Policy barriers to international trade in services

Borchert, Gootiiz and Mattoo (2012) find that “some of the fastest growing countries in Asia and the oil-rich Gulf states have the most restrictive policies in services, whereas some of the poorest countries are remarkably open”. Furthermore, they also find that professional and transportation services are among the most protected in both industrial and developing countries, while retail, telecommunications and even finance tend to be more open. Furthermore, OECD countries are found to restrict transportation services and movement of natural persons as service suppliers.

Below is part of their paper’s abstract:

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[..] An illustrative set of results suggests that trade policies matter for investment flows and access to services. In particular, restrictions on foreign acquisitions, discrimination in licensing, restrictions on the repatriation of earnings and lack of legal recourse all have a significant and sizable negative effect, reducing the expected value of sectoral foreign investment by $2.2 billion over a 7-year period, compared with "open" policy regimes. In terms of access to services, credit as a share of gross domestic product is on average 3.3 percentage points lower in countries with major restrictions on the establishment of foreign banks as compared with those that only impose operational restrictions.

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The paper comes with Services Trade Restrictions Database (STRD) that provides comparable information in five service sectors, particularly the policies that affect international trade in services (mostly foreign providers):

• Financial services (banking and insurance)
• Telecommunications
• Retail distribution
• Transportation
• Professional services (accounting and legal)

It covers the supply of a service through cross-border delivery (Mode 1), establishing a commercial presence or FDI (Mode 3) and the presence of a natural person (Mode 4). But, it excludes consumption abroad (Mode 2) and subsectors such as business processing services (outsourcing) and policies affecting international movement of less-skilled workers (immigration). They assess policy regimes based on five broad categories:

• completely open, i.e. no restrictions at all
• completely closed, i.e. no entry allowed at all
• virtually open but with minor restrictions
• virtually closed but with very limited opportunities to enter and operate
• middle category of regimes which allows entry and operations but imposes restrictions that are neither trivial nor stringent

Furthermore, they assign a value to each of these five categories of regime on an openness scale from 0 to 100 with intervals of 25 (i.e. completely open gets zero and virtually open gets 25 and so on with 100 for completely closed ) and call the resulting score a STRI (final aggregation is done based on various weights given to each sub-sector depending on the services sectors’ standardized share in total services output for an average ‘industrialized’ country—see p.50, Table A.1). A value of zero indicates the greatest level of openness.

Based on the above methodology (see this paper for full methodology), the table shows how Nepal stands as of now. Based on the scoring method above, judge yourself the extent of ‘openness’ of Nepal’s policies related to services trade. Later on when I have time, I will upload a table showing how Nepal’s score compares with scores of regional economies. Overall, it looks like Nepal is relatively more open in Mode 1 than in other modes of service delivery/trade. A score of 100 indicates that Nepal is completely closing these sectors for trade as per its commitment during WTO accession.

Services Trade Restrictions Index
Nepal	Overall	Mode 1	Mode 3	Mode 4
Overall	42.9	36.66	42.06	85
Financial	23.2	33.5	25
Banking	23.1	12.5	25
Lending by banks	21.3	0	25
Acceptance of deposits by banks	25	25	25
Insurance	23.3	66.67	25
Automobile Insurance	32.5	100	25
Life Insurance	32.5	100	25
Reinsurance	5	0	25
Telecommunications	50		50
Fixed-line telecommunications	50		50
Mobile telecommunications	50		50
Retail	25		25
Transportation	56	75	48.86
Air Passenger Domestic			50
Air Passenger International	63.8	75	37.5
Road Freight Domestic	25		25
Rail Freight Domestic	100		100
Professional	76	33.33	75	85
Accounting and Auditing	50	50	37.5	62.5
Accounting	30	0	25	50
Auditing	70	100	50	75
Legal	93.3	0	100	100
Legal Advice Foreign Law	80	0	100	100
Legal Advice Domestic Law	100		100	100
Legal Representation in Court	100		100	100

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Here is another paper from the same authors where they look at landlocked countries’ comparative advantage in services trade. They argue that protection of services sector (telecommunications and air transport) by landlocked countries is not a smart policy because it is the one of the few sectors in which they have comparative advantage.They find that even moderate liberalization in these sectors could lead to an increase of cellular subscriptions by 7 percentage points and a 20 percent increase in the number of flights.

For more, see this previous blog post about services trade competitiveness of Nepal. Computing RCA index for Nepal’s exports of each services sector category reveals that Nepal actually enjoys comparative advantage in all of them (this despite the fact that there is trade deficit in three of the six sub-sectors).

	2008	2009	2010	2008	2009	2010
Product name	RCA index			Trade balance (US$ million)
Total services	1.52	1.47	2.23	-128.09	-136.86	-199.07
Transportation	0.37	0.59	0.63	-304.62	-233.07	-241.42
Travel	4.23	5.00	4.55	-45.93	-20.56	-58.09
Communications services	5.59	4.54	8.62	40.91	16.11	3.13
Insurance services	0.10	0.19	0.06	-29.79	-25.41	-29.59
Other business services	1.11	1.31	1.87	-6.41	35.79	63.25
Government services, n.i.e.	26.73	11.46	10.63	217.75	90.28	63.65

Source: Author’s computation based on ITC’s Trade Map database.

A review of Finance Minister Pun’s partial budget

It was published in Nepali Times online on July 16, 2012.

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Budget discord

After much disagreement over the size and nature of budget for fiscal year 2012/13, Finance Minister (FM) Barsha Man Pun finally unveiled, through ordinance, “The Bill for Authorizing Withdrawal and Expenditure from Consolidated Fund for the Services and Works, 2012” (simply a partial budget) on July 15. The expected expenditure is approximately Rs 161.24 billion, of which Rs 51.29 billion is earmarked for debt servicing and expense of constitutional bodies. The remaining expenditure of Rs 109.72 billion is equal to one-third of the revised expenditure estimate of fiscal year 2011/12.

 

It will be just enough to meet administrative expenses and to finance ongoing development works, which should be of the same expenditure sub-heads as of the last fiscal year. The tax structure and revenue collection will be guided by the Finance Act 2010/11, which means they won’t change until the full budget is unveiled. Moreover, the government is not allowed to use domestic and foreign loans to finance expenditure during this period. It will have to issue overdrafts as per Nepal Rastra Bank Act 2001 in case revenue collection cannot cover expenditure.

The partial budget does not include new programs except for Rs 3 billion for CA election, Rs 3.69 billion for payment to PLA combatants who chose voluntary retirement, and Rs 3 billion for the establishment of proposed Directorate of Nepal Army. Understandably, the opposition has objected to such ad hoc allocations. Visibly unhappy with the way he was compelled to unveil a partial budget, FM Pun defended his track record and outlined, in his budget speech, what he would have done if a full budget were allowed. He mentioned populist programs like 100 days of employment guarantee to unemployed, free education up to 10+2 level for dalits, allowances to elderly and handicapped people, cultural centers, allowance to girls to attend school and universal insurance, among others.

FM Pun boasted that the economy—particularly growth rate, balance of payments (BoP) and foreign exchange reserves—had performed better during his tenure than previous years. According to government’s projection, the economy grew at 4.6 percent in 2011/12, up from 3.9 percent in 2010/11 and 4.3 percent in 2009/10. Let us be clear that this happened not due to any special effort by the government, but due to favorable monsoon and availability of agriculture inputs, which increased paddy production and pushed agriculture growth rate to 4.9 percent, the highest in the last four years. While the growth rate in service sector remained unchanged at 3.6 percent, industry sector grew at just 1.6 percent, which is lower than 2.9 percent in 2010/11.

It points to the fact that the major constraints to robust industrial activities were not addressed. In fact, the industrial sector is still crippled by power cuts, lack of affordable raw materials and qualified human capital, persistent labor problems coupled with expensive workforce (Nepal has the highest wage overheads in South Asia), strikes, lack of R&D and innovation, and policy implementation paralysis. No wonder gross fixed capita formation as a share of GDP was 19.6 percent, the lowest in the past decade. There is no improvement in cost competitiveness and efficiency of the industrial sector. Unsurprisingly, due to lack of adequate inventory and production hassles in export-oriented sectors, Nepal could not take advantage of weakening of Nepali rupee against major currencies.

Meanwhile, during the first eleven months of 2011/12, BoP surplus and forex reserves reached a record Rs 113 billion and Rs 427 billion respectively. It has resulted not from any novel government policy and structural change in the way the economy is functioning, but because of high remittance inflows and net transfers. There are still worrying signs in the economy: inflation is still high (government’s projection of 8 percent for 2011/12 is gross underestimation), trade deficit is widening, industrial woes are persistent, recurrent expenditure is rising, fiscal deficit is increasing, financial sector troubles are not sorted out, and some inefficient state-owned enterprises continue to drain taxpayer’s hard-earned money.

Given that this is just a special arrangement for revenue and expenditure, there is no relief program for the public, who are hammered by rising cost of living. Similarly, the troubled industrial sector—the most important sector for generating high and sustainable growth and employment opportunities—is also not getting immediate relief. The grand plan for Nepal Investment Year 2012/13 is now out of gear and completion of development works will be delayed.

Against this backdrop, the best the caretaker government could do is to create good industrial relations, maintain investor’s confidence and earnestly implement the ongoing projects by plugging leakages. Importantly, the primary focus should be on sustaining growth rate given the impending impact of late monsoon and fertilizer scarcity during planting season.

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NEPAL: Macroeconomic highlights from Economic Survey 2011/12

Major highlights (related to macroeconomy) from Economic Survey 2011/12. Let me point at the outset that the figures for 2011/12 are preliminary estimate based on the first eight months data of the fiscal year.

Economic activities:

• Real GDP growth was 4.6 percent, up from 3.9 percent in 2010/11 and 4.3 percent in 2009/10. Thanks to good agriculture production (it might not happen next year due to late monsoon and shortage of fertilizer during peak planting season). Agriculture sector grew at 4.9 percent, industry sector 1.6 percent, and service sector 3.6 percent. Industry sector slowed down this year compared to last year. It is also the most important in terms of generating employment and boosting sustainable growth rate.
• Per capita GDP was US$735, up from US$712 in 2010/11. Per capita disposable income was US$931.
• As a share of GDP, consumption, domestic savings, GFCF and gross investment were 90 percent, 10 percent, and 19.6 percent and 32.8 percent.
• Inflation is projected at 7.7 percent, down from 9.6 percent the previous two years. Frankly, this is bogus. The domestic supply-side constraints and initial rise in international fuel prices (and also the depreciation of rupee against dollar, which makes imported goods expensive) have upped market prices. Vegetable prices have risen by more than 50 percent. There is no way inflation will remain at 7.7 percent. I am not trusting this projection.

Economic Survey 2012	2011/12P	2010/11	2009/10
Real GDP growth (%)	4.6	3.9	4.3
Agriculture	4.9	4.5	2
Industry	1.6	2.9	4.1
Service	3.6	3.6	5.8
Per capita GDP (US$)	735	712	610
Per capita disposable income (US$)	931	876	759
Consumption/GDP	90	91.4	88.5
Gross Domestic savings/GDP	10	8.6	11.5
GFCF/GDP	19.6	21.2	22.2
Gross investment/GDP	32.8	32.5	38.3
Total population (million)	27	26.6	26.3
Inflation % (CPI)	7.7	9.6	9.6

Public finance:

• Revenue and expenditure growth were higher than last year’s. However, expenditure growth was higher than revenue growth. This is not sustainable. No wonder, budget deficit  reached 4.2 percent of GDP from 3.6 percent of GDP in 2010/11. Note that the total revenue contains domestic revenue and foreign grants. Nepal is getting increasingly dependent on foreign aid to finance development activities and also to meet capital expenditure.
• Foreign aid as a share of development expenditure has always been high. The highest was 86.53 percent in 2004/05. Total foreign aid in 1975/76 was Rs 0.51(grant Rs 0.36 billion and loan Rs 0.15 billion) and in 2009/10 it was Rs 49.76 billion (grant Rs 38.55 billion and loan Rs 11.22 billion). In 2009/10, total actual expenditure and total tax revenue were Rs 259.69 billion, Rs 179.95 billion. Development expenditure was Rs 151.02 billion in 2009/10.
• Recurrent expenditure increased by 50.8 percent, up from 12.8 percent in 2010/11. Meanwhile, capital expenditure decreased by 41.7 percent. This means that the government is unable to spend money in the stuff that is essential in creating strong base for economic growth. Domestic revenue is not enough to finance recurrent expenditure. This is bad financial planning and management.
• Debt servicing (principal and interest) increased by 19 percent, up from 5.4 percent in 2010/11.
• As a share of GDP, total revenue, tax revenue, total expenditure, recurrent expenditure, capital expenditure, foreign aid (grant plus loan) were 15.5 percent, 13.2 percent, 13.5 percent, 16.5 percent, 4 percent, and 5.4 percent respectively.

Economic Survey 2012	2011/12P	2010/11	2009/10
Revenue growth (%)	20.5	11	25.4
Expenditure growth (%)	23.8	13.7	18.2
Recurrent expenditure growth (%)	50.8	12.8	18.2
Capital expenditure growth (%)	-41.7	19.5	23.5
Principal payment growth (%)	14.7	-6.6	-2.1
Debt servicing (principal & interest), %	19	5.4	5.3
Revenue/GDP	15.5	14.6	15.1
Tax/GDP	13.2	12.6	13.1
Expenditure/GDP	23.5	21.6	21.8
Recurrent expenditure/GDP	16.5	12.4	12.7
Capital expenditure/GDP	4	7.9	7.6
Debt servicing (principal & interest)/GDP	2.3	2.2	2.4
Foreign aid (grant + loan)/GDP	5.4	4.2	4.2
Budget deficit/GDP	4.2	3.6	3.5

Financial sector:

• As a share of GDP, domestic credit, private credit, money supply and fixed and savings deposit were 65 percent, 52.7 percent, 69.2 percent and 53 percent. All of these except for domestic credit are an increase from last year.

Economic Survey 2012	2011/12P	2010/11	2009/10
Domestic credit/GDP	65	66.6	66.7
Private credit/GDP	52.7	53.1	53.5
Money supply (M2)/GDP	69.2	67.3	68.8
Fixed and saving deposit/GDP	53	51	51

External sector:

• Merchandise exports and merchandise imports increased by 14.8 percent and 15 percent respectively. Trade deficit increased by 15 percent. Again, exports growth has been lower than imports growth. Here are the reasons why exports of Nepal are declining.
• As a share of GDP, merchandise exports, merchandise imports and trade deficit were 4.7 percent (same as last year), 29.2 percent (increase from last year), and 24.5 percent (increase from last year). Compare these with the figures in 2001/02: exports, imports and trade deficit were 10.1 percent, 25.3 percent 15.1 percent respectively of GDP.
• As a share of GDP, tourism income and remittances were 2 percent (higher than in 2010/11, but lower than in 2009/10) and 21.2 percent (higher than previous years).
• Current account balance was 2 percent of GDP (it was negative the past two years). Balance of payments was Rs 80 billion (higher than previous years). Reason: higher remittance inflows and net transfers.
• Forex reserves have reached Rs 386.96 billion, which is enough to finance 9.2 months of merchandise goods import and 8.3 months of goods and services import.
• Nepal’s exchange rate against US dollar depreciated by around 10 percent to US$1= NRs 79.4. Still Nepal is unable to boost exports (no inventory of goods to take advantage of weak rupee).

Economic Survey 2012	2011/12P	2010/11	2009/10
Merchandise exports growth (%)	14.8	5.8	-10.2
Merchandise imports growth (%)	15	5.8	31.6
Trade deficit growth (%)	15	5.8	44.6
Merchandise exports/GDP	4.7	4.7	5.1
Merchandise imports/GDP	29.2	28.9	31.4
Trade deficit (merchandise)/GDP	24.5	24.2	26.3
Tourism income/GDP	2	1.8	2.4
Remittance/GDP	21.2	18.5	19.4
Current account balance/GDP	2	-0.9	-2.4
Balance of payments (Rs billion)	80	2.2	-3.3
Forex reserves (Rs billion)	386.96	272.2	268.9
Goods import finance by reserves (months)	9.2	8.4	8.7
Goods and services import finance by reserves (months)	8.3	7.3	7.4
Exchange rate (US$/NRs )	79.4	72.3	74.5

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State of public enterprises (PEs):

• Out of 37 PEs, 21 generated profit and 14 were in loss. Two (Nepal Engineering Consultancy Services Center Limited and Hydropower Investment and Development Company Limited) did not conduct any business. [Question: Why are defunct PEs still sucking out taxpayer’s money?]
• Net profit decreased by 36.7 percent to Rs 6.67 billion in 2011/12. The top profit making PEs were Nepal Telecom (Rs 12.12 billion) Agriculture Development Bank (Rs 2.36 billion), Rastriya Banijya Bank (Rs 1.76 billion), Rastriya Beema Sansthan (Rs 1 billion) and Civil Aviation Authority (Rs 742.6 million).
• The top loss making PEs were Nepal Electricity Authority (Rs 6.09 billion), Nepal Oil Corporation (Rs 5.11 billion), Nepal Oriend Magnesite (Rs 428.8 million), Janakpur Cigarette Factory (Rs 218.1 million), and Nepal Drugs Limited (Rs 198.9 million).
• PE gave Rs 49 billion in dividends to the government, of which Rs 5.5 billion was contributed by Nepal Telecom.
• Reasons government officials give for the dismal performance of PEs: political interference, overstaffing, unproductive human resources, bureaucratic hurdles in the procurement process and slow pace of modernization.

NEPAL: Foreign aid, government expenditure and revenue

The K-town is abuzz over budget, particularly its size and nature. Here are two charts that shows foreign aid (both loan and grant) as a share of actual expenditure, total revenue (i.e. total receipts minus grants) and development expenditure. These are actual figures and disbursed amount.

Foreign aid as a share of development expenditure has always been high. The highest was 86.53 percent in 2004/05. Total foreign aid in 1975/76 was Rs 0.51(grant Rs 0.36 billion and loan Rs 0.15 billion) and in 2009/10 it was Rs 49.76 billion (grant Rs 38.55 billion and loan Rs 11.22 billion). In 2009/10, total actual expenditure and total tax revenue were Rs 259.69 billion, Rs 179.95 billion. Development expenditure was Rs 151.02 billion in 2009/10.

As a share of actual expenditure, revenue, and development expenditure, foreign aid was 19.16 percent, 27.66 percent and 55.15 percent respectively in 2009/10. In 1975/76, the respective figures were 26.43 percent, 45.32 percent, and 40.81 percent.

In 2010/11, actual expenditure was Rs 295.36 billion and revenue collection was Rs 199.82 billion. Total aid (loan Rs 12.07 billion and grant Rs 45.92 billion) was Rs 57.99 billion. Aid constituted 19.64 percent of total expenditure.

In terms of loan and grant, it appears that donors are increasing grant portion in total foreign aid starting early 1990s.

Now, the question is: How far has foreign aid been helpful in meeting growth and development objectives? Since there is no comprehensive analysis of the effectiveness of overall aid in Nepal, we just can’t say that it is working or not working just by looking at these numbers.

That said, looking at the triggers of GDP growth, it is quite clear that foreign aid has not been a contributing factor in the short run. Aid to construct roads (intra district or intra villages) did help, but it didn’t go far enough to make a difference. There was no aid on hydropower, the important sector to stimulate growth and employment creation. Aid got concentrated in social sector, which did yield fairly good result (judging from the progress in achieving MDG targets). Here is more on aid in Nepal. Here is an evaluation of the effectiveness of Aid for Trade in Nepal.