Tariff war and policy uncertainty leading to synchronized global slowdown

In its latest World Economic Outlook (October 2019), the IMF argues that the global economy is in a synchronized slowdown, thanks to rising trade barriers and increasing geopolitical tensions. It has downgraded global growth for 2019 to 3%, the slowest pace since the global financial crisis a decade ago. Specifically,

• US-China trade tension will reduce the level of global GDP by 0.8% by 2020
• Growth is affected by idiosyncratic country-specific factors in emerging market economies. Growth in Argentina, Iran, Turkey, Venezuela, Saudi Arabia, India, Russia, Brazil, Mexico, China, etc are expected to slowdown
• Growth weakened in China because of regulatory efforts needed to rein in debt and macroeconomic consequences of increased trade tensions
• Growth slowed down in India because of corporate and environmental regulatory uncertainty in addition to the concerns regarding the soundness of nonbank financial sector. 
• Growth is also affected by structural factors such as low productivity growth and aging demographics in advanced economies

So, what is causing the weak growth? 

• Sharp deterioration of manufacturing activity 
• Global trade affected by higher tariffs
• Prolonged trade policy uncertainty affecting investment and demand for capital goods

What is supporting growth?

• Services sector is keeping labor markets afloat and wage growth and consumption spending healthy in advanced economies. This may not last long due to weaknesses in the US and Euro area.
• Monetary policy is supporting growth by easing policies amidst the absence of inflationary pressures and weakening economic activity. 

What are the risks to growth?

• Heightened trade and geopolitical tensions including Brexit-related risks
• These could lead to shift in risk sentiment, financial disruptions, and a reversal of capital flows to emerging market economies 
• Low inflation is constraining monetary policy and its effectiveness

What is needed to rejuvenate growth, especially to boost confidence and reinvigorate investment, manufacturing, and trade?

• Undo the trade barriers, rein in geopolitical tensions, and reduce domestic policy uncertainty. Tariffs should not be used to target bilateral trade balances. Cooperation to resolve roots of dissatisfaction is needed (resolve deadlock over WTO dispute settlement mechanism; modernize WTO rules to encompass e-commerce, subsidies and technology transfer, etc)
• Monetary policy needs to be coupled with fiscal support where fiscal space is available. If borrowing costs are low, then countries should borrow more to invest in social and infrastructure capital 
• If monetary policy is supporting growth, then macroprudential regulation should be the norm to prevent mispricing of risk and excessive buildup of financial vulnerabilities
• Sustainable growth requires structural reforms to boost productivity, improve resilience, and lower inequality. These reforms are more effective when good governance is already in place (applies to emerging market and developing economies)

Although global growth will inch up to 3.4% in 2020 it is still a downward revision from the April 2019 projection. This is supported by growth rebound in emerging market and developing economies. The ‘recovery’ is not broad-based and remains vulnerable because of the expected slowdown in major economies like the US, Japan, and China.

South Asian outlook

• Nepal is clocking in the highest GDP growth in FY2019. In FY2020 Bhutanese economy is expected to grow at 7.2%, followed by Indian economy 7.0% and Nepali economy 6.3%.
• Nepal is projected to have the highest inflation rate, 6.1%, in FY2020.
• Maldives is expected to have the highest current account deficit, 15.7% of GDP, in FY2020, followed by Nepal (10% of GDP)

GDP growth
Economy	FY2019	FY2020
Bhutan	5.5	7.2
India	6.1	7.0
Nepal	7.1	6.3
Maldives	6.5	6.0
Bangladesh	5.9	6.0
Sri Lanka	2.7	3.5
Inflation
Economy	FY2019	FY2020
Nepal	4.5	6.1
Bangladesh	5.5	5.5
Sri Lanka	4.1	4.5
Bhutan	3.6	4.2
India	3.4	4.1
Maldives	1.5	2.3
Current account balance (% of GDP)
Economy	FY2019	FY2020
Maldives	-20.4	-15.7
Nepal	-8.3	-10.0
Bhutan	-12.5	-9.6
Sri Lanka	-2.6	-2.8
India	-2.0	-2.3
Bangladesh	-2.0	-2.1

New cross-border transmission line, 762 MW Tamor reservoir project, projected GDP growth of 6.4%

Nepal, India agree to build New Butwal-Gorakhpur transmission line with equal equity investment

From The Kathmandu Post: Nepal and India have agreed to fund a second high-capacity cross-border transmission line connecting Butwal to Gorakhpur in India through a commercial entity with both countries pledging equal equity in funding of the project. The agreement on Tuesday followed a two-day, Seventh Joint Steering Committee and Joint Working Group meeting on Nepal-India Cooperation in the Power Sector in the southern Indian city of Bengaluru. The meeting concluded with agreements on implementation and financing modality of the 135 kilometre-long, 400 kV transmission line and formalisation of an energy banking mechanism between the two South Asian neighbours.

“The sides have agreed to build the transmission line with 20 percent of equity investment and 80 percent debt,” said Energy Minister Barsha Man Pun. It was decided that a company would be formed under the modality within three months and to have a project implementation agreement, within six months.The decision came a month after the Nepali and Indian energy ministers expressed optimism over both sides coming to terms on the development modality of the proposed 400 kV New Butwal-Gorakhpur transmission line project.

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HIDCL, Power China to build 762MW Tamor hydel

From The Himalayan Times: The government has awarded the 762-megawatt Tamor reservoir hydropower project to a Nepali and Chinese joint venture firm. Hydroelectricity Investment and Development Company Ltd (HIDCL) of Nepal and state-owned Power China Corporation will construct the project on government-to-government (G2G) basis. Construction of the Tamor project is expected to start from next fiscal and be completed by 2025.

During Chinese President Xi Jinping’s two-day state visit to Nepal, the Investment Board Nepal (IBN) and Ministry of Energy, Water Resources and Irrigation (MoEWRI) awarded the contract to HIDCL-Power China to build the project under the public-private-partnership (PPP) model. Minister for Energy, Water Resources and Irrigation, Barsha Man Pun, informed that the government has also signed an agreement with Power China to build the 156-megawatt Madi multipurpose hydropower project which is located in Rolpa district. As per an initial study, the project cost is around $39 million.

Earlier, HIDCL and Power China had jointly submitted a project development proposal at the IBN to build both the projects with a share structure of 46:54 per cent for the Tamor project, with the Nepali firm investing 46 per cent and Power China investing 54 per cent of the project cost. Similarly, in Madi multipurpose hydropower project, HIDCL will manage 26 per cent and Power China will manage 74 per cent of the total investment.

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World Bank projects Nepal’s GDP growth rate to average at 6.5%

From myRepublica: The World Bank has projected the growth of Nepal’s gross domestic product (GDP) to average at 6.5% over the current fiscal year – FY2019/20 and the next fiscal year – FY2020/21.The medium-term outlook is supported by government consumption and investment, according to the bank. Reasoning strong services and construction activity due to rising tourist arrivals and higher public spending, the international financial institution made the growth projection for Nepal. 

According to the report, growth on the supply side will be driven by services, underpinned by steady remittance inflows and high tourist arrivals whereas investment and government consumption are expected to be the main drivers of growth on the demand side. The tourist arrivals will be supported by the Visit Nepal 2020 campaign, the completion of the second international airport and the construction of big hotels in the country.

How did Nepali economy perform in FY2019?

Overview

• Positive point: Three consecutive years of high GDP growth
• Concerning points: Weak budget execution, revenue growth below target, inflation inching up (natural given high GDP growth), continued tight liquidity and high interest rates, large fiscal and current account deficits, lower FDI, depleting foreign exchange reserves (although at OK level)
• Things to watch out for: Whether high growth rate is sustainable without significant improvement in public capital budget execution and higher private investment (domestic and foreign), structural and institutional reforms (procurement, land, environment, human resources and labor market, laws and regulations), and sound governance

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1. CBS estimated that the economy would grow at 6.8% (GDP at basic prices) in FY2019. At market prices, it is expected to grow at 7.1%. This marks three consecutive years of above 6% growth rate. In FY2019, bumper agricultural harvest and pickup in services sector activities contributed the most to the GDP growth. Specifically, agricultural, industrial and services sectors are projected to grow by 5.0%, 8.1% and 7.3%, respectively. Agricultural sector contributed 1.6 percentage points, industrial sector 1.3 percentage points and services sector 3.9 percentage points to the overall projected GDP growth of 6.8%. These projections are based on eight to nine months data.

2. Specifically, electricity, gas and water sub-sector is projected to grow at the fastest rate (12.4%, up from 9.8% in FY2018), followed by wholesale and retail trade (10.9%, down from 12.3% in FY2018), mining and quarrying (9.5%) and construction (8.9%). These indicate accelerated work in hydroelectricity generation and ongoing construction as well as pickup in reconstruction related activities (public as well as private housing and infrastructure). The high wholesale and retail trade activities are related to the burgeoning import growth and remittance income. Overall, robust agricultural output is underpinned by favorable monsoon and timely availability of agricultural inputs, and high services sector output is supported by wholesale & retail trading, tourism and real estate activities. Industrial sector slowed down a bit compared to FY2018.

3. On the expenditure side, GDP (at market prices) grew by 7.1%, up from 6.7% in FY2018. Consumption accelerated but public fixed investment (public GFCF) decelerated, indicating a slowdown in capital spending. A much higher increase in import and a slower increase in export meant that net export was negative.

4. On fiscal sector, capital expenditure absorption capacity continues to remain low despite the budget being unveiled one and a half month prior to start of FY2019. The government argued that it spent the first few months in designing spending procedures and directives, and laws related to investment promotion and procurement. It also said that small projects were delegated to local governments, but was not so forthright in delegation of spending and monitoring authority. This also contributed in low capital spending. Furthermore, delays in land acquisition, environment clearance, lengthy procurement processes, lack of inter-agency coordination, etc continued to bog down the extent and the effectiveness of public spending. As per the data from FCGO, actual capital spending is projected to be about 75.9% of planned capital spending. Similarly, actual recurrent spending is projected to be 84.6% of planned recurrent spending. Recurrent and capital expenditures are projected to be 20.6% and 6.9% of GDP, respectively. These were 23% and 7.9% of GDP in FY2018. FCGO used to publish monthly budgetary expenditure and revenue previously. Very strange that it is not publishing them on time these days (even quarterly public debt data are not published regularly). These are preliminary figures. Actual figures will probably show slightly higher recurrent but a bit lower capital expenditures. Also, there isn't much change in spending pattern too, with over 50% of spending bunching in the last quarter. 

5. Meanwhile, based on the latest revenue data published by the central bank in its macroeconomic situation report, revenue growth is estimated to be about 17.4%, much lower than the government’s target. Total revenue will be around 24.8% of GDP. The share of VAT is the highest (28.1%), followed by income tax (22.6%), customs (18.1%) and excise duty (14.2%) among others. Considering the expenditure under-performance and high level of revenue mobilization (although short of the target), fiscal deficit will likely be around 6% of GDP. A higher fiscal deficit is exerting pressure on current account balance too.

6. Annual CPI inflation averaged 4.6%. Here, note that usually the central bank computes annual average inflation as the average of monthly inflation, in which case it will be 4.7%. However, the central bank used the average of monthly CPI index to compute annual inflation for FY2019. Why to be inconsistent in FY2019 only (probably, to side with the lower inflation figure or just a mistake)? In any case, let us use the 4.6%, which is slightly higher than the inflation in FY2018. Both food and beverage, and non-food and services inflation increased in FY2019. In food and beverages, the highest increase in prices was that of alcoholic drinks and tobacco products (no surprise here as the government increased taxes and excise duty). In non-food and services, the highest increase in prices was that of housing and utilities, clothes and footwear, and transportation (higher fuel prices, depreciation of currency as well as strong consumer demand). 

7. M2 (broad money) expanded by 15.8%, driven by private sector credit growth. However, M2 growth in FY2019 is lower than the central bank’s target (and the one in FY2018) owing to the decline in net foreign assets. Overall credit to private sector expanded by 19.1%, lower than in FY2018.

8. Deposits at BFIs increased by 18%, lower than 19.2% in FY2018. Credit (loans & advances) grew by 20.7%, lower than 23.3% in FY2018. Deposits growth of all class A, B and C BFIs slowed down. Credit by development banks increased but that by commercial banks and finance companies decreased compared to the growth in previous year. However, credit growth of commercial banks was still higher than its deposit growth. Agriculture sector credit grew by 42.5% (primarily because processing of tea, coffee, ginger and fruits and primary processing of domestic agro products were included in agriculture  from October 2017. Prior to this, most of these were under production). Credit to construction sector grew by 22.2%. Similarly, credit to mining, transport equipment production and fitting (includes aircraft and aircraft parts); transportation, communications and public services (includes electricity), and consumable loan (includes gold & silver) grew at a faster rate than the previous year. However, credit to industrial production; metal production, machinery and electrical tools and fitting; wholesale and retail trade; finance, insurance and fixed assets (includes real estate); and service industries slowed down.  Of the outstanding credit up to mid-July 2019, the largest share (21.1%) is that of transportation, communications and public services; followed by agriculture, consumable loan, service industry, and construction, among others. 

9. The weighted average inter-bank rate has been increasing. At 4.2% in FY2019, the weighted average inter-bank rate is the highest since FY2011, when it was 8.4%. In mid-July 2018, it was 2.96%. It decreased for few months and then started to rise again, peaking  at 6.91% in mid-June 2019. In mid-July 2019, it was 4.52%. Similarly, 91-day treasury bill rate also followed similar pattern, reaching 4.97% in mid-July 2019. It indicates tight liquidity in the banking sector arising from two sources: (i) faster credit growth than deposit growth (to maintain profit margin banks had to increase loans after the sharp increase in paid-up capital); and (ii) lower than expected public capital spending. CRR and repo rates remained unchanged, but SLF rate reduced by 50 basis points in FY2019. SLF is the money BFIs borrow from NRB by keeping government bills as collateral for five days. Inter-bank rate refers to transaction among A & B, A & C, B &B, B & C and C & C class banks and financial institutions. 

10. Commercial banks have broadly adhered to the deposit and loan related regulatory requirements. Capital adequacy ratio stood at 13.51% as of mid-April 2019 against the minimum 11% (minimum CAR 10% plus 1% buffer). CCD was about 77.73%. NPL started to increase since mid-July 2018, reaching 1.67% of total loan in mid-April 2019. Interest rate corridor did not help much to lower interest rate volatility. FY2018 monetary policy changed the way to compute interest rate corridor (between 3% and 7%), with SLF rate being the upper bound and two-week term deposit rate being the lower bound. FY2020 monetary policy decreased these by 50 basis points.

11.  By mid-July 2019, 735 local levels (out of 753) have presence of commercial banks. Total number of BFIs licensed by NRB increased to 171 by FY2019 from 151 in the previous year. There are 28 commercial banks, 29 development banks, 23 finance companies, 90 microfinance financial institutions, and one infrastructure development bank. The number of class A, B and C category BFIs decreased, but the number of microfinance financial institutions increased from 65 to 90 last year. With the rapid expansion of credit and stricter enforcement of banking regulations, the number of blacklisted borrowers is also increasing—reaching 2,842 by FY2019, up from 1,335 in FY2018.

12. According to data from Department of Customs, in US dollar terms, exports increased by 10.3%, reaching US$ 862.6 million. The growth rate of export is lower than last year. Exports to India increased but exports to China and other countries decreased. Meanwhile, imports grew by 5.3%, reaching US$12.6 billion. The growth rate of import is lower than last year. Consequently, trade deficit increased much slowly than last year, reaching US$11.7 billion. India accounted for about 65% of Nepal’s exports and imports in FY2019. As a share of GDP, exports, imports, trade deficit and total trade were 2.8%, 40.9%, 38.1% and 43.8% of GDP, respectively. Export to import ratio was 6.8.

13. The largest export to India in FY2019 is a new entry—palm oil (US$91.8 million). Nepal does not produce palm oil but traders may be importing raw materials from third countries, process domestically to add at least 30% value, and then export it to India taking advantage of the preferential tariff. In fact, import of crude palm oil increased by 152.2%, reaching US$41.7 million. The second largest export item to India was polyster yarn, followed by jute goods, juice, cardamom and textiles, among others. Export of pulses, polyster yar, noodles, pashmina, handicraft goods, vegetables, jute goods, thread, and readymade garments grew by over 20%. The largest export to China are handicraft, woolen carpet, noodles and readymade garments. The largest export to other countries are woolen carpet, readymade garments, pashmina, pulses and herbs, among others. 

14. The largest import from India in FY2019 was petroleum product (almost US$2 billion), followed by vehicles & spare parts, MS billet, machinery parts, rice and medicine, among others.  Import of raw cotton, bitumen, fruits, textiles, readymade garments, molasses sugar, electrical equipment, and vegetables grew by over 30%. The largest import from China are telecommunication equipment, readymade garments, electrical goods, machinery parts, and television parts. The largest import from other countries are gold, aircraft spare parts, coal, crude soybean oil and silver, among others. 

15. The number of migrant workers continues to decline steadily after peaking in FY2014. Outbound migrant workers decreased by 32.6% because of a massive drop in outmigrants to Malaysia (9,999 in FY2019 versus 104,207 in FY2018). The government stopped issuing labor permits to potential migrant workers to Malaysia to implement the G2G deal, which ensures cost-free migration and labor rights. But, it is not implemented as expected. Moreover, outmigration for work to all major destinations except Japan, Afghanistan, UAE and Saudi Arabia decreased in FY2019. However, this has not lead to a decrease in remittance inflows probably because more migrant workers are using formal banking channel to remit income back home and that Nepalis residing or studying in developed countries are remitting more money back home. Remittance inflows reached US$7.8 billion, which is equivalent to about 26.8% of GDP.

16. A lower rate of import growth compared to export growth slowed down the deterioration of trade deficit. Remittance inflows decelerated (7.7% growth in FY2019, down from 10.5% in FY2018) but the country received higher grants than year, resulting in a marginal improvement in net transfers. With net transfers of 28.7% of GDP and net income balance of 1.2% of GDP, and trade deficit (goods and services) of 37.5% of GDP, current account deficit was 7.7% of GDP, slightly lower than 8.2% of GDP in FY2018. Balance of payments recorded a deficit of US$598.7 million, the first in the last nine years. Meanwhile, net FDI decreased by 31%, reaching US$116 million (0.4% of GDP). Gross foreign exchange reserves reached US$10.6 billion, which is enough to cover 9.4 months of import of goods and services. Nepali rupee depreciated by 0.02% against the US dollar in mid-July 2019 compared to the same period last year. 

Overall, here is a snapshot: 

• The economy grew at over 6% for three consecutive years, thanks to bumper agricultural harvest, post-earthquake related reconstruction, stable supply of electricity and pickup in services sector activities. So, consumption accelerated but public investment slowed down. 
• Public capital spending decreased but higher recurrent spending will lead to a fiscal deficit of around 5% to 6% of GDP. 
• Inflation inched higher on account of higher food and non-food prices of goods and services. 
• Broad money growth (M2) was below the central bank’s target. Credit expansion outstripped deposit expansion with construction and agricultural sectors receiving more loans than before. 
• Retail deposit and loan interest rates as well as inter-bank rate increased, indicating tight liquidity situation in the banking sector. 
• The number of migrant workers is decreasing but remittance inflows are increasing, suggesting more use of formal banking channel and higher remittance from non-traditional employment destination. 
• There is not much change in composition of exports and imports. 
• A lower rate of import growth compared to export growth slowed down the deterioration of trade deficit. This along with improved net transfers resulted in lower current account deficit than last year. 
• Balance of payments slipped into the negative territory for the first time in nine years. 
• Forex reserves are down but are enough to cover 0.4 months of import of goods and services. FDI inflows decreased.
• Here is an earlier posts on FY2020 budget and FY2020 monetary policy

Water pollution endangers economic growth

According to a new WB report (Quality Unknown: The Invisible Water Crisis), the release of pollution upstream acts as a headwind that lowers economic growth downstream. Specifically, when Biological Oxygen Demand (BOD) – a measure of how much organic pollution is in water and a proxy measure of overall water quality – passes a certain threshold, GDP growth in downstream regions is lowered by a third. Meanwhile, in middle-income countries – where BOD is a growing problem because of increased industrial activity - GDP growth downstream of highly polluted areas drops by half.

High chemical fertilizer use has long-term consequences including stunting. Nitrate exposure in infancy wipes out much of the gain in height seen over the past half-century in some regions and harms children even in areas where nitrate levels are deemed safe. While an additional kilogram of nitrogen fertilizer per hectare increases agricultural yields by as much as 5%, the accompanying run-off and releases into water can increase childhood stunting by as much as 19% and decrease adult earnings by as much as 2%. This suggests a stark trade-off between using nitrogen to boost agricultural output and reducing its use to protect children’s health.

This report also reveals that enough food is lost due to saline waters each year to feed 170 million people every day – that’s equivalent to a country the size of Bangladesh. Such a sizable loss of food production to saline waters means food security will continue to be jeopardized unless action is taken. More salt in the water means less food for the world.

So, what can be done about it? First, there needs to be a reliable, accurate and comprehensive information about water quality. Second, prevention is better than cure. Sunlight is the best disinfectant but legislation, implementation and enforcement to reduce water pollution are equally important. Third, investment in wastewater treatment and reduce preventable pollution.

Tinkering at the margin

It was published in The Kathmandu Post, 16 August 2019

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Tinkering at the margin

The governor of Nepal Rastra Bank, Chiranjibi Nepal, recently unveiled the central bank’s monetary policy for 2019-20 fiscal year. Amidst persistently high-interest rates, liquidity crunch, unresolved structural issues including inherent operational and management vulnerabilities, and deterioration of external sector, the governor unveiled an expansionary policy to support the government’s unrealistic 8.5 percent growth target.

Many analysts had expected the central bank to take concrete measures to speed up the restructuring and consolidation of banks and financial institutions (BFIs). They were even planning actions like forced mergers. The idea was that this would result in efficient banking operations with lower management and operational costs, low interest rate volatility, innovation, and healthy competition. Instead, the central bank played it safe and prioritised an expansionary monetary policy. The concern over recurring bouts of a shortage of loanable funds and interest rate volatility remained on the backburner.

The central bank can influence interest rates charged to customers by BFIs and liquidity availability through conventional monetary policy tools that control the supply of money in the economy. For instance, lowering the cash reserve ratio—the minimum share of deposits that BFIs need to hold as reserves either in the form of cash or deposit with the central bank—frees up the funds available to the BFIs to loan out, and hence increases liquidity and lowers interest rates. Similarly, lowering statutory liquidity ratio—the share of deposits that BFIs have to maintain in the form of cash or approved assets and securities—also increases the money supply in the economy. Another measure is to change credit-to-core capital cum deposit (CCD) ratio threshold, which mandates the BFIs to lend a maximum of 80 percent of their deposits. The threshold for these remain unchanged in the monetary policy.

Volatile rates

Intending to lower interest rate volatility and improve monetary policy transmission, the central bank lowered thresholds for its interest rate corridor scheme. This sets a narrow band for the interest rate to fluctuate. The upper limit is lowered from 6.5 percent to 6 percent, repo rate (also called the policy rate) from 5 percent to 4.5 percent, and the lower threshold (term deposit rate) from 3.5 percent to 3 percent. It remains to be seen if this will actually lower retail interest rates because interest rates corridor, implemented since 2016-17, has not been much effective in reining in interest rate volatility.

The central bank has given continuity to directed lending to priority sectors including energy, tourism and agriculture. It has also boosted refinancing schemes, including lowering of interest rates for on-lending to priority sectors, and small and medium enterprises. Furthermore, it has extended the deadline to reduce the spread rate—the difference between deposit and lending rates—to 4.5 percent to mid-July 2020 instead of mid-July 2019. For BFIs that opt for a merger, the deadline is mid-July 2021.

These measures tinker existing regulations and accounting practices and hence address the underlying structural issues at the margin only. Furthermore, they may be insufficient to meet the core monetary policy targets—money supply growth of 18 percent, domestic credit growth of 24 percent and private sector credit growth of 21 percent, all higher than in the previous year. For instance, forcing the banks to maintain higher capital adequacy ratio plus countercyclical buffer (13 percent from 11 percent previously) will potentially lower their lending capacity and hence put upward pressure on interest rates, eventually slowing down credit expansion.

Credit crunch

The central bank has introduced two important measures to increase sources of deposits for BFIs and hence the availability of loanable funds.

First, it now allows BFIs to commercially borrow from not only foreign banks but also hedge and pension funds. Although this technically widens the sources of deposits for BFIs, it is unlikely that they will actively borrow money immediately from external sources due to risks associated with a higher cost of funds and the exchange rates.

Second, the central bank has mandated the BFIs to issue debentures or corporate bonds equivalent to at least 25 percent of paid-up capital. The expectation is that this will encourage BFIs to align their assets with their liabilities (i.e. discourage the tendency to use short term deposits to issue long term loans), and secure reliable sources of loanable funds in case they are close to the CCD threshold. If BFIs fail to meet this mandatory provision within this fiscal year, then they may be compelled to seek a merger. However, in the past, the central bank was too lenient. It repeatedly extended the timeline of what is supposed to be a mandatory provision (for instance, increased paid-up capital threshold, lower spread rate, and adherence to CCD threshold).

Regarding the external sector, the central bank has tightened loans to finance imported goods (especially vehicles) and the foreign exchange facility provided to Nepali citizens who visit abroad. Considering the deterioration of the balance of payments and depletion of foreign exchange reserves, the central bank is targeting to maintain reserves to finance seven months of imports. This is substantially down from barely two years ago, when reserves were large enough to sustain over ten months of imports. External sector stress will compound as exports, remittances and foreign investment growth stagnate or even decrease, but imports accelerate. The pegged exchange rate limits the central bank’s effectiveness to address external sector imbalance. Policy reforms to boost exports and foreign investment are crucial for this.

The success of the monetary policy will be judged in terms of how much interest rate decreases over time, sustainable credit expansion and lowering risks of asset-liability mismatch, further consolidation of BFIs and improved corporate governance, and external sector stability. Tinkering with productive sector lending has been a common feature of monetary policy, and this in itself will not help much to achieve the growth target.

Unemployment rate in Nepal is about 11.4 percent

Central Bureau of Statistics (CBS) published third edition of labor force survey few months ago. Unlike NLFS I and NLFS II, definition of employment is now narrower— the new definition of employment includes only work performed for others for pay or profit. So, production for own final use is not considered as employment. This is consistent with the 19th International Conference of Labor Statisticians in 2013. 

The changes in definition of employment mean that some of the employment and unemployment related indicators cannot be compared to the previous surveys. The survey covers general household information, current activities, current working hour, usual working hour, unemployment, past employment, and absentees. 

Here are the major highlights:

1. Population: About 38.7% of the population was below 20 years of age. About 63% reside in urban areas (note that the definition of rural and urban areas changed after the new local units were formed).The share of male in age cohorts between 20 and 49 is lower than that of female, indicating the male-dominated large-scale outmigration for work. The total population in 2018 was 29 million. 

2. Working-age population means individuals aged 15 years and older who are employed, unemployed, and not in the labor force. There were 20.7 million people of working age (15 years and older), and 40% of them were aged between 15-34 years. The share of individuals aged 15-24 is the largest among the unemployed people. Also, the share of the same age group is the highest among those who are not in the labor force. Labor force consists of individuals who are employed and those that are considered unemployed. The male to female ratio in the working age population is 100:125. But, among the employed, it is 100:59.

3. Labor force consists of individuals who are employed and those that are considered unemployed. Among the 20.7 million people of working age, 12.7 million were not in the labor force (61.3%). About 8 million people were in the labor force (7.1 million employed and 0.9 million unemployed). 

The share of working-age population not in the labor force is above 50% in all the provinces— the highest 72.7% is in Sudurpaschim and lowest 52.9% in province 3. About 79.1% of the labor force did not have secondary education. 

4. Employed: Anyone of working age is considered employed, in any activity to produce goods or provide services for pay or profit,  if he or she had a job for at least one hour (“at work”) in the reference week, or is not at work due to temporary absence from a job or due to working-time arrangements (flexitime, leave, shift work, etc). Paid trainee is regarded as employed.

There were 7.1 million employed people. As a share of total working age population, it is about 34.2% (or employment-to-population ratio). Province 3 had the highest EPR (48.3%) and Sudurpsashim province the lowest (24.1%). The male EPR was 53.8% and female EPR 26.3%.

5. Unemployed: An individual is unemployed if he or she is completely without work but is currently available to work and is taking active steps to find work.  The reference period is unemployed in the last week but actively engaged in seeking job in the last 30 days and is available to start working in the next 15 days. 

The unemployment rate was 11.4% (about 908,000 people of working age). Unemployment rate measures that proportion of the labor force that is trying to find work The highest unemployment rate was among 15-34 years. About 21.4% of 15-24 years age group were unemployed and for 25-34 years age group it was 12.7%.

The highest unemployment rate was in province 2 (20.1%) and the lowest in province 3 (7%). Unemployment rate among working age male was 10.3% and among female it was 13.1%.

There is a wide gap between labor force (employed and unemployed) and  working age population. It indicates that a large section of the working age population in fact did not work in the reference week, either because they did not look for work or try to start a business in the four weeks preceding the survey, or were not available to start work or a business in the reference week. One of the reasons is that most households are self-employed in agricultural sectors and production is mostly used to sustain household consumption, i.e. not intended to be sold in the market to earn profit. Earlier editions of NLFS considered these individuals to be employed too (and hence the low unemployment rate). In a way, with EPR of 34.2% (that is the share of employed population to working age population), those not employed (unemployed and not in labor force) comes to be about 65.8% (ignoring the definition of unemployed for a bit).

6. Labor underutilization: Labor underutilization is a wider measure of unemployment that takes into account the potential labor force as well. Usually, labor force constitutes employed and unemployed working-age population. However, extended labor force includes labor force plus potential labor force (which basically are those unemployed individuals who express an interest in working but are limited by existing conditions to actively search for job or make themselves available). For instance, during an economic downturn unemployment rate increases sharply even though people are willing to work more and some people might just engage in self-employment. 

Of the 12.7 million people outside the labor force, 2.6 million should be considered as potential labor force as they were either seeking work or they wanted to work and are available— showing some form of attachment to the labor market. 46 thousand individuals were actively seeking work but were not available to work (unavailable job-seeker) and a further 2.5 million individuals wanted to work and were available to start working (available potential job-seeker). If we add these individuals to the usual definition of labor force, then we get an extended labor force (10.6 million). Therefore, extended labor force makes up about 51% of total working-age population. 

The labor underutilization rate based on extended labor force was 33.1%. If we further include the time related underemployed (those who wanted to work more hours) to the extended labor force, then labor underutilization rate comes to be around 39.3%.

• Unemployment rate= [unemployed/labor force]*100 
• LU2= [(time-related underemployed + unemployed)/labor force]*100
• LU3= [(unemployed + potential labor force)/extended labor force]*100
• LU4= [(time-related underemployed + unemployed + potential labor force)/extended labor force]*100

7. Sectoral employment: A majority of the 7.1 million employed individuals are in the services sector. About 30.8% are in industrial sector and the rest 21.5% in agricultural sector. The share of employed female in agricultural sector is higher than the share of employed male. It is the opposite in the industrial sector, but around the same in the services sector. 

As a share of GDP too, services sector accounts for about 50%. Within services sector, wholesale and retail trade related activities have 17.5% of the total employed population. The next big employer is manufacturing (15.1%), followed by construction (13.8%), and education (7.9%).

8. Formal and informal sector: About 62.2% of the 7.1 million employed individuals are working in the informal sector (agriculture, non-agriculture, and private households). Only 37.8% are employed in formal sector (agriculture and non-agriculture). 

Non-agricultural formal sector comprises of incorporated companies or establishments that are registered with relevant authorities, government or state-owned enterprises, and international organizations/foreign embassies. Meanwhile, non-agricultural informal sector comprises of enterprises that are neither incorporated nor registered with authorities. Employment in private households is also informal.

9. Informal employment: There is a need to make a distinction between formal and informal sector, and formal and informal employment. Even if an individual is working in formal sector, he or she may not have access to basic benefits. Informal employment includes employers, own-account workers and contributing family workers who are employed in formal sector establishments, as well as employees and paid apprentices/interns who do not have paid annual leave or sick leave benefits and whose employers do not contribute to their social security. 

Considering this definition of informal employment, about 84.6% of those in employment were informally employed. Specifically, 59.2% of formal sector employment was informal and 100% of informal sector employment was informal. Informal employment is widespread in all occupations except managers – professionals, technicians, associate professionals, clerical support workers, service and sales workers, skilled agriculture, craft and related trade works, plant and machine operators, and elementary occupations among others.  

10. Monthly earnings: There were 3.8 million employees and paid apprentices/interns who were paid in cash the last time they were paid in their main job. About 51.1% received payment monthly. Just 0.3 million of those who were paid in cash (or 14.7%) earned Rs25,000 or higher monthly. About 41.3% earned between Rs15,000 and Rs25,000 monthly.

The average monthly earnings was Rs17,809 and median monthly earnings was Rs15,208 (median is not sensitive to extreme values). More skilled jobs fetched more earnings. In all occupations, male earned more than female.

Some technical background: 

• Like in NLFS I and NLFS III, the survey covers the entire country.  The sample size is 18,000 households (10,500 households from urban areas and 7,500 from rural areas). The sample design involved a two-sage probability proportional to size selection process— administrative wards were selected with PPS and then 20 households were selected by systematic random sampling method. The survey was carried out between 16 July 2017 and 15 June 2018 in three cycles (dry, rainy and winter). 
• The administrative wards are the PSUs and there are 900 of them in NLFS III (375 from urban areas and 535 from rural areas). Municipalities are considered as urban areas. The reference period is a week before the survey for employment. For unemployed, the reference period is unemployed in the last week but actively engaged in seeking job in the last 30 days and is available to start working in the next 15 days. Unemployment rate measures that proportion of the labor force that is trying to find work.
• Labor force participation rate measures the proportion of working-age population that engages actively in the labor market (either by working or looking for one). LFPR was 38.5%. Male LFPR was 53.8% but female LFPR was 48.3%.
• Employment-to-population ratio, which measures the proportion of the working-age population that is employed, was 34.2%. About 48.2% of male of working age were employed compared to 22.9% of female of working age.