Impact of late monsoon and fertilizer fiasco on the Nepali economy

It was published in Nepali Times, Issue #616 (03 AUG 2012 - 09 AUG 2012).

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Failure to yield

Lack of fertiliser and delayed monsoon are depriving poor farmers of their only source of income and stunting the country's economy

While the government boasted an increase in growth rate to 4.6 per cent in 2011-12, the highest in the last four years, the country faced an acute shortage of fertilisers and delay in monsoon by about two weeks.

Although the state cannot control the monsoon, it has almost complete control of the supply of fertilisers.

Unfortunately, its inability to swiftly handle procurement and distribution will result in a decline in agricultural production next year, particularly paddy and maize. More importantly, it will lower growth rate, increase food prices further, which will then heighten overall inflation, and compel poor farmers in the far and mid-west regions to migrate to bordering Indian towns for seasonal employment.

The importance of agriculture for inclusive development and to support modest economic growth cannot be overstated. About 76.3 per cent of households in Nepal depend on agriculture for livelihood and 83 per cent of the population lives in rural areas. Furthermore, the agricultural sector constitutes about 35 per cent of the country's GDP. Since growth of the services sector after 2001-02 is almost constant and growth of the industrial sector is very low, the agricultural sector largely determines the overall economic growth rate. Its average growth in the last decade was 3.3 per cent, which is higher than 2.4 per cent growth of the industrial sector.

Between 1990-91 and 2000-01, overall economic growth hinged on the performance of the non-agricultural sector, which grew at an average 7 per cent (far higher than 2.5 per cent of the agricultural sector). The main reasons for the poor performance of the non-agricultural sector are the destruction of infrastructure and erosion of industrial capacities, due in large part to the Maoist insurgency and supply-side constraints, including labour militancy.

It indicates that the agricultural sector is still the backbone of our economy. The government's negligence to supply adequate fertilisers in time and initiate remedial measures to counter the impact of late monsoon clearly shows how much importance it gives to this sector despite lofty talks about agricultural revolution and commercialisation.

Initially, the delay in monsoon severely affected maize plantation in the hilly region, which contributes 76 per cent of total maize production. It was followed by a shortage of fertilisers just before plantation of paddy all over the country. According to the Ministry of Agriculture and Development, paddy was planted in just 62 per cent of farmlands in mid-hill, 54 per cent in upper-hill, and 44 per cent in the Tarai.

This means the 5.5 per cent growth and 7.5 per cent inflation target set by the central bank in the latest Monetary Policy 2012-13 won't be met. The decline in agricultural production along with the never-ending labour and power problems in manufacturing sector will bring down growth rate well below the target despite the services sector's constant growth, thanks to remittances.

Second, the short supply of food grains will exert pressure on already escalating food prices. It will be compounded by the projected high food prices in India and other major cereal producing countries, owing to low rainfall and droughts. Since one-third variability of domestic prices is determined by prices in India and the remaining two-thirds by domestic production and supply conditions, overall inflation will be far higher than the figures projected. It will mean more hardship for common Nepalis and erosion of their purchasing power. There is a high probability that more people in the far and mid-western regions will migrate to India for work as a result of decrease in income from agriculture and worsening food insecurity.

There is little the government can do now to influence production this year as planting season is ending in a few weeks. However, it can still introduce measures to limit the impact of shortfall in production on the economy and food security. First, the state should ensure that there is an adequate supply of fertilisers for next year. Enough money should be allocated for procurement of fertiliser as no private player is going to jump into this market given the deep distortions.

Second, the government should be ready to import enough food to bridge the gap between demand and supply as the country is very likely to experience food deficit just a year after having surplus production. Major grain producing countries (including India, which already had 21 per cent less rainfall than average) badly hit by droughts and floods might restrict export like they did in 2008 at the height of global food price hike.

Third, it should plan ahead to guarantee adequate food supply in perennially food insecure districts in the far and mid-west. Fourth, development partners need to be ready to scale up food aid, if necessary.

Humans are responsible for climate change: Berkeley Earth

The latest analysis of land-surface temperature by Berkeley Earth shows that the rise in average world land temperature is approximately 1.5 degrees C in the past 250 years, and about 0.9 degrees in the past 50 years. And, to the relief of IPCC, they claim that humans are responsible for the increase in temperature especially in the last 50 years.

It notes:

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The annual and decadal land surface temperature from the BerkeleyEarth average, compared to a linear combination of volcanic sulfate emissions and the natural logarithm of CO2. It is observed that the large negative excursions in the early temperature records are likely to be explained by exceptional volcanic activity at this time. Similarly, the upward trend is likely to be an indication of anthropogenic changes. The grey area is the 95% confidence interval.

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Richard A. Muller, a professor of physics at the University of California, Berkeley writes in the NYT:

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The Conversion of a Climate-Change Skeptic

By RICHARD A. MULLER

CALL me a converted skeptic. Three years ago I identified problems in previous climate studies that, in my mind, threw doubt on the very existence of global warming. Last year, following an intensive research effort involving a dozen scientists, I concluded that global warming was real and that the prior estimates of the rate of warming were correct. I’m now going a step further: Humans are almost entirely the cause.

My total turnaround, in such a short time, is the result of careful and objective analysis by the Berkeley Earth Surface Temperature project, which I founded with my daughter Elizabeth. Our results show that the average temperature of the earth’s land has risen by two and a half degrees Fahrenheit over the past 250 years, including an increase of one and a half degrees over the most recent 50 years. Moreover, it appears likely that essentially all of this increase results from the human emission of greenhouse gases.

These findings are stronger than those of the Intergovernmental Panel on Climate Change, the United Nations group that defines the scientific and diplomatic consensus on global warming. In its 2007 report, the I.P.C.C. concluded only that most of the warming of the prior 50 years could be attributed to humans. It was possible, according to the I.P.C.C. consensus statement, that the warming before 1956 could be because of changes in solar activity, and that even a substantial part of the more recent warming could be natural.

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With more emphasis, again, from their research:

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The historic temperature pattern we observe has abrupt dips that match the emissions of known explosive volcanic eruptions; the particulates from such events reflect sunlight and cool the Earth’s surface for a few years. There are small rapid variations attributable to El Nino and other ocean currents such as the Gulf Stream. The gradual but systematic rise of 1.5 degrees C is best explained by the record of atmospheric carbon dioxide, measured from atmospheric samples and air trapped in polar ice.

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Here is a related video:

Farmers get 40-50 percent of retail price of veggies

The market distortion created by middlemen is not a surprise in a developing country like Nepal where the government lacks monitoring and supervision capabilities and political parties indirectly abet middlemen, who provide them with a strong financial and support base. Here is more on market distortion created by middlemen in Nepal.

The apparent incoherence in retail prices, farm prices and output is market manipulation by middlemen or agents, who act as monopsonist and monopolist. About 1,000 metric tonnes of vegetables enter the Kalimati Fruit and Vegetable Market during the season and about 600-700 metric tonnes in the off-season from Dhading, Kavre and Nuwakot .

So, how much of the retail price does farmers get? Here is an interesting piece in The Himalayan Times:

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Farmers sell us their products at a 10 per cent profit during season, but it goes up to 20 per cent in off-season, he added. Overall, a farmer's share in the retail value of vegetables sold in Kathmandu is 40-50 per cent. The remaining 50-60 per cent cost is added during the supply process.

Local collectors — who collect vegetables from farmers and sell to suppliers — take less than others in the supply chain. Their margin is around five per cent.

Transportation usually adds 10 per cent to the cost of vegetables produced in neighbouring districts. In the process, a supplier has to bear at least five per cent hidden costs. "Suppliers have to bribe police, feed local goons, and pay taxes to District Development Committees (DDC)," said president of Fruits and Vegetable Wholesalers' Federation Khum Prasad Ghimire.

All DDCs have been taking a tax of Rs 500 for a pick up van and Rs 1,500 for a truck, he said showing bills issued from Kavre and Dhading DDCs. "It's an illegal tax and we are fighting against it at the Supreme Court," he said. Retailers have been earning more from the vegetable business. Their share is about 15-20 per cent of the retail price of vegetables. "It needs to be cut down to a maximum of 10 per cent," said member of Kalimati Fruit and Vegetable Market Development Board Ujjawal Karki.

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Earlier, a government committee headed by the chief secretary brought out a report claiming that high rent inside the Kalimati Fruit and Vegetable Market plays a key role in vegetable price hike. Obviously, the association has refuted the claim by arguing that the price hike is due to short supply arising from drought in March-May and high veggie prices in India.

NEPAL: What is in the Monetary Policy 2012/13 for you?

As with previous tradition of brining out monetary policy after the fiscal budget is announced, Nepal Rastra Bank (NRB), the central bank of Nepal, rolled out Monetary Policy 2012/13 yesterday. Monetary policy doesn’t draw much attention like fiscal budget because its reach is limited to the banking sector (whose reach in turn is limited to few sectors that can contribute very little to enhancing productive capacities), is constrained by fixed exchange rate between Nepali rupee and Indian rupee, and supply-side constraints whose remedy is beyond its reach.

Few highlights from monetary policy:

• Targets for FY 2012/13:
• GDP growth: 5.5 percent
• Inflation: 7.5 percent
• Money supply growth: 15 percent
• Deposit growth: 15.1 percent (Rs 1160 billion)
• Credit growth to private sector: 16 percent
• Forex reserve: ability to finance 8 months of imports
• Policy changes:
• CRR increased to 6 percent for commercial banks, 5.5 percent to development banks, and 5 percent to finance companies. Earlier, it was 5 percent for all BFIs.
• Bank rate increased by one percentage point to 8 percent
• Deposit insurance of up to Rs 300,000 from Rs 200,000.
• Deprived sector lending by BFIs increased by 0.5 percentage points. Commercial banks, development banks and finance companies need to lend 4 percent, 3.5 percent and 3 percent of their respective loan portfolio to the deprived sector.
• Refinancing rates for agriculture and hydropower lowered to six percent from seven percent. BFIs to initially issue loans under the facility at rates of up to 9 percent.
• Refinancing facility to migrant returnees on loans take for commercial purposes.
• National Financial Literacy Policy and Financial Sector Development Strategy to be formulated. Financial Stability Unit to be set up at the central bank and it will bring out Financial Stability Report.
• For overseas travellers, foreign currency facility for each travel increased to US$2500 for public and US$5000 for entrepreneur. Earlier, there was a cap of US$5000 for a year.
• Commercial banks allowed to invest up to 30 percent of the amount parked in agency banks abroad in low risk instruments such as call deposit and certificate of deposit.
• Interbank lending transaction set at maximum of 7 days.
• PAN number mandatory while taking loan more than a set limit.

Few observations:

• The main change that could affect the public the most is the increase in CRR (cash reserve ratio). It means that banks this fiscal year need extra money as idle cash/reserve, which will affect credit flows. The NRB argues that the objective of the hike in CRR is to mop up excess liquidity (estimated at Rs 100 billion). However, this policy might run counter to growth and lending targets. Importantly, there is a chance that BFIs might lower deposit rates and hike lending rates. This is not what the central bank wants though.
• About growth and inflation targets, lets just say that it is beyond the NRB’s reach to meaningfully influence both these variables. First, growth rate next will get affected due to potential decline in agriculture production (thanks to late monsoon and shortage of fertilizers) and globally food prices might increase. It will affect both growth rate and inflation.
• Lowering refinancing rate is a good move to channel credit to priority sectors. But the present provision to acquire such loans for six months only virtually makes it useless. It takes time to realize returns from investment and six months is too short a period for this purpose. It might be useful to traders, but will probably not make a dent on lending to priority sectors.
• BFIs have been eagerly waiting for the so-called interest rate corridor, which sets a band for interest rates to fluctuate. Well, it seems it won’t come anytime soon as the NRB is still working on it.
• There is a confusion over what exactly is the NRB trying to achieve? It has little traction on growth and inflation targets. It could ease lending to priority sectors and limit credit to unproductive sectors. It has already done so in real estate and housing sector. But, BFIs are not probably going to ease lending rates now even if they have excess liquidity. They will simply lower deposit rates and either maintain present lending rates or hike it on new loans. Interest spread is going to widen.
• Looks like the central bank is in a fix. Whatever it does, there will always be unhappiness. If it wants to fuse bubbles arising from easy credit, then it is unpopular among investors. If it wants to redirect lending to productive sectors, then it is unpopular among BFIs. If it wants to have a grip on growth and inflation, then it is constrained by limited banking reach and its impact on real variables, and the pegged exchange rate.

Does what (how) you export (produce) matter?

Some economists had argued that the level of sophistication of exports determines the income level of a country and its growth rate. Importantly, the level of economic complexity indicates the nature of future economic growth and the ability to produce new goods and move from low-value added to high value-added goods. Sophistication comes from either increasing the quality of currently produced goods or from a move into new and more sophisticated products.

Now, there is a new twist to this line of argument. In a recent book (here is related paper and presentation), Maloney and Lederman argue that “we probably need to spend more time thinking about How rather than What goods are produced.” The reason: Countries exporting homogenous goods (natural resources) have heterogeneous performance. For instance, both Nigeria and Norway export oil, but Norway is doing far better than Nigeria. Similarly, both South Korea and Mexico promoted hi-tech production, but the former has been far successful than the latter. Furthermore, in a globalized world where global supply/value chains are so fragmented, attributing export of final product to a single country might not give the real picture of production process spread over a range of activities in many countries. They argue that production of similar products contributes in varying degree to development in different countries. In fact, “about half the differences in industry skill premia at a country level can be attributed to the composition of the export basket, but the other half are due to country specific factors.”

They advocate “horizontalish” policies that maximizes the benefits from existing products and creates background for production of new ones. In other words, rather than jumping to production of new products, first focus on harnessing the potential benefits from existing products:

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[…]will help get the most out of existing products and lay the foundations for the emergence of new ones.  These may include raising the level of human capital, promoting product quality upgrading, reforming the national innovation system, and improving infrastructure, which benefit a wide range of existing and potential products but which wouldn’t require choosing particular sectors to support.

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They argue that horizontalish policies:

• Resolve innovation related market failures (both old and new goods)
• Resolve barriers to the emergence of new goods and improvement of old ones
• Coordinate policies strategically

Gender-wise increase in wages of agriculture and unskilled workers in Nepal

Be it due to migration (leading to short supply of labor) or increasing demand for workers or adjustment of wages in line with the rise in cost of living, the fact is that wages for agriculture and unskilled workers are increasing. Importantly, in the agriculture sector, both men and female saw equal increase in wages in 2010/11. Wages for both gender increased by 32 percent. Meanwhile, in regular daily unskilled work (jyami), male saw higher increase in wages than female (29 percent and 25 percent respectively). Earlier, female wage increase outstripped the increase in wage of male (except in 2008/09).

The increase in wage is higher than overall inflation. For instance, 2010/11, overall inflation was 9.4 percent (with food and non-food inflation at 14.66 percent and 5.39 percent), much lower than the increase in wages.

Notice that food prices have consistently outstripped overall inflation after 2004/05 (the base year for CPI). In overall CPI index, the weight of food and beverage is 46.82 percent and that of non-food and services is 53.18 percent. The interesting thing is that despite having a lower weight on overall index, food prices have dragged it higher (it is also influenced by inflation in India and global petroleum prices, which justifies a third of the variability of domestic prices). No wonder food prices have increased drastically in the retail market. More on inflationary dynamics in Nepal here.

Few things to note here.

• The overall increase in wages might be due to wage adjustment with inflation, shortage of workers (mostly due to migration for unskilled work overseas and increase in leisure time allocation arising from rise in income, thanks to remittances), and high demand for unskilled labor in agriculture and construction sectors.
• Though both male and female have seen similar increase in wages, it doesn’t mean that their actual wages are same, i.e. growth of wages is different than actual wages. In terms of actual wage, female’s might be catching up with male’s. That said, wage growth disparity for both gender is leveling off.
• Mean daily wage in agriculture sector increased to Rs 170 in 2010/11 from Rs 75 in 2003/04. Mean daily wage in non-agriculture sector increased to Rs 263 in 2010/11 from Rs 133 in 2003/04. It shows that mean daily wage in agriculture sector increased more than in non-agriculture sector (127 percent and 98 percent respectively) over the same time period.
• The base year for inflation is 2005/06 and that for wages is 2004/05.
• More research is needed on the changing dynamics of wages for both gender, its causes, sustainability and implications for development and growth.

Who benefits most from rural electrification?

Khandker et al. (2012) study the impact of rural electrification in India and find that rural electrification leads to higher time allocation to studying, increase in supply of labor and household expenditure, and reduction in poverty level, but most of the benefits are enjoyed by wealthier rural households (due to higher consumption and more diversification of electricity service).

Below is an abstract of their working paper:

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This paper applies an econometric analysis to estimate the average and distribution benefits of rural electrification using rich household survey data from India. The results support that rural electrification helps to reduce time allocated to fuelwood collection by household members and increases time allocated to studying by boys and girls. Rural electrification also increases the labor supply of men and women, schooling of boys and girls, and household per capita income and expenditure. Electrification also helps reduce poverty. But the larger share of benefits accrues to wealthier rural households, with poorer ones having more limited use of electricity. The analysis also shows that restricted supply of electricity, due to frequent power outages, negatively affects both household electricity connection and its consumption, thereby reducing the expected benefits of rural electrification.

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They find that “the money households with electricity spend on kerosene equals what they pay for unreliable electricity service, not accounting for the loss of productivity and appliance damage due to power outages, suggesting that access without reliability may be counter-productive.”

Nepalese policymakers need to read this statement twice. Erecting electricity poles and connecting new houses with wires devoid of regular power supply is not going to be helpful. The focus should be on generating more hydropower. In Nepal’s case the shortage of electricity is leading to drastic increase in demand for diesel and LPG.