Poverty in Nepal

Different measures have different estimates. The NLSS I and NLSS II have the following estimates.

Meanwhile, MPI and the WB have the following estimates:

Additionally, the ADB has its own estimate of poverty and draws a poverty line at $1.35 a day. For Nepal, with the new ADB estimates, the percentage of population living in poverty is higher than under $1.25 a day. Under $1.35 a day estimate 59.5% of the population live in poverty, while under the WB’s estimate 24.7% live below the $1.25 a day line and under $2 a day 64.3% of the population live in poverty.

Lord Keynes and President Roosevelt, 1938/02/01

To Franklin Delano Roosevelt, 1 February 1938

Private and personal

Dear Mr. President,

You received me kindly when I visited you some three years ago that I make bold to send you some bird’s eye impressions which I have formed as to the business position in the United States. You will appreciate that I write from a distance, that I have not revisited the United States since you saw me, and that I have access to few more sources of information than those publicly available. But sometimes in some respects there may be advantages in these limitations! At any rate, those things which I think I see, I see very clearly.

(1) I should agree that the present recession is partly due to an ‘error of optimism’ which led to an overestimation of future demand, when orders were being placed in the first half of this year. If this were all, there would not be too much to worry about. It would only need time to effect a readjustment;—though, even so, the recovery would only be up to the point required to take care of the revised estimate of current demand, which might fall appreciably short of the prosperity reached last spring.

(2) But I am quite sure that this is not all. The recovery was mainly due to the following factors:—

1. the solution of the credit and insolvency problems, and the establishment of easy short-term money;
2. the creation of an adequate system of relief for the unemployed;
3. the public works and other investments aided by Government funds or guarantees;
4. investment in the instrumental goods required to supply the increased demand for consumption goods;
5. the momentum of the recovery thus initiated.

Now of these (i) was a prior condition of recovery, since it is no use creating a demand for credit, if there is no supply. But an increased supply will not of itself generate an adequate demand. The influence of (ii) evaporates as employment increases, so that there is a dead point beyond which this factor cannot carry the economic system. Recourse to (iii) has been greatly curtailed in the past year. (iv) and (v) are functions of the upward movement and cease—indeed (v) is reversed—as soon as the position fails to improve further. The benefit from the momentum of recovery as such is at the same time the most important and the most dangerous factor in the upward movement. It requires for its continuance, not merely the maintenance of recovery, but always further recovery. Thus it always flatters the early stages and steps from under just when support is most needed. It was largely, I think, a failure to allow for this which caused the ‘error of optimism’ last year.

Unless, therefore, the above factors were supplemented by others in due course, the present slump could have been predicted with absolute certainty. It is true that the existing policies will prevent the slump from proceeding to such a disastrous degree as last time. But they will not by themselves—at any rate, not without a large-scale recourse to (iii)—maintain prosperity at a reasonable level.

(3) Now one had hoped that the needed supplementary factors would be organized in time. It was obvious what these were—namely increased investment in durable goods such as housing, public utilities, and transport. One was optimistic about this because in the United States at the present time the opportunities, indeed the necessities, for such developments were unexampled. Can your Administration escape criticism for the failure of these factors to mature?

Take housing. When I was with you three and a half years ago the necessity for effective new measures was evident. I remember vividly my conversations with Riefler at that time. But what happened? Next to nothing. The handling of the housing problem has been really wicked. I hope that the new measures recently taken will be more successful. I have not the knowledge to say. But they will take time, and I would urge the great importance of expediting and yet further aiding them. Housing is by far the best aid to recovery because of the large and continuing scale of potential demand; because of the wide geographical distribution of this demand; and because the sources of its finance are largely independent of the stock exchanges. I should advise putting most of your eggs in this basket, caring about this more than about anything, and making absolutely sure that they are being hatched without delay. In this country we partly depended for many years on direct subsidies. There are few more proper objects for such than working-class houses. If a direct subsidy is required to get a move on (we gave our subsidies through the local authorities), it should be given without delay or hesitation.

Next utilities. There seems to be a deadlock. Neither your policy nor anybody else’s is able to take effect. I think that the litigation by the utilities is senseless and ill-advised. But a great deal of what is alleged against the wickedness of holding companies is surely wide of the mark. It does not draw the right line of division between what should be kept and what discarded. It arises too much out of what is dead and gone. The real criminals have cleared out long ago. I should doubt if the controls existing today are of much personal value to anyone. No one has suggested a procedure by which the eggs can be unscrambled. Why not tackle the problem by insisting that the voting power should belong to the real owners of the equity, and leave the existing organizations undisturbed, so long as the voting power is so rearranged (e.g. by bringing in preferred stockholders) that it cannot be controlled by the holders of a minority of the equity?

Is it not for you to decide either to make a real peace or to be much more drastic the other way? Personally I think there is a great deal to be said for the ownership of all the utilities by publicly owned boards. But if public opinion is not yet ripe for this, what is the object of chasing the utilities around the lot every other week? If I was in your place, I should buy out the utilities at a fair price in every district where the situation was ripe for doing so, and announce that the ultimate ideal was to make this policy nation-wide. But elsewhere I would make peace on liberal terms, guaranteeing fair earnings on new investments and a fair basis of valuation in the event of the public taking them over hereafter. The process of evolution will take at least a generation. Meantime a policy of competing plants with losses all round is ramshackle notion.

Finally, the railroads. The position there seems to be exactly what it was three or four years ago. They remain, as they were then, potential sources of substantial demand for new capital expenditure, Whether hereafter they are publicly owned or remain in private hands, it is a matter of national importance that they should be made solvent. Nationalise them if the time is ripe. If not, take pity on the overwhelming problems of the present managements, And here too let the dead bury their dead. (To an Englishman, you Americans, like the Irish, are so terribly historically minded!)

I am afraid I am going beyond my province. But the upshot is this. A convincing policy, whatever its details may be, for promoting large-scale investment under the above heads is an urgent necessity. These things take time. Far too much precious time has passed.

(4) I must not encumber this letter with technical suggestions for reviving the capital market. This is important. But not so important as the revival of sources of demand. If demand and confidence reappear, the problems of the capital market will not seem so difficult as they do today. Moreover it is a highly technical problem.

(5) Businessmen have a different set of delusions from politicians, and need, therefore, different handling. They are, however, much milder than politicians, at the same time allured and terrified by the glare of publicity, easily persuaded to be ‘patriots’, perplexed, bemused, indeed terrified, yet only too anxious to take a cheerful view, vain perhaps but very unsure of themselves, pathetically responsive to a kind word. You cold do anything you liked with them, if you would treat them (even the big ones), not as wolves or tigers, but as domestic animals by nature, even though they have been badly brought up and not trained as you would wish. It is a mistake to think that they are more immoral than politicians. If you work them into the surly, obstinate, terrified mood, of which domestic animals, wrongly handled, are so capable, the nation’s burdens will not get carried to market; and in the end public opinion will veer their way. Perhaps you will rejoin that I have got quite a wrong idea of what all the back-chat amounts to. Nevertheless I record accurately how it strikes observers here.

(6) Forgive the candour of these remarks. They come from an enthusiastic well-wisher of you and your policies. I accept the view that durable investment must come increasingly under state direction. I sympathise with Mr Wallace’s agricultural policies. I believe that the SEC is doing splendid work. I regard the growth of collective bargaining as essential. I approve minimum wage and hours regulation. I was altogether on your side the other day, when you deprecated a policy of general wage reductions as useless in present circumstances. But I am terrified lest progressive causes in all the democratic countries should suffer injury, because you have taken too lightly the risk to their prestige which would result from a failure measured in terms of immediate prosperity. There need be no failure. But the maintenance of prosperity in the modern world is extremely difficult; and it is so easy to lose precious time

I am, Mr President

Yours with great respect and faithfulness,

J.M. Keynes

References

John Maynard Keynes (1938), “Letter of February 1 to Franklin Delano Roosevelt,” in Collected Works XXI: Activities 1931-1939 (London: Macmillan).

************

Source: Brad DeLong

23 untold things about capitalism

Here is Ha-Joon Chang's list from his new book ’23 things they don’t tell you about capitalism’ (book review here). It will surprise you! I am looking forward to reading this book very soon. Chang has been an outspoken critic of free market and advocates greater government role and industrial policy.

23 Things they don’t tell you about Capitalism

Thing One. There is really no such thing as a free market.

Thing Two. Companies should not be run in the interest of their owners.

Thing Three. Most people in rich countries get paid more than they should.

Thing Four. The washing machine has changed the world more than the internet.

Thing Five. Assume the worst about people, and you get the worst.

Thing Six. Greater macroeconomic stability has not made the world economy more stable.

Thing Seven. Free-market policies rarely make poor countries richer.

Thing Eight. Capital has a nationality.

Thing Nine. We do not live in a post-industrial age.

Thing Ten. The US does not have the highest living standard in the world.

Thing Eleven. Africa is not destined for under-development.

Thing Twelve. Government can pick winners.

Thing Thirteen. Making rich people richer doesn’t make the rest of us richer.

Thing Fourteen. US managers are over-priced.

Thing Fifteen. People in poor countries are more entrepreneurial than people in rich countries.

Thing Sixteen. We are not smart enough to leave things to the market.

Thing Seventeen. More education in itself is not going to make a country richer.

Thing Eighteen. What is good for the General Motors is not necessarily good for the United States.

Thing Nineteen. Despite the fall of Communism, we are still living in planned economies.

Thing Twenty. Equality of opportunities is unequal.

Thing Twenty-one. Big government makes people more, not less, open to changes.

Thing Twenty-two. Financial markets need to become less, not more, efficient.

Thing Twenty-three. Good economic policy does not require good economists.

Trade, poverty and lagging regions

Krishna, Mitra and Sundaram have an interesting NEBR working paper 16322 where they show that states with lesser openness to international trade generally have weaker transmission of international prices to domestic prices. It means that poverty is high in lagging regions due to a lack of exposure to international markets. They also show that countries with lesser proportion of the population in lagging regions experience greater reduction in poverty rates following trade liberalization. They suggest that in order to make gains from trade equitable, there has to be adequate provision of infrastructure, including equipped ports, better and more extensive roads and communication links.

Generally, increase in trade (read exports) boosts economic growth rate. The growth, in most of the cases, translates into reduction in poverty (on an average) as there is rise in national income. However, the distribution of gains from trade is not always uniform, meaning that some gain, others won’t, or even some might lose. Lagging regions might not benefit from trade because transportation and transaction costs might be very high. Furthermore, some regions might have market rigidities such as immobility of labor and lack of capital, which also suppresses gains from trade. Also, trade liberalization might itself lead to clustering of industries in one place, primarily due to economies of scale. This also makes distribution of the fruits of trade uneven. For instance, three coastal areas in China (the Bohai Basin, the Pearl River Delta, and Yangtze River Delta) accounted for more than half of the country’s GDP in 2005, but constitutes less than a fifth of the total geographical area.

The paper is about estimation of differential impact of trade liberalization in lagging and leading regions within a country, factors inhibiting market integration, and factors preventing trade from positively affecting development in lagging regions. The authors find that a percentage point reduction in tariff rate decreases poverty by 0.22 percent in the leading states, while the effect is insignificant in the lagging states. Within leading states, the effects of trade liberalization are also larger in urban areas: A percentage point decrease in tariff rate decreases poverty by 0.19 percent in rural sector and by 0.26 percent in urban sector in the leading states.

Price transmission from international prices to domestic prices is less perfect in lagging states than in leading ones, especially in the rural sector. The authors estimate that, in urban India, a one percent reduction in international prices implies a 0.61 percent reduction in the unit price in the leading states but a 0.53 percent reduction in the unit price in the lagging states. Meanwhile, in rural India, a one percent reduction in international prices implies a 0.60 percent reduction the unit price in leading states but a 0.34 percent reduction in the unit price in the lagging states.

They also look at the impact of trade liberalization on productivity. They find that trade liberalization has increased the productivity of Indian industry, though the impact in lagging states is “weekly smaller”. Specifically, a one percentage point reduction in tariff rate increases productivity by 0.41 percent across all leading states but only by 0.38 percent in lagging states.

In an extension to their study in India, they find that in other South Asia countries (Bangladesh, Pakistan, Nepal, and Sri Lanka), the impact of trade liberalization on poverty depends on the proportion of national population living in lagging regions. Countries with a smaller proportion of population in lagging regions benefit more from trade liberalization. A point increase in the proportion of population in lagging regions depresses the annual growth in per capita GDP after trade liberalization further by 0.01 percentage points. This might be the reason why, in Nepal, after more than two decades of trade liberalization, its fruits is hardly seen in the economy, which has seen population growth rate almost equal to GDP growth rate quite some time. At one point the country had negative per capita growth due to high population growth rate. Furthermore, the authors find (statistically “weaker”) that a point increase in the proportion of population in lagging regions decreases the annual rate of decline in poverty following trade liberalization by an additional 0.01 percentage point.

For Nepal, the authors assume that central and western development regions to be leading regions and eastern, far-western, and mid-western development regions to be lagging regions. According to the author’s classification, around 46% of the population in Nepal resides in lagging regions. The mean national average distance to capital city is calculated to be 236 Kms. Nepal liberalized trade in 1991, India 1994, Pakistan 2001, Sri Lanka 1977-83 and 1981, and Bangladesh 1996 (see Table 4 in the paper).

“Bangladesh, India and Nepal show higher regional inequality as measured by above average poor in the most lagging region as a percentage of the total poor in the economy. For these countries, a priority would be to ensure integration of backward regions and government redistribution programs to lessen inequality so that the poor may also benefit from trade reforms.”

Global economic crisis & labor market in Asia

The paper investigates the labor market and social impacts of the global financial and economic crisis in Asia and the Pacific as well as national policy responses to the crisis. It draws on recent macroeconomic, trade, production, investment, and remittances data to assess the employment and social consequences of the crisis, including falling demand for labor, rising vulnerable and informal employment, and falling incomes and their related pressures on the working poor. The paper provides some projections of the impact on unemployment, vulnerable employment, working poverty, and labor productivity in the region in 2009. It demonstrates that labor market recovery is likely to lag behind output growth, based on the experience of Asian labor markets following the 1997 Asian financial crisis. The paper underscores some policy options that are likely to have positive outcomes toward generating employment and boosting aggregate demand, improving social protection and welfare on the basis of decent work principles, and promoting a sound and sustainable economic and labor market recovery.

The full paper is here (Impacts of Current Global Economic Crisis on Asia's Labor Market)

What China & the US should do to revive the Doha Round?

For starters, China should agree to join the WTO's Government Procurement Agreement (GPA), which ensures public agencies open procurement to companies from other GPA signatories. Furthermore, it should bind its provincial administrations as well as the central government in Beijing to its rules. Such steps would guarantee that foreign products enjoy nondiscriminatory treatment and would quiet concerns over Beijing's "indigenous innovation" program, which strongly favors Chinese firms. At the same time, China should join sector liberalization agreements in chemicals, information technology hardware, and environmental goods. Finally, China should be at the front of talks to liberalize services—not dragging the rear, as it is now.

If China acts as a leader in the trading system, it should be recognized as one. In its WTO accession agreement, China reluctantly agreed to be treated as a nonmarket economy in antidumping cases until 2015, which meant that its exports could be subject to safeguards with a lower trade impact threshold ("market disruption") than normal safeguards applied to other WTO members ("serious injury"). This provision was invoked by Obama last year, when the United States slapped high duties on inexpensive car tires made in China and imported by Walmart and other budget retailers. China also agreed in advance of its WTO accession to submit to annual compliance reviews, which Beijing considers humiliating. In return for concessions on government procurement and services, the United States and other developed countries should grant China recognition as a market economy—with normal remedies in antidumping and safeguard cases—and also put an end to annual compliance reviews.

Meanwhile, the United States should phase out cotton subsidies—which were ruled illegal by the WTO two years ago—and put a cap of about $9 billion annually on all its agricultural subsidies. Washington should also agree to extend duty-free, quota-free treatment to virtually all the exports of the least developed countries and allow duty-free imports on all manner of environmental goods, including ethanol. Such a gesture would give substance to the development promise of the Doha Round and, in a modest way, put the United States on the right side of the climate agenda.

If China and the United States are on board, other major players will feel enormous pressure to contribute. India, with its demonstrated interest in maintaining open markets in information services, would likely join the services talks and sign on to the GPA. Brazil and other successful developing countries would do the same and contribute concessions on industrial products.

These proposals could make the Doha Round a political winner: Major concessions by China and a few other emerging countries would be seen in the United States as evidence of greater access in markets that count. And China would advance its status as a full participant in the world trading system, while also positioning itself as the leader that delivered the benefits of the Doha agenda to all developing countries. The world would recover that much faster from the hangover of the Great Recession.

More by Haufber and Lawrence from Peterson Institute for International Economics here. 

In June, PIIE came out with a study that said that the total gains from the successful conclusion of the Doha Round (to 7 developed and 15 developing countries that together account for roughly three-quarters of all global imports and exports and nearly 90 percent of global GDP) would be US$280 billion per year. Studies show varying gains from trade under the Doha Round mainly because of the assumptions they work with. For the evolution of various proposals since 2001, here is a good note.

In 2005, a World Bank study put a bombshell on the overly optimistic estimations of gains from trade. The study showed that under the "likely Doha scenario", the global gains in the year 2015 would be just $96 billion, with only $16 billion going to the developing world. This means the developing countries would see a one-time increase in income of just 0.16 percent of GDP. Also, it showed that only 6.2 million people would be lifted above the $2 per day poverty line (it represents just 0.3 percent of those living in poverty worldwide). Worse, most of these gains would go to the developed world and those that goes to the developing world is largely distributed among few countries. Half of all the benefits are expected to flow to just eight countries: Argentina, Brazil, China, India, Mexico, Thailand, Turkey, and Vietnam. Furthermore, this study by Carnegie Endowment shows that total gains from trade to be between $32-55 billion, with rich nations getting $30 billion; middle income countries like China, Brazil and SA getting $20 billion; and poor countries getting $5 billion (about $2 per head).

Here is a policy brief by Gallagher and Wise that contests the estimation of gains from trade by PIIE economists. Kevin Gallagher and Tim Wise argue that the assertions of PIIE rest on "shaky assumptions, controversial economic modeling, misleading representations of the benefits, and disregard for the high costs of Doha-style liberalization for many developing countries." They wonder how the economists found another  $150-$350 billion in benefits for developing countries that the World Bank missed in 2005.

The gains in the new study from agriculture and non-agricultural market access (NAMA) are of the same order of magnitude as previous studies, about $100 billion, with the vast majority going to rich countries.

The new estimates for services, sectorals, and trade facilitation are highly speculative, use methodologies that are unproven, and assume far more ambitious outcomes than seem at all likely at this point.

Peterson finds high gains in services and sectorals because they assume that developing countries will make big concessions and that those same countries are big winners (from lower prices) even if they lose significant parts of those sectors to imports.

The estimates of $365 billion in gains from trade facilitation are particularly exaggerated, because they assume not only agreement on reforms but resources for the vast investments in infrastructure and human capital needed to make them happen.

The claims of “balance” are unfounded, as developing countries receive less than one-third of the projected income gains. Previous modeling has shown that many poorer regions, such as Sub-Saharan Africa, are projected to be worse off after an agreement.

As with most such projections, researchers disregard the costs of liberalization for developing countries. Tariff losses just from NAMA reforms are estimated at $64 billion, far more than the estimated gains to developing countries. As countries struggle to recover from the financial crisis, this is not the time to cut needed government revenues. Terms of trade for developing countries are 

projected to decline significantly, as they shift back toward primary production rather than forward toward industrial or knowledge-based development.

Nepal’s macroeconomic review of FY 2009-10

Notes and views on the major indicators as outlined in annual macroeconomic review 2009/10 of Nepal. A related excel file can be downloaded here.

● GDP growth rate 3.5%. Last year it was 3.9%

● Agricultural and non-agricultural sector growth 1.1% and 5.1%, respectively. Last year, they grew at 3% and 4.7%, respectively. The drag from agricultural sector was so strong that despite non-agricultural sector showing promising growth, overall GDP growth rate still is less than growth last year. Production of paddy and maize declined by 11% and 3.9%, respectively.

● Revenue mobilization amounted to Rs 179.95 billion, which accounted to 101.9% of annual budget estimate. Good news! Revenue/GDP = 15.2 (14.5 last year). Revenue slices: VAT Rs 53.46 billion, customs revenue Rs 35.3 billion, income tax revenue Rs 33.65 billion, and excise revenue Rs 24.31 billion. Non-tax revenue was Rs 25.28 billion, a decline by 4.3% as receipts of the government from principal, interest and dividend declined. Foreign cash grants increased by 1.9% to Rs 24.85 billion.

● Government expenditure increased by 20.2% to Rs 248.37 billion (Rs 206.69 billion last year), mainly due to growth in recurrent (Rs 144.38%, a rise of 20.7%) and capital expenditure (Rs 75.38 billion, arise by 20.2%)..

● Budget deficit/GDP is 3.3% (3.5% last year). Looking just at the figure, this is good, but note that there is less budget deficit due to low development expenditure. It was financed mainly by the issuance of securities worth Rs 29.91 billion, which is 2.5% of GDP. External cash borrowing was Rs 4.278 billion and net domestic borrowing was Rs 28.15 billion. Total outstanding debt amounts to Rs 157.86 billion.

● Gross consumption/GDP is 90.6 (0.3 percentage point increase from last year’s figure)

● Domestic savings/GDP is 9.4

● Gross capital formation/GDP is 38.2 (31.9 last year)

● Gross fixed capital formation/GDP is 21.3

● Gross national disposable income/GDP is 125.1 (126.4 last year during the review period).

● Annual average CPI was 10.5% in 2009/10 (13.2% in 2008/09). Food and beverage prices increased by 15.4% while non-food and services prices rose by 4.7%.

● Average salary index rose by 17.2% (15.3% increase last year)

● Merchandise exports down by 9.7% to Rs 61.13 billion (14.2% rise last year reaching Rs 67.70 billion). Exports to India declined by 2.2% (last year it increased by 6.4%). Exports to other countries declined by 21.3% as against a growth of 28.9% last year.

● Merchandise imports increased by 33.2% to Rs 378.80 billion (28.2% growth reaching Rs 284.47 billion last year). Imports from India grew by 34.2% (14.1% last year) and imports from other countries grew by 31.8% (53.4% last year).

● Trade deficit expanded by 46.5% to Rs 317.67 billion (33.3% rise to Rs 216.77 billion last year). BOT with India rose by 46.5% as compared to 17% last year. BOT with other countries increased by 46.7% compared to a growth of 62% last year. This is alarming. We need to do something urgent and possibly implement miraculous policy to boost exports or curb imports of luxury items. The widening BOT is simply unsustainable in a nation where population growth rate is close to the GDP growth rate and consumption rate is just ten percentage points shy of total GDP. Period.

● Balance of payments (BOP) deficit was Rs 2.62 billion as against a surplus of Rs 44.76 billion last year. Current account deficit is Rs 32.35 billion as against surplus of Rs 41.44 billion last year. Trade deficit Rs Rs 317.76 billion, services trade deficit Rs 16.84 billion, transfer account surplus Rs 282.65 billion (last year Rs 249.49 billion surplus), workers’ remittances Rs 231.73 billion (growth of 10.5% compared to 47% last year), capital account surplus Rs 12.58 billion (Rs 6.23 billion last year), financial account deficit Rs 3.70 billion (Rs 21.20 billion surplus last year), FDI grew by Rs 2.85 billion (Rs 1.83 billion last year), and trade credit liabilities Rs 21.97 billion (Rs 19.55 billion last year).

● FDI commitment of Rs 9.1 billion (171 joint venture projects approved by DoI as against 230 projects with Rs 6.3 billion approved last year). Sector-wise new joint ventures: 50 in tourism, 72 in services, 37 in manufacturing, 1 in construction, 2 in agriculture, 5 in energy, and 4 in mining. It is expected to provide 7848 jobs. Investment commitment from India is highest, followed by Mauritius, Canada, and China. A total of 34 countries are given approval for foreign investment in this period.

● Foreign employment increased by 35.4% to 294094 (217164 last year). Employment in Malaysia stood at 113933, a 240.7% rise in comparison to the previous year. About 38.5% of total foreign employment is in Malaysia, followed by Saudi Arab, Qatar, and UAE. Qatar was the top recruiter of Nepalese employment seekers in 2008/09.

● Foreign exchange reserves dropped by 7% to Rs 266.57 billion in mid-July 2010 (Rs 286.54 billion during same period last year). It can fund merchandise imports of 8.6 months and merchandise and service imports of 7.3 months. NRs vis-à-vis US$ appreciated by Rs 4.85% between mid-July 2009 (US$1=NRS 78.05) and 2010 (US$ 1= NRS 74.44).

● M2 expanded by 14.5% (27.1% expansion last year). M1 expanded by 27.3% (11.2% expansion last year). Currency in circulation increased by 13%, demand deposits increased by 7.9%, and time deposits increased by 16.1%.

● Domestic credit expanded by 16.2% against last year’s expansion of 27.1%. Reasons: lower growth in private sector credit of the banking system.

● A total of 22 new banks and financial institutions came into operation in 2009/10: 1 commercial bank, 16 development banks, 2 finance companies, and 3 micro-finance institutions. In total: there are 27 commercial banks, 79 development banks, 79 finance companies, 18 micro-finance institutions, 16 NRB licensed cooperatives (undertaking limited banking transactions), 45 NRB licensed NGOs (undertaking micro finance transactions), and 25 insurance companies.

Incomplete comments (I will expand on these and others issues related to the report in later blog posts): The growth rate of exports has continued to decline while imports are surging, leading to a wide balance of trade deficit. Decline in exports to India due to low exports of readymade garments, zinc sheet, GI pipe, pulses and plastic utensils, among others. Exports to other countries declined in pulses, woolen carpet, readymade garments, pashmina and herbs.

Imports from India are increasing at a high rate. Major import products from India are petroleum, vehicle and spare parts, MS billet, chemical fertilizers, MS wire and rods, among others. These are moderately essential items in various sectors. So, do not expect the demand for these items to decline. In other words, given present trend, imports from India will continue to grow. From other countries, Nepalese consumers imported gold, telecommunication equipment and parts, polythene granules, silver and steel rod and sheet, among others. With exception to the import demand for gold, expect imports of other items from other countries to increase as well, unless the government curbs imports with high tariff.

The ratio of exports to imports is 16.1 (23.8 last year). As said earlier, this is simply unsustainable. We gotta do something about it. Blanket import-substitution policies are definitely not the way. Export promotion policies and encouraging consumption of domestically produced goods and services, wherever feasible, might be worth experimenting.

A rise in capital account surplus with a rise in trade credit liabilities led to narrowing down of overall BOP deficit. Generally, current account deficit matters in the overall BOP picture. We still have a huge current account deficit. So there should not be any respite that BOP deficit has narrowed down. Capital account reflects net change in national ownership of assets. Current account shows a nation’s net income, which matters for growth instead of capital account. A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Interesting side note: When the news about BOP deficit of around Rs 20 billion was revealed in the first quarter, I had argued that this might narrow down when the full annual figure comes out. There was a huge concern that was, I think, overly blown up. Don’t get me wrong. BOP deficit has to be addressed, whatever small the deficit amount is. I was just saying that we need to wait for the overall yearly figure before stretching eyebrows to the max. Even the Economic Survey 2009/10 projected a BOP deficit of Rs 19.57 billion.

There is very low domestic savings. Consumption, which is fuelled by remittances, is increasing. GNDI is still high due to high remittances. GNDI is expected to increase by 18.1% against an increase of 24.5% last year. During the review period, the decline in remittances is seen as a decline in the ratio of GNDI to GDP. Still, it is expected to increase as the remittances sector starts to come back to normal after the global economic crisis.

More later on…