It looks like cost of Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the largest employment guarantee public works program in the world, is coming down. Its cost as a share of GDP, total expenditure and revenue receipts is decreasing and is expected to be 0.45 percent, 3.19 percent, and 5.08 percent respectively in fiscal year 2011-2012. Here is more on MGNREGA.
| NREGA budget (Rs Crore) | ||||||
| 2006-07 | 2007-08 | 2008-09** | 2009-10** | 2010-2011* | 2011-2012* | |
| GDP, current prices# | 4,293,672 | 4,986,426 | 5,582,623 | 6,550,271 | 7,877,947 | 8,980,860 |
| Total expenditure | 583,387 | 712,671 | 900,953 | 1,020,838 | 1,108,749 | 1,257,729 |
| Revenue receipts | 434,387 | 541,864 | 562,173 | 614,497 | 682212 | 789892 |
| NREGA allocated budget | 11,300 | 12,000 | 30,000 | 39,100 | 40,100 | 40,100 |
| NREGA/GDP | 0.26 | 0.24 | 0.54 | 0.60 | 0.51 | 0.45 |
| NREGA/Exp | 1.94 | 1.68 | 3.33 | 3.83 | 3.62 | 3.19 |
| NREGA/Rev | 2.60 | 2.21 | 5.34 | 6.36 | 5.88 | 5.08 |
Source: Union Budgets; The main reason for the expected decline is that GDP, expenditure and revenue are estimated to increase but the budget allocation for MGNREGA is kept the same as during the previous fiscal year. In FY 2010-2011, 5.49 crore households were provided employment (100 days employment on demand to each household during lean season). The total persondays of employment created was 257.15 persondays (crore). Of this, the share of SCs, STs, and women accounted for 30.63%, 20.85%, and 47.73% respectively. Former finance minister Rameshore Prasad Khanal argues that the two main barriers to trade integration in South Asia are poor cross-border transport and customs infrastructure, and difficulties in swapping currencies, especially for small producers. Here is my take on regional economic integration growth in Nepal. There are two The other barrier for trade between small producers in the region is currency. Trade between most of the countries are carried out in US dollars, as a result there is little preference for goods originating from within the region. A simple mechanism of currency swap would help small producers in the individual countries find market within the region. If countries agree to allow trade of up to a certain range in the currency of respective countries and central banks swap such currency reserves periodically, then the trade within the region can get a boost even without making much improvement in the other non-tariff barriers. A simple currency swap arrangement can, in course of time, lead to full convertibility of currencies in the region. If a currency swap arrangement is agreed upon by all central banks of South Asia, then currencies would not be required to move physically as most of the settlements will take place in the books. The net differentials may only be moved physically once in agreed period framework. Exchange rates between the two currencies may be allowed to move as the market conditions demand, except in cases where two currencies are pegged with each other. Currency swap arrangement would also open up two other potential areas in the region, namely, tourism and education. If a Bangladeshi needs to cough up US dollar to come to Nepal, he/she might choose to go to Thailand in place, so does a Nepali. Many Sri Lankans would like to come to Nepal to visit Lumbini and Nepalis would just as love to go to Kandy in Sri Lanka. Many Nepalis each year travel to New Delhi but few think of going to Lahore or for that matter Karachi. Countries in South Asia have world-class educational institutions but because of currency restrictions many good Pakistani, Bangladeshi or Nepali institutions do not receive South Asian students. If one has to procure US dollars for foreign education, the natural choice would be a country outside South Asia. Currency swap arrangements would also promote students mobility in the region. Visa restrictions have not been such a problem for many in the region, but in critical cases, this has been an issue. It is reported that the recently established South Asian University, funded by all member countries on the basis of an agreed formula, has been facing difficulty receiving Pakistani students and academicians due to visa-related problems. The prolonged standoff over “new” market access, by preventing the WTO from fulfilling these objectives, is causing serious damage to the global trading system. The solution to the WTO’s problems, therefore, lies not in decoupling the WTO from the Doha Round, but in enabling it to achieve an ambitious Doha outcome based on its development mandate. […]Doha is a symptom of the deeper crisis in the WTO which is essentially due to the changed political economy of the organisation. Only when WTO members arrive at a shared political understanding regarding the future role of the organisation can we begin to see light at the end of the tunnel. Without such an understanding, arguments for decoupling the WTO from Doha have little meaning. So argues Ujal Singh Bhatia here. According to this news piece that quotes Labor Standard Survey 2008: By the end of this decade, the number of people in the age range 15 to 34 is expected to be about 14 million, which is approximately 40 % of the estimated total population in 2020.The number of people in the age group 15-24 will peak in 2017 and the 15-34 segments will peak in 2023. They will be the agents of change and a catalyst to the engine of growth. Also, it is estimated that there are about 50,000 foreign workers in Nepal working without employment authorization (you have to pay Rs 10,000 yearly if you are registered). This excludes Indian nationals because according to Nepal-India Treaty of 1950 Indians can work in Nepal without such authorization (likewise for Nepalese citizens in India). Foreigners are usually working in projects, INGOs, banks, MNCs, tourism, aviation, hotel, and beverage sectors. Emigration, 2010 Stock of emigrants: 982.2 thousands Stock of emigrants as percentage of population: 3.3% Top destination countries: India, Qatar, the United States, Thailand, the United Kingdom, Saudi Arabia, Japan, Brunei Darussalam, Australia, Canada Skilled emigration, 2000 Emigration rate of tertiary-educated population: 5.3% Emigration of physicians: 40 or 3.3% of physicians trained in the country Immigration, 2010 Stock of immigrants: 945.9 thousands Stock of immigrants as percentage of population: 3.2% Females as percentage of immigrants: 68.2% Refugees as percentage of immigrants: 13.8% Top source countries: India, Bhutan, Pakistan, China, Australia, Sri Lanka, Bangladesh, Maldives, New Zealand Here is my latest article on the banking and liquidity crisis in Nepal. For earlier pieces on the same issues, check out this and this. Nepal’s banking bubble troubles When Vibor Bikas Bank (VBB) knocked on the doors of Nepal Rastra Bank (NRB), our central bank, to either inject money in the development bank or to take over management, it rattled the banking industry and the already suspicious depositors. There were rumors and anticipation that due to excessive loan exposure to real estate, housing and construction sectors bank and financial institutions (BFIs) will land in the red sooner or later. The sudden move by Vibor made depositors panic and policymakers scurry to find a way to avert a ‘Lehman moment’—the day when US investment bank Lehman Brothers collapsed (September 15, 2008) and triggered the global financial crisis that was ensued by the global economic crisis. In Nepal’s banking history, the rescue of Vibor is a ‘Northern Rock moment’—the day when the Bank of England extended emergency financial support to the trouble mortgage lender on September 17, 2007 and saved it from collapsing. Without deep structural changes in the banking industry, Nepal will definitely see many ‘Northern Rock moments’ and eventually a disastrous ‘Lehman moment’ as well. The tendency to seek short term, quick returns against long term viability and sustainability is leading the BFIs in a path of self-destruction. For a healthy banking industry, Nepal needs fewer but stronger BFIs with sound corporate governance. Furthermore, there has to be an enhancement of regulatory and supervisory capabilities of NRB. Mushrooming BFIs In Nepal, formal banking commenced with the establishment of Nepal Bank Limited (NBL) in 1937. The central bank was established in 1956 after nearly two decades of the start of commercial banking by NBL.Then a decade later, Rastriya Banijya Bank (RBB) was established by the government. Following the financial liberalization in the 1980s, Nepal Arab Bank Ltd (now NABIL Bank Ltd) was established, making it the first foreign joint venture (JV) bankin Nepal. Then two foreign JV banks, Nepal Indosuez Bank Ltd (now Nepal Investment Bank) and Nepal Grindlays Bank Ltd (now Standard Chartered Bank Nepal Ltd.) were established in 1986 and 1987 respectively. After mid-1990s, the number of BFIs increased multifold. In 1983 and 1993 there were two and eight commercial banks respectively; and by 2006, there were 18. Meanwhile, there were three development banks in 1995, which increased to 28 in 2006. Finance companies came into existence in 1992, and by 2006, they numbered 70. Currently, there are over 292 BFIs, including 31 commercial banks, 78 development banks, 79 finance companies, and 18 microfinance institutions. The growth in number of BFIs is unprecedented and not warranted by the economic and banking fundamentals of the past decade. It was facilitated by near-retiring NRB officials, who turned a deaf ear to calls for clamping down on BFI growth, in hopes of landing on lucrative private-sector banking jobs. Status of BFIs While total deposits at commercial banks stand at around Rs 642 billion (as of April 2011), development banks and finance companies have deposits around Rs 56 billion and 67 billion respectively (as of mid-July 2009). Of the total commercial banks’ deposits, demand deposits, savings deposits, and fixed deposits stand at 12%, 36%, and 52% respectively. They have liquid funds of Rs 114 billion (cash in hand is just 16.2 billion, and deposits with NRB Rs 39.3 billion). More than Rs 110 billion is invested in real estate by the commercial banks alone. Over 72% of commercial banks’ credit flows against fixed assets. Loans and advances of commercial banks (without claims on government) stand at Rs 572 billion (as of April 2011). Meanwhile, loans and advances of development banks and finance companies stand at Rs 52 billion and 70 billion respectively (as of mid-July 2009). As a share of gross domestic product (GDP), total deposit, total credit (including claims on government) and private sector credit are 51%, 54.9% and 43.6%, respectively. Commercial banks’ deposit rate ranges from 2-12% and loans 7-18%. Interbank lending rate is as high as 10.2%. Right now, the interest spread, which is the difference between lending and deposit rates, is also high. The wider it is, more worrisome the state of BFIs. Likewise, the high inter-bank rate shows that the banks themselves are reluctant to lend money to each other. Some of the BFIs are yet to meet the revised capital adequacy ratio, which is the ratio of a bank’s capital to its risks, laid out by the NRB, keeping in mind their increasing vulnerability to excessive loan exposure to just a few sectors. Banking troubles Without a proportional increase in depositor base and diversification of investment portfolios, the unnatural growth in the number of BFIs led to intense cutthroat competition in enticing depositors (institutional, government and individual) and borrowers. Buoyed by rising remittances, the former were incentivized to deposit cash at high interest rates rather than looking for alternative sources of investment. Meanwhile, the BFIs doled out easy loans to real estate and housing sector borrowers without assessing their capacity to honor interest and principal payments in time. It led to rapid rise in real estate and housing prices in urban areas. When the abnormally high prices started to fall, the borrowers were unable to pay back interest and principal in time, leading to a shortfall of liquidity in the banking industry. Simultaneously, category B, C and D BFIs were finding it hard to borrow more from category A BFIs because the inter-bank lending rate was almost above the average of BFIs’ normal lending rates. Worse, some BFIs have prepared a negative list to not lend money to BFIs which they think are on the verge of collapse. It was, to a minor extent, compounded by the government’s inability to mobilize development expenditure, the big institutional depositors’ decision to pull out mature deposits from fledging BFIs, and a slowdown in deposits growth rate. The combined effect of all these factors hit hard banks such as Vibor that had substantial loan exposure to a few sectors, compelling them to seek NRB’s intervention. In effect, we are seeing a serious erosion of confidence in our banking system, and a surge in demand for commodities like gold and silver. Two bubbles By overlooking the need for having a limited number of BFIs, the evolving depositor base, and financial penetration over the years, the NRB let too many BFIs to pop up. This created a BFI bubble. This was followed by intense competition of not only between banks in the same category but also between BFIs in different categories, leading to an informal war in offering high deposit rates and lending without differentiating markets, products, and borrowers’ creditworthiness. It reflected bad corporate governance, and a lack of innovation and R&D in the sector. The resulting lending surge in real estate and housing markets unnaturally swelled their prices, leading to a real estate and housing bubble. Causes There have been misleading and incongruous arguments floating around about the causes of the ongoing liquidity and banking crisis. They are made by stakeholders who fail to see how their vested interests and incompetence is jeopardizing the future of the banking industry, and is potentially derailing an already unstable economy. First, bankers and businessmen are arguing that delayed budget and disbursement of development expenditures are causing liquidity crisis. This argument does not hold much water. It is true that budgets have been coming out late for two years now, and there has not been normal flow of money from the Ministry of Finance and other Ministries to the respective corners of the country via BFIs. This has definitely limited liquidity in the banking system. But it in itself is not the main cause. Instead, it is a minor stimulant to the liquidity crisis. If delay in development expenditure is the cause, then why did we not have liquidity crisis when similar episodes occurred in the past? Second, the withdrawal of large amount of money by institutional depositors, especially NRB and Nepal Army, has drastically reduced reserves in BFIs’ vaults and squeezed available liquidity. This again is a stimulant to the liquidity problem, not its main cause. If just by pulling out a few millions of mature deposits by institutional depositors puts the BFIs in trouble, then there is something wrong with the way they are doing business. It points to bankers’ incompetence and inability to run BFIs. Third, while some argue that people are either stashing money at home or are investing in commodities like gold and silver, others assert that the compulsion to divulge source of income on transactions above Rs one million is restricting deposits. Again, both are not the real causes, but stimulant to the liquidity crisis. These arguments are trumpeted by certain businessmen who are afraid of divulging their sources of income and dutifully pay taxes to the government. Fourth, some argue that a decline in reserves, precisely monetary base (which is equal to currency in circulation and reserves of banks held in central bank), due to a slowdown in growth of remittances, led to a situation where credit growth was higher than deposit growth. They assert that it is resulting in a liquidity crisis, and to return to normal, the NRB should purchase bonds and treasury bills and lower cash reserve ratio and the already high capital requirements (all of which will help increase liquidity). Of all the arguments, this holds some truth. But increasing liquidity without correcting the distorted market would only postpone the inevitable. The NRB cannot afford to play such a cat-and-mouse game each time the BFIs irresponsibly increase credit without assessing the creditworthiness of borrowers and their deposit growth. The main cause is that we have too many BFIs catering to too few customers, meaning that in order to survive and meet ever-increasing profit target, they have to have constant flow of money from all sources, that also in higher proportion than previous flows. The higher the number of BFIs, the intense will be competition to attract deposits and the need for higher liquidity. It also means doling out more loans to earn quick returns to meet profit target before the annual general meeting of shareholders and directors. Were we warned? Many financial and economic analysts failed to perceive the rapid changes happening in the banking sector. Similarly, business journalists utterly failed to even read clues of troubles starting more than a decade ago when the now liquidated Nepal Development Bank (NDB) was put under management review, and when the number of BFIs increased multifold in a matter of just five years. It might be unsurprising because a majority of business journalists in Nepal do not actually have training in economics and business. They take on-the-job training on business reporting and are behind the curve in fathoming the economic fundamentals and troubles. Ironically, the same analysts who fail to comprehend the evolving troubles are given platforms in the media and civil society, leading to circulation of incongruous ideas and illogical interpretations. That being said, some observers, journalists, analysts, and bankers (including yours truly) did perceive the looming crises. The warning bell rang when the issue of willful defaulters and excessive non-performing loans of BFIs popped up in 2006. What next? The existing banking and liquidity crisis is not the usual yada yada about the banking sector troubles and refinancing schemes. It is much more serious than that. Some of the troubled BFIs will go belly up in the coming days and some will find ways to merge with others. There might be runs on some of the struggling BFIs when depositors lose confidence on them. Lets us be clear that repeated introduction of refinancing facilities will not resolve the recurrent problem; it will only defer the inevitable restructuring of the entire banking sector. Meanwhile, one way or the other, the costs of such refinancing facilities will have to be paid by taxpayers. It is tantamount to bailing out troubled BFIs who got into the mess due to their own incompetence, not due to the public’s desire to withdraw deposits and invest in commodities like gold and silver, and durables. For the short term, the NRB should use all its tools to increase liquidity so that anxious depositors are calmed down. This should be followed by concrete steps to consolidate our banking system. I think Nepal should have something like a “Troubled BFI Relief Program.” It could be a powerful body within NRB whose main purpose would be to rescue and restructure troubled BFIs so that the problem is not systemic, and depositors are not induced to run on banks. It should bail out depositors, but not sinking BFIs. Moreover, it could be given the authority to sell assets, change management, force merger or acquisition, and hold the majority of shares of troubled BFIs until they return to a healthy state. It would consolidate the banking sector, and potentially lead to fewer but healthier BFIs that are innovative in providing services to the public, and also not take excessive risks to derail the entire economy. Published in The Week, Republica, June 17, 2011, p.6] There economic impacts of M-Pesa, a mobile phone based money transfer system in Kenya that commenced operation in 2007. Here is the full paper Isaac Mbiti and David N. Weil (2011). In a paper prepared for the Cambridge conference commemorating the 75th anniversary of the publication of The General Theory of Employment, Interest and Money, Krugman argues that “What matters is what we make of Keynes, not what he ‘really’ meant.” I’d divide Keynes readers into two types: Chapter 12ers and Book 1ers. Chapter 12 is, of course, the wonderful, brilliant chapter on long-term expectations, with its acute observations on investor psychology, its analogies to beauty contests, and more. Its essential message is that investment decisions must be made in the face of radical uncertainty to which there is no rational answer, and that the conventions men use to pretend that they know what they are doing are subject to occasional drastic revisions, giving rise to economic instability. What Chapter 12ers insist is that this is the real message of Keynes, that all those who have invoked the great man’s name on behalf of quasi-equilibrium models that push this insight into the background, from John Hicks to Paul Samuelson to Mike Woodford, have violated his true legacy. Part 1ers, by contrast, see Keynesian economics as being essentially about the refutation of Say’s Law, about the possibility of a general shortfall in demand. And they generally find it easiest to think about demand failures in terms of quasi-equilibrium models in which some things, including wages and the state of long-term expectations in Keynes’s sense, are held fixed, while others adjust toward a conditional equilibrium of sorts. They draw inspiration from Keynes’s exposition of the principle of effective demand in Chapter 3, which is, indeed, stated as a quasi-equilibrium concept: “The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called the effective demand”. For what it’s worth, I’m basically a Part 1er, with a lot of Chapters 13 and 14 in there too, of which more shortly. Chapter 12 is a wonderful read, and a very useful check on the common tendency of economists to assume that markets are sensible and rational. But what I’m always looking for in economics is intuition pumps – ways to think about an economic situation that let you get beyond wordplay and prejudice, that seem to grant some deeper insight. Krugman takes on some of the critics of Keynes and how they distort his message. Here’s Robert Barro (2009): “John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall.‖And if that’s all that it was about, the General Theory would have been no big deal. But of course, it wasn’t just about that. Keynes’s critique of the classical economists was that they had failed to grasp how everything changes when you allow for the fact that output may be demand-constrained. They mistook accounting identities for causal relationships, believing in particular that because spending must equal income, supply creates its own demand and desired savings are automatically invested. And they had a theory of interest that thought solely in terms of the supply and demand for funds, failing to realize that savings in particular depend on the level of income, and that once you take this into account you need something else – liquidity preference – to complete the story. Here’s Chicago’s John Cochrane (2009): “First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out.”” That’s precisely the position Keynes attributed to classical economists – “the notion that if people do not spend their money in one way they will spend it in another”. And as Keynes said, this misguided notion derives its plausibility from its superficial resemblance to the accounting identity which says that total spending must equal total income. Here’s Niall Ferguson (in Soros et al 2009): “Now we’re in the therapy phase. And what therapy are we using? Well, it’s very interesting because we’re using two quite contradictory courses of therapy. One is the prescription of Dr. Friedman—Milton Friedman, that is —which is being administered by the Federal Reserve: massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the early 1930s. I’m fine with that. That’s the right thing to do. But there is another course of therapy that is simultaneously being administered, which is the therapy prescribed by Dr. Keynes—John Maynard Keynes—and that therapy involves the running of massive fiscal deficits in excess of 12 percent of gross domestic product this year, and the issuance therefore of vast quantities of freshly minted bonds. “There is a clear contradiction between these two policies, and we’re trying to have it both ways. You can’t be a monetarist and a Keynesian simultaneously—at least I can’t see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.” “After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don’t quite know who is going to buy them. It’s certainly not going to be the Chinese. That worked fine in the good times, but what I call “Chimerica”, the marriage between China and America, is coming to an end. Maybe it’s going to end in a messy divorce.” What’s wrong with this line of reasoning? It’s exactly the logical hole Keynes pointed out, namely that the schedules showing the supply and demand for funds can only be drawn on the assumption of a given level of income. As Hicks told us – and as Keynes himself says in Chapter 14 – what the supply and demand for funds really give us is a schedule telling us what the level of income will be given the rate of interest. That is, it gives us the IS curve …, which tells us where the central bank must set the interest rate so as to achieve a given level of output and employment. […] it’s possible that the interest rate required to achieve full employment is negative, in which case monetary policy is up against the zero lower bound, that is, we’re in a liquidity trap. That’s where America and Britain were in the 1930s – and we’re back there again. Which brings me back to the argument that government borrowing under current conditions will drive up interest rates and impede recovery. What anyone who understood Keynes should realize is that as long as output is depressed, there is no reason increased government borrowing need drive rates up; it’s just making use of some of those excess potential savings – and it therefore helps the economy recover. To be sure, sufficiently large government borrowing could use up all the excess savings, and push rates up – but to do that the government borrowing would have to be large enough to restore full employment! *estimate; **revised estimate'; # Economic Survey 2010-11 
Wednesday, June 29, 2011
Two main barriers to economic integration in South Asia
more main barriers to effective trade within the region. The cross-border transport and customs infrastructure in the region is very poor. If SAFTA is to yield any result, improvement in trade infrastructure is a must. Asian Development Bank (ADB) through South Asian Sub-Regional Economic Cooperation (SASEC) has been focusing on improvement of transport infrastructure in the quadrangle of Bhutan, Bangladesh, India and Nepal but the actual move on critical infrastructure has been slow.
Saturday, June 25, 2011
Can you separate the WTO from the Doha Round?
Thursday, June 23, 2011
Update on the state of labor market in Nepal
Meanwhile, there are 0.21 million child workers working in legally prohibited sectors. The sector-wise distribution is as below:
Tuesday, June 21, 2011
Nepal's banking and liquidity crises explained
M-Pesa versus Western Union: Mobile banking increases competition and consumer benefits in Kenya
Monday, June 20, 2011
Krugman on Keynes and his message