Impact of global financial crisis on the Nepali economy

That’s the title of my new op-ed published in a new news portal launched toady in Nepal. More on the new media house and news portal here.

Impact of global financial crisis on the Nepali economy

How will this crisis affect a small, landlocked country like Nepal? It will not directly affect the Nepali financial system, nor put strains on monetary policy, as Nepal is largely insulated from the toxic assets of big investment like in the West. However, it will indirectly affect economic growth, revenue collection, and development initiatives carried out by Non Government Organizations (NGOs). Potential monetary imbalance may arise from changes in Indian monetary policies and the exchange rate of NRs vs. INRs.

The economy could feel the impact of global financial crisis through four different routes- a slowing down in inflow remittances, a recessionary tourism sector, decline in aid, and a demand-deficient manufacturing sector. While a slowing of the first three components will affect poverty reduction and development initiatives, the decline in global demand for Nepali-manufactured products will put direct downward pressure on growth rate. The rate is expected to hover around 5% during 2009.

A global economic meltdown will decrease demand for products made in India, where a majority of low-skilled Nepali laborers work. Meanwhile, a slowing down of the construction and service sectors in the Middle East, the other major source of remittances, and in countries such as South Korea, Malaysia, and Japan, will result in lowering demand for Nepali labor abroad. Put simply, fewer workers leaving the country in days ahead will decrease remittances inflow in a number of ways. This could affect the rate of progress made in poverty alleviation and potentially lower domestic demand, as households will be more hesitant to spend money due to declining income.

Remittances, which currently account for 19% of the Gross Domestic Product (GDP), have been extending the economy a lifeline for almost a decade. It is chiefly due to these remittances that the balance of payments is still in surplus despite a huge balance of trade deficit. Remittances have furthermore helped decrease the poverty rate from 42 percent in 1995/96, to 31 percent in 2003/04. More than 34% of households receive remittances, an increase of more than 80% since 1994/95. Over one million Nepalis working abroad send money directly to their families, a portion of which is generally used to meet regular expenditures, and the remainder saved in domestic financial institutions.

A global slow-down and recession in Western economies will also affect the Nepali service industry, which contributed 50.9% of GDP in 2007. Global recovery is not expected any time soon as the Western financial crisis steadily worsens. This means potential tourists are likely to postpone or cancel travel plans. By working with the government and launching promotional packages, Hotel Association of Nepal (HAN) is hoping to entice about a million tourists in 2010. If the global economic slow-down continues past 2010, this dream seems unachievable

Meanwhile, the aid industry will also not be spared from the crisis. NGOs operating in Nepal receive funding from corporate donors, governments and large foundations in the West. The global slow-down will limit this funding, forcing the organizations to scale back development initiatives. This will have a negative impact on the fight against poverty and other development challenges. The manufacturing sector will also suffer. Export to major Western countries is expected to slow in the coming years. The Confederation of Nepalese Industries (CNI) recently estimated that the manufacturing sector would incur a loss of $256.16 million as a result of the global economic slow-down.

An extended and original version of the article is available here.

Snapshot of the new news portal:

Krugman’s Nobel lecture

Paul Krugman’s Nobel lecture slides here and here.

The ultimate news source about Nepal

A new news portal is launched today in Nepal. It is titled Republica, a national daily plus news portal about Nepal. Senior journalists, some of whom I know and have worked with in the past, are working in this new media house (Dhumbarahai Media). It is going to be the ultimate one-stop source of news and information about Nepal. A Nepali version is named Dainikee.

Below is a snapshot of the first-ever homepage of www.myrepublica.com:

Stiglitz and Keynes

Stiglitz argues that the financial crisis has made it clear that we all are Keynesians- admit it or not! The two quite vocal Keynesians- Krugman and Stiglitz, both Nobel laureates, have been arguing that monetary policy might not work now as the interest rate has already hit rock bottom and increase in money supply has not been able to affect economic activity. So, time to raise Keynesian wand! He worries about the potential misuse of Keynesian doctrines.

Economic theory had long explained why unfettered markets were not self-correcting, why regulation was needed, why there was an important role for government to play in the economy. But many, especially people working in the financial markets, pushed a type of “market fundamentalism.”

Keynes argued not only that markets are not self-correcting, but that in a severe downturn, monetary policy was likely to be ineffective. Fiscal policy was required. But not all fiscal policies are equivalent. In the US today, with an overhang of household debt and high uncertainty, tax cuts are likely to be ineffective (as they were in Japan in the 1990s). Much, if not most, of last February’s US tax cut went into savings.

...That necessitates restructuring both tax and expenditure programs. Lowering taxes on the poor and raising unemployment benefits while simultaneously increasing taxes on the rich can stimulate the economy, reduce the deficit, and reduce inequality. Cutting expenditures on the Iraq war and increasing expenditures on education can simultaneously increase output in the short and long run and reduce the deficit.

Today, the risk is that the new Keynesian doctrines will be used and abused to serve some of the same interests. Have those who pushed deregulation 10 years ago learned their lesson? Or will they simply push for cosmetic reforms — the minimum required to justify the mega-trillion dollar bailouts? Has there been a change of heart, or only a change in strategy? After all, in today’s context, the pursuit of Keynesian policies looks even more profitable than the pursuit of market fundamentalism!

More on similar stuff here.

Top ten missed stories this year

Foreign Policy lists the top ten stories missed in 2008.

Innovation: 8 Nepali students built an ultra-light aircraft!

Using mostly locally available materials, eight Nepali engineering students built an ultra-light aircraft and successfully completed a test flight yesterday. Interesting stuff!

 

More here and here. Human capital is not a constraint to growth in Nepal. Policies to promote R&D is lacking in Nepal. There is a high potential for “self-discovery”, but policies to promote them are long lacking.

Price floor on rent in Nepal

The left-wing Finance Minister Bhattarai is scrambling to meet revenue target set by him in this year’s budget. Many said that around Rs 42 billion in tax revenue is very ambitious. Recently, the government decided to give bonus of up to 200% on the basis of per worker revenue collection in customs offices. Now, to bring house rental business under the tax net, the government is imposing a minimum price for rent in major cities.

This means that house owners will have to pay a fixed (minimum)amount of tax even if rent charged by them is below the one earmarked by the government. If the prevailing equilibrium rent (price) is below the one set by the government, then house owners will be forced to pay rent tax that is not consistent with the price charged by them. So, market rent price will rise till the point where the price floor corresponds to the 10% flat rent tax imposed by the government. On the other hand, if the rent price fixed by the government is below the market price, then either rent price will come down or it will not have any effect other than increase in tax revenue from house rent sector.

Here is the article.

Kapildev Ghimire, director general at Inland Revenue Department (IRD) told the Post they would conduct a survey later this month on rents in various business and residential areas of Kathmandu and major cities outside Kathmandu to fix reference prices.

He made it clear the government would collect tax according to the rent it sets even if it is found that the rent is lower than the fixed amount.

"Fixing minimum prices has become necessary to discourage those who show very little rental prices in paper to evade tax ," he said. The government will start collecting taxes by effectively enforcing the law from mid-January after completing the survey."

The government has set a revenue collection target of Rs. 1.03 billion through rental tax in the current fiscal year while the amount was Rs. 706 million in the last fiscal year.

[I have microeconomics-related demand and supply graph in mind but can’t spend time in drawing that in MS Word because it’s finals week and I am overloaded with exams and papers. Next time, if this issue emerges again, then I’ll definitely include a figure to explain the effect of this price floor.]

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This news piece caught my eye. The vegetable ghee industry is perishing in Nepal. Why? due to high import taxes on raw materials, high transportation costs, labor troubles, and lack of power. The high cost of production has made Nepali ghee uncompetitive in the Indian market.

The ghee industry has been facing the squeeze for the last 10 months. There are 16 vegetable ghee factories in Nepal. High taxes in the import of raw materials from Kolkata of India, high customs duty on export, labour troubles, lack of power and poor transportation facilities have pushed these factories to the verge of extinction, said Laxman Nebatia of Swastik Ghee and Oil Industry. The closure of ghee factories has caused a loss of Rs 2,400 million. The government should revive the ghee industry, said Pradip Murarka of Nepal Ghee and Oil Industries’ Association. High import duty and export taxes have spoilt the competitiveness of Nepali ghee.