Constraints on Nepal Tourism Year (NTY) 2011

In my latest column, I look at constraints on making Nepal Tourism Year (NTY) 2011 a success. I am a little bit skeptic if Nepal would be able to draw in a million visitors in 2011, given the unaddressed constraints as of now. I hope my prediction is wrong and at least one million tourists visit Nepal in 2011. For my previous piece on Nepal’s tourism industry, see this. For an amazing promotional video of NTY 2011, check this out.

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Constraints on NTY 2011

With the aim of attracting one million tourists, the government announced its intention to launch the Nepal Tourism Year (NTY) 2011 campaign last year. Finally, the heat is picking up this year. The major parties—yes it includes UCPN(Maoist) as well—have promised to not resort to bandas, which severely crippled the tourism industry after 1999. The last time such a mega campaign was launched was in 1998 when around 464,000 tourists visited Nepal, earning US$24.8 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.

The government is planning to attract 40 percent of the targeted visitors from India and China. Considering the constraints to increasing the number of tourists and per capita visitor spending, it seems unlikely that one million tourists will visit Nepal in 2011. Getting more visitors than in 2007 and more receipts per visitor than in 2003 would require timely response to containing the constraints ailing the travel and tourism industry. Furthermore, to make it relevant to the public, the government should try to make the outcomes of this national campaign pro-poor, i.e. making sure that the poor people reap benefits of NTY 2011.

A healthy tourism industry is the need of the hour for the entire economy. Due to receding exports, surging imports and rapidly declining remittances, balance of payments (BOP) is in negative territory. Since there is little hope for increasing exports and growing remittances at pre-crisis rate, increasing revenue from tourism industry could be an alternative (but temporary) fix to deteriorating BOP situation. Importantly, revival of this industry would have a strong positive bearing on economic growth as agricultural and manufacturing sectors are underperforming right now. If the constraints are appropriately addressed in time, it could lead to promotion of small-scale local enterprises and increase in low- and medium- skilled jobs.

There are multiple constraints to growth and competitiveness of the travel and tourism industry. The major ones are weak regulatory regime, inadequate and poor infrastructure, frequent and fickle bandas, labor strikes, and disincentive-increasing factors such as pollution, garbage disposal and uncontrolled ancillary service-related activities within the travel and tourism industry.

There constraints are strongly reflected in the latest Travel & Tourism (T&T) Competitiveness Report. Nepal’s T&T industry’s competitiveness is weak, ranking 118 out of 133 countries. Particularly, Nepal ranks 131 in visa process, 103 and 125 in ground transport infrastructure and road quality respectively, and 114 in air transport. These are long running problems of the T&T industry. For decades, Nepal has been relying on a single international airport, which is now expected to grace one million visitors in 2011. The national flag carrier has been in terrible shape for a long time: It is bankrupt and lacks aircraft. Similarly, the condition of domestic airports is unsatisfactory.

Frequent bandas and labor strikes are the bane not only to the manufacturing sector but also to the T&T industry. Pictures of tourists ferrying luggage to hotels (and to airports) in rickshaws not only discourages potential visitors but also compels existing tourists to cut short their stay in Nepal. One can only hope that the political parties will keep their promise of making 2011 banda free.

Meanwhile, ad hoc, inconsistent and astronomical price of taxi ride from the airport to hotels is a huge incentive-killer. The moment tourists get out of Tribhuvan International Airport, they are greeted by cunning taxi drivers who charge ridiculously astronomical amount for a ride to hotel that is less than two kilometers away. One of my friends who recently visited Nepal argued that the cost of taxi ride from the airport to a nearby hotel was higher than in his native country.

The recurring power crisis has its own legacy. No one knows how we are going to provide uninterrupted electricity and internet access to visitors. Tourists definitely would not like to enjoy their holiday in dark! Additionally, stinking garbage in tourist hotspots deters visitors, leading to a potential decline in business activity in local economy. Among other issues, failure to manage garbage disposal in the Kathmandu Valley and other major urban areas is encouraging tourists go to rural areas, which are relatively cleaner. This has two disadvantages. First, the longer tourists stay in urban areas, the better it is for the urban economy. With increasing migration of rural unemployed youths to urban areas, it is in the country’s interest to increase per capita visitor spending in urban areas so that more jobs are created in places where it is needed the most. Second, the more tourists frequent rural areas, the less would be per capita visitor spending. This problem will get only worse because the only landfill site for Kathmandu Valley—Aletar landfill at Okharpauwa in Nuwakot district—is going to be full in six months, according to Kathmandu Metropolitan City office.

These constraints are not insurmountable. With strong political will, financial backing, and good planning, we can overcome them on time. Note that the number of visitors is correlated with the attractiveness of packages and incentives offered by the T&T industry. The private sector and the government should attempt to make Nepal’s tourism sellable in the international market. What kinds of competitive packages can Nepal provide? How would it be different from the ones provided by our neighbors? What are the advantages to visitors? Honestly and correctly answering these questions would also give clues to contain the constraints.

Irrespective of whether or not the constraints are addressed on time, it is in every citizen’s interest to promote NTY 2011 and try to make it a success. Good luck to all of us!

[Published in Republica, March 14, 2010, pp.6]

Nepal Tourism Year 2011 preview

Sub Saharan Africa rising!

Source: The Economist

The global recession was slow to reach Africa, but the continent did suffer from dampened demand for its commodities exports and from shrunken venture-capital funds. Economies of countries south of the Sahara together grew by less than 2% in 2009. But recovery is coming sooner than expected. Sub-Saharan Africa's economy is forecast to grow overall by 4.5% this year, in part because of the economic recovery in Asia. This is still slower than the 6% that many development economists reckon is the minimum to enable countries with rapidly increasing populations just to stand still.

 

 

End of an era in finance…

Dani Rodrik argues that the IMF’s new found philosophy that 4 percent inflation rate and capital controls are not bad policy tools marks an end of an era in finance.

In the world of economics and finance, revolutions occur rarely and are often detected only in hindsight. But what happened on February 19 can safely be called the end of an era in global finance.

On that day, the International Monetary Fund published a policy note that reversed its long-held position on capital controls. Taxes and other restrictions on capital inflows, the IMF’s economists wrote, can be helpful, and they constitute a “legitimate part” of policymakers’ toolkit.

The IMF’s policy note makes clear that controls on cross-border financial flows can be not only desirable, but also effective. This is important, because the traditional argument of last resort against capital controls has been that they could not be made to stick. Financial markets would always outsmart the policymakers.

The IMF’s change of heart is important, but it needs to be followed by further action. We currently don’t know much about designing capital-control regimes. The taboo that has attached to capital controls has discouraged practical, policy-oriented work that would help governments to manage capital flows directly. There is some empirical research on the consequences of capital controls in countries such as Chile, Colombia, and Malaysia, but very little systematic research on the appropriate menu of options. The IMF can help to fill the gap.

Now, it is time for international transaction tax (Robin Hood tax):

With this battle won, the next worthy goal is a global financial transaction tax. Set at a very low level – 0.05% is a commonly mentioned rate – such a tax would raise hundreds of billions of dollars for global public goods while discouraging short-term speculative activities in financial markets.

No change in NRs. exchange rate with IRs., for now!

I was contemplating writing an article on why the pegged exchange rate between Nepalese currency and the Indian currency should be kept as it is at least for now. A recent IMF mission to Nepal observed the same:

“The peg should remain the key macroeconomic policy priority, and monetary policy needs to be fully consistent with this objective. Interest rates need to be maintained above those prevailing in India and the Nepal Rastra Bank’s (NRB) liquidity management needs to be strengthened. When a general liquidity injection is not needed for the system, liquidity provision to sound individual banks with liquidity shortages should take place at penalty rates or at the bank rate under heightened supervision.

“Risks in the financial sector have been building up and need to be addressed urgently. Over the past years, accommodative monetary policy, weak supervision, and proliferation of financial institutions have led to rapidly rising asset prices and overextension of banks. Going forward, the financial system needs to adapt to an environment of slower growth and is likely to see deteriorating asset quality. The mission welcomes the NRB’s directives regarding prudential limits on credit-to-deposit ratios, real estate exposure, loan-to-value ratios, as well as the reintroduction of a minimum Statutory Liquidity Ratio. However, it is critical that these limits are enforced, and not diluted. In this respect, appointing a new governor who can provide strong and stable leadership for the NRB going forward is urgent. The authorities should also pass the revised Banking and Financial Institutions Act (BAFIA), encourage bank consolidation, refrain from issuing new licenses for the time being, and proceed with the restructuring of state-controlled banks.

FTAs in Asia in a chart

Source

Export-led growth 2.0

A very interesting note about the future and trend of export-led growth by Canuto, Haddad and Hanson from PREM division at the World Bank. Does the slackening of import demand due to the global financial crisis from the world’s biggest importers, the US and the EU, mean that export-led growth model is dead? Not really. In fact, a new model is emerging out.

The increasing import demand from rapidly growing economies like China, India, and Brazil is filling up the slack left by weak import demand in the US and the EU. This means that South-South trade is partly picking up the slack. In fact, BRIC import share nearly doubled, from 9 percent to 17 percent, between 1996 and 2008. Other low and middle income counties increased their share of import demand from 8 to 19 percent. Meanwhile, import demand from high-income countries declined from 88 percent to 69 percent in the same time frame. The world trade flow is changing and South-South trade is picking up. Also, middle-income countries are driving export diversification of low-income countries. The export diversification index (concentration index) of low-income countries has seen an improvement of 10 percent between 1997 and 2007 (this means exports moving from being spread evenly across four products to seven products; note that three sectors namely petroleum products, food, and iron and steel accounted for 76 percent of low-income countries’ trade between 1998 and 2006). Is this a sign of export-led growth 2.0?

Due to the global financial crisis world merchandise imports fell by 36 percent between 2007Q4 and 2009Q2. It was thought that the slackening import demand from the main importers would imperil growth in the developing countries. However, they argue that most of the recent growth in low-income developing countries’ export was driven by import demand in other developing countries. This means that low-income developing countries will continue to rely on developing countries for export growth. To increase South-South trade further, they recommend reduction in non-tariff barriers, which account for nearly two-thirds of the protection faced by low-income exporters and upper-middle-income markets.

Recession in the big importers

Due to the intensity of financial crisis spilling into the real economy in the US and the EU, low-income countries that depend on exports of oil and apparel to these economies will suffer more. Mexico and Central American countries rely heavily on the US final demand. Similarly, Nigeria might feel a stronger pinch as it exports most of its oil to the US. Also, the 39 Sub-Saharan African countries that have preferential access in export of apparel to the US market under the AGOA might see decline in demand. Meanwhile, developing Europe, Central Asia, and MENA region might see slackening import demand from the EU. Between 2000 and 2008, the US and the EU-25 absorbed about 20 percent of low-income countries’ export growth. Of this 20 percent, nearly half comes from petroleum products. Apparel accounts for an additional 4.3 percent.

South-South trade is picking up

As the prominent importers’ import demand slow down, it is increasing in low- and middle-income countries. Between 1996 and 2008, import share from BRIC is up from 9 to 17 percent; from low- and middle-income countries up from 8 to 19 percent; and from high-income countries down from 88 to 69 percent. What is driving export growth in low income countries? It is rapid growth in the emerging economies (BRIC). They argue that higher growth rate in low- and middle- income countries explain 51 percent of export growth in low-income MENA region, 42 percent in low-income EU and Central Asia, and 21 percent in low-income Sub-Saharan Africa.

All this means that selective industrial policy could still be an important element of national economic policy in the low income countries. Also, there is already some form of rebalancing happening in global exports and imports.

For an earlier piece on the past and future of export-led growth model see this blog post.