Sunday, November 5, 2017

Doing Business 2018: Nepal ranked 105 and India 100

Doing Business 2018 report ranks Nepal 105 out of 190 economies in terms of ease of doing business. In South Asia, Nepal ranked third, after Bhutan (75) and India (100). Nepal’s distance to frontier, which is the relative distance between Nepal’s score and the best preforming economy in a given indicator, score (59.95) is higher than the average for South Asia (53.64).

Due to change in methodology the rankings are not comparable by year, but the distance to frontier (DTF) score can be compared. DTF ranges from 0 to 100 and a score close to 100 is better. Bhutan improved its DTF score in 2014 and has continued to maintain it at the highest level in South Asia. Similarly, the recent push to ease business regulations in India (GST and construction reforms are not reflected in DB2018) paid off as well.

In South Asia, Bhutan has the best overall environment for doing business. India got a big boost in rankings as its distance to frontier score increased from 56.05 to 60.76. All the countries’, except for Afghanistan, had an improvement of DTF score in DB2018.

The DTF score for India in starting a business is the lowest in South Asia. Starting a business requires 11.5 documents, 29.8 men days and 14.8% of income per capita. In Nepal’s case, it is 7 documents, 16.5 men days and 24.9% of income per capita.

In dealing with construction permits, India ranked 181 out of 190 economies (with a DTF score of 38.8). This indicator tracks the procedures, time and cost to build a warehouse, including obtaining necessary licenses and permits. In Nepal, to open a standardized warehouse, it requires 12 procedures, 117 days and 16.6% of warehouse value. Nepal’s DTF score is 55.74 and rank 157. In India, to open a standardized warehouse, it requires 30.1 procedures, 143.9 days and 23.2% of warehouse value.

In getting electricity, India has made a remarkable progress. This indicator measures the procedures, time and cost required to obtain a permanent electricity connection for a newly constructed warehouse. In India, it requires 5 procedures, 45.9 days and 96.7% of income per capita. Reliability of electricity supply and transparency of tariff are also considered, in which Nepal’s performance is miserable. In Nepal it requires 5 procedures, 70 days and 993.7% of income per capita to obtain an electricity connection. This places Nepal in 133 rank among 190 economies.  

To register property, an entrepreneur in Nepal is required to fulfill 4 procedures, takes 6 days and costs 4.8% of value of the property. It places Nepal 84th among 190 economies (with DTF score of 64.82). In India, it takes 8 procedures, 53 days and 8.4% of value of the property. With a DTF score of 47.08, India is ranked 154. 

In the ease of getting credit (measures the strength of credit reporting system and the effectiveness of collateral and bankruptcy laws in facilitating lending), Nepal scored a DTF score of 50 (rank 90) and India 75 with rank 29. India has improved a lot since 2014 and currently it has the most favorable conditions for getting credit.

In protecting minority investors (measures the strength of minority shareholder protections against misuse of corporate assets by directors, governance standards and corporate transparency), Npeal ranked 62nd with a DTF score of 58.33. Meanwhile, India ranked 4th with a DTF score of  80. Again, India has the best system for protecting minority investors in the region.

In South Asia, paying taxes is easiest in Bhutan. Paying taxes indicator measures taxes and mandatory contributions that a company must pay or withhold in a given year and the administrative burden complying with the regulations. In Nepal, there are 34 payments per year, takes 339 hours per year and companies pay about 29.6% of profit for tax and contributions. It places Nepal at 146th position out of 190 economies (with a DTF score of 58.01). India is ranked 119th with a DTF score of 66.06. In India there are 13 payments per year, takes 214 hours per year, and tax and contribution rate stands at 55.3% of profit. India’s rank is improving in this category as well.

In trading across borders, which records time and cost associated with the logistical process of exporting and importing goods, Nepal ranks 76th with a DTF score of 77.17. India is ranked 146th with a STF score of 58.56. In Nepal, it takes 56 hours to comply with export regulations at the border, costs $288 and takes 43 hours to comply with documentary requirements (at a cost of $110). For import, these numbers are 61, $190, and 48 ($80), respectively. In India, it takes 106.1 hours to comply with export regulations, costs $382.4 and takes 38.4 hours to comply with documentary requirements (at a cost of $91.9). For import, these numbers are 264.5, $543.2, and 61.3 ($134.8), respectively.

The other two indicators are enforcing contracts and resolving insolvency. Nepal has fairly better standing than India on these but India is catching up. 

The data for DB2018 are as of 01 June 2017. The ranking includes ten indicators: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. The data also includes labor market regulations but it is not included in the ranking. 

This a transit post (waiting in Delhi airport transit after 9 hours long flight). So, please ignore the typos! :-)

Friday, November 3, 2017

Communists and fiscal imprudence in Nepal

It was published in The Kathmandu Post, 01 November 2017.



There is a danger of fiscal mismanagement by the Left alliance in case they secure a majority to form govt

The decision to forge a Left alliance for the upcoming provincial and federal elections by two major communist parties on October 3 baffled all the other political parties. The commitment to merge the Communist Party of Nepal (Unified Marxist-Leninist) (UML) and Communist Party of Nepal (Maoist Centre) immediately after the elections has rattled ‘democratic’ parties and international powers that hobnob with Nepali politicians and try to influence their decisions.

While some hailed the leftist alliance as a harbinger of political stability given the fickle coalition politics, others have raised concern over the intention of the alliance, seeing it as a means to hold on to power and tilt politics and the economy towards socialism characterised by flamboyant jingoism and redistributive experiments. Beyond these partisan arguments lies a real danger of fiscal mismanagement by the communist alliance in case they secure a majority to form a government in the upcoming elections.

Extractive politics

At the core of it, the alliance smacks of a desire to hold on to power and protect political and commercial interests—the antithesis of economic prosperity and political stability in the current political ecosystem. UML and Maoist Centre will try to reconstruct political and economic institutions such as private property, labour regulations, competitive practices, the judiciary, the bureaucracy, security of returns to investment and sound macroeconomic management to serve party interests and politicians. As seen in the past, communist governments have proactively supported unruly labour unions and strikes; debt-ridden public enterprises; cartels in sectors ranging from agriculture and construction to education, energy and healthcare; uneconomical redistributive pet programs; and land capture. These have resulted in the inefficient use of taxpayers’ money, substandard delivery of public services, and low growth potential.

For instance, UML and Maoist Centre jointly opposed licensing restrictions for new medical colleges and progressive reforms in the healthcare industry that are supported by a large section of the population and healthcare professionals. These two political parties are set against meeting any demands of Dr Govinda KC, a noted orthopaedic surgeon and philanthropic activist who just recently completed his 13th hunger strike protesting against the political parties’ attempt to pass a regressive medical education bill which prioritises politicians’ commercial interests but does little to ensure quality healthcare and access for common Nepali citizens. Similarly, bankers-cum-politicians from these parties lobbied to amend the Bank and Financial Institution Act to protect their commercial interests at the cost of sound corporate governance and banking practices.

Another example is the frequent transfer of professional staff that have been appointed for fixed terms in specialised offices. When UML came to power in the past, it did not waste time in placing yes-men in key positions. Three of these important specialised agencies are the Investment Board of Nepal, the National Reconstruction Authority and the Millennium Challenge Corporation Nepal. Appointing henchmen to key posts and awarding public contracts to quasi-political organisations faithful to these political parties have been hallmarks of their tenure in government.

These practices will not lead to political stability and economic prosperity. Instead, they will further erode effectiveness of progressive political and economic institutions. Note that this does not mean that the other political parties are clean of these malpractices. The difference is that some parties are less tainted than others.

Budgetary concerns

Leftist parties have traditionally favoured big increases to the fiscal budget, primarily due to their penchant for redistributive programs and pet projects irrespective of fiscal and macroeconomic soundness. Finance ministers from communist parties have lobbied for inconsequential hand-outs in the form of social allowance and the inclusion of multiple, small and incoherent pet projects to benefit their voter base and local contractors. Furthermore, they have discontinued or neglected previous reform initiatives, fostered moral hazards through blanket debt relief and self-employment programs, and have tried to bring in a supplementary budget despite recommendations from senior bureaucrats advising them against such a budget. Their budgets were bloated, wastefully redistributed and fiscally irresponsible. Recurrent spending growth outstripped revenue growth in five of the last 10 fiscal years—four times of which occurred when communists were leading the finance ministry.

As the then finance minister, Baburam Bhattarai increased the budget by almost 47 percent in 2008/09 and waived off farmers’ loans with a hope of lowering their debt burden and eventually encouraging more farmers to produce more goods. Instead of increasing agricultural productivity, the blanket loan waiver (a good move if well targeted and implemented efficiently) fostered a moral hazard, as these farmers are now just as indebted as before. The emphasis on cooperatives and attempts to tame the private sector also backfired. The mushrooming of cooperatives—of which over 50 percent were saving and credit cooperatives that directly competed with commercial banks in the absence of a strong cooperatives regulator—and their reckless conduct aggravated the financial sector crisis in 2011. Recently, lawmakers from these communist parties also actively lobbied to ensure that the amended cooperatives bill had less governance standards and regulatory oversight than suggested by experts.

The first fiscal budget by the Maoist government set the stage for an ever-increasing budget envelope as it was hard to discontinue populist recurrent programs in subsequent budgets. Additionally, championing unionism in public service was another detrimental policy that resulted in factionalism within the government service, encouraged frequent staff transfers, and eroded the effectiveness of public service delivery.

When UML’s Bharat Mohan Adhikari was finance minister in 2011, he tried to bring a supplementary budget barely three months before the end of fiscal year, completely ignoring the full year budget presented by former finance minister Surendra Pandey from his own party. Adhikari’s conduct was so irrational that the then finance secretary Rameshore Prasad Khanal resigned citing differences over the supplementary budget, handling of the fake value added tax bills scam, and the transfer of officials in the ministry. Furthermore, the budget for 2011/12 was leaked before Adhikari presented it to Parliament.

UML’s Bishnu Prasad Poudel introduced another fiscally irresponsible, bloated budget when he was finance minister in 2016. He increased the budget outlay by 74.5 percent by modestly increasing spending allocation for post-earthquake reconstruction and by aggressively diverting resources to multiple small pet programs and projects that had budgetary and macroeconomic consequences in the following year as well. Furthermore, during his tenure, key leadership in specialised agencies were unceremoniously replaced. 

Overall, communist governments have a history of being fiscally imprudent and protective of their political and commercial interests at the cost of sound economic and social reforms. In terms of progressive economic policies and inclusive institutions, we should not expect too much from the latest communist alliance.