Showing posts with label Food Price. Show all posts
Showing posts with label Food Price. Show all posts

Thursday, October 2, 2014

The disproportionate impact of inflation on small firms

Here is an abstract from a recent WB working paper that argues that inflation disproportionately reduces investment by small firms, which obviously have lower cash flows, because it erodes the value of their accumulated savings (= investment eventually).


In countries with limited access to finance, firms accumulate retained earnings to finance indivisible investment projects. McKinnon (1973) illustrates that when cash is used as a primary store of value, inflation may discourage investment as it increases the cost of accumulating retained earnings. This paper formalizes this argument in a dynamic framework and provides a simple calibration of the model that suggests sizable effects of inflation on investment. The mechanism is particularly relevant for small firms, as firms with lower cash flows must accumulate retained earnings for longer periods of time to meet the price of indivisible investment goods. Consistent with the model, empirical evidence suggests that inflation disproportionately reduces investment in small firms.


Sunday, September 14, 2014

Nepalese economy in FY2014: Monetary sector

This blog post is adapted from Macroeconomic Update, August 2014, Vol.2, No.2. Here are earlier blog posts on real sector, fiscal sector, and FY2015 growth and inflation outlook.


I. Inflation

Although inflation (year-over-year average CPI) moderated in FY2014 compared to 9.9% in FY2013, it still remained elevated at 9.1% as the effect of the substantial moderation in non-food prices was partly neutralized by the sustained rise in food prices. Food and non-food prices increased by 11.6% and 6.8%, respectively. They increased by 9.7% and 10.1%, respectively in FY2013. Overall, while food prices contributed to 5.4 percentage points to overall inflation, non-food prices contributed 3.6 percentage points in FY2014 (Table 2). Despite the good agricultural harvest and moderating prices in India, the high food prices, which have a 53.2% weight in the overall CPI index, indicate domestic distortions in the food distribution system, and the high fuel prices and transport cost transmitted to wholesale and retail prices. The price of cereals and grains, vegetables, meat and fish, and fruits increased by over 10%, and together they contributed 4.1 percentage points to the overall inflation, and almost 76% of food inflation. The subsiding of non-food prices reflect the gradual strengthening of Nepalese rupee, despite it still being weaker than a few years back, as it closely follows the currency movement of Indian rupee vis-à-vis the dollar.

Table 2: Annual inflation (% change)

Inflation (Y-o-Y)
Year Average  Food Non-food
FY2010 9.6 15.1 4.9
FY2011 9.6 14.6 5.3
FY2012 8.3 7.7 9.0
FY2013 9.9 9.7 10.1
FY2014 9.1 11.6 6.8

Inflation has remained elevated due to a combination of structural bottlenecks, domestic supply-side factors, high inflationary expectations, and exogenous pressures such as the ongoing weakness of the currency despite some strengthening in the latter part of the year. Structural bottlenecks include weak backward and forward linkages, fragmented value chain and distribution systems, low productivity and policy inconsistencies. Supply-side constraints include the lack of adequate supply of electricity, transport bottlenecks, lack of raw materials leading to high import content of processed and light manufactured goods, and the inadequate supply of key inputs to boost productivity. Credible strategies to tame elevated inflation would help dampen inflationary expectations.

Inflation gradually increased from 7.9% in mid-August 2013, reached a high of 10.3% in mid-December, and then started to moderate, reaching 8.1% in the last month of FY2014. Compared to the prices in the corresponding months in FY2013, inflation was lower in all months except the last three months in FY2014 (Figure 21). Similarly, compared to prices in FY2013, food and beverage prices remained higher for all months except mid-August and mid-September (Figure 22). Non-food and services prices moderated in all the months compared to the level in corresponding months in FY2013 (Figure 23).



III. Money Supply

Money supply[1] (M2) grew by 19.1%, reaching NRs250.1 billion, on the back of a significant growth of net foreign assets[2], which compensated for the one percentage points slowdown in net domestic assets (Figure 25). M2 growth was 16.4% in FY2013 (NRs185.1 billion). The large net foreign asset holdings— registering a 27.2% growth (NRs127.1 billion) in FY2014, up from 18% growth rate in FY2013 (NRs68.9 billion)— were supported by a higher rate of remittance inflows and increased foreign assistance. The increase in money supply was reflected in the 17.7% growth of narrow money (M1) and 11.8% growth of time deposits. As a share of GDP, money supply, net foreign assets and net domestic assets stood at 81.2%, 31.1%, and 50.1%, respectively, in FY2014.

Net claims on government[3] — direct loans and government securities held by the central bank— decreased by 16.4% (NRs27.5 billion) from an increase of 3% in FY2013, reflecting the large increase in government deposits compared to the bank and financial institutions’ (BFIs) claims on the government. The overall credit to the private sector slowed down, registering a growth of 18.3% compared to 20.2% growth in the previous year. It indicates the lack of immediate bankable investment opportunities despite the declining lending rates offering by BFIs, which have had excess liquidity for over a year. As a share of GDP, total credit to the private sector stood at 7.3% in FY2014, down from 9.9% in FY2013.

IV. Deposit and Credit

The BFIs mobilized NRs218.7 billion (reaching a total of NRs1406.8 billion) in deposits in FY2014, higher than the NRs176.3 billion mobilized in FY2013, as higher remittance inflows and the acceleration of government spending in the last quarter of FY2014 boosted deposits. This translates into a growth of 18.4%, higher than 17.4% growth in FY2013. Deposit mobilization of commercial banks, development banks and finance companies increased by 17.8%, 29.1% and 5.7%, respectively (Figure 26). The cumulative deposit mobilization reached 72.9% of GDP in FY2014.

Total credit (loans and advances) of BFIs increased by 14.4% (NRs165.5 billion) in FY2014, down from 18.6% growth in FY2013 (NRs180.2 billion). Credits of commercial banks grew by 13.7% (NRs128.8 billion), down from a rate of 19.1% in FY2013. Similarly, credits of development banks and finance companies grew by 27% (NRs47.4 billion) and 4.3% (NRs3.9 billion), respectively (Figure 27). Credit to the private sector (by category A, B and C BFIs) increased by 18.7% (NRs176.1 billion), down from 20.8% growth rate (NRs162 billion) in FY2013, with commercial banks and development banks registering growth of 18.7% and 29.3%, respectively. Credit to private sector from finance companies declined by 2.1%. Despite the positive political outlook and declining lending rates, the growth rate of credit to the private sector fell due to the low demand emanating from the lack of immediate bankable investment projects and the cap on lending to certain sectors (particularly the property market) that had seen bubbles in the previous years. Cumulatively, 21.6% of the total lending went to wholesale and retail traders, followed by 19.6% to industry, 10.5% to construction, and 8.0% to finance, insurance and fixed assets (Figure 28). The total credit of BFIs reached 68.1% of GDP in FY2014.


On a sectoral basis, 25.8% of the increase in credit by BFIs was absorbed by wholesale and retail traders (NRs25.8 billion), followed by industry (NRs18.1 billion), construction (NRs13.2 billion), services (NRs15.8 billion), and agriculture (NRs11.1 billion) (Figure 29). While lending to construction sector is recovering after it hit a low in FY2011, lending to real estate has declined for two consecutive years (Figure 30) — reflecting the pickup in residential housing and infrastructure related activities, but a slowdown in real estate market.


V. Liquidity Management

In FY2014, the NRB mopped up a net liquidity equivalent to NRs602.5 billion through reverse repo auctions— one of the short-term tools used by the central bank to manage liquidity— at a weighted average interest rate of 0.16%, and NRs8.50 billion through outright sale auctions at a weighted interest rate of 0.05%. The central bank did not use reverse repo auctions in FY2012 and FY2013. However, it mopped up NRs8.5 billion at a weighted average interest rate of 0.97% in FY2013. The reverse repo auctions for eleven consecutive months and the declining rate shows the increasing appetite of BFIs to park their excess liquidity with the central bank as deposit growth outpaced credit growth. Accordingly, BFIs did not use the standing liquidity facility in FY2014. Despite the repeated bouts of reverse repo auctions, the declining interest rates, and the slowdown in lending growth, the continuing excess liquidity indicates structural issues in the banking sector.

To finance burgeoning imports from India, the NRB sold $3.14 billion in the Indian money market and purchased Indian currency equivalent to NRs308 billion. In FY2013, the NRB sold $3.12 billion to purchase Indian currency equivalent to NRs277.4 billion. The central bank also injected NRs343.5 billion into the banking sector by purchasing $3.52 from the commercial banks.

VI. Interest Rates

The excess liquidity, which peaked to NRs70 billion in November 2013 before declining to NRs40 billion towards the end of FY2014[4], throughout the year pushed short-term interest rates below 1% (Figure 31). The 91-day treasury bills weighted average rate was 0.25% in mid-August 2013, which declined to 0.02% in mid-July 2014 and averaged 0.13% in FY2014, much lower than 1.77% in FY2013. Similarly, inter-bank rate dropped from 0.3% in mid-August 2013 to 0.16% in mid-July 2014, and averaged 0.22% in FY2014, much lower than 1.77% in FY2013. 

The weighted average deposit and lending rates fell as the BFIs struggled to boost lending amidst excess liquidity (Figure 32). The weighted average deposit rate of commercial banks dropped to 4.09% in mid-July 2014 from 5.13% in mid-August 2013. It has fallen consistently from a high of 6.17% in mid-July 2012. Similarly, the weighted average lending rate fell to 10.55% in mid-July 2014 from 12.1% in mid-August 2013. The weighted average interest spread stood at 6.5% by mid-July 2014.

VI. Securities Market

The increasing investor confidence following the successful second CA elections in November 2013, lower deposit rates and excess liquidity in the banking sector significantly boosted stock market turnover, which peaked to NRs77.3 billion in FY2014 from NRs22 billion in FY2013 (Figure 33). The commercial bank’s share in total turnover was 65% (NRs37 billion). A higher share turnover indicates more liquid shares of a listed company. Note that Nepal’s share market is still developing and it does not always respond meaningfully to policy change and political developments.

The Nepal Stock Exchange (NEPSE) index reached 1036.1 in mid-July 2014, exactly double the index level of 518.3 reached in mid-July 2013. Stock market capitalization sharply increased to 54.8% of GDP in FY2014 (NRs1057.2 billion) from 30.4% of GDP in FY2013 (NRs514.5 billion). The total number of listed companies increased to 237 from 230 in FY2013, indicating the willingness of more companies to go public to raise capital and trade shares in the secondary market (Figure 34).

 


[1] Money supply (M2) is the sum of net foreign assets and net domestic assets. Also called broad money, M2 is equal to narrow money (M1,) and saving and time deposits. M1 is equal to currency in circulation and demand deposits.

[2] The balance sheet of monetary authorities is composed of assets and liabilities. Assets consist of net foreign assets and net domestic assets (net claims on government and claims on the private sector). Liabilities consist of currency issued and deposits. Both net foreign assets and net claims on government affect reserve money and hence the money supply. A decline in net foreign assets, denominated in local currency in the monetary survey, and the banking sector’s net credit to government reduces the money supply. Net foreign assets are associated with the fluctuations in foreign exchange reserves (in the balance of payments account).

[3] To facilitate the analysis of the central bank’s financing of government operations, claims on the government are recorded in net basis. The net credit to the government means creation of high-powered money, i.e. monetary base (currency in circulation plus reserves of banks in the central bank).

[4] IMF.2014. Nepal Article IV Consultation 2014. Washington, DC: International Monetary Fund.

Monday, September 8, 2014

NEPAL: GDP growth and inflation forecast for FY2015

This blog post is adapted from Macroeconomic Update, August 2014, Vol.2, No.2.


GDP growth

The outlook for FY2015 is a bit less optimistic than that for FY2014, mainly due to the subnormal monsoon forecast and the likelihood of moderate El Nino conditions, which result in deficient rainfall and droughts. Not only did the monsoon rains arrive late this year[1], the overall rainfall also is expected to be lower— around 93% of the long term average[2]. This will potentially lower agriculture production in FY2015. It will be further exacerbated by the impact of natural disasters, particularly floods and landslides. However, with the gradual improvements in the political environment and the resurgence of investor confidence following the government’s commitment to unveil ‘second generation’ reforms to stimulate private investments, the industry sector s expected to perform much better than in the previous years. While he improved private sector confidence will likely boost manufacturing activities, the timely full budget with higher planned capital expenditures along with better project readiness, as well as increases in bank credit to personal housing may boost construction activities. The high inflow of remittances will continue to support robust service sector activities, especially wholesale and retail trade; transport, storage and communications; and real estate, renting and business activities.

Considering these developments, GDP growth (at basic prices) is forecast at 4.6% in FY2015, lower than both the FY2014 estimated growth rate and the government’s target of 6% set in the budget. Over six-tenths of the contribution to this growth rate is expected to come from the services sector, followed by one-tenth from the industry sector and the rest from the agriculture sector. Overall, the continuing robust services sector growth and a potential strong recovery of the industry sector will be partially offset by the anticipated decline in agricultural production, lowering the GDP growth rate in FY2015 compared to an estimated 5.2% in FY2014. In order to reach a 6% growth rate, assuming agriculture sector growth of 4.7% (which in reality in unlikely given the unfavorable monsoon), the non-agriculture sector has to grow by at least 6.7%, more than one percentage point higher than the growth rate in FY2014. Furthermore, assuming constant agriculture and services sectors growth as recorded in FY2014, the industry sector has to grow by a whopping 9% to achieve the government’s growth target. This would be challenging as industrial sector growth has averaged just 2.7% in the last three years.

Inflation

The expected low agriculture harvest, potential rise in administered fuel prices and transport cost, increase in public sector salary and allowance for two consecutive years, and disruptions in domestic distribution systems as a result of natural disasters and strikes will likely push up general prices of goods and services to 9.5% in FY2015. Furthermore, the heightened inflationary expectations will potentially exert further pressures on prices, especially that of key food products and clothing imported from PRC. The unfavorable monsoon will not only lower production and put pressures on food prices, but it might also encourage hoarding of major food products, creating additional pressures and further heightening inflationary expectations. That said, there is a high likelihood of a moderation of prices that pass-through imported goods from India and third countries as the ongoing stabilization of foreign exchange markets and increasing investors’ confidence on the Indian economy—thanks to the anti-inflationary stance by Reserve Bank of India Governor Raghuram Rajan and the credible, investor-friendly government led by Prime Minister Narendra Modi— might result in strengthening of the Indian currency in FY2015. Food and beverage, and non-food and services will likely account for about 60% and 40%, respectively, of the overall CPI inflation.


[1] Monsoon rains were late by around two weeks. Normally monsoon rains enter on June 10 from the Eastern region, and gradually covering the entire country within a week. Approximately, 80% of total rainfall occurs between June and September.

[2] Indian Meteorological Department’s forecast in the second week of June 2014. Long term average refers to the 50-year average. For more, see: http://www.imd.gov.in/section/nhac/dynamic/weeklypress.pdf

Monday, April 14, 2014

Taming high inflation in Nepal

[This blog post is adapted from Nepal country chapter of Asian Development Outlook 2014. The FY2014 and FY2015 outlook here.]


Average inflation has surpassed 9% in each of the past 5 years except for FY2012, when it was only slightly less. Inflation at 12.6% in FY2009 was the highest in the past 2 decades, largely driven by 17.4% rise in the price of food, which occupies a 46.8% share of the consumer price index basket. Since then, food inflation has slowed but remains high, averaging 11.7% in the past 4 years. Similarly, inflation for other items and services has surpassed 9% in the past 2 years. Taming high inflation, which erodes consumers’ purchasing power and makes producers less competitive, is one of the country’s major macroeconomic challenges.


Inflation in Nepal tends to move in tandem with inflation in India, which is Nepal’s largest trading partner and with whose currency Nepal has pegged its rupee. According to a study by the International Monetary Fund, inflation in India and international oil price movements account for about one-third of the variability in Nepal’s inflation. Moreover, after FY2007 inflation became more responsive to changes in international oil prices and the nominal effective exchange rate. Food price inflation, which has contributed about three-fourths of all consumer price index inflation in recent years, is more responsive to spillover from oil price movement and India’s food inflation. The impact of international oil price movements seems more pernicious because a rise in petroleum product prices is quickly felt in the price of chemical fertilizers and transportation. Monetary factors affect both food and nonfood inflation, but their effect tends to fade away quickly.


Other factors that have driven inflation in recent years are weak currency, wage pressures, and supply-side constraints. The depreciation of the Nepalese rupee against the currencies of its trade partners has inflated costs not only for final goods but also for imported raw materials and intermediate goods. Furthermore, 161 products, mostly industrial raw materials, are imported from India in exchange for US dollars. Supply-side constraints such as power outages, transportation bottlenecks, and market price distortions imposed by middlemen and syndicates have also played major roles in keeping inflation high. These factors appear to have intensified since FY2007, when inflation in Nepal started to diverge from its usual path in tandem with inflation in India. Syndicates’ arbitrary hikes in transportation costs and the widening gap between farm gate prices and retail prices— estimated to be at least 40% in the case of fresh vegetables— have propped up high inflation.


Though the government has banned syndicates and anticompetitive practices, enforcement remains weak. Effective market supervision and monitoring are needed to rectify market distortions. Another need is to check inflationary expectations by ensuring prudent fiscal and monetary policies. A way to diminish inflationary expectations would be to remove uncertainty over supplies of motor fuel and cooking gas. Appropriate steps to boost agricultural production would also help meet market demand and limit the impact of imported inflation. Taming inflation requires that financial policies and structural bottlenecks alike be effectively addressed.

Thursday, October 17, 2013

State of hunger in Nepal is improving (Global Hunger Index 2013)

IFPRI has published the latest update on Global Hunger Index (GHI), which shows that hunger in Nepal has consistently declined since 1990. The latest GHI score of 17.3 corresponds to 2008-2012 period. It is the second lowest score in South Asia. Sri Lanka has a GHI score of 15.6. In 2005 (data covering 2003-2007), Nepal had a score of 22.3.

In GHI 2012 (data covering 2005-2010), Nepal had a score 20.3, ranking 60 out of 79 countries. In GHI 2013, Nepal ranked 49 out of 78 countries.

2013 Global Hunger Index Rank
Higher GHI score indicates more hunger 1990 1995 2000 2005 2013 2012 2013
(with data from 1988-92) (with data from 1993-97) (with data from 1998-2002) (with data from 2003-2007) (with data from 2008-12)
Bangladesh 36.7 35.1 24.0 20.2 19.4 68 58
India 32.6 27.1 24.8 24.0 21.3 65 63
Nepal 28.0 27.3 25.3 22.3 17.3 60 49
Pakistan 25.9 22.8 21.6 21.2 19.3 57 57
Sri Lanka 22.3 20.7 17.8 16.9 15.6 37 43

The GHI ranks countries on a 100-point scale in which zero is the best score (no hunger) and 100 the worst. This year's GHI reflects data over 2008-2012 period. Hunger level is categorized as follows:

  • <= 4.9 is low
  • 5.0-9.9 is moderate
  • 10.0-19.9 is serious [Nepal falls in this category]
  • 20.0-29.9 is alarming
  • >= 30.0 is extremely alarming

In order to identify hunger levels and hotspots, the GHI scores countries based on three equally weighted indicators: the proportion of people who are undernourished, the proportion of children under five who are underweight, and the child mortality rate.

In Nepal, the largest contribution to the reduction in hunger score between 2005 and 2013 came from the progress in reducing the prevalence of underweight in children under five years (down from 38.8% in 2005 to 29.1% in 2013).

Excerpts from the report:


Across regions and countries, GHI scores vary considerably. South Asia and Africa south of the Sahara are home to the highest GHI scores. South Asia significantly lowered its GHI score between 1990 and 1995, mainly thanks to a large decline in underweight in children, but was not able to maintain its fast progress. Social inequality and the low nutritional, educational, and social status of women continue to contribute to the high prevalence of underweight in children under five.

[…]It is not surprising that many of the countries with “alarming” or “extremely alarming” scores have not been among the most stable. Higher GHI scores tend to be typical of countries that experience social or political unrest or are perennially exposed to shocks such as floods and droughts. Natural and manmade disasters can directly affect the food and nutrition security of people and communities that are particularly vulnerable or lacking resilience. By extension, a critical part of building resilience is ensuring food and nutrition security; and conversely, efforts to build food and nutrition security must be designed with a resilience lens. Poor people have long been vulnerable to “hunger seasons,” droughts, and other natural and manmade disasters. In recent years, this vulnerability has been exacerbated by food and financial crises and large-scale humanitarian crises such as the recurring droughts in the Sahel and the Horn of Africa. These short-term shocks have long-term consequences.

Policymakers and practitioners across the development and relief communities now recognize the need to build the resilience of vulnerable populations. More resilience will help them climb out of poverty, remain out of poverty, or avoid slipping into it in the first place. Conceptually, resilience has been expanded to include the capacity not only to absorb mild shocks, but also to learn from and adapt to moderate shocks and to transform economic, social, and ecological structures in response to severe shocks.


Tuesday, September 17, 2013

Nepalese economy in FY2013: Monetary sector

[This blog post is adapted from Nepal’s Macroeconomic Update, August 2013, published by the ADB. Here is a previous blog post on real sector and fiscal sector.]


MONETARY SECTOR

Inflation

Although inflation (year-on-year average CPI) moderated to 8.3% in FY2012 from 9.6% in FY2011, it climbed to 9.9% in FY2013, higher than the 9.5% revised target set during the mid-term review of the FY2013 monetary policy. It consistently remained above 10% till mid-December 2012, declined to 9.8% in mid-January 2013, increased to double-digits for the two subsequent months, and then moderated during the last four months of FY2013. Overall, inflation remained higher in all the months of FY2013, except for the last two months, compared to the level in the corresponding months in FY2012 (Figure 1). The high prices reflected the low agriculture harvest, high prices in India, cost escalation due to the depreciation of Nepali rupee, upward adjustment of administered fuel prices[1], power shortages and persistent supply-side constraints.

Figure 1: Year-on-year inflation (% change) Source: Nepal Rastra Bank.

Overall, both food and non-food inflation rates increased in FY2013. While food and beverage prices increased by 9.7% from a rate of 7.7% in FY2012, non-food and services prices continued the increasing trend, reaching a rate of 10.1% in FY2013 from 9% in FY2012 and 5.4% in FY2011 (Table 1). The increased food prices reflects the low agriculture harvest, rise in transport cost transmitted to retail prices[2], and the higher import prices of agriculture products. Meanwhile, the high non-food and services prices, which has a 53.2% weight in the overall CPI index, reflects the price increase of imported goods due to higher external prices as well as the depreciation of the Nepali rupee. On the domestic side, persistent structural bottlenecks and supply-side constraints have contributed to keeping prices at a higher level. Structural bottlenecks include low quality human resources and deficient skills, weak backward and forward linkages, fragmented value chains, negligible research and development (R&D) investment, distorted labor market characterized by high minimum wages and low productivity, and policy inconsistencies, among others. Furthermore, supply-side constraints include the lack of adequate supply of electricity, transport bottlenecks, lack of raw materials leading to high import content of manufactured goods, inadequate supply of key inputs to boost productivity, and strikes, among others.

Table 1: Average annual inflation (% change)

Year

Overall

Food

Non-food

FY2010

9.6

15.1

4.9

FY2011

9.6

17.7

5.4

FY2012

8.3

7.7

9.0

FY2013

9.9

9.7

10.1

Source: Nepal Rastra Bank.

Compared to prices in FY2012, food and beverage inflation remained higher in FY2013 in all months except in mid-October 2012 and the last two months of FY2013 (Figure 2). Non-food and services inflation remained higher till mid-January 2013 when compared to the prices in the corresponding months in FY2012 (Figure 3).

Figure 2: Year-on-year food inflation (% change)

Source: Nepal Rastra Bank.

Figure 3: Year-on-year non-food inflation (% change)

Source: Nepal Rastra Bank.

FY2014 Outlook

Despite the expected improved agriculture harvest, considering the wage pressures, persistently high price level in India, the rise in administered fuel prices, and the continued depreciation of the Nepali rupee, CPI inflation in FY2014 is forecast at 10.5%, higher than the government’s target of 8%. Civil service salaries were increased by 18% and allowances by NRs 1,000 per month in the FY2014 budget. Meanwhile, the non-agriculture sector workers’ minimum wage was revised up by 29% (Figure 4). Petroleum fuel prices were revised upward on 11 August 2013. While the good harvest will help lower food price pressures (which has a 46.8% weight in the CPI), the overall impact might be lower because the domestic supply is insufficient to meet total domestic demand, making Nepal a net food importing country. For instance, according to the Trade and Export Promotion Center, import of agricultural goods was over NRs 100 billion (about 20% of total imports) in FY2013.

Figure 4: Minimum wage, inflation and wage growth

Source: ILO Global Wage Report 2012-13; NRM staff estimates.

Money Supply

As a result of the slowdown in the growth of net foreign assets[3] of the banking sector— the difference between the value of assets owned abroad and the value of domestic assets owned by non-residents—money supply (M2) growth declined to a rate of 16.4% in FY2013 (NRs 185.1 billion) from 22.7% in FY2012 (NRs 209 billion). Net foreign assets grew by only 18% (NRs 68.9 billion), down from a 59.5% growth rate (NRs 131.6 billion) in FY2012 (Figure 5). The significant rise in imports, the deceleration of remittance inflows, and lower foreign grants led to the slow growth in holdings of net foreign assets.

Figure 5: Monetary sector (% change)

Source: Nepal Rastra Bank.

Net claims on government[4]— direct loans and government securities held by the central bank— fell by 5.2% (minus NRs 8.4 billion), a further decline from the 0.3% fall recorded in FY2012. Following surplus liquidity especially during the beginning of the fiscal year, the banking sector’s credit to private sector rebounded with a growth of 20.2% (NRs 163.2 billion) from 11.3% growth (NRs 82.5 billion) in FY2012.

Deposit and Credit

The BFIs mobilized NRs 176.3 billion (reaching a total of NRs 1,188 billion) in deposits in FY2013, lower than NRs 188.6 billion mobilized in FY2012. This translates into a growth of 17.4%, down from 22.9% in FY2012. While commercial banks and development banks increased deposit mobilization by 17.9%, and 27.1%, respectively, finance companies saw a decline in deposit mobilization by 9.6% (Figure 6). The modest acceleration of government expenditure in the last few months due to the delayed full budget and the low deposit interest rates (due to adequate liquidity in the banking sector) resulted in the low deposit growth. The reduction in the number of finance companies from 70 in FY2012 to 59 in FY2013 also contributed to reduced deposits.

Figure 6: Growth of deposits (% change)

Source: Nepal Rastra Bank.

Total credit (loans and advances) from BFIs increased by 18.6% (NRs 180.2 billion), up from a rate of 13.2% in FY2012 (NRs 112.8 billion). However, loans and advances of non-commercial bank BFIs decreased in FY2013. Credits from commercial banks grew by 19.1% in FY2013, up from a rate of 17% in FY2012. However, credit from development banks decreased by 13.1%, down from 23.6. Similarly, credit from finance companies decreased by 5.8%, down sharply from its earlier rate of 23.3% in FY2012 (Figure 7). Credit to the private sector (by category A, B and C BFIs) increased by 20.8% (NRs 161.9 billion) from a rate of 12.2% (NRs 84.9 billion) in FY2012, with commercial banks, development banks, and finance companies registering growth rates of 21.6%, 28.3% and 1.3%, respectively. Reflecting the NRB’s push to increase credit to productive sectors, there was increased lending to industrial, agriculture, energy, and construction sectors. Credit flows to agriculture and energy sectors were 6.7% and 3.3% of total loans by BFIs in FY2013, respectively.

Figure 7: Growth of credits (% change)

Source: Nepal Rastra Bank.

Liquidity Management

The NRB mopped up NRs 8.5 billion through open market operations (outright sale auction), which has traditionally been one of the monetary tools to manage liquidity in the banking sector.[5] This amount was slightly lower than that transacted (NRs 8.4 billion) in FY2012. NRB mopped up NRs 3.5 billion in mid-September 2012 (at weighted average interest rate of 1.01%) and NRs 5 billion in mid-October (at a weighted average interest rate of 0.94%) of 2012. The higher remittance inflows[6] and periodic liquidity injection through open market operations and Standing Liquidity Facility (SLF) addressed initial concerns, arising from the low government expenditure, over liquidity shortage. The BFIs utilized NRs 55 billion of SLF (with 8% interest rate) in FY2013, up sharply from NRs 5.6 billion in FY2012.

Meanwhile, the central bank injected NRs 285 billion into the banking sector in FY2013, up from NRs 258.3 billion in FY2012, by purchasing $3.2 billion from the commercial banks. To finance the burgeoning imports from India, NRB sold $3.1 billion in the Indian money market and purchased Indian currency equivalent to NRs 274.4 billion in FY2013. In FY2012, the NRB had sold $2.7 billion to purchase Indian currency equivalent to NRs 213.9 billion.

Interest Rates

Although the short-term interest rates were lower in the first six months of FY2013 compared to those in the same period in FY2012, they rose in later months due to the tightening of liquidity in the banking sector as a result of the low government expenditure (Figure 8). The 91-day treasury bills weighted average rate was lower in the first five months of FY2013 and higher in the rest of the months of FY2013 when compared to those in the corresponding months in FY2012. Similarly, the inter-bank weighted average interest rate among commercial banks was lower throughout the first six months of FY2013 than what was seen in the same period in FY2012. It started to increase from the second half of FY2013, reflecting the apprehension of the banks over the liquidity shortage arising from deceleration of remittance inflows (and hence demand deposits) and low capital expenditure (along with significant government budget surplus). In FY2013, after the introduction of the full budget in the ninth month, short term interest rates started to fall. Overall, the weighted average annual short term interest rate (interbank and 91 day T-bills rates) was higher in FY2013 than in FY2012.

Figure 8: Year-on-year interbank and 91-day treasury bills rate (% change)

Source: Nepal Rastra Bank.

In FY2013, the weighted average deposit rate of commercial banks was around 5% and the weighted average lending rate was around 12%, resulting in the interest rate spread of around 7%. The spread rate sharply dropped from 8.8% in October 2012 to 6.8% in July 2013, suggesting the gradual improvement in banking sector efficiency. In the meantime, the average base rate of commercial banks was 9.8%, slightly higher than in January 2013 when the central bank mandated commercial banks to publish their base rates. The mandatory provision to publish base rates is expected to make lending rates more transparent and competitive.  

Securities Market

As investor’s confidence rebounded following the formation of a new election government, the stock market turnover sharply increased to NRs 22 billion from NRs 10.3 billion in FY2012 and NRs 6.7 billion in FY2011. As a share of market capitalization, the turnover amounted to 2.1%, 2.8% and 4.3% in FY2011, FY2012 and FY2013, respectively (Figure 9). Of the total turnover, the commercial banks’ share was 64% in FY2013 (NRs 14.1 billion), up from 54.6% in FY2012 (NRs 5.6 billion). A higher share turnover indicates more liquid shares of a listed company. Note that Nepal’s stock market is still developing and does not always respond meaningfully to policy changes and political developments.

Figure 9: Stock market turnover (NRs billion)

Source: Nepal Stock Exchange.

The Nepal Stock Exchange (NEPSE) index increased sharply by 33% (518.3 points) in FY2013 from an increase of only 7.4% (368.3 points) in FY2012. Similarly, stock market capitalization surged by 39.7% to NRs 514.5 billion (30.2% of GDP) in FY2013, following a much lower growth rate of 13.8% in FY2012 (market capitalization NRs 368.3 billion, 24% of GDP). The total number of listed companies increased to 230 from 216 in FY2012, indicating the willingness of more companies to go public, raise capital and trade shares in the secondary market (Figure 10).

Figure 10: Stock market performance

Source: Nepal Stock Exchange


 
Notes:

[1] Fuel prices were increased in September 2012.

[2] Following the rise in administered fuel prices, insurance and maintenance cost, transport fares were increased by at least 9% and 16% for general transport and trucks (freight), respectively.

[3] The balance sheet of monetary authorities is composed of assets and liabilities. Assets consist of net foreign assets and net domestic assets (net claims on government and claims on the private sector). Liabilities consist of currency issued and deposits. Both net foreign assets and net claims on government affect reserve money and hence the money supply. A decline in net foreign assets, denominated in local currency in the monetary survey, and the banking sector’s net credit to government reduces the money supply. Net foreign assets are associated with the fluctuations in foreign exchange reserves (in the balance of payments account).

[4] To facilitate the analysis of the central bank’s financing of government operations, claims on the government are recorded in net basis. The net credit to the government means creation of high-powered money, i.e. monetary base (currency in circulation plus reserves of banks in the central bank).

[5] However, it may be noted here that in Nepal it is increasingly being used to sell T-bills and bonds in order to raise funds to finance government expenditure rather than to manage liquidity in the banking sector. Furthermore, the liquidity injection by purchasing dollars from the commercial banks is used to manage liquidity in the banking sector.

[6] Note that despite the decline in the growth rate of remittance inflows, total remittance inflows continued to increase.

Thursday, September 12, 2013

Food price insulation measures and poverty

Anderson, Ivanic and Martin (2013) argue that food price reducing measures in 2008 (export restraints and reduction in import protection) added substantially to the spike in international food prices, and increased poverty by 8 million.

Abstract of the paper:


This paper has two purposes. It first considers the impact on world food prices of the changes in restrictions on trade in staple foods during the 2008 world food price crisis. Those changes -- reductions in import protection or increases in export restraints -- were meant to partially insulate domestic markets from the spike in international prices. The authors find that this insulation added substantially to the spike in international prices for rice, wheat, maize, and oilseeds. As a result, although domestic prices rose less than they would have without insulation in some developing countries, in many other countries they rose more than they would have in the absence of such insulation. The paper's second purpose it to estimate the combined impact of such insulating behavior on poverty in various developing countries and globally. The analysis finds that the actual poverty-reducing impact of insulation is much less than its apparent impact, and that its net effect was to increase global poverty in 2008 by 8 million people, although this increase was not significantly different from zero. Since there are domestic policy instruments, such as conditional cash transfers, that could now provide social protection for the poor far more efficiently and equitably than variations in border restrictions, the authors suggest it is time to seek a multilateral agreement to desist from changing restrictions on trade when international food prices spike.


Sunday, March 24, 2013

New inflationary normal in Nepal?

The figure shows the monthly change in inflation, which is an aggregate measure of the change in prices of goods and services, in the last three years and the first seven months of FY2013 (ending 15 July 2013). The inflation in a month of a particular fiscal year is the change in prices in that month compared to the prices in corresponding month in the preceding year. In other words, inflation of 10.1% in mid-August of FY2010 means that on average prices of goods and services have increased by 10.1% compared to the prices in mid-August of FY2009. The most widely yearly inflation data is computed by taking the average of monthly inflation in a fiscal year (in the figure, it is mentioned as annual average in the legend). The Nepal Rastra Bank gives 46.82% weight to food prices and 53.18% to non-food and services prices while determining overall inflation.

The figure shows that inflation in the first five months of this fiscal year has been consistently higher, though in a decreasing trend, than the levels reached in corresponding months of previous years. Compared to previous year, it essentially means that households have been paying higher prices, in general, for all goods and services purchased this year. High inflation is eroding household’s, whose income hasn’t kept pace with the inflation rate, purchasing power and is especially hitting poorer households hard. With the government’s failure to clamp down on inflation, which is hovering above 8% since 2008/09, people have built up expectations that prices will not come down in the near future (or say embedded expectations at a higher base). Unfortunately, we are living in times where inflation above 8% is becoming a ‘new inflationary normal’. Just for comparison, inflation was as low as 2.9% in 2000/01.

Traditionally, high inflation has its roots on too much money chasing too few goods, i.e. when the demand for goods (backed by too much money in hands of people) outstrips supply of goods. The central bank controls the flow of money (by changing interest rates and imposing regulatory restrictions) in the economy. However, given the pegged exchange rate with India, Nepal Rastra Bank’s monetary policies have little traction on inflation in Nepal. Alternatively, an irresponsible government with a knack for higher spending also pushes prices higher (or rather helps keep prices high).

Now, the question is: what really is pushing prices higher? Several factors come into play here. The very fact that our currency is pegged to Indian rupee and over 60% of trade occurs with India means that the inflation in India will naturally affect prices here. Research shows that about one-third of the price variability in Nepal is determined by prices in India. The rest is determined by domestic factors, including prices of administered petroleum fuel.

First, inflationary expectations are embedded in people’s consumption behavior due to the incompetency of government to control rising prices. Wholesalers and retailers deliberately jack up prices, irrespective of market supply and demand, each year during festival season (Dashain and Tihar) and the prices hardly come down after the end of festivals. This behavior is also apparent immediately after bandas and temporarily disrupted distribution of essential items.

Second, middlemen are distorting prices and deliberately keeping them high. For instance, transportation cost and some leakages do not fully justify more than 50% increase in prices of fruits and vegetables after they reach Kalimati from Dharke of Dhading. Powerful politically affiliated middlemen and associations act both as monopsonists (only they purchase food from farmers), and monopolists (only they sell food to wholesalers), in effect depriving farmers of the true price by stifling competition and also burdening consumers with artificially inflated prices.

Third, the frequent hike in administered fuel prices, high transportation costs, and long load-shedding hours have increased cost of production, which is ultimately reflected in retail prices. It affects costs at production site, distribution chains, and retail stores. Fourth, the continually rising imports of goods, especially those from outside of India, and the depreciation of the Nepali rupee have further pushed up prices as non-food and services have more weight in determining overall inflation.

All of this shows the failure of government leadership to lower inflation and make people’s lives easier. The ineffective market monitoring against anti-competitive practices, control of supply chains and market distortions, and to some extent a rise in cost of production are associated with government leadership and governance structure in practice. Recently, we have had leaders favoring high budget spending (unproductive ones) and cash handouts along with lax market monitoring because the supplies (ranging from construction materials to food items) are essentially controlled by party associates, who rake in huge commission by distorting market incentives. At some point controlling inflation becomes a political economy issue rather than a pure economic issue in developing countries like Nepal due to political, institutional and regulatory weaknesses along with immature linkages between and within sectors.

In effect, Nepali economy is destined to have high inflation, and with it people’s lives will get harder each year. Unless the market distortions are dismantled, unproductive spending are checked, and a sound macroeconomic framework (that doesn’t depend on remittances for sustenance) is created, we will continue to have a high inflationary normal, i.e. high inflation will be a new normal and people will experience continued erosion of purchasing power.

Saturday, November 3, 2012

NEPAL: Proejcted agriculture production in FY 2012/13

The shortage of fertilizers and low and late monsoon during peak paddy planting season are expected to lower economic growth rate (unless industrial and services sector pick up rapidly, which seems negative as of now). So, how much is the expected decline in agriculture production in 2012/13?

Prabhakar Ghimire reports (his blog here) that the Ministry of Agriculture and Development estimates food production to decline by 563,000 MT.
  • Paddy production to fall by 14.2%. Total paddy output is expected to drop by 720,000 tons this year compared to 5.07 million tons recorded last year. Plantation was done in just 91% of total paddy land. Dhanusha and Siraha, key paddy producing districts, reported plantation in just 49 percent and 50 percent of paddy land
  • Maize production to fall by 10%. Total maize production is expected to drop by around 164,000 tons.
  • Demand for cereals could rise by 100,000 tons to 5.3 million tons this year.
  • At least 27 districts will face food deficit this year.
About 76.3% of households in Nepal depends on agriculture for livelihood and 83% of the population lives in rural areas. Paddy contributes around 21% to agriculture production, which then account for about 35% of GDP. Paddy and maize are the major cereals consumed by a majority of households.

Meanwhile, global food prices is increasing. According to the latest Food Price Watch, global food prices increased 10% between June and July 2012 with staples such as wheat increasing 25% in the period. The high global food and fuel prices gets reflected in domestic prices as almost half of the total food demand is fulfilled by imports. It tends to affect poor and vulnerable the most, while pushing back people just above the poverty line back under it. 

A study (Global Food Price Inflation and Developing Asia) by ADB showed that a 10% increase in food prices will increase the number of poor people (in millions) living below US$1.25-a-day by 3.8, 0.01, 22.8, 6.7, 0.6, 3.5, and 0.2 in Bangladesh, Bhutan, rural India, urban India, Nepal, Pakistan, and Sri Lanka, respectively. More here (and also this one on targeted food subsidies).

Tuesday, October 16, 2012

State of Hunger in South Asia, 2005-2010 (Global Hunger Index 2012)

According to the Global Hunger Index 2012, though hunger in Nepal is decreasing, it is still at "alarming" level. Nepal's hunger index declined from 26.9 in 1990 to 20.3 in 2012.  In hunger ranking, Nepal ranks 60 out of 79 countries. In 2011, Nepal's ranking was 54. Note that while GHI 2012 used data from 2005 to 2010, GHI 2011 used data from 2004 to 2009. 

In South Asia, GHI 2012 ranks Sri Lanka 37, Pakistan 57, Nepal 60, India 65 and Bangladesh 68. It means that hunger in Sri Lanka is the lowest in South Asia. Hunger level in Sri Lanka and Pakistan is "serious". In all other countries, it is "alarming".

Hunger in South Asia (Increase in GHI score means hunger situation is worsening)
Country 1990 1996 2001 2012 RANK
(with data from 1988-92) (with data from 1994-98) (with data from 1999-2003) (with data from 2005-2010)
Bangladesh 37.9 36.1 27.8 24 68
India 30.3 22.6 24.2 22.9 65
Nepal 26.9 24.4 23 20.3 60
Pakistan 25.5 21.8 21.7 19.7 57
Sri Lanka 20.8 18.4 15.2 14.4 37

The GHI ranks countries on a 100-point scale in which zero is the best score (no hunger) and 100 the worst. This year's GHI reflects data from 2005 to 2010. Hunger level is categorized as follows:
  • <= 4.9 is low
  • 5.0-9.9 is moderate
  • 10.0-19.9 is serious
  • 20.0-29.9 is alarming
  • >= 30.0 is extremely alarming
In order to identify hunger levels and hot spots, the GHI scores countries based on three equally weighted indicators: the proportion of people who are undernourished, the proportion of children under five who are underweight, and the child mortality rate.

Compared with the 1990 score, the 2012 GHI score was 16 percent lower in Sub-Saharan Africa, 26 percent lower in South Asia, and 35 percent lower in the Near East and North Africa. The report notes:

South Asia reduced its GHI score by more than 6 points between 1990 and 1996—mainly through a large 15-percentage-point decline in underweight in children—but this rapid progress could not be maintained. Stagnation followed, and the region has lowered its GHI score by only about 2 points since 2001 despite strong economic growth. The proportion of undernourished people did not decline between 1995–97 and 2006–08 and even showed a transient increase of about 2 percentage points around 2000–02. Social inequality and the low nutritional, educational, and social status of women are major causes of child undernutrition in this region and have impeded improvements in the GHI score.

The rising water, land and energy scarcity will impact food security in the coming decades (especially food price volatility and food price spikes). On this regard, the GHI provides the following recommendations to effectively deal with its impact on food security:
  • Responsible governance of natural resources: getting the policy frameworks right (secure land and water rights; phase out subsidies; create a macroeconomic enabling environment)
  • Scaling up technical approaches: addressing the nexus (invest in agricultural production technologies that support increased land, water, and energy efficiency; foster approaches resulting in more efficient land, water, and energy use along the value chain; prevent resource depletion by monitoring and evaluating strategies in water, land, energy, and agricultural systems)
  • Addressing the drivers of natural resource scarcity: managing the risks (address demographic change, women’s access to education, and reproductive health; raise incomes, lower inequality, and promote sustainable lifestyles; mitigate and adapt to climate change through agriculture