Does low public debt signal prudent fiscal management in Nepal?

A latest FCGO report shows that cumulative public debt is consistently decreasing in Nepal, reaching an estimated 28.7% of GDP in FY2014 (down from about 52% of GDP in FY2005). Total external and domestic debt stood at 18.0% and 10.7% of GDP in FY2014, respectively.

Generally, a declining public debt is a good sign of a sound/prudent macroeconomic situation in an economy. Recall how high level of debt in the EU and the US after the financial crisis (post-2007) resulted in harsh fiscal measures, including austerity measures, to bring down spending. Quite contrary to that Nepal’s public debt is declining rapidly.

If Nepal cannot mobilize enough revenue to finance its expenditure (both recurrent and capital), then the gap is bridged by domestic as well as external borrowing. Each year the country borrows money equivalent to about 2.0% of GDP from the domestic market. External borrowing is limited to long-term loans at concessional rates from multilateral and some bilateral donors. Overall, total stock of public debt is influenced by economic growth, which then affects revenue mobilization (positively) and jobs creation (positively).

Consider the following trends in recent years:

• GDP has been growing at below 5.0% (above 5.0% just twice in the last decade).
• Tax revenue averaged 20.9% in the last decade, reaching an estimated 16.2% of GDP in FY2014.
• Actual capital expenditure averaged just 71.3% of planned capital expenditure in the last decade. Actual  expenditure averaged about 92% of planned recurrent expenditure in the same time period.
• Fiscal balance (expenditure and net lending minus revenue and grants) averaged just minus 1.6% of GDP in the last decade. In FY2013, the country ran a fiscal surplus equivalent to 0.7% of GDP.

It is fair to deduce the following from the above four points:

• GDP growth is largely supported by monsoon-fed agricultural growth and remittance-backed services growth (mainly wholesale and retail trade, which is sustained by imported goods). Industrial sector growth has been chronically sluggish. There is hardly any discernible impact on employment generation (about 1,500 workers leave each day to work overseas). So, the prudent/sound macroeconomic situation/fiscal management as indicated by low and declining public debt (also low fiscal deficit) has little to do with economic growth and jobs creation. Structural transformation is unusual and labor productivity growth is dismal (more here and here).
• Revenue growth is largely dependent on taxes on imported goods, which are financed by remittances (reached about 28.2% of GDP in FY2014— also, merchandise trade deficit reached 30.9% of GDP in FY2014). Tax revenue on consumption and imported goods account for about 70% of total tax revenue mobilization.
• Low capital expenditure and high revenue mobilization have resulted in a large treasury surplus and the need to borrow less from domestic and external sources (grants are always welcome!). For a country like Nepal with a tremendous financing needs to plug the severe infrastructure deficit, running such a low fiscal deficit is not an optimum fiscal policy stance. Annual  infrastructure financing requirement over 2011-2020 is estimated between 8% and 12% of GDP. The country could afford to easily borrow more to finance higher capital expenditure in critical infrastructure projects. However, this option is constrained by the low and receding expenditure absorption capacity. (Lets not even touch on the quality of such spending in this blog post).

It is leading to two unreasonable developments on public debt front (based on the level of income per capita of Nepal):

1. The low fiscal deficit means less borrowing, and hence accumulation of low outstanding debt. External borrowing is declining even when generous concessional terms are being offered. Lately domestic borrowing is mainly used for managing liquidity in the economy (this should not be treated as a monetary instrument to manage liquidity!)
2. The high revenue growth and low expenditure have also resulted in substantial government savings, which are being used to service debt payments. Total debt service payments averaged 17.9% of total revenue over FY2007-FY2014. Not only interest payments, the country is rapidly repaying principal amount as well. Over the same period, principal and interest payments averaged 12.4% and 5.5% of total revenue, respectively. External debt service payments averaged 10.3% of total exports of goods and non-factor services in the last decade.

Note that low fiscal deficit means slowdown in the accumulation of public debt, and high principal and interest repayment means fast offloading of debt payment obligations. Consequently, this leads to lower stock of outstanding public debt, which in turn is interpreted as a sign of sound/prudent macroeconomic situation/management (despite sluggish GDP and income growth rate, and high unemployment).

The low public debt also affects the debt sustainability analysis, which showed Nepal faced a low risk of debt distress in 2014. In 2012 DSA, Nepal was categorized as facing moderate risk of debt distress. The DSA is used mainly by multilateral development banks to determine if a low income country needs either concessional/soft loans only or grants only or a combination of both. They conduct country economic, social, policy and institutional reform and capacity assessments independently and the resulting composite score (threshold) is ultimately evaluated against the various debt scenarios/simulations and the corresponding debt distress classification. Now that Nepal has been categorized as facing low risk of debt distress, multilateral development banks are more inclined to providing concessional/soft loans only (and the allocations/commitments may increase depending on the public expenditure performance of the country).

So, there is no point boasting about sound/prudent macroeconomic situation and at the same time whining about losing grants by multilateral development banks. Nepal has to efficiently and optimally manage fiscal and macroeconomic situation.

HAPPY NEW YEAR 2015!

New paper: Inclusive Economic Growth in Nepal

Below is the abstract of a recent paper published in Journal of Poverty Alleviation and International Development, Vol.5, No.2, pp.77-116 (authored by yours truly!) :) 

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Inclusive economic growth is one of the most prominent development agendas. However, a systematic evaluation of progress toward greater inclusivity in the developing countries, and the required strategic foci for the future, remain largely absent from debates in both the academic and policymaking spheres. This paper applies and complements the Asian Development Bank’s inclusive economic growth framework by including an intra-country analysis, and in particular, the convergence and divergence across a range of relevant indicators among consumption quintiles in Nepal. It finds three stark disparities: (i) Nepal’s GDP growth and per capita growth remain the lowest in South Asia; (ii) the slow growth rate has failed to create adequate job opportunities, resulting in large-scale out-migration of workers from all consumption quintiles; and (iii) despite the overall inclusive pattern of growth over the last decade, there remains large disparities in the reach and utilization of social services and economic opportunities among the poorest quintiles. In addition, the pattern of growth could be made more inclusive by creating new opportunities and ensuring that the existing ones are shared more proportionately with the bottom quintiles.

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Illicit financial outflows from Nepal over 2003-2012

A latest report from Global Financial Integrity (GFI) ranks Nepal 68 out of 145 economies in terms of average annual illicit financial flows— the cross-border movement of money that is illegally earned, transferred, or utilized— over 2003-2012. On an average, from Nepal, between 2003 and 2012, US$755 million was illegally earned, transferred, or utilized.

Illicit financial outflows has drastically reduced lately, largely due to lower import over-invoicing. In 2012, Nepal ranked 102 out of 151 economies, with illicit financial outflow equivalent to US$106 million. Here is an earlier blog post on previous reports. Illicit capital flows are detected by analyzing misinvoicing of external trade transactions and leakages from the balance of payments.

Cumulative illicit hot money outflows and trade misinvoicing were equivalent to US$228 million and US$7,254 million, respectively. Total illicit outflows between 2003 and 2012 was US$7,542 million. The largest illicit outflows came from trade misinvoicing (export over-invoicing and import over-invoicing). Import under-invoicing and export under-invoicing were not recorded. Over 2003-2012, cumulative import over-invoicing and export over-invoicing were US$7.254 billion and US$1.451 billion, respectively. This might be one of the reasons for the sudden slowdown in the growth of remittances in recent months of FY2015. Any downward trend in the growth of remittance inflows creates far reaching ripple effects across all sectors (real, fiscal, monetary and external).

Over-invoicing imports is common and is mostly attributed to high taxes (reduces corporate profits) and incentives to benefit from foreign exchange transaction in the black market. Over-invoicing exports is not that common and is mostly done to receive higher government subsidies (like in the case of cash incentives for exports).

In South Asia, India saw the largest illicit financial outflows, followed by Bangladesh, Pakistan, Sri Lanka, the Maldives, Bhutan, and Nepal. Overall, US$991.2 billion flowed illicitly out of developing and emerging economies in 2012.

Illicit financial outflows (HMN+GER), US$ million
Country	2008	2009	2010	2011	2012
Afghanistan	0	0	0	0	0
Bangladesh	1,229	1,063	672	593	1,780
Bhutan	0	0	0	44	168
India	47,179	29,002	70,236	86,002	94,757
Maldives	55	38	62	69	185
Nepal	854	1,551	1,883	645	106
Pakistan	51	0	729	0	405
Sri Lanka	0	0	881	337	349

Illicit/unrecorded money moves across borders under the following three forms:

• Corrupt: Proceeds of bribery and theft by government officials
• Criminal: Proceeds of drug trading, human trafficking, counterfeiting, contraband, and myriad forms of additional activities
• Commercial: Proceeds arising from import and export transactions conducted so as to manipulate customs duties, VAT taxes, income taxes, excise taxes, or other sources of government revenues

Here is how GFI computes the illicit flows:

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In analyzing illicit financial flows (IFFs), GFI utilizes sources of data and analytical methodologies that have been used by international institutions, governments, and economists for decades. Basically, these data sources and methodologies are providing information on gaps—gaps in balance of payments data and gaps in trade data. Where recorded sources and uses of funds in balance of payments data do not match, the difference is net errors and omissions, indicating an inflow or outflow that was not recorded. Where bilateral trade data does not match (after adjusting for freight and insurance in the data of the importing country) this indicates re-invoicing of transactions between export from one country and import into another country.

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GFI recommends countries to:

• Comply with all of the Financial Action Task Force (FATF) Recommendations to combat money laundering and terrorist financing
• Require meaningful confirmation of beneficial ownership in all banking and securities accounts
• Automatic exchange of financial information
• Require multinational corporations to publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis, as a means of detecting and deterring abusive tax avoidance practices
• Boost customs enforcement by equipping and training officers to better detect the intentional misinvoicing of trade transactions (it accounts for 77.8% of all illicit flows).

Impact of inequality or equality on growth…it depends

Dani Rodrik on inequality: there is no universal evidence that inequality jeopardizes growth (alternatively, equality supports growth). It all depends on other supporting factors (the root causes may not be known or cannot be factored in econometric analysis), and there is no iron law.

Excerpts from the article:

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The belief that boosting equality requires sacrificing economic efficiency is grounded in one of the most cherished ideas in economics: incentives. Firms and individuals need the prospect of higher incomes to save, invest, work hard, and innovate. If taxation of profitable firms and rich households blunts those prospects, the result is reduced effort and lower economic growth. Communist countries, where egalitarian experiments led to economic disaster, long served as “Exhibit A” in the case against redistributive policies.

In recent years, however, neither economic theory nor empirical evidence has been kind to the presumed tradeoff. Economists have produced new arguments showing why good economic performance is not only compatible with distributive fairness, but may even demand it.

For example, in high-inequality societies, where poor households are deprived of economic and educational opportunities, economic growth is depressed. Then there are the Scandinavian countries, where egalitarian policies evidently have not stood in the way of economic prosperity.

[…]Economics is a science that can claim to have uncovered few, if any, universal truths. Like almost everything else in social life, the relationship between equality and economic performance is likely to be contingent rather than fixed, depending on the deeper causes of inequality and many mediating factors. So the emerging new consensus on the harmful effects of inequality is as likely to mislead as the old one was.

Consider, for example, the relationship between industrialization and inequality. In a poor country where the bulk of the workforce is employed in traditional agriculture, the rise of urban industrial opportunities is likely to produce inequality, at least during the early stages of industrialization. As farmers move to cities and earn higher pay, income gaps open up. And yet this is the same process that produces economic growth; all successful developing countries have gone through it.

In China, for example, rapid economic growth after the late 1970s was associated with a significant rise in inequality. Roughly half of the increase was the result of urban-rural earnings gaps, which also acted as the engine of growth.

Or consider transfer policies that tax the rich and the middle classes in order to increase the income of poor households. Many countries in Latin America, such as Mexico and Bolivia, undertook such policies in a fiscally prudent manner, ensuring that government deficits would not lead to high debt and macroeconomic instability.

[…]It is good that economists no longer regard the equality-efficiency tradeoff as an iron law. We should not invert the error and conclude that greater equality and better economic performance always go together. After all, there really is only one universal truth in economics: It depends.

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Labor productivity and structural transformation in Nepal (plus LDCs)

The latest LDC Report 2014 focuses on the linkages between structural transformation, economic growth and human development. It argues that economic growth “must be accompanied by structural transformation and the creation of decent jobs in higher-productivity activities”. It has came up with a new term: "LDC paradox", which refers to “the failure of the MDGs to recognize the need for a policy framework that generates transformative growth, and in the inability of the LDCs to achieve structural transformation”.

The report underscores that the post-2015 agenda (Sustainable Development Goals) should focus on structural transformation of LDCs towards a modern and diversified economy (higher value-added sectors and more knowledge-intensive activities) in order to reverse the decline in labor productivity and to increase employment. It recommends three specific policy measures:

• Resource mobilization (to generate financing for productive public and private investment)
• Industrial policy (to direct those resources into sectors and activities that promote structural transformation)
• Prudent macroeconomic framework/policies(to support structural transformation rather than impeding it— mainly, public investment, credit, real exchange rate, and domestic demand)

Labor productivity growth is a crucial factor in determining the pace and pattern of economic growth— essentially a structural transformation (changes in composition of output, employment, exports and aggregate demand). Labor productivity is generally higher in countries that export more manufactured and mixed goods— reflective of the structure of the economies they have. Countries with sluggish growth tend to export more food and agriculture products.

Economic performance is based on two interrelated processes: labor productivity and structural change. Labor productivity growth is determined by: (i) innovations within sectors (increases in capital, new technology and knowledge), and (ii) shift of labor across sectors (from lower to higher productivity activities). Labor productivity growth can be decomposed into growth of labor productivity by sector and the growth of employment (demographic and labor market components).

For countries like Nepal economic growth should be characterized by a dynamic transformation of sectors and employment share— as opposed to the growth being propped up by monsoon rains and remittance-induced demand for imported goods. Nepal needs to boost productivity within sectors (shifting from lower value added agriculture and services activities to higher value added activities within the sectors), and productivity across sectors (shifting production/employment structure from agriculture to industry before jumping into services sector— this is the proven path for sustained rise in income per capita).

The report decomposes aggregate labor productivity into three main components:

• Direct productivity growth effect (changes in aggregate output per sector due to increases in productivity within sector)
• Structural/reallocation effect (changes due to movements of labor between sectors with different levels of output per capita)
• Terms-of-trade effect (changes due to relative output prices between sectors)

Manufacturing sector is important for higher productivity gains emanating from intersectoral reallocation of labor. Also, higher aggregate output per worker is strongly associated with higher productivity in the industrial sector, and with the transfer of workers to this sector.

Here is how Nepal stands relative to other LDCs in South Asia (and People’s Republic of China, which is not a LDC but has transformed is economy drastically within a generation’s time): 

• Productivity gains within sectors contributed more to aggregate labor productivity growth than structural effect (this is expected because due to the lack of domestic employment opportunities there is a large-scale out migration of workers each year, contributing workers’ remittances equivalent to about 28% of GDP, which finance either the imported goods traded in services sector or nontradable activities within the sector). Bhutan had more productivity growth coming from structural/reallocation effect because of the large shift of workers to industry sector (electricity falls under this) after the hydropower boom.
• Nepal’s labor productivity growth is low compared to the regional economies (see the dots in the above chart) .
• In direct productivity growth effect and reallocation effect, services sector contributed the most.
• Relocation effects in agriculture is negative, reflecting its reduced share in employment because of the shift of workers to other high productivity sectors. It shows trade-offs between employment generation and labor productivity (inverse).

• The highest level of employment growth is registered in services sector. However, these are mostly informal in nature with severe lack of productive capacities at the firm level (low level of capital and information technology). Employment growth in services sector is broadly at the expense of gains in labor productivity. The reallocation effects (agriculture to services sectors) added to overall productivity growth because average productivity is higher in services sector (even if underemployment is high).
• Industry sector productivity (both within and across) is considerably low (most probably due to the crippling binding supply-side constraints).

More on structural transformation in Nepal here (interested folks can follow the links within the blog post as well). Briefly, Nepal has ended up with an unusual structural transformation. Most of the GDP growth is coming from non-tradable sectors such as construction, retail and wholesale trade and real estate and housing. The demand for the services sector activities are in turn driven by public expenditure and remittances (see the rise in services sector value added while a premature deindustrialization in the chart below). Tradable sectors such as manufacturing and high-value agriculture activities are not prominent. Worse, more and more workers are shifting to informal activities in services sector until they find jobs overseas. Addressing this will be one of the major economic challenges for the Constituent Assembly II, if the country wants to realize its goal of graduating from LDC status by 2022.

Highlights of the 18th SAARC Summit Declaration

The 18th SAARC Summit was held in Kathmandu on 26-27 November 2014. The most prominent regional feature was the agreement on the framework on energy cooperation. Motor vehicles and regional railways agreements are to be finalized within three months.

Excerpts from the declaration:

• Commitment to achieve South Asian Economic Union (SAEU) in a phased and planned manner through a Free Trade Area, a Customs Union, a Common Market, and a Common Economic and Monetary Union
• Effectively implement the existing preferential facilities under SAFTA and SATIS (especially for Least Developed and Landlocked Member States)
• Accelerate free trade in goods and services in the region putting into operation simplified and transparent rules of origin; implementation of trade facilitation measures; harmonization of standards relating to Technical Barriers to Trade (TBT) and sanitary and phyto-sanitary measures; harmonized, streamlined and simplified customs procedures; elimination of non-tariff and para-tariff barriers; and smooth and efficient transit and transport facilities
• Signing of the SAARC Framework Agreement for Energy Cooperation (Electricity)
• Identify regional and sub-regional projects in the area of power generation, transmission and power trade, including hydropower, natural gas, solar, wind and bio-fuel, and implement them with high priority with a view to meeting the increasing demand for power in the region
• Initiate an Inter-Governmental process to appropriately contextualize the Sustainable Development Goals (SDGs) at the regional level
• Eliminate the threshold criteria from the SAARC Food Bank Agreement so as to enable the Member States to avail food grains, during both emergency and normal time food difficulty
• Collaborate and cooperate on safe, orderly and responsible management of labour migration from South Asia to ensure safety, security and wellbeing of their migrant workers in the destination countries outside the region
• India to develop and launch a satellite dedicated to SAARC Countries
• Collaboration and engagement among public authorities and private stakeholders in the Member States to lower telephone tariff rates for facilitating greater contacts among the people of the region and called for rationalization of the tariff structures
• Effectively implement SAARC Action Plan on Tourism (2006) particularly through initiating appropriate public-private collaboration
• Hold henceforth the meetings of the SAARC Summit every two years or earlier

Meanwhile, Nepal and India signed 12 agreements/MoUs on the sidelines of the summit. These include:

• MoUs on tourism, traditional medicines and youth exchange
• Motor Vehicle Agreement
• MoU on PDA for Arun III
• Twin City Agreements between Ayodhya-Janakpur, Kathmandu-Varanasi, and Lumbini-Bodh Gaya

Historical path and growth forecast: Regression to the mean

Lant Pritchett and Lawrence Summers argue that growth forecasters should taken into account the potential of a slowdown in China and India, especially their growth averaging towards the mean based on both internal (institutions) and external conditions (commodity prices, climate change, geopolitics, etc).

Excerpts from the paper:

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Regression to the mean is the single most robust finding of the growth literature, and the typical degrees of regression to the mean imply substantial slowdowns in China and India. relative even to the currently more cautious and less bullish forecasts.

India and, even more so, China are experiencing historically unprecedented episodes of growth. China’s super-rapid growth has already lasted three times longer than a typical episode and is the longest ever recorded. The ends of episodes tend to see full regression to the mean, abruptly.

It is impossible to argue that either China or India has the quality institutions that have been associated with the steady dynamic of growth in the currently high productivity countries. The risks of sudden stops are much higher with weak institutions and organizations for policy implementation. China and India have very different modalities of this risk, but both have tricky paths to continued prosperity.

We suggest several implications of these conclusions. First, there will be a strong tendency to assume that, if growth slows substantially in China or India, it will represent an important policy failure. This is not right. Regression to the mean in a decade or so is the rule, not the exception. What would require much more explanation would be continued rapid growth, which would be very much outside the general run of experience. Second, those making global projections should allow a very wide confidence interval with respect to growth for countries whose current growth rates are far from the mean. Given the sensitivity of commodity demands in particular to growth rates in Asia, this suggests substantial uncertainty about the medium-term path of commodity prices. In the same way, forecasts of global energy use and climate change impacts should also recognize the possibility of discontinuities in Asia. Third, much geopolitical analysis has focused on the implications of a rising China, and certainly Chinese international relations theorists have extensively studied past rising powers. Contingency planning should also embrace scenarios in which Chinese growth slows dramatically, presumably bringing with it a range of domestic and international political implications.

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Minimum wage and productivity in Nepal and South Asia (plus China)

Here is an update on the minimum wage and labor productivity in South Asia (plus China). In 2012, in a series of blog posts (here and here— also, here and here), I indicated that the minimum wage in manufacturing sector in Nepal is the highest in South Asia. The latest updated data (sourced from DB2015) shows India’ and Pakistan’s minimum wages above Nepal’s.

At US$95 per month in 2014, the minimum wage in Nepal was the third highest in South Asia. The minimum wage in India and Pakistan was $142 per month and $110 per month, respectively. In 2012, Nepal had the highest minimum wage in South Asia. Minimum wage in Nepal has drastically increased from $32.3 in 2007— a 194% growth over 2007-2014.

Relative to Nepal’s level (=100 in the chart below), minimum wages in China, India, and Pakistan are higher. Sri Lanka had higher minimum wage than Nepal in 2013.

However, productivity has not kept pace with the increase in minimum wage. Compared to 2007, labor productivity (measured by the ratio of minimum wage to value added per worker – not a perfect indicator, but its okay for indicative purpose!) in Nepal decreased by 18%. In fact, India and Pakistan also saw a decline in labor productivity over the same period. Sri Lanka and China saw increase in labor productivity. The ratio of minimum wage to value added per worker in 2007 was 0.8, which increased to 0.9 in 2014 (a higher value indicates lower labor productivity). Note that value added per worker is also affected by quantity and quality of other inputs, particularly raw materials and physical and social infrastructures (electricity, transport, educated workforce, healthcare, etc). The average value added per worker is the ratio of an economy’s GNI per capita to the working-age population as a percentage of the total population.

Nepal’s labor productivity is the lowest in South Asia. The chart below shows South Asia’s (plus China’s) labor productivity relative to Nepal’s in 2013 and 2014. All of them have better productivity than Nepal’s. India’s and Nepal’s labor productivity seems to be converging lately. This opens up an opportunity to relocate manufacturing firms to Nepal as wages are lower here and productivity is pretty much similar. IF the other inputs listed above are reasonably supplied in Nepal (plus reasonable degree of political stability), there is no reason to doubt that an increasing number of firms may opt to base their manufacturing plants here.

Lower (competitive) wages and higher labor productivity attract domestic and foreign investment, which help to boost jobs creation and economic growth. Nepal’s formal sector labor market suffers from a high degree of unionism (often politically motivated and at times violent), which has resulted in the closure of many domestic as well as multinational firms. Overall, manufacturing sector has been weakening over the past several years. Its share of GDP declined to an estimated 5.6% in FY2014 from 8.2% of GDP in FY2002. The average growth rate has been a mere 3.2% in the last five years. Here is a related blog post on this issue.

Doing Business 2015: Nepal ranked second in South Asia (globally, 108 out of 189 economies)

In its latest Doing Business 2015: Going Beyond Efficiency, the WBG has ranked Singapore as the top economy in terms of ease of doing business. The other top ranked economies are New Zealand, Hong Kong SAR (China), Denmark, the Republic of Korea, Norway, the United States, the United Kingdom, Finland, and Australia.

The report ranks economies based on performance in ten indicators: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. This data for this year’s report covered regulations measured up to 01 June, 2014.

Tajikistan was the global top improver in 2014. The other economies that have made the most progress in several areas of regulation last year were Benin, Togo, Côte d’Ivoire, Senegal, Trinidad and Tobago, the Democratic Republic of Congo, Azerbaijan, Ireland and the United Arab Emirates.

Doing Business in South Asia

In South Asia, Sri Lanka made the most progress and was ranked 99 out of 189 economies, followed by Nepal (108), the Maldives (116), Bhutan (125), Pakistan (128), India (142), Bangladesh (173) and Afghanistan (183).

The regional average (rank) is 134 in DB2015.

Rankings could go up or down depending on progress in business regulatory environment, progress by other economies (based on data revisions and methodology) and addition of new economies in the ranking (last year Libya, Myanmar, San Marino, and South Sudan were added).

This year 7 changes were made: (i) DB ranking is based on distance to frontier scores; (ii) data of 2 cities were taken into consideration for economies with over 100 million population; (iii) methodology was revised for getting credit indicator; (iv) protecting investors indicator was changed to protecting minority investors and its scope expanded; (v) resolving insolvency indicator has been expanded; (vi) calculation of the distance to frontier score for paying taxes indictor was changed; and (vii) employing workers indicator was changed to labor market regulations and scope for this expanded. These tend to affect the overall score and hence the rankings. So, this year’s ranking is comparable to last year’s only (DB 2014 ranking was revised based on DB 2015 methodology). However, the scores for these indicators and sub-indicators may still be safely compared to DBs of previous years.

Next year’s DB 2016 will cover quality measures as well (on top of the regulatory measures covered right now), including the quality of building regulations, the reliability of electricity supply, the quality of land administration system, the postfiling process of paying taxes, and the quality of judicial administration system.

Nepal in DB 2015

In terms of ease of doing business, Nepal ranked 108 out of 189 economies. In DB 2014, Nepal ranked 109 out of 189 economies. Between DB2014 and DB2015, Nepal initiated one reform in starting a business, which led to improvement in its ranking in that category by 35 notches. Specifically, Nepal made dealing with construction permits easier by implementing a new electronic building permit system. This pushed up Nepal’s ranking in dealing with construction permits indicator to 91 from 126 in DB 2014. In registering property indicator as well, Nepal’s ranking improved by 2 positions (up from 29 in DB 2014 to 27 in DB 2015). The ranking in all other indicators has gone down.

Doing Business 2015: NEPAL
DB rank 2015	108	out of 189 economies
DB rank 2014	109	out of 189 economies
Indicator ranking
Topics	DB 2015 Rank	DB 2014 Rank	Change in Rank
Starting a Business	104	97	-7
Dealing with Construction Permits	91	126	35
Getting Electricity	85	78	-7
Registering Property	27	29	2
Getting Credit	116	111	-5
Protecting Minority Investors	71	70	-1
Paying Taxes	126	120	-6
Trading Across Borders	171	169	-2
Enforcing Contracts	134	134	No change
Resolving Insolvency	82	78	-4

In South Asia region, Nepal has the best ranking (globally 27) in registering property. It requires 3 procedures, 5 days and 4.8% of property value to register a property in Nepal. The regional average is 6.4 procedures, 99.5 days, and 7.2% of property value.

Registering Property
Indicator	Nepal	South Asia	OECD
Procedures (number)	3	6.4	4.7
Time (days)	5	99.5	24
Cost (% of property value)	4.8	7.2	4.2

In trading across borders indicator, Nepal has the lowest rank in the region.

Trading Across Borders
Indicator	Nepal	South Asia	OECD
Export
Documents to export (number)	11	8	4
Time to export (days)	40	33.4	10.5
Cost to export (US$ per container)	2,545	1,923	1,080
Cost to export (deflated US$ per container)	2,545	1,923	1,080
Import
Documents to import (number)	11	9	4
Time to import (days)	39	34.4	9.6
Cost to import (US$ per container)	2,650	2,118	1,100
Cost to import (deflated US$ per container)	2,650	2,118	1,100

The reform measures initiated by Nepal since 2010 are as follows:

• DB 2015: Nepal made dealing with construction permits easier by implementing a new electronic building permit system.
• DB 2014: Nepal made starting a business easier by reducing the administrative processing time at the company registrar and by establishing a data link between agencies involved in the incorporation process.
• DB 2012: Nepal improved oversight and monitoring in the court, speeding up the process for filing claims.
• DB 2010: Nepal made transferring property easier by reducing the registration fee. Nepal improved access to credit information by starting to distribute historical data.

Distance to frontier

The report also provides scores for ‘distance to frontier’, which benchmarks economies to the frontier in regulatory practice. In other words, it measures the absolute distance to “the best performance achieved by any economy on each Doing Business indicator since 2005 or the third year in which data for the indicator were collected. The measure is normalized to range between 0 and 100, with 100 representing the frontier.”

When compared across years, the distance to frontier measure shows how much the regulatory environment for local entrepreneurs in each economy has changed over time in absolute terms, while the ease of doing business ranking can show only relative change. DB 2015 ranking is based on distance to frontier score.

An economy’s distance to frontier is indicated on a scale from 0 to 100, where 0 represents the lowest performance and 100 the frontier. For example, a score of 60 in DB 2014 means that an economy was 40 percentage points away from the frontier constructed from the best performances across all economies and across time. A higher score in DB 2015 (say 70) indicates an improvement.

Compared to DB 2014, in DB 2015, in Nepal, there was improvement in starting a business, dealing with construction permits, getting electricity, registering property, and trading across borders. There was no change in all other indictors.

Distance to Frontier (% points)
Topics	DB 2015	DB 2014	Change in DTF
Starting a Business	83.01	82.71	up 0.30
Dealing with Construction Permits	71.83	64.87	up 6.96
Getting Electricity	76.07	75.67	up 0.40
Registering Property	83.08	83.03	up 0.05
Getting Credit	35	35	No change
Protecting Minority Investors	56.67	56.67	No change
Paying Taxes	66.52	66.52	No change
Trading Across Borders	36.08	36.07	up 0.01
Enforcing Contracts	49.65	49.65	No change
Resolving Insolvency	45.41	45.41	No change

Finally, Kaushik Basu reflects on being a consumer of DB (as Chief Economic Adviser to the Indian government) and producer of DB (as Senior VP and Chief Economist at the WB):

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What I suspected when I was a user of Doing Business, and now know, is that a significant number of the top 30 economies in the ease of doing business ranking come from a tradition where government has had quite a prominent presence in the economy, including through the laying out of rules to regulate different dimensions of the activities of the private sector. However, all these economies have an excellent performance on the Doing Business indicators and in other international data sets capturing various dimensions of competitiveness. The top-performing economies in the ease of doing business ranking are therefore not those with no regulation but those in which governments have managed to create rules that facilitate interactions in the marketplace without needlessly hindering the development of the private sector. Ultimately, Doing Business is about smart regulations that only a well-functioning state can provide. The secret of success is to have the essential rules and regulations in place—but more importantly to have a good system of clearing decisions quickly and predictably, so that small and ordinary businesses do not feel harassed.

[...] Another common criticism is implicit in the question, If economy x is growing fast, why does it not rank high on the ease of doing business? First, if the ease of doing business ranking were constructed in such a way that it had a very high correlation with GDP or GDP growth, there would be little reason to have a new ranking. We would be able to get our result from looking at GDP or GDP growth tables. Second, this question is often rooted in the common mistake, already noted, of treating the ease of doing business ranking as an all-encompassing measure of an economy’s goodness. It is not. An economy can do poorly on Doing Business indicators but do well in macroeconomic policy or social welfare interventions. In the end, Doing Business measures a slender segment of the complex organism that any modern economy is. It attempts to capture a segment that is representative of other general features of the economy (and effort will be made to improve on this), but the fact remains that an economy can undo the goodness or badness of its performance on Doing Business indicators through other policies.

[...]A poor score should alert a government that it ought to examine its regulatory structure. On the basis of this it may decide to change some regulatory features and policies in ways that may not even directly affect its ease of doing business ranking but nevertheless improve the economy’s performance. If this happens, and there is some evidence that it does, the Doing Business report would be serving its purpose.

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