Tuesday, April 30, 2019

Third country trade via China, BRI and Nepal, disinterest in SSF and sugar politics

Nepal signs deal with China to access seven Chinese sea and land ports

From The Kathmandu Post: Nepal and China on Monday signed the Protocol on Implementing Agreement on Transit and Transport and six other agreements in Beijing after delegation level talks between President Bidya Devi Bhandari and her Chinese counterpart Xi Jinping at the Great Hall of the People. Minister for Foreign Affairs Pradeep Gyawali and Minister for Transport of China Li Xiaopeng signed the agreement on behalf of their respective governments, according to the Nepali Embassy in Beijing. The protocol had been pending since Nepal and China signed the Transit and Transportation Agreement in March 2016 during Prime Minister KP Sharma Oli’s visit to the northern neighbour.

The Transit and Transportation Agreement was signed just months after an undeclared Indian border blockade was lifted, with a view to diversifying Nepal’s trade and paving the way for landlocked Nepal to carry out third country trade through ports in the northern neighbour. But for the third-country trade via China to commence, the protocol was a must.

The signing of the protocol makes it possible for Nepal to use four Chinese sea ports--in Tianjin, Shenzhen, Lianyungang and Zhanjiang--and three land ports--in Lanzhou, Lhasa and Shigatse--for third-country import. It will also allow Nepal to carry out exports through six dedicated transit points between Nepal and China.

>>Other agreements include:

  • Handover Certificate of Grant-Aid for the Repair and Reinforcement Project of the Existing China-aided Projects
  • Agreement on Economic and Technical Co-operation
  • Minutes of Meeting on Strengthening Assistance Co-operation in the Field of Livelihood in the Northern Region of Nepal
  • Agreement on Co-operation and Mutual Administrative Assistance in Customs Matters
  • MoU on Co-operation on Standardization between Nepal Bureau of Standards and Metrology (NBSM) and Standardization Administration of China (SAC)
  • Agreement on Preventing the Theft, Clandestine Excavation and Illicit Import and Export of Cultural Property
Meanwhile, a joint communique of the Leaders' Roundtable of the 2nd Belt and Road Forum for International Cooperation included "the Nepal-China Trans-Himalayan Multi-dimensional Connectivity Network, including Nepal-China cross-border railway"

Govt continues sugar import restriction until mid-July

From myRepublica: Though Prime Minister KP Sharma Oli had said that he was ‘tricked’ by sugar mills to restrict the import of sugar, the government has continued the quantitative restriction until mid-July. The restriction that was in place until Chaitra end (April 13) was extended till mid-July. According to a notice published in the Government on Nepal Gazette on April 15, the deadline for the import restriction was extended until July 16. The decision to give the import restriction of sugar continuity was taken a week after Prime Minister Oli’s statement criticizing sugar mills for ‘tricking’ him into imposing the quantitative restriction on import of sugar. 

According to the quantitative restriction which was put in place in April 14 last year, the import of sugar exceeding a total quantity of 94,900 tons was restricted. As sugar of that quantity has already been imported, there won’t be sugar imports anymore. The decision to impose restriction on imports, however, was not free from the controversy. Consumer activists have criticized the government for bowing down to sugar mills’ pressure to restrict imports which prompted price hike immediately after the imports came to a halt. Even Prime Minister Oli, after seven months of the decision, had admitted at a public program that sugar mill owners misled him about the scenario of supply and production of their products to make him impose the restriction. But instead of course correction, the government has not allowed the deadline for the sugar import restriction to lapse. 

Concluding that there was ‘collusion’ between government officials and the sugar mills to artificially drive up prices, the Public Accounts Committee, upon the recommendation of its sub-committee, instructed the Commission for Investigation of Abuse of Authority to investigate.

Employers hesitant to join Social Security Fund

From Nayapatrika: सरकारले निकै तामझामका साथ सुरु गरेको सामाजिक सुरक्षा कार्यक्रम कार्यान्वयनमै आशंका उब्जिएको छ । देशभर करिब साढे ९ लाख रोजगारदाता रहेको भए पनि अन्तिम दिन शनिबारसम्म सामाजिक सुरक्षा कोषमा आबद्ध हुने रोजगारदाताको संख्या नगन्य छ । सातै प्रदेशका रोजगारदातालाई सूचीकरणका लागि दिएको समय समाप्त भइसक्दासमेत कोषमा शून्य दशमलव २७ प्रतिशत अर्थात् २ हजार ४ सय ८२ रोजगारदाता मात्रै आबद्ध भएका छन् । ऐनको व्यवस्थाअनुसार कोषमा रोजगारदाता आबद्ध नभएपछि कोषको कार्यान्वयनमै आशंका उब्जिएको हो । पछिल्लोपटक रोजगारदातालाई कोषमा आबद्ध हुने म्याद आगामी असार मसान्तसम्मका लागि थप गरिएको छ । 

कोषको अनलाइन प्रणालीमार्फत रोजगारदाताले सूचीकरण गर्न सक्ने व्यवस्था मिलाइएको थियो । रोजगारदाताले आफू सूचीकरण भएको तीन महिनाभित्र आफ्नो रोजगार सम्बन्ध कायम रहेका श्रमिकलाई कोषमा सूचीकरण गराउनुपर्ने कानुनी व्यवस्था छ । कोषका अनुसार आबद्ध केही रोजगारदाताले हालसम्म ४ हजार ६ सय ३८ श्रमिकलाई मात्र कोषमा सूचीकृत गराएका छन् । सरकारी सेवामा बहाल रहेका तथा सरकारी कोषबाट पारिश्रमिक पाउने व्यक्ति, अनौपचारिक क्षेत्रका श्रमिकहरू र स्वरोजगारीसमेत सामाजिक सुरक्षा कोषमा समेट्ने भनिए पनि सरकारले त्यसतर्फ कुनै कदम चाल्न सकेको छैन । 

How can Nepal sustain high growth rate?

It was published in The Kathmandu Post, 29 April 2019

Maintaining the current growth rate long-term requires devising a number of sustainable macro-economic policies.

The Central Bureau of Statistics estimated that the economy would likely grow at 6.8 percent in 2018/19, up from 6.3% last year. Since this is the third consecutive year the economy grew by over 6%, some analysts and the government are arguing that the economy is on a solid footing and that double-digit growth is within reach. Finance Minister Dr. Yuba Raj Khatiwada recently argued that the government’s economic outlook is realistic and that it is natural to have large fiscal and current account deficits in an emerging economy like ours.

However, the reality is different. Growth rates in the last three years are above the historical average, beyond the economy’s estimated productive capacity, and are not supported by strong economic fundamentals. The estimated growth rate for FY2019 is well below the government’s ambitious 8 percent target. Expansionary fiscal and monetary policies are increasing external and financial sector vulnerabilities. An unsustainably high current account deficit and large balance of payments shortfall along with declining foreign exchange reserves may compel the government to go for an abrupt policy adjustment in the near future. Fiscal and monetary policies should be sound and geared toward increasing private sector investment along with public capital spending absorption capacity to sustain high growth rates. 

Industrial slowdown

In FY2019, bumper agricultural harvest and pickup in services sector activities and reconstruction related works contributed the most to maintain high GDP growth. Specifically, robust agricultural output is underpinned by favorable monsoon, and high services sector output is supported by wholesale & retail trading, tourism and real estate activities. Wholesale and retail trade activities, whose share of GDP is equal to that of the entire industry sector (composed of mining and quarrying; manufacturing; electricity, gas and water; and construction), mainly depend on remittance-financed imported goods. These drivers of growth are not sustainable and pretty much exogenously driven. 

Instead, industrial output grew at a lower rate than last year because manufacturing and construction activities slowed down. Within industrial sector, electricity, gas and water subsector grew at the fastest rate: 12.4%, up from 9.6% in FY2018 as additional electricity was connected to the national grid and a favorable monsoon increased water flow, which then boosted hydroelectricity generation of projects that depend on run-of-the-river type production. Similarly, mining and quarrying activities are projected to grow at 9.5%, up from 8.9% in FY2018, as mining and quarrying of stones, sand, soil and concrete intensified in response to large and growing demand for reconstruction related materials. The haphazard mining and quarrying of riverbeds and hills, sometimes at the initiation of local governments, is one of the factors for this sub-sector’s robust growth. 

However, slow public capital spending, especially the setback in Melamchi water supply and delay in Upper Tamakoshi hydroelectricity, both of which were expected to be completed by this year after multiple time extensions, dragged down construction sector growth to 8.9% from 10% last year. Similarly, manufacturing activities are projected to grow by 5.8%, much lower than 9.2% in FY2018, indicating the lack of private sector investment as well as loss of both domestic and external markets due to eroding cost and quality competitiveness. Stable supply of electricity and improved industrial relations were not sufficient to jack up manufacturing output. 

It shows that there has not been much improvement in increasing capital spending despite unveiling the budget one-and-a-half months before the start of the fiscal year. The fiscal transfers to subnational governments (which come under recurrent budget of federal government, but capital budget of provincial and local bodies) are not used to create productive capital assets, but on activities that increase unproductive imports (such as vehicles) and on petty projects with high transaction cost but low productive value. No wonder, public gross fixed capital formation is projected to decrease by 8.1%, from 29.4% growth in FY2018.  Furthermore, despite all the talk about investment-friendly legal and operational environment, manufacturing sector growth tanked. Repeated talk about improvements in business climate and adequate supply of inputs (such as electricity and road network) is not translating into action on the ground.

What next?

The foundation for sustaining high economic growth is not solid yet. The 7.7 percent growth in FY2017, the highest since 7.9 percent growth in FY1994, was largely due to a base effect and high spending during the first two phases of local elections. In FY2018, spending during local and parliamentary elections gave a temporary boost to aggregate demand along with notable progress in industrial sector as better electricity supply and a pickup in post-earthquake reconstruction work increased economic activities. In FY2019, it was favorable monsoon, reconstruction works and robust services output underpinned by wholesale and retail trade, tourism and real estate activities. These factors do not alone sustain high growth rate, as they are susceptible to exogenous shocks beyond the control of the government. Furthermore, there will not be elections and reconstruction related temporary fiscal stimulus forever. 

We need to expand supply capacity of the economy to sustain high growth rate and this expansion should be in line with our capacity to manage fiscal and monetary policies. For instance, an expansionary fiscal policy has led to large increase in budget deficit, which in turn is increasing imports and subsequently current account deficit. In addition, it is either crowding out private investment or raising their cost of borrowing. Similarly, expansionary monetary policy has increased credit growth more than deposit growth and that it is flowing mostly to support higher consumption and import. Imports and capital goods accumulation have grown at such a rate that the private sector is worried about slowdown in sales and rapid building up of inventory or stocks. Overly accommodative monetary policy has raised non-performing assets, decreased credit flows to productive sectors, and increased financial sector vulnerabilities. 

To sustain high growth rate, monetary policy should be tightened to ensure that credit growth is in line with deposit growth, consistent with regulatory requirements, and that it goes to productive sectors to augment supply capacity. Meanwhile, fiscal policy should rationalize recurrent spending but increase quantum and quality of capital spending. On regulatory and institutional front, the government should foster competition rather than sectoral cartels. Structural reforms should be implemented, including revising procurement laws and easing procedures to doing business.

The efficiency gains from these measures will contribute to accelerate economic activities on a high and sustainable path, and are better than expansionary fiscal and monetary policies designed to boost short-term aggregate demand at the cost of medium-term fiscal and monetary soundness. Furthermore, they will ensure that productive or supply capacity increases too in a sustainable way.