Access to finance in Nepal

A latest WB report based on survey of about 150,000 people in 148 countries argues that 75 percent of adults earning less than US$2 a day do not have bank account because of poverty, cost, travel distance, and amount of paper work involved in opening one. Interestingly, the report argues that inequality also has got something to do with so many people being “unbanked” as the richest 20 percent of adults in developing countries are more than twice as likely to have a formal account as the poorest 20 percent.

Whats more? The “unbanked” 2.5 billion folks are forced to rely on money lenders who charge high fees and are also less likely to start their own business or insure themselves against unexpected events.

Interesting stats:

• The relative gender gap in formal account ownership is highest in South Asia: 41 percent of men and 25 percent women have an account. 73% of savers in South Asia report saving for an expense in the future such as an education or a wedding. 33% of adults have an account at a formal financial institution in South Asia (24% in SSA, 18% in MENA, 39% in LAC, and 55% in EAP)
• Only 37% of women in developing countries have an account, whereas 46% of men do. Women living below $2 a day are 28% less likely than men to have a bank account.
• Worldwide, 22% of adults report having saved at a formal financial institution in the past 12 months.
• Even among those who do have a formal bank account, only 43% of adults use their account to save. Yet 61% of account holders worldwide use their account to receive payments from an employer, the government or family members living elsewhere. About 7% and 3% adults use a formal account to receive payments from work/selling goods and from government respectively.
• More than 11% of adults in developing countries have an outstanding loan for emergencies or health-care needs, but more than 80% of these adults use only informal sources of credit.
• Of adults in developing countries working in farming, forestry or fishing, only 6% of them have crop, rainfall or livestock insurance.
• Mobile banking, which allows account holders to pay bills, make deposits or conduct other transactions via text messaging, has expanded to16% of the market in Sub-Saharan Africa, where traditional banking has been hampered by transportation and other infrastructure problems. Kenya, where 68% of adults report using a mobile phone for money transactions, has seen particularly impressive growth in this market.
• Nearly two-thirds of the unbanked cite poverty as the obstacle to financial access, but about a third also blame the cost of opening and maintaining an account or the banks being too far away, which means long bus rides for many.

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NEPAL:

• In Nepal, face-to-face interviews were taken with 1000 adults (15+) between May 21 and June 4, 2011.
• About 25.3 percent of adults have an account at a formal financial institution. This is higher than in Afghanistan and Pakistan in the region, but lower than South Asian average. About 50.6 percent of adults living in urban areas have bank account.
• Only 11.8 percent of adults with bank account use ATM as the main mode of withdrawal. It is lower than the South Asian and low income group average.
• Only 5.7 percent of adults have debit card. It is again lower than South Asian average (7.2 percent) and low income group average (7.4 percent).
• The use of formal account to receive payments from work or selling goods, payments from government is very low in Nepal compared to regional counterparts. Meanwhile, remittances payments via formal account is one of the highest in the region.
• Only 0.3 percent of adults use mobile phone to pay bills, 0.4 percent use mobile phone to send money, and 0.3 percent use mobile phone to receive money. These numbers are far lower than the regional average.
• For saving, credit and insurance, only 9.9 percent of adults used formal account. This is the third lowest in the region (Afghanistan 3 percent and Pakistan 1 percent).
• The proportion of Nepalese adults with an outstanding mortgage is the second highest in the region (first one is Afghanistan with 8 percent).

Access to finance (%, age 15+)			Nepal	South Asia	Low income
All adults (%, age 15+)			25.3	33	23.7
Adults living in a rural area  (%, age 15+)			22.3	30.8	22
Adults living in an urban area (%, age 15+)			50.6	39.2	35.8
ATM is the main mode  of withdrawal (% with an account)			11.8	18	23
Has debit card			3.7	7.2	7.4
Use an account  for business purposes			3	4	4.6
Use an account to receive wages			3.6	7.4	5.9
Use an account to receive government payments			1.2	3.5	2.5
Use an account to receive remittances			4.6	2	4.7
Use an account to send remittances			1.2	1.6	2.8
Use a mobile phone to pay bills			0.3	2	2.6
Saved any money in the past  year			18.4	21.3	29.9
Saved at a formal financial institution in the past  year			9.9	11.1	11.5
Loan from a formal financial institution in the past  year			10.8	8.7	11.4
Loan from family or friends in the past  year			33.2	19.5	30.2
Outstanding loan for home construction			13	4.4	6.3
Outstanding loan for health or emergencies			23.9	14.1	16.1
Outstanding loan for funerals or weddings			5.7	3.9	5.4

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FYI, the NLSS III showed that 20 percent of households received loans from banks, 15.1 percent from money lenders and 51.1 percent from relatives. The table from NLSS III related to access to finance is below:

Nepal Living Standard Surveys
	NLSS I	NLSS II	NLSS III
Survey year	1995/96	2003/04	2010/11
Loans (% of total household)
Borrowing loans	61.3	68.8	65
Having standing loans	58.4	66.7	62.6
Loans from banks	16.2	15.1	20
Loans from money lenders	39.7	26	15.1
Loans from relatives	40.8	54.5	51.1
Loans from cooperatives, NGO, etc	3.3	4.4	13.8
Purpose of household loans
Farm work	28.7	24.2	26.2
Consumption	49.4	46.5	30.7
Other personal uses	21.9	29.3	43.1
Loans with land/house as collateral	16.8	14.1	12.4
Loans with others as collateral	8.5	10.8	7.7
Loans without collateral	74.7	75.1	79.9

UNCTAD bats for the role of government in development

On the eve of UNCTAD XIII in Doha, Qatar from April 21 to April 26, UNCTAD released a statement strongly defending the role of “developmental state”. The UNCTAD has been under pressure from developed nations for criticizing the finance-driven globalization (FDG) model and calling for an overhaul of the system to move to development-led globalization (DLG).

The report, titled "Development-led Globalization: Towards Sustainable and Inclusive Development Paths," suggests that FDG has led to uneven, unstable and unfair outcomes. It outlines an agenda for DLG based on three pillars: enabling developing countries to mobilize domestic resources, strengthen productive capacities and share the gains in an equitable manner; creating more robust multilateral structures for collective responses to upcoming challenges, such as taming finance and promoting investment-led responses to climate change; and strengthening regional ties, including through South–South cooperation, to enhance stability and open new growth opportunities.

“The term finance-driven globalization characterizes the dominant pattern of international economic relations during the past three decades," the report says. "This is intended to convey the idea that financial deregulation, concerted moves to open up the capital account and rapidly rising international capital flows have been the main forces shaping global economic integration. […] Financial markets and institutions have become the masters rather than the servants of the real economy, distorting trade and investment, heightening levels of inequality, and posing a systemic threat to economic stability.”

Now, the UNCTAD says:

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The declaration, noting that LDCs currently account for only 1 per cent of international trade and that they attract foreign investment mostly to their extractive industries – which tend to create few jobs and tend not to lead to broader domestic economic development -- says that “efforts to build the developmental State” are the “key to drive economic growth.”

“We underline the importance of the balanced role of the State and market considerations, where the State designs policies and institutions with a view to achieving sustainable and inclusive economic growth as well as creates an appropriate enabling stable, transparent, and rules-based economic environment for the effective functioning of markets,” the declaration reads.

The document goes on to urge redoubled efforts by “trading and development partners, including developing countries that are in a position to do so” to support the LDCs in their efforts to expand, diversify, and fortify their economies and in their efforts to meet the United Nations Millennium Development Goals (MDGs). The MDGs include such targets are halving extreme poverty by 2015.

The declaration requests that such assistance “should go beyond ODA (official development assistance) to include, in a holistic manner, transfer of technology and know-how as well as building technological capacities and innovation in our countries.” It also urges industrialized countries to meet internationally established targets for ODA.

The concept of the developmental State goes against much international economic orthodoxy of the past few decades. The prevailing approach has called for governments to back off, contending that free markets then are liberated to spur economic growth directly. Several UNCTAD reports in recent years have charged that this approach, often called neoliberal economics, has not worked. In recent UNCTAD reports, including the Least Developed Countries Report 2011, the organization has advocated that the governments of poor countries take steps to encourage economic growth that will be stable, long-lasting, and likely to expand employment.

The LDC Ministerial Declaration also echoes UNCTAD’s stress on expanding LDCs’ productive capacities – that is, the abilities of their economies to produce broader varieties of goods, and goods of greater sophistication. UNCTAD has said in recent years that building productive capacity creates more and better paying jobs and leaves impoverished nations less vulnerable to historically volatile international prices for commodities such as raw natural resources and basic agricultural goods.

The LDC declaration further calls on donor countries to “support the commodity sectors of our countries, including through commodity diversification and value addition,” to enable LDCs “greater participation in global value chains on an equitable basis as a way to promote sustainable market-driven growth.”

And the document requests that something be done to “ease the burden of demanding quality and delivery standards” for LDC exports seeking to enter developed-country markets.” As trade barriers have fallen in recent years, LDCs have expressed concern that rich nations have been setting the bar for entry higher through health and quality standards LDC producers often cannot meet.

Among requests the declaration makes of UNCTAD are that the organization “undertake studies to help the LDCs better understand and address the factors that may be holding back their efforts to achieve the MDGs;” that it “assess the development effectiveness of aid;” and that it build on recent work to “advance the conceptual and analytical framework on the need for building productive capacities in LDCs.”

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Absentee (migrant) population of Nepal

In 2011, there were 1.92 million absentees (migrants), which represented 7.2 percent of total population of 26.6 million. In 2001, there were 0.762 million absentees (migrants), which represented 3.29 percent of total population of 23.2 million.

Migrant population has drastically increased in the past decade—so has people leaving each year and remittances inflows each year. Slowdown in economic activities, impact of insurgency and low job opportunities are clearly reflected in the figures below.

The figures are from census, CBS, DoFE, and the WB.

For more on remittances, see this blog post.

Trade and growth in Sub-Saharan Africa

Bruckner and Lederman argue that within-country variations in trade openness cause economic growth. Specifically, a 1 percentage point increase in the ratio of trade over GDP is associated with a short-run increase in growth of approximately 0.5 percent per year; the long-run effect is larger, reaching about 0.8 percent after ten years.

But, there are not only gains from open trade. While some gain, others lose. In 2010, a joint report (Benefits of Trade for Employment and Growth) by the OECD, the ILO, the WTO and the WB, stated that while open trade is always good, it must be complemented by properly designed domestic policies, including employment and social protection policies to ensure that benefits from trade are widely shared. While the crisis has limited growth in many countries, this should not be a reason to go for trade protectionist policies. Instead, trade should be kept open and it should be backed up by social security policies.

Meanwhile, there is also a growing body of literature that focuses on the level of sophistication of export products and its (positive) impact on per capita income. Anand, Mishra and Spatafora argue that “an educated workforce, external liberalization, and good information flows are important prerequisites for developing sophisticated goods and services”. Sophistication comes from either increasing the quality of currently produced goods or from a move into new and more sophisticated products. It induces structural transformation. The study finds that a one standard deviation increase in the sophistication of goods or services is associated with a, respectively, 0.6 or 0.4 percentage points increase in the average annual growth rate. See this blog post for more on the paper.

Study on exports of Nepalese tea and lentil

Here are the PowerPoint slides of a study based on training manual prepared by SAWTEE (yours truly as well was heavily involved in preparing the manual). It  was on international trading system. Researchers from the government ministries and SAWTEE used relevant stuff from the training manual and training program based on the manual. I will upload the manual when its available.

Here is news coverage of the event. See this one as well.

Links of Interest (2012-04-18)–Nepali economy special

GDP growth in FY2011/12 estimated to be 4.63 percent. This is short of the 5 percent target set while rolling out the budget for the fiscal  year. The estimate computed by CBS is based on first eight months data of this fiscal year. Other highlights:

• Per capita income expected to grow by 3.2 percent in the current fiscal year, reaching $735
• Domestic savings to be 9.98 percent of GDP (8.62 percent of GDP in 2010/11 and 11.5 percent of GDP in 2009/10)
• Consumption at 90 percent of GDP
• Agriculture sector to grow at 4.86 percent, thanks to increased production of cereal crops and other agri produces. Paddy production to go up 13.72 percent. Production of fruits, meat and dairy products, and other livestock products are estimated to go up by 5.13 percent, 3.01 percent and 5.99 percent, respectively
• Contribution of agriculture and forestry sector to GDP is expected to fall to 34.78 percent this fiscal year, from last year´s 36.54 percent.
• Manufacturing sector´s (projected to expand by mere 1.28 percent) contribution to GDP is also expected to remain unchanged at 6.17 percent. The low growth rate is expected due to a fall in production of clothing items and shoes made of fabric, leather and synthetic, plywood and dairy products.
• Construction sector which is expected to contract by 0.07 percent this fiscal year. Its contribution to the total GDP is also expected to fall to 6.73 percent this fiscal year from 6.93 percent of last fiscal year.
• Contribution of wholesale and retail trading to the GDP is expected to go up to 14.24 percent from 14.16 percent of previous year, with expansion of the sector by 3.79 percent.
• Gross national disposable income to stand at Rs 1.97 trillion this fiscal year, up from Rs 1.68 trillion of last year.

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Few points on the state of the economy this year:

• The targeted growth rate of 5 percent was initially unrealistic. The bump in agri production is mainly  due to favorable monsoon. Here is what I wrote in February.

“The claim of economic revolution by this government is pure hogwash. The economy is stuck in the same mess as it was before. The government has done nothing substantial to put it on the path of high growth, let alone address the short term constraints. The recent good news about bumper agriculture production, improved reserves and BoP surplus has nothing to do with policy changes by this government. Importantly, improvement in these indicators alone does not indicate an improved macroeconomy set to welcome more investment and ready to brace growth rate of over 5 percent.”

• Despite the improvement in some macro and social indicators, in terms of employment-generating productive economic activities and factors that can propel growth rate sustainably above 5 percent, we are still in the same mess. Inflation is still high; banking troubles are still there albeit in latent state; trade deficit is still widening and exports are faltering; policy implementation paralysis has clouded the relatively fine policies; market distortions are costing heavily to consumers, the industrial sector clamor for relief from several constraints remain unaddressed; labor unions are still running the running the full show (some of their demands are legit even though there is fear among investors that there will be a disconnect between wages and productivity; there is no progress on structural transformation and the economy is still supported by remittances, which has its own costs and benefits with the former weighing heavy on the latter; inadequate supply of power to industries, power cuts, and resistance to hydropower projects on grounds of nationality and other issues is still there; the northern parts of Mid West and Far West development regions continue to face food insecurity; a majority of the state-owned enterprises has huge arrears, financially and administratively bankrupt and are in need of either purge or drastic revival.
• Domestic savings are too low, which also hints at the low level of domestic investment. FDI inflows are not that encouraging. Let us hope that there will be substantial investment commitment (forget about immediate disbursement) during NIY 2012/13.
• BoP and current account surpluses and huge forex reserves don’t mean anything if these are due to external factors rather than internal factors driven by high industrial production, high exports and a gradual move toward structural transformation.
• Budget deficit will widen this year and next year as well, thanks to payments to voluntarily retired PLA fighters and expenditure growth being higher than revenue growth.
• The increase in employment in services sector (and its contribution to GDP) is not related to domestic sources of demand at the core. The huge remittance inflows have increased purchasing power of people and the demand for imported goods (both durables and nondurables). It means a robust trading business, as signified by rising imports (apart from petroleum products). It also means an increase in growth of retail services.
• Good sings are emerging though: NIY 2012/13 should be a milestone if it is run smoothly with adequate manpower, ideas and funds. There is no room for satisfaction from partial success like that during NTY 2011. The US$.18 billion West Seti hydropower project is a good start. More credible foreign firms should be given green light to start big hydropower projects (no hullaballoo on grounds of nationalism and neocolonialism, please). Target should be on three fronts: agro-processing industries to propel interim period structural transformation, big infrastructure projects to address binding constraints to growth, and employment-generating activities (both labor intensive and sophisticated activities) to entice youths.

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Four districts (Manang, Humla, Mugu and Dolpa) still not connected by road

Industrial production in Morang down by 80 percent due to more power cuts arising from decline in power imports from India and the NOC’s refusal to sell required amount of diesel to run generators.

MoF is struggling to find enough funds for PLA fighters who opted for retirement instead of joining Nepal Army. [The budget deficit is going to increase for sure and the MoF will compel other ministries to channel ‘budget surplus’—unspent money—to give it to the PLA fighters who opt for voluntary retirement.]

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Prevailing disenchantment among Maoist combatants on integration, which suddenly raised the number of voluntary retirements, has immediately inflated State´s liability, forcing the government to arrange additional Rs 2 billion from initial calculations of around Rs 5.75 billion to send the combatants home. Considering the initial estimates, Ministry of Finance (MoF) had released Rs 1.97 billion to Peace Ministry to initiate the voluntary retirement of 7,371 who chose it initially. But amid turn of situation, MoF released additional Rs 1.50 billion over the past few days to manage the cost. “We released Rs 1 billion on April 12 and also disbursed additional Rs 500 million on April 15,” said Finance Secretary Krishna Hari Baskota. He informed Republica that MoF managed the fund from budget allocated under miscellaneous heading and also by pooling fund from different ´not so important´ headings. But at the same time he added, the release has exhausted all the fund MoF had at its disposal.

With UCPN Maoist pushing hard for integration of 6,500 combatants in the Nepal army, the government had calculated that just around 10,550 combatants would opt for voluntary retirement. Furthermore, as 9,705 combatants continued to stay in the cantonment eyeing their chances of integration, the government had estimated it will need only around Rs 4 billion to start with for integration. Following such calculation, MoF had immediately disbursed Rs 1.97 billion to the Peace Ministry, which was half of the total retirement cost, for fulfilling the liability in two annual tranches as promised. However, when the integration process actually began, 13,671 combatants have already chosen to go for voluntary retirement by Tuesday.

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Migration, food insecurity and cropping months

Here is an interesting chart from a WFP study in 2008. It is hard to draw a definite conclusion from this chart. Overall, in-migration is high during cropping months. Out-migration is high towards the end of cropping months. If migrants don’t return, mainly from India, during the start from cropping season, then agriculture production goes down and food insecurity will heighten. The study found that lack of employment and food shortages were the two most important reasons for migration.

For more on food insecurity in Nepal, see this article. More on food security here and here. Here is a short paper on food security and aid in Nepal.