Nepal was the third largest remittance recipient in 2014

As a share of its GDP, Nepal was the third largest recipient of remittances in 2014 (see the latest Migration and Development brief by WB). Remittance inflows to Nepal amounted 29.2% of GDP in 2014. Tajikistan and Kyrgyz Republic received remittances amounting to 36.6% of GDP and 30.3% of GDP, respectively. In 2015, remittance inflows to Tajikistan and Kyrgyz Republic was $2.6 billion and $1.7 billion, respectively. In Nepal, it is estimated to be about $7 billion. 

The remittance inflows soared last year immediately after the earthquake and has been one of the most important income sources (sans faster government aid) of the earthquake-affected households. Increased inflows to finance daily household needs has been one of the most vital coping strategies of the affected households.

In 2015, Nepal received remittances from around 35 countries. The highest bilateral remittance inflows was from Qatar ($2.02 billion), followed by Saudi Arabia ($1.8 billion), India ($1 billion), UAE ($803 million) and the United States ($332 million). Qatar and Saudi Arabia absorbed about 124,368 and 98,246 migrants respectively in 2015. Malaysia was the most popular destination with 202,828 migrants in 2015, but the remittance inflows from Malaysia are lower than from other destination ($185 million). This probably might be due to the lower wages and less working hours plus the informal inflows. Or/and, the WB's estimation might have simply missed the realistic figures. For instance, remittances from Japan to Nepal are shown to be zero, but the money transfer agencies are doing brisk business (eg. Kyodai/IME Japan). Most of the countries waived remittance costs immediately after the earthquake, leading to a surge in inflows. 

Interestingly, India received $2.7 billion as remittances from Nepal in 2015. These bilateral remittance estimates are computed using data on migrant stocks, host country incomes and origin country incomes. Here is a cautionary note from the authors: "These are analytical estimates based on logical assumptions and derived from a global estimation of bilateral remittance flows worldwide. They are not actual officially reported data. The caveats attached to these estimates are: (a) the data on migrants in various destination countries are incomplete; (b) the incomes of migrants abroad and the costs of living are both proxied by per capita incomes in PPP terms, which is only a rough proxy; and (c) there is no way to capture remittances flowing through informal, unrecorded channels."

Here is a chart showing the migration and remittances trend after natural disasters.

Reality and requirements for Nepal-China accords to work

Symbolic or viable

Nepal needs serious homework to benefit from accords with China, including the important one on transit

The agreements signed between Nepal and China during Prime Minister KP Oli’s state visit has in theory ended the sole dependence on India for utilizing the transit right of a landlocked country. Furthermore, theoretically it has also increased the odds of procuring petroleum fuel and other essential supplies either from or through China. It marks a remarkable symbolic departure from the exclusive foreign, trade and transit relations Nepal has had with India for decades. The impetus for this was triggered by the supplies disruption between Nepal and India, and the latter’s cold reception and subsequent reaction to the promulgation of a new constitution last year.

Practically, it bears little significance unless Nepal upgrades existing connectivity as well as constructs new commercial custom points with China, reduces cost of doing business, establishes trust among traders on both sides, and boosts productive capacity by taking decisive action on policy and implementation fronts. 

New agreements

Nepal and China released a 15-point joint statement, which was missing during PM Oli’s state visit to India, detailing the new understanding and agreements on a range of issues. The most consequential one is the Agreement on Transit Transport, whose operational details (protocol of the agreement) are yet to be worked out. The Chinese government will also “seriously consider” to provide enhanced market access to tradable goods and start work on joint feasibility study of Nepal-China Free Trade Agreement. It also includes promises to conclude a commercial deal on the supply of petroleum products. 

Frustrated by the acute shortage of essential goods and supplies for about five months, analysts and the general public were quick to extol the agreements and are hoping for uninterrupted supplies and unhindered trade. However, operationalizing such agreements is not quick and easy. It requires serous homework, especially on our side, on policy, infrastructure, financial and procedural fronts. The usual tardiness of bureaucracy and meddling politicians will potentially slowdown implementation.

Trade and investment

The open border, state of infrastructure, business and family relations, language, free movement of labor, and the currency peg form the bedrock of Nepal’s trade relations with India. These are missing in the case with China and hence implementation will be even slower and difficult.

India accounted for 65.5 percent of total export and 63.5 percent of total import in FY2015. The figures for China are 2.6 percent and 12.9 percent, respectively. Accordingly, balance of trade with India was 62.2 percent of total trade deficit and 14.2 percent with China. The currency peg, which has remained unchanged since 1993 and has generally fared well for Nepalese economy given the fragile economic and infrastructure fundamentals, has supported the large and growing trade with India. Nepal’s top exports to India are light manufacture goods such as textiles, polyster yarns, zinc sheet, jute goods and some agro-processed items like juice. 

The Nepal India trade treaty allows for duty free access of manufacturing goods to India, a major incentive for Nepalese exporters to continue production despite the relatively high cost. Similar tariff preferences are not available with China and the duty free access it allows to its market is applicable to all least developed countries (LDCs) as per its commitment during the global trade negotiations. Nepalese exporters face a relatively high transaction cost and tough competition in the Chinese market. Tanned skin, handicraft, woolen carpet and noodles are the top export items to China. Interestingly, these light manufacture goods are produced by importing intermediate goods from India itself. This dynamics is not going to change anytime soon given the industrial base and its sophistication.

Regarding imports, the most important one is petroleum product, which accounts for about 20 percent of total import and is higher than the total value of merchandise exports. India has been the sole supplier of petroleum fuel, which is the largest import item followed by vehicles and spare parts, rice and paddy, and other machinery parts used in Nepal’s industrial sector. Meanwhile, Nepal’s top imports from China are telecommunication equipment, electrical goods and chemical fertilizers. 

Looking at the existing composition of export and import, it is not hard to notice that the basic items required by households and business community are actually imported from India and given the state of infrastructure, exchange rate regime, financial and business connectivity, it is not going to change overnight. For instance, due to the long distance and rugged terrain as well as Chinese taxes, importing fuel from China is about two times expensive than importing from India. 

If we look at investment, Indian investment is concentrated in manufacturing and energy sectors, while Chinese investment is focused on energy and services sectors. Overall, Indian investment is higher than Chinese investment. Meanwhile, Indian airlines bring in the largest number of visitors to Nepal, but the share of Indian and Chinese tourists is 17.1 percent and 15.7 percent, respectively with the latter growing at the fastest rate. Indian and Chinese foreign aid commitment is about 9.2 percent and 3.5 percent, respectively, of total aid commitment.

The other most important aspect is the open labor market in India, which absorbs a majority of the seasonal migrants from poor households from upper part of far-west and mid-west and the Terai belt. The remittances from India is an important source of the household’s expenditure. This access is missing in the case of China. Proximity-wise and cost-wise, the Indian market will continue to be more attractive than the Chinese market.

Ensuring viability

How can Nepal benefit from the renewed rapprochement with China on political-economic front, but also gradually lessen the over dependence on India? Given the state of infrastructure, trade and investment pattern, and business relations, there is little to gain in the short term. Like it or not, Nepal’s dependence on India for trade, investment and third country access will not decrease any time soon. In the medium to long run, a major effort to match the infrastructure, financial and business connectivity with China could be a game changer. 

However, this is easier said than done given the bureaucratic and political tardiness in implementing major infrastructure projects. Nepal has a lot of internal homework to do in terms of large public investment in infrastructure for enhanced connectivity, energy generation, capacity development, and country-specific export target based on Nepal’s comparative advantage.

Else, the agreements with China will bear no meaning beyond symbolism and we will continue to depend on India for pretty much everything used by households and businesses. The Chinese market is open, but is not easy to access and penetrate. Nepal is in a long haul to operationalizing the agreements with China and benefit from it.

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It was published in The Kathmandu Post, 11 April 2016

One year since the Great Gorkha earthquake

It is nearly a year since the catastrophic 7.8 magnitude earthquake struck Barpak, Gorkha. The massive earthquake on 25 April 2015 at 11:56 AM and subsequent aftershocks (two powerful 6.7 magnitude on 26 April and 7.3 magnitude on 12 May) caused widespread damage to lives and properties. About 9,000 were dead and 22,000 injured. Around 602,257 and 285,099 private houses were fully and partially damaged, respectively, forcing thousands of people to seek temporary shelter under tents and tarpaulin sheets. 

It was a natural disaster most were expecting, but the government and households were awfully unprepared— the government either had lax household and settlement policies, or/and did not enforce housing codes strictly; the households (mostly in urban areas) compromised safety standards to save money. Lessons were learnt or so the politicians, bureaucrats and the public said during the first few months of the disaster. Then the simple lessons inculcated only after a terrible tragedy evaporated in thin air as politicians paid lip service only, bureaucracy got mired in the usual maze infested with rent-seeking mentality, and the affected households did what they need to do to get by normal lives (by starting rebuilding houses on their own). It’s a sad story about reconstruction that did not happen even after a year into the disaster. Availability of funds was not a problem given the generous aid pledges during reconstruction conference.

First, a quick snapshot of the events thus far: A post disaster needs assessment (PDNA) was completed within two month. It estimated the cumulative damage and loss to be about $7.1 billion (33.3% of FY2015 GDP). The cumulative need for recovery (Building Back Better concept) was estimated to be $6.7 billion, of which almost half was needed for housing and settlement. The earthquake either destroyed or damaged cultural heritage, schools, health posts, houses, agricultural farms, irrigation system, financial sector infrastructure, communications, roads, hydroelectricity plants, livelihoods, and tourism infrastructure, among others. 

After the completion of PDNA, the government organized International Conference on Nepal’s Reconstruction (ICNR) on 25 June 2015 to raise funds for reconstruction. Bilateral and multilateral development partners made generous pledges to help the affected households get back on feet again. About $4 billion, which was larger than the estimated public sector needs, was pledged with a belief that the government would speed up the establishment of reconstruction authority and make it operational without delay. The initial expectation was that some form of relief would be distributed before the winter. This was to be followed by cash grant of about $2000 to rebuild destroyed houses so that some of the damaged houses could be rebuilt before the arrival of monsoon (June to September 2016). Then the expectation was that the government would plan resettlement where required and build back better the damaged infrastructure, which would help reinvigorate the economy, create employment opportunities and prepare the household better when the next disaster strikes (Nepal is in a seismically active zone). Alas, these remained unrealized expectations. More on this in a minute.

Briefly, 

• Total damage estimated at $7.1 billion. Total recovery needs estimated at $6.7 billion. 
• Total reconstruction aid pledged by bilateral and multilateral donors was around $4 billion.
• About 9,000 dead and 22,000 injured.
• About 602,257 and 285,099 private houses were fully and partially damaged, respectively.
• About 2,673 and 3,757 public buildings were fully and partially damaged, respectively.
• Earthquake struck in the tenth month of FY2015. The earthquake chopped 1.5 percentage points off an estimated 4.6% growth in FY2015 in a no-earthquake scenario. GDP growth and per capita GDP estimated at 3.0% and $762 in FY2015. Services sector was hit the hardest.
• An additional 700,000-982,000 people were pushed below the poverty line. This translates into an additional 2.5%-3.5% of the estimated population in 2015 pushed into poverty compared to the no-earthquake baseline scenario of about 21%. About 50%-70% are from rural central hills and mountains, where the vulnerability prior to the earthquake was already high.
• An ordinance was promulgated to establish National Reconstruction Authority (NRA) and to start reconstruction activities. 
• The FY2016 budget and monetary policy were focused on rehabilitation and reconstruction. About $910 million (3.8% of GDP) was earmarked for reconstruction related work ($740 million for the NRA and $170 million to be spent through sector ministries during the interim period, i.e. till the NRA was operational).
• The FY2016 budget included NRs200,000 (about $2000) for each household that has lost its house due to the earthquake. To address the shortage of labor for reconstruction, skill training is planned for 50,000 people in the areas of masonry, plumbing, and electrical works.

 

Now, nearly a year since the earthquake, the progress is rather disappointing. Few points:

• The political wrangle between CPN-UML and NC to appoint the CEO of NRA delayed the passage of the NRA bill. During the NC’s time in the government (coalition with CPN-UML) it had appointed a CEO. However, when the CPN-UML led the coalition government, it demanded that a new CEO be appointed. The disagreement over this persisted for about two months. Finally, after eight months the NRA bill was passed (creating too many committees and layers within it) and a new CEO was appointed. 
• The NPC handled the work of the NRA while the political infighting was ongoing. It approved many programs, which the NRA has asked ministries to get them approved again. 
• The NRA is struggling to get things done on time. Even the Prime Minister, who himself chairs the executive committee within NRA, has come down heavily on the NRA for its snail pace work.
• The NRA is not getting enough human resources and coordination from the bureaucracy to start the preliminary program, especially identification of victims and distribution of cash grant for house reconstruction. Senior bureaucrats have shown strong disinclination to transfer to NRA. 
• At the local level, the political parties are trying to usurp the cash distribution process by demanding representation in local committees, under whose recommendation victims are to be identified. This is for the sake of “ownership”. There are also cases of inflated number of victims (dummy victims).
• The CEO is not taking decisive action despite having unparalleled powers as per the NRA Act. Seeking the presence of political leaders for cash distribution in far off villages is not logical. In one case, cash distribution was delayed because some political leaders were not available.
• The earthquake affected households have been expecting the promised cash grant for housing for almost a year now. About five months of supplies disruption has not only escalated prices of housing materials, but also created severe shortage of essential supplies in the market. The raw materials used for constructing the houses are in short supply and those that are available are sold at inflated prices. In this respect, the earthquake affected households are even requesting the government to build the houses instead of grant. They are willing to contribute labor for such reconstruction. See this and this episode of BBC Sajha Sawal. 
• The trade blockade/supplies disruption negatively affected reconstruction planning and works. Its impact will linger on till the supplies and prices normalize to previous levels.
• There is inadequate coordination among I/NGOs for relief distribution. Affected households are complaining of similar goods (blankets and tarpaulin sheets, etc) being distributed by many I/NGOs. And distribution is centered in some places only. The NRA has to coordinate this in the strict sense.
• Reconstruction hasn’t started. Even a consolidated planning for reconstruction is not done yet. 
• There is a possibility that the NRA won’t be able to utilize all the funds pledged during the ICNR last year. The more delay in utilizing the funds, the higher the changes of it being restructured for use in other purposes.

The lingering impact of damages caused by the earthquake and supplies disruption will suppress potential growth and employment opportunities. 

• GDP growth in FY2016 was initially projected on the higher side because of the expectation of speedy cash distribution and initiation of reconstruction projects. This impact of the trade blockade for about five months and the delayed reconstruction activities will depress growth prospects in FY2016 and beyond. The agricultural output forecast is also disappointing. Some households in the earthquake affected districts have not cultivated their fields due to the uncertainty over housing.
• Inflation will also continue to be at elevated levels, primarily due to the lingering impact of the supplies disruption.
• There is a slowdown in the rate of overseas migration because of the cooling of demand for workers in GCC (this in turn is due to the continued low oil prices). Malaysia is implementing measures to discourage foreign workers and is also levying extra taxes on income. This means a slowdown in migration rate and ultimately deceleration of remittance inflows. It will increase the number of unemployed youths in the economy and also put pressure on external sector stability. Current account surplus will decline and if imports rebounds to normal levels, then it may as well be negative.
• Rehabilitation and reconstruction should primarily aim at increasing productivity-enhancing public capital investment. This is a key to ensuring structural transformation whereby high value-added and high-productivity sectors are more dominant than low value-added and low-productivity sectors in the medium term. Promoting agribusiness, industrial capacity, innovation and high-productivity services need to be at the center of such a reconstruction and structural transformation strategy. In addition to higher investment, this will require reforms on institutional, legal, regulatory, and capacity enhancement fronts.

Overall, the earthquake, the severe supplies disruption and the delay in starting reconstruction projects do not bode well for the economy. It a combination of misplaced politics, ineffective bureaucracy and a lost NRA (which will try to accelerate processes in the next two weeks to show that things are moving ahead despite it being slow-- a common escape argument popular in the bureaucracy!)