Nepal’s budget for FY 2011-2012

After much drama Finance Minister Bharat Mohan Adhikari has finally presented the budget to the parliament. Here are some of the stuff as I read from the budget speech.

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• Expenditure: The size of the budget is Rs 384.9 billion, almost 14% higher than last year’s budget (and 25.67% higher than revised estimate). Recurrent expenditure is Rs 266.61 billion (69.27% of total budget). Capital expenditure is Rs 72.61 billion (18.86% of total budget). Financing, which is a new addition to the expenditure-revenue sheet, is Rs 25.38 billion (6.59% of total budget) and principal repayment is Rs 20.3 billion (5.27% of total budget).
• Development expenditure is Rs 202.56 billion (52.63% of total budget) and general administration expenditure is Rs 182.34 billion (47.37% of total budget). The former is an increase by 13.41% and the latter 14.47% from last year.
• Income: The total income of the government is expected to be Rs 317.83 billion, which is 12.71% higher than last year’s total revenue projection. Total revenue is expected to be Rs 241.77 billion (11% increase over last year), principal refund Rs 5.93 billion and foreign grants Rs 70.13 billion (17.43% of total budget).
• Deficit financing: The difference between total expenditure and total income is budget deficit, which is Rs 67.07 billion. This is expected to be covered by Rs 29.65 billion foreign loan and Rs 37.41 billion domestic borrowing. Deficit financing is 17.43% of total budget and it has increased by 19.96% from last year.

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Budget allocation for FY 2011-2012
	Rs, billion	Percent of total budget	Percent increase from last FY
Total expenditure	384.9	100	13.91
Recurrent	266.61	69.27	40.09
Capital	72.61	18.86	-43.95
Financing (loan & share investment)	25.38	6.59
Principal repayment	20.3	5.27	10.21
Development expenditure	202.56	52.63	13.41
General administration expenditure	182.34	47.37	14.47
Total Income	317.83	82.57	12.71
Revenue	241.77	62.81	11.60
Principal refund	5.93	1.54
Foreign grants	70.13	18.22	7.33
Deficit	67.07	17.43	19.96
Deficit financing	67.07	17.43	19.96
Foreign loans	29.65	7.70	33.38
Domestic borrowing	37.41	9.72	11.07
FY 2011-12 full annex

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• The Finance Minister argues that his budget will be able to “accelerate economic growth and ensure equitable development by increasing investment in public, private and cooperative sectors and by bringing dynamism in the economy.”
• Expected growth rate of 5%, with inflation 7% and BoP to remain positive.
• Education (Rs 63.9 billion) is the top priority, followed by local development (Rs 44.5 billion) and physical planning and works (Rs 43.9 billion).

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Few points from the budget:

• Public service delivery: market monitoring to check artificial rise in prices; improving supply system and service delivery by establishing Fair Price Shops. Against cartels and obstruction of supply; address food insecurity in remote areas; upgrade of existing SAARC Food Security Storage and National Food Security Storage; implement recommendation of High Level Committee to reform supply of petroleum products
• Development program in remote areas: capital subsidy for agriculture, herbs and fruits production, collection and processing through cooperatives in Kalikot, Jumla, Humla, Mugu, Dolpa, Jajarkot, Achham, Bajhang, Bajura and Darchula; economic, social infrastructure and services in Karnali and nearby districts; ‘One Family One Employment’ program in Karnali to be expanded gradually to other areas as employment guarantee-- focus in those areas with low human development index and infrastructure such as Jajarkot, Achham, Bajhang and Bajura;
• Agriculture sector: increase in subsidy in fertilizer and seeds; land pooling to increase production and productivity; several specific products focused incentives and subsidies
• Cooperatives: “Cooperatives in Villages, Employment at Every Household” program; to be established as strong pillar by building economic base and utilizing local resources, capital and labor; seed money to cooperatives run by women; concessional loans; assistances to tea cooperative; establish National Cooperative Federation by giving Rs 10 million; concessional loans to cooperatives investing in micro-hydro power projects of up to 1MW.
• Infrastructure: money for many highways feasibility studies; expedite construction of postal highway; fast track highway; repair and reconstruction of bridges; expansion of railways
• Energy crisis: Hydropower Development and Investment Company with paid up capita of Rs 8 billion already registered; master plan on hydropower development; study and implementation of reservoir projects; request NRNs to invest in hydropower project of 100 MW; extension of national grid and transmission line; too many slogan filled programs
• Irrigation: construction of canals and irrigation facilities; mostly in Terai;
• Employment: collateral free loan facility of up to Rs 200,000 per person under Youth Self Employment Program; skill based and professional training programs; youths to be incentivized to work in call centers, medical transcription, account, service business; trade union education program; training to remitters to enhance skill; remittance income to be mobilized according to investment proposal drawn out by a high level task force
•  Tourism: airport upgrade; Nepal to be established as model tourism country of the world within 15 years; exploration of new tourist destinations; infrastructure and tourism service development in 17 destinations; modern conference hall to be built in Butwal;
• Private sector development: PPP model to be promoted; security in industrial zones and declare them as zone of peace; international investment forum to be held to attract investment in industries having comparative and competitive advantage; separate electricity feeders to be installed in Biratnagar, Birgunj, Kathmandu and Butwal-Bhairawa to address load-shedding problems; Industrial Enterprise Act to be enacted; lump sum capital subsidy for the import of machinery and capital goods by group of more than 100 people returned from abroad after engaging in similar works; support for floriculture business; Rs 100 million for Women Entrepreneur Fund; custom duties exemption in import of machinery for alternative energy;
• Financial sector and capital market: disclosure of income source while depositing a sum of over Rs 1 million; disclosure of income if on purchase of vehicle worth more than Rs 5 million and real estate more than Rs 10 million; capital gains tax decreased; NRNs can invest in housings and share market; foreigners can purchase flats and apartments of over US$ 200,000; supervision and monitoring of saving and credit co-operatives with annual transactions of more than Rs 50 million; action against willful defaulters; incentives for merger in the form of waving of registration fees;
• Export promotion: special facility to exporters of tea, coffee, cardamom, herbs, unseasonal vegetable products; drying and packaging facility to be made available; upgrade certification laboratory; expedite construction of dry ports at border points; recommendation by concerned agencies for implementing NTIS to pursued; herbs processing plants; work toward implementing SEZs
• Planning: NPC to prepare a 20 year long term plan for socio-economic transformation; results of Census 2011 to be quickly published; agriculture census next year; third party evaluation of foreign aid funded projects; FM to head a monitoring team for monitoring projects of over Rs 150 million;
• Public enterprises: CEO and GM of PEs to be selected through open competition;
• Public service: Salary increased between 30.39% and 42.86%.

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• Revenue policy: Tax incentives to domestic and foreign investors to attract investment in hydropower and infrastructure development; promoting production oriented, import substituting and export oriented industries; broadening revenue bases by expanding tax net; control revenue leakage;
  • Voluntary disclosure of fixed and movable properties to Inland Revenue Offices by paying certain percentage of tax; declare MRP of imported goods at customs point to avoid under-invoicing; increase in excise rates on alcohol, beer, cigarettes, and tobacco products; only persons with PAN number will be eligible for registration process of land and house transactions;
  • Tax exemption for tomato ketchup firms that are run through cooperatives; reduction of flat rate custom duty on LCD, Plasma and LED equipment brought by Nepalese passengers returning from foreign employment; VAT concession to Jute firms on the import of materials; reduction of capital gains tax by 50% on the income from sales of house and land; CGT in shares reduced (for entities 10% and for individuals 5%);
  • Exemption of income tax for first ten years for hydro-power projects commencing construction within August 24, 2014 and starting commercial production by mid-April 2018; extend deadline for merger among BFIs and waiving of land registration fee; 
  • Income tax exemption of 90 percent will be given to any of the special and information technology industry employing 300 or more Nepalis. Similar income-tax exemption of 80 percent will be given to any special industry employing 1,200 or more Nepalis directly. An exemption of 80 percent in the income tax will be given to any special industry which employs more than 100 Nepalis with at least 33 percent of them women, untouchable and differently-abled persons.

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Comments:

• This is a directionless budget. Our macroeconomic challenges (low growth rate, high inflation, balance of payments deficit, ballooning trade deficit, eroding competitiveness of our economy and its productive capacities, slump in manufacturing sector and liquidity and banking crises) are hardly been addressed. In fact, an impression that one gets is that all these will be resolved by promoting cooperatives (this was already hinted in Program and Policies for 2011-2012). In fact, the budget is placing cooperatives above the private sector and it essentially is a cooperatives’ budget as was mentioned in the white paper. Neither in white paper nor the program and policies did FM Adhikari mention these macroeconomic challenges with emphasis. He has been very cosmetic in pointing them out loud and clear. And, his budget lacks vision in addressing these issues. 
• Cooperatives are seen as a solution to the macroeconomic problems faced by the country. It is not a good idea. Even balance of trade deficit is being considered to be addressed by promoting cooperatives.
• Note that due to increasing pressure from other political parties to fund their pet projects under various names and the decision to hike salary of civil servants, recurrent expenditure has shot up by almost 40.09% from last year’s allocation. Meanwhile, this was made up by reducing capital expenditure by at least 43.95% (or 24.36% if you choose to include capital and financing expenditures). It is bad for the economy and does not add much to productive capacities. In fact, it will very likely increase inflation even higher.
• The way the size of the budget is increased will not add much productive capacities and will most probably put upward pressure on inflation. Also, since the revised total expenditure for FY 2010/11 is estimated to be Rs 306.27 billion against budget allocation of Rs 337.9 billion, this year’s allocation would also not be spent as envisioned.
• This allocated amount of development expenditure is not going to be spent given present conditions. Neither was last year’s development expenditure spent (which partly contributed to the liquidity crisis).
• Generating the revenue target is not going to be possible if the current trend is anything to go by. The MoF was unable to collect the projected revenue of Rs 216.64 billion of last year’s budget; it is estimated to collect only Rs 206 billion. I don’t understand why Finance Secretary Baskota is so ambitious. (He did accounting gimmick by including unspent budget as revenue. I think after so much of repudiation from experts and lawmakers, he has corrected the mistake.) It must be that since expenditures could not be brought down, they increased target for revenue mobilization (now total income).
• The increase in domestic borrowing by 11.07% from last year’s budget will mop up liquidity from the market, essentially crowding out private sector investment and worsening liquidity crisis.
• Foreign aid accounts for 25.9% of total budget (Rs 99.78 billion--just sum up foreign grants in total income heading and foreign loans from deficit financing heading). It is an increase by 13.9% from last year. Since the country was unable to even mobilize last year’s total aid, why so much of expectation this year? Absorptive capacity of foreign aid has also been decreasing.
• No concrete steps to curb inflation except for monitoring markets. In fact, inflation will exacerbate due to FM Adhikari’s budget.
• Insufficient and ineffective incentives for merger of BFIs. The relaxation on disclosure of sources of income will not aid much to alleviate the liquidity and banking crises.
• No concrete plan to spur growth rate higher than the usual 3-4%. No explanation how the growth target of 5% and inflation target of 7% are to be reached. FM Adhikari is clueless on this one.
• How on earth will balance of payments (BoP) will be positive from negative of around Rs 12 billion right now without decreasing trade deficit and increasing the growth rate of inflow of remittances. No clue about how to promote exports except for mentioning that it will be based on NTIS 2010 recommendation by the concerned ministry. In fact, of the seven pillars of state growth and development, mainstreaming for industry, trade and service sector is getting only Rs 7.24 billion (up from Rs 4.81 billion last year). Some income tax incentives to companies in SEZs is not going to work when we actually don’t have SEZs and an Act on this regard.
• Overall, this is a lifeless budget with no tooth to make real impact on the productive capacity of the economy and to address the most pressing macroeconomic needs of the country. It is instead a cooperative promoting, ambitious but directionless, and distributive budget. It does not even adequately acknowledge the macroeconomic problems. A budget is not a political tool to hand out taxpayers’ hard earned money!

Vibor does the right thing

After getting rescued by the central bank following liquidity crunch, Vibor Bikas Bank has done the right thing by merging with Bhajuratna Finance Savings, a category ´C´ financial institution. With a competent and knowledgeable CEO, Ajay Ghimire, I think Vibor will emerge strong after this merger. Before that happens it still has to bring its balance sheet in order though and decrease the proportion of risky loans/credit in its loan portfolio. More BFIs should aim for merger by following Vibor’s positive move. Else, without a consolidation of BFIs in the financial sector, a deeper financial crisis in inevitable.

Congratulations to Vibor and Bhajuratna!

Export quality and growth

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Country export quality (measured by unit values) is correlated with income level suggesting that studying quality dynamics potentially offers insights into the development process. This paper uses highly disaggregated trade data to explore the export quality (unit value) dynamics of goods exported to the United States over the 1990-2000 period. In addition to finding considerable heterogeneity in the relative quality of exports across countries and across goods within countries, the authors find that the rate of quality growth varies substantially across countries, as well. Specifically, the fastest growth is seen in exports from the richer (OECD) countries, implying an evolving divergence in product quality across regions. This divergence obtains despite evidence of conditional convergence in quality over time- goods with lower initial relative quality levels experience faster growth in quality. The data suggest that part of this divergence is driven by the product mix itself -- OECD exported products experience intrinsically higher growth rates. This is consistent with the argument of Hausmann, Hwang and Rodrik (2007) that what countries export does matter for growth. However, it is partly driven by a higher growth rate of quality in the richer countries independent of convergence effects, suggesting that other country-specific factors impeding overall convergence are at work. Finally, there is very limited technological "leap-frogging" by countries across product lines as the relative quality of new exports, on average, is roughly the same as incumbent exports, both in richer countries and elsewhere.

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Here is the full paper by Krishna and William (2011).

Links of Interest (2011-07-12)

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1. De and Iacovone on Did NAFTA increase productivity?. “The results show that the North American Free Trade Agreement stimulated the productivity of Mexican plants via: (1) an increase in import competition and (2) a positive effect on access to imported intermediate inputs. However, the impact of trade reforms was not identical for all integrated firms, with fully integrated firms (i.e. firms simultaneously exporting and importing) benefiting more than other integrated firms.” Here is more on NAFTA.

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2. Li, Mengistae and Xu diagnose development bottlenecks in China and India. “The analysis finds that China has better infrastructure, more skilled workers, and more labor-hiring flexibility than India, but a worse access to finance and higher regulatory burden. Infrastructure appears to be a key constraint for India: it lags significantly behind China, yet it has important indirect effects for the effectiveness of labor flexibility. Labor flexibility is also likely a major constraint for India, as evident in the predominance of small firms, the importance of firm size in accounting for India's disadvantage in productivity, and the complementarity of proxies of labor flexibility with infrastructure and access to finance. Interestingly, regulatory uncertainty has adverse effects in India but not in China.”

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3. Khanal and Satyal weigh in the socio-economic impact of remittances. Their basic argument is that the failure to find jobs (or create due to laxity in implementing such policies) is leading to an exodus of workers to foreign employment destinations. They also argue that remittances have not helped in “reducing poverty”. I wonder how they define it because the latest study on remittances find that it has helped to reduce absolute poverty.

The increase in imports, consumption, aiding real estate and housing bubbles, and change in labor supply of returnees are some of the concerns. Remittances have done both good and bad to the economy, both at the household and macro levels. It in itself is not bad. When there are few existing chances of employment in economy and chances of finding new are very slim, exodus of workers is normal. Systematizing such supply of labor by giving training and helping them find good employment opportunities, if they like, elsewhere is not a bad policy in the short run. In the long run, retaining the required at home is crucial. For that, channeling remittances in productive usages as opposed to consumption of imported goods is essential. Nepali policymakers have failed on this front. And, that is the danger.

We are seeing symptoms of Dutch Disease in the economy. Letting it not be a Dutch Disease itself requires a both short run and long run policies. The former is due to our compulsion as we can’t just chock the flow of money just to check ‘brain drain’ (or ‘brain gain’?). People will go anyway if there are no opportunities at home or the opportunities elsewhere are higher than at home. Systematizing this process (though a second best option) in the short term is good for the nation. The first best option is creating opportunities at home, which can be done gradually. Work should be started on both fronts. Note that even if there are opportunities at home, people still do migrate.

Here is Santosh Pokharel’s take on why remitters are drifting away form using formal remittance channels (high fees and lack of awareness).

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4. Bernstein on Obama’s hat tip to Keynes. “The President signaled an understanding of the effectiveness of stimulus along with the need for more of it.” Krugman on “He’s just not that into you”.

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5. Campos and Nugent on why the global financial crisis has been wasted.

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6. Ezekwesili on the birth of the Republic of South Sudan.

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7. Nepal’s budget for FY 2011-2012: The upcoming budget in a new format to make Nepal’s accounting system compatible with international accounting. Any expenditure under the grants and subsidies heading will be considered as recurrent expenditure. Therefore, grants and subsidies that currently fall under capital expenditure will be moved to recurrent expenditure. Revenue and grant will be shown in the income part instead of revenue. Under this heading, tax, other revenues and foreign grants will be included. The principal refund that is currently shown in the revenue heading will be moved to financing part. The principal payment will be moved from the expenditure part.The new budget will have loan investments, capital investment, foreign loans and borrowing under the financing heading. It will be shown under this heading after adjusting refund of loan investment and principal payment of foreign and domestic borrowing. Meanwhile, peace, social inclusion and infrastructure will be the priority (so they say!). Civil servants salary to be hiked by at least 20 percent. Earlier, I argued for why the public sector salary should be increased. Here is my take on Nepal’s policies and programs for FY 2011-2012.

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Female reservation and political outcomes

Deininger, Jin, Nagarajan and Fang (2011) find that in rural India gender quotas led to decline in quality and negative impact on service delivery, it nevertheless have positive impact on women’s political participation, political accountability, and willingness to contribute to public goods. The abstract of the paper is as follows:

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Although many studies have explored the impacts of political quotas for females, often with ambiguous results, the underlying mechanisms and long-term effects have received little attention. This paper uses nationwide data from India spanning a 15-year period to explore how reservations affect leader qualifications, service delivery, political participation, local accountability, and individuals’ willingness to contribute to public goods. Although leader quality declines and impacts on service quality are often negative, gender quotas are shown to increase the level and quality of women's political participation, the ability to hold leaders to account, and the willingness to contribute to public goods. Key effects persist beyond the reserved period and impacts on females often materialize only with a lag.

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May be the Nepalese leaders and policymakers, who are ever-active in reserving quotas in all sectors for women, could learn something from the findings of this study.

Misplaced export incentives in Nepal

My latest piece is about why cash incentive for exporters will not work when the binding constraints to exports growth and revenue are related to supply-side and slacking productive capacities.

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Misplaced export incentives

Against the backdrop of declining exports and increasing imports, leading to widening trade deficit, last fiscal year the then Finance Minister Surendra Pandey announced export incentives in the form of cash returns to exporters that met certain value addition criteria. Though it initially filled in excitement in the export-oriented sector, the ill conceived program was not implemented due to lack of appropriate regulations. Now, without much consideration if such incentives will in fact work, the government is all set to give continuity to the same program and implement it through the upcoming budget.

Before such incentives are rolled out a pertinent question to ask is: How effective and optimal cash incentives will be in promoting Nepali exports? It seems cash incentives will not have much impact in our exports, encourage entrepreneurship and expand the exports basket. Instead, much more substantive impact might be seen if alternative incentive measures are implemented at pretty much the same cost.

During the budget for fiscal year 2010/11, cash incentives totaling two to four percent, based on value addition, of total exports value earned by exporting items to destinations except India was announced to boost exports and increase foreign exchange. Specifically, exporters of goods with up to 30-50 percent value addition were supposed to get 2 percent of total export revenue as cash incentive. Similarly, that with 50-80 percent value addition were supposed to get 3 percent cash incentive and for over 80 percent value addition the cash incentive was 4 percent of total exports revenue. The government allocated Rs 240 million for this program. Now, the Ministry of Commerce and Supplies (MoCS) has asked the government to provide such incentive to exporters exporting goods to India as well. Furthermore, it has even asked cash incentives as high as five percent of total exports revenue on products identified as having high “export potential” in Nepal Trade Integration Strategy (NTIS) 2010.

Export incentives (monetary, tax or legal) are given with the hope that exports and foreign reserves will increase and economic activities pick up in the export-oriented sectors, mainly manufacturing sector. Currently, both exports and manufacturing sectors are performing poorly. Exports and manufacturing are around 15 percent and 7 percent of GDP respectively. Any incentive geared toward increasing exports and its competitiveness sounds fine. But, these incentives should help in enhancing productive capacity as well and in making exports sustainable, especially after such incentives are pulled back.

For now, doling out cash to exporters that export the same items that fill up much of our exports basket is not a smart move and will neither make our exports competitive nor increase exports revenue as envisioned. Most of the items in the basket are losing competitiveness, both in terms of cost and quality. In our export-oriented firms, giving cash incentives will not decrease cost of production and make products cost competitive in the international market. Most of the allocated amount will be claimed by garment, textile and carpet manufacturers, whose exports are losing competitiveness. There will hardly be any value addition above the existing level in these products. Hence, in terms of enhancing productive capacities and competitiveness of the existing export-oriented firms, the scheme’s impact will almost be nil. Furthermore, there will be little change in terms of new exporters and new export items added to the exports basket.

Export incentive packages that increase productive capacity and address binding constraints to exports growth work more often than simply doling out cash based on certain value addition criteria. The same amount of money can be used to construct roads up to manufacturing plants or to provide credit and concessional loans to emerging entrepreneurs or to subsidize insurance premium during transportation of goods to the nearest port in India or to construct the much needed special economic zones. These measures will help enhance our exports and add to productive capacities more than the cash incentives.

It would also be wise to design such incentive packages so that they help in reducing time and cost incurred while exporting goods from Nepal. The Nepali exporters still face comparatively more hurdles in exporting goods than our neighbors in the region, giving them cost and time advantage. In trading across borders, which is one of the indicators of Doing Business ranking, Nepal is ranked 164 out of 183 countries. Moreover, Nepali exporters have to produce at least 9 documents and takes 41 days to process them before they are cleared for export. These numbers are one of the highest in the region. Furthermore, Nepal has one of the worst logistics related to exports and ranks 147 out of 155 countries in the latest Logistics Performance Index ranking. Nepal’s logistics ranking is worse than that of Afghanistan. Cash incentives to a few sectors and businessmen will do nothing to alleviate these problems. Instead the government should be looking into investing the allocated sum to reduce these hurdles for exporters. It will eventually make our exports competitive and might increase both exports volume and revenue.

Another reason why cash incentives will not increase exports earnings (share of GDP) is that it will not address the underlying cause for eroding export competitiveness at the first place: Supply side constraints such as poor infrastructure network, lack of reliable and adequate power supply, excessive labor unionism and militancy, lack of raw materials needed for our firms, and very few opportunities and avenues, on top of bureaucratic red tapes, for new entrepreneurs to enter the market.

Exports incentives should be wisely designed and implemented to address some of the supply side constraints and to enhance productive capacities of the export-oriented firms. Cash incentives to be reaped by few firms and businessmen will not address the main reasons why our exports are losing market pie in the increasingly competitive international market.

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[Published in Republica, July 10, 2011. P.6]

Political instability and economic growth in Nepal

Here is Prem Khanal’s take on the relationship between political instability and economic growth. Here is what I argued about frequent political change (democracy and autocracy only-- not political instability) and growth.

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Political instability saps economic growth

PREM KHANAL

Nepal´s economic growth rate slid to 3.5 percent this year, the lowest in the last three years, raising a pertinent question: Is this poor performance linked to our political instability?

Analyses of Nepal´s growth data for the last 20 years and the political situation clearly indicate that the economy and politics are intricately linked and economic growth and political stability have a strong positive correlation. 

The major political changes and election of majority governments are always followed by robust economic growth. Likewise, political instability and hung parliaments often lead to weak performance by the economy.

Nepal attained high economic growth of 7.9 percent in fiscal year 1993/94, following the election of a majority government under the leadership of the Nepali Congress in the first general election held after Jananadolan-I. During the subsequent three and half years under NC rule, the economy grew by 5.3 percent on average.

However, the mid-term election held in November 1994 produced a hung parliament and the CPN-UML took leadership of a minority government. Nepal´s first communist government, which was headed by Manmohan Adhikari, lasted only nine months. The country then saw four more governments in as many years, led in turn by Sher Bahadur Deuba, Lokendra Bahadur Chand, Surya Bahadur Thapa and the late Girija Prasad Koirala.

During these years of political instability the economy teetered. The average growth rate in those five years was hardly 4 percent and in fiscal year 1997/98 it dipped to 3.3 percent.

The general election held in May 1999 once again produced a majority government led by the Nepali Congress and the economic growth rate bounced back to 6.1 percent in 1999/2000 and remained relatively high at 5.4 percent the following year.

By the end of the 1990s the Maoist insurgency has begun to peak and economic growth again started to falter. The year 2001/02 saw the highest single-year insurgency toll of over 5,000 and not surprisingly the economic growth rate sank to 0.16 percent and the economy was in the doldrums in successive years.

The growth rates remained pessimistic, averaging slightly over 3 percent, even during the king´s 15-month direct rule.

The success of Janaandolan-II that humbled the king´s rule and ended the insurgency provided an immediate boost to the economy. It grew by over 5.8 percent in 2007/08.

As the Janandolan euphoria gradually receded and political uncertainty crept back, the economy started to falter again. In the last three years economic growth rate has slid steadily, culminating in this year´s 3.5 percent.

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Nice article. It would be even more revealing if we look at growth rate, political instability, and investment rate/capital formation. The reason is that the fruits of some investment projects is seen after some years of inception or completion. The effects are not immediately visible. For instance, during FY 2059/60 budget, the then finance minister Dr. Ram Sharan Mahat pumped in large amount of money into infrastructure projects. I think its positive impact helped sustain growth (though low) rate during the insurgency period. Without the investment it would not have been possible to sustain even that low growth rate during the insurgency period. Al least, local economies remained buoyant during insurgency as well. A lagged effect (few years) of capital expenditure/formation might reveal a truer relationship.