Competitiveness of Nepalese Travel and Tourism Industry

Nepal ranked 112 out of 139 economies in the Travel & Tourism Competitiveness Index (TTCI) 2011.

See my earlier post on Nepal Tourism Year 2011 here.

What’s in the 17th SAARC Summit declaration?

I forgot to upload this post before. It is a bit dated but is still relevant.

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The seventeenth summit of the South Asian Association for Regional Cooperation (SAARC) was held on 10-11 November, 2011 in Addu City, the Maldives. The head of the eight member states attended the summit, whose theme was "Building Bridges"-- both in terms of physical connectivity and figurative political dialogue.

Founded in 1985, the SAARC is an organization of eight South Asian nations, namely Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan.

The summit saw signing of the SAARC Agreement on Rapid Response to Natural Disasters, the SAARC Seed Bank Agreement, the SAARC Agreement on Multilateral Arrangement on Recognition of Conformity Assessment and the SAARC Agreement on Implementation of Regional Standards.

Moreover, it also decided to set the timeline for finalizing a framework for rail and sea connectivity. Specifically, the attending heads of state decided to finalize a Regional Railways Agreement and complete the preparatory work on an Indian Ocean Cargo and Passenger Ferry Service by the end of this year. The declaration also decided on early demonstration run of a Bangladesh-India-Nepal container train. Furthermore, the member states committed to conclude the inter-governmental framework agreement for energy cooperation and the study on regional power exchange concept.

Regarding economic integration and trade, the emphasis was on effective implementation of South Asia Free Trade Agreement (SAFTA), pruning sensitive lists, eliminating non-tariff barriers (NTBs) and harmonizing standards and customs procedures. These barriers have been partly contributing to limiting intra-regional exports to five percent of total world exports by South Asian economies.

Still, the member countries are sitting on a lengthy list of sensitive products and imposing various forms of NTBs. A mere call for grater trade cooperation and reduction of number of products in sensitive lists will not suffice. There has to be concrete action and the leaders have to walk the talk to show that they are genuinely committed to greater economic integration and cooperation in South Asia.

As per trade liberalization program under SAFTA, the non Least Developed Countries (LDCs) would reduce their tariffs to 0-5 percent by 2013 and LDCs of SAARC would reduce their tariffs to 0-5 percent by 2016. That being said, cooperation is happening albeit at a gradual pace, which needs to be sped up in the coming days. On the eve of the summit, Pakistan announced most-favored-nation (MFN) treatment in trade and commerce to India. Additionally, Pakistan has committed to reduce its sensitive list by 20 percent and allow tariff concessions on further 233 items under South Asia Free Trade Agreement (SAFTA) in February 2012. During the summit, India reduced sensitive products’ list by 20 percent.

With respect to cooperation in combating the negative impacts of climate change, the summit was a disappointment. It just made a passing reference to this very important issue. The declaration states that the member countries are “conscious of the environmental degradation and particular vulnerabilities of the region to the threat of climate change” and hoped for timely implementation of the Thimphu Statement on Climate Change. Similar is the case with the commitment to alleviate poverty and reduce income inequalities within the societies: It reaffirmed the member’s resolve “to improve quality of life and well-being of people through people-centred sustainable development”, but made no specific actions, activities and commitments.

Regarding regional security, it mentions of their concerns about the continuing threat of terrorism in all its forms and manifestations, transnational organized crimes, especially illegal trafficking in narcotic drugs and psychotropic substances, trafficking in persons and small arms and increased incidents of maritime piracy in the region; and reiterating their resolve to fight all such menaces.

The leaders also agreed to hold 18th SAARC Summit in Nepal.

Nepal Tourism Year 2011 concludes short of target

The much hyped Nepal Tourism Year (NTY) 2011 came to an end yesterday. When the campaign was launched in 2010, the target was to attract one million visitors, of which 40 percent were targeted to be from India and China.

So, how many visitors came to Nepal in 2010? Here are three different numbers from three different newspapers (Republica and TKP quoted the same source—TIA’s Immigration Office):

• Republica: 730,000 visitors
  • 544,985 tourists entered the country via air
  • Chinese 45,400; 145,000 Indian tourists
  • Share of Chinese tourists in total arrivals increased by 8.3 percent, second only to India that had market share of 26.7 percent.
• The Kathmandu Post: 737,597 visitors
  • Chinese 75,517 (45,400 by air and 30,117 overland); 145,338 (by air only)
• The Himalayan Times: 719,547 visitors (till November 2011)
  • 501,264 by air and 174,612 by land till November 2011
  • In 2011, 544,985 arrivals by air, only 96,216 more than a year ago

I tried to get the figures from official sources but they are not yet uploaded on the websites.

Anyway, the last time such a mega campaign was launched was in 1998 when around 464,000 tourists visited Nepal, earning US$24.8 US$248 million in revenue. The Nepali tourism industry has come a long way since 6,179 visitors visited Nepal in 1962. It increased to 509,752 (378,712 by air and 131,040 by land) in 2009. Here is a detailed report on 2010’s tourism activities.

My hasty comments on NTY 2011:

• The target of one million tourists was way too high, especially given the past record, political instability, quality of infrastructure and resources.
• Though number of tourists went up, tourism receipts of tourism enterprises did not go up as expected. We will have to wait to see the total tourism revenue earned in 2011. It could be that more restaurants, hotels, travel and trekking agencies were opened up expecting a surge in visitors. Surge did happen to some extent, but the increased total revenue was divided among these old and new enterprises. This might have caused low reported earnings (or less than expected) of tourism enterprises.
• Commitments to spare tourism sector from strikes and disturbances were not kept. Few days after making such commitments by all parties, a nationwide strike was organized. Leaders failed to walk the talk. Also, the tourism sector was battered by labor strikes and vandalism.
• The soring cost of production did not help to make our tourism sector competitive.

Does interest rate channel work? Evidence from Ghana

In short, it won’t work as expected. Why? Because of information asymmetries and imperfect markets. Here is the abstract from a recent paper by Arto Kovanen.

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This paper analyzes interest rate pass-through in Ghana. Time series and bank-specific data are utilized to highlight linkages between policy, wholesale market, and retail market interest rates. Our analysis shows that responses to changes in the policy interest rate are gradual in the wholesale market. Prolonged deviation in the interbank interest rate from the prime rate illustrate the challenges the Bank of Ghana faces when targeting a short-term money market interest rate. Asymmetries in the wholesale market adjustment possibly relate to monetary policy signaling, weak policy credibility, and liquidity management. In the retail market, pass-through to deposit and lending interest rates is protracted and incomplete.

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Nepal’s problems with exports

[It published in The Week, Republica, December 30, 2011, p.9]

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Nepal’s problems with exports

Trade is one of the most vital components of our economy. Exports and imports have a strong bearing on macroeconomy, employment opportunities and the pace of structural transformation. We depend so much on foreign goods to satisfy increasing domestic demand and a shortfall in production that imports are six times higher than our exports. This has resulted in a huge trade deficit (value of imports minus exports), which has already reached unsustainable level. Fortunately, high remittance inflows are helping financing it for now.

To address this situation, since 1983, when the first trade policy was introduced, our government has been rolling out numerous exports promotion schemes and import substituting measures. Unfortunately, they have failed to boost exports and reduce trade deficit, thanks to a slew of domestic problems, including supply-side constraints.

Trade performance

Exports of goods and services have been declining since it reached approximately 26 percent of gross domestic product (GDP) in 1997. Last year, it dropped to 9.8 percent of GDP. In contrast, India’s and Bangladesh’s exports are increasing, mainly because of successful implementation of reforms, targeted promotion of exportable items, and timely management of supply-side constraints. Last year, exports (share of GDP) were 21.5 percent and 18.5 percent respectively in India and Bangladesh.

Meanwhile, imports are ever-increasing, resulting in trade deficit of around 22 percent of GDP. In 2010, while Nepal’s imports were equal to 37.4 percent of GDP, India’s was 24.8 percent of GDP and Bangladesh’s was 24.9 percent of GDP. No wonder, Bangladesh and India had average economic growth rate of over 5.8 percent over 2001-2010 while Nepal had just 4 percent. Over the same period, Nepal had a negative growth of exports, but Bangladesh and India had growth of over 8.5 percent.

Despite joining the WTO in April 2004 and being a member of two regional free trade blocs (SAFTA and BIMSTEC), Nepal’s trade composition and destination have not changed much. It is still heavily dependent on the Indian market for both exports and imports. About 67 percent of total exports go to India and 66 percent of total imports come from India. Last year, the revenue generated from total exports of goods was still Rs 10 billion short of total petroleum imports. Our ballooning imports are financed by remittances, which are estimated to be US$3.9 billion in 2011. This is about US$2 billion higher than the total export of goods and services.

 

In contrast, India’s and Bangladesh’s trade is pretty diversified. The top two export destinations of India are the US and the UAE, where it sends just 13 percent and 12 percent of total exports respectively. Bangladesh’s top two export destinations are the US and Germany, where it sends 22 percent and 11 percent of total exports respectively. As for imports, India’s top two destinations are China and the US (13 percent and 6 percent of total imports respectively) and Bangladesh’s China and India (22 percent and 12 percent of total imports respectively). Our high dependence on the Indian market means that a small fluctuations and policy changes there would have a substantial impact on our economy.

Regarding export and import composition, nothing much has changed though garment and textiles have lost their significance in the export basket. The demand for our exports is price elastic to consumers in destination markets, meaning that as retail costs of our exports increase due to exchange rate fluctuation and high cost of production, quantity demanded decreases. However, the demand for imported items is relatively price inelastic, implying that change in price does not affect much our demand for imported items. It is so because the import demand for petroleum products, low range durables and food items is increasing each year due to low domestic production and high remittance inflows.

Trade reform

The government has rolled out a number of export promotion schemes to boost exports and foreign currency reserves. While updating trade policy in 2009 and industrial policy in 2010, it made a slew of commitments to promote exports. Additionally, the government listed 19 products having export potential and outlined detailed time bound strategies for their promotion in Nepal Trade Integration Strategy (NTIS) 2010. In the latest Three Year Interim Plan 2010/11-2012/13 as well, there is a long list of programs aimed at implementing the recommendations of NTIS.

Despite the updated policies and high priority given to exports sector, why are they performing miserably at a time when our neighbors’ exports are increasing at an impressive? Well, it is not because we have bad policy documents, but rather the inability to implement the policies and strategies promised to boost exports. For instance, even after the construction of Special Economic Zone (SEZ) in Bhairahawa is near completion, the parliament is yet to pass the SEZ bill. The success of India’s and Bangladesh’s export sector owe much to the construction and effective operation of SEZs and the effective implementation of policies designed to address binding constraints.

Constraints

No number of export promotion schemes is going to work unless our politicians and policymakers put the house in order, i.e. address domestic supply-side constraints that are eroding competitiveness of our products.

First, the most binding constraint to economic activities in Nepal is the lack of adequate infrastructure. The supply of road network, electricity and irrigation facilities has not matched the growth in demand for them. There is still a demand-supply gap of around 450MW of electricity during dry season, leading to operation of industries below their capacity. Worse, investors are compelled to run their machines using imported diesel and petrol. For fear of protest and further rise in inflation rate, the government is subsidizing diesel, inflicting losses to the state-owned Nepal Oil Corporation. Additionally, many industries and production sites are not linked with good roads, leading to delay in delivery despite adequate production on time. In the agriculture sector, farmers are not supplied with adequate fertilizers and irrigation. These have led to increase in cost of production, wastages, and operation below capacity. Note that Nepal’s infrastructure ranking is the second worst out of the 142 economies in the latest Global Competitiveness Report (GCR).

Second, political strikes (bandas) are disrupting production, supply and distribution of goods and services. Just a few years back, big retailers such as Wal-Mart and Gap withdrew planned orders of garment due to our producers’ inability to supply goods on time, thanks to repeated strikes along the main trading routes and highways. This was/is further impacted by the violence and strikes during and after the Maoist insurgency, leading to a sharp rise in cost of production and loss of cost and quality competitiveness. These problems rarely affect the export-oriented sector in our neighbors.

Third, labor issues have been the thorniest since 2006. The UCPN (M)-affiliated trade unions have wreaked havoc on the industrial sector by incessantly demanding hike in wages and other services that at times are inconsistent with labor productivity. Investors are scared of the militant trade unions and their aggressive cadres. Even after multiple rounds of wages and compensation revision, the unions are still not satisfied. Several hotels, manufacturing plants, and factories with foreign investment are already closed due to labor problems. Note that labor cost in Nepal is already the highest in South Asia. These have hit exports the most and nearly wiped off of the garment and textiles sector.

Fourth, our exporters relied more on market concessions in destination markets than investing on research and development. A prime example of this is the near demise of garment industry after the end of Agreement of Textiles and Clothing (ATC), which eliminated quotas on the trade of textiles and clothing, in 2005. The end of ATC was known in 1990 itself and quota was phased out in successive four phases starting 1994. But, still neither our exporters heeded to it nor our government proactively worked to reorganize and restructure this sector to confront intense competition in the international market. Countries such as China, India, Cambodia, Bangladesh and Viet Nam that invested heavily to promote innovation in these sectors gained after 2005.

Fifth, our policymakers were inept to comprehend the ever-evolving force of globalization. While talking about structural transformation and high growth rate, they failed to implement reforms promised in voluminous documents and lofty speeches. New policies were introduced without looking at coherence with the already existing ones, leading to confusion and paralysis in implementing the already agreed ones. Innovation and self-discovery (i.e. learning by making mistakes and taking risk) were never promoted. There is a lack of coordination among government, investors and producers to foster innovation and competition.

Tackling constraints

Given the limited amount of resources at our disposal, we cannot address all the problems at the same time. The most binding constraints have to be addressed first. To bring down costs, the industries need good roads, uninterrupted supply of electricity and other facilities, security, network of firms producing similar range of products in the same space and attractive incentives. All of these cannot be provided to each firm scattered across the country. But, at the same time, without these facilities our firms cannot produce efficiently. The government could immediately pass SEZ bill, construct such zones in strategic locations like India and Bangladesh are doing, and then provide the required facilities to firms operating inside such zones. This positive discrimination is the most cost effective way to deal with our industrial and export woes at present.

Apart from this, what is really needed is serious implementation of the already committed reforms in trade and industrial policies. It will do a lot in boosting production and exports and in making our products competitive in the international market. Additionally, we need to successfully negotiate with neighbors to reduce trade barriers that are increasing production, transaction and transportation costs. Importantly, to boost production and exports, we need to make Nepal a better place to do business in and provide the necessary enabling conditions for smooth operation of firms and stimulation of entrepreneurial activities.

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Companies pulling out of SEZ after incentives were scaled down in India

Looks like companies are pulling out of SEZs after the Indian government pruned benefits given to companies locating and operating inside SEZ. Below is a story published in The Economic Times.

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But this February, finance minister Pranab Mukherjee pruned some of those benefits to SEZs, leaving entrepreneurs like Sonthalia fretting. "Having already made a significant investment of Rs 200 crore, we couldn't have pulled out," says Sonthalia, vice-chairman & managing director, Sonthalia Group of Companies. Sonthalia represents India Inc's growing disenchantment with SEZs -- the previous government's big idea to drive exports and, in turn, employment and growth.

China was reaping the benefits of such a policy crafted in the eighties and UPA-I felt SEZs could redefine India's status as an exporter. It rolled out a 15-year SEZ plan in 2006. Land on a platter. Speedy approvals. No income tax for five years and concessions for another 10 years. No tax on inputs.

Except after two years, the promises started coming unstuck, like the one on income tax. "We don't know what the government might do next," says Sonthalia. Faced with a harsher business climate and a government that is wavering on SEZ laws, companies are unsure whether they can plan for 15 years. About one-third of companies that held the rights to build an SEZ -- 202 of 583 -- have raised their hands and walked away.

The pace of withdrawals is increasing, with 60 leaving in the past two years alone. These include companies that were looking to set up SEZs for captive purposes (Bata, Dr Reddy's and Essar) or to lease it out (DLF, Omaxe and Unitech). It's no different for tenants. "Most units are evaluating their tax arbitrage before deciding whether to go to an SEZ," says Anshuman Magazine, managing director, CB Richard Ellis, a real estate consultancy.

About one-third of India's exports come from SEZs. Impressive as that headline number is, it is boosted by some migrating exporters -- for example, IT companies moved from software technology parks to SEZs. Further, it hides the skew of just five states and five sectors account for 90% of exports from SEZs. It hides the fact that SEZs are anything but nonurban and manufacturing conclaves, as they were conceived to be.

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Of the 583 SEZs the Indian government had approved till October 2011, only 143 were operational. The running SEZs are operating under capacity as well. The government recently changed land acquisition, incentives and taxation provisions. In 2008, the Indian government transferred the responsibility of land acquisition from government to developer itself. In 2009, the government changed the basis of incentives from profits to investments in the draft of the direct tax code (DTC). In 2011, the budget removed income tax exemption for 15-year period and slapped 18.5% minimum alternate tax and 15% dividend distribution tax. Investors argue that once the DTC is enacted, SEZs won't be an attractive option. Why did this happen? It is because  of the tussle between two ministries for long-term plan (commerce) and short-term imperatives (finance).

The perils of having consumer groups in the absence of elected local bodies

A latest study by United Nations Capital Development Fund (UNCDF), reported in Nagarik Daily, states that budget leakage in Mountain and Terai regions is as high as 80 percent. The figure for Hilly region is 25 percent. On average, the leakage of allocated budget  by ministries and income of local authorities is close to 50 percent. Consumers committee in local authorities are misusing the money (by showing investment in local roads that are redone multiple times).

This raises doubt over the hypothesis that efficiency is enhanced if power is given to consumer committees to come up with priority projects and also allow discretionary power to them to spend budget allocated to local authorities. It raises question over the effectiveness of decentralization in the face of rampant corruption, vested interests of leaders, and illiterate committee members. The study states that without local elections and elected local representatives, real decentralization is unimaginable.

Here is an editorial on the same issue published in Republica:

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The study has found that every year, over Rs 20 billion is being embezzled from state funds going into local development. According to the study, the money funneled down to the local level is misappropriated, right from the planning to the implementation stage of local projects. The problem is most acute in the Hill and Tarai regions with up to 80 percent of the allocated sums going missing.

[…]The latest revelations have also questioned a hallow principle among development experts in Nepal. Of late, a consensus has been building that local people are the best equipped to bring meaningful changes in the society. Thus, the local consumer groups have been given more and more say on how the money going into local bodies is spent. But the ground realities hint that things are not so straightforward. It was quite a stretch of imagination to assume that consumer groups that do not need license to operate, that do not pay taxes and most surprisingly, cannot be held accountable for their actions, would maintain self-discipline without any oversight. It is bizarre because no human being is immune to the base motives induced by a potentially endless source of money.

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