Links of Interest (2012-04-18)–Nepali economy special

GDP growth in FY2011/12 estimated to be 4.63 percent. This is short of the 5 percent target set while rolling out the budget for the fiscal  year. The estimate computed by CBS is based on first eight months data of this fiscal year. Other highlights:

• Per capita income expected to grow by 3.2 percent in the current fiscal year, reaching $735
• Domestic savings to be 9.98 percent of GDP (8.62 percent of GDP in 2010/11 and 11.5 percent of GDP in 2009/10)
• Consumption at 90 percent of GDP
• Agriculture sector to grow at 4.86 percent, thanks to increased production of cereal crops and other agri produces. Paddy production to go up 13.72 percent. Production of fruits, meat and dairy products, and other livestock products are estimated to go up by 5.13 percent, 3.01 percent and 5.99 percent, respectively
• Contribution of agriculture and forestry sector to GDP is expected to fall to 34.78 percent this fiscal year, from last year´s 36.54 percent.
• Manufacturing sector´s (projected to expand by mere 1.28 percent) contribution to GDP is also expected to remain unchanged at 6.17 percent. The low growth rate is expected due to a fall in production of clothing items and shoes made of fabric, leather and synthetic, plywood and dairy products.
• Construction sector which is expected to contract by 0.07 percent this fiscal year. Its contribution to the total GDP is also expected to fall to 6.73 percent this fiscal year from 6.93 percent of last fiscal year.
• Contribution of wholesale and retail trading to the GDP is expected to go up to 14.24 percent from 14.16 percent of previous year, with expansion of the sector by 3.79 percent.
• Gross national disposable income to stand at Rs 1.97 trillion this fiscal year, up from Rs 1.68 trillion of last year.

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Few points on the state of the economy this year:

• The targeted growth rate of 5 percent was initially unrealistic. The bump in agri production is mainly  due to favorable monsoon. Here is what I wrote in February.

“The claim of economic revolution by this government is pure hogwash. The economy is stuck in the same mess as it was before. The government has done nothing substantial to put it on the path of high growth, let alone address the short term constraints. The recent good news about bumper agriculture production, improved reserves and BoP surplus has nothing to do with policy changes by this government. Importantly, improvement in these indicators alone does not indicate an improved macroeconomy set to welcome more investment and ready to brace growth rate of over 5 percent.”

• Despite the improvement in some macro and social indicators, in terms of employment-generating productive economic activities and factors that can propel growth rate sustainably above 5 percent, we are still in the same mess. Inflation is still high; banking troubles are still there albeit in latent state; trade deficit is still widening and exports are faltering; policy implementation paralysis has clouded the relatively fine policies; market distortions are costing heavily to consumers, the industrial sector clamor for relief from several constraints remain unaddressed; labor unions are still running the running the full show (some of their demands are legit even though there is fear among investors that there will be a disconnect between wages and productivity; there is no progress on structural transformation and the economy is still supported by remittances, which has its own costs and benefits with the former weighing heavy on the latter; inadequate supply of power to industries, power cuts, and resistance to hydropower projects on grounds of nationality and other issues is still there; the northern parts of Mid West and Far West development regions continue to face food insecurity; a majority of the state-owned enterprises has huge arrears, financially and administratively bankrupt and are in need of either purge or drastic revival.
• Domestic savings are too low, which also hints at the low level of domestic investment. FDI inflows are not that encouraging. Let us hope that there will be substantial investment commitment (forget about immediate disbursement) during NIY 2012/13.
• BoP and current account surpluses and huge forex reserves don’t mean anything if these are due to external factors rather than internal factors driven by high industrial production, high exports and a gradual move toward structural transformation.
• Budget deficit will widen this year and next year as well, thanks to payments to voluntarily retired PLA fighters and expenditure growth being higher than revenue growth.
• The increase in employment in services sector (and its contribution to GDP) is not related to domestic sources of demand at the core. The huge remittance inflows have increased purchasing power of people and the demand for imported goods (both durables and nondurables). It means a robust trading business, as signified by rising imports (apart from petroleum products). It also means an increase in growth of retail services.
• Good sings are emerging though: NIY 2012/13 should be a milestone if it is run smoothly with adequate manpower, ideas and funds. There is no room for satisfaction from partial success like that during NTY 2011. The US$.18 billion West Seti hydropower project is a good start. More credible foreign firms should be given green light to start big hydropower projects (no hullaballoo on grounds of nationalism and neocolonialism, please). Target should be on three fronts: agro-processing industries to propel interim period structural transformation, big infrastructure projects to address binding constraints to growth, and employment-generating activities (both labor intensive and sophisticated activities) to entice youths.

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Four districts (Manang, Humla, Mugu and Dolpa) still not connected by road

Industrial production in Morang down by 80 percent due to more power cuts arising from decline in power imports from India and the NOC’s refusal to sell required amount of diesel to run generators.

MoF is struggling to find enough funds for PLA fighters who opted for retirement instead of joining Nepal Army. [The budget deficit is going to increase for sure and the MoF will compel other ministries to channel ‘budget surplus’—unspent money—to give it to the PLA fighters who opt for voluntary retirement.]

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Prevailing disenchantment among Maoist combatants on integration, which suddenly raised the number of voluntary retirements, has immediately inflated State´s liability, forcing the government to arrange additional Rs 2 billion from initial calculations of around Rs 5.75 billion to send the combatants home. Considering the initial estimates, Ministry of Finance (MoF) had released Rs 1.97 billion to Peace Ministry to initiate the voluntary retirement of 7,371 who chose it initially. But amid turn of situation, MoF released additional Rs 1.50 billion over the past few days to manage the cost. “We released Rs 1 billion on April 12 and also disbursed additional Rs 500 million on April 15,” said Finance Secretary Krishna Hari Baskota. He informed Republica that MoF managed the fund from budget allocated under miscellaneous heading and also by pooling fund from different ´not so important´ headings. But at the same time he added, the release has exhausted all the fund MoF had at its disposal.

With UCPN Maoist pushing hard for integration of 6,500 combatants in the Nepal army, the government had calculated that just around 10,550 combatants would opt for voluntary retirement. Furthermore, as 9,705 combatants continued to stay in the cantonment eyeing their chances of integration, the government had estimated it will need only around Rs 4 billion to start with for integration. Following such calculation, MoF had immediately disbursed Rs 1.97 billion to the Peace Ministry, which was half of the total retirement cost, for fulfilling the liability in two annual tranches as promised. However, when the integration process actually began, 13,671 combatants have already chosen to go for voluntary retirement by Tuesday.

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Migration, food insecurity and cropping months

Here is an interesting chart from a WFP study in 2008. It is hard to draw a definite conclusion from this chart. Overall, in-migration is high during cropping months. Out-migration is high towards the end of cropping months. If migrants don’t return, mainly from India, during the start from cropping season, then agriculture production goes down and food insecurity will heighten. The study found that lack of employment and food shortages were the two most important reasons for migration.

For more on food insecurity in Nepal, see this article. More on food security here and here. Here is a short paper on food security and aid in Nepal.

Does high remittances lead to high demand for credit?

Analyzing the scenario in El Salvador, Anzoategui et al. argue that remittances do not necessarily led to “a significant and robust” demand for and use of credit from formal institutions. However, it has positive impact on financial inclusion by promoting the use of deposit accounts. Remittances account for about 17 percent of GDP of El Savador. Here is the abstract of the paper:

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This paper investigates the impact of remittances on financial inclusion. This is an important issue given recent studies showing that financial inclusion can have significant beneficial effects on households. Using household-level survey data for El Salvador, the authors examine the impact of remittances on households' use of savings and credit instruments from formal financial institutions. They find that although remittances have a positive impact on financial inclusion by promoting the use of deposit accounts, they do not have a significant and robust effect on the demand for and use of credit from formal institutions. If anything, by relaxing credit constraints, remittances might reduce the need for external financing from financial institutions, while at the same time increasing the demand for savings instruments.

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The latest household survey in Nepal shows that with massive increase in remittances (which is close to 25 percent of GDP), the proportion of households taking loans from financial institutions increased (from 15.1 percent of total households in 2003/04 to 20 percent in 2010/11). Meanwhile, there was a decline in the proportion of households taking loans from money lenders and relatives.

Electricity theft and electoral cycle in UP

Here is an interesting paper on the relationship between the magnitude of electricity theft and electoral cycle in UP, India’s most populous state. Golden and Min argue that during election years electricity theft is significantly greater than in other years and it increases with the intensity of tubewells. Interestingly, they find that the probability of being re-elected is higher when power theft in locality increases. They show that power theft is most intense in the state’s most agricultural localities, suggesting it is largely due to unmetered agricultural use. Below is the abstract of the paper.

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Utilizing data from the power corporation of Uttar Pradesh, India’s most populous state, we study the politics of electricity theft over a ten year period (2000–09). Our results show that electricity theft is substantial in magnitude. The extent of theft varies with the electoral cycle of the state. In years when elections to the State Assembly are held, electricity theft is significantly greater than in other years. Theft is increasing with the intensity of tubewells, suggesting that it is linked to unmetered electricity use by farmers. Incumbent legislative members of the state assembly are more likely to be reelected as power theft in their locality increases. Our interpretation of these various results is that power theft exhibits characteristics consistent with the political capture of public service delivery by local elites. Our results fail to substantiate that theft is linked either to political criminality or is the product of weak institutions.

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Electricity theft is also an acute problem in Nepal, increasing load-shedding hours and inflicting loss of revenue to government. The leakage was thought to be as high as 30 percent few years back, but it has come down in recent years due to active monitoring by the relevant government agencies. The increase in load-shedding hours in areas with more electricity theft has also worked to some extent. The leakage occurs from three sources: illegal hookups, meter fraud (by bribing inspection officials, meter tempering by using magnets to slow spinning disk that records the amount of power that is being drawn) and unmetered use (paying in bulk instead of according to meter reading as the cost of installing meter is high; agriculture consumers do it in some places with flat system of electricity pricing).

The impact of Bolsa Familia on inequality

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Some of the 13 million families in Brazil’s Bolsa Familia program, for instance, can now access microcredit and job training so they can “make their own living,” says Bank economist Anna Fruttero. The effort is “still experimental,” she says.

The Bolsa Familia program costs about 0.5% of GDP and covers 25% of the population. It is considered a key part of a strategy to create a “Brazil without Misery,” where everyone has access to health, education, housing, water and sanitation. “Income transfer programs, as important as they are, are just one block” of the strategy, says Fruttero. While they have shown to be an important instrument in reducing poverty they are not enough to completely eradicate it, she says.

Still, researchers in fast-growing Brazil say Bolsa Familia and related programs have contributed about 25% of a reduction in income inequality in the country.

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Here is more on safety nets and social protection programs. More on Bolsa Familia here, here and here.

Employment in Nepal and South Asia compared

According to the ILO estimates, Nepal has the highest labor force participation rate in South Asia (83.9 percent). Similarly, Nepal also has the highest employment to population rate in the region (82.1 percent). See the figures below (all data pertain to 2010).

In Nepal, the labor force participation rate of male and female is 87.7 percent and 80.3 percent respectively. The total labor force (15+) is estimated to be 16.03 million and population (15+) to be 19.12 million. Overall, LFPR of 35-54 age group is the highest (93 percent).

Labour force participation rate (%)- Nepal
Sex	Age group	LFPR	Sex	Age group	LFPR
Male and female	15+	83.9	Male	15+	87.7
Male and female	15-24	75.9	Male	15-24	76.7
Male and female	15-64	85.9	Male	15-64	88.8
Male and female	25-54	92.2	Male	25-54	96.4
Male and female	25-34	91.2	Female	15+	80.3
Male and female	35-54	93.0	Female	15-24	75.1
Male and female	55-64	84.5	Female	15-64	83.1
Male and female	65+	54.8	Female	25-54	88.3

The labor force participation rate is a measure of the proportion of a country's working-age population that engages actively in the labor market, either by working or looking for work. It provides an indication of the relative size of the supply of labor available to engage in the production of goods and services. The data are based on ILO estimates based on previous year surveys (except for India and Sri Lanka, for which reported data by governments is used).

In Nepal, the employment to population rate of male and female is 85.7 percent and 78.7 percent respectively. The total employment (15+) is estimated to be 15.71 million and population (15+) to be 19.12 million. Overall, E-to-P ratio of adults (25+) is the highest (86.4 percent)

Employment- to-population ratio (Nepal)
Sex	Group	Age group	Emp ('000)	Pop ('000)	E-to-P
Male and female	Total	15+	15,705	19,118	82.1
Male and female	Youth	15-24	4,553	6,209	73.3
Male and female	Adult	25+	11,152	12,908	86.4
Male	Total	15+	7,972	9,298	85.7
Male	Youth	15-24	2,343	3,182	73.6
Male	Adult	25+	5,629	6,116	92.0
Female	Total	15+	7,733	9,819	78.7
Female	Youth	15-24	2,210	3,028	73.0
Female	Adult	25+	5,523	6,792	81.3

The employment-to-population ratio is defined as the proportion of a country's working-age population that is employed. A high ratio means that a large proportion of a country's population is employed, while a low ratio means that a large share of the population is not involved directly in market-related activities, because they are either unemployed or (more likely) out of the labor force altogether.

[I checked on the source based on which the estimates were made. In Nepal’s case, the sources are Census 2001, NLSS 2003/04 and NLFS 2008. These are dated surveys now. I think the figures would be a little bit different if the latest surveys (NLSS III and Census 2011) are used to estimate the employment and employed status.]

Rising inequality is eating up growth dividend in Asia

A latest ADB report argues that “Asia’s rapid growth is leaving millions behind, causing a widening gap between rich and poor that threatens to undermine the region’s stability.”

The striking point of the report is the estimate that another 240 million people could have been lifted out of poverty over the past 20 years if inequality had remained stable instead of increasing as it has since the 1990s. The report states that the richest 1% of households account for 6% to 8% of total income. Close to 20% of total income went to the wealthiest 5% in most countries. It has fascinating numbers on inequality of opportunity in access to education, health and public services.

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Unequal access to education, health and other public services contributes greatly to growing inequalities, further hindering opportunities for the poor to raise their living standards. School drop-out rates are up to five times higher for children in the poorest families, while the chance of a poor infant dying at birth can be 10 times higher than those of a child born to a rich family.

Highly uneven distribution of new technology, infrastructure and investment is further fueling the divide, particularly between rural and urban areas, and coastal and inland provinces.

Governments need to focus on policy options for reducing inequality, the report says. These include the creation of quality jobs; increased spending on education and health; and expanding social protection including conditional cash transfers for the poor. Other key policy options include switching fiscal spending from untargeted price subsidies, such as on fuel, to targeted transfers; greater and more equitable revenue mobilization; and more investment in infrastructure to reduce imbalances between developed and lagging regions.

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The ADO 2012 is silent about the case where you have low growth, but both poverty and inequality are decreasing (its Nepal’s case). The latest national poverty estimate based on the National Living Standard Survey 2010/11 (NLSS III) shows that 25.2 percent of the population lived below the absolute poverty line. Similarly, the latest US$1.25 a day poverty estimate based on data from NLSS III reveals that about 24.82 percent of the population is living below the globally comparable absolute poverty line. Furthermore, the Gini index—a popular measure of inequality—has declined from 43.83 in 2003 to 32.82 in 2010, according to WB estimates. The CBS estimated Gini index at 41.4 and 32.94 in 2003/04 and 2010/2011 respectively. Meanwhile, income or consumption of those in the middle of income deciles (i.e. middle class) has also increased remarkably. Obviously, the main factor here is remittances.

The ADB estimates that Nepal’s GDP growth would be 4.5% and 4% in FY2011/12 and FY2012/13 respectively. Inflation to be 8% and 7% in the two years and current account balance (share of GDP) to be 0.5% and 1%.

I am wondering why the ADO 2012 doesn’t discuss the low growth but declining poverty and inequality in Nepal (looks like a rare case). Also, it is a bit unsettling to not see the Nepal chapter of ADO 2012 not touching upon this issue though one of the main themes of the report is growth and inequality.

Here a synopsis of what the ADO states about Nepal’s economic scenario:

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Growth slowed in FY2011 on weaker remittance inflows, a downdraft in real estate, fuel and power shortages, and continued political uncertainty. Inflation stayed hovering around the double-digit threshold, and the banking system came under stress. The outlook is for a modest pickup in growth but with some progress in bringing down inflation. Timely completion of the peace process, including an agreement on a federal structure and on a new constitution, would allow political leaders to focus on spurring growth and development.

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Here is a synopsis of South Asian growth scenario:

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South Asia will see growth improve a shade in 2012 to 6.6%. Growth in 2011 fell sharply to 6.4%, mainly reflecting India’s marked monetary tightening in the face of persistent inflation and slumping investment. Growth in Pakistan declined because of disastrous flooding, although Bangladesh and Sri Lanka did well on brisk exports. The pace of India’s growth is projected to edge up to 7.0% in 2012 and 7.5% in 2013, providing most of the lift for subregional growth to reach 7.1% in 2013. Pakistan’s growth will advance only slightly in both years because electricity will remain a bottleneck on the supply side. South Asia’s inflation is expected to fall from 9.4% last year to 7.7% in 2012 and further to 6.9% in 2013. Some cutbacks in the heavy fuel and electricity subsidies in most countries are expected, and will set a floor to how far inflation can fall.

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