Mid-year review of FY2013 budget scales back GDP growth to 4.1%

The Ministry of Finance has released a mid-year review of budget for FY2013. At the outset note that this year Nepal is not having a full budget so far due to lack of political consensus as the opposition parties contend that the caretaker government prior to election is not authorized to launch full budget with new programs and policies. Consequently, Nepal had a one-third budget in July 2012 and followed by two-third budget in November 2012.

It means the economy still doesn’t have a full budget. Now, readers might be wondering what is the big deal if things are going fine. Well, a full budget comes with around six associated bills, including those on revenue policies and internal borrowing. Revenue policies are guided by Finance Act 2012 and internal borrowing is not allowed right now. Furthermore, the present budget is pretty much the same size as of last year’s actual expenditure. Considering inflation of above 10%, we are actually seeing a real contraction of spending allocation, let alone the capacity to spend given the political difficulties.

Anyway, here are some of the relevant stuff from the mid-year review:

• GDP growth rate for FY2013 revised to 4.1% from 5.1% considering the impact of unfavorable monsoon and low capital expenditure.
  • Projected agriculture sector growth: 0.7%
  • Projected non-agriculture sector growth: 5.4%
• Total expenditure stood at 29.59% of total allocation. Capital expenditure was around 15% (Rs 7.66 billion) of the allocated amount for FY2013 (Rs 51.3 billion). All expenditures (recurrent and capital) are lower than what was achieved in the first half of FY2012 (overall down by 6.3%). Recurrent expenditure is down by 3.05% and capital expenditure by 19.90%.
• Revenue mobilization was Rs 134.56 billion, 2.04% higher than the target.
• Average inflation was 10.7%.
• Exports increased by 9.3% and imports by 25.2%. Balance of payments surplus dropped to Rs 6.7 billion.
• A number of important projects—especially those tagged as national pride projects— have seen some progress.
• Private sector added 30 MW electricity to the national grid. More power imports from India and 38 MW electricity generation from thermal and diesel plants helped contain power cuts to around 12 hours a day.
• Deposits of BFIs increased by 4.8%, but loans increased by 5.3%. Liquidity declined by 15.1% (down by Rs 30.30 billion) as the government could not spend enough and banks could not attract deposits with relatively low interest rates.

The revised GDP growth figure still looks quite optimistic given the continued slowdown in construction sector and slowing down of growth of remittance inflows, which will then hit services sector growth. Earlier, the IMF, ADB, and the WB estimated GDP growth at 3.8%. The IMF recently indicated that it expects growth to fall below 3.8% estimate.

Also, though the capital spending is low, we might see pick up in spending in the last three months of FY2013 as in the previous years. But, overall spending level might fall short of the already low level reached in FY2012 (dropped to 3.3% of GDP from 7.9% of GDP in FY2011).

Boosting capacities of existing firms to increase export growth

A very interesting paper by Cebeci et al. based on Exporter Dynamics Database, which has measures on exporter characteristics and dynamics based on firm-level customs information from 38 developing countries and seven developed countries.  Excerpts from the paper:

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This paper introduces the Exporter Dynamics Database. The database includes exporter characteristics and measures of exporter growth based on firm-level customs information from 38 developing and seven developed countries, primarily for the period between 2003 and 2010. The measures are available at different levels of aggregation, including: a) country-year, b) country-year-product, and c) country-year-destination. Several new stylized facts about exporter behavior across countries emerge from the database. (i) Larger or more developed economies have more exporters, larger and more diversified exporters, and lower entry and exit rates than smaller or developing economies. (ii) In the short run, expansions along the intensive margin (exporter size) contribute more to export growth than expansions along the extensive margin (number of exporters). (iii) Exit rates are highly correlated with entry rates and both are negatively correlated with survival rates, average exporter size, and diversification. (iv) The number of exporters and the entry and exit rates in a country-product group are partially driven by country and product-group effects; however, the average size of exporters in a country-product group is not. Although the first three facts can be explained by models incorporating firm heterogeneity and uncertainty, the fourth fact is more difficult to explain with existing models. Several findings are confirmed in this database, including the importance of large multi-product firms. This database can be a valuable tool to improve the understanding of the micro-foundations of export growth, by providing new insights about exporter characteristics and dynamics.

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Though Nepal is not included in the database, an important finding of the paper that is directly relevant to Nepal’s trade sector is that increasing export growth in the short run is possible by expanding capacities of existing exporters rather than promoting entry of new exporters or concessions in export market destinations. In Nepal’s context, it would mean boosting capacities of those exporting firms performing below capacity. The findings of a recent NRB report, which found that industrial capacity utilization has merely been 58%, nicely fits with the findings of the paper by Cebeci et al. The low capacity utilization is due to lack of electricity, labor disputes, rise in cost of raw materials, and persistent supply side constraints. If Nepal wants to boost exports, then it first needs to create a conducive environment for existing firms to fully utilize their capacities.

Unfortunately, rather than working on operating existing exporting firms at full capacity, the government seems to be always asking for concessions in foreign markets. Of course, concessions in exporting destinations are important, but Nepal has to first create an environment to utilize existing firms’ capacities fully and competitively. The need is to first put the house in order before seeking concessions abroad.

Employing India: Guaranteeing jobs for the rural poor

Here are highlights from one of the latest published reports (Employing India: Guaranteeing Jobs for the Rural Poor) yours truly was involved in. It is about Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), probably the largest social protection programs in the world -- directly employing members of around 50 million rural households at a cost of less than 0.5% of GDP.

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• India faces persistent poverty and inequality despite burgeoning growth. Between 1988 and 2005 the country’s GDP almost tripled, but its poverty rate only decreased by 30 percent, underscoring the need for poverty reduction policies.
• Under the program, members of 50 million households worked a total of 2.5 billion days in 2011.
• The act looks to empower women, widen opportunities for marginalized population groups, and reinvigorate community decision-making bodies.
• The program is meant to operate transparently and fight corruption, but corruption has been seen in the act’s implementation.
• The act is having a significant impact on the lives of the poor with rural wages increasing, but its effectiveness varies according to activity and location.
• Simulations using an economy-wide model indicate that the act has a positive macroeconomic impact, leading to increases in GDP and trade.
• As the program shifts purchasing power from the urban rich to the rural poor, the structure of demand changes. Economic activity in agriculture, processed food, and light manufacturing increases and activity in heavy manufacturing and services declines. Likewise, the demand for unskilled labor in urban and especially rural areas increases, while the demand for mainly urban skilled labor decreases.
• Poor households benefit from added employment opportunities, while high-income households might suffer from weaker demand.
• The act is likely increasing land productivity, which boosts GDP and opens the opportunity to introduce incentives to investment while keeping tax rates constant.
• Given India’s weak institutional setting, a new way of doing business is necessary to implement the act’s detailed and ambitious procedures. Institutions must solidify processes for making information transparently available, and communities need to be involved in creating and managing projects.
• The act is a work in progress that needs ongoing evaluation to fully succeed and keep the corruption affecting the program’s implementation in check.

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Below is a brief of the report:

I will have more from the report in another blog post.

How close is Nepal to achieving the MDGs?

Since MDGs are coming to an end in 2015, global leaders, development agencies, CSOs and think-tanks are already talking about post-MDG framework and targets. One proposal is to adopt the Sustainable Development Goals (SDGs). In the last Rio+20 Summit, Nepal proposed focusing on food security and sustainable agriculture; water and sanitation; energy; sustainable cities; natural disaster; green job and social inclusion; and mountain ecosystem. As this discussion moves ahead and the global team of experts come up with some kind of quantifiable development targets for the post-MDG era, it is time to take a look at the achievements made thus far in achieving the MDGs.

Here, I am presenting a table showing the latest achievement and the target in 2015. The information is sourced from MDG Progress Report for Nepal 2010, Nepal Demographic Health Survey 2011, CBS and WB. Targets in parentheses are the revised ones as per Needs Assessment Report, Table 5.A.1. The table shows that Nepal is unlikely to achieve the target of reducing the proportion of employed people living on less than US$1.25 per day (PPP); increasing proportion of births attended by skilled birth attendant; and increasing proportion of population using an improved sanitation facility. All other targets are either achieve, likely to be achieved or potentially likely to be achieved.

Progress against MDGs target
MDGs	Specific goals	Latest achievement	Target in 2015	Scenario 2015
MDG 1	Proportion of population living on less than US$ 1.25 per day (PPP) (%)	24.8	17	Likely
	Proportion of population below national poverty line (%)	25.2	21	Likely
	Proportion of employed people living on less than US$ 1.25 per day (PPP) (%)	22	17	Unlikely
	Proportion of population below minimum level of dietary energy consumption (%)	36.1	25	Potentially likely
	Proportion of underweight children aged 6–59 months (%)	28.8	29	Likely
	Proportion of stunted children aged 6–59 months (%)	41	30
MDG 2	Net enrolment rate in primary education (%)	91.9	100	Potentially likely
	Survival rate to Grade 5 (%)	80.6	100
	Literacy rate for 15–24 years old (%)	88.6	100
MDG 3	Ratio of girls to boys at primary level	0.9	1	Likely
	Ratio of girls to boys at secondary level	1	1	Achieved
	Ratio of women to men at tertiary level	0.8	1	Potentially likely
	Ratio of literate women to men aged 15–24 years	0.83	1	Potentially likely
MDG 4	Proportion of one-year-old children immunized against measles (%)	88	>90
	Under-five mortality rate (per 1,000 live births)	54	54 (38)
	Infant mortality rate (per 1,000 live births)	46	34 (32)	Likely
MDG 5	Maternal mortality ratio (per 100,000 live births)	229	213 (134)	Likely
	Proportion of births attended by skilled birth attendant (%)	36	60	Unlikely
MDG 6	HIV prevalence among population aged 15–49 years (%)	0.49	0.35	Likely
	Clinical malaria incidence (per 1,000 population)	5.7	3.8
	Prevalence rate associated with TB (per 100,000 population)	244	210	Likely
	Death rate associated with TB (per 100,000 population)	22	20	Likely
MDG 7	Area under forest coverage (%)	39.6	40	Potentially likely
	Proportion of population using improved drinking water source (%)	88.6	73	Achieved
	Proportion of population using an improved sanitation facility (%)	39.5	53	Unlikely

Meanwhile, to achieve the MDG targets, it is estimated that Nepal will need Rs 451 billion between 2011 and 2015. The figure below shows the cumulative resource need, funding available and resource gap to meet the MDGs between 2011 and 2015. The resource gap in achieving MDG Goal 2 (education)  is about 60% of the actual expenditure (Rs 295 billion) in FY2011.

Of course, we need to be also aware of the fact that having the financial resources alone will not be sufficient to achieve the targets.

Understanding inclusive growth: Role of good governance and institutions

Inclusive growth is one of the most talked about issues in developing countries, especially those in transition, these days. It has been pretty much widely accepted that growth alone is not sufficient; it has to be followed by wider access to economic opportunities and provision of social protection for those left out of the growth process.

ADB has come up with a framework for inclusive growth, which has three main components:  (i) High and sustainable growth; (ii) Access to economic and social development opportunities; and (iii) Stronger social protection. It also has a list of 35 indicators to quantify (either directly or via proxies) inclusive growth.

The policies for inclusive growth are supported by good governance and institutions, which are quantified by looking at two components of Worldwide Governance Indicators (voice and accountability, and government effectiveness) and the corruption perception index. The information and data in this blog come from ADB’s FIGI 2012 and the related dataset (Nepal only; for other countries, see this one).

 

GOOD GOVERNANCE AND INSTITUTIONS	1990 or Nearest Year		2010 or Latest Year
Voice and accountability	−0.1	(1996)	−0.5
Government effectiveness	−0.4	(1996)	−0.8
Corruption Perceptions Index	2.2	(2010)	2.2	(2011)

The first two components of WGI are presented in standard normal units of the governance indicator, ranging from –2.5 to 2.5 with higher values corresponding to better governance outcomes. In the CPI, scores relate to perceptions of the degree of corruption and ranges from 10 (very clean) to 0 (highly corrupt).

Fiscal decentralization and FDI inflows

Here (ungated version here) is an abstract from an interesting paper on fiscal decentralization and foreign direct investment in India and China. Yong Wang argues that “endogenous policies toward FDI are favorable only when both central and local governments benefit”. Fiscal decentralization has a non-monotonic and significant impact on FDI.

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A political-economy model is developed to explain why fiscal decentralization may have a non-monotonic effect on FDI inflows through endogenous policies. Too much fiscal decentralization hurts central government incentives, whereas too little fiscal decentralization renders the local governments vulnerable to capture by the protectionist special interest groups. Moreover, the local government's preference for FDI can be endogenously polarized; therefore, a small change in fiscal decentralization across certain threshold values may lead to a dramatic difference in equilibrium FDI inflows. Empirical investigations support that the difference in fiscal decentralization is an important reason for the nine-fold difference in FDI per capita between China and India. Cross-country regression results also support the inverted-U relationship.

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Inverted-U relationship between FDI per capita and fiscal decentralization (measured by sub-national government’s overall revenue share).

China’s central and local governments are more aggressive in enticing FDI inflows than India’s. China’s central government encourages FDI inflows by offering fiscal incentives (tax holidays and tariff waiver on imported inputs to foreign-invested firms). Furthermore, the local governments as well offer favorable policies (simple license application, lower fees for land use, provision of infrastructure, etc).

Understanding inclusive growth: Stronger social protection

Inclusive growth is one of the most talked about issues in developing countries, especially those in transition, these days. It has been pretty much widely accepted that growth alone is not sufficient; it has to be followed by wider access to economic opportunities and provision of social protection for those left out of the growth process.

ADB has come up with a framework for inclusive growth, which has three main components:  (i) High and sustainable growth; (ii) Access to economic and social development opportunities; and (iii) Stronger social protection. 

It also has a list of 35 indicators to quantify (either directly or via proxies) inclusive growth. This follow up to an earlier blog post sheds some light on the third pillar of inclusive growth, i.e. stronger social protection.

It focuses on stronger social protection to prevent extreme deprivation and reduce the effects of shocks. It components include strengthened:

• Labor market policies and programs
• Social insurance programs
• Social assistance and welfare schemes
• Child protection programs
• Disaster management
• Public sector management

The table below shows the quantifiable indicators for the third pillar of inclusive growth.The information and data in this blog come from ADB’s FIGI 2012 and the related dataset (Nepal only; for other countries, see this one).

Social protection	1990 or Nearest Year		2010 or Latest Year
Social protection and labor rating	3.0	(2005)	4.0	(2011)
Social security expenditure on health as a percentage of government expenditure on health	3.6	(2001)	4.6	(2009)
Government expenditure on social security and welfare as a percentage of total government expenditure	3.1	(1995)	3.2	(2011)

In the social protection and labor component, a rating of “1” corresponds to a very weak performance, and a “6” rating to a very strong performance.