Sunday, September 16, 2018

Twin deficits in Nepal

It was published in The Kathmandu Post, 14 September 2018

Nepal’s external sector has remained fairly stable for more than a decade. The current account balance--a measure of the country’s earnings from and expenditure on traded goods and services--has been positive for most of the time despite a weak export performance, thanks to large remittance inflows. Unfortunately, the external situation took an unexpected turn last year: The current account deficit swelled to a level not seen since the fiscal year 1995-96.

The expected large increase in imports along with a widening fiscal deficit (the difference between government revenue and expenditure) has increased the odds of external sector instability. It will deplete foreign exchange reserves and deter foreign direct investment as investors worry about the country’s ability to supply them convertible currency for repatriation of their return on investment. The government faces the delicate task of addressing twin deficits (large fiscal and current account deficits) without reining in productivity-enhancing expenditure and intermediate goods import.

High imports

In fiscal 2017-18, the current account deficit widened to 8.2 percent of the Gross Domestic Product (GDP), around $2.4 billion, up from a deficit of just 0.4 percent in the preceding year, but sharply down from a surplus between 2011-12 and 2015-16. The last time the current account deficit was above 6 percent of the GDP was during the four consecutive years before the country embraced liberalisation reforms, and in 1995-96. This time, despite large official workers’ remittances, which was almost insignificant then, the current account deficit has increased drastically, led by an ever-increasing trade deficit.

The current account balance includes the value of transactions with other countries in merchandise goods, services, income and transfers. The merchandise trade deficit reached a record 37.7 percent of the GDP owing to stagnating exports (about 3.1 percent of the GDP) but large imports of about 40.8 percent of the GDP. The country’s exports have been suffering from a range of supply-side constraints such as inadequate supply of infrastructure (particularly electricity and road network), labour disputes and political instability, high cost of finance, lack of required human resources and technical know-how, ad hoc non-tariff barriers, and policy implementation paralysis. Recently, two of the major constraints, political instability and supply of electricity, seem to have been taken care of. The other constraints continue to affect industrial output.

Meanwhile, imports of fuel and agricultural and industrial goods have been surging due to increased demand for imported products in the absence of sufficient and competitive domestic production. It widened the trade deficit which is so high that even a surplus in other components (including remittances) of the current account was not enough to balance it. Tourism receipts are meagre compared to its potential, and remittance inflows are moderating due to a decrease in the number of outbound migrant workers.

The government and some economic analysts argue that the high current account deficit is not a bad thing because it will help boost growth in the coming years. Normally, a moderate level of current account deficit due to imports of large machinery and intermediate goods may be beneficial to low-income countries like Nepal. The theoretical logic is that they not only boost current growth prospects but also expand potential growth because the large imports will enable exports to grow in the future and narrow the trade deficit. However, in reality, this is hard to achieve due to the nascent financial market, which normally plays a vital role in efficiently allocating capital, and weak institutional and governance regimes.

Nepal’s current import basket is hardly composed of productivity-enhancing machinery and intermediate goods. Imports of petroleum, the top import item, account for about 11 percent of total imports. The other imported products are used in the industrial sector as raw material or intermediate goods and are either consumed domestically or exported. The issue is that domestic value addition in these industries is low, and the likelihood of a drastic change in the productivity-output landscape anytime soon is also unlikely. The top imported goods have hardly changed in recent years.

The top five imports from India are petroleum products, vehicles and spare parts, MS billet, machinery and parts, and cement. They accounted for 50 percent of total imports from India last year. Note that imports from India make up about 65 percent of total imports. Agricultural items such as rice and vegetables also feature high on the import list from India. From China, we are importing electrical and machinery parts and readymade garments. From the rest of the world, our top imports are gold and silver, aircraft and spare parts, and agricultural products. A government obsessed with revenue mobilisation has no incentive to reduce imports of vehicles and machinery parts because taxes on them are an important source of customs revenue.

Boost earnings

Nepal cannot do much to alter the pegged exchange rate with the Indian rupee. However, the government could proactively work to address the supply-side constraints which are forcing companies to operate below their installed capacity and increasing their cost of production. Currently, costly production is not only substituted by competitive imports, but exports are also declining as price competitiveness is eroding despite the competitive advantage from preferential treatment accorded to our exports.

Increasing exports and tourism receipts besides replacing substitutable imports by domestic production is an ideal policy. However, this will be realised only after we take care of the binding supply-side constraints and infrastructural and services related issues in the tourism sector. In addition to implementing timely trade and industry related policies, foreign direct investment should be increased for which the existing laws and the Investment Board Act need to be amended. Until then, the government should advocate a policy to reduce unnecessary public spending and unproductive private sector credit flows that support imports. The large current account deficit right now reflects low domestic savings and high consumption, indicating a reckless fiscal policy and credit flows to unproductive sectors.

Saturday, September 15, 2018

0.9 million economic establishments engage 3.4 million people in Nepal

On September 13, the Central Bureau of Statistics released preliminary results of the first ever National  Economic Census 2018. The preliminary results are based on enumerator’s control forms, which is basically a summary sheet of details in form B. Data collection was done between 14 April and 14 June 2018. The census is now the basis for designing sampling frame of economic establishment for forthcoming surveys and censuses. 

The economic census covers most of the economic establishments, the unit of analysis, in the country. It includes registered agricultural, forest and fishery businesses; mining and quarrying; industrial production; electricity, gas, etc; drinking water supply, sanitation, waste management and processing; construction; retail and wholesale trade, and sale and repair of vehicles and motorcycles; transportation and storage; hotels and restaurants; information and communication; financial intermediation; real estate and business activities; professional, scientific and technical activities; public administration; education; healthcare and community related activities; arts and entertainment; and other relevant economic activities that are either registered or not registered.   

Nepal has 0.92 million economic establishments, where about 3.4 million people are engaged. The sex ratio of persons engaged is 150 (male per 100 engaged females).  

Here are the major highlights from the preliminary results:
  • Number of establishments: 922,445 
    • For comparison, Japan has 5.8 million, Indonesia 26.7 million, Sri Lanka 1 million and Cambodia 0.5 million
  • Number of persons engaged: 3,408,746
  • Number of persons engaged per establishment: 3.7 
    • For comparison, its 9.9 in Japan, 2.6 in Indonesia, 2.8 in Sri Lanka, and 3.3 in Cambodia
  • Number of establishments per 1000 people: 31.6 
    • For comparison, in 45.4 in Japan, 105.6 in Indonesia, 50.3 in Sri Lanka, and 34.6 in Cambodia 
  • Kathmandu has the largest number of economic establishments (13.4%), followed by Jhapa (4.2%), Rupandehi (4.2%), Morang (2.8%) and Sunsari (2.4%)
  • The lowest number of economic establishments is in Manang, Mustang, Dolpa, Rukum East and Rasuwa (all less than 0.1% of total)
  • The density of economic establishment is 6.3 per sq km
  • Number of economic establishments by province (persons engaged in brackets):
    • Province 1: 168,434 (580,000)
    • Province 2: 117,588 (424,367)
    • Province 3: 282,056 (1,190,721)
    • Gandaki: 100,688 (341,818)
    • Province 5: 147,892 (527,960)
    • Karnali: 42,817 (132,425)
    • Province 7: 62,970 (211,555)
For interested folks, here are key highlights from the last census of manufacturing establishment

Saturday, September 8, 2018

Nepal can now use Chinese ports for third country trade and more

China allows Nepal access to its ports, ending Indian monopoly

From The Kathmandu Post: Two years after signing the Transit and Transportation Agreement, Nepal and China have agreed on the text of the protocol to the agreement that would allow Nepali traders and businessmen to use Chinese sea and land ports for third country trade. With this agreement, Nepal’s long dependence on India for third-country trading has ended, allowing Nepal to trade from the Chinese sea and land ports once the deal goes into effect. Prime Minister K P Oli had signed the Transit and Transportation Agreement with China in March 2016, following months-long Indian blockade at the southern border.

The major takeaway of the agreement is that Nepal can use four Chinese seaports, three land ports for third country import, and export through the six dedicated transit points between Nepal and China. “The Chinese side is also open for Nepal to use its other seaports if Nepal requires them,” said Joint Secretary at Ministry of Commerce and Supplies Rabi Shankar Sainju, who led the Nepali delegation in the talks. The Department of Transport Services Director General Wang Shuiping led the nine-member Chinese delegation at the meeting on Thursday.

The agreed-upon text would be signed during a high-level visit from China, the date or details of which have not been announced, said a foreign ministry official. The Chinese side hinted that the protocol can be signed during Chinese President Xi Jinping’s visit to Nepal, expected to take place in 2019. There were suggestions that the Chinese president was supposed to visit this year, but Chinese officials told Nepali counterparts that his schedule was packed this year.

According to a press statement issued by the Ministry of Industry, Commerce and Supplies following the agreement on Thursday, China has agreed to let Nepal use Tianjin, Shenzhen, Lianyungang and Zhanjiang seaports and Lanzhou, Lhasa and Xigatse dry ports for trading with third countries.

One major hurdle to implementing the deal, according to the Nepali officials, is the upgradation and improvement of Nepal’s roads to China. Other challenges facing Nepal are poor infrastructure on its side of the border, including maintenance of highways and construction of dry ports to park the imported and exported goods. “This is a major breakthrough, but we have to upgrade our infrastructure too,” said Sushil Lamsal, deputy chief of mission at the Nepali Embassy in Beijing. He was also part of the Nepali delegation.

Imported goods would be transported up to Xigaste by Chinese rail and Nepali containers would bring them from Xigaste to the Nepali border. Currently, Nepali containers are permitted up to Kerung. The same rule applies to two other land ports. Nepal will provide lists of import and export goods that would be transported as well as electronic bills of all items transported to China. China electronically monitors all goods containers.

In 2012, Nepal and China agreed to open six dedicated land routes: Humla, Korola, Rasuawagadhi, Tatopani, Olangchung Gola and Kimangthanka. Currently, only the Rasuwaghadi-Kerung route operates.


On the same note, how viable will be third country trade through China? Here is an excerpt from a piece I wrote two years ago: "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. "

Nepali workers to benefit as Qatar lifts ‘exit permit’ system

From The Himalayan Times: The decision of the Qatari government to allow most migrant workers to leave the country without an exit visa will facilitate thousands of Nepalis working in the Arabian nation to return home without any hassles after completion of their work contract, as per recruiting agencies. The government of Qatar on Wednesday partially scrapped the ‘exit permit’ that had been preventing migrant workers from leaving the country without their employers’ permission.

This decision of the Qatari government has been welcomed by labour-related international organisations, including International Labour Organisation (ILO) and Amnesty International. “The decision is an important first step towards dismantling Qatar’s exploitative sponsorship system,” Amnesty International said in a statement issued today. As Qatar is one of the major work destinations of Nepali migrant workers, both the government and recruiting agencies said that the recent decision of the Qatari government will facilitate almost 300,000 Nepalis currently working in Qatar.

“Due to lack of enough human resources and lengthy process to hire new employees, we had often received complaints of employers in Qatar extending work contract of Nepalis against their will and not facilitating them in acquiring exit permits even after their work contract had ended,” informed Rohan Gurung, president of Nepal Association of Foreign Employment Agencies. According to him, this decision of Qatar will ease the process for Nepali workers to return home. As per available data, an average of around 100,000 Nepalis go to Qatar for jobs every year.

Thursday, August 30, 2018

750 MW West Seti project doomed, and BIMSTEC plan for $50 bn infrastructure projects

From The Kathmandu Post: The West Seti Hydroelectric Project has all but collapsed after the Chinese developer turned down the government request to execute the project citing financial infeasibility. The all-important two-day meeting between Investment Board Nepal (IBN) and China Three Gorges International (CTGI) ended inconclusively on Wednesday, with the latter expressing inability to move ahead despite assurance from the government on capacity optimisation and US dollar power purchase agreement. 

While the investment board has not categorically said the deal with the Chinese company is over, senior officials who spoke to the Post say this as the end of Chinese company’s involvement in the West Seti project. Whether or not the Chinese company will completely pull out of the project now entirely depends on Prime Minister KP Sharma Oli, and if he agrees to all the terms raised by the Chinese developer. Officials wouldn’t say if there were chances for such reconsideration.

The government side was flexible on addressing two major issues of the Chinese developer--dollar PPA and the downward revision of the project’s installed capacity. Officials present at the meeting said the Chinese developer did not show any intent to carry forward the project. Instead, the issue of resettlement and rehabilitation was brought forward by the Chinese company which it termed would be expensive and unpredictable. In a bid to make the project feasible, the investment board even made an offer to the representatives of the Chinese company, going beyond the guidelines issued by the government for the dollar-denominated power purchase. The official guidelines say the payment to the developer is made in convertible currency for a period of 10 years or until the time the project pays back the foreign debt, whichever is earlier. The investment board had offered to increase the period to 12 years for the West Seti project. The IBN also offered to downsize the project capacity to 600MW from 750MW.

Foreign ministers agree on projects worth $50b

From The Kathmandu Post: In an ambitious plan to connect the member states of BIMSTEC, foreign ministers from the seven-nation group identified and agreed on Wednesday to push forward 167 various connectivity-related projects at an estimated cost of $50 billion. The ministers agreed to approve projects, at least in principle, following a detailed study by the Asian Development Bank. The member states are developing BIMSTEC Transport Connectivity Master Plan, with a goal to complete it by the end of September 2018, Foreign Minister Pradeep Gyawali told the Post. 

The ADB study included transportation and cross-border facilitation, multimodal transport and logistics, infrastructure development, aviation, maritime transport, human resources development, as well as communication linkages and networking.
The BIMSTEC Transport Infrastructure and Logistic Study (BTILS) was updated by the ADB in 2014. Out of 167 projects, the study has prioritized 66 projects. 

Wednesday’s meeting also underlined the establishment of BIMSTEC Permanent Secretariat in Bangladesh; BIMSTEC Cultural Industries Observatory (BCIO) in Bhutan; and BIMSTEC Centre for Weather and Climate (BCWC) in India as some of the key achievements in institutional development.

Tuesday, August 28, 2018

नेरु भर्सेस भारु (विनिमय दर)

सेतोपाटीमा प्रकाशित विचार, भदौ ८, २०७५

सय भारतीय रुपैयाँ (भारु) बराबर कति नेपाली रुपैयाँ (नेरु) हुन्छ?

यसको जवाफ प्राय: हामी सबैलाई थाहा छ- १ सय ६० रुपैयाँ।

यो दर कहिले तय भयो? किन कहिल्यै घटबढ हुँदैन?

नेपालले भारतसँग आफ्नो मुद्राको विनिमय दर स्थिर राखेको छ। यसको मतलब, जसरी अमेरिकी डलर वा अन्य विदेशी मुद्राको दाँजोमा नेपाली रुपैयाँ दिनकै घटबढ भइरहन्छ, नेरु र भारुबीच त्यस्तो हुँदैन।

२०१६ सालसम्म नेपाली र भारतीय रुपैयाँको भाउ बराबर थियो। सय भारु बराबर सय नेरु। त्यसयता भारुको दाँजोमा नेरु सस्तो हुँदै अहिलेको अवस्थामा आइपुगेको हो।

यसबीच परिवर्तन हुँदै नभएको होइन। सन् १९६६, १९६७, १९७७ र १९८५ मा भारुको दाँजोमा नेरु सस्तो भएको थियो। सन् १९९१ र १९९३ मा महँगो भएको थियो। सन् १९९३ यता भने परिवर्तन गरिएको छैन।
बेलाबेला परिवर्तन भए पनि नेरु र भारुको मूल्य स्थिर राख्ने प्रणाली कायम छ। नेरुको अरु विदेशी मुद्रासँगको विनिमय दर पनि भारुको ती मुद्रासँगको विनिमय दरले नै निर्धारण गर्छ। अर्थात्, भारुको मूल्य अमेरिकी डलरसँग जसरी घटबढ हुन्छ, त्योसँगै नेरुको पनि हुन्छ।

एकथरी विश्लेषकहरू अहिलेको विनिमय दर पुनरावलोकन गर्नुपर्ने तर्क गर्दैछन्। उनीहरु नेपाली रुपैयाँ अझ सस्तो बनाउनुपर्छ भन्दै छन्। अर्काथरी विश्लेषक भने स्थिर विनिमय दरको व्यवस्था नै हटाउनुपर्छ भन्छन्।

नेपाल र भारतको अर्थतन्त्रमा सन् १९९३ यता ठूलो परिवर्तन आएको छ। व्यापार र लगानीका स्रोत विकेन्द्रीकरण भएका छन्। अर्थतन्त्रमा संरचनात्मक परिवर्तन भएको छ। अहिलेको विनिमय दर वा मुद्रा स्थिर रहने प्रणालीले अर्थतन्त्रको परिवर्तन प्रतिविम्बित गर्दैन। त्यसैले, भारुको दाँजोमा नेरुको मूल्य सस्तो बनाइयो भने नेपालले आफ्नो निर्यात बढाउन सक्छ। अझ विनिमय दर स्थिर रहने प्रणाली नै हटाइयो भने हामी आफ्नो मौद्रिक नीति स्वतन्त्र रुपले लागू गर्न पाउँछौं। भारतीय मौद्रिक नीतिको पुच्छर समाएर हिँड्नु पर्दैन।
यस्ता तर्क-वितर्कबीच आखिर हामीले के गर्न ठिक हुन्छ?

सबभन्दा पहिला मूल्य सस्तो हुनुपर्छ भन्ने तर्कमा चर्चा गरौं।

हामीले नेरु सस्तो बनायौं भने निर्यात सस्तो पर्छ, आयात महँगो।

मानौं, १ सय ६० रुपैयाँ पर्ने बिस्कुट हामीले भारत निर्यात गर्यौं। अहिलेकै विनिमय दरमा त्यो बिस्कुट भारतीय ग्राहकले १०० भारुमा किन्ने छन्। हामीले नेरु सस्तो बनाएर सय भारु बराबर १ सय ८० तोक्यौं भने त्यही बिस्कुट भारतीय ग्राहकलाई सस्तो पर्नेछ। उनीहरुले सय भारु तिर्दा १ सय ६० रुपैयाँको बिस्कुटसँगै २० रुपैयाँको थप सामान किन्न सक्ने छन्।

यसले नेपाली उद्योगलाई फाइदा हुन्छ। केही पनि अतिरिक्त मूल्यविना उही समान सस्तोमा बेच्न पाइन्छ। यसलाई हामी प्रतिस्पर्धात्मक मूल्य भन्छौं। नेपाली निर्यात सस्तो पर्यो भने भारतीय ग्राहकले धेरै माग गर्छन्। नेपाली उद्योगले आफ्नो क्षमता विस्तार गरेर धेरै सामान उत्पादन गर्न सक्छन्। यसले रोजगारी र आर्थिक वृद्धि हुन्छ।

यसरी नेरु सस्तो बनाउँदा हाम्रो व्यापार घाटा भने कम हुँदैन। किनभने, हामीले आयात गर्दै आएका सामान पहिलेभन्दा थप महँगो पर्न जान्छ।

अघिकै उदाहरणलाई उल्टोबाट हेरौं।

मानौं, १ सय भारु पर्ने बिस्कुट हामी भारतबाट आयात गर्छौं। अिहलेकै विनिमय दरमा त्यो बिस्कुट नेपाली ग्राहकले १ सय ६० रुपैयाँमा किन्ने छन्। हामीले मूल्य घटाएर सय भारु बराबर १ सय ८० नेरु तोक्यौं भने त्यही बिस्कुट नेपाली ग्राहकलाई महँगो पर्नेछ। पहिले १ सय ६० रुपैयाँ तिर्दै आएको बिस्कुट किन्न १ सय ८० तिर्नुपर्नेछ।

हामीले भारतबाट आयात गर्ने अधिकांश सामान नेपाली उद्योगले उत्पादन गर्दैनन्। गरे पनि कच्चापदार्थ आयात गर्ने उतैबाट हो। त्यही कच्चापदार्थमा थोरै मूल्य अभिवृद्धि गरेर त्यही सामान हामी महँगोमा उत्पादन गर्छौं। हाम्रो उत्पादन लागत महँगो छ। लागत प्रतिस्पर्धामा हामी कमजोर छौं।

भारतबाट हुने आयातमा ठूलो हिस्सा ओगट्ने भनेका पेट्रोलियम र ग्यास, सवारी साधन, औद्योगिक औजार र कतिपय कृषिसँग सम्बन्धित सामान र उत्पादन हुन्। देशमा पर्याप्त बिजुली उत्पादन र उपयोग छैन। अझै पनि हामी भारतबाट बिजुली आयात गर्छौं। उद्योगहरु पूर्ण क्षमतामा चल्न सकेका छैनन्। हाम्रो औद्योगिक उत्पादन क्षमताको ५५ प्रतिशत हाराहारी मात्रै छ। उद्योगहरुमा दक्ष कामदार अभाव छ। निर्यात प्रवर्द्धन गर्न बनेका नीतिहरु कागजमै सीमित छन्।

यहाँनिर अर्थशास्त्रको एउटा सिद्धान्तबारे कुरा गरौं।

'जे-कर्भ प्रभाव' भनिने यो सिद्धान्तले भन्छ- मुद्राको भाउ सस्तो बनाइयो भने केही वर्षसम्म व्यापार घाटा बढेर जान्छ। यसले निर्यात बढ्छ, आयात घट्छ। र, कालान्तरमा व्यापार घाटा पनि घट्दै जान्छ।

हामीले भारुको दाँजोमा नेरु सस्तो पार्नेबित्तिकै पहिल्यै अर्डर गरेका तर भुक्तानी नभएका सामानको मात्रा परिवर्तन हुँदैन। आयात मूल्य भने महँगो पर्छ। यसले व्यापार घाटा तत्कालै बढेर जान्छ।

जब आयात महँगो र निर्यात सस्तो पर्छ, उपभोक्ताले महँगा आयातीत वस्तुको विकल्प स्वदेशमै खोज्न थाल्छन्। उद्योगहरुले सस्तोमा धेरै सामान निर्यात गर्न सक्छन्। आन्तरिक उद्योगहरुले आफ्नो क्षमताअनुरुप उत्पादन सुरु गर्छन्। नयाँ उद्योग खुल्ने वातावरण बन्छ। हामीले बनाएका सामान अरु राष्ट्रको भन्दा सस्तो हुन्छ। यसले व्यापार घाटा कम हुँदै अर्थतन्त्रमा सकारात्मक प्रभाव पर्छ।

यसरी हामी मुद्राको भाउ सस्तो बनाएर लाभान्वित त हुन सक्छौं, तर हाम्रो अर्थतन्त्र अहिल्यै त्यो विन्दुमा पुगेको वा पुग्न लागेको अवस्था छैन।

अब भारुको तुलनामा नेरुको मूल्य सस्तो पार्दा बृहत् अर्थतन्त्रमा पर्ने अरु प्रभावबारे चर्चा गरौं।

आयात महँगो पर्नेबित्तिकै बजारमा मूल्य वृद्धि दर बढ्छ। निर्यात सस्तो भएपछि हाम्रो सामानको माग बढ्छ। हामीले माग भएर पनि उत्पादन बढाउन सकेनौं भने कामदारको ज्याला र अरु खर्च वृद्धि हुन्छ। यसले समग्रमा उत्पादन लागत बढ्छ। र, अन्त्यमा बजारमा खुद्रा सामानको पनि मूल्य वृद्धि हुन्छ।

यो क्रम बढ्दै मूल्य वृद्धि धेरै भयो भने सरकारले आफ्नो खर्च घटाउनुपर्ने हुन्छ। राष्ट्र बैंकले ब्याज दर बढाउनुपर्ने हुन्छ। सर्वसाधारणले बैंकबाट लिएको ॠणको व्याज बढ्छ। अहिले बैंकहरुमा ॠणको व्याज २० प्रतिशत हाराहारी छ।

नेपाली रुपैयाँ सस्तो बनाउनुको मनोवैज्ञानिक पक्ष पनि छ।

हाम्रो अर्थतन्त्र तुलनात्मक कमजोर छ। मूल्य वृद्धि दर धेरै छ। राजनीतिक तथा आर्थिक अवस्था अस्थिर भए जनताले बलियो अर्थतन्त्रको बलियो मुद्रा आफूसँग राख्न रुचाउँछन्।

कमजोर अर्थतन्त्र र मूल्य वृद्धि दर धेरै हुँदाहुँदै हामीले भारुको दाँजोमा नेरु सस्तो बनायौं भने जनताले भारुकै माग बढाउन सक्छन्। उनीहरुले नेपालमा भएको पैसा भारत लगेर राख्न वा लगानी गर्न सक्छन्। यसलाई पुँजी पलायन भन्निन्छ। अहिले पनि सीमा क्षेत्रमा भारुको भाउ सरकारले तोकेको विनिमय दरभन्दा बढी छ। अर्थात्, नेपाली रुपैयाँको चलनचल्ती मूल्य वास्तविकभन्दा सस्तै छ।

अझ भारतका बैंकले नेपालका बैंकले भन्दा धेरै व्याज दिने र यहाँको मूल्य वृद्धि भारतमा भन्दा धेरै भए झन् धेरै पुँजी पलायन हुनेछ।

नेपाली रुपैयाँ एकचोटि सस्तो बनाएपछि पनि स्वदेशी उत्पादन र निर्यात वृद्धि भएन, व्यापार घाटा घटेन र आर्थिक वृद्धि भएन भने फेरि पुनरावलोकन गर्नुपर्ने हुन सक्छ। कतिपटक र कहिलेसम्म पुनरावलोकन गर्नुपर्ने हो भन्ने अनुमान गर्न गाह्रो छ। यस्तो अवस्थामा स्वदेशी मुद्राप्रति विश्वास घट्नेछ। र, झन् धेरै पुँजी पलायन हुने सम्भावना बढ्छ।

यो भारुको दाँजोमा नेपाली रुपैयाँ सस्तो पार्दाको कुरा भयो। अब भारु र नेरुको स्थिर विनिमय दर हटाउनेबारे चर्चा गरौं। अर्थात्, डलर वा अन्य विदेशी मुद्राजस्तै भारु र नेरुको विनिमय दर दिनहुँ घटबढ भइरहने अवस्था हेरौं।

भारतसँगको स्थिर विनिमय दरले नेपालको मौद्रिक तथा आर्थिक नीति स्वतन्त्र भएन भन्ने छ। यसले भारतबाट सामानसँगै मूल्य वृद्धि पनि आयात गर्दैछौं भन्ने तर्क गरिन्छ। भारतले पाँच सय र हजार रुपैयाँलाई चलनचल्तीबाट हटाएपछि नेपाललाई पनि असर पर्ने कुरा उठाइँदैछ।

यी जायज तर्क हुन्।

तर, हामीले आफ्नो अर्थतन्त्रको क्षमता बुझेर मात्र यस्तो तर्क गर्नु ठिक हुन्छ।

सन् २०१७ मा नेपालको अर्थतन्त्र करिब २४ अर्ब डलर बराबर पुगेको छ। भारतको २ हजार ५ सय ९७ अर्ब डलर छ। नेपालको प्रतिव्यक्ति आय ८ सय ३५ डलर छ भने भारतको १ हजार ९ सय ४० डलर।

हाम्रो कमजोर अर्थतन्त्रको नजिक भारतको बलियो अर्थतन्त्र छ। हामीबीच स्वतन्त्र आवागमन हुन्छ। खुला व्यापार सन्धि छ। यसले पुँजी पलायन हुने र गम्भीर आर्थिक समस्या पर्दा सहनै नसकिने अवस्था आउन सक्छ।

जस्तै, नेरु सस्तो बनाउन हामीसँग पर्याप्त विदेशी मुद्रा भएर अन्तर्राष्ट्रिय मुद्रा बजारमा हस्तक्षेप गर्ने क्षमता हुनु जरुरी छ। यो रणनीति तब सफल हुन्छ, जब अरु राष्ट्रले आफ्नो मुद्राको भाउ घटाउँदैनन्। हामी प्रतिस्पर्धी तरिकाले निर्यात गर्न सक्ने गरी उत्पादन गर्न थाल्छौं।

अस्थिर विनिमय दर प्रणालीमा मुद्राको मूल्य माग र आपूर्तिले निर्धारण गर्छ। हाललाई राष्ट्र बैंक र अन्तर्राष्ट्रिय मुद्रा कोषले पनि स्थिर विनिमय दर प्रणालीलाई निरन्तरता दिँदा केही हदसम्म आर्थिक अनिश्चितता कम हुने र हामीलाई फाइदा हुने निष्कर्ष निकालेका छन्।

त्यस्तो भए अब के गर्ने?

भारुको दाँजोमा नेरु सस्तो बनाउनुको लक्ष्य स्वदेशी उत्पादन र निर्यात वृद्धि, व्यापार घाटा कम, आर्थिक समृद्धि र रोजगार वृद्धि हो। हाम्रो औद्योगिक उत्पादन र क्षमता कमजोर छ। मूल्य वृद्धि दर स्थिर भइसकेको छैन। यस्तो अवस्थामा हामीले त्यतातिर पनि ध्यान दिनुपर्छ।

स्थिर र प्रतिस्पर्धी विनिमय दर राख्न विश्वसनीय मौद्रिक तथा आर्थिक नीति हुनु जरुरी छ। यसका तीन विशेष पक्ष छन्: बलियो वित्तीय क्षेत्र, सही समष्टिगत आर्थिक नीति र विश्वसनीय संस्थाहरु।

विश्व वित्तीय बजारमा हाम्रो पहुँच नगन्य छ। उत्पादन क्षमता कम छ। उत्पादनको मूल्य कम छ। वित्तीय क्षेत्र अव्यवस्थित छ। मौद्रिक र आर्थिक नीतिमा विश्वसनीयताको कमी छ। मूल्य वृद्धि दर धेरै छ र अस्थिर छ। अर्थतन्त्र रेमिटेन्स आयले धानेको छ। यस्तो अवस्थामा हाम्रो निम्ति अहिलेको स्थिर विनिमय दर नै उचित हुन्छ।

पुनरावलोकन गरी नेपाली रुपैयाँको भाउ सस्तो बनाउने हो भने यसबाट फाइदा गराउने आधारहरु बलियो हुनु जरुरी छ।

हचुवा भरमा हल्ला मच्चाउने र निर्णय गर्ने हो भने सबैलाई घाटा हुन्छ। सन् २०१० मा यस्तै हल्ला हुँदा अर्थमन्त्री, अर्थसचिव र राष्ट्र बैंकले खण्डन गर्नुपरेको थियो।

Monday, August 20, 2018

Kathmandu-Kerung railway to cost US$2.6 billion, mandatory credit rating of loans and more

From The Kathmandu Post: The Department of Railways (DoR) on Sunday said construction of Kathmandu-Kerung railway is estimated to cost Rs257 billion. The construction of the railway running through complicated geological terrain and challenging engineering work is likely to be completed in nine years, the department said. The DoR observations corroborate the report prepared by Chinese team.

The railway would be 72.25 km in Nepal. Around 98.5 percent of the railway would either be bridges or tunnels. The project would cost Rs3.55 billion per kilometer. The project’s longest and most steep grade is up to 95 km long out of 121 km. A report obtained by the Post states, the railway plan that passes through rugged Himalayan mountains involves complex structural engineering.The report says engineering crews would build ramps along the northern and southern slopes leading to Lake Paiku, near Kerung, to connect tracks to the Kathmandu section. The ramps would overcome the huge difference in elevation between the southern and northern toes of the Himalayan mountains.

From The Himalayan Times: Bankers have sought incentives for borrowers to execute the provision of credit rating of borrowers who want to avail loans of Rs 500 million and above, and renewal of loans as provisioned by the Monetary Policy. Borrowers will not be encouraged to opt for credit rating without any incentive, as there are multiple challenges to execute this policy introduced by the Monetary Policy.

The firms that avail loans worth Rs 500 million and above are big companies and they will be reluctant to disclose all the information about their company that a credit rating requires to avail the bank loan because their competitors — businesspeople — might be in the board of the respective banks and financial institutions (BFIs), according to Gyanendra Prasad Dhungana, president of Nepal Bankers’ Association. “On the other hand, BFIs cannot issue loans on the basis of rating without collateral or guarantee. If collateral or guarantee is a must, the borrowers will not be encouraged for credit rating of their companies because it is a costly affair.”

As per the provision of the Monetary Policy, BFIs must float loans on the basis of credit rating for loans of Rs 500 million and above. “In this regard, the cost of rating could also be a liability for the BFIs and if so, the cost must be adjusted in lending rates,” said Dhungana. “BFIs cannot treat borrowers differently based on their ratings if the cost of rating has to be borne by the BFIs.”

Power leakage came down to 20.45pc last fiscal year

From The Himalayan Times: Nepal Electricity Authority (NEA) has said that it was able to reduce electricity leakage by 2.45 percentage points in the last fiscal year 2017-18. As per data released by NEA, it was able to meet its target to reduce the leakage of electricity. NEA had earlier set a target to reduce electricity leakage from 22.90 per cent to 20.45 per cent of the total electricity supply in the last fiscal. According to NEA, the 20.45 per cent electricity leakage figure is the lowest in NEA’s history. At present, NEA loses 5.5 per cent of electricity through leakage in its transmission system and 14.5 per cent through its distribution system.

“In this fiscal, we plan to reduce the electricity leakage by 1.95 percentage points to 18.5 per cent, however if possible we will try to bring it down to around 15 per cent,” said Kul Man Ghising, managing director of NEA. Currently, NEA has started taking strict action against electricity theft and has become more stringent in collecting dues. It has also installed high-capacity transformers, and upgraded the transmission and distribution system and substations to reduce electricity leakage. In the last fiscal 2017-18, NEA was able to earn net profit of Rs one billion (unaudited). NEA has forecast to earn net profit of Rs 1.1 billion in this fiscal. In the last fiscal, NEA earned operating profit worth Rs 7.86 billion.

A cabinet meeting on Sunday decided to form a five-member Public Expenditure Review Commission led by Dr. Dilli Raj Khanal. The commission will review public expenditure, its usefulness, policy reforms, and selection of projects among others. 

Monday, August 13, 2018

Indian EXIM Bank proposes stake in Nepal's infrastructure bank, Nepal Bangladesh energy cooperation and more

From The Kathmandu Post: Exim Bank of India, an undertaking of the government of India, is exploring an investment opportunity in Nepal, potentially setting up its own infrastructure bank or making equity investments in an existing Nepali bank.

Officials of the southern neighbour’s export finance institution had approached the Finance Ministry in June with a proposal, which coincides with the Nepal government’s decision to sign an MoU with China’s Zhongji Richway Holdings Limited that same month, just days before Prime Minister KP Sharma Oli’s visit to China. Finance Ministry officials told the Post they recommended the Exim Bank enter into an equity partnership with Nepal’s Infrastructure Development Bank (IDB), financed by local businessmen in partnership with the government.

Emerging Nepal, which was established under public-private partnership, is expected to come into operation by November 22, after it received a letter of intent (LoI) from the Nepal Rastra Bank in May. Chandra Prasad Dhakal, a board director of Emerging Nepal, confirmed to the Post that they had talks with Exim bank officials. He said they have been exploring the possibility of a joint venture with a number of Indian companies, and the Exim Bank of India is one. “The discussions are still at an early stage, so no concrete decision has been taken yet,” he said. Dhakal said Emerging Nepal could accommodate the Exim Bank as a promoter by altering the existing capital structure of the proposed bank. According to the IDB licensing policy introduced by NRB last year, foreign investors can invest up to 85 percent in such banks; and a paid-up capital of Rs20 billion is required to establish the bank.

From myRepublica: epal and Bangladesh inked a bilateral agreement on cooperation in electricity development, in Kathmandu Friday. This paves the way for opening the market in Bangladesh for Nepal’s hydroelectricity as well as bringing in Bangladeshi investment in this sector. Bangladesh, for its part, will meet its energy needs in the face of depleting natural gas, for sustaining its high rate of economic growth. 

Under the bilateral agreement, both countries will work on electricity generation, energy efficiency, renewable energy and on building grid connectivity, according to a press statement issued by the Ministry of Energy, Water Resources and Irrigation. The agreement was signed by Minister Barshaman Pun and Bangladesh State Minister for Power, Energy and Mineral Resources Nasrul Hamid.

Bangladesh has to produce 40,000 MW of electricity by 2030 and 60,000 MW by 2041 to become a middle-income country, according to statistics of the Bangladesh government. According to a media report, if Bangladesh is to increase its GDP by 1 percent it will have to increase electricity generation by 1.5 percent. Currently, 80 percent of Bangladesh’s 160 million people have access to electricity—up from 47 percent in 2009.

Gandaki Province to integrate all tourism fees into one

From myRepublica: The provincial government of Gandaki Province has announced that it will integrate all tourism fees into one, following criticisms by trekking agencies and tourism professionals for not doing the needful in removing ambiguity about redundant tourism fees collected by different government entities. The tourism entrepreneurs had been demanding with the government to roll back the tourism fee imposed by each municipalities and rural municipalities separately to the trekkers. 

From the beginning of the current fiscal year, the Gandaki Province had imposed US$ 5 in tourism fee for tourists from the SAARC countries and US$ 10 fee for other nationals. Likewise, the local levels have imposed similar taxes on the tourists. Tourists who travel to the Annapurna Conservation Area Project (ACAP) pay tourism fee in the name of Trekkers Information Management System (TIMS), while they are also required to pay additional fee for entering into specified areas in the name of ACAP Permit Fee. 

Thursday, August 9, 2018

India's improving economic outlook

Here are major highlights from IMF’s 2018 IV report on the Indian economy

Following disruptions caused by November 2016 demonetization and July 2017 GST rollout, the economy is stabilizing. Real GDP growth slowed to 6.7% in FY2018 (April 2017-March 2018) but is expected to increase to 7.3% in FY2019 and 7.5% in FY2020 on account of strengthening investment and robust private consumption. 

Headline inflation averaged 3.6%, a 17-year low, due to low food prices thanks to favorable monsoon rainfall, agricultural sector reforms (pulses buffer stock, national agriculture market, crop insurance, irrigation), subdued domestic demand, and currency appreciation. It is expected to increase to 5.2% in FY2019 owing to the recent depreciation of the Indian rupee along with higher oil prices, housing rent allowances and agricultural minimum support prices. 

Current account deficit is expected to increase to 2.6% of GDP due to rising oil prices and strong import demand. Remittances are expected to increase slightly. High forex reserves and strong FDI inflows have helped contain external vulnerabilities. External position remains broadly consistent with fundamentals. 

Fiscal consolidation is expected as FY2019 Union Budget targets fiscal deficit of 3.3% of GDP (but a 3.6% GDP in IMF terms). India’s Fiscal Responsibility and Budget Management Review Committee recommended the government to cap public debt level to 60% of GDP by FY2023. Considering the general elections to be held by May 2019, the government is accelerating implementation of ongoing reforms rather than initiating new ones. 

Monetary policy is expected to remain tight on account of higher inflationary pressures as output gap narrows to -0.3% of potential GDP. India follows an inflation-targeting monetary policy framework (helps lower sticky inflation expectations), which dictates it to maintain CPI inflation between 2% and 6%. More needs to be done to improve NPAs and recapitalized public sector banks. The recent fraud at a public sector bank indicates how vulnerable is the financial sector to poor governance and operations. 

India’s GDP is US$2,602 billion; per capita GDP is US$1,942;  total population is 1.32 billion (with 33.1% residing in urban areas); poverty headcount ratio at $1.90 a day is 21.2; and Gini index is 35.2.

Risks to the economy are on the downside. Key external risks include higher global oil prices and tighter financial conditions. Key internal risks include tax revenue shortfalls and delays in addressing the twin bank-corporate balance sheet problems. The plan to recapitalize PSBs announced in October 2017 will add at least 0.8% of GDP to public debt (financed through recapitalization bonds). 

Structural reforms are needed in labor, land and product markets. 

Here is a collection background issue papers covering GST, fiscal discipline in Indian states, FDI, labor market reforms and agricultural sector reforms.

Wednesday, August 8, 2018

Subnational regulations and competitive populism

It was published in The Kathmandu Post, 07 August 2018.

Competitive populism

An emerging but entirely predictable major headache for federal government is the tendency of subnational governments to engage in a race-to-the-bottom revenue policy. Provincial and local governments have introduced overlapping tax regimes and are openly sparring with the federal government to assert their rights as per their own understating of power mentioned in the constitution. 

The uncertainty over tax regime and the subnational government’s jurisdiction with respect to mobilizing certain type of taxes have unnerved business community and potential investors. A competitive populism instead of cooperative and competitive federalism will have negative consequences on budget execution and investor sentiment. Note that this has happened even when the ruling Nepal Communist Party has two-thirds majority at federal as well as subnational levels. 

Subnational budget

All seven provinces as well a majority of local governments have introduced fiscal year 2018/19 (FY2019) budget, the first under the federal set up. Federal transfers (fiscal equalization, conditional, special and matching grants) and revenue sharing form the basis for their budget. In fact, total federal fiscal transfer and revenue sharing account for over 90% of provincial budget. They plan to cover remaining budget gap by raising revenue (province 2 and Karnali governments plan to borrow one billion rupees internally as well). Provincial and federal budget together tops Rs1552 billion, of which about 28.6% consists of capital budget. Similarly, a majority of the 753 local governments have presented FY2019 budget in line with federal and provincial fiscal transfers and revenue sharing. They plan to raise revenue by imposing local taxes when their expenditure plan is in excess of fiscal transfers and revenue sharing.

The whole process of designing expenditure priorities and revenue policy is supposed to be cooperative and competitive so that all tiers of government have synchronized and coherent plans to boost economic activities (and probably help the government realized its overarching motto “Prosperous Nepal, Happy Nepali”, irrespective of how that is measured or what is means!). This appears not to be the case right now. Several provincial and local governments are at loggerheads with the federal government over their jurisdiction in designing revenue policy. Note that they don’t have much say over expenditure priorities owing to the fact that the constitution is clear on what public services they must provide and how federal transfers are to be utilized for that purpose. 

Fiscal management

The subnational governments are aspirational and want to do more with larger budgets, which require more and bigger sources of revenue. Besides fiscal transfers and revenue sharing, they have limited options: internal loan, raising taxes and widening tax net as well as taxable economic or social activities. Currently there is a lack of clarity on procedures and regulatory framework to raise internal loans. So, most of the subnational governments have resorted to either raising taxes and/or including any economic activities under the tax net. This has pitted the subnational governments against the federal government, leading to a regulatory regime that looks like a race to the bottom and especially damaging to improving investment climate.  

For instance, province one has imposed district export tax on agricultural and forest items against the spirit of the constitution. Upon a challenge by the federal government that intra and inter province movement of goods should be free, province one government renamed it sales tax. All they did was to change the name of tax but keeping its distortive nature intact. Similarly, province two is imposing natural resources tax, province five is charging entry fee to Indian vehicles, province seven is imposing a fee on registration and renewal of industries, province three is imposing export tax, and Karnali province is imposing taxes on inter-district export of mining and quarrying items. Meanwhile, several local governments have drastically increased or introduced taxes on tourism, transport and small business activities— the lifeline of local economies and employment. 

This kind of uncertainty and tax policy disarray kills the spirit of federalism rooted in cooperative and competitive interaction among the three tiers of government. Two course corrections are important going forward. 

First, the federal government should immediately work to resolve this matter as this kind of uncooperative federalism harms local businesses and potential investment. Ministry of Finance, Prime Minister’s Office, National Planning commission and Ministry of Federal Affairs and General Administration need to work together with subnational governments to create not only a coherent and consistent expenditure plan, but also a revenue policy that is unambiguous to business community and one that is geared toward boosting local economic activities. Unfortunately, the federal government itself is weak in fiscal management and governance exercise, evidenced by the dismal capital budget execution record and its singular focus on mobilizing revenue. The subnational governments are thinking that their success lies in raising more revenue to fund more recurrent spending type commitments they made to voters before the elections. Alas, this is fiscally fatal, kills entrepreneurship and harms investment prospects. Confusion is also cropping up due to the delay by the federal government to introduce laws and policies to implement the constitution. 

Second, the federal government should facilitate competitive federalism between provincial and local governments to boost investment and commerce. They should be focusing on attracting investment in their region by rolling out regulations that eases cost of doing business, provides tax and land concessions, and raises productivity by supplying necessary infrastructure. Furthermore, the subnational governments should compete to attract more fiscal transfers by improving budget execution as more meaningful and efficient projects of subnational governments tend to attract more fiscal transfers. 

The subnational governments must compete to attract more investment and to boost growth instead of competing on regulatory regimes that sets them on a path to the bottom. 

Sunday, July 22, 2018

Action room to resolve implementation issues, Chinese funded infrastructure bank, empty treasury and more

From The Kathmandu Post: The government is set establish an Immediate Problem Solving Centre at the Prime Minister’s Office (PMO) in order to address legal, institutional and administrative issues at priority projects and service delivery of the government agencies. The centre, to be known as ‘Action Room’, will have a separate set of staff under the PMO secretary. Armed with video conferencing and telephony facilities, the centre will allow the prime minister to instruct the ministers, secretaries and project chiefs directly to instantly address the issues that arise in key priority projects and service delivery, according to PMO officials.

The PMO action room will help solve the problems at different ministries through cross-ministry coordination, among others. “In fact, the action room will be developed as a body to keep tabs on the monitoring bodies in the ministries to ensure timely completion of project works and service delivery,” said a PMO official.  The PMO is looking for space to setting up the action room. It has already arranged a team of staff, including a secretary, a joint-secretary, an under-secretary and three section officers. It plans to add some technical staff. The government is drafting a regulation to govern operations of the action room and establish a mechanism for monitoring and solving problems at the ministry levels.

NRA work stalls without a CEO

From The Kathmandu Post: The process of extending deadline for obtaining second tranche of housing grant has been in limbo as the National Reconstruction Authority (NRA) is without Chief Executive Officer. Yubaraj Bhusal had stepped down as the NRA chief in the second week of July, following the Oli-government’s decision on July 5 to revoke all the political appointments made by the erstwhile government led by Sher Bahadur Deuba after August 30, 2017.

A meeting of the NRA Advisory Council scheduled on July 6, which was supposed to take call over the matter, did not convene due to the government decision which had revoked the appointment of NRA CEO. NRA Deputy Spokesperson Manohar Ghimire said, “There would certainly be repercussions over the top position at the NRA which is vacant at the moment. There are a number of issues that need to be resolved,” 

A frequent change in NRA leadership due to political meddling has severely hit the reconstruction process even though three years have passed since the horrifying disaster struck the country that killed nearly 9,000 lives, leaving tens of thousands homeless. The authority had set mid-July 2018 deadline for quake survivors to obtain Rs150,000—the biggest chunk in Rs300,000 housing reconstruction aid handed out by the government. 

According to the agency mandated to carry out the reconstruction works post the Gorkha Earthquake, around 250,000 households have yet to receive second tranche of the government aid. Following the earthquake, the government decided to provide Rs200,000 per household in private housing rebuilding aid. It later increased it to Rs300,000 to be distributed in three installments—Rs 50,000, Rs 150,000 and Rs 100,000. The NRA also has to address several other issues urgently as the meeting of the NRA Advisory Council and Steering Committee cannot convene in the absence of chief executive.

Govt to set up Rs 100bn infra development bank under Chinese investment

From The Himalayan Times: The government has approved the proposal to form an infrastructure development bank under Chinese investment. A Cabinet meeting recently agreed in principle to form such a mega bank under Chinese investment, which will have paid-up capital of Rs 100 billion, informed Rajan Khanal, secretary at the Ministry of Finance (MoF). Following the Cabinet’s nod, MoF is currently holding bilateral discussions with China to set up the bank as soon as possible. The Chinese-investment bank needs to have at least 20 per cent domestic share.

In August last year, Nepal Rastra Bank (NRB) had brought ‘Licensing Policy for Infrastructure Development Bank 2017’ opening licence for Nepal Investment Development Bank (NIDB), which will have paid-up capital of Rs 20 billion. Likewise, MoF officials informed that Indian investors have also expressed interest to set up an infrastructure development bank in Nepal.

Govt treasury empty after haphazard spending in last month

From myRepublica: The government treasury is now empty following irrational budget distribution at the end of the fiscal year that ended Monday. Not a single penny has been left from the previous fiscal year , according to officials of the Ministry of Finance (MoF). This fiscal indiscipline on the part of the current government is sure to have serious consequences as it may trigger internal borrowing right from the first month, just as the previous government had done this time last year. The internal borrowing may exert further pressure on cash available for lending in the banking sector, shrinking the growth of the private sector, said two MoF officials who have direct knowledge of the matter.

The government spent about 33 percent of the total allocated budget for development purposes of Rs 335 billion, or Rs 110 billion, in the 12th month . A total of Rs 27 billion was paid out for the purpose on a single day in the last month. Overall payment by the government in the last month (mid-June to Mid-July) hovered at around 28 percent of the total budget of Rs 1,278. Economists have criticized this eleventh hour spending, questioning the motives and rationale.

The pressure on the government has already started as it has to disburse immediately a total of Rs 78.66 billion-- Rs 21 billion for provinces and Rs 57.66 billion for the local levels-- as part of conditional grants, and these were payable on Tuesday, the first day of the fiscal year. The government needs further disbursements of Rs 16.76 billion and Rs 45.16 billion by August 10 to the provinces and local levels respectively as equalization grants . “Government has no choice but go for internal burrowing as early as possible,” added an official. In a change from the past year, the payment of equalization grants was separated and scheduled on August 10 in order to evade pressure for fiscal transfers to subnational governments in the Appropriation Act 2075.

Thursday, July 5, 2018

Import-based revenue account for 45% of tax revenue in Nepal

Finance ministers in their budget speech focus exclusively on two issues: new or augmented expenditure programs and revenue mobilization plan to cover additional expenditure without drastically increasing budget deficit (although this and previous finance ministers unveiled budgets with larger-than-expected deficits). Implementable reform measures to enhance public service delivery and effective budget execution are usually missing or mentioned cursorily. The core focus of expenditure plan and associated reform measures are to attain high and inclusive economic growth by transitioning the remittance and monsoon based economy to a one that is based on more robust sources of growth (industrialization, commercial agriculture, tourism, innovation, etc). For this, the government requires both revenue and knowledge transfer (comes usually with foreign grants, loans and investment).

However, meeting revenue target supersedes all other objectives of MOF (which sometimes is labelled Ministry of Revenue instead of Finance). The strategy for meeting ever-higher revenue target is dependent on import related taxes and duties, and revenue administration’s efficacy. The core strategy of raising more revenue from duties on imports to finance an ever-increasing expenditure plan that aims to change the structure of the economy is at some level self-defeating (unless the expenditure plan, i.e. budget execution, is realized faster than expected to create a base for generating higher non-trade/import related revenue). Else, we are always at the mercy of remittance income!

Anyway, this dynamics is not going to change anytime soon and the economy will continue to bank on customs duties and taxes on trade as a core source of tax revenue to finance expenditure. The share of trade related revenue (total customs revenue including taxes on exports, VAT on imports, import duties in the form of excise duty) in tax revenue is about 46%. In FY2018, this was equivalent to about 9.6% of GDP.  Note that total tax revenue is about 21.9% of GDP). Non-tax revenue is about 2.3% of GDP. Total receipts (tax and non-tax revenue plus foreign grants) is about 25.4% of GDP. 

Import related revenue increased from 6.5% of GDP in FY2012 to 9.6% of GDP in FY2018. It is projected to be about 11.6% of GDP in FY2019.  This indicates how much the economy is reliant on import-based revenue to finance its rising expenditure. As long as imports are increasing, largely financed by remittance income, tax revenue will continue to rise. It will rise even more if excise duties on some imported goods are increased. There isn’t much room to raise trade/custom tariffs due to various multilateral and bilateral treaties.  

Total expenditure was about 34.8% of GDP (23.3%, 7.9% and 3.6% as recurrent, capital and financial provision expenditures, respectively). From FY2019 onward, federal government has to share 30% of VAT and 30% of domestic excise duty collections with subnational governments (it further squeezes available revenue sources and without a reduction in expenditure, it increases federal budget deficit). 

Friday, June 22, 2018

Kerung-Kathmandu railway, cartelish NBA and dysfunctional ICP

From The Kathmandu Post: Nepal and China have signed a landmark accord to develop a cross-border railway line that will connect the Tibetan town of Kerung with Kathmandu, calling the Cooperation for Railway Connectivity “as the most significant initiative in the history of bilateral cooperation”. The two sides signed the memoranda of understanding on Thursday following hour-long delegation-level talks at the Great Hall of the People.

This follows nine agreements signed by Nepali and Chinese public and private sector companies on Wednesday, with major ones being: Investment Board Nepal (IBN) and Huaxin Cement Company of China to develop a Rs15-billion Huaxin Narayani Cement; Butwal Power Company and Sichuan Investment Group (SCIG) to work together on Marsyangdi Cascade to produce 1,000 megawatt electricity; Nepal Electricity Authority and China’s State Grid Corporation will construct a 159-km Kerung-Galchhi transmission line.

In a visit where connectivity was the political buzzword, the two sides agreed to encourage Nepali and Chinese airlines to operate additional direct flights between the two countries. They will also speed up the construction of the Pokhara International Airport.

Though it was not explicitly stated which of the China-assisted projects fall under BRI, the two sides agreed to intensify implementation of the MoU on Cooperation under the Belt and Road Initiative to enhance connectivity, encompassing such vital components as ports, roads, railways, aviation and communications within the overarching framework of trans-Himalayan Multi-Dimensional Connectivity Network.

**Here is an excerpt from joint statement between Nepal and the PRC:
The two sides agreed to intensify implementation of the Memorandum of Understanding on Cooperation under the Belt and Road Initiative to enhance connectivity, encompassing such vital components as ports, roads, railways, aviation and communications within the overarching framework of trans-Himalayan Multi-Dimensional Connectivity Network. The two sides also agreed to take practical measures to promote cooperation in all fields contained in the MOU. The Nepali side conveyed its readiness to facilitate more Chinese investment in infrastructure building and in other productive sectors. In this regard, the Nepali side expressed its willingness to welcome further investment from Chinese enterprises and, in accordance with Nepali laws and regulations, simplify the related approval procedures on applications related to land, taxes and visas in an efficient manner, and create a favourable investment climate and business environment for Chinese enterprises.
Both sides agreed to reopen the Zhangmu/Khasa port at an early date; improve the operation of the Jilong/Keyrung port; ensure the sound operation of Araniko Highway; and carry out the repair,maintenance and improvement of Syaphrubesi-Rasuwagadhi Highway and push forward the construction of a bridge over Karnali river at Hilsa of Pulan/Yari port at an early date. To ensure the inter-connectivity and smooth running of the infrastructures above, the Nepali side will complete the disaster treatment around the Tatopani Port and along the Arniko Highway, maintain Kathmandu-Syaphrubesi Highway in operational condition.
Both sides expressed happiness over the signing of the MOU on Cooperation for Railway Connectivity. They underscored it as the most significant initiative in the history of bilateral cooperation and believed that it would herald a new era of cross-border connectivity between the two countries. Both sides agreed to make good use of the long-term communication mechanism on railway cooperation between government departments and promote railway cooperation. The Chinese side agreed to provide such support as in technology and personnel training.
The two sides agreed to encourage Chinese and Nepali airlines to launch/operate more direct flights between the two countries in accordance with provisions of the bilateral air service agreement between the two countries. Both sides will coordinate closely to speed up the construction of the Pokhara International Airport so that it would start operation at an early date.
The two sides expressed satisfaction over the successful commercial operation of China-Nepal cross-border optical fiber cable and agreed to further strengthen cooperation on information and communications for mutual benefit.

Birgunj ICP fails to please importers

From MyRepublica: Importers claim that the transportation of goods through the ICP has been inefficient and costlier than before. Although the replica infrastructures were constructed in both sides of the Nepal-India border so as to ease and advance trade and customs, the experience importers have faced transporting goods through the ICP is far from what was expected.

Om Prakash Sharma, president of Birgunj Chamber of Commerce stated: “The ICP has created more problems and the entry process of vehicles is very slow. As a result, containers are lined up for up to 25 kilometers.” He added, “Besides, the Indian security forces are not well-behaved. Entering the ICP, which was built to strengthen mutual trade relations, gives people the feeling as if they are entering an army camp and drivers are thus not willing to enter the ICP. Extortion of funds by Indian security forces is prevalent and at an increasing trend outside the ICP. Those who do not give the demanded money have to wait for an entire week and have also faced manhandling by the security forces outside the ICP. However those who pay between IRs 500 to IRs 1,000 per vehicle, are easily allowed to enter the ICP. 

From The Himalayan Times: The Nepal Bankers’ Association (NBA) has once again decided to regulate deposit rates without providing assurance of reining in runaway lending rates. This is an indication that commercial banks are more interested in reducing their expenses by forcefully lowering deposit rates, while maximising their income by keeping lending rates high.

The NBA today barred all 28 commercial banks from offering annual interest of over 11 per cent to retail depositors who park money in fixed deposit accounts. The interest threshold on funds deposited by institutional depositors in fixed accounts has been set at 10.5 per cent. The NBA has also said yields on money parked in savings deposit accounts should not exceed seven per cent.

Here is my earlier pieces on interest rate volatility, slack NRB, and cartelish NBA.