NEPAL ECONOMIC FORUM
P.O.Box 7025, Krishna Galli, Lalitpur - 3, Nepal Phone: +977 1 5548400 info@nepaleconomicforum.org www.nepaleconomicforum.org
ISSUE 34 | SEPTEMBER 2018
NEPAL ECONOMIC FORUM
MONETARY POLICY SPECIAL
DOCKING NEPAL’S ECONOMIC ANALYSIS
DOCKING NEPAL’S ECONOMIC ANALYSIS ISSUE 34 | SEPTEMBER 2018
NEF PROFILE NEF PROFILE
Nepal Economic Forum (NEF) is a premier private-sector led economic policy and research organisation that seeks to redefine the economic development discourse in Nepal. Established in 2009 as a not-for-profit organisation under the beed (www.beed.com.np) umbrella, NEF is a thought center that is working to create positive transformations in policy reforms. One of the big updates for NEF this year was its feature in the list of Top Think Tanks in Southeast Asia and the Pacific in the 2017 Global Go To Think Tank Index. The report was released by the Think Tanks and Civil Societies Program under University of Pennsylvania. NEF stands out in being able to make significant strides to bring the private sector perspective and engage with both the public and private sectors in the development discourse. NEF is currently a recipient of the Open Society Foundations’ Think Tank Fund.
NEPAL ECONOMIC FORUM
NEF works in partnership with many Nepali and international institutions in its quest to mainstream the discourse on the Nepali economy, which has not been given the necessary space it deserves. NEF has partnered with the Himalayan Consensus Institute (HCI) to facilitate the development of alternative development paradigms and successfully held the Third Himalayan Consensus Summit 2018 in March 2018.
NEF BROADLY WORKS UNDER THREE AREAS:
BPRC
The Business Policy Research Center (BPRC) engages in research, dialogue and dissemination relating to pertinent economic policy issues. BPRC has been producing nefport, a quarterly economic analysis publication, nefsearch, a periodic research publication and conducting neftalk, a platform for policy discourse.
PPCP
Through the Center for Public, Private and Community Partnerships (PPCP), the partnerships discourse is further elaborated through addition of the community dimension to existing models of public private partnerships. Apart from standalone interventions, the PPCP perspective is integrated in the work that NEF and beed initiate. NEF operates in the domain of Development Consulting through its devCon division in conjunction with beed management.. It works with a variety of bilateral, multilateral, national and international NGOs in the areas of policy research, economic analysis, value chain analysis, enterprise development, sectoral studies and public private dialogue.
We are striving to ensure financial sustainability for NEF to complement the support it currently receives from beed management and the Open Society Foundations. If you are interested to support NEF, please do get in touch with sujeev.shakya@beed.com.np or niraj.kc@beed.com.np
CONTENTS CONTENTS SEPTEMBER 2018 | ISSUE 34
NEPAL FACTSHEET 4 EDITORIAL 5
1
GENERAL OVERVIEW 7 Political Overview 8 International Economy 11
2
MACROECONOMIC OVERVIEW
3
SECTORAL REVIEW 21
13
Agriculture 22 Energy 25 Infrastructure 28 Information and Communication Technology 30 Real Estate 31 Education 33 Health 35 Tourism 37 Trade and Debt 39 Foreign Aid 42 Remittance 45
4
MARKET REVIEW 47
5
MONETARY POLICY SPECIAL 53
6
Endnotes 62
7
NEF Profile 65
Financial Market 48 Capital Market 51
FACTSHEET NEPAL FACTSHEET
KEY ECONOMIC INDICATORS GDP
USD 30.07 billion
Rank
105
GNI (PPP)
USD 2443
Rank
149
Gross Capital Formation (% of GDP)
34%
HDI Rank
0.574 148
GDP Growth rate (%)
6.3%
Inflation (annual %)
4.2%
Agriculture sector Manufacturing sector Service sector
HDI figure from Human Development Reports of the UNDP-2018, Nepal Rastra Bank (Annual Report 2074-75)
31.57%
15% 53.43%
EDITORIAL Issue 34:September 2018 Publisher: Nepal Economic Forum Website: www.nepaleconomicforum.org P.O Box 7025, Krishna Galli, Lalitpur — 3, Nepal Phone: +977 1 554-8400 Email: info@nepaleconomicforum.org Contributors: Akendra Joshi Anant Tamang Apekshya Shah Arya Awale Niraj K.C Prashanti Poudyal Raju Tuladhar Rojesh Bhakta Shrestha Samridhi Pant Samita Shrestha Shraddha Gautam Design & Layout: Ultimate Marketing (P.) Ltd. info@marketingultimate.com This issue of nefport takes into account news updates from June 1 - August 20, 2018. The USD conversion rate for this issue is NPR 109.54 to a dollar, the quarterly average for this issue. Reproduction is authorised provided the source is acknowledged. The views and opinions expressed in the article/publication are those of the author(s) and do not necessarily reflect the official opinion of Nepal Economic Forum. Neither the organisation nor any person acting on their behalf may be held responsible for the use which may be made of the information contained therein. NEF Advisory Board: Arnico Panday Basudha Gurung Kul Chandra Gautam Mahendra Krishna Shrestha Mallika Shakya Shankar Sharma
The last quarter was marked by the unfolding of series of a important political and socio-economic events. Government of Nepal introduced new civil and criminal codes to replace old national criminal code, Muluki Ain. In the process of implementing federalism, the government transferred the power from district offices to the local authorities. However, much to the ire of the public, it seems the local authorities have gone far beyond the mandated agendas of federalism by influencing the tax rates randomly. The tax problem can be a disturbing metaphor for the full-fledged implementation of federalism. The people of Nepal have high expectations from the new government, nevertheless. Some positive developments have added to the optimism. Considering the aspiration of federalism, government has already announced the budget of NPR 1.3 trillion (USD12.38 billion). The budget has prioritised to end extreme poverty, achieve rapid economic growth and build a prosperous and socialist-oriented economy. Furthermore, Nepal attained the GDP growth of 6.3% to NPR 3 trillion (USD 27.45 billion). In the last quarter, NEF has been engaged in the discourse on doing business in federated Nepal. We have conducted research and held several discussion sessions on the topic where we have collected opinions from key stakeholders in different fields. Discussions have converged on what the new federated structure means to Nepal’s business and economy. Likewise, NEF successfully conducted awareness generation and information campaign as a part of BBIN (Bangladesh, Bhutan, India and Nepal) project in Birgunj and Bhairahwa. NEF is currently collaborating with Jindal School of Public policy and Governance to develop a sub-national government (SNG) monitoring and evaluation framework. This multidimensional indicator approach will attempt to capture the business climate, economic environment and governance capabilities of municipal governments. This evidence-based approach will assist policymakers in monitoring and decentralisation process and allocating resources to SNGs.NEF also hosted the US Ambassador Alaina B Teplitz reflections as she completed her tenure in Nepal. Advisory Board member Kul Chandra Gautam launched his memoir Global Citizen from Gulmi that has now received much global attention. The next quarter will be one to watch as the devaluation of the Indian Rupee has been putting much strain in the Nepali Rupee. NEF Increasing prices of fuel and depreciation of the Indian Rupee will push inflation. With large remittances in US dollars and diversification of trade in the future, NEF will also start discussing on the need of review of the Nepali Rupee fixed peg with Indian Rupee or explore other long-term plans. This edition is a monitory policyspecial, highlighting the forthcoming challenges and opportunities. We would like to thank all the key contributors especially Mr. Ajay Shrestha (Former CEO, Bank of Kathmandu), Mr Anjan Neupane (Advocate, Neupane Law Associates), Mr. Gerard Almekinders and Mr. Patrick Blagrave (Asia and Pacific Development, Asian Development Bank), Mr. Nara Bahadur Thapa (Executive Director, Nepal Rastra Bank), Mr. Siddhant Raj Pandey (Chairperson and CEO, Business Oxygen Private Limited) and Mr. Suman Joshi (Managing Director, One to Watch), for helping us make this issue an enriching one. We continue to look forward to your valuable comments and suggestions.
Sujeev Shakya Chair, Nepal Economic Forum
1 NEFPORT ISSUE 34 – SEPTEMBER 2018
GENERAL
OVERVIEW
7
8
DOCKING NEPAL’S ECONOMIC ANALYSIS
POLITICAL OVERVIEW POLITICAL OVERVIEW In the last quarter of 2018, the government’s new Civil and Criminal Codes replaced the old national criminal code, Muluki ain. In the new code punishments and sentences have been extended for some crimes and new provisions like criminalising Chhaupadi, match-fixing and begging have been introduced. In the process of implementing federalism, the government has scrapped committees and district offices and transferred their power to the local authorities. However, the local authorities are currently under fire for raising tax rates for various transactions and sectors. Nepal is on a verge to hold the fourth BIMSTEC summit. Government brings into effect new Civil and Criminal Codes: The Nepal
government has carried into force the new Civil and Criminal Codes on 17 August 2018. The new codes replace the national code, also known as Muluki Ain, implemented by the first Rana Prime Minister Jung Bahadur. The code had been guiding the civil and legal proceedings of the country for the last 165 years.1 Some of the key provisions of new codes are: 1. Legal petitions can be filed online: Nepalis can file a
petition with the judicial or law enforcement institutions online.
2. Ban on torch rallies in public premises: Organising a torch
rally (or holding a torch during protests) in public places is banned and those found violating this law will face a six-month prison sentence.
3. Begging a punishable crime:
Anyone found begging or forcing someone to beg in public places can face a jail term of one month and a year respectively. 4. Conventional jail terms replaced by new corrective justice: The existing traditional
jail terms have been replaced by open prison, community service, and night prisons. However, only those who are sentenced to less than three years of imprisonment and are considered to have “decent conduct” will qualify for corrective justice measures.
listening to or recording a conversation between two or more people and photographing someone without their consent is now a criminal offence. Anyone found violating these rules faces one year in prison and a fine of NPR 10,000 or both.
5. Criminalisation of Chhaupadi practice: Chhaupadi, the much-
8. Fine and deportation if involved in conversion of religion:
criticised Hindu practice that banishes women from their homes during menstruation and after childbirth, has been criminalised for the first time. The sentence for this crime shall be three months in jail and NPR 3,000 fine, or both.
6. Criminalisation of enforced disappearance: Anyone
Anybody encouraging or engaged in religious conversion by any means would be booked and would face a jail term of five years and NPR 50,000 fine. Foreigners will be deported with a week if found guilty for such practice. 9. Increment of age limit for marriage of girls: Until now,
convicted for the disappearance of an individual will face 15 years of jail-term and NPR 500,000 fine or both. This provision is first of its kind in Nepal.
the marriage age for girls and boys were set at 18 years and 20 years respectively. The new law has increased the marriage age for girls, making it equal with that of boys.
7. Enforcement of strong privacy laws: Violation of an individual’s
10. Increment of life imprisonment from 20 years to 25 years:
right to privacy would result in up to three years imprisonment and fines in thousands of rupees. According to the provisions,
Anyone found guilty of murder after torturing or abducting or raping an individual; committing murder through poisoning of
NEFPORT ISSUE 34 – SEPTEMBER 2018
food; committing mass murder by hijacking aircraft and genocide. 11. Longer jail sentence for Rape: The jail-term for anyone
convicted of rape has been increased to 20 years from 15 years in the past.
12. Match-fixing in sports has been criminalised: This law is first of
its kind in Nepal where those found guilty of match-fixing will face five years in prison and NPR 50,000 fine or both.
13. Negligence in medical practice will lead to severe actions:
A medical practitioner would face an action equivalent to a murder charge if authorities determine that a patient lost its life due to medical negligence. If reckless treatment leads to a patient’s disability, the medical practitioner will face three years behind bars and a monetary fine.
14. Husbands can initiate divorce proceeding: Until now, only
a wife could start the divorce process by filing a case in court, making it more bureaucratic for a husband to initiate such a proceeding. This provision has been changed in the new criminal code and now both husband and wife can start the divorce proceedings from a court. The new law also states that marital rape could lead to a legal divorce.
Constitutional Council picks Mishra for Chief Justice: The Constitutional
Council headed by Prime Minister KP Oli selected Supreme Court (SC) Acting Chief Justice Om Prakash Mishra as the Chief Justice (CJ).2 The position of Chief Justice was vacant for the last five months. According to Article 284 of the Constitution, the Constitutional Council has the power to pick Chief Justice, Justices of the Supreme Court and heads and
members of the constitutional bodies and recommend their names for parliamentary hearings. Nepal to host fourth BIMSTEC summit: The fourth summit meeting
of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) is taking place in Kathmandu on August 30 and 31. It is believed that the BIMSTEC development fund that is being proposed in the fourth summit could be helpful in boosting tourism especially through the promotion of eco-tourism and Buddhist Circuit.3
President Bhandari expresses condolence to former Indian PM, UN chief: President of Nepal, Bidhya
Devi Bhandari expressed condolence on the demise of former Indian Prime Minister Atal Bihari Vajpayee and former UN Secretary-General Kofi Annan.4 The Maoists had just started their insurgency when Annan was elected Secretary-General, and the conflict ended with the peace agreement in 2006, the last year of his second term at the helm of the UN. Annan also paid his visit to Nepal to draw international attention to the conflict.
PM Oli congratulates Pakistan’s new Prime Minister: Prime Minister
KP Sharma Oli has congratulated Imran Khan for being elected as the new prime minister of Pakistan.5 Khan’s upstart Pakistan Tehreek-eInsaf (PTI) party took 115 of 270 seats in the National Assembly, in an election marred by a deadly suicide bombing and accusations of vote tampering. The party’s total is 21 short of a majority, but Khan declared victory nonetheless, planning to team up with regional party representatives to form a governing coalition.6
Local governments under fire for hiking tax rates: While the federal
government has been asserting that sub-national governments cannot impose taxes beyond their constitutional mandate, provincial and local governments are increasing the tax on various transactions resulting in double taxation in numerous cases.7 District offices become nonfunctional: Eighteen district offices
of the country have become nonfunctional starting 17 July 2018. The authorities of these offices have been transferred to local levels. Some of the bodies that have been scrapped are listed below:8 1. District Forest Office 2. District Child Welfare Committee 3. Peace Committee 4. District Cooperative Office 5. Land conservation Office 6. Domestic and Small industries 7. District Hospital 8. District Irrigation Office 9. Women and Children’s Office 10. District drinking water Office 11. Urban Development Division Office 12. District Sports Development Committee. Now onwards district includes District Administration Office, District Police Office, District Post Office, District Prison Office, District Office of government lawyer, District Coordination Committee, District Court and District Election Office, among others. Parliament Convention
ratifies 1999:
Montreal
Parliament recently ratified the Convention for the Unification of Certain Rules for International Carriage by Air, also known as the Montreal Convention 1999 (MC99), that stipulates higher
9
10
DOCKING NEPAL’S ECONOMIC ANALYSIS
compensation for accidents involving international flights.9 Following endorsement by Parliament, the
“ OUTLOOK
Nepal government has to deposit the ratification instrument with the International Civil Aviation
Organisation (ICAO) in Montreal, Canada.
The Nepali politics looks relatively stable in the coming days. However, as the government continues to institutionalise federalism, coordination in issues like double taxation will be challenging and can lead to protests in the near future. Besides, implementing the new Criminal and Civil Code will not be an easy task either, as the government might face various legal hurdles and amendment demands in the process.
NEFPORT ISSUE 34 – SEPTEMBER 2018
INTERNATIONAL ECONOMY INTERNATIONAL ECONOMY Last quarter of 2018 saw continuum in the US-China trade war with tariffs increased in various sectors and products. The effect of the conflict is felt globally with a decline in global growth rates. The setback in the global growth is also attributed to the sharp decline in growth of the Eurozone economy. On the other side, two parameters continue to see a rise in the global economy, global oil prices and inflation in Venezuela.
Economic Outlook: The International Monetary Fund (IMF) published the World Economic Outlook, July 2018 under the theme ’Less Even Expansion, Rising Trade Tensions.’10 According to the report, global growth is projected to reach 3.9% in 2018 and 2019, in line with the forecast of the April 2018 World Economic Outlook (WEO). However, the expansion is becoming less even, and risks to the outlook are mounting. The rate of expansion appears to have peaked in some major economies and growth has become less synchronized. The recently announced and anticipated tariff increases by the US and retaliatory measures taken by trading partners have increased the likelihood of escalating and sustained trade actions. These actions could derail the recovery and depress mediumterm growth prospects, through their direct impact on resource allocation and productivity, and by raising uncertainty on investment. Financial market conditions remain accommodative for advanced economies—with compressed spreads, stretched valuations in some markets, and low volatility—but this could change rapidly. Possible
World
triggers include rising trade tensions and conflicts, geopolitical concerns, and mounting political uncertainty. Tighter financial conditions could potentially cause disruptive portfolio adjustments, sharp exchange rate movements, and further reductions in capital inflows to emerging markets, particularly those with weaker fundamentals or higher political risks. US-China Trade War: The US imposed
25% tariffs on another $16 billion of Chinese goods in August that affects 279 Chinese products, including chemical products, motorcycles, speedometers and antennas. China responded immediately with 25% tariffs on an equal amount of American goods, such as chemical products and diesel fuel.11 Both China and the United States have now imposed tariffs on $50 billion of each other’s goods in the clash, which the Trump administration launched to punish China for what it says are ‘’unfair trade practices.’’ The first round of tariffs went into effect in July. Many American companies have warned that they would not be able to absorb 25% tariffs without raising prices on American consumers.
Representatives from the motorcycle industry, electric bicycle makers, food equipment manufacturers, and chemical companies have written to the US government or testified in opposition to this latest round of tariffs. Businesses in China are also feeling the heat of the trade war, which has weighed on the country’s financial markets. Investors are increasingly concerned about how a slowing Chinese economy will weather a protracted dispute with the US. The continuous battle over tariffs between China and the US shall shave off global growth by a significant value. US sanctions on Iran affect oil prices: President Donald Trump
announced the US withdrawal from the Iran nuclear deal in early May and promised fresh US sanctions on Iran’s economy, especially on its oil industry. After the announcement, Iran’s export has declined severely as its oil customers have started to wind down purchases drastically. This has risen the oil prices by more than one percent till August 24, 2018.12
Venezuela and Turkey in currency crisis: On 20 August 2018, Venezuela
slashed five zeros from its currency
11
12
DOCKING NEPAL’S ECONOMIC ANALYSIS
with the release of the new “sovereign bolivar,” equivalent to 100,000 old bolivars.13 The government also announced a 3000% increase to the minimum wage, tax increases, and a plan to peg the currency to the petro, a state-backed cryptocurrency widely considered a fraud. Another major player in the global economy, Turkey is also in a currency crisis.14 The Turkish currency (Lira) plunged by 42% against the US dollar in 2018 after the Trump administration
“ OUTLOOK
imposed sanctions and tariffs against Turkish goods. The lira suffered its biggest monthly drop in August 2018 since February 2001, when the country abandoned exchange controls and allowed the currency to float amid an economic crisis.15 Eurozone economy declines sharply: The Eurozone economy
decelerated sharply in the first quarter of the year, ending the spell of robust growth that was seen in 2017. Slower global recovery
and strong euro caused exports to plunge and GDP growth to slide to a seasonally-adjusted 0.4% over the previous quarter.16 The monthly economic indicators suggest that the economy remained in a soft patch at the start of the period but stabilised towards June. Industrial production shrank in April, and economic sentiment fell throughout the quarter. However, industrial output rebounded solidly in May and the composite PMI recovered some lost ground in June.
The US dollar shall remain strong in the upcoming quarter led by the tightening of the US monetary policy. The continuum in the US-China trade policy is expected to enhance uncertainty among the investors and lead to a decline in mediumterm growth prospects. Although the advanced economies shall have stable financial market conditions, emerging markets shall remain under pressure. The main highlight of the next quarter shall be the impact of Turkey’s economic crisis on the global economy as the crisis has chances of contagion and a possible risk of default.
2 MACROECONOMIC
OVERVIEW
DOCKING NEPAL’S ECONOMIC ANALYSIS
MACROECONOMIC OVERVIEW MACROECONOMIC OVERVIEW The year-on-year (YoY) inflation level inflated to 4.2% over the past twelve months of FY 2017/18, nevertheless the inflation is within the targeted level of 7%. On the other hand, Nepal’s trade deficit continues to widen as merchandise import increased to NPR 1242.83 billion (USD 7.58 billion). The inflation rate, measured by Consumer Price Index (CPI), has increased to 4.6% in mid-July (see Figure 1). It stood at 2.7% over the same period the previous year.
Inflation:
Inflation wedge between Nepal and India: The inflation wedge, measured
as the YoY change in CPI of Nepal and India has slightly increased to 0.4%, as shown in Figure 2. Over the same period last year, the inflation wedge between
India and Nepal stood at 0.3% as shown in Figure 3. An improved supply situation between the two countries and a deceleration in the Indian inflation rate can be cited as the main reason for the subtle inflation wedge.
Figure 1: Year on year inflation measured by Consumer Price Index (CPI) for twelve months of FY 2016-17 and 2017-18
Inflation measured by CPI (In %)
14
8.6
7.9
6.7 6 5
2.6 3.1
3.2
3.2
mid-Dec
mid-Jan
3.3
2.3
2.3
mid-Aug
4.1
4
3.8
3.4
mid-Sep
mid-oct
mid-Nov
5.3
mid-Feb
Review Period
3.8 2.9
mid-Mar mid-Apr
3.4
mid-May
4.1
2.8
mid-Jun
4.6 2.7
mid-Jul
2016-17 2017-2018
Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
NEFPORT ISSUE 34 – SEPTEMBER 2018
Change in Consumer Price Index (in %)
Figure 2: Year-on-year percentage change in CPI in Nepal and India and the inflation wedge in the corresponding period for FY 2017-18
6 5.2
4.9
3.4
3.4 3.3
mid-Aug
mid-Sep
3.6
4.2
3.9
5.07
5.3
5 4.4
4.3
mid-Feb
mid-Mar
4
4.9
4.6
5
4.6
4.1
4.1
mid-May
mid-June
4.2
3.1
2.3
mid-oct
mid-Nov
mid-Dec
mid-Jan
mid-Apr
mid-July
Review Period Nepal
India
Inflation wedge
Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
Figure 3: Year-on-year change in inflation wedge (based on CPI) between Nepal and India in FY 2016-17 and 2017-18 2016-17 2017-2018
3.6 3.5
Inflation Wedge
2.5
1.3
1.7
1.3
1.2 0.8 0.6
0.4 0.1 mid-Aug
mid-Sep
mid-Nov
mid-Dec
(0.5)
-1
-1
0.4 0.3
0.0
0.0 mid-oct
0.7
mid-Jan
mid-Feb
mid-Mar
mid-Apr
mid-May
mid-June
mid-July
0.4 -1.17
-0.8
-0.9
Review Period Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
-1.17
15
DOCKING NEPAL’S ECONOMIC ANALYSIS
Import-export and trade deficit:
Merchandise imports have increased by 25.5% to NPR 1242.83 billion (USD 8.24 billion) in the first twelve months of FY 2017/18, as shown in Figure 4, compared to 28% in the same period of the previous year. In comparison to the same period last year, Nepal’s import from India increased by 27.8%, showing a greater dependency on its neighbour. Merchandise exports have grown at a sluggish pace in comparison to a
drastic increment in merchandise imports. Merchandise exports increased by only 11.1% to NPR 81.19 billion (USD 562 million) in the first twelve months of FY 2017/18. The corresponding figure was 4.2 % in the same period of the previous year. A lack of growth in the industrial sector can be attributed to the lack of any substantial growth in exports. Similarly, twelve months average wholesale price indices (WPI) moderated to 1.7% in FY 2017/18. The corresponding figure was 2.7% in the previous year.
As a result of the widening gap between imports and exports, Nepal’s trade deficit increased by 26.7%, compared to 30.4% in the same period the previous year, as shown in Figure 6. Nepal’s trade deficit now stands at NPR 1161.64 billion (USD 7.68 billion). Nepal’s propensity to import goods from India and the lack of growth in domestic producers can be attributed to the widening trade gap. With the government unable to boost exports and support the development of the domestic industrial sector, the trade deficit will continue to worsen with imports growing at a substantial rate.
Figure 4: Year-on-year percentage change in merchandise imports in review periods in FYs 2016-17 and 2017-18 2016-17 2017-2018
Change in merchandize import (in %)
16
87.4 78.9
69.1
60.8
67.3
44.2 43.4
34.9
mid-Sep
mid-oct
mid-Nov
22.2
21.9
23.5
mid-May
mid-June
28 25.5
15
10.8
9.3 mid-Aug
12.8
11
30.9
20.6
18.9
16.9 13
39.7
mid-Dec
mid-Jan
mid-Feb
mid-Mar
mid-Apr
mid-July
Review Period Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
NEFPORT ISSUE 34 – SEPTEMBER 2018
Change in merchandize export (in %)
Figure 5: Year-on-year percentage change in merchandise exports in review periods in FY 2016-17 and 2017-18
17
17.1 14.8
15.2
12.6 10 7.7 7.7
13.4
12.8
12.9
9.8 10.8
7.9
8.2
7.5
mid-Aug
-3.9
mid-Sep
mid-oct
12.1
mid-Nov
9.2
11.1 10.4 4.2
mid-Dec
-3.3
mid-Jan
mid-Feb
mid-Mar
mid-Apr
mid-May
mid-June
mid-July
Review Period 2016-17 2017-2018
Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
Change in trade deficit (in %)
Figure 6: Year-on-year percentage change in the trade deficit in review periods in FY 2016-17 and 2017-18
97.9
97
77.5
74
66.2
48.1
13.6
11.8
47.6 17.7
11.1
13
15.1
mid-Sep
mid-oct
mid-Nov
mid-Dec
mid-Jan
37.5
33.2
30.4
24.6
26.7
19.4 23
21.7
22.9
mid-Mar
mid-Apr
mid-May
10.7 mid-Aug
42.6
mid-Feb
mid-June
mid-July
Review Period 2016-17 2017-2018 Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
17
DOCKING NEPAL’S ECONOMIC ANALYSIS
Government revenue: Government
revenue collection increased by 19.2%, amounting to NPR 726.08 billion (USD 4.76 billion). The revenue collection had increased by 26.4% to NPR 609.17 billion (USD 3.94 billion) in the corresponding period of the previous year as shown in Figure 7. Government expenditure: Total government expenditure increased by
26.2% to NPR 1029.02 billion (USD 6.05 billion), compared to an increase of 36.5% in the corresponding period of the previous year, as shown in Figure 8. This was on account of both recurrent and capital expenditure rising to NPR 680.31 billion (USD 4.62 billion) and NPR 239.91 billion (USD 1.02 billion) respectively. Recurrent and capital expenditure stood at NPR 501.62 billion (USD
2.87 million) and NPR 189.46 billion (USD 697 million) respectively in the corresponding period of the previous year. The utilisation of capital and the recurrent budget has been approximately 84.7% and 71.6% respectively. Figure 9 shows the monthly outlay in terms of percentage of the target achieved for government spending.17
Figure 7: Year-on-year percentage change in revenue collection during the review periods for FY 2016-17 and 2017-18
Change in revenue collection (in %)
18
81.5
84
65 68.9
66.7
51.9
51.6
32.6
36 11.5
mid-Aug
44.4
17 10.3
10.7
mid-Sep
mid-oct
20.7
19.5
21.4
mid-Dec
mid-Jan
mid-Feb
mid-Mar
26.4 19.2
20.8
16.3 mid-Nov
33.1
mid-Apr
21.8
19.4
mid-May
mid-June
mid-July
Review Period 2016-17 2017-2018
Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
NEFPORT ISSUE 34 – SEPTEMBER 2018
Change in government spending
Figure 8: Year-on-year change in government expenditure during the review period for FY 2016-17 and 2017-18
18.57
72.38
138.84
170.7
140.68
95.16
256.3
194.61
364.95
428.88
506.55
248.2
313.3
374.96
mid-Jan
mid-Feb
mid-Mar
643.64
727
832
419.93
478
555.1
mid-Apr
mid-May
mid-June
1029.02
793.91
31.55
2.31 mid-Aug
mid-Sep
mid-oct
mid-Nov
mid-Dec
Review Period
mid-July
2016-17 2017-2018
Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
Figure 9: Budgetary outlay trend over the twelve months of FY 2017-18
Budgetary Outlay (in% of target)
90 80 70 60 50 40 30 20 10 0 mid-Aug mid-Sep
mid-oct
mid-Nov
mid-Dec
mid-Jan
mid-Feb
mid-Mar
mid-Apr
mid-May mid-June mid-July
Review Period Recurrent (17/18)
Capital (17/18)
Financing (17/18)
Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
19
DOCKING NEPAL’S ECONOMIC ANALYSIS
“ OUTLOOK Overview: During the current fiscal year, GDP of Nepal grew by approximately 14% (at current price) to NPR 30 billion (USD 27.45 million). The percentage change in major sectors can be depicted from the following diagram.
Percentage growth in the sector 30.0
27.3
25.0 18.5
20.0
21.6
17.9 16.7
15.0
15.7
11.4
9.5
8.6
8.3
10.0
12.4
9.6
8.4
5.8
7.7
5.0
...
k
d
ity ,s
oc
so
ia
ci
al
la
w
nd
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th
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er
co
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or
n
...
tra
Ed
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n
an
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,r en te ta
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d
d
tio ia ed m
er nt lI
ia Re
nc na Fi
...
n
.. an e
ag or st
rt, po ns
el
s
an Tr a
ot H
d.
ts an ta
re s d
d an le sa
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ur
ra lt
re t
on C
ai
ru st
d an s
ga ty,
ci tri ec El
de
n io ct
at w
tu ac uf
an M
g in in M
er
g rin
g rry ua
Q an
d
an re tu ul ric
in
in sh Fi
d
fo
re s
try
g
0.0
Ag
20
Source: Current Macroeconomic Situation of Nepal (Based on the twelve-month data of 2017/18), Nepal Rastra Bank
In order to achieve the objective of “Prosperous Nepal and Happy Nepali”, Nepal needs to attain the two-digit growth for a sustainable period of time. Private sector must be encouraged to make an investment in manufacturing industries. Even a simple idea can act as a catalyst to spur the business eco-system. For instance: establishment of pencil industry will help to mobilise other sectors as well including—wood, paint, lead, metal, and rubber. Furthermore, bureaucratic hurdles must be minimized to promote the industries and businesses. The report claims that at least 21 days are required to register a business if all the necessary documents are submitted. Table below compares the bureaucratic process required to register a business.1
Nepal
India
Pakistan
Number of Procedures
7
11
11
Bangladesh 8
Durations
21
89
24
35
The appropriate political landscape required for the economic upsurge has always been a subject of debate. Nevertheless, considering the economic growth achieved by the most of the Asian nations—including—China, India, Taiwan, South Korea, Hong Kong and Singapore—free trade and globalisation seems to be the answer. However, there is a fundamental difference between the economic growth achieved by India and China. India, even after the reforms, has been promoting its homegrown industries (especially IT business), whereas China has primarily relied on foreign transnational companies to stimulate the manufacturing business. In fact the Chinese export that falls under the control of foreign enterprises is approximately 70%.2 This strategy of China to invite the foreign capital and exploit the abundance labor has helped the country to achieve the impressive economic growth. Considering the strategies adopted by India and China, there is little doubt that in the short term Chinese strategy seems more plausible. Nevertheless time alone will confirm the long term viability of the project. 1. Law Liberty and Livelihood. “introduction: Making a Living on the Street” P. 197f 2. Pederson, Jorgen D. “Managing Globalization: India and China compared” P. 243ff
v
3 NEFPORT ISSUE 34 – SEPTEMBER 2018
SECTORAL
REVIEW
21
DOCKING NEPAL’S ECONOMIC ANALYSIS
AGRICULTURE AGRICULTURE AGRICULTURE
Even with government support there has been a significant loss of crops due to stressful climatic conditions and lack of knowledge. However, the government has increased the Minimum Support Price for farmers to safeguard the loss of their production.
The government has been providing a 70% subsidy on the premium for agriculture-related insurance policies to protect the farmers from potential loss. However, the district faces huge loss every year as farmers are unaware and lack proper knowledge about the state-subsidised crop and livestock insurance schemes in operation since last five years. The insurance companies have not even implemented the mandatory government-backed insurance schemes.18 Heavy reliance on foreign agro products: Nepal’s total import bill
amounted to NPR 1,234 billion
s al im
es ic Sp &
& C
of fe
e,
Te a
s ed se il
O
An
ts Fr
ne
ui
ry
s
io fe
on
Su
ga
r&
C
Fr
ui
ts
ct
&
rti
liz
N
er
ut
s
er dd fo
al
Fe
s le ab im
et
An
&
oi
Ve g
ts
ab
le
fa
C
er ea
ls
ls
50 45 40 35 30 25 20 15 10 5 0
et
The Siraha district of eastern Tarai faces enormous crop damage every year due to severe climatic conditions like floods, strong winds, storms and hailstorms. The loss has summed up to nearly NPR 6.4 billion (USD 58.4 million) this year alone. About 70% of the mango crop worth NPR 5.75 billion (USD 52.49 million), watermelon worth NPR 74.7 million (USD 681,942), litchi worth NPR 20 million (USD 182,581), and lentils worth NPR 200 million (USD 1.83 million) has been destroyed by the hailstorms, according to the District Agriculture Office.
Table 1: Data showing Nepal’s Agro Imports
Ve g
Unawareness of farmers and weather stress induces huge crop loss:
Amount in NPR billion
22
Products Source: Ministry of Agriculture Development
(USD 11.27 billion) the last fiscal year as shown in Table 1, with agricultural goods topping the import bill crossing the NPR 200 billion (USD 1.83 billion) mark for the first time. According to the Department of Customs, Nepal imported NPR 215.50 billion (USD 1.97 billion) worth of farm products, the share of agro products in the total import bill has increased to 17%. Reliance on foreign agro goods has increased nearly fivefold in the last nine years. The swelling of food imports is due to the expanding population, change in Nepali consumption pattern, and stagnant local production due to lack of farmers.
The hike in the agro bill is also due to the growth in the food processing industry and livestock industry. Cereals are the top agro product imported followed by edible oil, vegetables, food and animal fodder. According to Customs Department imports, animal fodder alone amounted to NPR 15.51 billion (USD 141.64 million) last fiscal year.19 Ministry of Agriculture exhibited 100-day progress report and launched a mobile application:
After an inspection undertaken by the Ministry officials, the Ministry of Agriculture, Land Management and Cooperative undertook legal
NEFPORT ISSUE 34 – SEPTEMBER 2018
action against 98 traders at Kalimati Vegetable Market for defying market rules and regulations. The Ministry has taken needful action and asserted their commitment to continue market inspection. Moreover, the agriculture minister unveiled a 100-day work progress report that illustrated various agreements and bilateral discussions with China, Qatar, Netherlands, and Israel for technical support in the agricultural sector. In order to increase the production and productivity of agro products in the country, the Ministry has also agreed to a five-year work plan (2018-2023) with International Rice Research Institute of the Philippines. It has also prepared a draft of the regulations for farmers’ pensions, promotion of agrotourism and also a policy discouraging fragmentation of farmland for real estate purposes.20 Likewise, the Ministry for Agriculture launched a mobile application which would prove beneficial to service seekers. The mobile application provides information on accomplishments of the Ministry’s programmes, services provided by the government, citizen charter and working areas of the offices under the Ministry. The app also includes applications forms for service seekers, rules and regulations, land dictionary and survey calculator.21 Increase in export of coffee but production of green leaves at risk:
Nepal produces approximately 350 tons of coffee annually and commercial coffee farming is becoming very popular with the farmers. The export of coffee from the districts of Gulmi and Palpa alone in the current fiscal year has been of 29 tons. Two companies Highland Coffee Promotion and Nepal Organic Coffee Product, alone undertake the export of Nepali coffee from these
districts to countries like the US, South Korea, Japan and Germany. It is believed that the global demand for coffee is around 4,000 tons. Coffee farmers have been benefiting from different cooperatives, training and orientation programmes aimed at increasing coffee production; however, processing of coffee in mass scale is only possible if the government provides coffee grading and packaging machine for the local farmers.22 While export of coffee is on the rise, the tea growers are facing hard situations. Tea production from the major tea producing areas such as Panchthar, Jhapa and Ilam has declined significantly. The unfavourable climate, lack of fertilisers and others have attributed to the low production. According to the Central Tea Cooperative Federation (CTCF), the production has dropped by nearly a half compared to last year. According to the Nepal Tea and Coffee Development Board, NPR 2.42 billion (USD 22.10 million) worth of tea was exported in the fiscal year of 2017/18.23 Promotion of farm mechanization by providing rental service: According
to the Ministry of Agriculture, Land Management and Cooperatives, the government has planned to open custom rental and hiring centre in all provinces specialising in farm equipment to promote farm mechanization, reduce the cost of production and encourage youth towards farming. The government levies only 1% duty on imports of farm equipment for farmers but charges 38-40% duty if imported by traders. Hence, to achieve the government’s target of doubling agro production in
five years, it is essential to adopt modern farming technology and machinery to increase production. However, fragmentation of farmland, the high cost of production and low yields along with decreasing interest of youth towards farming remain a challenge.24 The rise of MSP for paddy ensures profit for farmers: The high-level
government committee approves the increase in the Minimum Support Price (MSP) for common paddy. The scheme will protect farmers against sudden depreciation in the market price. The MSP for common paddy has been raised to NPR 2,460.75 (USD 22.47) per quintal this fiscal year from NPR 2,438 (USD 22.26) last year which also ensures a profit of at least 30% for farmers.25 For the first time in three years, the government announced the MSP before the end of the planting season and will be useful as the government sets fair prices for the farmers. The MSP will be pivotal this year as paddy production is expected to break records of surplus production.26 Dairy farmers protest due to cuts on the commission: Dairy
cooperatives took to the streets in Chitwan after the state-owned Dairy Development Corporation (DDC) decided to reduce their commission from NPR 6.92 (USD 6.3 cents) to NPR 3 (USD 2.7 cents) per litre of milk.27 Protests also erupted in other areas of the country with farmers arguing that they will incur a loss due to the government’s decision. The demonstrators demanded previous rates of milk, guaranteed market for their product and the rate of the milk to be based on the production cost. According to the DDC, it lowered the commission to provide subsidies in cattle feed.28
23
24
DOCKING NEPAL’S ECONOMIC ANALYSIS
“ OUTLOOK Agro products topping the import bill raises concerns of the country. Meanwhile, the initiatives made by the Ministry of Agriculture, such as the progress report and the mobile app, are commendable. However, if the past is any indication, the Ministry needs to put more concentrated efforts on the delivery and implementation of programmes.
NEFPORT ISSUE 34 – SEPTEMBER 2018
ENERGY ENERGY AGRICULTURE
The Nepal Electricity Authority (NEA) reported a net profit for the second consecutive year after facing losses for over a decade. The NEA reported a net profit of NPR 1.01 billion (USD 9.22 million) for the fiscal year 2017/18 as it brought down the system losses to 20% by reducing almost six percentage points since 2015/16. Cutting down electricity loss in supply and distribution has largely influenced the development. Furthermore, the energy consumption of large household consumers and industrial consumers increased in the fiscal year 2017/18, which was also the reason for the increased revenue.29 The NEA further hopes to reduce the losses to around 15% and forecasts to earn a net profit of NPR 1.1 billion (USD 10 million) in the current fiscal.30 Figure 10: Electricity System Loss FY 2013/14-2017/18
30.00% 24.64% 25.00%
24.44%
25.75% 22.90% 20%
20.00% 15.00% 10.00% 5.00% 0.00% 2013-14 2014-15 2015-16 2016-17 2017-18
Source: My Republica
Nepal, Bangladesh sign Memorandum of Understanding (MoU) on energy cooperation:
The MoU signed between the two governments aims to increase electricity trade between Nepal and Bangladesh by encouraging cooperation and support between the public and private entities of the
two countries.31 As per the MoU, Nepal and Bangladesh have agreed to form a Joint Working Group cochaired by the Joint Secretaries of the energy ministries of both the countries to promote and facilitate power cooperation. By signing the MoU, Nepal aspires to attract more Bangladeshi investments towards its
hydropower sector. Nepal envisions to export 9,000 MW to Bangladesh by 2040. 32 Renewable Energy For Rural Areas (RERA) Programme launched in Province 7: The RERA programme,
a joint technical support programme between the Nepal government (GoN)
25
26
DOCKING NEPAL’S ECONOMIC ANALYSIS
and the German Federal Ministry for Economic Cooperation and Development (BMZ), was launched in Dhangadi on 31 May. It is jointly implemented by the Alternative Energy Promotion Centre (AEPC) of Nepal and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH of Germany. The programme received a monetary contribution of € 5 million from the German Federal Ministry for Economic Cooperation and Development (BMZ) for three years (October 2016-September 2019) and is developing a framework to promote small-scale renewable energy in federal, local and provincial level governments.33 The programme’s motive is to improve the energy situation in the rural households who have limited or no access to energy, mainly in Province 1 and 7. Motihari-Raxaul-Amlekhgunj Pipeline Project: A petroleum
pipeline from Motihari to Amlekhgunj via Raxaul is being constructed in full swing to facilitate uninterrupted supply of petroleum products to Nepal. It is anticipated that the pipeline would decrease
transportation cost by approximately NPR 700 million (USD 6.40 million) annually.34 The construction of the highly anticipated project commenced on 7 April 2018 and is expected to be completed within 30 months from the date of commencement. Although the project is a joint undertaking between Nepal and India, the Indian Oil Corporation (IOC) has been covering most of the construction cost, while the Nepal Oil Corporation (NOC) has been handling logistics to expedite the pipe laying work and land compensation procedures within Nepal. Country’s largest biogas plant inaugurated: Nepal’s first biogas
plant commercially producing bottled compressed gas, Envipower Energy and Fertiliser Pvt Ltd, was recently inaugurated in Nawalparasi. The government is increasingly tapping on its alternative energy sources such as biogas to foster a low carbon economy and reduce the import of petroleum products—one of the most imported items of the country. Besides, biogas is comparatively cheaper than the liquid petroleum gas (LPG) as well.
With the support of the Climate Investment Funds (CIF) and the World Bank, Nepal plans to encourage private actors to build biogas facilities in 10 different municipalities and construct 340 new biogas plants. This joint endeavour would be beneficial in creating jobs and also reduce the number of imported LPG gas cylinders by approximately 1, 31,000 and about 5,000 tons of imported fertiliser annually. 35 Petroleum import bill keeps rising:
Nepal’s petroleum import bill has set a new record of NPR 153.24 billion (USD 1.40 billion) as of the first 11 months of the fiscal year. Petroleum products are the highest imported commodity of the country and continue to be the largest contributor towards the nation’s widening trade deficit. The total trade deficit of the nation widened by 24.6% to NPR 1,033.04 billion (USD 9.43 billion) in 11 months of FY 2017/18.36 The rise in the oil import bill is also contributed by the rise in global crude oil prices and the rise in the value of the US dollar. Also, despite the elimination of load shedding in the industrial sector, import of petroleum products does not seem to decrease.
Figure 11: Total Petroleum Bill *11 months
Total Petroleum Bill (in billion Rs)
153.24 131.73 107.13
118.91
110.05
92.25 75.08 41.4
65.6
51.61
2008/09 2009/10 2010/11 2011/12 2012/13 2013-14 2014-15 2015-16 2016-17 2017-18 Source: Nepal Rastra Bank.
NEFPORT ISSUE 34 – SEPTEMBER 2018
“ OUTLOOK Efforts have been made by the government to reduce the nation’s reliance on petroleum products by promoting alternative energy such as biogas and facilitating uninterrupted power supply to the industries and households. These efforts although encouraging, may not reduce the nation’s demand for petroleum products which has seen a growing trend in recent years. However, the construction of the petroleum pipeline between India and Nepal would undoubtedly aid in meeting the increasing demand for petroleum and could ease the prices with the reduction of transportation costs of fuel.
27
28
DOCKING NEPAL’S ECONOMIC ANALYSIS
INFRASTRUCTURE AGRICULTURE INFRASTRUCTURE
Infrastructure gap was a significant challenge for Nepal to achieve desirable economic growth in the last decade. It is essential for a developing country like Nepal to invest in infrastructure if it desires to move out of the cycle of low economic growth. Although various projects have been categorised as National pride projects, lack of coordination between government agencies and poor contracting has led to delay in almost all large size projects.
Development of ICP in Bhairahawa and Nepalgunj: The Ministry of
Industry, Commerce and Supplies are preparing detailed project reports for the two Integrated Check Posts (ICPs) in Bhairahawa and Nepalgunj. As per the agreement signed between Nepal and India in 2005, India will bear all the construction cost while Nepal will provide the land required for the ICPs in Birgunj, Biratnagar, Bhairahawa and Nepalgunj. Currently, the ICP in Biratnagar is being constructed over 169 bighas (13.54 hectares) of land. It is expected that the Biratnagar ICP will commence operation in December this year. The Nepal government has already acquired 52 bighas and 90 bighas of land for the proposed ICP in Bhairahawa and Nepalgunj respectively.37
monsoons in Terai region. However, till July, 13 km out of the 69 km oil pipeline has been laid since work began in March 2018. The project is estimated at NPR 5.18 billion (USD 47.28 million) with the capacity of two million tonnes per annum.39 Bheri – Babai multipurpose project tunnel work on track: The
first ever Tunnel Boring Machine used in Nepal has managed to complete boring six km tunnel out of the total 12 km long tunnel. China Overseas Engineering Group has been assigned to complete the project by March 2020. The project once completed will generate 48 MW of electricity and irrigate 51,000 hectares of land in Banke and Bardiya.40
tourism minister and Caan director general.41 Progress on Gautam Buddha International Airport: As of mid-
July the project has achieved 48% physical progress which was only 29% in 2017. At the current rate of progress, the project is expected to be completed by June 2019. The NPR 6.22 billion project has been awarded to China’s Northwest Civil Airport Construction group. The project was delayed after a series of hurdles such as lack of construction materials, issue of land acquisition and compensation, and the contractor left midway citing problem in the budget release. The project deadline has been revised to 2019.42 railway: The Department of Railway based on a detailed project report estimates that the 72.25 km Kathmandu – Kerung railway will take nine years to finish construction at an estimated cost of NPR 257 billion. Based on the time required to complete the project the yearly fund requirement is estimated at NPR 28.55 billion.43
Kathmandu-Kerung Sirsiya Dry Port plagued by congestion: Congestion at Sirsiya
dry port due to importers delaying the clearance of container has become a routine. Importers are delaying clearance as a result of the government mandate to check the reference prices of imported goods to prevent underinvoicing.38
Amlekhgunj-Raxual oil pipeline in construction: The oil pipe laying
works of between Nepal – India has come to a halt owing to heavy
Budget sanctioned for Tribhuvan International Airport (TIA): The Civil
Aviation Authority of Nepal (Caan) has approved NPR 45.17 billion (USD 412.3 million) for upgrading the infrastructure at the TIA. In the previous year, Caan approved NPR 43.59 billion (USD 397.93 million), but only NPR 26 billion (USD 237.35 million) was spent. The under spending is driven by the budget being endorsed only after four months of the financial year and also due to a bitter disagreement between
Tripureshwor-Kalanki-Nagdhunga road expansion project delayed: The
road expansion project which began in July 2015 is still not complete. The
NEFPORT ISSUE 34 – SEPTEMBER 2018
project deadline has been extended by one year to January 2019. The Public Procurement Monitoring Office reports poor preparation of detailed project report (DPR) as one of the reasons for the delay. Also, lack of coordination among government agencies such as Kathmandu Valley Development Authority, Nepal Electricity Authority, Nepal Telecom, Kathmandu Metropolitan City
and other municipalities, district forest office, Kathmandu Valley Water Supply Management Board, National Trading Limited and Local Guthis.44 India provides grant for postal highway: The Government of India
(GOI) released NPR 470 million (USD 4.29 million) as part of grants assistance for the Postal Highway
Project. With this imbursement, the GOI has released NPR 2.35 billion (USD 21.45 million) out of the total grant assistance of NPR 8 billion (USD 73.03 million) to implement the Highway project. Till date, two road sections, i.e., Dhangadhi – Bhajaniya – Satti road and Lamki –Tikapur – Khakraula have been completed.45
“ OUTLOOK
Infrastructure development has been characterised by slow progress in all fronts. Infrastructure development is still marred by poor coordination between government agencies, influential contractors, poor project management, bureaucracy, corruption and political interference.
Narrowing the infrastructure gap should be a top priority for Nepal to achieve its goal of graduating from LDC status to a middle-income country by 2030. Nepal needs infrastructure investment of at least 8-12% of GDP38 until 2020 to develop its infrastructure. The transport infrastructure sector requires NPR 370 billion (USD 3.37 billion) while in the energy sector the budget of hydropower development planned by the government is estimated at NPR 3.3 trillion (USD 30.12 billion) over a period of 20 years to develop 25,000 MW.
29
30
DOCKING NEPAL’S ECONOMIC ANALYSIS
INFORMATION AND INFORMATION AGRICULTUREAND COMMUNICATION TECHNOLOGY COMMUNICATION TECHNOLOGY In the review period, several positive initiatives have been taken from the government level in the field of Information, Communication and Technology (ICT). Efforts like digital Cabinet meetings and use of social media like Twitter to disseminate information and receive complaints from the public will lead to the journey of Digital Nepal. First digital Cabinet meeting: Nepal’s
first digital Cabinet meeting was held on 28 July 2018. The meeting was conducted at Singha Durbar, Kathmandu. An ‘Automachine System’ has been installed in the office of Prime Minister and Council of Ministers to make the discussions on the agenda precise and effective. The government has also given laptops to all Cabinet ministers. The ministers would receive a username and One Time Password (OTP) once they enter the Cabinet hall. The ministers would then log in and access the Cabinet meeting’s agenda. Every Cabinet meeting will issue a new password. Chief Secretary will distribute the username and password of each Cabinet meeting to the Prime Minister and Ministers. The office of Prime Minister has installed cell phone jammers on its premises as well as at the Prime Minister’s residence to secure discussions and ensure no distractions during Cabinet meetings.46
“ OUTLOOK
Uber to place its data centre in Kathmandu: Uber, a famous
transportation network company, is gearing up to launch its data centre in Kathmandu. As the company has been extending its centre in different parts of the world in recent years, it has chosen Nepal to establish its south Asia data centre considering the cost factor—it would be relatively cheaper to set up the centre in Nepal compared to other South Asian countries.47
Nepali team “SochWare” bags Imagine Cup Award in artificial intelligence:
Nepali team “SochWare” won Imagine Cup Award in Artificial Intelligence (AI) organised by Microsoft. It is the world’s biggest information and technology competition. Imagine Cup gathers the top student teams that bring their biggest and boldest ideas to life for the title of World Champion. Team SochWare has designed a solution “E-Agrovet,” a mobile technology-based platform that helps farmers identify plant diseases, suggest mitigation
strategies, connect them with experts and gives recent agriculture findings as well as climatic conditions.48 Twitter to operate in all the government offices: Government
offices have started preparing for operating Twitter to disseminate information, receive complains and provide public awareness. Likewise, Twitter will also be used to update the public about the activities of the Office of the Prime Minister and Council of Ministers.49
Nepal Airlines and eSewa signs agreement:
The Nepal Airlines Corporation (NAC) and eSewa have recently signed an agreement to make online ticketing possible for the NAC. With this agreement, customers will be able to purchase a flight ticket online, which is aimed to increase the market expansion of the Airlines. eSewa had already been providing online ticketing service for Buddha Air, Shree Airlines, Yeti Airlines, Simrik Air, and Saurya Airlines.50
The first digital Cabinet meeting and the government agencies using Twitter to disseminate information are good initiatives to digitize Nepal. These initiatives will not just save time and effort but will also foster the efficient delivery of government services. However much remains to be done to connect more people and provide maximum services through digital means. Besides, Uber gearing to place its South Asian data centre in Nepal can be an excellent example for other multinational companies who are thinking of running their industry in Nepal. Similarly, it can also motivate other online and information technology service companies to invest in Nepal.
NEFPORT ISSUE 34 – SEPTEMBER 2018
REALESTATE ESTATE REAL Nepal Housing and Land Developers Association estimate demand of approximately 25,000 units of new houses year on year. Currently, there are 82 housing complexes and 4,900 houses have been built and handed over to the owners. Likewise, there are 117 apartment buildings in the nation and 14,500 units have been sold. Further, the association claims that the sector contributes approximately NPR 24 billion revenue in taxes to the government. Contribution to GDP: The monetary policy 2018/19 estimates that the real estate, renting and business contributed NPR 309.360 billion to GDP at current prices. The figure below shows the contribution to GDP in the last five years. Figure 12: Contribution to GDP at current price 350
NPR in Billions
300 250 200 150 100 50 0
In Billion
2013/14
2014/15
2015/16
2016/17
2017/18
152.984
166.946
191.325
267.392
309.36
Source: Nepal Rastra Bank, Monetary Policy 2018/19
Refinance to BFIs to disburse loans to earthquake victims: The Nepal
Rastra Bank has provided cost-free housing refinance to BFIs to disburse loans to earthquake victims. The loan is disbursed to earthquake victims at a maximum of 2% per annum. Till date, NPR 1.79 billion has been approved and 1,011 victims have benefited from this facility as of July 2018.51
Amendment of Land Act 2021:
The Ministry of Agriculture, Land Management and Cooperatives (MALMC) is going to implement the land classification plan. It is rumoured that the land will be classified into three categories namely Agricultural Land, Commercial Land and Residential Land. Further preparations are underway at the
Ministry to amend the Land Act 2021 which is aimed at efficient land management and utilisation.52 Reduction
in
house
rent
tax:
Various metropolitan city offices such as Kathmandu Metropolitan City (KMC), Lalitpur Metropolitan City (LMC) and Biratnagar Metropolitan City (BMC) have reduced the
31
32
DOCKING NEPAL’S ECONOMIC ANALYSIS
house rent tax from 12% to 10%.53 However, Birgunj Metropolitan City has not reduced the house rent tax. Under the new federal structure, the local government is responsible for raising and receiving the house rent tax. The tax rates have been reduced to encourage citizens to pay taxes thereby increasing the base of taxpayers. Government to provide compensation for land acquisition: The Supreme
Court upheld the apex court’s decision to pay compensation to the parties affected by the expansion of the Tribhuvan Highway. The government had acquired the land to expand the
highway from Kalanki to Nagdhunga without paying any compensation to the affected parties. The Land Acquisition Act provides that affected parties shall be paid compensation.54
100,000 tenant families who need to give up tenancy rights after getting half the land.
Government issues notice on dual land ownership: The Ministry of
The Ministry of Urban Development (MoUD) has asked local level governments to strictly follow basic standards on settlement development, urban planning and building construction. The basic standards were established after the devastating earthquake of 2015. The notice issued by the MoUD highlights strict legal action against officials not following the basic standards of the government.56
Agriculture, Land Management and Cooperatives (MALMC) issued a notice on 6 May 2018 to landowners and tenants to end dual ownership of property within one year. As per the notice, all applications must be submitted to the respective land reform office by 20 August 2018. 55 The Ministry estimates that there are around
Local government instructed to obey basic building standards:
“ OUTLOOK
Both tenants and landowners welcome the government’s move to end dual ownership. Even the BFIs are not comfortable providing loans to both the tenant and the landlord under dual ownership. However, given the limited capacity and resources of the Ministry, implementing the initiative will be a challenge as the Ministry has taken such steps in the past. The monetary policy 2018/19 lay down that a survey will be conducted to construct the Housing Price Index (HPI) to reflect the fluctuations of prices in the housing market. Urbanisation within the Kathmandu Valley calls for the development of a housing price index as it can be used as a tool to show areas where home values are increasing or decreasing to take investment/ purchasing decision. HPI’s also help buyers decide if it is a good time to purchase a new house. However, the HPI may not always represent the correct scenario as transaction prices in Nepal are not accurate due to tax evasion.
NEFPORT ISSUE 34 – SEPTEMBER 2018
EDUCATION EDUCATION The Ministry of Education, Science and Technology (MoEST) has endorsed a National Curriculum Framework (NCF) spanning early childhood to basic education. Major changes include an integrated curriculum for Grades 1 to 3 and a single-track curriculum for Grades 11 and 12. The NCF is not without critics with the decision to drop math as a compulsory subject in Grades 11 and 12 seen as particularly controversial amidst accusations of donor interference. Meanwhile, students in several districts failed to receive their textbooks on time for yet another year, even as the state-run publisher had to shelve millions of unsold books.
National Curriculum Framework drafted for basic and secondary education: The Curriculum
Development Centre (CDC) has drafted a National Curriculum Framework (NCF) spanning early childhood to Grade 12 education. The framework specifies principles for devising curricula at different school levels and emphasizes skill-based education and envisions developing soft skills at the foundational level and hard skills at the secondary level. Grades 11 and 12 were brought under the school system through an amendment of the Education Act in 2016. The amendment restructured Nepal’s school system in line with international standards, consolidating education from Grades 1 to 8 as basic education and that from Grades 9 to 12 as secondary education. The NCF specifies an integrated curriculum from Grades 1 to 3 and a single track curriculum from Grades 11 to 12. The framework allows for three types of education from Grades 9 to 12—General, Sanskrit/Traditional, and Technical/Professional. General education will encompass streams
such as social sciences, science, and management. Sanskrit/Traditional education will encompass courses offered by Gurukuls, Gonpas, and Madrasas. Technical/Professional education will focus on practical and profession-oriented education. The draft framework was formulated with input from education experts and other stakeholders and finalized by a board consisting of members of the National Curriculum Development Board and the Evaluation Council chaired by the Minister of Education.57 Switch from multi-stream to singletrack curriculum for Grades 11 & 12: The NCF has foregone the
long-prevailing system of streambased education for Grade 11 and 12. At present, students who pass the Grade 10 Secondary Education Examination (SEE) can choose between one of four ‘streams,’ namely Science, Management, Humanities, and Education—a system introduced by the now defunct Higher Secondary Education Board (HSEB) some twenty-five years ago.58
Under
the
revised
framework,
students of Grades 11 and 12 will be able to choose three optional subjects along with four compulsory ones— Nepali, English, Social Studies, and skill-based or behavioral education.59 The new syllabus has been designed under the credit hour system with each period lasting one hour. Schools will be able to offer optional subjects based on student interests, needs, teacher and resource availability and in coordination with local governments. The National Examination Board (NEB), which was formed in 2016 by restructuring the HESB, will be responsible for administering the School Leaving Certificate examination at the end of Grade 12. Donors accused of pushing selfserving agendas in education reform: Donors have been accused of
exerting pressure on the MoEST to introduce changes in the NCF that favor the performance of the donorfunded School Sector Development Programme (SSDP, 2016-2023). The SSDP was launched in 2016 for seven years after the failure of the donorsupported School Sector Reform Programme (SSRP; 2011-2015) to
33
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DOCKING NEPAL’S ECONOMIC ANALYSIS
achieve several of its goals. The budget for SSRP was NPR 43.94 billion (USD 401.13 million) while SSDP has an estimated budget of NPR 125.41 billion (USD 1.14 billion). According to representatives at the MoEST, Math was a compulsory subject for Grades 11 and 12 in the first draft of the NCF. However, at the insistence of a World Bank representative, Math was made optional. Education experts working on the NCF are unhappy with this change as they believe it makes Nepali students less competitive on the international stage. The World Bank’s Nepal Country Office has denied claims of involvement in exerting pressure to modify the curricula of Grades 11 and 12.60 Textbook shortage: Six weeks after the beginning of the new academic session, students in several districts were yet to
“ OUTLOOK
receive a complete set of textbooks. According to representatives, textbooks of Environmental Science for Grades 4 and 5, Math for Grade 7, and optional subjects for Grades 9 and 10 were yet to be supplied in several hill and some Terai districts.61 In rural Accham, students were without textbooks well into the third month of the academic session.62 According to the Ministry of Education, Science and Technology (MoEST), textbooks need to be supplied to districts two weeks before and to schools one week before the start of the new academic session. The Department of Education (DoE) has said that the state-owned Janak Education Material Center (JEMC) was authorised to print 19.2 million copies of textbooks for Grades 6 to 10; whereas private publishers were authorised to publish 16.5 million copies of textbooks for Grades 1 to 5.
A MoEST spokesperson has claimed that the required set of textbooks has already been printed and that it is the weakness of distributors or schools for failing to acquire the required books on time. Meanwhile, millions of copies of textbooks printed by JEMC have been shelved due to a lack of coordination between government agencies. Five million textbooks for Grades 6 to 10 worth NPR 250 to 300 million (USD 2.28 to 2.74 million) and a million textbooks for Grades 1 to 5 worth NPR 60 to 65 million (USD 548 to 593 thousand) will remain unsold as the government is preparing to introduce a new curriculum starting next year. JEMC accused Sajha Prakashan, another staterun publisher, of illegally printing and selling textbooks and DoE of providing an inaccurate number of students across the country.63
The MoEST has assured that the NCF has been put on hold amidst controversies and the new school curriculum will meet national and international standards. Strong government vision and ownership of education reform will be required to ensure third-party interests do not easily derail the process and that substantial reform is achieved. While the government plans to start implementing the new curriculum as early as next year, challenges including those associated with the lack of resources and readiness of schools and teachers to implement the new curriculum along with the short duration of time available for printing textbooks are bound to emerge. Implementation of the new curriculum will also be challenging given the transition toward federalism. Local governments will be particularly hard-pressed to implement the new curriculum given the lack of resources and capacity along with coordination problems with provincial and federal government. Along with new problems, the government also needs to tackle the old ones such as the perennial shortage of textbooks in certain districts.
NEFPORT ISSUE 34 – SEPTEMBER 2018
HEALTH HEALTH An alarming increase in cases of different types of cancer has raised health concerns in the country. Meanwhile, the government has reached an agreement with Dr. KC to amend the National Medical Education Bill, and harsh penalties are to be set for the sale of expired drugs and falsified reports.
patients is increasing alarmingly in the country, and the doctors have been stressing on the need to spread awareness of different types of cancer among the people. The Bhaktapur Cancer Hospital reports a steady rise in the number of cancer patients—28,366 cancer patients in the year 2012, 34,202 in 2013, 39,191 in 2014, 41,913 in 2015 and 58,873 in 2016. The highest number of patients has cervical cancer followed by lung cancer and breast cancer.64 The numbers of patients who have bone cancer and head and neck cancer have also almost doubled in the last few years. Changing lifestyle of people, lack of exercise, genetic factors, smoking, air pollution, exposure to radiation and use of pesticides and insecticides are significant factors that cause cancer.65 Early diagnosis of cancer may help in preventing it from spreading to other parts of the body. As per the World Health Organisation, cancer is one of the leading causes of morbidity and mortality worldwide. It is expected to rise by about 70% over the next two decades.66
National Medical Education bill, reached between the government and Dr.Govinda KC. The Minister of Education, Science and Technology presented the bill to the Speaker Krishna Bahadur Mahara, who approved the registration of the amendment proposal.68
has cut down the budget to Kanti Children’s Hospital (KCH) by NPR 26.4 million—NPR 192 million (USD 1.75 million) for this fiscal year compared to NPR 218.4 million in the last fiscal year. According to KCH, the allocated budget is spent on regular expenses, which amounts to NPR 140 million (USD 1.28 million) and the current budget is not sufficient enough to buy new medical equipment. Moreover, there are not enough medical officers, specialists and nurses to attend to patients.67
The changes in the medical education bill comprised of: • amendments to 22 clauses of the medical education bill • a 10-year moratorium on the establishment of new medical colleges • Medical colleges required to run a hospital for three years before claiming affiliation
National Medical Education Bill amendments: The House of
Representatives proceeded with the nine-point agreement to amend the
Table 2: Data showing a rise of Oncology Patients in KCH 1600
Number of patients
Increase in number of cancer patients: The number of cancer
1369
1400 1200 994
1000
961
1425
1093
800 600 400
389
440
495
606
IPD OPD
200 0 2013-14 2014-15 2015-16 2016-17 2017-18
However, while the numbers of oncology patients are on the rise as shown in Table 2, the government
Fiscal Year Source: My Republica
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DOCKING NEPAL’S ECONOMIC ANALYSIS
• One university having not more than five medical colleges as affiliation • Setting up a government teaching hospital in each province and providing 75% scholarships to students in public medical colleges The bill along with amendments was presented to the House of Representatives on 27 July 2018.69 Endorsement of penalty for sale of expired drugs: The new
Criminal Code Act stipulates harsher punishment against any individual selling or distributing expired medicines. Section 236 of the Act states that if a person is found selling or distributing expired drugs, he/ she shall be imprisoned for one year and fined NPR 10,000 (USD 92). Likewise, Section 235 of the act restrains the sale or distribution of any drugs, pesticides without prescription. Similarly, other code of conducts that threatens an individual’s life has also been set forth such as adulterating medicine and providing a falsified pathology report.70
Teenage pregnancy: According to
the Lamjung District Community Hospital (LDCH), 363 women out of 1,190 pregnant women in the fiscal
year 2017/18 were below 20 years of age. Likewise, in the fiscal year of 2016/17 and 2015/16, 225 and 256 women out of 1,220 pregnant women were approximately below 20 years of age. Despite conducting awareness programmes, the LDCH and District Public Health Office (DPHO) are unable to control early marriage and early pregnancy. The chief of DPHO has stressed on the need for awareness about women’s health hazards due to early pregnancy.71 Government supported insurance schemes not implemented:
According to the data conveyed by the Health Insurance Board (HIB), only 39 families from 77 districts registered for the government-backed health insurance plan started in FY 2016/17. As per the data, only 196,734 families registered for the insurance from 899,418 families. The government plans to make the policy mandatory for public servants and migrant workers. Under this plan, a family of five must allocate NPR 2,500 annually to avail health services up to NPR 50,000 (USD 457). However, according to health experts, the plan does not encourage people to register due to the limited amount of health cover. Also, poor hospital facilities and services make people hesitant to take up the insurance policy.
The government aims to expand its health insurance plan in all 77 districts and has allocated funds for the same.72 Ministry of Health and Population publishes Ministerial Declaration:
The Ministry of Health and Population published a report on the mid-term review of the Asia Pacific Ministerial Declaration on Population and Development (APMDPD). The published report includes important achievements and activities for further implementation of the Programme of Action of International Conference on Population and Development (ICPD). ICPD was endorsed by 179 country members in 1994 to collectively address challenges such as population, development, poverty eradication, health and education, climate resilience, gender equality, social inclusion, employment, migration and food security. As per Pinky Rana, national Expert, with this endorsement, there has been a remarkable reduction in maternal mortality rate and a significant increase in life expectancy at birth in Nepal. As requested by the member states, a regional inter-governmental meeting would be conducted to review the implementation of the Programme of Action of ICPA in November 2018.73
“ OUTLOOK Although the government-backed health insurance plans are a good initiative, more needs to be done to implement it. Also, that teenage pregnancy is still prevalent in the country should alarm the authorities. Although setting up of penal codes for the sale of expired drugs and falsified reports is a step in the right direction, efforts should be made towards monitoring the market.
NEFPORT ISSUE 34 – SEPTEMBER 2018
TOURISM TOURISM Visit Nepal campaign version 3.0 was officially launched with the objective of drawing 2 million tourists to the country annually by the year 2020. Although the Ministry of Culture, Tourism and Civil Aviation (MoCTCA) had planned to launch Visit Nepal Year 2018, the campaign was deferred due to the delay in the upgrade of airports, slow progress in the restoration of heritage sites and roads. Visit Nepal 3.0 aims to promote ‘Destination Nepal’ and in the process, creates employment opportunities and improves the livelihoods of the locals by increasing countrywide engagement in the tourism sector. The government plans to introduce various new tourism products and tourism activities as well as endorse the campaign by holding promotional events to make it a success. The government also plans to engage the private sector, aviation sector, various national and international organisations to promote and implement this campaign. Additionally, infrastructure development will be prioritised, specifically in the aviation sector. Rise in tourist arrivals: The total number of foreign tourist arrivals in the country grew exponentially in the first six months of FY 2017/18 compared to
the same period last year. The country welcomed 519,621 foreign tourists in the first six months compared to 460,304 last year—a rise of 13%.
In this six month period, the highest number of foreign tourists that arrived in the country was from India with 96,372 tourists followed by China at
Figure 13: Tourist Arrival in the first six months of FY 2016-2018
600000 500000 400000 519621
300000 460304
200000 325249 100000 0
2016 2017 2018 Source: Department of Immigration
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DOCKING NEPAL’S ECONOMIC ANALYSIS
71,379. As the country gears up to welcome 2 million tourists annually by 2020, the data so far is motivating. The government has proposed to identify, develop and promote at least 100 new tourist destinations across the country in the fiscal year 2018/19. 1 This proposal was put forward in the federal budget presented by the Minister of Finance Dr. Yuba Raj Khatiwada. As per the plan, the government aims to work with provincial and local governments for the promotion of internal and external tourism. The current federal budget allocates NPR 5.2 billion for the development and growth of the tourism sector.
New
tourist
destinations:
Length of Stay of Foreign Tourists Shortens: Although the country
received a record-breaking number of 940,218 foreign tourists in 2017, the average length of stay of the travellers has declined by 6%. In 2017 the average length of stay of the foreign tourists was 12.6 days compared to 13.4 days in the past year. 2 The threeyear development plan (2017/2018) intended to increase the length of stay of tourists to 14 days by 2017 seems to have failed. So far the lowest average length of stay of foreign tourists is 7.92 days in 2002 while the highest has been 13.50 in the year 1996. Memorandum of Understanding (MoU) to boost bilateral tourism:
The Korean Tours and Trekking Operators Association of Nepal (KTTOAN) has signed a MoU with the Embassy of the Republic of Korea to promote bilateral tourism between the two countries. The respective parties will work towards enhancing cooperation and communication as well as promote tourism. As per the MoU, the two sides have agreed to share knowledge and work on the safety and security of the Korean nationals visiting Nepal mainly for trekking. The two parties have agreed to establish and operate disaster evacuation centres in certain trekking routes in Nepal and carry out rescue operations if needed.
“ OUTLOOK As the stage is officially set for the Visit Nepal 2020 campaign 3.0, the government has kick-started an ambitious endeavour to welcome 2 million foreign tourists annually by 2020. To this end, the government has launched various marketing and promotional activities which show its dedication. Still, doubts over whether the government is capable of achieving the target remains. Similar campaigns in the past have been futile—both campaigns in the years 1998 and 2011 failed to attract 1 million tourists annually. In fact, the country till date has not achieved the 1 million mark; the closest has been 940,218 tourists in the year 2017. Nevertheless, the year 2018 so far has been promising with the country receiving just over half a million foreign tourists in six months. Hence, with all the promotional and marketing campaigns, the country is expected to hit the 1 million mark by the end of this year. Additionally, new developments in the aviation sector, such as the expansion of the Tribhuvan International Airport and upgrading the Gautam Buddha Airport to an international airport would be vital to receiving foreign tourists. Although achieving the 2 million mark is a tall order, any number even close to it would be a great achievement.
NEFPORT ISSUE 34 – SEPTEMBER 2018
TRADE AND DEBT AGRICULTURE TRADE AND DEBT
Key highlights of the review period include an account of burgeoning trade deficit accompanied by a surplus in Balance of Payments (BOP). Furthermore, marking the BIMSTEC Summit, Nepal and India have agreed to sign two crucial agreements on large cargo movement across the border. In addition, the Nepal Rastra Bank (NRB) has imposed stringent rules on imports from India and has made Letter of Credit (LC) mandatory for imports worth USD 0.46 million and above. Foreign trade scenario: Table 3 shows the foreign trade scenario of Nepal based on annual data of 2017/18. Overall, Nepal’s trade outlook appears to be meagre, and its soaring trade deficit can be primarily attributed to supply-side constraints and non-tariff barriers faced by the country’s exports.
that from other trading partners went up by 19.3%. On the other hand, merchandise exports increased by 11.1% to NPR 81.19 billion (USD 741.2 million) as compared to the rise of 4.2% during the same period of last year. Exports to India witnessed a modest rise of 12.4% as compared to Nepal’s exports to China which
In the current review period, merchandise imports to Nepal registered an increase of 25.5% to NPR 1242.83 billion (USD 11.35 billion) compared to an increase of 28% in the same period of the previous year. Imports from India and China witnessed an increase of 27.8% and 25.5% respectively, and
Table 3: Foreign Trade Statistics for the annual financial year 2017/18 (in million)
(NPR. in million)
Percent Change
In NPR Billion
2015/16
2016/17R
2017/18P
2016/17
2017/18
TOTAL EXPORTS
70117.1
73049.1
81191.6
4.2
11.1
39493.7
41449.2
46604.8
5.0
12.4
To India To China
1681.5
1701.5
2437.8
1.2
43.3
28941.9
29898.4
32149.0
3.3
7.5
TOTAL IMPORTS
773599.3
990113.2
1242826.8
28.0
25.5
From India
477212.6
633669.6
809814.2
32.8
27.8
From China
115694.3
127245.0
159636.3
10.0
25.5
From Other Countries
180692.4
229198.6
273376.2
26.8
19.3
TOTAL TRADE BALANCE
-703482.2
-917064.1
-1161635.2
30.4
26.7
With India
-437718.9
-592220.4
-763209.4
35.3
28.9
With China
-114012.8
-125543.5
-157198.5
10.1
25.2
With Other Countries
-151750.5
-199300.2
-241227.3
31.3
21.0
TOTAL FOREIGN TRADE
843716.4
1063162.3
1324018.4
26.0
24.5
With India
516706.3
675118.7
856419.1
30.7
26.9
With China
117375.8
128946.5
162074.1
9.9
25.7
With Other Countries
209634.3
259097.0
305525.2
23.6
17.9
To Other Countries
Source: Nepal Rastra Bank. Current Macroeconomic Situation (based on annual data of 2017/18)
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DOCKING NEPAL’S ECONOMIC ANALYSIS
substantially increased by 43.3%. Similarly, exports to other nations went up by 7.5%. Top imports and exports: In line with the trend of the previous FY 2016/17, increasing imports of petroleum products continued to contribute to the overall rise in the value of imports in the current review period. Also, import of vehicles and spare parts, other machinery and parts, M.S. billet and Hot-rolled Sheet in Coil, among others, has increased. On the contrary, the import of agriculture equipment and parts, sanitary ware, edible oil, small cardamom and zinc ingot, among others, decreased in the current review year. Commodity wise, exports of cardamom, polyester yarn, sackings, zinc sheet and threads, among others,
have increased, whereas export of G.I. pipes, twines, juice, woollen carpet and pashmina, among others, have decreased in the current review year.
comparison, the current account had a smaller deficit of NPR 10.13 billion (USD 92.5 million) in the same period of the last FY. However, the overall BOP documented a surplus of NPR 960.2 million (USD 8.77 million) in contrast to a surplus of NPR 28.78 billion (USD 0.26 billion) in the same period of the previous FY.
Trade deficit: As imports outperform
exports in the annual FY 2017/18, the total trade deficit widened by 26.7%, amounting to NPR 1161.64 billion (USD 10.6 billion). As a result, the export-import ratio declined to 6.5% in the current review period as compared to 7.4% in the previous fiscal year.
Balance
of
Payments
Nepal-India signed two crucial agreements: Nepal and India
have agreed to sign two important agreements alongside the Bay of Bengal Initiative for MultiSectoral Technical and Economic Cooperation (BIMSTEC) Summit 2018. The first agreement will help facilitate bulk cargo movement to the nearest railheads of major customs points in Nepal namely Biratnagar, Bhairahawa and Nepalgunj. At present, transportation cost of bulk
surplus:
Skyrocketing import of petroleum products, transport equipment and parts and industrial goods, accompanied by sluggish exports have resulted in a current account deficit of NPR 245.22 billion (USD 2.24 billion) in the review period. In
Figure 14: Foreign Trade Scenario for FY 2017-18
Foreign Trade (annual) 35
Growth rate (in percent)
40
25
15
0
2013/14 -5
2014/15
2015/16
2016/17
2017/18
-15
-25 Exports
Imports
Trade Balance
Source: Trade and Export Promotion Center
NEFPORT ISSUE 34 – SEPTEMBER 2018
The second agreement, Railway Traffic Survey Agreement of BirgunjKathmandu Railway, will support the expansion of the railway system between the two regions.74
Birgunj dry port in total imports came down to 10.5% in the FY 2017/18, compared to 14.2% in FY 2016/17. The prime reason behind the drop is the congestion in unloading the bulk cargo. The Indian government has also cut off facility to unload dirty cargo—clinker, coal, fly ash— at railway sidings in Raxaul of India. On the other hand, the volume of imports from Bhairahawa, Biratnagar, Nepalgunj, Krishnanagar and Rasuwa customs points increased substantially in the current fiscal year as the cement factories made use of these alternate routes instead of the Birgunj dry port.75
Import through Birgunj dry port takes a downturn: Although Birgunj
Letter of Credit made mandatory for imports: The NRB has made a
cargo is expensive as cargos need to be ferried from Birgunj, where the country’s only rail-based Inland Clearance Depot (ICD) is located, to other parts of the country. The agreement is expected to benefit the country by narrowing down the cost of transportation of bulk cargo substantially and producing spillover effects along those areas.
is a major gateway for trade activities, with one-third of the country’s total imports entering through this customs point, the volume of imports through the dry port fell substantially in the review period. The share of imports via
letter of credit (LC) mandatory for imports worth NPR 50 million (USD 0.46 million) and above from India. However, the requirement of the bill of export while importing goods and services from India makes the process
difficult. Similarly, the NRB has also slashed the limit of payment of third country imports through draft to USD 40,000 from the earlier limit of USD 50,000. The new rules are aimed at easing the payment process for importing goods and services to Nepal while also controlling underinvoicing and misuse of foreign currency exchange service. According to the NRB officials, the central bank is also moving towards gradual liberalisation of foreign exchange. Moreover, the NRB has also allowed banking institutions to provide foreign exchange of up to USD 1,000 for those who are travelling abroad on travel document issued by the government. Meanwhile, the bank has also moved toward simplifying the process for government agencies to open LC to make payment for the purchase of goods and services from foreign suppliers.
“ OUTLOOK A sharp depreciation of Nepali rupee against the US dollar in the review period resulted in 8.6% average annual growth of remittance. As a result, the BOP situation improved for Nepal; however, the widening trade deficit is still a matter of grave concern for the economy. A review of Nepal’s trade strategy and bilateral treaties will be essential to improve the country’s trade indicators. Furthermore, improving connectivity with regional players is also a must.
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DOCKING NEPAL’S ECONOMIC ANALYSIS
FOREIGN AID AGRICULTURE FOREIGN AID
Key highlights of the period include an overview of aid disbursement trends in Nepal which was mainly concentrated in recurrent spending as opposed to the government’s foreign aid policy. Also, the government has released a review of the efforts made to enhance aid effectiveness through a basket fund for foreign aid, and it has decided to tighten norms for grants coming from India. In addition, endorsement of a new five-year Country Partnership Framework (CPF) by the World Bank and the launch of Enhancing Access to Justice through Institutional Reform are other significant developments observed in the sector this quarter. World Bank okays Country Partnership Framework: The World
Bank (WB) endorsed a new five-year Country Partnership Framework (CPF) for Nepal which will assist the country’s development priorities as it transits to a federal structure. The CPF is designed to support the authorities and development partners in three thematic areas— (a) public institutions for economic management, service delivery and public investment; (b) private sector-led jobs and growth; and (c) inclusion for the poor, vulnerable, and marginalised groups, with greater resilience against climate change, natural disasters and other exogenous shocks. The WB also approved the Financial Sector Stability Development Policy Credit of USD 100 million. The Policy Credit is the fourth and final in a series of financial sector development policy credit initiated back in 2013 to help Nepal on its reform programme for the financial sector.76
ADB financed projects progress slow: Contract award and
disbursement are the two primary indicators that gauge the performance and progress of a project. In this
regard, projects financed by the Asian Development Bank (ADB) continued to demonstrate a slow performance in the second quarter of 2018. Of the total target, 70% was achieved in terms of awarding contracts for the projects co-financed by the Bank, and out of the USD 149 million worth targeted contracts, only USD 104 million worth contracts were awarded in the review period. Besides, the contract award represents only onethird of the annual target of USD 447 million—only 74% of the funds were disbursed by the end of June 2018.77 Nepal government proposes basket fund: The Nepal government has
proposed a mechanism for foreign aid to be disbursed through a basket fund that will allow the donors to pool in their resources. The fund will be allocated to the provincial governments and local units as conditional grants by the federal administration. As per the proposal, the basket fund will align development assistance with the country’s key priorities. It further clarifies that although the federal government will be responsible for allocating the resources, it is the provincial and local units that will propose and implement
the required project within their area of jurisdiction. However, there is still no clarity over how the provincial and local governments will receive the funds.78 Recurrent spending exceeds capital spending: According to the Financial
Comptroller General’s Office (FCGO), recurrent expenditure for the current FY 2017/18 was much more than the capital spending. The trend is also in line with the spending pattern of the government’s funds. As of June 2018, NPR 54.30 billion (USD 495.7 million) in foreign aid went into recurrent spending against a total of NPR 97 billion (USD 0.89 billion) allocated for the same. On the contrary, capital or development spending amounted to only NPR 40.21 billion (USD 0.37 billion) of the total allocated amount of NPR 133 billion (USD 1.21 billion). In contradiction to Nepal’s foreign aid policy that gives high priority to spending on infrastructure development and projects for capital formation, the recurrent spending in the country mainly includes programmes and activities that encompass capacity development and foreign junkets.79
NEFPORT ISSUE 34 – SEPTEMBER 2018
Figure 15: Donor’s Expenditure as of June 2018 (in NRB billion)
Donor’s Expenditure in NPR billion
54.3
Recurrent Spending
42.98
40.21
Capital Spending
93.6
0 20 40 60 80 100 120 140 160
Spent Remaining
Source: Financial Comptroller General’s Office
Project to enhancing access to Justice launched: With a goal to
enhance access to justice of women, poor and vulnerable groups in Nepal, The Ministry of Law, Justice and Parliamentary Affairs and the UNDP launched the project titled ‘Enhancing Access to Justice through Institutional Reform (2018-2020)’. The Norwegian Government is supporting the programme with USD 4.6 million and the UNDP is contributing USD 3.6 million and USD 1 million respectively. The three-year project aims to enhance people’s access to justice and help the Ministry reform the legal aid regime in Nepal. The project will also support effective implementation of the integrated legal aid policy currently being finalised by the Ministry. The policy aims to provide
free legal aid services to the poor and vulnerable people across the country by providing scholarships, internships and other professional opportunities to law students coming from marginalised groups. The project will also explore opportunities to support effective delivery of justice for inclusive economic development through tailored training to stakeholders.80 Government revised norms for Indian grants: The government has
revised its policy regarding the grants coming from India and has made it compulsory for Indian grants to pass through the bank account of the federal government. Moreover, the grant cannot be utilised without financing agreements with Nepal’s Finance Ministry.
India disburses grants up to NPR 50 million (USD 0.46 million) for each Small Development Projects (SDP). Currently, the Indian Embassy provides grants to various projects at the local level, including schools, colleges and hospitals under the SDP. The decision will limit the power of the Indian Embassy in Kathmandu to fund projects in Nepal at its discretion. The decision will also provide greater scrutiny and a paper trail of Indian grants to small projects in Nepal.81 Furthermore, Indian grants under SDP will come under the national system for the first time since its inception in 2003. Both local and provincial governments will have the authority to implement the SDPs from the FY 2019/20.
43
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DOCKING NEPAL’S ECONOMIC ANALYSIS
“ OUTLOOK
Nepal has not been able to utilise the abundant inflow of foreign aid into the country to the fullest capacity. Short-sighted spending of aid to meet the country’s recurrent expenditure pose a severe threat to the country’s national development priorities, mainly targeted to meet capital and achieve infrastructure development. There is a need to strictly execute Nepal’s foreign aid policies to achieve long-term goals and embrace foreign aid as a tool to create a sustainable development model
NEFPORT ISSUE 34 – SEPTEMBER 2018
REMITTANCE REMITTANCE In the review period, remittance recorded a growth of 8.6% year on year as against 4.6% last year. The growth is primarily attributed to a rising dollar against the Nepali rupee. Meanwhile, the Nepal government is planning a Government-to-Government (G2G) agreement with the Malaysian government to resume the departures of the migrant workers to Malaysia, Nepal’s top foreign employment destination. Since May the Nepal government has suspended the departures to Malaysia due exorbitant fees levied on the migrant workers by illegal agencies. Remittance swell despite a drop in migrant departures: According to
the latest Macroeconomic Report of Nepal Rastra Bank (NRB), despite a departure of Nepali migrant workers remittance inflows have increased to 8.6% to NPR 755.06 billion (USD 6.89 billion) in the FY 2017/18
compared to a growth of 4.6% in the previous year. The jump in the value of remittance has been mainly attributed to a rising US dollar against the Nepali rupee. The report said that 358,815 individuals were given approval for foreign employment in FY 2017/18, down by 10.1% in
comparison to FY 2016/17. Foreign employment statistics show that Malaysia topped the list of destination countries for migrant workers with a total of 104,207 Nepalis leaving for Malaysia in the FY 2017/18, up by 6% as compared to the same period last year.
Figure 16: Outflow of Nepali migrant workers for Foreign Employment in twelve months of FY 2017-18 550,00000 500,00000 450,00000 400,00000 350,00000 300,00000 250,00000 200,00000 150,00000 100,00000 50,00000
2013-14
2014-15
2015-16
2016-17
2017-18
Source: Current Macroeconomic and Financial Situation (Based on Twelve Month’s Data of 2017/18, Nepal Rastra Bank)
45
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DOCKING NEPAL’S ECONOMIC ANALYSIS
Similarly, Qatar emerged as the second most popular destination of Nepali migrant workers with 103,174 individuals going to the oilrich nation. However, the number of Nepalis going to Qatar dropped by 18% during the review period and departures to the UAE increased by 7% to 60,243 individuals.82 According to the data, the number of Nepali migrant workers going to Saudi Arabia declined sharply by 47% to 40,963 individual as compared to the same period last year. The decline is owed to the shutdown of many industries in Saudi Arabia due to fluctuations in oil prices and economic recession. There were also reports of migrant workers getting low wages
“ OUTLOOK
and facing payment delays, which might have discouraged Nepalis to go to Saudi Arabia.83 Nepal keen on a labour pact with Malaysia: The Nepal government
has expressed its interest to sign a Government-to-Government (G2G) agreement on migrant Nepali workers with the Malaysian government. The government had recently shut illegal agencies that levied exorbitant fees on migrant workers. This clampdown led to a temporary suspension of dispatching Nepali workers to Malaysia. Departure to Malaysia, the most popular destination for Nepali migrant workers, has been on hold for over two months now. The Malaysian government has requested
Nepal to lift the travel ban on Nepali workers because its industries depend on foreign labour that comes from countries like Nepal. It is working on some other mechanisms to bring in Nepali workers to overcome its labour shortage.84 Government mulls social security scheme for migrant Nepali workers:
The government is mulling over providing social security benefits for Nepali workers going abroad. As the government is moving toward implementing a contribution-based pension system for government employees, Nepalis in foreign employment are also likely to be enrolled in social security schemes, including retirement saving plans.85
Although remittance has increased in the FY 2017/18 in comparison to the previous fiscal year, Nepalis going for foreign employment has decreased. Hence, the government should be proactive in implementing right strategies to address the economy’s excessive dependency on remittance. The government’s plan to enrol migrant workers in the social security scheme is an excellent initiative. However, this scheme should be designed in such a manner that along with the benefits to the migrant workers, it should be able to bring maximum remittance through formal banking channels.
4 NEFPORT ISSUE 34 – SEPTEMBER 2018
MARKET
REVIEW
47
48
DOCKING NEPAL’S ECONOMIC ANALYSIS
FINANCIAL MARKET FINANCIAL MARKET The commercial banks saw its net profit increased by almost 20% in the FY 2017/18, the increase in profits was driven by higher interest spread, foreign exchange earnings and recovery of nonperforming loans. Key Indicators
Some of the key macroeconomic indicators as per the macroeconomic and financial situation report based on the annual data of FY 2017/18 published by the Nepal Rastra Bank (NRB) are highlighted below.
Deposit and credit mobilisation
Deposits at Banks and Financial Institutions (BFIs) increased by 19.2% in the review period. Of the total deposits at BFIs, the share of demand deposits and fixed deposits increased by 9.3% and 44.8% respectively while the share of saving deposits decreased from 35.4% to 34.5% in mid-July 2018. Likewise, credit extended to the private sector by BFIs increased by 22.5% in the review year as compared to an increase of 18.2% in the previous fiscal year. Credit mobilisation of commercial banks, development banks and finance companies increased by 22.3%, 25.6% and 16.1% respectively. Of the total outstanding credit of BFIs, 61.7% is against the collateral of land and building and 14.4% against the collateral of current assets such as agricultural and non-agricultural products. In terms of credit exposure, the outstanding credit of BFIs to real
estate loan (including the residential personal home loan) increased by 17.0 % and trust receipt loan extended by commercial bank increased by 76.5 % during the year. Similarly, Hire Purchase loan increased by 14.5% while overdraft loan increased by 14.4%.
Liquidity management
In the review period, the NRB injected new liquidity of NPR 107.34 billion (USD 979.92 million) in the banking system through various open market operations. Under this provision, the Bank injected liquidity of NPR 69.72 billion (USD 636.47 million) through repo auction and NPR 37.62 billion (USD 343.43 million) liquidity was availed through outright purchase auction. Likewise, BFIs used Standing Liquidity Facility (SLF) worth NPR 38.33 billion (USD 349.91 million) during the review period. The NRB injected net liquidity of NPR 422.34 billion (USD 3.855 billion) through the net purchase of USD 4.05 billion from foreign exchange market (commercial banks). Likewise, the NRB mobbed up NPR 195 billion (USD 1.78 billion) through open market operations. Similarly, the NRB also purchased Indian currency (INR) equivalent to NPR 522.03 billion (USD 4.76 billion) through the sale of USD 4.76 billion and Euro 59 million during
the review year. INR equivalent to NPR 451.89 billion (USD 4.12 billion) was purchased through the sale of USD 4.12 billion and Euro 120 million in the previous year.
Foreign exchange reserves and adequacy
The gross foreign reserves increased to NPR 1,102.59 billion (USD 10.02 billion) at the end of mid-July 2018, an increase of 2.1% compared to NPR 1,079.43 billion (USD 9.85 billion) in mid-July 2017. Out of the total foreign exchanges, reserves held by the NRB increased by 6.7 % to NPR 989.40 billion (USD 9.03 billion) at mid-July 2018 from NPR 927.27 billion (USD 8.46 billion) as at mid-July 2017. The share of INR in total reserves stood at 23.8%. Based on the imports of FY 2017/18, the foreign exchange holdings of the banking sector is sufficient to cover the prospective merchandise imports of 10.8 months, and merchandise and services imports of 9.4 months. The ratio of foreign currency reserve-toGDP, reserve-to-imports and reserveto-M2 stood at 36.7%, 78.6% and 35.6% respectively as at mid-July 2018.
Interest Rates
The weighted average 91-day Treasury bill rate increased to 3.74% in the review period from 0.71% a year
869.8
342.1
803.3
815.2
760.3
Prime Commercial Bank
Sunrise Bank
NMB Bank
457.3
276.7
800.3
806.3
800.1
Century Commercial Bank
1,393.7
23,301.5
Agriculture Dev. Bank
Total
804.2
900.4
Nepal Bank
Rastriya Banijya Bank
Public Sector Banks
Sanima Bank
145.8
1,028.5
Mega Bank
Civil Bank
13,010.2
850.5
804.7
680.3
140.9
210.6
172.6
823.3
800.0
Prabhu Bank
Janata Bank Nepal
304.5
329.2
276.8
888.8
803.3
427.3
Global IME Bank
846.4
Siddhartha Bank
252.6
316.2
218.8
323.4
629.3
346.8
Citizens Bank International
716.3
822.1
Kumari Bank
Laxmi Bank
805.5
Machhapuchchhre Bank
286.4
467.9
803.1
707.2
Bank of Kathmandu Lumbini
NCC Bank
810.6
Everest Bank
NIC Asia Bank
505.5
808.8
Nepal Bangladesh Bank
608.5
471.9
811.4
804.6
Himalayan Bank
588.5
Nepal SBI Bank
801.1
standard chartered bank
1,166.0
1,007.2
804.3
1,064.5
Nabil Bank
Reserve & Surplus
Paid-up Capital
Nepal Investment Bank
Bank
247,146.0
10,500.6
16,933.0
9,983.1
7,913.9
6,132.1
4,001.2
6,296.4
6,016.9
9,725.9
8,450.7
6,948.1
8,131.2
6,148.1
10,651.0
10,174.8
6,773.5
6,965.1
7,247.4
15,119.9
6,332.8
7,677.4
11,485.2
4,798.2
8,421.6
9,974.3
6,738.7
14,007.1
209,225.6
9,981.6
15,358.0
9,394.4
5,775.4
4,259.3
3,423.5
3,893.6
4,857.4
8,134.9
7,322.4
6,101.3
6,585.5
5,271.8
10,191.0
7,731.7
5,932.0
5,207.1
5,862.9
8,669.7
5,879.5
7,213.7
9,509.4
4,371.3
8,166.4
9,288.1
6,387.2
12,566.9
11,889.6
4 QTR
4 QTR
13,597.8
FY 16/17
FY 17/18
DEPOSIT
18.1
5.2
10.3
6.3
37.0
44.0
16.9
61.7
23.9
19.6
15.4
13.9
23.5
16.6
4.5
31.6
14.2
33.8
23.6
74.4
7.7
6.4
20.8
9.8
3.1
7.4
5.5
11.5
14.4
"% Change
210,177.8
9,649.0
12,087.2
7,963.2
6,866.3
5,498.8
3,946.0
5,640.3
5,438.8
7,598.0
7,564.5
6,054.5
6,970.9
5,795.4
9,337.3
8,476.0
6,199.6
6,274.0
6,436.5
12,066.6
5,501.3
6,946.3
9,399.1
4,240.0
7,450.2
8,684.6
4,614.8
12,238.8
11,239.8
4 QTR
FY 17/18
172,574.1
8,820.6
10,643.1
7,437.2
5,126.4
3,950.7
2,951.1
3,459.6
4,565.3
6,197.9
6,260.9
21.8
9.4
13.6
7.1
33.9
39.2
33.7
63.0
19.1
22.6
20.8
17.0
20.8
5,771.1 5,173.9
19.6
15.5
28.5
17.6
38.8
24.1
66.3
14.2
11.1
20.1
13.2
18.2
11.9
17.5
14.7
22.9
% Change
4,844.1
8,081.9
6,598.6
5,273.3
4,519.5
5,186.6
7,256.1
4,816.8
6,254.9
7,828.4
3,746.0
6,302.4
7,764.0
3,926.3
10,668.3
9,149.1
4 QTR
FY 16/17
LOANS AND ADVANCES
6,894.2
341.6
480.0
421.3
263.4
127.4
44.10
156.8
141.6
138.6
229.8
172.7
269.5
169.7
279.0
249.4
168.0
130.8
184.0
157.0
20.4
214.9
393.5
165.6
305.7
265.6
322.5
469.0
612.3
4 QTR
FY 17/18
5,471.9
225.7
282.2
296.2
204.0
77.4
10.50
118.7
58.4
136.9
197.9
158.4
199.0
103.6
269.8
175.0
134.8
80.1
177.5
169.9
40.6
172.7
308.9
177.1
233.9
244.9
198.5
472.9
546.4
4 QTR
FY 16/17
26.0
51.4
70.1
42.2
29.1
64.6
320.0
32.1
142.5
1.2
16.1
9.0
35.4
63.8
3.4
42.5
24.6
63.3
3.7
(7.6)
(49.8)
24.4
27.4
(6.5)
30.7
8.5
62.5
(0.8)
12.1
% Change
OPERATING PROFIT
5,312.7
367.3
432.8
339.9
170.8
87.5
64.5
104.6
93.4
112.9
181.2
131.1
189.2
140.8
215.6
185.4
116.6
100.1
121.0
119.0
107.2
154.8
254.4
110.7
194.0
247.4
207.3
357.8
405.4
4 QTR
FY 17/18
4,455.5
254.8
277.6
311.7
133.2
50.1
34.8
79.3
63.3
175.1
146.7
117.6
146.7
108.1
200.6
138.6
100.6
70.0
130.2
147.3
132.5
131.2
200.6
120.0
152.3
217.8
142.1
311.4
361.3
4 QTR
FY 16/17
NET PROFIT
19.2
44.2
55.9
9.0
28.2
74.7
85.3
31.9
47.6
(35.5)
23.5
11.5
29.0
30.2
7.5
33.8
15.9
43.0
(7.1)
(19.2)
(19.1)
18.0
26.8
(7.8)
27.4
13.6
45.9
14.9
12.2
% Change
1.3
3.2
4.3
2.9
0.0
0.4
2.7
0.8
1.3
3.6
0.9
1.3
0.7
1.3
0.7
1.1
1.3
1.0
0.4
0.1
3.9
1.3
0.2
1.1
0.2
1.0
0.2
1.0
0.6
4 QTR
FY 17/18
1.7
4.6
3.8
3.3
0.0
1.2
4.0
1.4
2.1
4.3
1.7
1.4
0.9
2.0
1.6
1.2
0.9
1.9
0.4
0.4
4.8
1.3
0.3
0.8
0.1
0.9
0.2
0.8
0.8
4 QTR
FY 16/17
NPL (%)
TABLE 4: FOURTH QUARTER RESULTS OF COMMERCIAL BANKS-UNAUDITED-AS ON FY 2017-18 (FIGURES IN NPR TEN MILLION)
6.7
7.4
2.2
3.0
7.4
8.9
8.8
7.7
7.9
-
7.5
7.5
8.0
8.5
7.0
7.6
8.0
8.3
7.6
7.7
8.3
7.9
5.6
8.0
5.5
6.4
4.4
6.3
4.8
4 QTR
FY 17/18
5.4
5.7
1.7
2.0
5.4
8.1
6.8
6.0
8.0
-
5.1
6.0
8.2
8.0
7.1
5.4
7.4
5.9
4.8
6.1
6.0
7.7
4.8
5.1
3.5
4.0
3.1
5.8
2.7
4 QTR
FY 16/17
1.3
1.6
0.5
1.0
2.1
0.8
2.0
1.7
(0.1)
-
2.4
1.5
(0.1)
0.4
(0.0)
2.2
0.6
2.3
2.9
1.6
2.3
0.2
2.8
2.9
1.9
2.4
1.4
0.5
2.1
% Change
COST OF FUND (LCY)
10.4
11.7
5.0
7.0
10.7
12.1
11.8
11.4
11.6
10.6
10.7
11.4
10.5
11.8
10.6
11.2
11.5
11.6
11.1
11.2
11.9
10.7
8.5
11.5
10.1
9.7
7.9
9.0
7.8
4 QTR
FY 17/18
BASE RATE (%)
ago. Likewise, the weighted average inter-bank transaction rate among commercial banks also increased to 2.96% from 0.64% a year ago. Also, the weighted average base rate of commercial banks increased to 10.47% from 9.89% a year ago.
Balance of Payments (BOP)
In terms of BOP, the current account fell into a deficit by NPR 245.22 billion (USD 2.24 billion) during the review period as compared to a deficit of NPR 10.13 billion (USD 92.47 million) during the same period of the previous FY 2016/17. The overall BOP posted a surplus of NPR 960.2 million (USD 8.76 million) in the review period compared to a surplus of NPR 82.11 billion (USD 749.58 million) in the same period of previous year. On a positive note, during the review period, Foreign Direct Investment (FDI) inflow of NPR 17.51 billion (USD 159.85 million) was observed compared to transfer of NPR 13.50 billion (USD 123.24 million) during the same period last fiscal year.
Fourth quarter performance analysis of commercial banks
As per the unaudited fourth quarter financial results of commercial banks
for FY 2017/18, as shown in Table 4, the operating profit of commercial banks grew by 26% while the net profit increased by 19.2% compared to the corresponding figure of the previous fiscal year. Rastriya Banijya Bank was able to post the highest net profit of NPR 4.32 billion (USD 39.43 Million), followed by Nabil bank at NPR 4.05 billion (USD 36.97 million) and Agricultural development Bank at NPR 3.67 billion (USD 33.50 million) at the end of this quarter. During the review period, the deposit mobilisation increased by 18.1% while credit mobilisation by the commercial banks increased by 21.8%. At the end of the fourth quarter, the average Non-Performing Loan (NPL) of banks had decreased to 1.3% from 1.7% as compared to the corresponding period, and the average cost of funds of commercial banks increased to 6.7% from 5.4% amidst tight liquidity. Similarly, the average base rate of commercial banks stood at 10.4% during the end of this quarter, the highest being 12.1% of the Century Commercial Bank and the lowest being 5% of Rastriya Banijya Bank.
Key Developments
Borrowing in Indian Currency
Based on the provision made in the monetary policy, the central bank has allowed commercial banks to borrow from Indian banks in Indian Currency (INR). However, such loans would be granted only for these sectors—hydropower, roads, tunnel, airport, tourism and farming. According to the NRB, commercial banks can borrow up to 25% of their core capital. Likewise, the maturity period should not be more than five years and the interest rate should not be more than one percent premium on the average rate on 364-day treasury bills issued by the Indian government. New format for financial reporting
Commercial banks have started to publish their financial performance under the new financial reporting format prescribed by the central bank. The newly introduced accounting system, i.e., Nepal Financial Reporting Standards (NFRS) requires a financial institution to publish their financial statement of FY 2017/18 in the new format. This new accounting software is introduced to meet the international standards so that all the reports can be understood globally.
“ OUTLOOK
Even though banks struggled with adequate loanable funds due to sluggish deposit growth, banks were able to achieve healthy profits in the FY 2017/18. Banks credit expanded by 22.5% while deposit growth was relatively lower at 19.2% during the FY 2017/18. Banks profits were driven by higher interest spread, foreign exchange earnings and recovery of non-performing loans. The profitability of commercial banks went up by almost 20%, and 25 commercial banks out of 28 were able to post net profit above NPR 1 billion (USD 9.13 million). As per the published annual data, the average base rate of commercial banks stands at 10.4% nonetheless, with ease in liquidity and favourable adjustments via monetary policy, banks are likely to decrease their lending rates in the days ahead. Further, the growth in inward remittances and increment in capital expenditure are going to be key to ease the process. Moreover, as Commercial banks start to utilise the international borrowing facility, banks are likely to exhaust less pressure on lending rates.
NEFPORT ISSUE 34 – SEPTEMBER 2018
CAPITAL MARKET CAPITAL MARKET The FY 2017/18, the secondary market went down by 23.4% to close at 1212.4 points; moreover, the total yearly market turnover went down by 46.2% to NPR 6.63 billion (USD 60.52 million). Secondary Market
During the review period, the Nepal Stock Exchange (NEPSE) benchmark index decreased by 10.86% (143.69 points) to close below 1200 points at 1178.58 points. At the end of the review period, the total market capitalisation had reached NPR 1,402
billion (USD 12.79 billion) while the total floated market capitalisation was NPR 481 billion (USD 4.39 billion). As shown in Table 5, during the review period, all the sub-indices ended in the red zone. The Insurance index (-17.08%) was the biggest loser
followed by the Micro-Finance Index (-16.64%), Hydropower (-15.54%), Hotel (-8.99%), Commercial bank (-9.32%), Development Bank (-6.18%), Finance (-5.85%), other index (-4.38%) and Manufacturing & Processing (-0.39%).
Table 5: Key Indicators Indicators
30 May-18
23 –August 18
% change
NEPSE Index
1322.27
1178.58
-10.86%
Commercial Bank Index
1118.57
1014.30
-9.32%
Development Bank Index
1526.31
1431.93
-6.18%
646.64
608.81
-5.85%
Insurance Index
6954.75
5766.63
-17.08%
Hydropower Index
1627.00
1374.08
-15.54%
Manufacturing & Processing Index
2336.18
2.139.97
-0.39%
Micro-Finance Index
1774.64
1479.23
-16.64%
Hotel Index
1988.18
1809.44
-8.99%
Others Index
750.52
717.59
-4.38%
Finance Index
Source: NEPSE
Figure 17: NEPSE Movement Index
1290
Nepse Index
1270 1250 1230 1210 1190 1170 1150 6/3/2018 6/19/2018 7/5/2018 7/21/2018 8/6/2018 8/22/2018 Source: Nepal Stock Exchange
51
52
DOCKING NEPAL’S ECONOMIC ANALYSIS
Primary Market
In the public issue front, the market witnessed Initial Public Offerings (IPOs) and Further Public Offering (FPO) of numerous companies during the review period. • Nepal Bank Limited Issued FPO of 1, 76, 84,858 unit shares at NPR 280 per share which included premium NPR 180. ICRA Nepal has assigned Grade 3 indicating average fundamentals. • Upper Tamakoshi Hydropower Limited (UTHL) has issued Initial Public Offering (IPO) worth NPR 1.06 billion for the locals affected by the Hydropower Project in Dolakha district. The issue was assigned IPO Grade 4 by ICRA Nepal indicating below-average fundamentals. • Shivam Cement Limited (SHCL) has also issued IPO worth NPR 264 million for the locals of Makwanpur district. The issue was assigned IPO Grade 3+ by ICRA Nepal indicating average fundamentals. • Aankhu Khola Hydropower Company Limited (AAKHU) and Union Hydropower Company Limited (UHCL) have also issued IPOs worth NPR 80 million and NPR 75
million to the locals of Dhading and Lamjung/Kaski district respectively. Both AAKHU and UHCL have been assigned IPO Grade 5 by ICRA Nepal indicating poor fundamentals. • Nepal Reinsurance Company is issuing IPO of 1,60,000 units of shares at NPR 100 per share. ICRA Nepal has assigned grade 4 rating to this issue, indicating below average fundamentals. The current paid up capital of the company stands at NPR 840 million (USD 7.66 million). RBB Merchant Banking is appointed as issue manager. • Likewise, Ghalemdi Hydropower Limited is issuing IPO of 15, 55,770 units at NPR 100 per share. The credit rating agency, ICRA Nepal, has assigned grade 4 rating to this issue, indicating below average fundamentals of the company.
Key Developments
SEBON approves annual fees for NEPSE
The Securities Board of Nepal (SEBON) has approved a revision on the listing of securities fees that the NEPSE can charge on the listed securities.The approval of the fees from
the SEBON, including an annual fee, paves the way for public companies, whose proposal was pending due to the lack of listing bylaws, to list their securities for trading in the secondary market. As per the new rate, companies with paid-up capital of up to NPR 500 million (USD 4.56 million) will have to pay 0.1 % of the paid-up capital or NPR 50,000 (USD 456.45). Similarly, public companies with paid-up capital higher than NPR 500 million (USD 4.56 million) have to pay 0.05 % of the paid-up capital or NPR 100,000 (USD 912.90). For, debentures and mutual fund fee has been fixed at NPR 60,000 (USD 547.74). Guidelines for Margin lending facility
The NEPSE is preparing to allow margin trading through stock brokering firms as the Nepal Rastra Bank (NRB) has endorsed the ‘Guidelines on margin lending facility from stockbrokers.’ As per the guidelines, the stockbroker that is allowed to provide margin lending facility by the central bank can do so for the securities of only those companies allowed by the NEPSE. The broker firms can lend up to two times of the net worth of their company and up to 50% of the market value of the collateral.
“ OUTLOOK
In terms of the secondary market, the market continued with its downward momentum for the second consecutive year. During the FY 2017/18, the benchmark index went down by 23.4% to close at 1212.4 points; the market had gone down by 7.9% in the FY 2016/17. Throughout the FY 2017/18 investors’ confidence remained low mainly due to tight liquidity in the banking system; moreover, the influx of right and bonus shares added to the cause. Securities (rights and bonus shares) worth 63.61 billion (USD 580.70 million) were listed in the secondary market. Similarly, the total market turnover in the FY 2017/18 went down by whopping 46.2% to NPR 6.63 billion (USD 60.25 million). On a positive note, as the central bank has endorsed the ‘Guidelines on margin lending facility from stockbrokers,’ the onus is on the both NEPSE and SEBON to implement margin trading at the earliest. Facilitation of such services by stockbrokers is expected to provide greater liquidity in the market. As banking liquidity eases, the secondary market is likely to regain traction. With low PriceEarnings (PE) ratio of listed companies and announcement of yearly dividend around the corner, the market is likely to attract a fresh batch of investors. Further, the primary market is going to witness numerous primary offering of newly licensed insurance companies along with large hydropower companies.
5 NEFPORT ISSUE 34 – SEPTEMBER 2018
MONETARY POLICY SPECIAL
53
54
DOCKING NEPAL’S ECONOMIC ANALYSIS
NARA BAHADUR THAPA, EXECUTIVE DIRECTOR NEPAL RASTRA BANK
FOREWORD The focus of this year’s monetary policy is on three issues including sustaining growth momentum, augmenting funds and lowering long-term interest rate. In this regard, though the core of monetary policy is still the same, priority has changed. For the last two years, economic growth has been encouraging primarily due to a low base, improved energy situation, speeded reconstruction work and good monsoon. In fact, Nepal has been able to achieve an average growth of 7% in the past two years. Due to the devastating earthquake,there was almost no growth during FY 2015/16. However, the economy bounced back with the growth of 7.9% in FY 2016/2017 and 6.3% in FY 2017/2018. We must understand that monetary policy cannot function in isolation and is a tool to complement the fiscal policy. Therefore, when discussing monetary policy, we must alsotake budget into consideration. To achieve the proclaimed growth economic growth of 8% for the FY 2018/19agriculture sector must grow by 4.5% and non-agriculture sector by 9.6%. The Table below highlights sector wise growth for FY 2018/19.
Many people argue that the targeted growth rate of 8% is ambitious. However, given the right political vision and governance, the economy of Nepal can achieve the growth of 11% to 12%. For example, undertaking of mega projects such as West-Seti, Budigandaki and Second International Airport in Nijgardh, the economy can readily leap-bound to double-digit growth. Along with the political aspiration, supportive monetary policy is also equally important or else the growth will derail. Economic growth models (including Harrod-Domar model, Solow Models and indigenous growth model) have concluded that saving -investments and technological reforms are key to accelerating the growth. Accordingly, if the government along with private sector have proper investment pedigree, targeted economic growth can be achieved. For example, Incremental Capital Output Ratio (ICOR) of Nepal is 5.2:1and the gross fixed capital investment required is 42% of GDP amounting to NPR 1438 billion (USD 13.13 billion). Of the required amount, NPR 432 billion (USD 3.94 billion) should
Particulars
Targeted growth for FY 2018/19
Agriculture
4.5%
Non-agriculture
9.6%
• Service
12%
• Manufacturing
8.5%
come as public investment andNPR 1,007 billion (USD 9.19 billion) as a private. Therefore, private sector investment is key for achieving the growth. The focus of the monetary policy has definitely been to sustain the growth momentum. As discussed above sustaining the growth momentum is only possible with the increase in investment from private and public sectors. In other words, augmenting the loanable funds is pivotal for supporting the fiscal targets. Likewise, the current monetary policy has also targeted to lower the longterm interest rate for both public and private sectors. Accordingly, two pronged approaches have been adopted to address the issue of higher long-term interest rate. • Firstly, narrow the band of interest rate corridor from 400 basis points to 300 basis points with the upper and lower bound rates at 6.5% and 3.5% respectively. While the repo rate has remained unchanged at 5%. • Secondly, regenerate the funds so that there is no urge to increase long-term interest rate to compensate for the loss or
NEFPORT ISSUE 34 – SEPTEMBER 2018
decrease in profit. Accordingly, individual institutional deposit to total deposit ratio has been lowered to 15% from 20%. Key Initiatives of monetary policy:
• Refinancing:Non funded refinancing has been introduced. • Interest rates:Interest rate will not be capped, instead focus will be to reduce the base rate. • External borrowing: Banks can borrow up to 23% of their core
capital from an external source. • Exchange rate hedging facility: Rastra Bank will take necessary initiatives to attract foreign direct investment into the country by providing hedging facility. • Resource planning:The provision will necessitate banks to take stock of their resources before sanctioning loans. The introduction of resource planning will strengthen the monitoring and supervision.
• Credit rating: Henceforth credit rating is required of both banks and borrowers. The initiative aims at promoting financial stability. • Broker license for banks: the initiative will help develop capital market throughout the country. • Removing cooperatives from NRB domain:NRB will regulate commercial banks, development banks, finance companies and microfinance institutions.
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DOCKING NEPAL’S ECONOMIC ANALYSIS
AJAY SHRESTHA, FORMER CEO BANK OF KATHMANDU
MONETARY POLICY: AN OVERVIEW Monetary policy is a primary tool to manage, control and administer money supply. The expectations and challenges of current monetary policy are high as it is the first after formation of the current government that carries strong public mandate. Monetary policy face challenges to control inflation and meet the expectations of the targeted economic growth of 8%, mainly supported by robust growth in manufacturing and industrial sector. Traditionally, economic growth of Nepal has been supported by the monsoon based agriculture. However, the growth is not likely to sustain unless core sectors are promoted. On the other hand, sole reliance on agriculture is not the likely give the desired result either.
Monetary policy and economic growth:
The current monetary policy is expansionary in nature as it plans to provide additional money supply for investments. The challenge, nevertheless, is to channel the surplus money into meaningful productive sectors (i.e. investments) and discourage speculative investments (on land, property, commodities, stocks etc).In other words, making more money available will be meaningful only if it collaborates with effective entrepreneurship. The concern of aggressive economic growth, however, is that the banks might lend excessively, creating bad investments and credit crunch. Case in point is India, which had put immense pressure on the private and public sector banks for the growth and development. This led to a situation of shoddy investments and surfeiting bad debts. As Nepal is a small economy, we don’t have good shock absorbers to handle such situation; therefore the monetary policy should be mindful of potential credit loss while trying to promote aggressive investments. • Money supply
If we analyze the GDP, the contribution of investment is in increasing trend. This is much needed as we have been
primarily a consumption-driven economy. As remittance is the primary source of domestic savings, the supply of broad money may not grow as expected. Foreign countries such as Malaysia, Qatar and UAE, which are the popular foreign employment destinations for our migrant workers have been passing through uneven economic and political environment. They may not be able to offer jobs for the same number of people from a country like our at least in the immediate future. In that case, Foreign Direct Investment (FDI) may be a feasible alternative to support the balance of payment and targeted growth. Additionally, this monetary policy has allowed the banks to borrow from abroad and also envisaged for a process of hedging foreign exchange risks on such borrowings, which I think is forward-looking idea at this point in time. • Socio-economic objective:
Besides, pecuniary motive, banks and financial institutions should also focus on socio-economic objectives. Banks with a specific purpose of developing infrastructure should be established to invest in the projects supporting socioeconomic growth. Commercial banks do not have appetite to invest in long-term investment projects. Nevertheless, they have been investing in productive and deprived sector to meet the socio-economic obligations.
Conclusion:
The current monetary policy has echoed the aspirations of fiscal policy but still needs to be reviewed periodically. The necessary measures should be taken to make the banking sector effcient and competitive. Further, it should also play an effcetive role in augmenting the image of the sector both at local and international level. In this context, the focus should be on developing quality human resource, promoting technologically driven growth and encouraging foreign banks to enter Nepali market and vice-versa.
NEFPORT ISSUE 34 – SEPTEMBER 2018
ANJAN NEUPANE, ADVOCATE NEUPANE LAW ASSOCIATES
MONETARY POLICY—A LEGAL PERSPECTIVE Monetary policy must be strictly implemented as it is a tool to control the inflation and money supply. In many instances, monetary policy remains as a policy and does not come into actual practice. The current policy broadly provides a sense of optimism as major steps have been initiated to control the situation of money supply. For instance: Commercial Banks are allowed to raise capital from foreign sources. Nevertheless, due to a lack of international exposure, it could be difficult for the local banks to raise capital from the foreign sources. Likewise, local banks also may not have technical capability to borrow the loans from the foreign banks. The policy of inviting foreign capital could also ease the chronic problem of liquidity crisis. Coming from a different academic background it is hard for us to understand the situation of money supply in the market. Also the market does not provide any prior indication as to why and how liquidity crisis happens. Monetary policy should also encourage banks to initiate innovation and creativity. The notion of innovation is currently being limited to the development of mundane credit products. However, the innovation should be transferred into an economic concept and reflect the development of new goods and services. Furthermore, the banking industry lacks qualified professionals as there are instances of face lending wherein credibility is not taken into consideration while disbursing the loan. Besides, Nepali economy also lags proper investment sector as several banks compete to finance even a small project.
Considering the size of the market, it seems a number of banks are surplus to requirement. Previously, adhering to the spirit of the free market and contemplating that competition will squeeze the interest rate, the licensing policy was loosely controlled. In contrary, the desired result was not achieved and the banks instead collided to manipulate the financial market. Thus the slack licensing policy adopted by the Nepal Rastra Bank (NRB) rather produced the counterfeiting result. Currently, there is no denying to the fact that the number of banks should be decreased, but the forced merger may not be practical as there would arise a question of who is responsible if the organization collapses. Instead the policies such as tax rebate and exemptions should be promoted to encourage the merger process. In my view, monetary policy should also clearly address the policies regarding FDI as it also impacts the monetary situation. One window policy whose primary objective is to attract FDIs and facilitate service delivery has also remained futile. The process of FDI in Nepal is actually cumbersome and tedious. One window has many doors as defined by the multiple undesired layers of rules and regulations. In contrary, the repatriation policy is much simpler and easier as the regulations are clearly defined. If all the necessary documents including—taxation and audit reports are submitted, repatriation can be done without intricate hassles.
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DOCKING NEPAL’S ECONOMIC ANALYSIS
GERARD ALMEKINDERS AND PATRICK BLAGRAVE, ASIA AND PACIFIC DEVELOPMENT, INTERNATNIONAL MONETARY FUND
MODERNISING NEPAL’S MONETARY POLICY FRAMEWORK: THE IMPORTANCE OF THE INTEREST RATE CORRIDOR In recent years, short-term interest rates in Nepal have been low and highly volatile. The recent introduction of an interest rate corridor (IRC) by the Nepal Rastra Bank (NRB) is an important step towards stabilising shortterm interest rates and thereby improving control over interest rates in the domestic economy. Control over interest rates contributes directly to the NRB’s ability to achieve its monetary policy objectives on a durable basis. These objectives can be split into two broad categories, as outlined below. First and foremost, monetary policy in Nepal is characterised by a nominal exchange rate peg to the Indian rupee—1 Indian rupee can always be purchased for 1.60 Nepalese rupees. The exchange-rate peg has served Nepal well as the lynchpin of its monetary policy strategy for decades by providing a stable price at which households and firms in the Nepali economy can exchange goods and services with India, by far Nepal’s largest trading partner. To maintain this exchange-rate peg and minimise pressures on it, it is to Nepal’s advantage to keep real interest rates close to those in India, even though Nepal maintains a de jure closed capital account which tends to limit capital inflows and outflows. For example, if real interest rates in Nepal fall substantially below those in India, Nepali workers in India may choose to save more abroad to earn a higher return, thereby remitting less money to Nepal. In the event of a prolonged substantial divergence between Nepal’s and India’s real interest rates, sustained pressure on the exchange rate (either through capital outflows or weakening inflows) would require the NRB to purchase
large quantities of Nepalese rupees in order to preserve the value of the exchange-rate peg, and over time this would erode the NRB’s stock of foreign exchange reserves— eventually, the peg could become untenable. Nepal’s de jure closed capital account allows the NRB some leeway to pursue a second policy objective, namely to contain inflation pressures in the economy. Once again, the ability to control market interest rates is key, as these have a substantial influence over economic activity, which ultimately feeds through into inflation. More specifically, firms make investment decisions in part based on the cost of financing projects—when borrowing costs are higher, investment projects must offer a higher prospective rate of return to justify the higher cost. Households’ decisions to make substantial purchases (their consumption/savings decisions) are also influenced by current and expected future interest rates. The investment/savings decisions of firms and households then feed into demand for labor in the economy and ultimately wage growth, which is a key driver of inflation. First announced by the NRB in July of 2016, the IRC was initially intended to stabilise short-term interest rates and modernise monetary management. In November of 2017, the NRB began to achieve its IRC objective of keeping the interbank rate between 3 and 7 percent—as shown in the chart, interbank rates stayed between about 3 and 5 percent from November 2017 through the end of the 2017/18 fiscal year. In the Monetary Policy Statement for 2018/19, the NRB announced that the IRC would
NEFPORT ISSUE 34 – SEPTEMBER 2018
Interbank Rate and Interest Rate Corridor (IRC) (In Percent) 12
12
10
Interbank Rate
Repo rate
Interest Reate “Floor” (interbnk minus 0.1 PP)
Deposit Collection Rate
Interest Rate “Ceiling” (interbank plus 2 pp)
Standing Facility Rate
10
JAN-19
NOV-18
SEP-18
JUL-18
MAY-18
MAR-18
JAN-18
NOV-17
SEP-17
JUL-17
0
MAY-17
0
MAR-17
2
JAN-17
2
NOV-16
4
SEP-16
4
JUL-16
6
MAY-16
6
MAR-16
8
JAN-16
8
Sources: NRB and IMF staff calculations. Note: The interest rate corridor (IRC) was first introduced in July 2016. The new IRC with floor and ceiling according to deposit collection and standing facility rates was announced as official NRB policy in July 2017.
be tightened, with the floor increasing to 3.5 percent and the ceiling lowered to 6.5 percent. The narrowing of the corridor is consistent with the central bank’s improved control of short-term interest rates. However, in recent weeks the interbank interest rate has fallen to about 1.6 percent as the NRB’s efforts to mop up liquidity have been insufficient to keep interbank rates above the new floor of the IRC (3.5 percent). The IRC is an essential device through which the NRB can guide market interest rates, thereby helping it to achieve both exchange-rate-peg and price-stability objectives. The progress made over the past year has been laudable, and renewed efforts are now needed to bring interbank interest rates back within the IRC corridor. In
particular, a greater effort must be made to remove excess liquidity from the system when it exists. In the near term, stronger coordination between the NRB and the Ministry of Finance and Financial Comptroller General Office regarding future liquidity conditions would improve the NRB’s ability to anticipate future liquidity surges. A more robust mechanism would involve establishing a standing facility, through which banks could deposit excess funds with the NRB at a fixed rate (corresponding to the bottom of the IRC)—this would allow excess liquidity to be withdrawn automatically, without a need for active central bank intervention. Finally, macroeconomic forecasting capacity needs to be developed to help inform NRB decisions regarding the appropriate level of the policy rate.
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SIDDHANT RAJ PANDEY, CHAIRMAN & CEO BUSINESS OXYGEN PRIVATE LIMITED
STATUS OF MONETARY POLICY IN NEPAL Nepal’s Monetary Policy, at best, may be defined as a lax monetary policy. It has been perceived as an ordinary document that is delivered annually as a ritual. A country like Nepal is in a very constrained position to have an independent monetary policy given that the country has a pegged exchange rate and its economy is divergent from the dynamics of the country its currency is pegged with. Comparatively, fiscal policy holds more weight for private entrepreneurs as it encompasses important FDI and taxation policies.
Overview of the Monetary Policy:
In Nepal’s case, the monetary policy does not have any control over inflation owing to the fact that Nepal has a pegged exchange rate arrangement with India. As we are an import based economy, with 2/3rd of our international trade with India, we are exposed to imported inflation. Furthermore, this situation is compounded by cartels and syndicates in the country, which the government has no control over, impacting the inflation on goods and services. The banks now have more liquidity and disposable funds due to the reduction in Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) However, it is important for the banks to capitalize on these lower rates and effectively deploy the liquidity as the CRR and SLR may not always be reduced year after year. On the other hand, with the CRR and SLR being reduced, the monetary policy becomes more superficial in its efforts to control inflation. This may not be the right way forward to tame inflation because (a) it breaks away from the prudential banking norms (b) it really does not address the problem of mismanagement of assets and liabilities. Due to the lack of a yield curve, long-term cost of capital is very difficult to define in Nepal’s economy. Interest rate is
modelled on short-term treasury rates and the base rate of the banks. The reduction in the interest rate spread from 5% to 4.5% in the current monetary policy is certainly going to adversely affect the banks’ profitability, but this also gives the banks the opportunity to develop and increase their non-funded portfolios to supplement their profitability. Another area of concern is that the monetary policy falls short in addressing the shadow economy, which constitutes 1/3rd of the total economy of Nepal. The country does not have adequate control mechanism over the informal economy, such as effective capital account controls. As a result of this, the government has no real account of capital flight. The only area the monetary policy seems to address is the banking system and its rules and regulations. As a result, monetary policy in Nepal has not been very significant in its implications for the wider economy and regulation since capital account controls are poor along with the fixed peg that renders it quite ineffective in Nepal’s case.
Conclusion:
The current monetary policy is more focused towards banks liquidity and the ability to control the supply of money in the economy. In order for the central bank to have control of broader aspects of the economy government policy needs to end cartels and syndicates and be more proactive in controlling capital flight. It would also help to have a yield curve based on long-term bond maturity. The question of the peg with India for an economy like Nepal needs serious research work to deduce whether we should continue with it or free float our currency. The latter, at this stage, does not seem viable.
NEFPORT ISSUE 34 – SEPTEMBER 2018
SUMAN JOSHI, MANAGING DIRECTOR ONE TO WATCH
GENERAL COMMENTS ON MONETARY POLICY The fundamental objective of the monetary policy is to manage the supply of money in the economy. In Nepal’s case, there has been a gap between articulation and execution of policy provisions to achieve desired objectives. The credit crunch has been a prominent issue over last couple of years and there is a possibility that we will face a similar scenario this year too. However, the recent monetary policy falls short in addressing this issue. Excessive regulatory forbearance (eg., relaxation in computation of CCD ratio) has been misused by the financial institutions impacting the level of discipline and respect for regulatory provisions. Certain relaxations may have been warranted to mitigate systemic risk situations but one-step-forward-twosteps-backward approach seen over the years in executing prudential norms do little to improve banking standards. There are many economic activities that take place outside of the formal economy. A significant number of monetary transactions still take place by means of cash making us a cash-based economy. If we could progressively limit the use of cash in day-to-day activities, the central bank could manage money supply better and address credit crunch situations more effectively. One way of helping people move away from cash transactions is by encouraging proliferation of digital payment systems. Unfortunately, the monetary policy does not address this as effectively as there is a very limited understanding on part of the
regulators on emerging trends in digital economy and very little has been done to expand the payment systems. Mismatch in tenure and quantum of central bank refinance has long gone unaddressed. Interest rate corridor is finally operational but applies to money market only. The central bank’s tendency to micromanage continues to be obvious in the recent version of the monetary policy as well. For instance, in response to the credit crunch, the banks are allowed to resort to external commercial borrowing. However, NRB found it necessary to impose pricing guidelines as well rendering ECB impractical for many banks. For a long time, the monetary policy has not addressed the fixed exchange rate system with Indian Rupees. It is desirable that technical basis for the peg with INRis reviewed from time to time, even if the rate is not revised for political reasons. At some level, quality of the monetary policy is also gauged by accuracy of forecasts for the economy. The monetary policy does address the target growth rate set in the fiscal policy; however, there is a level of uncertainty on our ability to achieve the target on account of possible credit crunch and government’s poor track record in terms of ability to spend on capex.
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ENDNOTES ENDNOTES
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39. Shankar Acharya, “13km pipeline laying works completed”, Money, The Kathmandu Post, 04 July 2018, accessed on 24 August 2018; http://kathmandupost.ekantipur.com/printedition/news/2018-0704/13km-pipeline-laying-works-completed.html 40. Nagendra Upadhyaya, “Tunnel work of Bheri Babai project 50% complete”, myRepublica, 24 August 2018, accessed on 24 August 2018; https://myrepublica.nagariknetwork.com/news/tunnel-workof-bheri-babai-project-50-complete/ 41. “Caan passes NPR 45 b budget with largest chunk for infra”, Money, The Kathmandu Post, 15 August 2018, accessed 24 August 2018; http://kathmandupost.ekantipur.com/printedition/news/2018-0815/caan-passes-rs45b-budget-with-largest-chunk-for-infra.html 42. “Gautam Buddha Airport to have 16 parking bays”, Money, The Kathmandu Post, 03 August 2018, accessed on 24 August 2018; http://kathmandupost.ekantipur.com/printedition/news/2018-0803/gautam-buddha-airport-to-have-16-parking-bays.html 43. “Project to cost Rs 257 billion”, Money, The Kathmandu Post, 20 August 2018, accessed on 24 August 2018; http://kathmandupost. ekantipur.com/printedition/news/2018-08-20/project-to-cost-rs257billion.html 44. “Watchdog slams agencies for delays,” The Kathmandu Post, 23 August 2018, accessed on 24August 2018; http://kathmandupost. ekantipur.com/printedition/news/2018-08-23/watchdog-slamsagencies-for-delays.html 45. “India grants Rs 470 million for postal highway project”, The Kathmandu Post, 15 August 2018, accessed on 24 August 2018; http://kathmandupost.ekantipur.com/printedition/news/2018-0815/india-grants-rs-470m-for-postal-highway-project.html 46. “Nepal holds first digital meet cabinet meet”, The Kathmandu Post, July 26, 2018, http://kathmandupost.ekantipur.com/news/2018-0726/nepal-cabinet-turns-into-paperless-with-photos.html 47. Uber to place it’s data center in Kathmandu. the Kathmandu post. August 3, 2018; https://ictframe.com/uber-place-datacenter-kathmandu/ https://ictframe.com/uber-place-data-centerkathmandu/
56. “MoUD tells local levels to strictly follow basic building standards,” The Himalayan Times, 13 July 2018, accessed on 23 August 2018; http://www.housingnepal.com/news/national/moud-tells-locallevels-to-strictly-follow-basic-building-standards 57. “CDC prepares draft of new curriculum,” The Himalayan Times, May 22, 2018, https://thehimalayantimes.com/kathmandu/cdcprepares-draft-of-new-curriculum/ 58. “School level not to have multiple disciplines,” The Kathmandu Post, May 16, 2018, http://kathmandupost.ekantipur.com/ printedition/news/2018-05-16/school-level-not-to-have-multipledisciplines.html 59. “What’s new in school,” The Kathmandu Post, June17, 2018, https:// thehimalayantimes.com/kathmandu/cdc-prepares-draft-of-newcurriculum/ 60. “Rs 125b donor project ‘watering’ down school curricula”, Republica, June 21, 2018, https://myrepublica.nagariknetwork. com/news/rs-125b-donor-project-watering-down-school-curricula/ 61. “School students of various hill, tarai districts yet to get all textbooks,” Republica, May 27, 2018, https://thehimalayantimes. com/kathmandu/cdc-prepares-draft-of-new-curriculum/ 62. “Textbook shortage in rural Achham,” The Kathmandu Post, June 25, 2018, http://kathmandupost.ekantipur.com/printedition/ news/2018-06-25/textbook-shortage-in-rural-achham.html 63. “School textbooks worth Rs 300 million printed by JEMC unsold”, The Himalayan Times, June 04, 2018, https://thehimalayantimes. com/kathmandu/school-textbooks-worth-rs-300-million-printedby-jemc-unsold/ 64. ‘’Cases of cancer increasing alarmingly’’, The Himalayan Times, June 22, 2018. https://thehimalayantimes.com/kathmandu/casesof-cancer-increasing-alarmingly/ 65. ‘’Cases of bone cancer up’’, The Himalayan Times, June 19, 2018. https://thehimalayantimes.com/kathmandu/cases-of-bone-cancerup/ 66. ‘’Cases of cancer increasing alarmingly’’, The Himalayan Times, June 22, 2018. https://thehimalayantimes.com/kathmandu/casesof-cancer-increasing-alarmingly/
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67. ‘’Cancer cases at Kanti rise, govt slashes funds’’, my Republica, August 20, 2018. https://myrepublica.nagariknetwork.com/news/ cancer-cases-at-kanti-rise-govt-slashes-funds/ 68. ‘’National Medical Education Bill to incorporate govt-Dr KC ninepoint deal’’, The Himalayan Times, August 26, 2018. https:// thehimalayantimes.com/kathmandu/national-medical-educationbill-to-incorporate-govt-dr-kc-nine-point-deal/ 69. ‘’Bill amendments filed in line with Dr KC’s concerns’’, the Kathmandu Post, August 1, 2018. http://kathmandupost.ekantipur. com/printedition/news/2018-08-01/bill-amendments-filed-in-linewith-dr-kcs-concerns.html
77. “ADB-financed projects continue to move at sluggish pace,” My Republica, August 3, 2018. https://myrepublica.nagariknetwork. com/news/adb-financed-projects-continue-to-move-at-sluggishpace/ 78. “Basket fund to serve state, local govts foreign aid” The Kathmandu Post, August 2, 2018. http://kathmandupost.ekantipur.com/ printedition/news/2018-08-02/basket-fund-to-serve-state-localgovts-foreign-aid.html 79. “Aid donors also spent more on recurrent programs,” My Republica, July 11, 2018. https://myrepublica.nagariknetwork.com/news/aiddonors-also-spent-more-on-recurrent-programs/
70. ‘’Harsh penalty set for sale of expired drugs’’, The Himalayan Times, August 17, 2018. https://thehimalayantimes.com/kathmandu/ harsh-penalty-set-for-sale-of-expired-drugs/
80. “Project to enhance access to justice launched,” The Himalayan Times, July 10, 2018. https://thehimalayantimes.com/kathmandu/ project-to-enhance-access-to-justice-launched/
71. ‘’31% of women deliver babies before reaching 20 years’’, my Republica, July 25, 2018. https://myrepublica.nagariknetwork. com/news/31-of-women-deliver-babies-before-reaching-20-years/
81. “Nepal clamps on India’s small project grant,” The Kathmandu Post, July 10, 2018. http://kathmandupost.ekantipur.com/printedition/ news/2018-07-10/nepal-clamps-on-indias-small-project-grants. html
72. ‘’Health insurance plan yet to cover 38 districts in Nepal’’, the Kathmandu Post, June 7, 2018. http://kathmandupost.ekantipur. com/printedition/news/2018-06-07/health-insurance-plan-yet-tocover-38-districts-in-nepal.html 73. ‘’MoHP makes report on APMDPD public’’, The Himalayan Times, June 11, 2018. https://thehimalayantimes.com/kathmandu/mohpmakes-report-on-apmdpd-public/ 74. “Nepal, India to sign two agreements on sidelines of BIMSTEC,” The Himalayan Times, August 25, 2018. https://nepaleconomicforum. org/portfolio/nefport-32-doing-business-in-federated-nepal/ 75. “Share of Imports through Birgunj dry port drops to 10.5 percent”, The Himalayan Times, August 25, 2018. https://thehimalayantimes. com/business/share-of-imports-through-birgunj-dry-port-dropsto-10-5-per-cent/ 76. “Work Bank okays new framework for Nepal,” The Kathmandu Post, August 9, 2018. http://kathmandupost.ekantipur.com/printedition/ news/2018-08-09/world-bank-okays-new-framework-for-nepal.html
82. Nepal Rastra Bank, Research Department. Current Macroeconomic and Financial Situation of Nepal. https://nrb.org.np/ofg/current_ macroeconomic/CMEs%20Annual%20English%202074-75%20 Final.pdf 83. “Remittances swell despite drop in migrant departures.” the Kathmandupost. July 17, 2018. http://kathmandupost.ekantipur. com/printedition/news/2018-07-17/remittances-swell-despitedrop-in-migrant-departures.html 84. ‘Nepal keen on labor pact with Malaysia.” The Kathmandu Post, August 2, 2018. http://kathmandupost.ekantipur.com/news/201808-02/nepal-keen-on-labour-pact-with-malaysia.html 85. “Government mulls social security scheme for migrant Nepali workers.” my Republica. August 16, 2018. https://myrepublica. nagariknetwork.com/news/government-mulls-social-securityscheme-for-migrant-nepali-workers/
NEF PROFILE NEF PROFILE
Nepal Economic Forum (NEF) is a premier private-sector led economic policy and research organisation that seeks to redefine the economic development discourse in Nepal. Established in 2009 as a not-for-profit organisation under the beed (www.beed.com.np) umbrella, NEF is a thought center that is working to create positive transformations in policy reforms. One of the big updates for NEF this year was its feature in the list of Top Think Tanks in Southeast Asia and the Pacific in the 2017 Global Go To Think Tank Index. The report was released by the Think Tanks and Civil Societies Program under University of Pennsylvania. NEF stands out in being able to make significant strides to bring the private sector perspective and engage with both the public and private sectors in the development discourse. NEF is currently a recipient of the Open Society Foundations’ Think Tank Fund.
NEPAL ECONOMIC FORUM
NEF works in partnership with many Nepali and international institutions in its quest to mainstream the discourse on the Nepali economy, which has not been given the necessary space it deserves. NEF has partnered with the Himalayan Consensus Institute (HCI) to facilitate the development of alternative development paradigms and successfully held the Third Himalayan Consensus Summit 2018 in March 2018.
NEF BROADLY WORKS UNDER THREE AREAS:
BPRC
The Business Policy Research Center (BPRC) engages in research, dialogue and dissemination relating to pertinent economic policy issues. BPRC has been producing nefport, a quarterly economic analysis publication, nefsearch, a periodic research publication and conducting neftalk, a platform for policy discourse.
PPCP
Through the Center for Public, Private and Community Partnerships (PPCP), the partnerships discourse is further elaborated through addition of the community dimension to existing models of public private partnerships. Apart from standalone interventions, the PPCP perspective is integrated in the work that NEF and beed initiate. NEF operates in the domain of Development Consulting through its devCon division in conjunction with beed management.. It works with a variety of bilateral, multilateral, national and international NGOs in the areas of policy research, economic analysis, value chain analysis, enterprise development, sectoral studies and public private dialogue.
We are striving to ensure financial sustainability for NEF to complement the support it currently receives from beed management and the Open Society Foundations. If you are interested to support NEF, please do get in touch with sujeev.shakya@beed.com.np or niraj.kc@beed.com.np
NEPAL ECONOMIC FORUM
P.O.Box 7025, Krishna Galli, Lalitpur - 3, Nepal Phone: +977 1 5548400 info@nepaleconomicforum.org www.nepaleconomicforum.org
ISSUE 34 | SEPTEMBER 2018
NEPAL ECONOMIC FORUM
MONETARY POLICY SPECIAL
DOCKING NEPAL’S ECONOMIC ANALYSIS
DOCKING NEPAL’S ECONOMIC ANALYSIS ISSUE 34 | SEPTEMBER 2018