Wednesday, April 18, 2012

Links of Interest (2012-04-18)–Nepali economy special

GDP growth in FY2011/12 estimated to be 4.63 percent. This is short of the 5 percent target set while rolling out the budget for the fiscal  year. The estimate computed by CBS is based on first eight months data of this fiscal year. Other highlights:

  • Per capita income expected to grow by 3.2 percent in the current fiscal year, reaching $735
  • Domestic savings to be 9.98 percent of GDP (8.62 percent of GDP in 2010/11 and 11.5 percent of GDP in 2009/10)
  • Consumption at 90 percent of GDP
  • Agriculture sector to grow at 4.86 percent, thanks to increased production of cereal crops and other agri produces. Paddy production to go up 13.72 percent. Production of fruits, meat and dairy products, and other livestock products are estimated to go up by 5.13 percent, 3.01 percent and 5.99 percent, respectively
  • Contribution of agriculture and forestry sector to GDP is expected to fall to 34.78 percent this fiscal year, from last year´s 36.54 percent.
  • Manufacturing sector´s (projected to expand by mere 1.28 percent) contribution to GDP is also expected to remain unchanged at 6.17 percent. The low growth rate is expected due to a fall in production of clothing items and shoes made of fabric, leather and synthetic, plywood and dairy products.
  • Construction sector which is expected to contract by 0.07 percent this fiscal year. Its contribution to the total GDP is also expected to fall to 6.73 percent this fiscal year from 6.93 percent of last fiscal year.
  • Contribution of wholesale and retail trading to the GDP is expected to go up to 14.24 percent from 14.16 percent of previous year, with expansion of the sector by 3.79 percent.
  • Gross national disposable income to stand at Rs 1.97 trillion this fiscal year, up from Rs 1.68 trillion of last year.

Few points on the state of the economy this year:

“The claim of economic revolution by this government is pure hogwash. The economy is stuck in the same mess as it was before. The government has done nothing substantial to put it on the path of high growth, let alone address the short term constraints. The recent good news about bumper agriculture production, improved reserves and BoP surplus has nothing to do with policy changes by this government. Importantly, improvement in these indicators alone does not indicate an improved macroeconomy set to welcome more investment and ready to brace growth rate of over 5 percent.”

  • Despite the improvement in some macro and social indicators, in terms of employment-generating productive economic activities and factors that can propel growth rate sustainably above 5 percent, we are still in the same mess. Inflation is still high; banking troubles are still there albeit in latent state; trade deficit is still widening and exports are faltering; policy implementation paralysis has clouded the relatively fine policies; market distortions are costing heavily to consumers, the industrial sector clamor for relief from several constraints remain unaddressed; labor unions are still running the running the full show (some of their demands are legit even though there is fear among investors that there will be a disconnect between wages and productivity; there is no progress on structural transformation and the economy is still supported by remittances, which has its own costs and benefits with the former weighing heavy on the latter; inadequate supply of power to industries, power cuts, and resistance to hydropower projects on grounds of nationality and other issues is still there; the northern parts of Mid West and Far West development regions continue to face food insecurity; a majority of the state-owned enterprises has huge arrears, financially and administratively bankrupt and are in need of either purge or drastic revival.
  • Domestic savings are too low, which also hints at the low level of domestic investment. FDI inflows are not that encouraging. Let us hope that there will be substantial investment commitment (forget about immediate disbursement) during NIY 2012/13.
  • BoP and current account surpluses and huge forex reserves don’t mean anything if these are due to external factors rather than internal factors driven by high industrial production, high exports and a gradual move toward structural transformation.
  • Budget deficit will widen this year and next year as well, thanks to payments to voluntarily retired PLA fighters and expenditure growth being higher than revenue growth.
  • The increase in employment in services sector (and its contribution to GDP) is not related to domestic sources of demand at the core. The huge remittance inflows have increased purchasing power of people and the demand for imported goods (both durables and nondurables). It means a robust trading business, as signified by rising imports (apart from petroleum products). It also means an increase in growth of retail services.
  • Good sings are emerging though: NIY 2012/13 should be a milestone if it is run smoothly with adequate manpower, ideas and funds. There is no room for satisfaction from partial success like that during NTY 2011. The US$.18 billion West Seti hydropower project is a good start. More credible foreign firms should be given green light to start big hydropower projects (no hullaballoo on grounds of nationalism and neocolonialism, please). Target should be on three fronts: agro-processing industries to propel interim period structural transformation, big infrastructure projects to address binding constraints to growth, and employment-generating activities (both labor intensive and sophisticated activities) to entice youths.

Four districts (Manang, Humla, Mugu and Dolpa) still not connected by road

Industrial production in Morang down by 80 percent due to more power cuts arising from decline in power imports from India and the NOC’s refusal to sell required amount of diesel to run generators.

MoF is struggling to find enough funds for PLA fighters who opted for retirement instead of joining Nepal Army. [The budget deficit is going to increase for sure and the MoF will compel other ministries to channel ‘budget surplus’—unspent money—to give it to the PLA fighters who opt for voluntary retirement.]

Prevailing disenchantment among Maoist combatants on integration, which suddenly raised the number of voluntary retirements, has immediately inflated State´s liability, forcing the government to arrange additional Rs 2 billion from initial calculations of around Rs 5.75 billion to send the combatants home. Considering the initial estimates, Ministry of Finance (MoF) had released Rs 1.97 billion to Peace Ministry to initiate the voluntary retirement of 7,371 who chose it initially. But amid turn of situation, MoF released additional Rs 1.50 billion over the past few days to manage the cost. “We released Rs 1 billion on April 12 and also disbursed additional Rs 500 million on April 15,” said Finance Secretary Krishna Hari Baskota. He informed Republica that MoF managed the fund from budget allocated under miscellaneous heading and also by pooling fund from different ´not so important´ headings. But at the same time he added, the release has exhausted all the fund MoF had at its disposal.

With UCPN Maoist pushing hard for integration of 6,500 combatants in the Nepal army, the government had calculated that just around 10,550 combatants would opt for voluntary retirement. Furthermore, as 9,705 combatants continued to stay in the cantonment eyeing their chances of integration, the government had estimated it will need only around Rs 4 billion to start with for integration. Following such calculation, MoF had immediately disbursed Rs 1.97 billion to the Peace Ministry, which was half of the total retirement cost, for fulfilling the liability in two annual tranches as promised. However, when the integration process actually began, 13,671 combatants have already chosen to go for voluntary retirement by Tuesday.