Ncell ordered to pay capital gains tax

On September 6, the Supreme Court ordered Ncell and Axiata to pay capital gains tax. This long pending order puts to rest one of the most contentious and protracted capital gains tax issues in Nepal. Taxes were avoided when ownership of Ncell was transferred from one company to another. Companies need to pay 25% in CGT per Income Tax Act. However, TeliaSonera did not pay taxes even though it made profits from the sale and repatriated “income”. 

Here is a brief outline and key points from a news story in myRepublica:

• With this decision, the apex court has set a precedent that any firm buying into another company may have to pay such tax if the seller hadn't cleared its tax liabilities on the bought portion. Malaysian company Axiata had bought Reynolds Holdings, which held a majority share in Ncell, from TeliaSonera for $1.03 billion. It was a wholly-owned subsidiary of TeliaSonera and believed to be registered in the tax haven of Saint Kitts and Nevis.
• Ncell has already deposited Rs 23.57 billion in two installments as applicable tax on the profit generated through the sale of the telecom company. It paid Rs 9.97 billion in May, 2016 on the basis of its own calculations. It again paid Rs 13.60 billion on June 4, 2017, bowing to intense pressure and criticism from a cross-section of society.
• TeliaSonera, a Swedish-Finnish company, has not paid any capital gains tax on the sale of its 80 percent share in Ncell to Malaysian company Axiata in April 2015.
• The Large Taxpayers Office determined that Ncell needed to pay Rs 60.71 billion in capital gains tax and fines and interest calculated as of June 17, 2017. A capital gains tax of Rs 35.91 billion was determined and fines and interest made for the total figure of Rs 60.71 billion. 

The LTO wanted TeliaSonera to pay CGT and filed a case in the court, which halted transfer of income outside of the country. However, Justices Om Prakash Mishra and Kedar Prasad Chalise of the Supreme Court, on December 18, 2017, took a decision in favor of TeliaSonera and allowed it to repatriate "income" (which included taxes it should have paid to the government). There are reports that investment in Ncell was used as a conduit to launder undeclared income. 

The order has come just one month before the Nepal Investment Summit 2019, where investors will be asking questions about repatriation of income by foreign investors and clarity on tax regime. The finance minister said that the government will determine how much Ncell owes in capital gains taxes and accumulated interest and fines after it formally receives the order from the Supreme Court. 

In other news, a recent Cabinet meeting approved hedging regulations to lower foreign exchange risks in projects with foreign investment. This is expected to be especially helpful in the energy sector. Additionally, the central bank approved the application for license to establish Infrastructure Development Bank, which has Rs20 billion paid-up capital. 

Distorted sugar market, new destination for NAC and more

Imported sugar trickles into market after being stranded at Dry Port

From The Kathmandu Post: Salt Trading Corporation has released 10,000 sacks of sugar that had been lying idle for four and a half months at the Dry Port in Sirsiya, Birgunj, following the import restriction imposed by the government. The sugar was imported targeting the Dashain, Tihar and Chhat festivals when demand for sugar increases significantly.

On September 17, 2018, the government imposed quantitative restriction on imported sugar. The government took the measure in the name of protecting domestic sugar producers who were complaining about not being able to sell the domestic product as cheaper imported sugar had dominated the market. The dry port does not charge any amount to the importers till five days on the entry of goods at the Dry Port. After five days to 10 days, the warehouse charge is Rs77 per tonne excluding VAT. For 11 to 20 days, the terminal charges Rs99 per tonne and Rs157 per tonne from 21 days onward. The corporation had purchased sugar from Renuka Sugar Mills in West Bangal of India.

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Nepal Airlines gets CAAN’s nod to fly from Nepal to Japan

From The Himalayan Times: The national flag-carrier Nepal Airlines Corporation (NAC) has gained an Air Operator’s Certificate (AOC) through the Civil Aviation Authority of Nepal (CAAN) to operate flights from Nepal to Japan. According to NAC Assistant Spokesperson Nawaraj Koirala, CAAN granted it an AOC to use its new A-330 wide-body for Kathmandu-Osaka flights on Friday. Likewise, the national flag carrier – that plans to launch Kathmandu-Osaka flights in the upcoming month – will soon seek green signal from Japan Civil Aviation Bureau (JCAB) to materialise the plan, informed officials.

It has been learnt that the corporation has managed human resources to handle the flights to Osaka as well as Kathmandu-China flights for which authorities are yet to give a nod. At present the NAC operates international flights to New Delhi, Bangalore, Mumbai, Malaysia, Singapore, Bangkok and Qatar. Meanwhile, efforts are underway to add China, South Korea, and the Saudi Arabia in NACs’ straight flight destinations.

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Local units told not to levy production, export taxes

From myRepublica: Ministry of Federal Affairs and General Administration has issued a circular to all 753 local units across the country, instructing them against levying taxes on production and exports.From the very beginning of the new fiscal year, industrialists have been speaking out about the increasing cost that they have been facing as a result of taxes on ‘production’ and ‘export’ by local governments.  Though some local units withdrew such taxes, industrialists were facing similar situation till January. Representative bodies of the private sector, especially the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and its units, had been seeking strong instruction against the local units from the Ministry of Federal Affairs and General Administration.


The ministry, finally, issued a circular on Sunday, informing the local units to not levy production and export taxes on industries. The ministry has said that the issued circular is in accordance to a secretary-level meeting held earlier in September.In the first week of July, 2017, the ministry had written a letter to local units to not overstep the rights enshrined in Article 228 of the Constitution of Nepal 2015. However, the local units had paid no heeds to the ministry’s words. Article 228 of the Constitution states that no tax shall be levied and collected except in accordance with law. “The local level shall impose tax in areas within its jurisdiction, without causing any adverse impact in the national economic policy, transportation of goods, services, capital and labor, and on neighboring or local levels,” the constitutional provision states.

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Qatar interested in West Seti hydropower project and Nijgarh internaitonal airport

From The Kathmandu Post: atar has approached Nepal to build an estimated $1.2 billion mega-airport project in Nijgadh, Bara, in a bid to strengthen its presence in Southeast Asia and China in the wake of the blockade imposed by a number of major Arab nations in June 2017.The airport scheme envisions building a modern airport in Nijgadh, 175km from Kathmandu in the southern plains, as an alternative to congestion and winter fog at Tribhuvan International Airport--the country’s sole aerial gateway. A highly placed source at the Tourism Ministry revealed that Nepal and Qatar governments “are in talks” to build a new international airport in Nepal, which has been on the drawing board for more than two decades.

One proposal to build the airport has come from a London-based company on November 17, 2016. WGP Global, in association with its project partner Uniel Holdings, has expressed its interest to lead a team to design, construct, finance and manage the project. “We would be able to introduce leading global financial institutions and other parties which have the experience, capability and interest to participate in the financing of the project--whether in the form of a public-private partnership; BOOT model; or anything else,” WGP Global has said in its proposal.

Similarly, the Malaysian government had on January 6, 2016, proposed implementing a fully-financed construction of the airport under a ‘design, finance, build, operate and transfer’ (DFBOT) model through a government-to-government deal. “We understand that the Second International Airport [now Nijgadh International Airport] is very critical for the development and growth of Nepal. The Malaysian government and its consortium have a proven track record in terms of experience and expertise in developing and managing international airports all over the world,” said the Prime Minister’s Department, Malaysia in the proposal sent to Nepal’s Tourism Ministry.


From Bizmandu: लामो समयदेखि चर्चामा मात्रै सीमित भएको पश्चिम सेती जलविद्युत् आयोजनामा लगानी गर्न कतार सरकारको एक कम्पनीले इच्छा व्यक्त गरेको छ । कतारका लगानीकर्ताले सो आयोजनामा चासो देखाएपछि लगानी बोर्डका अधिकारी र सो कम्पनीका अधिकारीबीच द्विपक्षीय छलफल भएको हो । बोर्डका प्रवक्ता उत्तमभक्त वाग्लेसहितको टोलीले कतारको नेब्रास पावर कम्पनीका अधिकारीसँग विभिन्न आयोजनाका बारेमा छलफल गरेको हो। कतारी कम्पनीसँग छलफल गरेर बोर्डको टोली फर्किसकेको छ। प्रवक्ता वाग्लेले निर्माणमा जान सक्ने तयारीमा रहेको परियोजनाका रुपमा पश्चिम सेती आयोजनाको विषयमा छलफल भएको जानकारी दिए।विस्तृत परियोजना प्रतिवेदन (डिपिआर) समेत तयार भएको सो आयोजना निर्माण जान सक्ने अवस्थामा रहेको बारेमा बोर्डले सो कम्पनीका प्रतिनिधिलाई जानकारी गराएको प्रवक्ता वाग्लेको भनाइ छ । 

Emerging consumption pattern and distribution in Nepal

Central Bureau of Statistics recently released annual household survey 2016/17, which is fifth in a series of quick surveys that looks at the state of consumption, demography and social services. It used to include employment module too, but is missing from the last two surveys (NLSS IV or NLFS III will cover them). Here is a blog post from 2014 on AHS I.

AHS V shows that consumption pattern has not changed much in the last five years (and since NLSS III). The total nominal household consumption was NRs1,555.4 billion in 2016/17, a 5.3% increase over 2015/16, when consumption decreased by 8.9% (a result of border blockade, which severely dented non-food consumption). Food consumption accounted for about 56.6% of total household consumption. Average household consumption is recovering after the decline caused by the devastating earthquakes in 2014/15 and border blockade in 2015/16. 

What about the composition of household consumption? As noted above, about 50% of household consumption expenditure goes to food. This is followed by rent 12.7%, durables, 7.1%, education, 4.1%, alcohol and tobacco 3.7% and utilities 2.4%. 18.1% of household consumption expenditure goes to other non-food items. Notice that as a share of consumption expenditure, households on average spend more on alcohol and tobacco than utilities and it very close to expenditure on education. 

The poorest household consumption quintile (i.e., poorest 20% of the households based on consumption expenditure) actually spent more on alcohol and tobacco (3.9%) than education (2.3%) and durables (1.9%). Their food consumption accounts for 64.9% of total household consumption, which on average was NRs155,183 in 2016/17. Similar is the case with the second, third and fourth household consumption quintiles. The share of expenditure on alcohol and tobacco of the first three consumption quintiles is actually higher than the national average. The richest household quintile’s consumption on food account for 34.6% of their expenditure, followed by rent and other non-food (19.5% each) and durables (15.7%). 

Of the total household expenditure of NRs1,555.4 billion in 2016/17, the lowest 20% of households based on consumption expenditure accounted for 8.2%, and the highest 20% households accounted for 41.1%. 

Now, let us look at nominal per capita consumption based on the consumption quintiles. The overall nominal per capita consumption stood at NRs80,807 in 2016/17. Again, per capita consumption growth nosedived in 2014/15 and is far from the pre-earthquake and blockade consumption growth rate. The poorest 20% of the population has seen its share of total per capita consumption decline (7.6% in 2012/13 to 6.5% in 2016/17). Meanwhile, the richest 20% have seen their share of per capita consumption increase from 45.9% to 50.9% over the same period. So, per capita consumption based inequality seems to be increasing.

Per capita consumption on food items accounts for 56.6% of consumption expenditure (including alcohol and tobacco). Of the total per capita consumption on food items, the largest share is accounted for by grains and cereals (27.9%), followed by meat and fish (16,1%), vegetables (12.4%), alcoholic beverage and tobacco & related products (11.8%), and eggs and milk products (9.4%) among others. 

Meanwhile, per capita consumption on nonfood items accounts for 43.4% of consumption expenditure. OF the total per capital consumption on nonfood items, the largest share is accounted for by education (15.4%), followed by medical (10.8%), cultural (8.9%), jewelry and watches (3.2%) among others. 

The per capita consumption of alcoholic beverages, and tobacco & related products was NRs4,142 in 2016/17. For educational purposes, it was NRs4134. For medical purposes, it was NRs2,888.

About 15% of the population had inadequate food consumption in 2016/17. The share of households with poor dietary diversity (four or fewer food groups consumed) has decreased from 10.5% immediately after the earthquake (2014/15) to 5.3% in 2016/17. The broad food groups are: Cereals, tubers & roots; pulses; vegetables; meat, fish & eggs; fruits; milk & dairy products; ghee, oil & butter; sugar, honey & sweets. The richer the households, the better their food consumption and dietary diversity. 

Other interesting stats: 

• About 60.5% of the population is of 15-59 years of age (working age population).
• Dependency ratio is declining. It was 65 in 2016/17
• Female heads a quarter of the households 
• There are 94 male per 100 females
• Average household size is 4.5
• 88.4% of households have access to mobile phone and 44.8% have access to cable TV. 12.7% have access to email/internet. 
• 85.2% of households use electricity for lighting and 9.6% use solar. 52.4% of households use firewood as a major source for cooking. 
• About 33.1% of households use cylinder gas for cooking (among them, 54.1% of urban households use cylinder gas for cooking; for rural households, its 16.5%)

Nepal's troubled capital market

It was published in The Kathmandu Post, 21 January 2019, p.8. An earlier blog on the same issue here.

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Troubled capital market

The authorities should have let the stock market self-correct and fall back to its natural state

The recurring financial sector instability recently affected the stock market too. Investors exerted political pressure on the Ministry of Finance and Nepal Rastra Bank to rescue them from the downward spiral of share prices. The government formed a committee to assess the state of the capital market and recommend measures to stabilise it. Some of the proposed solutions will likely push share prices in the bullish zone, but undermine the soundness of the financial system and implicitly foster moral hazard.

The turmoil in the stock market is not because the market perceives declining profitability from trading shares at Nepal Stock Exchange Limited (NEPSE). It is also not driven by quarterly or annual earnings of companies whose shares are traded at the market. The squeeze in liquidity flowing into this market as a result of recurring credit crunch faced by banks and financial institutions (BFIs) and excess issuance of shares given the market size are the main factors behind the current turmoil at NEPSE.

Bullish problem

While chronically low capital spending by the government and tepid growth of remittances have been dragging deposit growth, strong credit demand from almost all sectors and the BFI’s largess in approving loans to sectors that earn quick returns (at times at the cost of quality and overexposure) has led to a situation where credit growth has surpassed deposit growth. Hence, except for the two government-owned banks, all other commercial banks are close to the regulatory credit-to-core capital cum deposit (CCD) ratio threshold. Nepal Bankers’ Association (NBA) lobbied hard to increase the 80 percent CCD threshold, but the central bank refused to do so arguing that it is necessary for the viability of the financial system and security of deposits. The underlying deposit-credit dynamics, asset-liability mismatch and depleting stock of loanable funds have hamstrung the BFIs and lately rattled stock market investors as they are deprived of new funds to maintain bullish trading.

It is not the first time the stock market has crashed after remaining bullish for an extended period. It grew steadily at least since fiscal year 1993/94 before crashing in 2007/08 when the then finance minister hinted of enhanced oversight (after terming trading at NEPSE a ‘gamble’). Concurrently, liquidity also started to dry up owing to deceleration of remittances and the BFIs faced severe stress as real estate and housing prices collapsed. This affected NEPSE index too, as it reached a high of 1084.8 in August 2008 and then crashed to a low of 297.6 by June 2011. A slew of regulatory caps on overexposed sectors, partial bailout by the central bank, and an increase in remittance inflows gradually stabilised liquidity situation. However, increasing margin lending by BFIs and rerouting of approved loans to the stock market in anticipation of quick returns by borrowers started to push NEPSE index in the bullish territory, hitting a record 1815.2 in September 2016. Since the bullish stock market closely followed liquidity situation of BFIs, it took no time for the index to collapse to 1148.8 by December 2018 as liquidity crunch worsened.

The authorities should have let the stock market self-correct and fall back to its natural state, i.e. in line with the broader economic fundamentals. Instead, the central bank loosened rules to push it in the bullish zone. For instance, reducing the risk weight on loan against shares to 100 percent from 150 percent; provision to offer loan up to 65 percent of valuation of shares (up from 50 percent previously) based on the average price in the past 180 days or the prevailing market price, whichever is lower; issuing loan on shares equivalent to at most 40 percent of their core capital (up from 25percent previously); and loosening margin call decisions will increase flow of funds to the stock market. However, these will not correct the underlying flaws in trading and conflict of interest of some investors at NEPSE. Being overly pro-cyclical when prices go up but counter-cyclical when prices come down serves a few at the cost of many. It undermines governance and efficacy of the banking sector, which needs to channel more resources to productive sectors that create jobs and directly addresses binding constraints to shared prosperity.

The central bank also directed the BFIs to lower interest spread rate (the difference between lending and deposit rates) to 4.5 percent by mid-July 2019 by tweaking computation of base rate. Specifically, BFIs will not have to add 0.75 percent return on asset while computing base rate, which includes the cost of fund, cost of cash reserve ratio, cost of statutory liquidity ratio and operating cost. The lower the base rate, the lower should be the lending rate. However, even with this tweak in computing base rate and a directive by NBA to cap deposits rate, there is no sign of lowering of lending rates anytime soon.

Given the operational and managerial inefficiencies, it will be challenging for the BFIs to lower interest spread by the end of this fiscal year. High-interest spread has its root in a number of factors: risky investment, high inflation (although this is not the case now), high operating costs, reliance on interest income for survival amidst cut-throat competition to rope in depositors, diseconomies of scale due to small market size, and poor access to finance. Real sector investors (those that invest in factories and infrastructure to produce or to build something, and at the same time create employment) are worried about the high cost of finance, which will dent whatever prospects there were for achieving the government’s economic growth target of eightpercent for this year.

Recurring problem

BFIs are used to earning high-profit rates by lending to certain sectors, without much self-discipline and due diligence that earn them quick return. Previously, they overexposed themselves to real estate and housing sectors. This resulted in a drastic escalation of land prices and haphazard plotting of arable land. Now, they are overexposing themselves to the vehicle and hire purchase financing, and margin lending.

The credit crunch is a recurring problem in the banking sector and increased volatility of share prices will now be recurring too. The latter is at the mercy of credit flows from the former, which itself depends on the extent to which the government executes its proposed budget and the growth of remittances. Tweaking rules to reinforce the flawed link between them is not a sensible strategy. This may give respite to the government and central bank for some time, but it is a long way from stabilising the financial sector and eventually addressing its structural weaknesses. Currently, the stock market is not resilient and stable enough to mobilise capital for real sector investment, and BFIs are still operating with the same strategy of socialising losses but privatising gains. Nepal needs fewer but stronger BFIs with sound corporate governance. The banking sector has no other option but to consolidate and enhance operational efficiency.

Stabilisation measures should be geared towards correcting immediate flaws by providing temporary relief so that it eventually sets the stage for structural reforms. It should not be designed to foster moral hazard and systemic risks and to provide relief by weakening regulations and soundness of the entire system.

Inflated revenue mobilization, uncertain Melamchi project and more

Federal government’s figure on revenue collection a hoax

From The Himalayan Times: The government, which has been boasting of a brisk revenue collection since the start of this fiscal year, has suffered a rude jolt, as the body which operates its treasury has been found to be inadvertently producing inflated figures because of double counting. The erroneous reporting on revenue collection came to the fore after the Financial Comptroller General Office, the main agency responsible for the government’s treasury operation, stated that the government had generated revenue of Rs 520 billion in the first half of this fiscal.

The figure surprised many because it was 21 per cent more than the government’s own revenue collection target of Rs 429 billion for the six-month period from mid-July to mid-January. At a time when the Ministry of Finance was apprehensive about meeting its own target because of slackness in collection of duties at customs offices, the news that revenue collection beating the target by close to Rs 100 billion was too good to be true. Turns out it was.

Nepal Rastra Bank, which also tracks the government’s revenue collection, has said the government generated Rs 414.3 billion in revenue in the same six-month period. This means the government missed its revenue collection target by 3.4 per cent in the first six months. After crunching its own numbers, the FCGO has acknowledged its mistake and told THT today that the central bank’s figure was closer to reality.

“We failed to present accurate statistic because of double calculation of fund transferred to divisible fund,” said a senior FCGO official on condition of anonymity. Since the beginning of this fiscal, the federal government has been sharing 30 per cent of value added tax and another 30 per cent of inland excise duty with provinces and local bodies as part of the policy to financially empower sub-national governments and institutionalise fiscal federalism. The portion of VAT and inland excise duty dedicated to provinces and local bodies is parked in the divisible fund. “Although the amount deposited in the divisible fund is also a part of federal government’s revenue, we had initially decided to keep it separate,” said the FCGO official. This means FCGO’s system had to deduct the amount kept in the divisible fund from the federal government’s gross revenue. But the deduction was not made,” added the official.

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Government scraps Melamchi contract of Italian builder

From The Kathmandu Post: The government has decided to scrap the contract with the Melamchi Water Supply Project’s Italian builder in a move which will push the national pride project into further uncertainty. “The government formally dispatched a letter of termination to the Italian contractor Cooperativa Muratori e Cementisti di Ravenna after it failed to come up with any concrete decision regarding resuming works,” Surya Raj Kadel, executive director of the Melamchi Water Supply Development Board, told the Post. “We have decided to terminate the contract with the existing builder after it did not turn up to resume works even a month after abandoning the project.”

In its previous letter sent last Tuesday, the government had set a Friday deadline for the CMC to make it clear whether it was interested to resume works and how it would want to resolve the dispute. According to Kadel, the Italian builder did respond but sought at least one more week. “We received a meaningless correspondence which had not even come from the proper channel… and it just sought more time. We cannot do that anymore,” Kadel added. CMC officials on their part told the Post that the Nepal government gave them “a very short deadline”.

“For a meeting set for January 18, the employer [Nepal government] had sent us a message on the night of January 15. The company had responded saying it was not possible to meet within three days’ time,” a CMC official said. “We had said a meeting was possible at a suitable time-around January 27 or so and we had also sought diplomatic assurances.”

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Govt pays Rs 758m in interest subsidy for agro-livestock loans

From myRepublica:  The government has disbursed  Rs 758.2 million in interest subsidy for loans floated under a concessional credit scheme for certain agricultural and livestock businesses.  It bears five percent of the interest for loans disbursed by banks and financial institutions. According to  Nepal Rastra Bank (NRB), the outstanding subsidized loans aimed at encouraging youths to pursue agriculture and livestock businesses through BFI loans stand at Rs 14.39 billion as of mid-December. 

A total of 9,749 beneficiaries have borrowed under the scheme, according to NRB data. The scheme was introduced by the government in fiscal year 2014/15 and the subsidy rate was revised after two years. Those who want to start or expand certain agriculture or livestock businesses can get the concessional loans from BFIs. 

The government subsidizes five percent of the interest on the loans under the scheme. The data shows that the government has so far spent Rs 758.2 million on subsidizing the interest. The upper limit for concessional loans under the subsidy scheme has been fixed at Rs 700 million with a maximum payback period of five years. BFIs have to provide loans under the scheme against the collateral of land used for the agro or livestock undertaking or the crops. Loans can be disbursed against group guarantee up to a limit of Rs 1 million.

>>Here is a news story about misuse of the interest subsidy program

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New public debt management office, energy banking between Nepal and India, and more

Nepal and India agree on energy banking

From The Kathmandu Post: Nepal and India have agreed to set up an energy banking mechanism that will prevent spilling of electricity generated in the country when production surpasses demand, a situation the domestic energy sector is expected to face in a few years’ time. Energy banking involves exchanging electricity for electricity instead of cash. Under this mechanism, one country exports electricity to the other when it has a surplus, and imports back the same amount of energy when it has a deficit.

Nepal Electricity Authority (NEA), the state-owned power utility, and Central Electricity Authority (CEA) of India on Wednesday agreed to the draft of the guidelines on power exchange. The draft will be presented for approval before the energy secretary-level joint steering committee (JSC) meeting scheduled to be held in January.

Nepal had long been advocating energy banking saying that seasonal complementarities of demand and supply of electricity in Nepal and India will make the mechanism a suitable model of power transfer. As a majority of power plants in Nepal are run-of-the-river type, they generate a large amount of electricity during monsoon. The surplus coincides with a sharp rise in demand for electricity in the Indian states of Uttar Pradesh, Haryana and Punjab due to increased power consumption in the farm sector.

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Nepal expected to harvest record 5.6m tonnes paddy

From The Himalayan Times: Paddy productivity is estimated to go up by 8.6 per cent in the current fiscal year to 3.8 tonnes per hectare on the back of favourable monsoon, timely availability of fertilisers and use of modern tools and equipment. Paddy productivity stood at 3.5 tonnes per hectare in 2017-18, according to the Ministry of Agriculture and Livestock Development (MoALD). With the growth in productivity, paddy output is expected to hit an all-time high of 5.6 million tonnes in the current fiscal year, up 9.8 per cent than in the last fiscal year, data released today by the MoALD show. Nepal grew 5.1 million tonnes of paddy in the last fiscal year. The jump in paddy production is expected to raise total agricultural production, as the crop makes a contribution of over 25 per cent to overall agricultural output.

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Investment summit in March 2019

From myRepublica: The government is organizing a second investment summit in March next year. Organizing a press meet at the Ministry of Finance on Thursday, Minister for Finance Yuba Raj Khatiwada, who is also the coordinator of the summit organizing committee, said that the two-day Nepal Investment Summit 2019 will kick off on March 29. The summit, among others, aims at promoting Nepal as a lucrative investment destination, according to officials of the Investment Board of Nepal (IBN), which is the coordinating agency of the event.

The government had hosted the first investment summit in March last year. The summit had secured investment pledges worth US$ 13.74 billion. However, most of the pledges have been limited to paper as not a single letter of intent (LoI) has materialized as real investment so far. Speaking at the press meet, Finance Minister Khatiwada, who is also the vice-chairman of the IBN, said that the summit was being held with an objective to translate the country’s long-term development ambition into achievement. “The summit will also help to share with investors what we have done to make the country more investment-friendly,” he added.

IBN CEO Maha Prasad Adhikari told Republica that the investment summit is a part of the government’s initiatives to attract foreign direct investment. Asked why another summit was needed when the investments pledged of the last summit was yet to realize, Adhikari said that the IBN along with other government agencies are following up with the investors. According to Adhikari, over 25 percent of such LoI is in the process of realization. 

>>My take on the proposed investment summit here

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Nepal establishes Public Debt Management Office 

From The Himalayan Times: Government has established the Public Debt Management Office with a view to manage public debt in an integrated manner. Finance Minister Yubaraj Khatiwada inaugurated the office in Putalisadak amidst a programme here today. The office established as a subordinate body of the Ministry Finance will function autonomously. Prior to this, Nepal Rastra Bank (NRB) dealt with proceedings related to internal borrowings and Public Debt and Investment Section at the Office of the Auditor General owned the responsibility of managing external and domestic debt.

The newly established office will look after works relating to debt management including some works of the Finance Ministry. According to Office Chief, Bishnuraj Dhakal, the office will support effective implementation of the government’s fiscal and monetary policies. It will invest in public enterprises and recover loans.

Moreover, it has been given the additional responsibility of looking after some tasks relating to the internal and external debt executed by the International Cooperation Coordination Division and Economic Policy Analysis Division of the Ministry of Finance. It has also been assigned to prepare a draft of the public debt policy. On the occasion, the Finance Minister expressed hope that the government’s fiscal and monetary policies will become more effective with the office coming into operation.

Central bank tweaks regulations to aid stock market

Closely following the recommendations of a committee formed to study the slide in stock market and to reinvigorate it, the central bank tweaked rules and regulations yesterday. 

Specifically, 

Issuance of loan against shares by the banks:  Reduced the risk weight in such loans to 100% from 150%. Offer loan up to 65% of the valuation of shares based on the average price in the past 180 days or the prevailing market price, whichever is lower. Earlier, the threshold of margin lending stood at 50%.  They can also issue loan on shares equivalent to at most 40% of their core capital. Earlier, the NRB had restricted banks to issue loan in shares up to 25% of the core capital.

Margin call:  Banks will now consider right and bonus shares as collateral while valuating shares to make the margin call. Earlier, they were allowed to make a margin call if valuation of shares fell below 20% of the approved value while issuing loan. 

>>These measures will help to increase flow of funds to the stock market, which was crippled by lack of funds as BFIs started to jack up deposit rates. 

Interest spread rate: Banks will have to maintain spread rate at 4.5% by mid-July 2019. Spread rate is the different between deposit and lending rates. They need to reduce spread rate to 4.75% by mid-April 2019. Earlier, it was 5%. 

>>This will help to reduce lending rates. High interest spread is an indication of lack of efficiency and competitiveness of BFIs. High interest spread has its root in a number of factors: risky investment, high inflation (although this is not a case now), high operating costs, reliance on interest income for survival amidst cut-throat competition to rope in depositors, diseconomies of scale due to small market size (which necessitates consolidation of BFIs), and poor access to finance. NRB has been monitoring spread since mid-July 2014 and has been instructing BFIs to bring it down. 

Base rate: Base rate is calculated by BFIs by adding the cost of fund, cost of Cash Reserve Ratio, cost of Statutory Liquidity Ratio, operating cost, and return on asset (ROA). Now, BFIS do not have to to add 0.75 percent ROA while calculating their base rate.

>>This will reduce reported profits of BFIs. Ideally, base rate is published to enhance transparency in lending rate and to strengthen monetary transmission mechanism. NRB started to monitor base rate since 2013 in the case of commercial banks, and since 2014 in the case of development banks and finance institutions. BFIs do not lend below their respective base rate.  

Institutional deposit: The ceiling for share of institutional deposits has been increased to 50% from 45%. 

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The committee formed by finance minister has recommended ways to revive the stock market so that is is always in the bullish zone. Tweaking banking regulations to increase temporary funds flowing to stock market is hardly the solution that is needed now. NEPSE should be responding to economic fluctuations more than the variation in cash savings of few players/speculators. A strong and stable stock market mobilizes capital for investment.

One of the unfinished financial sector reform agenda is consolidation of BFIs, which will help to enhance capital base, operational efficiency and resilience of BFIs. NRB has imposed a moratorium on new BFIs and has been nudging BFIs go for merger and acquisition. Fewer and larger BFIs should lower operational cost (economies of scale), lower cost of fund, increase capital base, reduce asset-liability mismatch as long-term funds could be attracted, diversify loan portfolio, increase R&D investment, and enhance resilience to internal and external shocks.