Monday, January 28, 2019

Emerging consumption pattern and distribution in Nepal

Central Bureau of Statistics recently released annual household survey 2016/17, which is fifth in a series of quick surveys that looks at the state of consumption, demography and social services. It used to include employment module too, but is missing from the last two surveys (NLSS IV or NLFS III will cover them). Here is a blog post from 2014 on AHS I.

AHS V shows that consumption pattern has not changed much in the last five years (and since NLSS III). The total nominal household consumption was NRs1,555.4 billion in 2016/17, a 5.3% increase over 2015/16, when consumption decreased by 8.9% (a result of border blockade, which severely dented non-food consumption). Food consumption accounted for about 56.6% of total household consumption. Average household consumption is recovering after the decline caused by the devastating earthquakes in 2014/15 and border blockade in 2015/16. 
What about the composition of household consumption? As noted above, about 50% of household consumption expenditure goes to food. This is followed by rent 12.7%, durables, 7.1%, education, 4.1%, alcohol and tobacco 3.7% and utilities 2.4%. 18.1% of household consumption expenditure goes to other non-food items. Notice that as a share of consumption expenditure, households on average spend more on alcohol and tobacco than utilities and it very close to expenditure on education. 
The poorest household consumption quintile (i.e., poorest 20% of the households based on consumption expenditure) actually spent more on alcohol and tobacco (3.9%) than education (2.3%) and durables (1.9%). Their food consumption accounts for 64.9% of total household consumption, which on average was NRs155,183 in 2016/17. Similar is the case with the second, third and fourth household consumption quintiles. The share of expenditure on alcohol and tobacco of the first three consumption quintiles is actually higher than the national average. The richest household quintile’s consumption on food account for 34.6% of their expenditure, followed by rent and other non-food (19.5% each) and durables (15.7%). 
Of the total household expenditure of NRs1,555.4 billion in 2016/17, the lowest 20% of households based on consumption expenditure accounted for 8.2%, and the highest 20% households accounted for 41.1%. 

Now, let us look at nominal per capita consumption based on the consumption quintiles. The overall nominal per capita consumption stood at NRs80,807 in 2016/17. Again, per capita consumption growth nosedived in 2014/15 and is far from the pre-earthquake and blockade consumption growth rate. The poorest 20% of the population has seen its share of total per capita consumption decline (7.6% in 2012/13 to 6.5% in 2016/17). Meanwhile, the richest 20% have seen their share of per capita consumption increase from 45.9% to 50.9% over the same period. So, per capita consumption based inequality seems to be increasing.
Per capita consumption on food items accounts for 56.6% of consumption expenditure (including alcohol and tobacco). Of the total per capita consumption on food items, the largest share is accounted for by grains and cereals (27.9%), followed by meat and fish (16,1%), vegetables (12.4%), alcoholic beverage and tobacco & related products (11.8%), and eggs and milk products (9.4%) among others. 
Meanwhile, per capita consumption on nonfood items accounts for 43.4% of consumption expenditure. OF the total per capital consumption on nonfood items, the largest share is accounted for by education (15.4%), followed by medical (10.8%), cultural (8.9%), jewelry and watches (3.2%) among others. 
The per capita consumption of alcoholic beverages, and tobacco & related products was NRs4,142 in 2016/17. For educational purposes, it was NRs4134. For medical purposes, it was NRs2,888.
About 15% of the population had inadequate food consumption in 2016/17. The share of households with poor dietary diversity (four or fewer food groups consumed) has decreased from 10.5% immediately after the earthquake (2014/15) to 5.3% in 2016/17. The broad food groups are: Cereals, tubers & roots; pulses; vegetables; meat, fish & eggs; fruits; milk & dairy products; ghee, oil & butter; sugar, honey & sweets. The richer the households, the better their food consumption and dietary diversity. 

Other interesting stats: 
  • About 60.5% of the population is of 15-59 years of age (working age population).
  • Dependency ratio is declining. It was 65 in 2016/17
  • Female heads a quarter of the households 
  • There are 94 male per 100 females
  • Average household size is 4.5
  • 88.4% of households have access to mobile phone and 44.8% have access to cable TV. 12.7% have access to email/internet. 
  • 85.2% of households use electricity for lighting and 9.6% use solar. 52.4% of households use firewood as a major source for cooking. 
  • About 33.1% of households use cylinder gas for cooking (among them, 54.1% of urban households use cylinder gas for cooking; for rural households, its 16.5%)

Tuesday, January 22, 2019

Nepal's troubled capital market

It was published in The Kathmandu Post, 21 January 2019, p.8. An earlier blog on the same issue here.

The authorities should have let the stock market self-correct and fall back to its natural state

The recurring financial sector instability recently affected the stock market too. Investors exerted political pressure on the Ministry of Finance and Nepal Rastra Bank to rescue them from the downward spiral of share prices. The government formed a committee to assess the state of the capital market and recommend measures to stabilise it. Some of the proposed solutions will likely push share prices in the bullish zone, but undermine the soundness of the financial system and implicitly foster moral hazard.

The turmoil in the stock market is not because the market perceives declining profitability from trading shares at Nepal Stock Exchange Limited (NEPSE). It is also not driven by quarterly or annual earnings of companies whose shares are traded at the market. The squeeze in liquidity flowing into this market as a result of recurring credit crunch faced by banks and financial institutions (BFIs) and excess issuance of shares given the market size are the main factors behind the current turmoil at NEPSE.

Bullish problem

While chronically low capital spending by the government and tepid growth of remittances have been dragging deposit growth, strong credit demand from almost all sectors and the BFI’s largess in approving loans to sectors that earn quick returns (at times at the cost of quality and overexposure) has led to a situation where credit growth has surpassed deposit growth. Hence, except for the two government-owned banks, all other commercial banks are close to the regulatory credit-to-core capital cum deposit (CCD) ratio threshold. Nepal Bankers’ Association (NBA) lobbied hard to increase the 80 percent CCD threshold, but the central bank refused to do so arguing that it is necessary for the viability of the financial system and security of deposits. The underlying deposit-credit dynamics, asset-liability mismatch and depleting stock of loanable funds have hamstrung the BFIs and lately rattled stock market investors as they are deprived of new funds to maintain bullish trading.

It is not the first time the stock market has crashed after remaining bullish for an extended period. It grew steadily at least since fiscal year 1993/94 before crashing in 2007/08 when the then finance minister hinted of enhanced oversight (after terming trading at NEPSE a ‘gamble’). Concurrently, liquidity also started to dry up owing to deceleration of remittances and the BFIs faced severe stress as real estate and housing prices collapsed. This affected NEPSE index too, as it reached a high of 1084.8 in August 2008 and then crashed to a low of 297.6 by June 2011. A slew of regulatory caps on overexposed sectors, partial bailout by the central bank, and an increase in remittance inflows gradually stabilised liquidity situation. However, increasing margin lending by BFIs and rerouting of approved loans to the stock market in anticipation of quick returns by borrowers started to push NEPSE index in the bullish territory, hitting a record 1815.2 in September 2016. Since the bullish stock market closely followed liquidity situation of BFIs, it took no time for the index to collapse to 1148.8 by December 2018 as liquidity crunch worsened.

The authorities should have let the stock market self-correct and fall back to its natural state, i.e. in line with the broader economic fundamentals. Instead, the central bank loosened rules to push it in the bullish zone. For instance, reducing the risk weight on loan against shares to 100 percent from 150 percent; provision to offer loan up to 65 percent of valuation of shares (up from 50 percent previously) based on the average price in the past 180 days or the prevailing market price, whichever is lower; issuing loan on shares equivalent to at most 40 percent of their core capital (up from 25percent previously); and loosening margin call decisions will increase flow of funds to the stock market. However, these will not correct the underlying flaws in trading and conflict of interest of some investors at NEPSE. Being overly pro-cyclical when prices go up but counter-cyclical when prices come down serves a few at the cost of many. It undermines governance and efficacy of the banking sector, which needs to channel more resources to productive sectors that create jobs and directly addresses binding constraints to shared prosperity.

The central bank also directed the BFIs to lower interest spread rate (the difference between lending and deposit rates) to 4.5 percent by mid-July 2019 by tweaking computation of base rate. Specifically, BFIs will not have to add 0.75 percent return on asset while computing base rate, which includes the cost of fund, cost of cash reserve ratio, cost of statutory liquidity ratio and operating cost. The lower the base rate, the lower should be the lending rate. However, even with this tweak in computing base rate and a directive by NBA to cap deposits rate, there is no sign of lowering of lending rates anytime soon.

Given the operational and managerial inefficiencies, it will be challenging for the BFIs to lower interest spread by the end of this fiscal year. High-interest spread has its root in a number of factors: risky investment, high inflation (although this is not the 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, and poor access to finance. Real sector investors (those that invest in factories and infrastructure to produce or to build something, and at the same time create employment) are worried about the high cost of finance, which will dent whatever prospects there were for achieving the government’s economic growth target of eightpercent for this year.

Recurring problem

BFIs are used to earning high-profit rates by lending to certain sectors, without much self-discipline and due diligence that earn them quick return. Previously, they overexposed themselves to real estate and housing sectors. This resulted in a drastic escalation of land prices and haphazard plotting of arable land. Now, they are overexposing themselves to the vehicle and hire purchase financing, and margin lending.

The credit crunch is a recurring problem in the banking sector and increased volatility of share prices will now be recurring too. The latter is at the mercy of credit flows from the former, which itself depends on the extent to which the government executes its proposed budget and the growth of remittances. Tweaking rules to reinforce the flawed link between them is not a sensible strategy. This may give respite to the government and central bank for some time, but it is a long way from stabilising the financial sector and eventually addressing its structural weaknesses. Currently, the stock market is not resilient and stable enough to mobilise capital for real sector investment, and BFIs are still operating with the same strategy of socialising losses but privatising gains. Nepal needs fewer but stronger BFIs with sound corporate governance. The banking sector has no other option but to consolidate and enhance operational efficiency.

Stabilisation measures should be geared towards correcting immediate flaws by providing temporary relief so that it eventually sets the stage for structural reforms. It should not be designed to foster moral hazard and systemic risks and to provide relief by weakening regulations and soundness of the entire system.

Monday, January 21, 2019

Inflated revenue mobilization, uncertain Melamchi project and more

From The Himalayan Times: The government, which has been boasting of a brisk revenue collection since the start of this fiscal year, has suffered a rude jolt, as the body which operates its treasury has been found to be inadvertently producing inflated figures because of double counting. The erroneous reporting on revenue collection came to the fore after the Financial Comptroller General Office, the main agency responsible for the government’s treasury operation, stated that the government had generated revenue of Rs 520 billion in the first half of this fiscal.

The figure surprised many because it was 21 per cent more than the government’s own revenue collection target of Rs 429 billion for the six-month period from mid-July to mid-January. At a time when the Ministry of Finance was apprehensive about meeting its own target because of slackness in collection of duties at customs offices, the news that revenue collection beating the target by close to Rs 100 billion was too good to be true. Turns out it was.

Nepal Rastra Bank, which also tracks the government’s revenue collection, has said the government generated Rs 414.3 billion in revenue in the same six-month period. This means the government missed its revenue collection target by 3.4 per cent in the first six months. After crunching its own numbers, the FCGO has acknowledged its mistake and told THT today that the central bank’s figure was closer to reality.

“We failed to present accurate statistic because of double calculation of fund transferred to divisible fund,” said a senior FCGO official on condition of anonymity. Since the beginning of this fiscal, the federal government has been sharing 30 per cent of value added tax and another 30 per cent of inland excise duty with provinces and local bodies as part of the policy to financially empower sub-national governments and institutionalise fiscal federalism. The portion of VAT and inland excise duty dedicated to provinces and local bodies is parked in the divisible fund. “Although the amount deposited in the divisible fund is also a part of federal government’s revenue, we had initially decided to keep it separate,” said the FCGO official. This means FCGO’s system had to deduct the amount kept in the divisible fund from the federal government’s gross revenue. But the deduction was not made,” added the official.

Government scraps Melamchi contract of Italian builder

From The Kathmandu Post: The government has decided to scrap the contract with the Melamchi Water Supply Project’s Italian builder in a move which will push the national pride project into further uncertainty. “The government formally dispatched a letter of termination to the Italian contractor Cooperativa Muratori e Cementisti di Ravenna after it failed to come up with any concrete decision regarding resuming works,” Surya Raj Kadel, executive director of the Melamchi Water Supply Development Board, told the Post. “We have decided to terminate the contract with the existing builder after it did not turn up to resume works even a month after abandoning the project.”

In its previous letter sent last Tuesday, the government had set a Friday deadline for the CMC to make it clear whether it was interested to resume works and how it would want to resolve the dispute. According to Kadel, the Italian builder did respond but sought at least one more week. “We received a meaningless correspondence which had not even come from the proper channel… and it just sought more time. We cannot do that anymore,” Kadel added. CMC officials on their part told the Post that the Nepal government gave them “a very short deadline”.

“For a meeting set for January 18, the employer [Nepal government] had sent us a message on the night of January 15. The company had responded saying it was not possible to meet within three days’ time,” a CMC official said. “We had said a meeting was possible at a suitable time-around January 27 or so and we had also sought diplomatic assurances.”

Govt pays Rs 758m in interest subsidy for agro-livestock loans

From myRepublica:  The government has disbursed  Rs 758.2 million in interest subsidy for loans floated under a concessional credit scheme for certain agricultural and livestock businesses.  It bears five percent of the interest for loans disbursed by banks and financial institutions. According to  Nepal Rastra Bank (NRB), the outstanding subsidized loans aimed at encouraging youths to pursue agriculture and livestock businesses through BFI loans stand at Rs 14.39 billion as of mid-December. 

A total of 9,749 beneficiaries have borrowed under the scheme, according to NRB data. The scheme was introduced by the government in fiscal year 2014/15 and the subsidy rate was revised after two years. Those who want to start or expand certain agriculture or livestock businesses can get the concessional loans from BFIs. 

The government subsidizes five percent of the interest on the loans under the scheme. The data shows that the government has so far spent Rs 758.2 million on subsidizing the interest. The upper limit for concessional loans under the subsidy scheme has been fixed at Rs 700 million with a maximum payback period of five years. BFIs have to provide loans under the scheme against the collateral of land used for the agro or livestock undertaking or the crops. Loans can be disbursed against group guarantee up to a limit of Rs 1 million.

>>Here is a news story about misuse of the interest subsidy program