Friday, December 28, 2018

New public debt management office, energy banking between Nepal and India, and more

From The Kathmandu Post: Nepal and India have agreed to set up an energy banking mechanism that will prevent spilling of electricity generated in the country when production surpasses demand, a situation the domestic energy sector is expected to face in a few years’ time. Energy banking involves exchanging electricity for electricity instead of cash. Under this mechanism, one country exports electricity to the other when it has a surplus, and imports back the same amount of energy when it has a deficit.

Nepal Electricity Authority (NEA), the state-owned power utility, and Central Electricity Authority (CEA) of India on Wednesday agreed to the draft of the guidelines on power exchange. The draft will be presented for approval before the energy secretary-level joint steering committee (JSC) meeting scheduled to be held in January.

Nepal had long been advocating energy banking saying that seasonal complementarities of demand and supply of electricity in Nepal and India will make the mechanism a suitable model of power transfer. As a majority of power plants in Nepal are run-of-the-river type, they generate a large amount of electricity during monsoon. The surplus coincides with a sharp rise in demand for electricity in the Indian states of Uttar Pradesh, Haryana and Punjab due to increased power consumption in the farm sector.

From The Himalayan Times: Paddy productivity is estimated to go up by 8.6 per cent in the current fiscal year to 3.8 tonnes per hectare on the back of favourable monsoon, timely availability of fertilisers and use of modern tools and equipment. Paddy productivity stood at 3.5 tonnes per hectare in 2017-18, according to the Ministry of Agriculture and Livestock Development (MoALD). With the growth in productivity, paddy output is expected to hit an all-time high of 5.6 million tonnes in the current fiscal year, up 9.8 per cent than in the last fiscal year, data released today by the MoALD show. Nepal grew 5.1 million tonnes of paddy in the last fiscal year. The jump in paddy production is expected to raise total agricultural production, as the crop makes a contribution of over 25 per cent to overall agricultural output.

Investment summit in March 2019

From myRepublica: The government is organizing a second investment summit in March next year. Organizing a press meet at the Ministry of Finance on Thursday, Minister for Finance Yuba Raj Khatiwada, who is also the coordinator of the summit organizing committee, said that the two-day Nepal Investment Summit 2019 will kick off on March 29. The summit, among others, aims at promoting Nepal as a lucrative investment destination, according to officials of the Investment Board of Nepal (IBN), which is the coordinating agency of the event.

The government had hosted the first investment summit in March last year. The summit had secured investment pledges worth US$ 13.74 billion. However, most of the pledges have been limited to paper as not a single letter of intent (LoI) has materialized as real investment so far. Speaking at the press meet, Finance Minister Khatiwada, who is also the vice-chairman of the IBN, said that the summit was being held with an objective to translate the country’s long-term development ambition into achievement. “The summit will also help to share with investors what we have done to make the country more investment-friendly,” he added.

IBN CEO Maha Prasad Adhikari told Republica that the investment summit is a part of the government’s initiatives to attract foreign direct investment. Asked why another summit was needed when the investments pledged of the last summit was yet to realize, Adhikari said that the IBN along with other government agencies are following up with the investors. According to Adhikari, over 25 percent of such LoI is in the process of realization. 

>>My take on the proposed investment summit here

Nepal establishes Public Debt Management Office 

From The Himalayan Times: Government has established the Public Debt Management Office with a view to manage public debt in an integrated manner. Finance Minister Yubaraj Khatiwada inaugurated the office in Putalisadak amidst a programme here today. The office established as a subordinate body of the Ministry Finance will function autonomously. Prior to this, Nepal Rastra Bank (NRB) dealt with proceedings related to internal borrowings and Public Debt and Investment Section at the Office of the Auditor General owned the responsibility of managing external and domestic debt.

The newly established office will look after works relating to debt management including some works of the Finance Ministry. According to Office Chief, Bishnuraj Dhakal, the office will support effective implementation of the government’s fiscal and monetary policies. It will invest in public enterprises and recover loans.

Moreover, it has been given the additional responsibility of looking after some tasks relating to the internal and external debt executed by the International Cooperation Coordination Division and Economic Policy Analysis Division of the Ministry of Finance. It has also been assigned to prepare a draft of the public debt policy. On the occasion, the Finance Minister expressed hope that the government’s fiscal and monetary policies will become more effective with the office coming into operation.

Thursday, December 27, 2018

Central bank tweaks regulations to aid stock market

Closely following the recommendations of a committee formed to study the slide in stock market and to reinvigorate it, the central bank tweaked rules and regulations yesterday. 


Issuance of loan against shares by the banks:  Reduced the risk weight in such loans to 100% from 150%. Offer loan up to 65% of the valuation of shares based on the average price in the past 180 days or the prevailing market price, whichever is lower. Earlier, the threshold of margin lending stood at 50%.  They can also issue loan on shares equivalent to at most 40% of their core capital. Earlier, the NRB had restricted banks to issue loan in shares up to 25% of the core capital.

Margin call:  Banks will now consider right and bonus shares as collateral while valuating shares to make the margin call. Earlier, they were allowed to make a margin call if valuation of shares fell below 20% of the approved value while issuing loan. 

>>These measures will help to increase flow of funds to the stock market, which was crippled by lack of funds as BFIs started to jack up deposit rates. 

Interest spread rate: Banks will have to maintain spread rate at 4.5% by mid-July 2019. Spread rate is the different between deposit and lending rates. They need to reduce spread rate to 4.75% by mid-April 2019. Earlier, it was 5%. 

>>This will help to reduce lending rates. High interest spread is an indication of lack of efficiency and competitiveness of BFIs. High interest spread has its root in a number of factors: risky investment, high inflation (although this is not a case now), high operating costs, reliance on interest income for survival amidst cut-throat competition to rope in depositors, diseconomies of scale due to small market size (which necessitates consolidation of BFIs), and poor access to finance. NRB has been monitoring spread since mid-July 2014 and has been instructing BFIs to bring it down. 

Base rate: Base rate is calculated by BFIs by adding the cost of fund, cost of Cash Reserve Ratio, cost of Statutory Liquidity Ratio, operating cost, and return on asset (ROA). Now, BFIS do not have to to add 0.75 percent ROA while calculating their base rate.

>>This will reduce reported profits of BFIs. Ideally, base rate is published to enhance transparency in lending rate and to strengthen monetary transmission mechanism. NRB started to monitor base rate since 2013 in the case of commercial banks, and since 2014 in the case of development banks and finance institutions. BFIs do not lend below their respective base rate.  

Institutional deposit: The ceiling for share of institutional deposits has been increased to 50% from 45%. 

The committee formed by finance minister has recommended ways to revive the stock market so that is is always in the bullish zone. Tweaking banking regulations to increase temporary funds flowing to stock market is hardly the solution that is needed now. NEPSE should be responding to economic fluctuations more than the variation in cash savings of few players/speculators. A strong and stable stock market mobilizes capital for investment.

One of the unfinished financial sector reform agenda is consolidation of BFIs, which will help to enhance capital base, operational efficiency and resilience of BFIs. NRB has imposed a moratorium on new BFIs and has been nudging BFIs go for merger and acquisition. Fewer and larger BFIs should lower operational cost (economies of scale), lower cost of fund, increase capital base, reduce asset-liability mismatch as long-term funds could be attracted, diversify loan portfolio, increase R&D investment, and enhance resilience to internal and external shocks. 

Wednesday, December 26, 2018

Prospect for Nepalese migrant workers in Japan

On December 25, the Japanese government approved measures aimed at ensuring that foreign workers under its new visa system have proper working conditions and access to support mechanism for adjustment. It includes a plan to set up about 100 consultation service centers that will provide information and services related to employment, medical services, childcare, and education. The centers will provide assistance in 11 languages. 

Earlier this month Japan’s parliament endorsed a new law to allow foreign workers in 14 industrial sectors facing acute labor shortages (thanks to declining population). The government will create two new visa categories for workers from nine countries— Cambodia, China, Indonesia, Mongolia, Myanmar, Nepal, Thailand, the Philippines and Vietnam— for employment in restaurants, hotels, nursing care, building cleaning, agriculture, fishery, food and beverage, materials processing, industrial machinery, electronics and electric machinery, construction, shipbuilding, vehicle maintenance, and airport ground handling and aircraft maintenance. 

The government expect up to 345,150 foreigners to acquire the new residency status in the first five years. There are industry specific guidelines that stipulate the maximum number of foreign workers to be accepted (60,000 in the nursing assistant sector and 53,000 in the restaurant business). No.1 type of residency status is for workers with certain level of knowledge and experience (basic Japanese language, pass language and skills test), and No.2 type of residency status is for workers with higher skills level. The first type of residency is valid for up to five years and workers will not be allowed to bring in family members to Japan (the cap on foreign workers mentioned above applies to this type of visa category). The second type of residency has no such restrictions and also doesn’t have limit on renewal of visa. Hiring for No.1 type will being in April/May 2019 and for No.2 type in 2021.

Previously, working visas were granted to people with high skills such as doctors, professors, lawyers and teachers. Workers with low skills usually came on trainee (technical interns type) visas that needed to be renewed periodically. 

It is a good news that Nepal is also included in the list of nine countries from where Japan will bring in foreign workers, which are sorely need in low skilled jobs and in rural areas facing manpower shortage (plus for the expected stimulation of economic activities in the lead up to and during Tokyo 2020 summer Olympics). Now, Nepal needs to ensure that middlemen are kept aside (usually, workers pay hefty sum to agents in Nepal and are saddled with debt for the rest of their uncertain stay and work in Japan) as it participates in the new scheme. Japanese foreign minister Taro Kono is visiting Nepal in the second week of January 2019. It will be a good opportunity to seek for an early G2G deal on foreign workers so that hiring of Nepalese workers for Japanese companies is fast, more and without much hassle. Nepal government should also work on preparing potential migrants for the Japanese market by facilitating skills and language training. Ultimately, this should help in increasing formal sector remittance flows from Japan to Nepal. 

The number of migrant workers to Japan who took labor permit from government is declining: FY2016: 3844; FY2017: 2251; FY2018: 761.

Monday, December 24, 2018

Nepal-India-Bangladesh power trade, soft loans for returning migrants and recurring banking crisis

From The Kathmandu Post: India for the first time has given explicit recognition to the tripartite arrangement in cross-border trading of electricity, paving the way for Nepal to export surplus electricity to Bangladesh via Indian transmission lines. Introducing new guidelines on cross-border trading of electricity, the Indian Power Ministry included a provision under which two countries having a bilateral agreement with the Indian government can trade electricity between them through Indian power lines after entering into agreement with the Indian government owned-Central Transmission Utility.

While issuing guidelines on cross-border electricity trade for the first time in 2017, the Indian Power Ministry had failed to recognise a possible trilateral arrangement among two countries and India. But the recently introduced guidelines by India after withdrawing the old one issued in 2017, according to the experts, provide an opportunity to its neighbouring countries— Bangladesh and Nepal—to trade electricity between them via Indian territory.

The Indian government has also removed the discriminatory provision included in the older guidelines, under which Nepali-based hydropower projects which are owned by the Indian government or have a majority Indian share were only allowed to export power to India.

>>Here is an earlier story on the same issue. 
>> Here is the full text: Guidelines for Import/Export (Cross Border) of Electricity-2018

Soft loan attracts migrant workers

From The Kathmandu Post: The government’s bid to retain migrant returnees has received an encouraging response with more and more workers applying for the financial assistance introduced to engage them in occupations within the country. Nearly 3,000 youths who are experienced in foreign jobs have applied for a soft loan since the scheme was launched on November 22. Under the scheme, skilled migrant workers who returned to the country within the past three years can apply for a soft loan of up to Rs1 million.

According to board officials, there have been 200 applicants for financial grants and the number is likely to surge before the December 14 deadline. Applicants can apply online or submit documents to the board office. For accessing financial support from the government, applicants should submit a clear business plan along with necessary documents certifying their experience and skill in a particular sector. However, not many candidates have submitted concrete business plans that would increase their chances of getting the support, Shrestha told the Post. A large number of applicants have only mentioned what they would be doing with the fund they will receive.

The foreign employment promotion board has sought a detailed business plan that would clearly mention how the enterprise would operate, the number of people to be involved in the business, and how the business would utilize their own skills. The board has not specified any sector in which it wants the fund recipients to invest or start their business.

Bankers agree to bring down deposit rate

From The Himalayan Times: Owing to pressure from Nepal Rastra Bank (NRB) and the government, Nepal Bankers’ Association (NBA) — the umbrella organisation representing 28 commercial banks of Nepal — has decided to cap the interest rate on savings, individual fixed deposits and institutional fixed deposits. The NBA meeting today decided to cap interest rate on savings at 6.5 per cent, on individual fixed deposit at 9.25 per cent and 8.5 per cent for institutional fixed deposits. The NBA decision will come into effect from Friday itself. 

The banking sector started witnessing massive interest rate volatility after the commercial banks began waging an interest rate war by offering higher rates to lure depositors by ditching their ‘gentlemen’s agreement’ on interest rates three weeks ago.

Previously, NBA had agreed upon to limit interest rate on savings to seven per cent and 10 per cent each on individual fixed deposit and institutional fixed deposit. However, some banks had started accepting fixed deposits at up to 13 per cent interest rate lately after the NBA agreement was ditched. Following such instability in the bank interest rate, the central bank had directed commercial banks to bring down the interest rate on deposits.

Moreover, a study committee of the government had submitted its report to the Ministry of Finance today recommending the central bank to scrap the provision of adding 0.75 percentage point as return on assets in the formula to derive the base rate. The suggestion aimed at bringing down the base rate of banks and subsequently the lending rate. The base rate is the minimum rate at which banks and financial institutions can disburse credit to borrowers.

>>Here are two recent articles on financial sector: errant NRB, and they had it coming

Thursday, December 13, 2018

Will the proposed new law to bypass existing procurement law accelerate project execution?

The government has drafted a new law that will allow it to bypass existing public procurement process and award projects worth Rs50 billion and above to developers through direct negotiation. 

The proposed new law allows the government to award projects to probable developer without competitive bidding under three conditions: (i) when no proposals are received during the public procurement process initiated by the authorities; (ii) when the project is based on new concept and technology; and (iii) when the estimated cost of the project is Rs50 million or more. The government will invite for competitive bidding for projects with estimated cost between Rs25 and Rs50 billion, but if only one company applies for it, then the proposed law allows the government to award projects to that company. If no company bid for projects, then government can award it directly to a potential developer. A committee chaired by the prime minister will have a final say on these projects. The committee will be represented by ministers from line ministries responsible for implementing the project, finance minister, vice chairman of National Planning Commission, chief secretary and secretary at PMO overseeing the project. 

The proposed law allows the PM-led committee to decided on the following projects: 50 km two lane road, 25 km four lane road, 2 km tunnel, international airport, 200 MW and above hydroelectricity projects, 220 KV and above transmission line, 100 km railway, 20,000 hectar and above irrigation project, 100 million and above per day drinking water project, and projects above Rs25 billion. 

Politicians and bureaucrats have been arguing for a fast-track approach to finalizing procurement for a long time. One of the core reasons why capital spending is low and spending in the last quarter or month is high is due to delay in procurement. Budget used to be unveiled in mid-July, then project authorization took another two months followed by a month or so of preliminary procurement work. Then government and project offices closed down during festival season. By the time festival season was over, five to six months already lapsed. Government awarded projects at the end of second quarter and those who won bidding of the project took some time to start work (some contractors underbid, took advance amount and forgot about finishing work on time). They felt pressure to spend fast and more towards the end of the year. They tried their best but still could not finish work. Their application for payment against physical progress is cleared in the final quarter or month. This was (and unfortunately is) the process of budget execution. 

To get out of this vicious circle of timing, (under)capacity and low spending, politicians and bureaucrats were looking for a solution.  Public Procurement Act was amended in 2016, but it didn’t work. Budget was unveiled one-and-a-half month before the start of fiscal year (it is written in the constitution now), but still it is not working as expected. Some procurement processes were cleared by the Cabinet, but still it did not work. So, the last weapon now is to bring out a law to fast-track awarding of contracts by bypassing procurement process for national priority projects. Here is a pretty detailed review of various aspects related to public procurement in Nepal. Here is an article on the reasons behind chronically low capital spending

Without sufficient checks and balances, it opens up avenues for foul play by politicians: awarding contract to select developers from particular country without vetting their credibility and ability to take on the task, escalate cost to ensure that it is above $500 million so that the project is governed by the new law, etc. 

The issue is not about awarding of the contract through a fast-track process. The main issue is with the preliminary work that needs to be done prior to the awarding of contract: land acquisition, financial adequacy, contract management (by both government and principal contractor), safeguards assessment and clearance (social and environmental), availability of adequate inputs for construction (raw materials, human resources, machinery, etc), and monitoring and evaluation capacity. ]

If the new law doesn't address these issues plaguing capital spending and focus on fast-track awarding of big projects to select developers, then the situation isn't going to be any different from what we are witnessing now. In fact, it might escalate true cost of project and there will be an incentive to award such project to select developers. A case in point is the 1200 MW Budhi Gandaki hydroelectricity project, which was re-awarded to a Chinese company without competitive bidding. 

Sunday, December 9, 2018

Nepal India power trade, subnational government's budget execution and more

From The Kathmandu Post: India opened the door wider to power exporters by removing a discriminatory provision in the Guidelines on Cross Border Trade of Electricity under which Nepali-based hydropower projects which are owned by the Indian government or have a majority Indian share are only allowed to export power to India. This condition essentially bars plants built with Nepali or third country funding from exporting electricity to India, and its removal has been hailed as a major boost for Nepal’s energy sector.

According to the Energy Ministry and the Indian Embassy, the Indian Power Ministry has prepared a new draft of the guidelines minus the provision allowing only Nepali-based companies wholly owned by the Indian government or the public sector or private companies with a 51 percent or more Indian stake to sell power to India. Moreover, companies owned or controlled by the Nepal government will be able to export power to India after getting a one-time approval from Indian authorities, as per the guidelines.

According to the guidelines issued by the Indian Power Ministry in December 2016, other companies wishing to sell power to India have to obtain the approval of the designated authority on a case-by-case basis. The provision was discouraging to foreign investors and private Nepali power developers planning to build export-oriented hydropower projects with an eye on the Indian market.

From The Kathmandu Post: Even as pressure builds on the government to resume movement of Nepalis to work in Malaysia without further delay, officials say it will take more time as both the countries are working for implementation of a bilateral deal. Nepal and Malaysia signed a much-awaited labour agreement on October 29. This was expected to resume departures of Nepali workers for Malaysia, which has been halted since mid-May. However, there has been no significant progress towards that end.

Minister for Labour, Employment and Social Security Gokarna Bista told the Post that the government was working to complete the process so that Nepalis can work in Malaysia again. “The labour deal with Malaysia was signed after years. We need to work for putting the agreement into practice. There is still some work to be done before we allow workers to migrate to Malaysia,” said Minister Bista.

According to him, joint working committees are thrashing out issues. The delay in resuming worker departures for Malaysia five weeks after signing the labour pact has irked recruiting agencies as well as political leaders from the opposition Nepali Congress.

From The Kathmandu Post: The federal government’s delay in handing over the key institutions and deputing the required number of civil servants has hit the provincial governments’ ability to spend. In the first five months of the current fiscal year, the provincial governments have spent only two percent of their budget on an average. 

The combined budget of all the seven provinces for the current fiscal year is Rs113.43 billion whereas their combined spending stood at Rs2.36 billion as of December 5. This shows that budget utilisation of the provinces is much below the federal government’s. Singha Durbar spent 20.91 percent of its total budget in the same period, according to the federal finance ministry.

The dismal spending by provincial governments comes at a time when the federal government itself is criticised for its poor spending. Provincial governments, however, blame Kathmandu for the poor implementation of the budget.“The failure of the federal government to depute necessary staff to the provinces and the frequent transfers of officials at the provinces, particularly the secretaries, are the main reasons behind the poor spending,” said Province-2 Finance Minister Bijaya Kumar Yadav. “How can budget be implemented without the bureaucracy?”

According to the Ministry of Federal Affairs and General Administration, only around 12,900 civil servants have been mobilised at the provinces against the need for 21,000.

Govt takes over projects meant for provinces

From The Himalayan Times: The federal government has taken over some development projects supposed to be under the jurisdiction of provinces. The federal government had stated in the budget that some key development projects would be under the jurisdiction of provinces but now it has taken control of them.

The projects the federal government has taken over include:  The 10  Mid-Mountain Highway Cities, 15 linkage roads of the postal highway in Tarai-Madhes, Jhamak Kumari Ghimire foundation, nine risky settlements including in Bajura and the four municipalities of Province 7 funded by the Asian Development Bank. The  budget had stated that these projects would be under the provincial government’s jurisdiction. According to the Ministry of Urban Development, the provinces have expressed dissatisfaction with the federal government’s decision.

Spokesperson of the Ministry of Urban Development Krishna Prasad Dawadi told THT the Cabinet had decided to this effect on November 19 after consulting the federal finance ministry. “The federal government decided to take over these projects because provincial governments lacked skilled manpower and had failed to open offices to execute the projects,” he added.  He said the other reason was involvement of foreign donors in the projects and the risk of high variation order on account of delay. “The donors had also expressed concerns regarding some projects,” Dawadi added. Dawadi said the federal government would gradually hand over these projects to the provincial governments.

Thursday, December 6, 2018

Latest trade policy review of Nepal

The WTO has released the latest trade policy review of Nepal (prepared by WTO here and by Nepal here). The last review was done in 2012. Nepal has updated its trade policy and export strategies and investment as well as labor legislation since then. However, there is not much to show in terms of its effect on industrial output and exports growth, which suffers from supply-side constraints and inadequate trade facilitation measures. 

Nepal became a member of the WTO on 23 April 2004 when it became the first LDC to join the WTO through the full working party negotiation process. It is also a member of two overlapping regional free trade agreements: South Asia Free Trade Area (SAFTA), and Framework Agreement on the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). Nepal has bilateral trade agreement with 17 countries. The transit and trade treaty, railways services agreement and an agreement on cooperation to control unauthorized trade with India are the most consequential ones. The transit treaty with India allows Nepal to trade with other countries through Kolkata/Haldia ports and Vishakapatnam port (since 2016).

Here are some of the highlights from the TPR:

1. Exports have declined since the last review, but imports have more than doubled. Almost two-thirds of export and imports occur with India. As a share of total imports, agricultural (19%), iron & steel (9.7%), non-electrical machinery (8.5%), and transport equipment (8.9%) imports increased. Manufacturing import's (i.e. total minus agricultural and mining imports) share increased from 54.3% to 59.2% over the review period. 

2. Nepal updated its trade policy in 2015 and Nepal Trade Integration Strategy in 2016. MoICS is responsible for implementing trade policy, but MOF has the final say in setting tariffs. Trade related legislation covers customs, export and import licensing, TBTs, SPSs, competition policies, investment regimes, competition policies, government procurement, and intellectual property rights.

3. NTIS 2016 provides the foundation for the implementation of trade policy 2015. It identifies 12 strategic area goods and services: large cardamom, ginger, tea, medicinal and aromatic plants, fabrics textiles yarns and ropes, leather, footwear, chyangra pashmina, knotted carpets, skilled and semi-skilled professionals, IT services and BPO, and tourism. Seven cross costing areas are trade capacity (including trade negotiations), trade and investment environment, trade and transport facilitation, standards and technical regulations, sanitary and phytosanitary standards, intellectual property rights, and trade in services. NTIS 2016 identified 190 actions to be implemented by 2020. 

4.  The bilateral trade and transit treaty with India allows each other unconditional MFN treatment and exemption from customs duties and quantitative restrictions on a reciprocal basis on a mutually agreed list of primary products. Nepal gets non-reciprocal access (no customs duties and quantitative restrictions) of its industrial products to the Indian market except for vegetable fats, acrylic yarn, zinc oxide and copper products under HS headings 74 and 8544. These four products face tariff quotas. The EU provides duty-free and quota-free access to Nepalese exports under its Everything But Arms (EBA) initiative. Nepal is beneficiary under the GSP schemes of Australia, Canada, the European Union, the Eurasian Economic Union, Iceland, Japan, Kazakhstan, New Zealand, Norway, Switzerland, Turkey and the United States. The US is providing duty-free treatment for 779 products to help the country expand its trade and economic development following the devastating earthquakes in 2015. This unilateral preferential agreement started on 30 December 2016 and will last until 21 December 2025. China and Nepal also signed a bilateral agreement on transit transport in March 2016.
5.  FITTA 1992 and IEA 2016 provide the legal basis for regulating, administering and facilitating FDI. There many other laws related to banking, environment, and labor among others that also affect investment. The Company Act, 2006 (as amended in 2017) simplifies and makes the process of establishing, managing and administering companies more convenient and transparent. The Industrial Enterprises Act (amended in 2016) is simplifies and clarifies the procedures for the entry, operation and exit of industrial enterprises. The SEZ Authority Act 2016 provides incentives for investors establishing firms within a SEZ: full tax exemption for first five years, income tax rebates, dividend tax exemption, VAT facility, and custom duty exemptions among others. Investment Board of Nepal and Department of Industry facilitate and approve investment proposals depending on the amount of investment or as specified in respective laws.

6.  There are eight MFN tariff bands: duty-free, 1%, 5%, 10%, 15%, 20%, 30% and 80%. As of 2018/19, there are 5,572 tariff lines at the eight-digit level based on HS2017 nomenclature. The simple average applied MFN tariff (excluding ad valorem equivalents for specified duties) decreased from 12.2% in 2011/12 to 12% in 2018/19. Including ad valorem equivalents, the simple average applied MFN tariff in 2018/19 is 12.4%. The highest ad valorem rate of 80% applies to two tariff lines related to tobacco, along with motor vehicles, and arms and ammunition products.  

7. Tariffs have been increasing, with an average tariff of 9.3% on raw materials (first stage of processing), 11.4% on intermediate goods, and 13.8% on finished goods.  
8. Nepal bound 54 tariff lines at HS eight-digit level, with overall average bound tariff of 26.6%. The average bound tariff for agricultural products is 42.9% and for non-agricultural products 23.9%. However, applied tariffs (average 12.4%) are much lower than the average bound rate except for 38 tariff lines. These are mainly chemical products and some machinery including motor vehicles. 

9. The simple average tariff rate for SAARC members is 9.5% (for non-SAARC members its 12.4%). For agricultural products the average preference margin is 2.2 percentage points compared to the applied MFN tariffs, and for non-agricultural products its 2.9 percentage points. 

10. Other duties and charges imposed by Nepal include an agricultural reform fee of 5% (or 8% on some products) on selected agricultural products imported from India and Tibet Autonomous Region of China; and a road maintenance and reform fee of NRs4 per liter for import of petrol and NRs2 per liter for diesel. A customs service fee of NRs565 per declaration is charged o import consignments worth over NRs5,000. VAT and excise duties are also levied at customs points.

Tuesday, December 4, 2018

Waiting for the pay-off: Contribution-based social security scheme in Nepal

It was published in The Kathmandu Post, 03 December 2018. Related blog post here.

Prime Minister KP Sharma Oli launched a new contribution-based social security scheme for private sector employees amidst much fanfare and self-congratulation. The opposition bloc cautiously welcomed the initiative, asserting their share of contribution too but censuring the government’s flamboyance.

The new social security scheme, a product of groundwork that began almost a decade ago, is a landmark initiative. It is a win-win for private sector employees and employers (at least on paper) as it offers financial and income certainty for the former and a possibility of investor-friendly workplace environment for the latter. However, the success of the scheme now depends on how effectively and efficiently the government implements it by prioritising institutional set up, and operational and management independence of the fund.

Setting new precedents

The new scheme is in line with contribution-based social security regulation, which reflects the contribution-based social security law passed by the parliament last year. All formal sector firms are required to join the scheme and deposit 31 percent of an employee’s basic monthly salary in the Social Security Fund (SSF), of which 11 percent needs to come directly from worker’s basic salary and the remaining 20 percent must be contributed by the employer. Workers will get a unique social security number that will not change even if their jobs do. 

The SSF offers a number of schemes for workers. First, the health and maternity policy is restricted to medical coverage up to Rs. 100,000  and maternity allowance is equivalent to one month’s salary. If workers need to be absent from work beyond the 12 days of annual leave, then the SSF will provide them 60 percent of minimum salary. Pregnant workers who need to take leave in excess of 60 days (at the maternity level) will also be offered similar facilities. Second, workers will receive financial support in the case of workplace and non-workplace accidents and injuries. Third, workers who have contributed to the fund for at least 15 years are eligible for a monthly pension. Those working less than 15 years can withdraw the contributed money after termination of their employment. Fourth, in cases of deaths of workers, their family members can receive monthly pension equivalent to 60 percent of the worker’s basic salary in the last job. Similarly, children will receive 40 percent of parent’s monthly salary to cover educational expenses up to the age of 18 years.

Compared to existing schemes for workers’ welfare and financial security, these are generous offers. Employees have an incentive to be more disciplined, punctual and productive at workplace- something the private sector wanted since trade unions became unruly, leading to a deterioration of the investment climate - given the promises of not only their own financial and health securities, but also of their dependents. Employers are hoping for an end to labor strikes, often instigated by politically affiliated trade unions, over workers’ welfare and financial allowance. It should help to raise labour productivity (per worker output) if disruptive union politics and dishonest employers do not game the system in their favor. There will also be pressure on informal sector firms to enroll their employees into the program, leading to the formalisation of businesses (and potentially more tax revenue for the government).

The trade unions, which act as sister organisation of political parties, are happy because it is easier for them to make a deal with the government than the private sector (remember that the contribution rates could be changed). The private sector is also happy because now, issues such as planned and ad hoc welfare are now the government’s headache.

Key lies in implementation

The success of the new scheme depends on how effectively and efficiently it is implemented. First, the fund should be operated by an independent agency free from political and trade union pressure. An independent and transparent mechanism to manage fund is quintessential to its operational success and for it to earn higher return on investments. The law allows the government to direct the SSF on issues it thinks are pertinent and of national interest. This provision should not be used by the government to indirectly advance its agenda, especially on matters related to personnel management, daily operation of SSF, and investment decisions. Moreover, the SSF should desist from funding the government’s fiscal deficit—especially if it is due to drastic increase in recurrent expenditure—by purchasing treasury bills and bonds if the returns are not higher than in alternative scenarios.

Previously, the Ministry of Finance indirectly instructed Employees Provident Fund (EPF) and Citizen Investment Trust (CIT) to extend loans to projects it deemed were important and necessary to support the government’s agenda. A recent example includes the loans extended by these semi-autonomous pension funds to Nepal Airlines to purchase aircrafts, whose full operation is uncertain as the company is mired in a controversy over foul play in their procurement processes. This kind of investment, even with sovereign guarantee, increases the odds of incurring losses, which would mean lower than expected payment for employees enrolled in the scheme. Remember that final payment is based on the contribution of employees and the returns earned by the SSF on investments.

Second, a professionally run SSF without political and union interference is paramount to its success. If all formal and informal sector employees enroll, it could easily have over one billion dollars in deposit each year. Acquiring the human resources, and operational and management expertise required to manage such a large fund is quite a behemoth challenge. Furthermore, the failure to invest deposited funds will have an impact on banking sector liquidity unless the SSF adopts the pension fund’s strategy to park deposits in banks offering the highest interest rate.

Third, the government’s liabilities are going to increase drastically because it guarantees payment to workers even if money contributed by the SSF is insufficient. Some of the SSF’s policies, including issues pertaining to workplace accidents and the eligible age for pension schemes, are open ended and therefore, could significantly increase liabilities vis-à-vis its accumulated assets.

Furthermore, if SSF’s investment goes sour, then the liabilities will be even higher. The government is already alarmed by the ballooning retirement payment to public sector employees. Contingent and unfunded liabilities are ever increasing. This calls for a unified social protection scheme that covers public and private sector employees, old age allowance, medical insurance, and unemployment allowance, among others.

Fourth, workers, with their own and familial financial and health securities guaranteed, need to be more disciplined and productive at workplace. This, along with improvements to the investment climate, could result in higher production and investment. Currently, labor productivity of Nepali workers is one of the lowest in South Asia. 

Tuesday, November 27, 2018

Contribution-based social security scheme in Nepal

Prime Minister KP Sharama Oli formally launched a new contribution-based social security scheme today. It provides health, accident and maternity coverage to workers employed in the private sector. Workers will also get a lifetime pension after retirement. The scheme is in line with Contribution-based Social Security Regulation.

To enroll into the scheme, a sum equivalent to 31% of a worker’s basic monthly salary needs to be deposited in Social Security Fund (SSF). 11% will come directly from the worker’s basic salary and 20% will be contributed by the employer. This is a significant step in terms of financial and social security of workers and will be a win-win scheme for both workers and their employers. It is step toward workers security as well as creating an investor-friendly workplace environment. 

Here are some of the features:
  • Enrolled workers will get a unique social security number, which remains unchanged even if they change their job.  
  • The fund has four types of social security policy: health and maternity security, dependent family security, accident and disability security, and old age pension security. 
  • They must contribute to the fund for at least six months to avail medical insurance, which covers doctor’s fee, hospital charges, medical test fees, and travel expenses among others. 
  • They must contribute to the fund regularly for at least 12 months (in the last 18 months) to receive health and maternity coverage. Health coverage is limited to NRs100,000 annually. Maternity coverage is limited to one month of extra salary.
    • Workers are getting 12 days of annual leave. If they have to take leave more than that, then SSF will give them 60% of minimum salary 
    • Pregnant worker can get 60 days leave. SSF will give 60% of minimum salary if she has to take leave more than that (but not in excess of NRs25,000).
  • They will get financial support in the case of workplace accidents and disabilities.
    • They must contribute to the fund for at least two years to ensure that all expenses related to occupational diseases are covered. 
    • For non-workplace accidents, a maximum coverage of up to NRs700,000 can be availed.
    • For those who cannot return back to work after accident, the SSF will provide 60% of minimum salary until they report back to work.
  • They are eligible for pension 15 years after they start regular contribution to the fund (and after 60 years of age).
    • Workers who have worked less than 15 years can withdraw the deposited money after termination of employment
    • Workers who have worked at least 15 years will get monthly pension, which is equivalent to the sum of worker's deposit and profit earned by SSF from its investment divided by 180. If workers retire after 20 years of employment and contribution to the fund, then they will divide it is by 240.
  • If a worker dies, then the family members can receive monthly pension equivalent to 60% of the worker’s basic salary in the last job. The worker’s children will receive 40% of parent’s monthly salary to cover educational expenses up to the age of 18. If the worker doesn’t have spouse or children, then his or her parents will get 60% of monthly salary as pension. 
The government is planning to make it mandatory for formal sector firms to enroll in the scheme. It then wants to expand the coverage to informal sector too. Formal sector enterprises need to register by February 22 and submit employees' details by May 21. The exiting social security funds deposited in Citizen Investment Trust and Employees Provident Fund need to be transferred to SSF.

As per the plan as of now, of the total SSF, 3.22% will be allocated for medical treatment, health and maternity security; 4.52% for accident and disability coverage; 0.87% for dependent's family; and 91.39% for old age security. Currently, SSF has NRs20 billion deposited by levying one percent social security tax on basic salary of all private sector employees.  There are an estimated 3.5 million workers currently. The minimum wage as of FY2018 is NRs13,450, of which NRs8455 is basic salary and NRs.4995 is allowance. 

It is a good social security scheme whose groundwork started almost a decade ago. The big question now is how enrollment and fund will be managed and operated transparently. A committee headed by the secretary of Ministry of Labour, Employment and Social Security along with representatives from NRB (deputy governor), finance ministry, law and justice ministry, and cooperatives and poverty alleviation ministry will manage the fund. The executive committee will have three representatives each from trade unions and employers. There will be an executive director at the SSF. If politics is not kept away from SSF, then there is scope for mismanagement of funds (like pressure from MOF to invest in certain projects it deems necessary to support the government's plan). 

Independent and transparent management of fund is quintessential to its operational success and for it to earn profits from the investments. Higher the profits from investments, higher will be the payments to workers enrolled in the scheme. If not, then this is likely to increase fiscal burden of the federal government. 

Another question is how is the SSF going to encourage informal sector firms to enroll in the program (which in a way will force them to operate formally). There are about 0.5 million workers in the formal sector. Monthly contribution from them will be about NRs2.5 billion. 

Tuesday, November 20, 2018

China's manufacturing transformation

China's trajectory of manufacturing is quite interesting. Here is an abstract from an article in NYT:

Economic textbooks lay out a common trajectory for developing nations. First they make shoes, then steel. Next they move into cars, computers and cellphones. Eventually the most advanced economies tackle semiconductors and automation. As they climb up the manufacturing ladder, they abandon some cheaper goods along the way.
[...]Look at the evolution of what China sells to the rest of the world. As it ramped up its manufacturing engine in 2000, China was pretty good at making basic products like toys and umbrellas. By 2016, China had moved into more expensive goods like cellphones and computers, while making even more of the cheaper stuff.

The next phase, which includes the most valuable products in the world, will be harder. China can’t make chips as small and fast as the United States can. Its cars are mostly sold at home. Its manufacturing prowess is built on the back of engineering and expertise from the West.
Both the Apple iPhone and Huawei Mate 10 are assembled in Chinese factories. Both rely on pieces from outside China. The most intricate and expensive technology in the Huawei phone, the motherboard, has a Chinese processor, but it is primarily composed of chips from American, South Korean and Japanese companies. The 2.8-inch board accounts for 52 percent of the cost of the phone, according to data from TechInsights.

Sunday, November 18, 2018

Nepal Airlines seeks bailout, federal government to address tax overlaps and latest private sector diagnostics

From The Kathmandu Post: Less than four months after making the largest jet purchase in the history of Nepali aviation, Nepal Airlines Corporation, which was on a mission to reclaim its long-lost glory, said it is running out of cash and teetering on the edge of bankruptcy.

A statement made public on Thursday by the national flag carrier through a “white paper” shows that the corporation’s monthly cash deficit has reached Rs317.79 million since inducting the first of two long-range Airbus A330s into its fleet. Before that, Nepal Airlines had a monthly revenue surplus of Rs12.54 million. Since summer, Nepal Airlines’ debt-to-equity ratio, which measures the financial health of a company, has swelled to 39.82 percent from 14.40 percent. A higher ratio indicates the company is receiving most of its financing from borrowing, threatening bankruptcy if business continues to decline.

According to the white paper data, revenue earnings from the two wide-body jets from August 1 to September 15 stood at Rs264.8 million, while the expenses nearly tripled to Rs756.6 million, in addition to a staggering deficit of Rs491.8 million. At the moment, the two A330 jets are being utilised for less than seven hours daily, less than half of the required flight time to generate a decent profit. The revelation about the dire state of Nepal Airlines’ finances comes on top of the corporation’s massive loans to various institutions—its long- and short-term loans stand at Rs41.73 billion and it owes more than Rs3.66 billion in interest annually.

The national flag carrier, instead of scoping pilots for the new aircraft, followed its traditional practice—to get the planes first and find the pilots to fly them later. It still has at least three planes sitting on the tarmac at the Tribhuvan International Airport while it frantically looks for capable pilots. It was indeed a gargantuan project to equip the airlines with the youngest fleet in the country—inducting two Airbus A320 aircraft in 2015 and two additional wide-body A330 in 2018. The induction of four jets had been described as a game-changer for the corporation—and the country, allowing the airlines to compete with other international players on long-haul routes to Europe, Japan and the Middle East. However, some airlines officials say the corporation did not plan its operations efficiently.

From The Kathmandu Post: The Finance Ministry presented the proposal to the Cabinet for implementing the report that calls for scrapping several taxes levied by the local and provincial governments while broadening the tax base of the sub-national administrations.

The report recommends that the arbitrary taxes should be scrapped and a composite federal revenue law introduced to provide legal clarity. Finance Ministry officials confirmed that the government will instruct the provincial and local governments to follow the recommendations. The Thapaliya-led committee was formed after an uproar over hefty increments in taxes imposed arbitrarily by the provincial and local governments.

The committee concluded that only the federal government has the authority to levy tourism fees, which has to be shared between the provincial and local governments. It also recommends an end to the practice of non-state actors such as various committees and projects collecting tourism-related taxes contrary to the spirit of the constitution. The high-level committee also suggests that local governments cannot impose business taxes—on industries, trade, profession or occupation within a particular local federal unit—on transactions. Such taxes can be imposed only during the registration and renewal of business ventures. The report deems the Patake Sawari Kar (vehicle tax) and the District Export Tax as unconstitutional as they go against Article 236 of the constitution.

While the erstwhile District Development Committees imposed ‘District Export Tax’ on the sale of such goods to another district, the new constitution banned it. However, Clause 11 of the Local Government Operation Act allows the local government to collect sales and export fees on such items. After the Financial Act introduced by the federal government amended the provision of the Local Government Operation Act-2017, local governments complained that the changes breached their right to collect wealth tax. The report suggested implementation of the Act’s provision. The report also stresses the need for a law on taxing the extraction of stones, gravel and sand as there is no legal clarity over their use.

Private sector diagnostics 

The IFC recently released country private sector diagnostics, which identifies sectors that have potential to support Nepal's growth. In addition to hydropower, the other identified five sectors that have potential to have major impacts on Nepal's growth trajectory are tourism, agribuisness, education, health, and IT. 

The private sector is constrained by institutions/governance and infrastructure. With key sectors such as tourism and agribusiness being highly reliant on connectivity, strengthening infrastructure is the other critical challenge for private sector development. A gap in technical skills and managerial capabilities is constraining growth-oriented firms from scaling up and rising up the value chain. Access to finance and inefficient land markets are also key constraints. Excessive barriers to foreign investment and foreign-exchange transactions also constrain the private sector. Policies on land acquisition and the use of land as collateral, in particular, deter foreign investors and lenders, restricting private sector access to long-term finance.