Normal monsoon forecast, risk aversion in bond market, and debt relief for poor countries

India to get normal monsoon, says IMD as country battles coronavirus

From Business Standard: India is likely to have a normal monsoon this year, the country’s weather department said on Wednesday giving the country’s coronavirus-battered economy some good news. Monsoon rains are expected to be 100 per cent of a long-term average, M. Rajeevan, secretary at the Ministry of Earth Sciences told a news conference, according to news agency Reuters.

The India Meteorological Department (IMD) defines average, or normal, rainfall as between 96 per cent and 104 per cent of a 50-year average of 88 centimetres for the entire four-month season beginning June. Monsoon enters Kerala coast on June 1, covers much of central and western India between June 5 and 15, and enters North India from July 1. It is crucial to rice, wheat, sugarcane and oilseeds cultivation in the country, where farming accounts for about 15 per cent of the economy and employs over half of its people.

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Risk aversion: Bond sell-off brings down FPI utilisation of G-sec limits to 52%

From Financial Express: With continuous selling in central government securities by foreign portfolio investors (FPIs) due to persistent risk aversion in the wake of the Covid-19 crisis, general category FPI utilisation of investment limits in G-secs have fallen to 52.31% as on April 13 compared to the peaks of over 75% at the beginning of 2020. In the last 18 consecutive sessions, FPIs have sold Indian bonds – including both G-secs and corporate bonds  – worth $8.8 billion, Bloomberg data show. Following the continuous selling by foreign investors, general category FPI investments in G-secs currently stand at just over $17 billion against the total available investment limits worth over $32 billion, CCIL data show.

Manish Wadhawan, managing partner at Serenity Macro Partners, said that markets are a bit wary of the potential spike in fiscal deficit this year. “We saw FPI selling in equities halting a bit in recent times but the selling has continued in debt. I believe FPI fund flows will depend a lot on the fiscal and currency views. Even when foreign investors decide to make a comeback to emerging markets, they will have options to invest in the debt of other countries like Korea and China. The only turning point India can see would be if the RBI decides to conduct open market operations (OMOs) or decides to buy bonds directly in the primary central and state government auctions,” Wadhawan said.

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G20 agrees debt freeze for world's poorest countries

From Reuters: Finance officials from the Group of 20 major economies agreed on Wednesday to suspend debt service payments for the world’s poorest countries from May 1 until the end of the year, as a group of private creditors also backed offering debt relief. The moves to freeze both principal repayments and interest payments will free up more than $20 billion for the countries to spend on their health systems and help tackle the coronavirus pandemic, Saudi Finance Minister Mohammed al-Jadaan said.

[...]German Finance Minister Olaf Scholz called the move “an act of international solidarity with a historical dimension,” adding it would let the countries invest in healthcare “immediately and without time-consuming case-by-case examination”. A source familiar with the agreement said it would cover $12-$14 billion in bilateral debt service payments.

The G20 also called on private creditors to participate in the initiative on comparable terms. The Institute of International Finance, which represents 450 banks, hedge funds and other global financial firms, said it would recommend that private sector creditors voluntarily grant similar debt relief to the poorest countries, if they requested it. A French finance ministry official on Tuesday said private creditors had agreed voluntarily to roll over or refinance $8 billion of the debt of the poorest countries, on top of $12 billion in debt payments to be suspended by countries.

IMF enhances debt relief trust to support low-income countries

The IMF enhanced its Catastrophe Containment and Relief Trust (CCRT) to enable the Fund to provide debt service relief for its poorest and most vulnerable members. The CCRT enables the IMF to deliver grants for debt relief benefitting eligible low-income countries in the wake of catastrophic natural disasters and major, fast-spreading public health emergencies. 

The IMF now allows all member countries with per capita income below the World Bank’s operational threshold for concessional support to qualify for debt service relief for up to two years. This would apply when a life-threatening global pandemic is inflicting severe economic disruption across the Fund’s membership and is creating balance of payments needs on such a scale to warrant a concerted international effort to support the poorest and most vulnerable countries.

The COVID-19 pandemic is bound to create balance of payments crisis (declining exports, remittances, FDI, etc) and fiscal stress (lower revenue, higher expenditure) in some low-income countries. 

Third country trade via China, BRI and Nepal, disinterest in SSF and sugar politics

Nepal signs deal with China to access seven Chinese sea and land ports

From The Kathmandu Post: Nepal and China on Monday signed the Protocol on Implementing Agreement on Transit and Transport and six other agreements in Beijing after delegation level talks between President Bidya Devi Bhandari and her Chinese counterpart Xi Jinping at the Great Hall of the People. Minister for Foreign Affairs Pradeep Gyawali and Minister for Transport of China Li Xiaopeng signed the agreement on behalf of their respective governments, according to the Nepali Embassy in Beijing. The protocol had been pending since Nepal and China signed the Transit and Transportation Agreement in March 2016 during Prime Minister KP Sharma Oli’s visit to the northern neighbour.

The Transit and Transportation Agreement was signed just months after an undeclared Indian border blockade was lifted, with a view to diversifying Nepal’s trade and paving the way for landlocked Nepal to carry out third country trade through ports in the northern neighbour. But for the third-country trade via China to commence, the protocol was a must.

The signing of the protocol makes it possible for Nepal to use four Chinese sea ports--in Tianjin, Shenzhen, Lianyungang and Zhanjiang--and three land ports--in Lanzhou, Lhasa and Shigatse--for third-country import. It will also allow Nepal to carry out exports through six dedicated transit points between Nepal and China.

>>Other agreements include:

• Handover Certificate of Grant-Aid for the Repair and Reinforcement Project of the Existing China-aided Projects
• Agreement on Economic and Technical Co-operation
• Minutes of Meeting on Strengthening Assistance Co-operation in the Field of Livelihood in the Northern Region of Nepal
• Agreement on Co-operation and Mutual Administrative Assistance in Customs Matters
• MoU on Co-operation on Standardization between Nepal Bureau of Standards and Metrology (NBSM) and Standardization Administration of China (SAC)
• Agreement on Preventing the Theft, Clandestine Excavation and Illicit Import and Export of Cultural Property

Meanwhile, a joint communique of the Leaders' Roundtable of the 2nd Belt and Road Forum for International Cooperation included "the Nepal-China Trans-Himalayan Multi-dimensional Connectivity Network, including Nepal-China cross-border railway"

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Govt continues sugar import restriction until mid-July

From myRepublica: Though Prime Minister KP Sharma Oli had said that he was ‘tricked’ by sugar mills to restrict the import of sugar, the government has continued the quantitative restriction until mid-July. The restriction that was in place until Chaitra end (April 13) was extended till mid-July. According to a notice published in the Government on Nepal Gazette on April 15, the deadline for the import restriction was extended until July 16. The decision to give the import restriction of sugar continuity was taken a week after Prime Minister Oli’s statement criticizing sugar mills for ‘tricking’ him into imposing the quantitative restriction on import of sugar. 

According to the quantitative restriction which was put in place in April 14 last year, the import of sugar exceeding a total quantity of 94,900 tons was restricted. As sugar of that quantity has already been imported, there won’t be sugar imports anymore. The decision to impose restriction on imports, however, was not free from the controversy. Consumer activists have criticized the government for bowing down to sugar mills’ pressure to restrict imports which prompted price hike immediately after the imports came to a halt. Even Prime Minister Oli, after seven months of the decision, had admitted at a public program that sugar mill owners misled him about the scenario of supply and production of their products to make him impose the restriction. But instead of course correction, the government has not allowed the deadline for the sugar import restriction to lapse. 

Concluding that there was ‘collusion’ between government officials and the sugar mills to artificially drive up prices, the Public Accounts Committee, upon the recommendation of its sub-committee, instructed the Commission for Investigation of Abuse of Authority to investigate.

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Employers hesitant to join Social Security Fund

From Nayapatrika: सरकारले निकै तामझामका साथ सुरु गरेको सामाजिक सुरक्षा कार्यक्रम कार्यान्वयनमै आशंका उब्जिएको छ । देशभर करिब साढे ९ लाख रोजगारदाता रहेको भए पनि अन्तिम दिन शनिबारसम्म सामाजिक सुरक्षा कोषमा आबद्ध हुने रोजगारदाताको संख्या नगन्य छ । सातै प्रदेशका रोजगारदातालाई सूचीकरणका लागि दिएको समय समाप्त भइसक्दासमेत कोषमा शून्य दशमलव २७ प्रतिशत अर्थात् २ हजार ४ सय ८२ रोजगारदाता मात्रै आबद्ध भएका छन् । ऐनको व्यवस्थाअनुसार कोषमा रोजगारदाता आबद्ध नभएपछि कोषको कार्यान्वयनमै आशंका उब्जिएको हो । पछिल्लोपटक रोजगारदातालाई कोषमा आबद्ध हुने म्याद आगामी असार मसान्तसम्मका लागि थप गरिएको छ । 

कोषको अनलाइन प्रणालीमार्फत रोजगारदाताले सूचीकरण गर्न सक्ने व्यवस्था मिलाइएको थियो । रोजगारदाताले आफू सूचीकरण भएको तीन महिनाभित्र आफ्नो रोजगार सम्बन्ध कायम रहेका श्रमिकलाई कोषमा सूचीकरण गराउनुपर्ने कानुनी व्यवस्था छ । कोषका अनुसार आबद्ध केही रोजगारदाताले हालसम्म ४ हजार ६ सय ३८ श्रमिकलाई मात्र कोषमा सूचीकृत गराएका छन् । सरकारी सेवामा बहाल रहेका तथा सरकारी कोषबाट पारिश्रमिक पाउने व्यक्ति, अनौपचारिक क्षेत्रका श्रमिकहरू र स्वरोजगारीसमेत सामाजिक सुरक्षा कोषमा समेट्ने भनिए पनि सरकारले त्यसतर्फ कुनै कदम चाल्न सकेको छैन । 

MCC grant to Nepal: Can it be completed without time and cost overruns?

It was published in The Kathmandu Post, 18 September 2017.

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A matter of time

Government transitions and failure to maintain consistent policies over time may hamper investment grant pledges

On September 14, Finance Minister Gyanendra Bahadur Karki and Millennium Challenge Corporation (MCC) acting CEO Jonathan Nash signed a $500 million grant agreement for investment in the energy and transportation sectors. This assistance is especially significant for two reasons: it is the single largest one-time grant assistance by a development partner, and no cost and time overruns are entertained once the grant becomes effective.

A large one-time grant amount equivalent to about two percent of Nepal’s gross domestic product by a specialised foreign aid agency, which uses a fairly transparent yet rigorous selection methodology to assess eligible countries, is in itself a significant positive development for Nepal. However, the challenge would be to complete the projects considered under the assistance without cost and time overruns, which unfortunately are also the two most common yet unresolved issues concerning public capital spending in Nepal.

Binding constraints

The MCC selected Nepal to develop a five-year compact program in December 2014 after Nepal met the eligibility requirement, which includes sound performance in about one and a half dozen independent policy indicators related to democratic governance, economic freedom and investment in citizens. Earlier, a threshold program, which has a smaller grant assistance than the compact program, in December 2011 led to a rigorous analysis of Nepal’s growth constraints and identification of potential areas for policy improvement. The diagnostics study—an update of a 2009 study led by Asian Development Bank—identified four key constraints to growth: policy implementation uncertainty, inadequate supply of electricity, high cost of transport and challenging labour relations.

This diagnostic study formed the basis for selection of energy and transport sectors for investment, and sectorial reforms under the compact program. A series of stakeholder consultations—including public and private sectors and donors—were held to identify fairly large investment projects that could be completed within five years and that have the potential to yield substantive outcomes by tackling some of the most binding constraints to economic growth.

Out of $630 million (including $130 million as counterpart investment by the government), about $520 million is planned for the electricity transmission project, under which 300 kilometres of high voltage electricity transmission network will be built and capacity of the country’s energy regulator enhanced. This kind of infrastructure is crucial for supporting transmission of power generated by various hydroelectricity projects across the country and for greater electricity trade between Nepal and India. Around $55 million is earmarked for road maintenance, under which 305 kilometres of road will be built and rehabilitated. The remaining amount is allocated to cover project administration costs, including procurement and monitoring and evaluation expenses.

No overruns

The actual implementation of projects will probably start towards the end of 2018 after they are investment-ready, i.e. procurement packages are finalised, significant proportion of land is acquired, detailed implementation plan is outlined and implementation offices are established. Once implementation starts they have to be completed within five years and without any cost overruns. Else, the unspent grant amount will be returned to the MCC. Against this backdrop, if the same structure of project implementation including staff deputation, policies and laws are going to govern the MCC’s investment projects, then there is little room to be optimistic that it will be completed within five years.

Execution of capital budget is hamstrung by a maze of bureaucratic and structural factors, leading to under spending as well as heavy bunching of spending in the last quarter of every fiscal year. For instance, in 2016/17, the budget was approved one and a half months prior to the start of fiscal year, which in principle gave the ministries time cushion to get approval for spending and initiate preparatory project planning (especially procurement documents). Still, 60 percent of actual spending happened in the last quarter, and 41.2 percent in the last month itself, raising doubts over the quality of spending. Worse, just 65.5 percent of planned capital budget was spent. This pattern of spending, and deficient expenditure absorption capacity, has been persistent irrespective of which political party leads the government.

Capital budget execution is affected by structural weaknesses in project preparation and implementation; low project readiness; bureaucratic hassles in project approvals and sanctioning of spending authority; weak project and contract management; and political interference at planning, management and operation stages. These issues are common across all projects irrespective of investment amount and duration.

Political interference

The exact details about the implementation modality of MCC’s projects in Nepal are not known yet. The MCC usually establishes its own local office to manage and oversee project implementation, which is fairly independent, rigorous and transparent. Meanwhile, the government procures land and secures environment clearances along with preparation of procurement documents before implementation starts. Unfortunately, the government does not have a good track record of completing these preparatory works on time.

Two specific issues are of particular concern regarding implementation. First, the upcoming provincial and federal elections will result in a new political structure along with changes in government leadership, as a coalition government would be a defining feature because no party is likely to secure the necessary majority in Parliament. This in turn would entail transfer of government staff loyal to ruling parties to large project management or implementation offices, leading to snags in implementation and opening up of avenues for funds misappropriation.

For instance, the Communist Party of Nepal-Unified Marxist Leninist (CPN-UML) led coalition government in 2016 abruptly decided to not renew the contract of former secretary Krishna Gyawali, who was serving as a national coordinator of MCC Nepal upon appointment by the previous Nepali Congress (NC) led coalition government. Similarly, the same government terminated the contract of Radhesh Pant, former CEO of Investment Board Nepal, in 2016, even though Pant’s contract was renewed for an additional term by the NC-led coalition government. The case with the CEO of National Reconstruction Authority is also similar. These kinds of unceremonious contract terminations and transfers to put party loyalists in key positions affect project implementation timelines and escalate costs. The MCC’s projects need to be insulated from this kind of party-based selfish political incursion.

Second, Nepal needs to retain its score above median (threshold score) each year for a majority of policy indicators. For instance, worsening of governance may pull down the country score below the yearly median. Failure to have a satisfactory score in a majority of the policy indicators would also lead to either suspension or termination of grant assistance.

About domestic resources and infrastructure financing in Nepal

There has been a lot of debate about the use of domestic funds to finance large-scale infrastructure projects, especially hydroelectricity, roads and airports. Let me provide a brief background and readers can see for themselves which claims made by ‘experts’ hold water and which ones are impractical and outlandish. 

First, issue about fiscal space to finance large scale projects. Nepal has a very low outstanding public debt (about 25.6% of GDP), with internal and external debt stock amounting to 9.5% and 16.1% of GDP, respectively. The outstanding public debt decreased drastically from about 52% of GDP in FY2005. This was a result of faster repayment of principal and interest (due to high revenue growth rate but eroding low expenditure capacity). Now, given the huge infrastructure deficit and low per capita income, Nepal can afford to increase it by few percentage points and use those money in productivity-enhancing infrastructure projects. Here is brief study on increasing public debt by 10 percentage points to finance post-earthquake reconstruction without jeopardizing fiscal sustainability (that is, maintaining the present level of primary balance). 

To increase this limit further needs attention on two fronts: (i) a higher growth rate (ideally above 5%), concessional nature of external borrowing and higher remittance-financed imports, which then boosts revenue; and (ii) drastic enhancement of absorption capacity. 

On the first point, no comment on growth rate as we know well what drives it in Nepal. But, the concessional financing may be drying up. The ADB is phasing out concessional lending in few years and Nepal may have to borrow at a rate between concessional rate (for low income countries) and nonconcessional rates (for lower to middle income countries). The WB is also moving in the same direction. AIIB financing may not be as concessional as those from the ADB and the WB. We will have to wait and see that one. Bilateral financing may or may not be equally generous in terms of interest and maturity, but the downside is that there are hooks on procurement and utilization of funds.

On remittance-financed imports, remittance inflows may not be as stable as before given the continued slump in oil prices and fiscal strain in the countries where Nepali workers go for employment. Remittance inflow is already decelerating, i.e. its growth rate is decreasing although the amount is rising.

On the second point, without drastic enhancement of absorption capacity, even concessional financing won’t come (disbursement happens after government spends money, submits the bills or details of spending to donors and then gets reimbursed). And it is no secret that spending absorption capacity is receding in the last couple of years. So, yes POTENTIAL financing options are available, but REALIZING it is an entirely different ball game. It is not as simple as it sounds. 

What about domestic financing (from treasury savings), domestic borrowing and using some forex reserves? Again, utilizing these is linked to macroeconomic balance and fiscal space. Given the occasional fiscal surplus (even primary balance is in surplus) the government can afford to run fiscal deficit IF the additional money is used in productivity-enhancing infrastructure projects in an accelerated manner. This is more and more unlikely given the receding disbursement rates of major projects and the usual legal, institutional and political hiccups overpowering project implementation. 

A lot of folks are also talking about pooling in the liquidity in the market and household savings apart from those in the banks (as seen when several IPOs being oversubscribed in recent years) to generate funds for large-scale infrastructure projects. But then this liquidity is transitory because of the adverse market conditions. Domestic financing will quickly dry up as soon as real estate and trading activities regain momentum, and BFIs see a favorable credit demand with less socio-political risk. Another aspect associated with this is the domestic borrowing by government through the selling of bills and bonds. This cannot be extended beyond 2-2.5% of GDP to maintain fiscal stability. This is already being practiced (as the government targets to raise around Rs50 billion annually). Higher domestic borrowing by government will push up lending rates (not good for private sector and households as it stifles growth and then subsequently revenue and then finally the funds available for such projects—boomerang!).

Additionally, most of the savings are for short term, but infrastructure financing is for long term. So pooling in money to explicitly finance large-scale infrastructure projects is difficult as folks don’t want to wait for years to get financial benefit. This is different from IPOs, where folks want to purchase shares with an objective to trade it at higher prices after the moratorium on selling is over after few months. Also, banks will be unwilling to invest in large amount in long-term projects out of the short-term deposits. Can you see the asset-liability mismatch there (and the troubles BFIs would be in)?

Next, what about treasury surplus? Again, it is not as easy as it sounds as the government has been using a portion of it as “carry over from last year” to finance the burgeoning (recurrent) expenditure. Not a new thing, but its size will deplete as soon as the government spends more on other projects across the country. If we pin much hope on treasury savings, then we are basically saying lets decrease capital spending in the rest of the country, save the money and then use it in few of the large infrastructure projects. The treasury savings (about Rs50 billion in the first nine months of FY2015) are there because the government is raising revenue (thanks to remittance-finance imports and consumption) that it cannot spend on in infrastructure projects. It is not an additional bonus to domestic financing that you can use for large-scale infrastructure projects! Importantly, at the core of it, it does not solve the problem: the government is not able to spend the money it appropriates for various infrastructure projects across the country. The focus should be in resolving this aspect and ensuring that major projects on an average spend over 90% of allocated money (but not 60% of those in the last quarter; preferably at least 50% by the first seven months of fiscal year).

Finally, what about the forex reserves (about $10 billion as of the ninth month of FY2016). Nepal cannot use this like that because it needs to maintain enough reserves to finance around 7 months of import of goods and services (given the peg to the Indian rupee, to fend off external shocks and the opportunity cost of holding reserves). And the amount of reserves fluctuates depending on remittance inflows and the level of import of goods and services.  

Overall, yes some room for domestic financing is there, but not as high as is being perceived by folks out there.

One year since the Great Gorkha earthquake

It is nearly a year since the catastrophic 7.8 magnitude earthquake struck Barpak, Gorkha. The massive earthquake on 25 April 2015 at 11:56 AM and subsequent aftershocks (two powerful 6.7 magnitude on 26 April and 7.3 magnitude on 12 May) caused widespread damage to lives and properties. About 9,000 were dead and 22,000 injured. Around 602,257 and 285,099 private houses were fully and partially damaged, respectively, forcing thousands of people to seek temporary shelter under tents and tarpaulin sheets. 

It was a natural disaster most were expecting, but the government and households were awfully unprepared— the government either had lax household and settlement policies, or/and did not enforce housing codes strictly; the households (mostly in urban areas) compromised safety standards to save money. Lessons were learnt or so the politicians, bureaucrats and the public said during the first few months of the disaster. Then the simple lessons inculcated only after a terrible tragedy evaporated in thin air as politicians paid lip service only, bureaucracy got mired in the usual maze infested with rent-seeking mentality, and the affected households did what they need to do to get by normal lives (by starting rebuilding houses on their own). It’s a sad story about reconstruction that did not happen even after a year into the disaster. Availability of funds was not a problem given the generous aid pledges during reconstruction conference.

First, a quick snapshot of the events thus far: A post disaster needs assessment (PDNA) was completed within two month. It estimated the cumulative damage and loss to be about $7.1 billion (33.3% of FY2015 GDP). The cumulative need for recovery (Building Back Better concept) was estimated to be $6.7 billion, of which almost half was needed for housing and settlement. The earthquake either destroyed or damaged cultural heritage, schools, health posts, houses, agricultural farms, irrigation system, financial sector infrastructure, communications, roads, hydroelectricity plants, livelihoods, and tourism infrastructure, among others. 

After the completion of PDNA, the government organized International Conference on Nepal’s Reconstruction (ICNR) on 25 June 2015 to raise funds for reconstruction. Bilateral and multilateral development partners made generous pledges to help the affected households get back on feet again. About $4 billion, which was larger than the estimated public sector needs, was pledged with a belief that the government would speed up the establishment of reconstruction authority and make it operational without delay. The initial expectation was that some form of relief would be distributed before the winter. This was to be followed by cash grant of about $2000 to rebuild destroyed houses so that some of the damaged houses could be rebuilt before the arrival of monsoon (June to September 2016). Then the expectation was that the government would plan resettlement where required and build back better the damaged infrastructure, which would help reinvigorate the economy, create employment opportunities and prepare the household better when the next disaster strikes (Nepal is in a seismically active zone). Alas, these remained unrealized expectations. More on this in a minute.

Briefly, 

• Total damage estimated at $7.1 billion. Total recovery needs estimated at $6.7 billion. 
• Total reconstruction aid pledged by bilateral and multilateral donors was around $4 billion.
• About 9,000 dead and 22,000 injured.
• About 602,257 and 285,099 private houses were fully and partially damaged, respectively.
• About 2,673 and 3,757 public buildings were fully and partially damaged, respectively.
• Earthquake struck in the tenth month of FY2015. The earthquake chopped 1.5 percentage points off an estimated 4.6% growth in FY2015 in a no-earthquake scenario. GDP growth and per capita GDP estimated at 3.0% and $762 in FY2015. Services sector was hit the hardest.
• An additional 700,000-982,000 people were pushed below the poverty line. This translates into an additional 2.5%-3.5% of the estimated population in 2015 pushed into poverty compared to the no-earthquake baseline scenario of about 21%. About 50%-70% are from rural central hills and mountains, where the vulnerability prior to the earthquake was already high.
• An ordinance was promulgated to establish National Reconstruction Authority (NRA) and to start reconstruction activities. 
• The FY2016 budget and monetary policy were focused on rehabilitation and reconstruction. About $910 million (3.8% of GDP) was earmarked for reconstruction related work ($740 million for the NRA and $170 million to be spent through sector ministries during the interim period, i.e. till the NRA was operational).
• The FY2016 budget included NRs200,000 (about $2000) for each household that has lost its house due to the earthquake. To address the shortage of labor for reconstruction, skill training is planned for 50,000 people in the areas of masonry, plumbing, and electrical works.

 

Now, nearly a year since the earthquake, the progress is rather disappointing. Few points:

• The political wrangle between CPN-UML and NC to appoint the CEO of NRA delayed the passage of the NRA bill. During the NC’s time in the government (coalition with CPN-UML) it had appointed a CEO. However, when the CPN-UML led the coalition government, it demanded that a new CEO be appointed. The disagreement over this persisted for about two months. Finally, after eight months the NRA bill was passed (creating too many committees and layers within it) and a new CEO was appointed. 
• The NPC handled the work of the NRA while the political infighting was ongoing. It approved many programs, which the NRA has asked ministries to get them approved again. 
• The NRA is struggling to get things done on time. Even the Prime Minister, who himself chairs the executive committee within NRA, has come down heavily on the NRA for its snail pace work.
• The NRA is not getting enough human resources and coordination from the bureaucracy to start the preliminary program, especially identification of victims and distribution of cash grant for house reconstruction. Senior bureaucrats have shown strong disinclination to transfer to NRA. 
• At the local level, the political parties are trying to usurp the cash distribution process by demanding representation in local committees, under whose recommendation victims are to be identified. This is for the sake of “ownership”. There are also cases of inflated number of victims (dummy victims).
• The CEO is not taking decisive action despite having unparalleled powers as per the NRA Act. Seeking the presence of political leaders for cash distribution in far off villages is not logical. In one case, cash distribution was delayed because some political leaders were not available.
• The earthquake affected households have been expecting the promised cash grant for housing for almost a year now. About five months of supplies disruption has not only escalated prices of housing materials, but also created severe shortage of essential supplies in the market. The raw materials used for constructing the houses are in short supply and those that are available are sold at inflated prices. In this respect, the earthquake affected households are even requesting the government to build the houses instead of grant. They are willing to contribute labor for such reconstruction. See this and this episode of BBC Sajha Sawal. 
• The trade blockade/supplies disruption negatively affected reconstruction planning and works. Its impact will linger on till the supplies and prices normalize to previous levels.
• There is inadequate coordination among I/NGOs for relief distribution. Affected households are complaining of similar goods (blankets and tarpaulin sheets, etc) being distributed by many I/NGOs. And distribution is centered in some places only. The NRA has to coordinate this in the strict sense.
• Reconstruction hasn’t started. Even a consolidated planning for reconstruction is not done yet. 
• There is a possibility that the NRA won’t be able to utilize all the funds pledged during the ICNR last year. The more delay in utilizing the funds, the higher the changes of it being restructured for use in other purposes.

The lingering impact of damages caused by the earthquake and supplies disruption will suppress potential growth and employment opportunities. 

• GDP growth in FY2016 was initially projected on the higher side because of the expectation of speedy cash distribution and initiation of reconstruction projects. This impact of the trade blockade for about five months and the delayed reconstruction activities will depress growth prospects in FY2016 and beyond. The agricultural output forecast is also disappointing. Some households in the earthquake affected districts have not cultivated their fields due to the uncertainty over housing.
• Inflation will also continue to be at elevated levels, primarily due to the lingering impact of the supplies disruption.
• There is a slowdown in the rate of overseas migration because of the cooling of demand for workers in GCC (this in turn is due to the continued low oil prices). Malaysia is implementing measures to discourage foreign workers and is also levying extra taxes on income. This means a slowdown in migration rate and ultimately deceleration of remittance inflows. It will increase the number of unemployed youths in the economy and also put pressure on external sector stability. Current account surplus will decline and if imports rebounds to normal levels, then it may as well be negative.
• Rehabilitation and reconstruction should primarily aim at increasing productivity-enhancing public capital investment. This is a key to ensuring structural transformation whereby high value-added and high-productivity sectors are more dominant than low value-added and low-productivity sectors in the medium term. Promoting agribusiness, industrial capacity, innovation and high-productivity services need to be at the center of such a reconstruction and structural transformation strategy. In addition to higher investment, this will require reforms on institutional, legal, regulatory, and capacity enhancement fronts.

Overall, the earthquake, the severe supplies disruption and the delay in starting reconstruction projects do not bode well for the economy. It a combination of misplaced politics, ineffective bureaucracy and a lost NRA (which will try to accelerate processes in the next two weeks to show that things are moving ahead despite it being slow-- a common escape argument popular in the bureaucracy!)

The 17 Sustainable Development Goals (SDGs)

Here is the list of the 17 SDGs agreed this week at the UN. There are many targets within each group. SDGs are the set of long term global development goals. They succeeded the MDGs.

1. End poverty in all its forms everywhere
2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture
3. Ensure healthy lives and promote well-being for all at all ages
4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
5. Achieve gender equality and empower all women and girls
6. Ensure availability and sustainable management of water and sanitation for all
7. Ensure access to affordable, reliable, sustainable and modern energy for all
8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all
9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation
10. Reduce inequality within and among countries
11. Make cities and human settlements inclusive, safe, resilient and sustainable
12. Ensure sustainable consumption and production patterns
13. Take urgent action to combat climate change and its impacts
14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development
15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss
16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels
17. Strengthen the means of implementation and revitalize the global partnership for sustainable development

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The targets within Goal #8 (Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all) are as follows:

8.1. Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 per cent gross domestic product growth per annum in the least developed countries

8.2. Achieve higher levels of economic productivity through diversification, technological upgrading and innovation, including through a focus on high-value added and labour-intensive sectors

8.3. Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services

8.4. Improve progressively, through 2030, global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation, in accordance with the 10-year framework of programmes on sustainable consumption and production, with developed countries taking the lead

8.5. By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value

8.6. By 2020, substantially reduce the proportion of youth not in employment, education or training

8.7. Take immediate and effective measures to eradicate forced labour, end modern slavery and human trafficking and secure the prohibition and elimination of the worst forms of child labour, including recruitment and use of child soldiers, and by 2025 end child labour in all its forms

8.8. Protect labour rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment

8.9. By 2030, devise and implement policies to promote sustainable tourism that creates jobs and promotes local culture and products

8.10. Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all

8.a. Increase Aid for Trade support for developing countries, in particular least developed countries, including through the Enhanced Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries

8.b. By 2020, develop and operationalize a global strategy for youth employment and implement the Global Jobs Pact of the International Labour Organization

Structure of Nepal’s public debt

This is adapted from Box 1 of Macroeconomic Update, August 2015, Vol.3, No.2 (executive summary here, and FY2016 growth and inflation outlook here). It presents is the composition of Nepal’s outstanding internal and external debt. The Macroeconomic Update includes FY2015 update on real, fiscal, monetary and external sector, and growth and inflation outlook for FY2016. It provides a comprehensive macroeconomic assessment, including fiscal sustainability, after the April 25 earthquake.

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Nepal’s public debt stock has been continuously decreasing, reaching 25.6% of GDP in FY2015 from a 51.9% of GDP in FY2005. In FY2015, internal and external debt stock amounted 9.5% and 16.1% of GDP, respectively. Much of Nepal’s external debt is on concessional terms. Hence, debt sustainability is not considered at risk.

Nepal’s outstanding public debt (% of GDP)

Source: FCGO

External debt

Nepal’s debt servicing has marginally increased, reaching 3.5% of GDP in FY2015 from 2.7% of GDP in FY2009. Total internal and external principal repayments were 2.2% and 0.8% of GDP, respectively, in FY2015. Similarly, total internal and external interest payments were 0.3% and 0.1% of GDP in FY2015.

Gross debt servicing (% of GDP)

Source: FCGO; NRM staff estimates

Of the total outstanding external debt (NRs343 billion), ADB’s and WB’s share is 41% and 45.3%, respectively. It translates into 6.6% and 7.3% of GDP, respectively, in FY2015. Total debt owed to multilateral and bilateral donors was equivalent to 14.5% and 1.6% of GDP, respectively, in FY2015. It was 19.2% and 3.8% of GDP, respectively, in FY2010. Among bilateral donors, the outstanding debt owed to Japan is 0.5% of GDP, 0.4% for PRC, and 0.3% of GDP for India and South Korea.

Gross outstanding external debt (% of GDP)

Source: FCGO; NRM staff estimates

Of the total loan commitment in FY2015, only 58.5% was disbursed (amounting to about 1.4% of GDP). ADB committed loan amounting to 0.8% of GDP, but only 0.4% of GDP was disbursed. Similarly World Bank (IDA window) committed loan amounting to 1.0% of GDP, but only 0.6% of GDP was disbursed in FY2015. Total disbursement has lagged behind total loan commitment, reflecting the government’s low capital expenditure absorption capacity.

Total loan commitment and disbursement (% of GDP)

Source: FCGO, MOF; ADB staff estimates

Internal debt

The outstanding internal debt increased to NRs201.7 billion in FY2015 (12.4% of GDP) from NRs122.8 billion in FY2009 (9.5% of GDP). Treasury bills accounted for 5.6% of GDP and development bonds 2.7% of GDP. Most of the internal debt is short-term treasury bills (60% of total internal debt) and such funds are used to fund long-term development projects. Ideally, increasing the share of long-term bonds in total internal debt to finance medium to long term investment is desirable. The medium to long term bonds are in the form of national savings certificate, development bonds, citizen saving bonds and foreign employment bonds.

Outstanding internal debt (% of GDP)

Source: FCGO; NRM staff estimates

The gap between internal borrowing target and actual borrowing is widening recently. For instance, in FY2003 the government had a target of borrowing 2.4% of GDP internally, but ended up borrowing 3.1% of GDP. However, in FY2014, the government had a target of 2.3% of GDP, but actual borrowing was just 1.0% of GDP. In FY2015, there was a slight improvement with actual borrowing of 2.0% of GDP against the target of 2.5% of GDP. It again indicates the low expenditure absorption capacity of the government despite having comfortable fiscal space, which could be utilized in financing critically needed physical and social infrastructure that would create the foundation for a high, employment-centric and sustainable inclusive growth, and strengthen economic fundamentals.

Internal target and actual borrowing (% of GDP)

Source: FCGO; NRM staff estimates

Accelerating Post-earthquake Reconstruction for Faster Recovery in Nepal

This is adapted from the issue focus section of Macroeconomic Update, August 2015, Vol.3, No.2 (executive summary here, and FY2016 growth and inflation outlook here). It includes FY2015 update on real, fiscal, monetary and external sector, and growth and inflation outlook for FY2016. It provides a comprehensive macroeconomic assessment, including fiscal sustainability, after the April 25 earthquake.

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I. Introduction

A catastrophic 7.8 magnitude earthquake struck Barpak of Gorkha district on 25 April at 11:56 AM. In between numerous aftershocks of below 5 magnitude, two powerful 6.7 magnitude (26 April) and 7.3 magnitude (12 May) aftershocks shook a large part of the country, particularly central and western administrative regions. It caused further damage to the already weakened houses and physical infrastructure, and also triggered numerous landslides in the rural areas. The calamity has added a new challenge to Nepal’s short-to-medium term economic growth and development prospects.

The completion of post disaster needs assessment (PDNA), establishment of a National Reconstruction Authority (NRA) the reconstruction-focused budget and monetary policy for FY2016, and the gradual improvement in political environment have put in place the key prerequisites for the execution of reconstruction programs. Now, effectively operationalizing the NRA along with immediate planning and strategizing of reconstruction projects is critical for ensuring a fast and inclusive recovery. The NRA’s and sector ministries’ ability to swiftly prepare and implement the viable reconstruction projects will be a key determinant for speedy restoration of livelihoods and economic recovery.

The estimated 700,000-982,000 additional people pushed below the poverty line by the earthquake-induced income shock need to be pulled back above the line by providing them with jobs, skills and social protection as appropriate. The post-reconstruction programs need to be well coordinated, ensure ‘building back better’, and be an integral part of the larger goal of meaningful structural transformation of the economy.

II. Damages to lives and property

Over 8,800 were confirmed dead and 22,309 injured. Furthermore, 602,257 and 285,099 private houses were fully and partially damaged, respectively, forcing thousands of people to seek temporary shelter under tents and tarpaulin sheets. Furthermore, 2,673 and 3,757 public buildings were fully and partially damaged, respectively. To prioritize rescue and relief operations, the government declared 14 districts as severely affected (mostly in the central and western regions) although the earthquake has affected 31 of Nepal’s 75 districts.

III. Post disaster needs assessment

According to PDNA estimates, the cumulative damage and loss amount to 33.3% of GDP ($7.1 billion) and the cumulative need for recovery is estimated at $6.7 billion (31.5% of GDP). PDNA was spearheaded by the National Planning Commission with the support of various government agencies, development partners and civil society. It included 21 sectoral and thematic assessments.

 

Damages, losses and needs ($ billion)
Sector	Included sectors	Damage	Loss	Total needs
Social	Cultural Heritage, Education, Health and Population, Housing and Human Settlements	3.5	0.5	4.0
Productive	Agriculture, Financial Sector, Industry and Commerce, Irrigation, Tourism	0.6	1.2	1.2
Infrastructure	Communications, Community Infrastructure, Electricity, Transport, Water and Sanitation	0.5	0.1	0.7
Cross-Cutting	Gender, Social Protection, Nutrition, Employment & Livelihoods, Disaster Risk Reduction, Environment and Forestry, Governance	0.5	0.3	0.8
Total		5.1	2.1	6.7

Source: National Planning Commission

Of the total estimated recovery needs, about 50% is for rebuilding private housing and settlement. Productive and infrastructure clusters need 17.3% and 11.1%, respectively. These amount to about 5.5% and 3.5% of GDP, respectively. The recovery needs requirement for agriculture, education, electricity, and transport is estimated at $156 million, $397 million, $186 million, and $282 million, respectively. Furthermore, recovery of the tourism sector and restoration of cultural heritage are estimated to require $387 million and $206 million, respectively.

IV. Impact on economy

On 8 June 2015, the Central Bureau of Statistics estimated the macroeconomic impact of the earthquake. GDP growth (basic prices) is estimated to decline by over 1.5 percentage points to 3.0% in FY2015. Pre-earthquake growth estimate for FY2015 was 4.6%. Although the earthquake struck Nepal only in the tenth month of FY2015, the impact on GDP growth is sizable, especially on the services sector.

GDP growth (at basic prices), %

Source: Central Bureau of Statistics

Agricultural sector is expected to grow by 1.9%, industry by 2.7%, and services by 3.9%, down from earlier no-earthquake scenario forecasts of 3%, 3.5%, and 5.8%, respectively. The sharp drop in agricultural output is primarily due to the negative impact of delayed and weak monsoon in the first half of FY2015, and later the loss of livestock due to the earthquake.

The slowdown in the industry sector is due to the drastic drop in quarrying (stones, aggregates, sand and soil extraction slowing down in the affected districts, and the government’s policy to temporarily halt construction activities till mid-July 2015); manufacturing (physical damage, labor shortage, and weak demand); and construction (policy to temporarily halt construction activities, and low production of construction materials, among others).

The disruptions caused by the earthquake have been the most severe in the services sector. Overall, services growth is estimated to decline by about 2.1 percentage points to 3.9% in FY 2015. It grew by 6.4% in FY2014. Wholesale and retail trade; tourism activities (affects air transport, and hotel and restaurant businesses); real estate, renting and business activities; and education sub-sectors are the most affected.

Impact of earthquake on sectoral growth (%)

Source: Central Bureau of Statistics

Wholesale and retail trade grew by 9% in FY2014, but dropped to 3.4% after the earthquake (against the pre-earthquake forecast of 5.6%) in FY2015. This is primarily due to the slowdown in agricultural production and import of goods immediately after the earthquake. Hotels and restaurants suffered due to slowdown in tourist arrivals, physical damage to hotels and restaurants, and decline in domestic tourism. Furthermore, real estate activities were in line with the substantially lower land-related transactions (including buying and selling, renting, and operation of self-owned or leased real estate; and renting of machinery, equipment and personal and household goods). There was also a substantial slowdown in property renting business due to the physical damage to buildings.

Overall, agricultural, industry, and services sectors will contribute 0.6, 0.4, and 2.1 percentage points to GDP growth of 3% (at basic prices) in FY2015, respectively. Nepal’s GDP is estimated at $21.6 billion in FY2015 ($371 million less than what would have been in a no-earthquake scenario). The loss is equivalent to 1.5% of GDP, and about 62% of the total gross value added[1] (GVA) loss is accounted for by the services sector.

Value added output loss by sub-sector in FY2015 ($ million)

Source: Central Bureau of Statistics

Per capita income is estimated to decrease by $23 compared to the no-earthquake scenario (in which case per capita income would have been $785). Accordingly, real per capita income increased by just 0.6% against 3.6% in a no-earthquake scenario.

Nominal per capita GDP (US$)

Source: Central Bureau of Statistics

Inflation was moderating till mid-April 2015, but it started edging up as a result of the supply-side disruptions caused by the earthquake. Prices of both food and non-food items increased in the last three months of FY2015, resulting in an average inflation of 7.2%.

External sector stability remained robust as net transfers increased sharply than the rise in trade deficit, resulting in a current account surplus of 5.1% of GDP and a record foreign exchange reserves ($8.3 billion, which is sufficient to cover 11.2 months of import of goods and nonfactor services). However, this may not be sustained for long as import of construction items is expected to increase drastically in the next few years for the post-earthquake reconstruction programs. Consequently, growth of net transfers may stabilize as migrant workers deplete their present and anticipated savings by remitting early to help households meet immediate needs. Furthermore, remittance inflows may also slowdown if there is less demand for workers in the Gulf countries and Malaysia following the cost-free migration policy[2] implemented by the on July 2015. Hence, the current account balance may slip into the negative territory over the medium term and foreign exchange reserves may deplete to an equivalent of around 7 months of imports, which is also the recommended level of reserve adequacy to ensure external sector stability.[3]

V. Impact on poverty and MDGs

The severely earthquake-affected 14 districts account for about 13.6% of the total number of people living below the poverty line in Nepal. Among them, Dolakha, Makwanpur, Ramechap, Rasuwa, Sindhuli, and Sindhupalchowk have higher poverty rate than the national average of 25.2% in 2011. Similarly, nine have human development index (HDI) score lower than the national average.

Preliminary estimates show that the income shock as a result of the earthquake will likely push an additional 700,000-982,000 people below the poverty line. This translates into an additional 2.5%-3.5% of the estimated population in 2015 pushed into poverty compared to the no-earthquake baseline scenario of about 21%. About 50%-70% will come from rural Central hills and mountains, where the vulnerability prior to the earthquake was already high. The income shock is largely felt through the loss of livelihoods (including death and injuries to primary wage earners) and the loss of housing, productive assets (seeds, livestock, and farm equipment), and durable assets (assorted household items).

Beyond this monetary-based poverty estimates, a larger impact can be expected when factoring in multidimensional poverty, which includes additional factors such as water and sanitation services, disruption of schools and health services, and the possibility of an uptick in food insecurity. The poor and vulnerable are particularly dependent on local infrastructure (roads, bridges, health posts, and schools) for access to labor and commodity markets, and for accumulation of human capital (especially those of children). Reviving local economic activities and resumption of basic public services along with an accelerated implementation of reconstruction projects will be critical to make up for the setback on poverty reduction caused by the earthquake.

Furthermore, the progress towards achieving the Millennium Development Goals (MDGs), on which Nepal was mostly on track prior to the earthquake, is likely to be adversely affected, given the widespread damages to houses, classrooms, and health posts. It will also likely affect the country’s overarching goal to graduate from the Least Developed Country (LDC) category by 2022.

VI. International Conference on Nepal’s Reconstruction

On 25 June 2015, the government organized an international conference on Nepal’s reconstruction. High level representatives from over 50 countries and multilateral agencies participated in the conference.

ADB, represented by its President, Takehiko Nakao, pledged $600 million—including $200 million emergency assistance approved by its Board of Directors on 24 June—to support rebuilding of schools, roads, and public buildings. The government estimated the total pledge of assistance at $4.0 billion (equally spilt in grants and concessional loans). Of the total pledge, about 67% is new commitment ($2.7 billion). Cumulatively, India and the Peoples’ Republic of China committed $1.4 billion and $767 million, respectively. World Bank, Japan, the US and the EU pledged $500 million, $260 million, $130 million, and $117 million, respectively.

According to the PDNA, total public sector losses and damages amount to $1.7 billion, which excludes housing. The National Planning Commission estimated that about 57% of the recovery needs ($3.8 billion), including housing, will have to be shouldered by the government. In this respect, the total pledged amount was higher than the public sector recovery needs till the medium-term. However, a much higher amount of investment may be needed in the long-term to build better and earthquake-resilient public infrastructure throughout the country.

Total aid pledged for reconstruction ($ million)

Source: Ministry of Finance; ADB staff estimates

VII. FY2016 Budget and Monetary Policy

The FY2016 budget is primarily focused on rehabilitation and reconstruction of physical and social infrastructure, housing and livelihoods after the catastrophic earthquake.

Completing of reconstruction work within the next five years is the most prominent agenda. It commits to fully operationalize the NRA soon, with a special implementation authority, effective leadership, and adequate financial resources. A total of NRs91 billion ($910 million or 3.8% of GDP) has been earmarked for reconstruction work, including $740 million (3.1% of GDP) for the National Reconstruction Fund, which will initially prioritize reconstruction of housing, public buildings, archeological structures, physical infrastructure, and enhancement of productive capacity. About $170 million is earmarked for sector ministries and agencies to carry out reconstruction works till the NRA is operational, i.e. an interim arrangement.

Planned reconstruction budget for FY2016 and composition of National Reconstruction Fund (NRs billion)

Source: FY2016 Budget Speech

The budget also includes NRs200,000 (about $2000) for each household that has lost its house due to the earthquake. To address the shortage of labor for reconstruction, skill training is planned for 50,000 people in the areas of masonry, plumbing, and electrical works.

Meanwhile, to assist government, Banks and Financial Institutions (BFI), and the public in their efforts toward accelerated post-earthquake recovery, Nepal Rastra Bank (the central bank) introduced a number of measures in the monetary policy for FY2016, including:

1. Zero percent refinancing facility for BFIs willing to provide loans at 2% interest to those households affected by the earthquake, provided that such households meet the requirements set by the government. Accordingly, households within and outside Kathmandu Valley can access the subsidized loans of up to NRs2.5 million and NRs1.5 million, respectively.
2. As announced in the FY2016 budget speech, the NRB will help assist in the establishment of an Economic Rehabilitation Fund, which will provide refinancing facility and interest subsidy to the business community affected by the earthquake.

Breakdown of reconstruction budget for FY2016
NRs billion	GON	Grant	Loan	Total	Share of aid
National Reconstruction Fund	16	36	22	74	78
Recurrent expenditure	8	15	12	35	77
Program expenses	2	0	0	2	0
Capital grants to institutions & individuals	6	15	12	33	82
Capital expenditure	8	21	10	39	79
Building construction	2	10	5	17	88
Civil works	6	11	5	22	73
Natural disaster relief & reconstruction	17	0	0	17	0
Recurrent expenditure	2	0	0	2	0
Capital expenditure	15	0	0	15	0
Civil works	5	0	0	5	0
Capital contingencies	5	0	0	5	0
Capital formation	5	0	0	5	0

Source: FY2016 Red Book; Budget Speech            

VIII. Effective reconstruction and recovery

Recovery has to be faster, better and smarter given that the country lies on an active geological fault lines. Drawing from ADB’s experience in post-disaster recovery in Asia and the Pacific region, ADB President Nakao highlighted, during the reconstruction conference, five principles for effective reconstruction that Nepal could follow:

1. Public as well as private buildings should be rebuilt to earthquake-resilient standards, fully applying the principle of “Build-Back-Better”.
2. Inclusiveness should be at the core of reconstruction effort. Special attention should be paid to the needs of the poor, rural residents, and other vulnerable social groups, who have suffered more from the earthquakes.
3. A robust institutional setup for reconstruction is pivotal to successfully execute reconstruction projects within the given timeframe. A strong leadership and competent human resources are vital for the success of the NRA.
4. Continuous enhancement of the institutional capacity of executing and implementing agencies along with the adoption of sound governance and fiduciary risk management systems for the reconstruction process are also important.
5. Effective donor coordination and strong government ownership of the entire process are also equally important for the success of the reconstruction projects.

He also emphasized that reconstruction should go hand in hand with development programs already planned, without affecting the latter.

IX. Accelerated recovery and structural transformation

The reconstruction authority’s and sector ministries’ ability to swiftly prepare and implement viable projects will underpin the scope and pace of reconstruction, and hence the recovery phase. A coherent reconstruction strategy has to be ideally aligned with the long-term economic development vision, which aims to increase per capita income to the level of a middle-income country before 2030. This is especially important because the PDNA covered earthquake-resilient reconstruction only in the affected areas, whereas this has to be implemented throughout the country. Adhering to the principle of Build-Back-Better, t rebuilding damaged houses beyond the set size, retrofitting standing buildings in Kathmandu Valley and affected districts, and nationwide resilience (such as ensuring housing and school safety across the country) need to be kept in mind while planning and initiating rehabilitation and reconstruction projects.

Overall, rehabilitation and reconstruction should primarily aim at increasing productivity-enhancing public capital investment. This is a key to ensuring structural transformation whereby high value-added and high-productivity sectors are more dominant than low value-added and low-productivity sectors in the medium term. Promoting agribusiness, industrial capacity, innovation and high-productivity services need to be at the center of such a reconstruction and structural transformation strategy. In addition to higher investment, this will require reforms on institutional, legal, regulatory, and capacity enhancement fronts.

Structural transformation

Source: Authors’ estimate

Private investment has been suppressed primarily due to the liberal product market (including imports), but an unreformed factor market (land, labor, and capital) after 1992 (the time when the first set of liberalization reforms were rolled out). This has led to stunted growth of the manufacturing sector and its declining share of GDP as imported-based activities expanded. Given this background, a higher quantum and quality[4] of capital spending is vital to boost aggregate demand, expand the growth potential of the economy, and increase per capita income. Higher productivity-enhancing public capital investment would also increase returns on private investment, resulting in higher private investment due to the ‘crowding-in’ effect. Such public investment over the medium term in physical and social infrastructure enhances productivity growth, encourages technological innovation, accelerates recovery and establishes a faster, inclusive, and sustainable growth pattern. However, in the long term, structural changes, especially in factor markets (land, labor, and capital), are required to sustain the growth pattern established through stabilization measures over the medium term.

X. Concerns over effective budget execution

One of the biggest unknowns following the decision to establish the NRA is its ability to fully execute the planned reconstruction budget in well-planned productivity-enhancing projects. This concern arises from the persistent budget execution shortfalls even under normal circumstances, which has further weakened in the last decade. As such, actual capital spending averaged about 72% in the last decade and about 60% is bunched in the last quarter. Furthermore, the actual capital spending (about 3% to 4 % of GDP) is far less than the required spending (of 8-10% of GDP) to close the infrastructure gap..

Planned and actual capital spending (% of GDP)

Note: Changed reporting system to Government Finance Statistics (GFS) 2001 in FY2012. In FY2011, actual reporting was done based on GFS 2001, but budget allocation was done based on earlier GFS.

Source: Ministry of Finance; NRM staff estimates

Capital spending is marred mainly by:

1. Bureaucratic hassles: project approval delays, and weak intra and inter-ministry coordination,
2. Structural weaknesses: limited appraisal, planning, and implementation capacity of line ministries (including the lack of medium-term expenditure framework), lack of strong pipeline of projects ready for implementation, cumbersome laws and regulations (procurement and procedural clearances), and allocative inefficiency,
3. Low project readiness: lack of feasibility studies and detail designs in advance, lack of well-planned procurement plans, and delays in land acquisition,
4. Weak project management: high staff turnover, lack of staff capacity, lengthy procurement process, weak contractor capacity, and weak contract management
5. High fiduciary risks in project implementation, particularly in rural areas when programs are implemented through local government having limited human resources and capacity,
6. Political instability and interference at operational level

The budget for FY2016 partially addresses this concern by giving the line ministries administering large projects the authority to spend the planned budget without getting prior approval from the NPC and the MOF. Similarly, multi-year contracts are allowed for some projects and the government has committed to restrict transfer key project staff subject to satisfactory progress in implementation. Deployment of managers, accountants, and technical staff is envisaged in village development committees starting with earthquake affected areas. However, other issues outlined above impeding regular capital spending remain unchanged and it is likely that $170 million allocated to various line ministries for reconstruction work may remain underspent at the end of FY2015.

With regard to spending by the NRA, the ordinance, which needs to be transformed into an Act without delay, governing its establishment gives it sweeping powers to do away with most of the hassles impeding accelerated capital spending. The authority is chaired by the Prime Minister and its CEO will independently handle the operations. The CEO, whose performance will be critical to accelerated reconstruction within the given timeframe, was still not appointed two months after the ordinance for its establishment was introduced. This already delayed the pace of implementation, especially concerning hiring of human resources, preparing a quick pipeline of projects, an associated action plan for investment, and its overall synchronization with the long-term development vision being envisaged by the NPC. The faster the NRA comes into operation, the faster will be the capital spending and ultimately completion of the reconstruction programs.

The NRA will have a critical role in managing the following crucial issues for accelerated reconstruction and recovery:

• Hiring competent human resources that can bring in new and smarter ideas and foster innovation (including reassigning competent civil servants from across government departments)
• Preparing a credible time-bound action plan for investment in reconstruction projects, including a sizable pipeline of potential projects
• Managing political interference in normal operations and preparation of reconstruction projects and ensuring an inclusive development process
• Ensuring line ministries’ full ownership of projects designed, approved and procured by the NRA
• Coordinating with development partners to ensure that the committed funds for reconstruction are realized within the given timeframe
• Engaging meaningfully youth, local communities, think tanks, specialized institutes, and civil society in reconstruction planning, design, implementation, monitoring, and evaluation
• Ensuring ‘crowding-in’ of private investment for reconstruction on public-private partnership (PPP) basis
• Outsourcing of managerial as well as non-managerial work (time and output-bound contractual arrangement for design, supervision, and management of reconstruction projects).

XI. Conclusion

The earthquake caused tremendous loss of lives and properties. It lowered economic growth rate, pushed about a million people below the poverty line, slowed progress on achieving some of the MDGs, and sapped investors and consumer confidence. The cumulative pledges during the international reconstruction conference exceeded the expected public sector needs for reconstruction. Now, the NRA and line ministries’ ability to swiftly prepare and implement viable projects will underpin the scope and pace of reconstruction and ultimately a better, faster and smarter recovery. The authority needs to be operationalized without delay and it has to chart out a coherent five-year reconstruction strategy by aligning it with the long-term economic development vision.

Accelerated reconstruction would require hiring of competent human resources, preparing a time-bound investment action plan, a strong pipeline of viable projects, outsourcing of design, monitoring and evaluation, political buy-in of proposed actions, and engaging youth, specialized institutions, and civil society at various stages of the project cycle. This would then ‘crowd in’ private investment as well, leading to a higher, sustainable, and inclusive economic growth. Overall, rehabilitation and reconstruction should primarily aim at increasing productivity-enhancing public capital investment, which is a key to ensuring structural transformation whereby high value-added and high-productivity sectors are more dominant than low value-added and low-productivity sectors in the medium term.

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[1] Gross output is the total value of all goods and services produced during the accountancy period (at basic prices). Intermediate consumption is the total value of goods and services consumed as inputs by production processes (at purchasers’ prices). Gross value added is the difference between gross output and intermediate consumption. Finally, GDP is equal to gross value added plus taxes minus subsidies.

[2] The Ministry of Labor and Employment directed overseas recruitment agencies to facilitate migration without financially burdening the migrant workers. This essentially means cost-free migration for workers seeking employment in Saudi Arabia, Qatar, Kuwait, the United Arab Emirates, Bahrain, Oman and Malaysia.

[3] IMF. 2015. Nepal: Request for Disbursement Under the Rapid Credit Facility. IMF Country Report No.15/224. Washington, DC. See: http://www.imf.org/external/pubs/ft/scr/2015/cr15224.pdf

[4] Low quality of capital spending escalates future recurrent costs associated with the project (such as operation and maintenance costs, staff required to monitor the project, etc)