Cooperatives under the local bodies and more

Cooperatives under the local bodies

The government has started handing over cooperatives to local bodies. The new constitution allows all three tiers of government to register, monitor, promote and regulate cooperatives, which do not fall within the mandate of the central bank despite substantial deposit mobilization and credit disbursement. 

• Total number of cooperatives: 34,512 (13,886 savings and credit cooperatives)
• Under state government’s jurisdiction:  1,000
• Under local government’s jurisdiction: 33,363
• Under federal government’s jurisdiction: 150
• Total direct employment generated: 57,000
• Total credit mobilization: NRs400 billion
• Share capital: NRs94 billion
• Share members: 6,754,273

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IBN cannot issue survey license for hydropower projects

The Law Ministry has resolved the long-standing dispute between the Energy Ministry and the Investment Board Nepal (IBN) over authority to issue licence to large hydropower projects with an installed capacity of 500MW or more. In its letter to the Energy Ministry on Friday, the Law Ministry has said the former has the sole authority to issue survey licences for hydropower projects and that issuing such licences will not encroach IBN’s jurisdiction nor violate the provision of Investment Board Act.

“Section 9 of the Investment Board Act does not give the IBN authority to issue survey licence of any kind of hydropower project, while Section 4 of the Electricity Act clearly allows the Energy Ministry to issue such licence,” reads the letter by the Law Ministry. “The IBN’s role in implementing the hydropower projects comes only after the survey is completed when the investment is required for the project development.” The letter further said the project’s exact installed capacity is determined only after the survey is completed. The Law Ministry’s explanation has limited the IBN’s role to arranging the fund for development of hydropower projects, while endorsing the Energy Ministry’s recent decision to award a survey licence of the Betan Karnali and Bheri-1 projects to Betan Karnali Sanchayakarta Hydropower Company and Vidhyut Utpadan Company respectively.

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Excerpts from an interview with Indian FM Arun Jaitley:

GST: In India we started in the first few months itself. Today we are already thinning the 28% bracket. The mood in the GST Council is that as collections rise, this should be thinned to the extent that only non-merit and luxury items remain in it. But that will be contingent on an increase in the revenues itself. And I think this is already work in progress. There is hardly a GST Council meeting where rationalisation of taxes on a few dozen items does not take place. It is only at a later stage that you can think of converging the 12% and 18% slabs into the standard rate. […]I believe that non-compliance is a curse on the compliant taxpayer because he not only pays his share but also pays the larger share of those who do not comply.

Spending: In any area, whether it is the social sector, or infrastructure, or defence, we increase expenditure every year. We would have loved to increase more. Having been defence minister I know the requirements are more. But the fact is—it’s the size of the cake which has to be shared. Unless the cake enlarges, the only other option is to enlarge the fiscal deficit.

Formalization: Demonetisation had three impacts—it helped us reduce the quantum of cash; it increased the tax base and ended the anonymity of cash transactions; and it encouraged digitisation. GST is more of a voluntary compliance. […]Input Tax Credit is the best anti-evasion measure you have. Now with other anti-evasion measures that will slowly come into place, I think GST will start formalising the sector faster.

Agricultural output: There is a storage challenge, and the problem of market prices falling below the Minimum Support Prices because of a glut. We have overcome the shortage era. We also have to ensure more non-farm income income. What is the capacity of the rest of the system to get people out of agriculture to other areas of the economy?

Populist budget: It is not a populist budget. It may be popular because it blends both economy and politics.

Saudi job restriction rule to hurt Nepalis and more

Saudi job restriction rule to hurt Nepalis

The Minister of Labour and Social Development have issued a decision to restrict work in 12 activities and occupations to Saudi men and women to enable their employment in the private sector.

From September 11 this year, sales jobs will be reserved for Saudi citizens in four categories: cars and motorcycles; ready-made garments, children’s clothes and men’s accessories; home and office furniture; and home kitchenware. From November 9, this rule will extend to the sale of: electronics and electric appliances; watches; and eyewear. From January 7, 2019, the rule will apply to the sale of medical equipment and appliances; building and construction materials; car spare parts shops; carpet and floor covering stores; and finally sweet shops.

Nepalis with good educational qualification used to work as accountants, engineers, sales, electronics, hardware, contracting companies, cashiers, and supermarkets. They will be deprived of these opportunities as well. Saudi Arabia had the highest number of Nepali migrant workers at 138,529 in the fiscal year 2015-16.

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Three reasons why National Trading Limited collapsed

A trading company established during the cold war era has been laid to rest in Nepal. NTL used to sell agricultural, construction and machinery goods in the Nepalese market by importing them from Russia since private sector was not up to the task then. The competitive private sector after economic liberalization and a series of unfortunate political interference bankrupted the trading company. Three main reasons as follows:

1. Government forced NTL to absorb the cost of golden handshake for employees of bankrupt Himal Cement Company, where NTL had 15% share. The government never returned NRs430 million to NTL.
2. In 1996, the then PM Sher Bahadur Deuba led government gave license to a private company to sell duty free liquor, which was exclusively done by NTL. In 1998 late PM Girija Prasad Koirala led government revoked the license. Then in 2001 when Sher Bahadur Deuba became prime minister, his government gave license to sell duty free liquor to the same private company. 
3. In 2009, the then finance minister Baburam Bhattarai completely barred public and private companies to sell duty free liquor (even closed down the one at the international airport). NTL had already taken out NRs500 million loan to import duty free item, including NRs320 million. Since NTC was barred from selling duty free liquor and it had to go through a lengthy bureaucratic approval process to sell it at retail rates in the market, it started incurring huge administrative losses. Also, its retail cost was high because of high administrative costs and inefficiencies. NTL incurred huge losses after this. Consequently, MOF froze its assets and barred it from doing trading business. In 2011, the then PM Baburam Bhattarai led government took a decision to sell 18 ropanies of NTL’s land and establish petroleum and gas industry. The government changed and the then PM Khil Raj Regmi led government revoked the decision of the previous government. Meanwhile, NTL was left in an operational limbo but its losses continued to accumulate. 

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Nepal sends feasibility report of cross-border transmission line to China

The Nepali Energy Ministry has sent the initial feasibility report of a cross-border transmission line to be constructed on the Nepali side to China, a senior official of the ministry said. Nepal had requested China to provide assistance for the construction of the Rasuwagadhi-Kerung (Geelong) Cross-Border Transmission line during former Nepali Prime Minister KP Sharma Oli's visit to China in March 2016.

With the hydropower plants being constructed along the proposed transmission line, Nepali officials said that 400 KV transmission line has been necessary along the route to transform power for the hydropower projects being constructed and those which are about to kick off construction. The Energy Ministry has selected the project for potential financing under the China-proposed Belt and Road Initiative. The country had signed a Memorandum of Understanding with China to become part of the initiative in May 2017.

Key highlights from Economic Survey 2017/18 of Indian economy

1. Overview of the economy in 2017-18: 

• GST launched
• Twin balance sheet problem addressed by sending the major stressed companies for resolution under the new Indian Bankruptcy Code and implementing a major recapitalization package to strengthen the public sector banks.
• Economy began to accelerate in the second half of the year. This should allow real GDP growth to reach 6.75 percent for the year as a whole, rising to 7-7.5 percent in 2018-19.
• Fiscal deficits, current account and inflation were all higher than expected.
• Rationalize government resources by redirecting them away from subsidies towards public provision of essential private goods and services at low prices, especially to the poor
• Fiscal stasis: Tax to GDP ratio has remained at similar level for decades despite average economic growth of 6.5%
• Current account vulnerability: Revive manufacturing and export more  
• Downside risks come from high international oil prices, sharp correction of elevated stock prices
• Policy agenda for next year: stabilizing GST implementation (remove uncertainty for exporters, facilitate easier compliance, expand tax base), completing the twin balance sheet problem resolution (4Rs: recognition, resolution, recapitalization and reforms), complimentary reforms to shrink unviable banks and allow greater private sector participation (privatize Air India)
• Policy agenda for medium-term: creating more employment for youth, more focus on education to create an educated and healthy labor force, and raising farm productivity while strengthening agricultural resilience.

2. Large increase in registered indirect and direct taxpayers. A 50 percent increase in unique indirect taxpayers under the GST compared with the pre-GST system. Similarly, there has been an addition (over and above trend growth) of about 1.8 million in individual income tax filers since November 2016

3. States’ prosperity is correlated with their international and inter-state trade States that export more internationally, and trade more with other states, tend to be richer. But the correlation is stronger between prosperity and international trade.

4. To re-ignite growth, raising investment is more important than raising saving. Cross-country experience shows that growth slowdowns are preceded by investment slowdowns but not necessarily by savings slowdowns may not.

5. Own direct tax collections by Indian states and local governments are significantly lower than those of their counterparts in other federal countries. This share is low relative to the direct taxation powers they actually have.

6. Indian society exhibits strong son “Meta” Preference. Parents continue to have children until they get the desired number of sons. This kind of fertility-stopping rule leads to skewed sex ratios but in different directions: skewed in favor of males if it is the last child, but in favor of females if it is not the last

Elderly allowance, fiscal burden and competitive populism

On January 24, PM Deuba led caretaker cabinet took an ill-conceived decision to lower minimum age eligibility to receive elderly allowance to 65 years from the existing 70 years. Currently, the government provides NRs2000 per month to citizens who are 70 years and above. There is intense debate on sustainability of such handouts without generating additional resources at a time when tax revenue is barely sufficient to cover recurrent spending. 

Here is how much it will cost to the treasury: the cabinet decision on Wednesday will cost an additional NRs16 billion each year in the next five years since it will have to include about 0.645 million new recipients in this ‘social security’ scheme. There are about 1.02 million people of 70 years and above age and they take around NRs25 billion. Cumulatively, old age allowance now amounts to about NRs40.7 billion (around 1.4% of GDP and 5.6% of revenue).

The cabinet also took a decision to increase housing grant to earthquake, fire and flood victims by NRs100,000 (making total NRs400,000). This alone would cost an additional NRs96 billion (767,705 eligible for earthquake related housing grant and 192,136 for flood related grant). In total, last Wednesday’s cabinet decision cost the economy an additional cost equivalent to about 3.8% of GDP. That’s insane. 

Now, this is a bait for the upcoming left alliance led government. They committed to raise old age allowance to NRs5000 in their elections manifesto. If they keep their promise, then it would cost NRs101 billion (NRs63 billion for 70+ and NRs38 billion for 65-69 years old), which is equivalent to 3.4% of GDP. It will be very difficult for the next government to raise the eligible age for old age allowance back to 70 years and above. And they probably won’t do it because they love such handouts in the first place. Recall that it was Man Mohan Adhikari led government that decided to distribute NRs300 monthly as old age allowance in 1994. Later on it was increased to NRs1000 and then UML’s Bishnu Prasad Poudel, when he was finance minister in 2016, doubled it to NRs2000. This has been a good selling point to attract elderly votes. The NC led caretaker government probably have thought they can claim credit for lowering eligibility age for elderly allowance and for increased housing grant. They did this without considering if the next government will have enough resources to fulfill them. Furthermore, it restricts the next government’s flexibility with respect to realigning budget on their signature programs. In short, its fiscal irresponsibility and imprudence. 

Overall, the caretaker government has added NRs80 billion extra burden on the next government over five years. The green section in the bar chart shows the additional burden inflicted by the caretaker government. 

Few points to consider:

• First, the population projection comes from CBS’s estimation under medium variant scenario (more plausible decline in fertility and mortality levels along with appropriate effects on migration). The additional burden to treasury assumes that all eligible citizens will take the allowance. Practically, actual take up could be around 90% but then allocation needs to be made based on potential take up.
• Second, FY2018 budget has earmarked NRs36 billion for allowances to senior citizen, single woman, dalits, endangered indigenous people or ethnic groups, and physically challenged people. The government spent NRs88.6 billion in social security (allowances, scholarship and retirement benefits) in FY2017 and has allocated NRs102.6 billion for FY2018, which is equivalent to about 8 percent of the entire budget and one-third of capital spending.
• Third, those residing in Karnali region, dalits and single mothers are eligible to receive elderly allowance from 55 years onward (previously it was 60 years). So, the total additional burden will be even higher. Note that the above estimate does not consider administrative costs incurred while administering the welfare program. 
• Fourth, this whole façade by a caretaker government puts the next government in a bind. They will not be able to unroll the handouts, which means the next finance minister will have a tough time managing budget. A large increase in budget (using past savings as well as increasing deficit) is on the cards now as the next government will probably fall into the competitive populism trap.
• Fifth, this cabinet decision was taken without adequate consultation with MOF and NPC. What were the advisers doing?
• Sixth, it is better to provide health insurance cover rather than cash handouts. Remember that average life expectancy is increasing.
• Seventh, here are the five key economic challenges for the next government. 

Cargo movement to Nepal via Visakhapatnam up but lags behind Kolkata port and more

Cargo movement via Visakhapatnam up

More and more Nepali traders have started using the seaport in Visakhapatnam, India, for third country trade. In the last six months, the country’s only dry port in Sirsiya, Birgunj, received 19 railway rakes of goods from Visakhapatnam port. Each rake contains 90 containers of 20 feet long each.

The number of rakes dispatched through Visakhapatnam port is still small considering 16 rakes that Kolkata port sends to Nepal per month. But concerned stakeholders consider rise in movement of cargoes from Visakhapatnam port a good sign for Nepal’s third country trade, as it will exert pressure on Kolkata port to improve its services. Indian authorities had opened Visakhapatnam port for Nepal after traders demanded an alternative port for the landlocked country to conduct third-country trade.

India had agreed in principal to allow Nepal to use the Vishakhapatnam port in 2009. Nepal got the permission to use the port for third country trade in February 2016. Vishakhapatnam port is 1,436 km away compared to 704 km distance to Kolkata port (which is heavily congested, affecting trade).

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Industries in Bhairahawa SEZ yet to get electricity

At a time when the industries selected to set up plants in the Bhairahawa Special Economic Zone (SEZ) are waiting for grid connectivity with adequate power supply to operate their factories, Nepal Electricity Authority (NEA) today issued a disappointing statement that the industries in SEZ may be deprived of adequate power supply for next two years.

The power utility has stated that Bhairahawa SEZ and SEZ Development Committee have not taken any initiative to develop a substation at Bhairahawa SEZ. NEA will provide 33 kV dedicated line to Bhairahawa SEZ from its Dhagdhagi substation, which is at a distance of 15 kilometres from the SEZ. NEA has criticised Bhairahawa SEZ for blaming the authority for lack of grid connection with adequate power as the SEZ has not initiated the process to set up a substation to distribute power to individual plants. 

NEA is responsible to install 33 kV dedicated line for the SEZ from Butwal substation to Dhagdhagi, but the SEZ itself has to instal a 15-km 33 kV transmission line from Dhagdhagi to the SEZ and distribute it to the individual industries through their 33/11kV substation.

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Cement factories told to roll back price hike within three days

The government has directed cement factories to rollback the decision to increase the price of cement within three days. The decision comes in the wake of as much as 16 percent increment in the price cement - a key construction material - in recent weeks.

A survey conducted by the Department of Supply Management and Protection of Consumers Interest (DSMPCI), the agency for market monitoring and consumer protection, in Kathmandu and some major cities of the country in the past two weeks showed that price of cement has gone up by 10 to 16 percent, while factory input cost has increased by only 7 to 9 percent. The rise in the price of construction materials has affected victims of the 2015 earthquakes as most of them are rebuilding their homes. Factories hiked the price to cash in on the rise in demand for construction materials.

Civil servants adjustment in federal set up and more

Over 75 percent’ civil servants to go out of central government

More than 75 percent of the total civil servants will be deployed to the provincial and local levels for their full-fledged functioning. The High Powered Federal Administration Restructuring Committee led by Kashi Raj Dahal, chairman of the Administrative Court, has recommended that over 75 percent of the total 83,200 civil servants be deployed to the provincial and local levels. This will leave only one-fourth of the existing government employees under the federal government. Broadly, some 40 percent staffers will be deployed to the 753 local federal units while around 35 percent will work under the provincial governments. 

The Local Level Restructuring Commission had suggested 70 officials on an average in each local government under the command of a joint-secretary at the metropolitan city and under-secretary at the lower level. The secretary (called provincial chief secretary) will lead the bureaucracy in the province. According to Article 302 of the constitution, civil servants will be deployed at the three levels in the new arrangement. The Civil Servant Adjustment Act endorsed by parliament three months ago sets the broader criteria for management and deputation of the staffers within six months. The constitution provisions the provincial Public Service Commission to hire civil servants in the state and the local bodies under it.

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Indian construction workers coming to Nepal in droves

The booming construction works in the highlands has been attracting a large number of Indian workers due to the lack of Nepali workers. Hundreds of young Nepalis are still flocking abroad, taking out huge loans to work overseas. The locals said that the shortage of labour in construction sector has been luring workers from the southern neighbour. These workers usually work in road, hydroelectric and other construction projects. Road construction works has been rapidly progressing at Terhathum section. The length of Mid-hill Highway is 1,776 km connecting east to west. In Dhankuta, Indian workers are working for Sindhuwa Road project, Basantapur-Taplejung Road project and a bridge project over Tamor River. They are also involved in the construction of the governmental buildings in different rural municipality and headquarters. 

Indian workers get a pay of Rs600 to Rs1000 daily — which roughly amounts to Rs18,000 to Rs22,000 monthly salary. Workers are not required to make any investment in projects except their physical labour. Machines and equipments required for the work are supplied by the respective construction company. An increasing number of youths from Terhathum have been leaving for foreign jobs. Each of them have been paying at least Rs150,000 to manpower agencies. However, their jobs are not secured and are forced to work in dire conditions. 

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All regions in South Asia are expected to have higher growth rate except for Nepal

IMF’s South Asia Regional Update, January 2017: The deceleration in growth in 2017 to 6.5 percent reflects primarily weaker activity in India, where the economy was hit with two temporary shocks—the country’s currency exchange initiative and glitches in implementation of the national Goods and Services Tax. Growth was broadly stable or accelerated in other countries, primarily driven by domestic demand. In 2018, growth is expected to accelerate, other than in Nepal, to 7.1 percent in aggregate for the region reflecting continued strong consumption and investment, supported by favorable financial conditions and improving external demand.

Nepal: GDP is expected to grow at 5% in FY2018 (ends in mid-July 2018).  Inflation is projected to be 6% in FY2018. The challenge now is to maintain the momentum and avoid falling back to the relatively low average historical growth of about 4 percent per annum through steady implementation of structural reforms. At the same time, with the fiscal stance becoming more expansionary, monetary policy needs to be tightened to keep inflation and balance of payments pressures in check. Fiscal policy should focus on higher and better-quality public investment and prudent implementation of fiscal decentralization through sustainable intergovernmental fiscal arrangements and the need to build public financial management capacity at the sub-national level. Hasty implementation of fiscal decentralization could strain government finances and weaken fiscal policy’s stabilization function.

India: GDP is expected to grow by 6.7% in FY2018 (ends in March 2018) and 7.4% in FY2019. Inflation is projected to rise to 5% in FY2018. The Government of India implemented multiple structural reforms in 2016. The emphasis is now likely to shift to addressing implementation of policy rather than new policy measures. Key recent measures include: adoption of a formal medium-term inflation target (4 percent median CPI inflation with a symmetric 2 percent band) in August 2016; passage of the GST constitutional amendment in August 2016; passage of a new Bankruptcy Code in May 2016; supply-side measures to contain food inflation; and improvements in financial inclusion and domestic bond markets. The government also announced a major decision in October to recapitalize state-owned banks, committing to provide about two-thirds of the total financing of 1.3 percent of GDP. The longawaited nationwide GST is a major reform of the Indian tax system. Focus should remain on further streamlining the rate structure and improving the supporting infrastructure to ease implementation costs particularly for SMEs. Other key reform priorities include credible reforms in the banking sector to ward off recurrent balance sheet problems particularly in the public banks, labor market reforms to facilitate greater and better quality job creation, and agricultural sector reforms to reduce production risk and improve competitiveness. These reforms and others already in train should help raise medium-term GDP growth rates in India above 8 percent.

Slow capital spending this year as well and more

14% of budgeted capital spending used by H1 FY2018

The government’s capital spending hovered around Rs47 billion in the first six months of the fiscal year, which is only 14 percent of total capital budget of Rs335.2 billion allocated for 2017-18. Three main reasons for underutilisation of the capital budget: (i) flooding in Terai in August delayed progress in implementing infrastructure projects; (ii) state and federal elections meant that government staff were deputed to conduct and monitor elections, and workers returned back to their hometown to cast vote; and (iii) confusion over transfer of projects to local bodies and implementation agency. Other reasons include delay in preparation of detailed project design, land acquisition, establishment of project management offices and preparation of procurement plans.

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Five key economic challenges for the next government

1. Increase investment in physical and social infrastructures
2. Sound fiscal management and governance regimes
3. Coherent planning and policies among the three tiers of government
4. Bureaucratic reform for better budget execution and public service delivery
5. Accelerated post-earthquake reconstruction

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Contractor-politician nexus in Nepal

In Nepal, half a dozen contractors exercise monopoly over construction contracts. The cartel holds sway over entire construction administration and political sector. They huddle together before bidding for large infrastructure projects. […]After the deal, the contractors divide civil works among themselves. The contractor who is receiving the contract proposes a cost one percent less than the estimated cost. In order to show it was a competitive bidding, another contractor of the group proposes a slightly higher cost. As a result, one of the group members wins the contract.

In the last few years, against the fundamental principles of law, procurement policies have been modified so that only certain companies can bid for tender without any competition or by limiting competition. The report details how collusion affected more than Rs 25 billion worth of road projects.

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Local bodies lack planning and budgeting expertise

Local bodies in Gulmi have been approving short-term populist programs instead of medium-term projects that help to raise local productive capacity. They don’t have the capacity to do planning, select projects and approve budget. 

Resunga municipality approved 648 project, of which 103 are of NRs10,000-NRs50,000. There are 211 projects with a budget of just NRs100,000. Similarly, they have allocated NRs30.6 million to upgrade 150 local roads. Isma village council (gaupalika) has approved 42 drinking water projects, of which 10 have allocations below NRs300,000. 

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Govt to break up Air India into four parts to speed up privatisation process

The proposed privatisation of Air India Ltd has gained momentum, with the government deciding to break the airline into four units and offer to sell at least 51% in each of them besides transferring most of the non-core debt owed by the carrier to its own balance sheet. The core airline business comprising Air India and Air India Express—the low-cost overseas arm—will be offered as one company, and the process will be completed by the end of 2018, minister of state for aviation Jayant Sinha said in an interview with Bloomberg on Monday. Its regional arm, ground handling and engineering operations will also be sold separately in the same process.

The government has also eased rules allowing foreign airlines to buy a stake of up to 49% in Air India with prior government approval but with the caveat that substantial ownership and effective control of Air India will remain with Indian nationals as is the case with all domestic airlines. The airline has a fleet of about 140 planes, with a 17% share of traffic on routes linking India to international destinations and about 13% share of the domestic market.