia are top ranked countries.

Availability is composed of sub-indicators namely sufficiency of supply (average food supply and dependency on chronic food aid), public expenditure on agricultural R&D, agricultural infrastructure (existence of adequate crop storage facilities, road infrastructure, and port infrastructure), volatility of agricultural production, and political instability. In availability, Denmark, Norway, France, the US and Netherlands are the top ranked countries.

Quality and safety is composed of sub-indicators namely diet diversification, nutritional standards (national dietary guidelines, national nutrition plan or strategy, and nutrition monitoring and surveillance), micronutrient availability (dietary availability of vitamin A, animal iron and vegetal iron), protein quality, and food safety (agency to ensure the safety and health of food, percentage of population with access to portable water, and presence of formal grocery sector). In quality and safety, Israel, France, the US, Portugal and Spain are the top ranked countries.

The figure below shows the overall food security index score with respect to per capita GDP, poverty, agriculture infrastructure, and political stability risk. Nepal’s position is marked by a red dot. The yellow dots are South Asian countries. Needless to say, Nepal’s standing is quite low in all of them (except for poverty).

Crowding out of the private sector in fertilizer supply in Nepal

Here is a classic case of distortion of incentives and ‘crowding out’ of private sector in fertilizer supply.

Initially, when there was no subsidy in fertilizer, there was adequate supply in the market despite high prices. Then the Maoist-led government introduced fertilizer subsidy in 2007/08 and started increasing the subsidy amount in successive years. The supply by AICL, which is assigned to procure fertilizer and sell it at subsidized rate, undercut the market price. The private sector importers were unable to compete and survive at the prices offered to farmers by AICL through local cooperatives. Gradually, they got crowded out from the market. Since the government could not allocate adequate funds to subsidize fertilizer, AICL was unable to procure enough of it, leading to acute shortage during peak paddy planting season. AICL is able to meet only 20-25 percent of the demand for fertilizers. See this blog post for more.

Here are excerpts from an interesting piece on the same issue by BR Kaini, a former chairperson of AICL Board:

[…] Various surveys conducted in the past (ASPR in 2000/2001 and OPM in 2001/2002) estimated fertilizer usage ranges from 56.0kg to 58.0kg nutrient/hectare. But if we consider only the amount of fertilizer imported from formal sources for calculating per hectare use of fertilizers, it would be less than 30kg. This clearly indicates that about 50 percent fertilizer used in Nepal is imported from informal sources, which is both illegal and unreliable. Therefore, ensuring an adequate supply of fertilizer to farmers in the country has always been a challenge for the government.

The government has, however, changed fertilizer policies several times in a bid to ensure a smooth supply of fertilizers in the country. In this context, the government has recently re-introduced a subsidy on 25 percent chemical fertilizers of the total requirements. This new subsidy policy is now being implemented and the percentage of subsidized fertilizers is gradually increasing every year.

Nepal’s fertilizer supply growth rate is negative while the demand growth rate is over 15 percent (approximately) every year. AICL is meeting only 20 to 25 percent of the present demand of fertilizers in Nepal. Private importers have almost given up this business because of their inaccessibility to subsidy. Hence; there is a glaring gap between the projected demand and supply of fertilizers. The average supply gap is reported to be around 46 percent. In order to reduce this gap and make fertilizers available to farmers in time, some measures are imperative.

Read the full article here. Kaini also proposes some remedial measures, ranging from a study to estimate the real demand for fertilizer to domestic production and a fertilizer agreement at the regional level.

Sunday, August 5, 2012

Difference between farm price and wholesale price of fruits and veggies

Here is an interesting piece about the lawlessness in Kalimati wholesale market for fruits and vegetables. Kantipur’s Lokmani Rai reports the distortions created by YCL, the Maoist party’s youth wing, and syndicated business. 

Below is a snapshot of the difference between farm price and wholesale price of fruits and veggies.

Price difference (Rs per kilo), 2012-08-03

Farming site (Dharke, Dhading)

Wholesale market (Kalimati, Kathmandu)

Tomato 25 48 52.08
Pumpkin threads (per roll/mutha) 8 15 53.33
Pear 15 35 42.86
Bitter melon 16 35 45.71
Cauliflower 18 40 45.00
Cucumber 27 35 77.14

Other stuff from the article:

  • In the wholesale market spread over 42 ropanis, two to four dozen farmers are left to squeeze in a small corner to sell veggies. There are about 450 stalls, including 300 wholesale stalls, in Kalimati Fruit and Vegetable Market.
  • Since the last six years the YCL has grabbed 45 stalls without even paying rent and electricity bills. The owe about Rs 6.5 million to the management.
  • The rent for each stall ranges from Rs 5000 to Rs 7000 per month. But, middlemen charge as much as Rs 70000 per stall per month. Only a dozen stalls are owned by ‘real’ farmers and only 20 percent of the stalls are operated without middlemen being involved in rigging rents.

Earlier, a report about the same issue stated that farmers get 40-50 percent (similar is the case with the percentage of farm price in wholesale price in the table above) of retail price of veggies sold in Kathmandu.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 .

Furthermore, 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.