NEPAL ECONOMIC FORUM
nefport Docking Nepal’s Economic Analysis SEPTEMBER 2012 | ISSUE 10
CONTENTS 05
SEPTEMBER 2012 | ISSUE 10
13 Energy
Editorial
14 Foreign Aid General Overview
17 Health
08
19 Infrastructure
Political Overview
09 International Economy Macroeconomic Overview
10 Agriculture 12 Education
20 Manufacturing and Trade
21 Real Estate 22 Remittance 24 Telecommunication and Media 25 Tourism 28 Macroeconomic Outlook Review
Issue 10 | September 2012
30 Monetary Policy 2012 - 2013
Publisher: Nepal Economic Forum Website: www.nepaleconomicforum.org
35 Capital Markets
P.O.Box 7025, Krishna Galli, Lalitpur - 3, Nepal Phone: +977 1 554-8400 email: info@nepaleconomicforum.org
37 Endnotes
Editor: Pranab Man Singh Contributors: Akriti Sharma, Chandni Singh, Pragya Ratna Shakya, Prarthana Bhattarai, Raju Tuladhar, Rojesh Shrestha, Shayasta Tuladhar, Shreyansh Malla, Shristi Singh Design & Layout: Big Stone Medium contact@bigstonemedium.com
EDITORIAL With our tenth issue of the nefport, we bring to you an overview of the past three months for the Nepali economy, covering events from May 15, 2012 to August 15, 2012. This issue builds upon the general structure established in previous issues and is divided into two sections. Two special nefsearch editions on Social Entrepreneurship in Nepal and the state of the Insolvency Act also accompany this issue. The first section provides a general overview of the overall macroeconomic state of Nepal’s economy. It goes into some depth within each sector and provides an overview of key stories that have developed over the last quarter. It also provides an outlook for the next quarter of the Nepali economy. Like with previous issues, the second part of nefport is more analytical. In this issue, we have decided to do an extensive review of the new Monetary Policy. We also provide a detailed analysis and assessment of the performance and figures of banks, financial institutes and the Nepal Stock Exchange. We hope that this analysis will be beneficial for those who make critical decisions in these sectors and will also be of interest for those invested in the general economic well being of the country. While the US dollar has appreciated in value considerably during the course of the last quarter, we have used a USD conversion rate of NPR 82.14 to a dollar, the one year average.The difference in the annual average and the current rates (at the time of publication) approaching NPR 90, show how recent and rapid, the rise in the dollar has been. Nepal Economic Forum is a not for profit organization and a wing of beed management. We would like to thank beed invest and beed management for their support in making this issue possible.We also thank all our readers for their invaluable feedback. Your input helps us develop this publication and better cater to your needs. We appreciate your encouragement. We are eager to receive your valuable feedback on how to make future issues of nefport more useful and user friendly. Please email us your suggestions at info@ nepaleconomicforum.org
Sujeev Shakya Chairman Nepal Economic Forum
NEFPORT ISSUE 9 JUNE 2012
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GENERAL OVERVIEW
POLITICAL OVERVIEW The hopes for the successful completion of the peace process and the drafting of the new constitution were shattered after the political parties were unable to reach an agreement on federalism. This led to the dissolution of the four year old Constituent Assembly(CA) and the government announcing a fresh round of elections for a new CA on November 22, 2012. The Election Commission subsequently stated elections by the stated date were not possible. There is an air of gloom in the country due to the repeated failure of the political class to deliver. A complete stalemate on the political front does not bode well for the long term growth prospects of the Nepali economy. HIGHLIGHTS The Constituent Assembly is dissolved, new election dates announced:
In a major setback for Nepal, the CA was dissolved after its term expired on midnight, Sunday, May 27, 2012 without the promulgation of a new constitution. The government unilaterally decided to announce fresh elections for a new CA on November 22, 2012. The CA had been elected in 2008 and was dissolved because the major parties failed to find common ground on the issue of state restructuring. The Nepali Congress (NC) and the United Marxist Leninists (UML) parties strongly opposed the actions of the Baburam Bhattarai led government. Maoist party splits: The hardline faction
within the Unified Communist Party of Nepal, Maoists (UCPN-Maoists) formally split on June 18, 2012 to form a new party, the Communist Party of Nepal, Maoist (CPN-M). The new party is being led by Mohan Baidya who takes on the role of Chairman, while Ram Bahadur Thapa has been appointed the general secretary and CP Gajurel the secretary. The party’s main line is the establishment of a “people’s republic” through revolt. Budget through ordinance:
8
Finance
| DOCKING NEPAL’S ECONOMIC ANALYSIS
Minister Barsha Man Pun on July 16, released a special budget through ordinance for the fiscal year 2012/ 1. The budget is one-third of what it actually spent in the previous year and amounts to NPR 161.24 billion (USD 1.96 billion) of which NPR 3 billion (USD 36.5 million) has been set aside for fresh elections. Elections not possible in November:
The Election Commission stated that it would not be able to meet the November 22, 2012 date for holding elections for a fresh Constituent Assembly on July 30, 2012. The main reasons cited were constitutional and legal hurdles and an absence of consensus among political parties. The commission stated that it could not formulate rules and directives for elections in the absence of clear legal provisions. New party on ethnic lines formed: The
Social Democratic Pluri-National Party was formed by Janajati leaders and intellectuals in August, 2012. Its stated aim is to form an alternative political force that accommodates people from every background, irrespective of caste, class, culture, location and creed. Federal Democratic Republican Alliance formed: A Federal Demo-
cratic Republican Alliance (FDRA) was formed on August 15, 2012 under the leadership of UCPN (Maoist) Chairman Pushpa Kamal Dahal. The alliance was formed from 20 political parties represented in the disbanded CA and stands in support of an identity based federal structure.
OUTLOOK The prospects for an immediate resolution to the current political crisis appear to be slim. The dissolution of the CA came as a blow to Nepal and is a source of great disappointment and frustration. It is now squarely up to the political class to resolve the current impasse as soon as possible. It is important for the political parties to come to an agreement on state restructuring and decide on whether they will go for fresh CA elections or revive the defunct 2008 CA. In order for this to happen, political parties and political leaders must shed their immediate personal gains and power struggles and focus on the long term benefits of the Nepali people. However, given previous track records, this seems unlikely and the current political vacuum can be expected to continue for the next few months.
DOCKING NEPAL’S ECONOMIC ANALYSIS
INTERNATIONAL ECONOMY There are signs that the global economy is on its way to recovery. According to the IMF, world GDP is set to rise by 3.5% this year and by 4.1% in 2013. Emerging markets are expected to have robust growth and the American economy is expected to register a 2.1% growth. Several risks threaten this recovery, chief of which arethe euro crisis, instability in the Middle East, and the slowdown of growth in Nepal’s two neighbors, India and China. HIGHLIGHTS
The threat of recession in the euro zone loomed on the horizon with a combined GDP contraction of 0.2%. This happened even with the German economy posting an unexpected growth of 0.3% in the last quarter over the last one and the French economy avoiding contracting as well. The contraction happened due to a drop in output in economies including Greece, Italy, Spain and Finland. Euro zone still wobbly:
The price of gold on the international market surged upwards past USD 1600 (NPR 131,424) per ounce. Uncertainty over the euro-zone crises and American debt has pushed investors into the asset. Gold on the rise:
Food prices on the rise: The
Food and Agriculture Organization of the United Nations has revealed a 6% increase in the food price index due to droughts and poor harvests in many of the world’s crop growing countries.
Security fears for migrant workers in India: Thousands of migrant
workers from the north eastern regions of India and from Nepal have fled the cities of Bangalore and Pune amidst fears of targeted ethnic violence. The violence is a reaction to the ethnic clashes in the northwestern Indian state of Assam. A stress test conducted on European banks by the European Banking Authority, revealed that there was a combined short fall of USD 3.5 billion (NPR 287.49 billion) in the ability of banks to absorb losses during a downturn. This was received with skepticism, with critics concerned that the stress test was not strong enough. Stress test on European banks:
Fighting in Syria continued unabated between the forces of President Bashir Assad and those of the rebels. The Assad’s forces claims to have routed rebels from Violence in Syria continues:
their stronghold in Salaheddin district, but chances of the violence stopping in the near future remain slim. In a clear statement of intention Barack Obama, the President of the United States, warned that intervention is an option if chemical weapons are used by Assad’s forces.
OUTLOOK Nepal stands to benefit from a global economic recovery and will suffer from a global recession. Nepal’s most significant linkage to the global economy is through its labor market. Global growth means an increase in labor demand and consequently an increase in remittances to Nepal. A growing global economy also promises an increase in tourist numbers to Nepal. The sudden threat of violence for migrant workers in India does not bode well for Nepal as many Nepali workers utilize the open border between the two countries in searching for employment opportunities.
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macroECONOMIC OVERVIEW
With failure of the political leadership in drafting a new constitution, the future of the Nepali economy will depend on how quickly political leaders can come to a consensus and revive the constitution making process. Fortunately, the caretaker government was successful in issuing a budget through ordinance at one-third its actual size. For now, the Nepali economy remains hijacked by the political process and cannot expect dramatic improvements until the political issues are resolved. Since the turn of the century, Nepal’s GDP has grown at a snail’s pace from NPR 413 billion (USD 5.62 billion) in the 2000/01 fiscal year to NPR 637 billion (USD 8.76 billion) in 2010/11 at 2000/01 prices. The decade leading to the current political impasse saw momentous change in Nepal’s political spectrum through the removal of the monarchy and the end of the civil war. However, economic progress has at best trudged forward with sociopolitical issues consistently trumping the economy. According to the Central Bureau of Statistics (CBS), Nepal’s per capita Gross National Income (GNI) during this time period doubled from NPR 19,144 (USD 260) in 2000/01 to NPR 46,859 (USD 645) in 2010/11. However, this still keeps Nepal close to the bottom of global income tables. AGRICULTURE
Fiscal year 2011/12 saw a record high food surplus of 886,000 tons of edible grain; double that of last year’s figure. However, prospects remain gloomy for FY 2012/13 due to unfavorable weather conditions in addition to persistent hurdles including the lack of agricultural inputs. Since the June-September growing season contributes towards 80% of the total food grain output, fertilizer scarcity at this peak period comes as a serious blow. After two years of plentiful harvest, Nepal stands the risk of sliding back towards food shortage. A recent economic survey published by the Ministry of Finance states that agriculture contributed 37.43% to the Gross Domestic Production (GPD) in FY 2011/12 whereas the contribution in FY 2012/13 is predicted to be at
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| DOCKING NEPAL’S ECONOMIC ANALYSIS
35.68%.1 Thus, despite some recent improvements in the production of high-value crops, the prospect for agriculture still remains bleak. A direct allocation of NPR 5 billion (USD 60.9 million) and NPR 820 million (USD 10 million) has been made for the development of the agriculture sector in the FY 2012/13 budget, a 47.3% increase compared to FY 2011/12. In addition to this, the existing credit limit of NPR 10,000 (USD 121.7) with interest subsidy for the agricultural sector has been increased to NPR 15,000 (USD 182.6). According to the Ministry of Finance, increased allocation for the agriculture sector is expected to contribute to commercialization, diversification, advanced Budget allocation:
technology adoption, and improve the availability of fertilizers and seeds. Food production predicted to decline:
The lack of irrigation facilities and consequent dependence on the monsoons is a huge setback for agriculture in Nepal, particularly the Mid and FarWestern Region which receives low annual rainfall. According to World Bank data, only 27.7% of total agricultural land (land that is arable, under permanent crops or under permanent pastures) is irrigated in Nepal.6 The Ministry of Agriculture and Development (MoAD) predicts that the production of paddy, maize and millet will decline by 10% on average over the next year. Even with an average production of food grains, an estimated 60% of households in Nepal cannot meet their
DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
Ginger
to
receive WTO
support:
World Trade Organization (WTO) has provided NPR 100 million (USD 1.21 million) to the government of Nepal for a project aimed at enhancing productivity and export of ginger. India absorbs 99% of all ginger production in Nepal.9 According to the Ministry of Commerce and Supply(MoCS), Nepal has a possibility of exporting quality ginger to Japan, Gulf and the European Union in large scales. The WTO initiative targets the development of a system for producing, processing and exporting Nepali ginger to international markets. Under the Nepal Trade Integration Strategy 2010 (NTIS), the MoCS has identified 19 potential exports for Nepal, of which seven are agriculture products.10 Ginger is the first product having competitive advantage identified by NTIS 2010 to get WTO support. Niche products show mixed performance: Products featured in
the NTIS 2010 showed mixed performance in export markets in the first 10 months of the FY 2011/12. The Nepal Rastra Bank’s recent report shows that while Cardamom, Ginger, Tea and Pashmina recorded growth, export of herbs and instant noodles plunged in comparison to the FY 2010/11. Tea recorded the largest percentage growth exports with a growth in of 94% whereas export of herbs had the least growth rate of 39.6%.
FERTILIZER SCARCITY WORSENS Urea, Potash, DAP, and Complex are some of the major chemical fertilizers used for agriculture in Nepal. The Nepali market has been experiencing a shortage of fertilizers. Though shortages of chemical fertilizers ahead of paddy planting season is a recurrent hassle in Nepal, this year’s shortage was exacerbated by the government’s inability to resolve the prolonged uncertainty over potential suppliers. According to the Ministry of Agriculture and Development (MoAD), Nepal requires an estimated 700,000 tons of fertilizers per year. The state-owned Agriculture Input Company (AIC) is the sole importer and distributor of fertilizers in the country and fulfills only 20% of the demand, while illegally imported fertilizers make up the rest. AIC maintains that the budget allocated for the FY 2011/12 was only enough to buy 150,000 tons due to rising world prices.2 After the Indian government tightened security, particularly to prevent smuggling of fertilizers, Mineral and Mine Trading Company (MMTC)- the Indian company responsible for dispatching urea to
Nepal failed to dispatch urea on time because the Government of India had not renewed its operating license. Moreover, the scarcity was worsened by the controversy over Indian Potash Ltd (IPL), which has been blacklisted for supplying under-weighted fertilizer sacks to Nepal. The amount spent on importing fertilizers has seen a rise of 36% from NPR 4.54 billion (USD) in the first ten months of FY 2010/11 to NPR 6.18 billion (USD) during the same period in FY 2011/12.3 To curb growing dependence on imported chemical fertilizers, AIC has decided on manufacturing 4,200 tons of organic manure produced through the vermicomposting method (which uses earthworm and other microorganisms to convert organic waste into manure).4 Out of the governmentallocated budget of NPR 3 billion (USD 36.5 million) for subsidizing fertilizers (both organic and chemical), NPR 100 million (USD 1.2 million) has been used to supply organic fertilizers.5
Figure 1: Sales of fertilizers from FY 2006/07 to 2010/11 12 20000 10 00000 Sales in metric tonnes
food needs, especially in mountainous areas. Agricultural production only fulfills food requirements for three to eight months per year.8 The Ministry of Agriculture and Development (MoAD) reports that 33 districts (eight from Terai, 13 from hilly regions and 12 from mountain regions) out of 75 districts in Nepal are food deficit.
Potash
Co omplex
DA AP
Urea
8 80000 6 60000 4 40000 2 20000 0 Po otash
20 006/07
2007/08
2008/09
2009/10
2010//11 2821 1
0
0
0
2359
Co omplex
2747 2
2156
1198
3793
0
DA AP
7437 7
1990
0
25210
2202 22
Urea
14744
2501
5935
50237
8516 66
Fiscal Years Source: Nepal Agricultural Inputs Company, Fertilizer Sales from FY 2006/07 to FY 2010/11
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Macroeconomic Overview
Figure 2: Export of niche products from FY 2009/10 to 20111/12
people above school leaving age by providing informal classes and preparing them for the SLC. This program could be a model for other districts that face similar shortfalls in education.13
Export in NPR (in millions)
30 000 25 500 FY 2009/10
20 000
FY 2 2010/11
FY 2 2011/12
15 500
SLC results: SLC
10 000 5 500 0 Cardam mom
Ginger
Tea
Noodles
Herbs
Pashminaa
Produccts Source: Recent Macro economic review 2012, Nepal Rastra Bank
China agrees to import Nepali oranges: Representatives from Nepal
and China have signed a memorandum of understanding (MoU) at the third Nepal-China Trade Facilitation Committee (NTTFC) meeting held on July 4-5 in Lhasa. The agreement allows for easy access of Nepal’s oranges to the Chinese market, particularly in Tibet as it has stopped importing citrus fruits from South Africa. Nepal plans to export 100 tons of sweet oranges and 1000 tons of orange from Syangja and Sindhuli districts in the initial phase based on WTO standards.11 China has also agreed to expand the product list. After Nepal’s accession to WTO in 2004, this is the first time Nepal is receiving a facility under Sanitary and Phytosanitary (SPF) measures, which accords for food safety and animal and plant health regulations.
EDUCATION
Budgetary allocations made in the education sector for the fiscal year 2012/13 have been reduced to NPR 46 billion (USD 560 million) from NPR 63.91 billion (USD 778
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million) in 2011/12. This allocation is considered insufficient for improving the status of education in the country and meeting the ambitious plans of the government. According to the Ministry of Education, a major chunk of the allocated budget is used as salary for teachers (70%), 10% for infrastructure development and 20% for trainings, scholarships and other school requirements.Research and development in education continues to be ignored in the national arena with most new education plans being largely donor driven. There is therefore a great need for a revision of education acts and policies to meet the required educational standards.12 Baglung VDCs ingenuity can be a model for increasing child enrollment:
Two VDCs in Baglung (Bobang and Adhikarichaur) have found a creative way of increasing enrollment in schools. A fund has been set up by local VDC authorities and their respective youth clubs to guarantee the provision of food at home for children who enroll. Some parents have been donating to the fund in the hopes that it will increase incentives for children to go to school. The program also helps
results were released nationwide and a significant drop in the percentage of students that passed the examinations was observed. Results show a drop of 9% points in the proportion of students that passed (down from 56% to 47%). Results were published amid calls from the Vice Chairman of the National Planning Commission to make funding for schools regular. The release of the temporary budget, that includes no highlights on education, will not help this persisting problem.14 The dip in results is being attributed to the failure of the School Sector Reform Program (SSRP), which was launched to improve the quality of education in the country.15 Myagdi children have no access to education: : Recent statistics have
shown that 1136 children in Myagdi (age 5-16) have no access to education. This shows that the situation for children in more isolated and impoverished areas of Nepal is dire. Even though NPR 1.36 million (USD 16,557) was given to the 12 VDCs in the area, the funds have not been used properly. The survey, for which the data was collected, cites improper implementation and monitoring as the main reasons for this lack of basic education in Myagdi.16 School children, vehicles targets for student union violence: The militant
culture in Nepal, with regards to protests, is clear for all to see. Crippling strikes happen periodically all over the country, with violence marring the proceedings. More dangerously, All Nepal
DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
National Free Students Union – Revolutionary (ANNISU-R) affiliated with the Baidya-led CPN-Maoists targeted children from Delhi Public School in order to protest high fees and nonadherence to the national curriculum.17 Schools with foreign names targeted:
Student unions have taken to violent activities in order to demonstrate their ire at schools and colleges with foreign names. Unions have torn down school signs and vandalized school property in the name of nationalism. Student unions argue that the use of foreign names for educational institutions erodes the identity of such schools. Leaders of the unions have urged the government to stop providing licenses to institutions that adopt foreign names. The unions have also stated that they will hold their ground, and will seek no compromise.18
ENERGY
No significant changes were observed in the energy sector over the last quarter other than the Nepal Oil Corporation (NOC) increasing the price of petroleum products. The prices of diesel and kerosene have been increased by NPR 4 (USD 0.05) to NPR 93 (USD 1.13) per liter.19 However, financial institutions and retirement funds are still providing loans to NOC to ensure a smooth supply of petroleum products. Of the NPR 2.1 billion (USD 25.6 million) loan approved by the government, NPR 1.4 billion (USD 17 million) was made available to the NOC in June.20 Nonetheless, NOC claims that it still owes NPR 3.04 billion (USD 37 million) to the Indian Oil Corporation. The Nepal Electricity Authority has
Table 1: Revised Electricity Tariff Effective from Shrawan 2069 (Mid July 2012) Units of Energy per month
Rate per unit (In NPR)
Rate per unit (In USD)
UP TO 20 UNITS
Minimum of 80
Minimum of 0.97
UP TO 50 UNITS
7.3
0.09
UP TO 150 UNITS
8.6
0.10
UP TO 250 UNITS
11
0.13 Source: Nepal Electricity Authority
also increased electricity rates. The loss making state monopoly increased electricity tariff by 20%, effective from Shrawan (Mid-July).21 The Electricity Tariff Fixation Commission (ETFC) revealed that there would be no change for domestic consumers using up to 50 units per month. The table provides a breakdown of the revised rates. Separate electricity transmission company: The government has decided
to commence the registration process for a separate electricity transmission company to free the Nepal Electricity Authority (NEA) from transmission related activities.22 The reform is a result of the constant pressure from the private sector, which has been pushing the government to establish separate agencies to handle production, transmission and distribution of electricity in the country. The separation of transmission activities will help in the efficient utilization of the transmission lines being laid within and across Nepal’s borders. : The dual pricing system for Liquefied Petroleum Gas (LPG) is set to come into operation by the third week of August. The government’s primary intention is to curb losses from its sale.23 In the dual system, general consumers will continue getting LPG at Dual pricing for LPG on the cards:
subsidized rates whereas commercial users will be charged at the cost price that NOC incurs. The two types of cylinders will be differentiated on the basis of color. General consumers will need to use blue cylinders and commercial consumers will use red ones. Currently, NOC is bearing a loss of NPR 359.63 (USD 4.38) per cylinder.24 NOC has instructed LPG bottlers to segregate their bottles by painting them red or blue. However, this decision faced strong resistance from bottlers. The bottlers stated that with approximately 4.5 million cylinders in circulation in the Kathmandu Valley alone, financial and time constraints would not allow all of them to be painted by August. to construct pipeline: In accordance with the government’s request, the Indian Oil Corporation (IOC) has expressed a willingness to construct the Amlekhgunj-Raxaul pipeline under certain conditions. The IOC has proposed a ‘build, own, operate and transfer’ (BOOT) model, whereby the IOC will own and operate it for 10 years after its construction. According to NOC, the pipeline system will need investments worth NPR 1.6 billion (USD 19.5 million), and will stretch across 39 km in Nepal and 2 km in India.25 IOC intends to recover the construction cost within seven years. For Nepal, the pipelines will sigIOC
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Macroeconomic Overview
nificantly reduce transport costs, assure uninterrupted supplies, curb fuel adulteration and limit pollution as it will displace the tankers currently used to transport fuel. Government interventions to bring relief to hydro projects: : In an
attempt to ensure access to finance for hydro projects, the High Level Finance Sector Reform Recommendation Committee has formed a task force under Maha Prasad Adhikari, deputy governor of Nepal Rastra Bank.26 At present, several small hydro projects have not been able to come into operation because of a lack of access to finance. However, since the government cannot directly be involved in providing financial support due to its caretaker status, the task force has been given the responsibility to find ways to assist these projects. The task force consists of joint secretaries of finance and energy and the director of the Power Trade Agreement under Nepal Electricity Authority. Power Development Agreement for hydro projects: The Investment Board
has approved the format for the Power Development Agreements (PDA) that will be used when awarding hydro projects to international investors with a capacity of over 500 MW.27 As per the approved PDA, these projects will come under the BOOT model, allowing developers to own and operate the project for 30 years and serve as the concession period. After this period, the ownership will be transferred to the government. The PDA also sets the condition that the project must last 100 years and for the remaining 70 years, the developers will still be able to operate the project. Through the PDA template, the government aims to ensure a timely mechanism
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for approval, set international environmental and social standards, and develop packages that benefit local communities. NOC makes profit; accounts under scrutiny: As per the tariff sent by IOC
on July 16, the profits of NOC for the same month are estimated to be NPR 13.2 million (USD 160,700). The following table provides a breakdown of profits/losses for each of the petroleum products sold by NOC for the month of July. 28 Table 2: Per Unit Profit/(Loss) on Petroleum Products as per Current Rates Petroleum Product
Profit/ (Loss) in NPR
Profit/ (Loss) in USD
Petrol
13.09 per liter
0.16 per liter
Diesel
(1.86) per liter
0.02 per liter
Kerosene
12.80perliter
0.16 per liter
Aviation Turbine Fuel (Duty Paid)
18.66 per liter
0.23 per liter
Aviation Turbine Fuel (Bonded)
30.05 per liter
0.37 per liter
LP Gas
(359.63) per cylinder
4.38 per cylinder
Estimated Total profit forJuly 2012
13.2 million
160,700
Source: Nepal Oil Corporation, http://nepaloil.com.np/main/
Despite profits, NOC does not plan to cut back prices as it still has loans it owes to various financial institutions. On a more negative note, NOC’s accounts came under scrutiny by a committee led by Deependra Bahadur Kshetri, vice chairman of the National Planning Commission. The committee is in the process of reviewing the price structure, loss computation and other accounting methods adopted by NOC.29 According to the inspection, the accounts were not able to justify
the administrative costs for which it has been collecting a surcharge on the petroleum products. The interventions required are to be implemented by representatives from Nepal Rastra Bank, the Finance Ministry, and the Institute of Chartered Accountants of Nepal. NOC is planning to diversify its business and include additional products in its list of sales items. These additional items include bitumen, lube oils, petrochemicals, and aviation tubes.30 NOC has asked IOC for a price list of such products, backing such a decision with the profits for the month of July. NOC has already start looking for potential consumers, with a special focus on bitumen which already has a ready market consisting of the Department of Roads and other concerned government agencies. Diversification plan for NOC:
NEA has proposed to buy electricity generated from biomass and sugarcane in an attempt to provide an alternative means of energy. The NEA board has decided to sign power purchase agreements to buy 3 MW and 1 MW respectively from Balaju Biomass and Bricket Company (BBBC) and Everest Sugar Mill, Janakpur.31 The rates that have been agreed are NPR 8 (USD 0.09) per unit of biomass energy and NPR 8.4 (USD 0.1) per unit of energy generated by the sugar mill. However, NEA will initially buy energy for six months on a trial basis, after which a more permanent decision will be made. Electricity from waste:
FOREIGN AID
Research conducted by the Ministry of Finance in its Development Coop-
DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
Asian Development Bank (ADB) provides grant assistance to key water projects: The Asian Development Bank
(ADB) has agreed to provide a grant of NPR 903 million (USD 11 million) to the Government of Nepal to speed up and ensure the quick and efficient implementation of key water projects. The funds will be used to make advance preparations for potential projects aimed towards upgrading irrigation schemes, improving irrigation efficiency, and preventing water related disasters. The Departments of Irrigation and Water Induced Disaster Prevention will use the funds to provide job trainings, enhance social and environment capacity, update the government’s Irrigation Master Plan, and set up a facility management unit. Being an agrarian economy, irrigation accounts for 87% of water use and is the most critical input for food security. Sound management of water infrastructure and effective water use
is essential as it can contribute towards tripling crop yields, expansion of irrigated areas and a dramatic improvement in farmer incomes.33 Japanese grant for Sindhuli road:The
Government of Japan has agreed to provide an additional grant assistance of NPR 5.59 billion (USD 68 million) to the Government of Nepal for the implementation of two projects, the Construction of Sindhuli Road Section III and the Countermeasure Construction against Landslides Project in Sindhuli Road Section II. Previously this year, a grant of NPR 580 million (USD 70 million) was provided for the construction of 37km of road in the Sindhuli Road Section III. For the first project, a grant assistance of
NPR 4.58 billion (USD 56 million) will be provided to acquire products and services required to construct the remaining 20km segment of the Sindhuli Road Section III. Once completed, this road will reduce travel distances significantly by acting as the main corridor connecting the capital city Kathmandu to the Eastern-Terai region. For the second project, a grant assistance of NPR 1 billion (USD 12 million) will be provided.34 Japanese grant to improve farmer livelihood in Sindhuli: The Government
of Japan, under the Grants Assistance for Japanese NGO Projects Scheme will be extending financial assistance of NPR 20 million (USD 246,723) to the GLM Institute. This assistance will
Figure 3: Grants, Bilateral Loans and Multilateral loans for the Fiscal Year 2010/11 and 2011/12 60 0.00 2 2010/11
50 0.00 NPR (in billions)
eration Report 2010/11, indicates that foreign aid constitutes 20% of the national budget and Nepal receives official development assistance from over 40 donors. Thus, foreign aid plays an important role in the socio-economic development of the country. The need for greater transparency on foreign aid features very prominently in the commitments made by Nepal, initially in the Paris declaration in 2005, in subsequent High Level Forums, and in the latest fourth High Level Forum on Aid Effectiveness held in Busan, Korea, in December 2011. Over the past 10 years, the Government of Nepal has made significant efforts to improve the quality of information and effectiveness of these crucial resources. However, despite increased attempts by the Ministry of Finance to increase aid transparency, it continues to be an issue.32
2011/12
40 0.00 30 0.00 20 0.00 10 0.00 0 0.00 Grants
Bilaateral Loans
Multilateral Loans Source: Ministry of Finance
Figure 4: Figure 4: Foreign Cash Grants to the Government of Nepal in the last five years Foreign C Cash Grants 39.54
1 12.80
20 006/07
17.50
2007/08
24.40
25 5.23
26.21
9 2008/09
2009/10
2010/11
2011/12 (firstt 11 months) Source: Ministry of Finance
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Macroeconomic Overview
Figure 3: Grants, Bilateral Loans and Multilateral loans for the Fiscal Year 2010/11 and 2011/12
Firrst 11 months
4.26
Firrst 10 months
4.1 12
F First 9 months
3 3.60
F First 8 months
3.27
Months
F First 7 months
2.79
F First 6 months
2.59
F First 5 months
1.23
F First 4 months
1.55 5
F First 3 months
0.90
F First 2 months
0.56
First 1 month
0.51 0 0.00
0.50 0
1.00
1.50
2.00
2 2.50
3.00 0
3.50
4.00
4.50
C Cash Loans in b billions Source: Recent Macroeconomic Situation Report, Nepal Rastra Bank
be used for “Improving Livelihood of Farmers” project through the promotion of environmentally harmonizing agriculture in the hilly areas of Sindhuli District in Nepal. The GLM Institute will implement the project in close coordination with the NGO, Sirjansil Welfare Society. The aim of this project is to improve the livelihoods of local farmers by introducing environmentally harmonizing agricultural technology to farmers by implementing various agriculture related activities such as skill development training on high value crop farming, animal hus-
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| DOCKING NEPAL’S ECONOMIC ANALYSIS
bandry, and trainings on water resource management and soil conservation. The project will also construct microirrigation facilities to provide suitable infrastructure to farmers.35 United Nations injection for peace building in Nepal:The United Nations
(UN) Peace Building Fund, will release NPR 657 million (USD 8 million) to the Government of Nepal to strengthen peace, improve policing, promote dialogue and reinforce national efforts to address the needs of conflict ridden women and children. After missing the
May 27, 2012 deadline for a new constitution, the fund is targeted towards moving the peace building process forward. It will be administered by the UN Peace Fund for Nepal which is overseen by the Government of Nepal, the UN and other donors. The funds will bring the total resource allocated to Nepal by the UN Peace Building Fund to an approximated total of NPR 1.56 billion (USD 19 million).36 World Bank approves credit for the Strategic Road Network: The World
Bank has approved a NPR 4.9 billion
DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
(USD 60 million) credit to Nepal for maintaining and constructing bridges for its Strategic Road Network. The network constitutes roughly 10,800 kilometers of national highways, feeder roads and other roads. The Bridges Improvement and Maintenance Program, is aimed towards improving access for the population of Nepal and supporting Nepal’s Bridge Policy and Strategy, 2004, to provide safe reliable and cost effective bridges. This program will be financed through a new World Bank financing instrument called the Program for Results (P4R) which links disbursements of funds directly to the delivery of verifiable results, with the World Bank providing approximately 40% and the Government of Nepal providing 60% of the funds. The program will support the strengthening of institutional systems through the development of transparent implementation arrangements, linking disbursements to verification of results, third party monitoring, use of social accountability tools and technical audits.37 United States Department of Agriculture provides grant: The United
States Department of Agriculture (USDA) has agreed to contribute an annual grant of NPR 492.8 million (USD 6 million) to the World Food Program (WFP) School Feeding Program in Nepal for three consecutive years. The aid will be used to provide mid-day meals for over 210,000 children in 1800 pre-primary and primary schools in 11 districts in the mid and far western regions. WFP’s school lunches also provide a strong incentive for poor parents to send their children to school. The grant comes at a time when resources are scarce in the most food insecure areas in Nepal. WFP will be combining the school feeding program with infrastructure
development, such as construction of school buildings, compound walls, ground leveling, etc to create a more conducive learning environment for school children. WFP plans on providing food assistance to over a million people in Nepal within this year.38 OFID
pledges
loan
assistance:
The Organization of the Petroleum Exporting Countries (OPEC) Fund for International Development (OFID), has agreed to provide a loan assistance of NPR 1.64 billion (USD 20 million) to Nepal for the implementation of the Rural Connectivity and Community Development Project. The assistance is co-financed by the Asian Development Bank (ADB) and is aimed towards the improvement of rural connectivity, the enhancement of economic and employment opportunities and increased access to markets and social services through small-scale infrastructure and capacity building.39 This includes construction of roads, bridges, schools, and provision of skills and building of social awareness. The projects are to be implemented in 18 low-income, remote and mountainous districts in Nepal and are expected to benefit approximately 1.5 million people and to reach completion by December 31, 2016.40 Kuwait agrees to soft loan for Budhi Ganga: A soft loan worth NPR 2.5
billion (USD 30 million) by a Kuwaiti fund has been approved for the construction of a 30 MW Budhi Ganga hydropower project in western Nepal.41 The objective of the project is to construct a concrete dam, 54 meters in length and a non-overflow height of 24 meters, 720 meters above sea level, and a concrete stilling basin 19 meters wide and 80 meters long. The estimated cost of the project is NPR (USD 54
million dollars). The project will lie in the Achham and Bajura districts, and includes the construction of an access road approximately 15 km in length.42 ADB pledges assistance for urban development: The Asian Development
Bank (ADB) has agreed to provide assistance of NPR 4.6 billion (USD 56.8 million) to the Government of Nepal for the implementation of Integrated Urban Development Project (IUDP). NPR 3.7 billion (USD 44.8 million) is to be provided as a loan and NPR 985 million (USD 12 million) as a grant. The grant is aimed towards the development of physical infrastructures in the municipalities of Dharan, Janakpur, Nepalgunj and Siddharthanagar. This will be achieved through the development of better access to municipal infrastructure and services through the building of solid waste management systems, drainage systems and urban roads based on the needs and priorities of each municipality. The Ministry of Physical Planning and Works will implement the project with the municipalities and the Department of Urban Development being the key implementing agencies. The project is slated for completion by June 30, 2017. The project will also undertake community development projects focusing primarily on poverty pockets in municipalities and communities that may not benefit directly from major infrastructure improvements.43
HEALTH
In the past quarter, there have been some improvements to health services. Separate elderly wards were opened and the smoking ban was finally put into effect. However, Nepal has a con-
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Macroeconomic Overview
AID TRANSPARENCY IN NEPAL The issue of aid transparency in Nepal is gaining ground with an Aid Transparency study being conducted by the Freedom Forum, and the release of the Development Cooperation Report 2010/11. The study showed that donors working in the country had varying levels of transparency at different levels, in their budget and work. Seven major donor agencies, namely: UKAID, USAID, Japan International Cooperation Agency (JICA), Norwegian Embassy and Asian Development Bank (ADB), World Bank, and United Nations Development Program (UNDP) were evaluated in the study. As indicated in the figure, the study indicates that the World Bank had the most efficient information dissemination mechanism, while the Norwegian Embassy ranked last and was closely followed by the ADB. It also revealed confusion
among donors on whether or not to provide information to general people. Donor supported projects often appear to be irresponsible, as only a few beneficiaries are aware of the project budget.44 The Development Cooperation Report 2010/11 published by the Ministry of Finance, indicates that Nepal has been receiving a high level of international support for socio-economic development, as evident in the increase in foreign aid commitments over the years. However, despite an increase in aid, the results remain dissatisfactory. This has led to increased aid transparency due to allegations that limited foreign aid effectiveness is due to a lack of transparency. The ministry is also aiming towards making all Aid Management Program (AMP) data available to concerned stakeholders by the end of 2012.45
Figure 6: Sources of Foreign Aid Disbursements in USD, 2010-11
Organization o of Global Fun nd to Fight the Petroleum m AIDS, Tub berculosis Exporting and M Malaria Canada 8% Countries Denmark 1.8 0.4% 0.5% Finland d Saudi Arabia 1.7% Austtralia Netherrlands 2.1% 1% 0.1 GAVI Ch hina 2.0 0% 0.2 2% 0.7% 1..7% Korea Geermany 2.5% Norwaay 2.1% 3.0% World Bank Group S Switzerland 23.7% 2 2.6%
Nordic Development d Fund 0.3% %
European n Union 3.9% Asian n Developmentt Bank 17.1%
USAID 4.5% United Nations 10.4%
India 4.7% Japan n 5.4% United Kingdom % 8.6% Source: Development Cooperation Report 2010-11, Ministry of Finance, and Government of Nepal
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DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
siderable way to go before it can make its way up global health indexes. Separate ward for elderly in Bharatpur hospital: A hospital in Bharatpur
received NPR 1.5 million (USD 18261.5) from the Ministry of Health to setup a separate ward for the elderly. Upon completion, it will be the first Nepali hospitals to have such a facility for the elderly, categorized as those individuals above the age of 75.46 The smoking ban has finally come into effect and as of the first week of July 2012, police started arresting people for smoking in public places. Officials said they made over 20 arrests in the New Road, Durbar Marg, Basantapur and Singha Durbar areas. They freed the offenders after they agreed not to repeat their actions. Those smoking in public places are fined up to NPR 100 (USD 1.217) and anyone selling tobacco products to people under the age of 18 or pregnant women will be fined up to NPR 10,000 (USD 121.7.) All government offices, educational institutions, public vehicles and hotels have been designated as no-smoking zones.47 Smokers arrested:
The Human Organ Transplant Center in Bhaktapur is all set to provide dialysis and kidney transplants at the nominal cost of NPR 800 (USD 9.739). Most private kidney centers charge between NPR 3,000- NPR 6,000 (USD 36.5273.04) per dialysis and hundreds of renal patients each year forego the treatment because of the high costs. Bir hospital is another medical institution that provides such low costs. However, the waiting period can take years and the only way to get treatment is if an existing patient dies or undergoes a transplant.48 Dialysis at nominal charges:
Dengue and Chikungunya veillance in Kathmandu: The
sur-
World Health Organization (WHO) has urged the government to carry out surveillance on the spread of the Dengue and Chikungunya virus in the capital. The District Public Health Office has allocated NPR 200,000 (USD 2434.867) for the project.49 The need for this became apparent after disease causing mosquitoes were found in sufficient concentration to cause an outbreak in the capital. The humidity and rising temperature levels have aided in creating a favorable environment for the growth of the mosquitoes. As of June 2012, there have been a total of 14 diarrhea related deaths in the district of Doti. Patients in remote villages are dying every day due to a lack of medicine and health personnel. The District Public Health Office said over 250 diarrhea patients have been treated this month in the district alone.
such as Nepal could be doing better had it not been for the past years of political instability. This study implies that maternal health care is partially determined by characteristics of the social environment - in this case political instability- and health care providers need to properly revise maternal health strategies in conflict affected areas. The study specifically shows that under high-intensity conflict conditions women receive between 0.3 and 1.5 fewer antenatal care check-ups.51
INFRASTRUCTURE
Diarrhea claims lives in Doti:
A researcher from the University of California in Berkeley, who has been working on indoor air pollution for decades, estimated that each year 2 million people die worldwide because of this pollution. Among the findings was that women in Nepal and other south Asian countries are afflicted with chronic lung diseases before the age of 40 because of smoke that is inhaled when they cook with wood and dried cow dung as a form of cooking fuel.50 This smoke has also been linked to rising cases of heart failure that causes the premature death of women in South Asian countries. Worse than cigarettes:
Maternal healthcare amid political unrest: A study by the Oxford Uni-
versity Press has shown that maternal healthcare in conflict ridden countries
Limited road development was observed during the first eight months of the fiscal year 2011/12. 15 km of roads were blacktopped, while 45 km of gravel roads, and 185 km of earthen roads were added. The total length of black topped, gravel and earthen roads reached 9,917 km, 5,715 km, and 7,822 km respectively. However, the total number of vehicles increased by 8.6 percent or 101,779 compared to the number recorded at the end of the last fiscal year.52 Hydropower development remained in a dismal state with just 7.72 Megawatt (MW) of power being added to the national system. The total length of electricity transmission lines reached 1,987 km, while distribution line totaled 95,816 km. The total number of electricity consumers increased by 200,000. However, traditional energy sources such as firewood and cow dung still account for 86.5% of the total energy consumption. Fast Track: The Ministry of Physical Planning, Works and Transport Management Kathmandu-Terai
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DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
(MOPPWTM) invited Expressions of Interest (EOI) for the “Kathm a n d u - Ni j g a d h - Pa t h l a i y a Te r a i / Madhes” Expressway project, also called “Kathmandu-Terai/Madhes Fast Track Project”, through Public Private Partnership (PPP) on Build, Operate and Transfer (BOT) basis. Six applicants from among those submitting EOIs will be shortlisted to submit a Request for Proposal.53 The selection process was cancelled last year after the Public Accounts Committee directed the government to ensure that at least 10% of the investment came from Nepali investors. The project costs at 2014, including 20% financing costs, are estimated at USD 844 million (NPR 69.33 billion). Only joint ventures or single firms having a net worth of USD 150 million (NPR 12.32 billion) and having experience in carrying out infrastructure projects worth over USD 1,500 million (NPR 123.21 billion) or BOT highways and projects of over USD 500 million(NPR 41.07 billion) in the last 10 year will be eligible. Two Indian companies Reliance Infrastructure and Infrastructure Leasing and Financial Services (IL&FS) have purchased the EOI to construct the 76 km express highway. Of the total 76 km, 56 km of the road section has already been opened by the Nepal Army. Upgradation of Tribhuwan International Airport: Infrastructure Leasing &
Financial Services (IL&FS) expressed an interest to manage and upgrade the Tribhuwan International Airport and 15 domestic airports under the Build, Operate, Own, and Transfer (BOOT) model with the Investment Board. However, the Supreme Court has issued a stay order not to proceed with the controversial TIA contract as the Investment Board did not follow the due process while inviting the Expression of
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| DOCKING NEPAL’S ECONOMIC ANALYSIS
Interest.54 IL&FS estimates around USD 600-700 million55 (NPR 49.28 – 57.5 billion) will be required for upgrading and modernizing in and around TIA. Regional airports in the doldrums:
The Civil Aviation Authority of Nepal (CAAN) invited bids for the construction of the Pokhara airport in February 2012. Three Chinese firms bid for the project but quoted project costs much higher than the government’s estimate of USD 180 million (NPR 14.79 billion). China CAMC Engineering company quoted the lowest at USD 305.13 million (NPR 25.06 billion), while Sinohydro Corporation and China International water and electric Corporation quoted USD 337.82 million (NPR 27.75 billion) and USD 349.28 million (USD 28.69 billion) respectively. The airport will have a 3,000 meter long runway, air traffic control tower, a cargo terminal building and an airport hangar.56 An assessment carried out by a Korea based consulting firm show the cost of completion of the first phase up gradation of Gautam Buddha Airport in Lumbini will hover around USD 77 million (NPR 6.32 billion) which is higher than the Asian Development Bank’s estimate four years ago, which had put the total cost of the first phase of upgrading at around USD 35 million (NPR 2.87 billion).57 On completion, it will be able to handle 600,000 passengers annually. The airport will be spread over 13,000 square meters and will include a new runway 3000 m in length and 60 m wide. : International Finance Corporation (IFC) is providing a loan of USD 6.9 million (NPR 566.77 million) to Buddha Air. The loan will enable the airline to Loan to Buddha Air:
purchase an ATR 72 aircraft thereby improving air travel connectivity in Nepal. In 2008, the IFC provided a loan of USD 10 million (NPR 821.4 million) to Buddha Air to purchase two ATR-42 aircrafts and construct a closed door hangar at Tribhuwan International Airport.58 The Nepal Electricity Authority has extended the term of Chinese company JheijianJinlin Electromechanical for the next two years. The contract was awarded to the Chinese company for the construction of electro-mechanical part of the 14MW Kulekhani Hydropower Project III. Due to disturbances at the project site and delays by consultants, less than 20% of the work is complete.The Department of Electricity Development is readying to construct the Budhi Ganga 20 MW hydro project with loan assistance from Kuwait and Saudi Arabia. The total estimated budget of the project is USD 54 million (NPR 4.44 billion). As per the government drafted loan agreement, Kuwait will fund USD 18 million (NPR 1.48 billion) and Saudi Arabia USD 20 million (NPR 1.64 billion), while the remaining amount of USD 16 million (NPR 1.31 billion) will be invested by the Government of Nepal. Hydropower:
MANUFACTURING AND TRADE
Nepal has been facing significant hurdles in trade, especially as developed economies, facing a financial slow down, impose barriers to trade. However, earnings from the export of goods and services have been favorable as a result of the devaluation of the Nepali Rupees.
DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
Figure 7: Rice Production (FY2001-02 to FY2011-12) 6000 5000 4000 3000 2000 1000
Balance of Payment reaches record high: : In the first eleven months of FY
0
Source: Ministry of Finance, Economic Survey (2011-12)
Ban on rice exports lifted: The Ministry
of Commerce and Supplies (MOCS) has decided to export 10,000 metric tons of rice to China in FY 2012/13.59 Because of low domestic production and a global food crisis, MOCS had placed a ban on rice exports in 2008. As shown by the graph, there has been a reasonable increase in rice production in the last two fiscal years such that the rice surplus reached 443,000 tons in FY 2010/11 and 300,000 metric tons in FY 2011/12. Since agriculture production is unpredictable as it is still heavily based on the monsoons, MOCS has not made any commitments on the amount that may be exported in FY 2013/14. MOCS hopes that its decision to lift the ban on rice exports to China will discourage illegal exports. Export earnings rise due to plunging rupee: Export earnings has reached
USD 736 million (NPR 60.45 billion) in the first 10 months of FY 2011/12,60 a 14.5% increase as opposed to USD 642 million (NPR 52.70 billion) during the same period in FY 2010/11.
Rising price competition in the international market and decreased income in the western world as a result of thefinancial crisis in 2008 resulted in a decrease in the price of Nepali manufactures. The report shed light on the fact that said least developed countries particularly Bangladesh, Cambodia, Lao People’s Democratic Republic and Nepal have been facing trade restrictive measures as a result of the discriminatory trade policies of several developed countries.
This increase can be attributed to an increase in the export earnings of woolen carpets, readymade garments, synthetic yarns and a number of farm products.61 Although some increase in exports can be attributed to an increase in competitiveness, many have been a result of the devaluation of the Nepali Rupee against the Dollar.62 Export earnings from woolen carpets surged by 22.3% to USD 59 million (NPR 4.84 billion) in the first 10 months of FY 2011/12 while volume of exports declined to 606,631m2 from 698,067m2 in the same period in FY 2010/11. Exports have decreased because of lower demand in the European market, which is currently going through a recession. Nepal’s Terms of Trade declined by 31% annually in the last 10 years:
According to Economic and Social Survey of Asia and the Pacific 2012,63 Nepal’s Terms of Trade64 declined at an annual rate of 31%65 over the last decade as a result of low productivity and declining prices of manufactures.
2011-12, the Balance of Payment (BoP) reached a record high, with a surplus of USD 1.4 billion (NPR 113.2 billion).66 During the same period in FY 2010/11, BoP was at a deficit of USD 4.1 billion (NPR 335.6 billion). The current surplus can be attributed to a growth in remittance and improvements in the service account, which showed a surplus of USD 173 billion (NPR 14.2 billion). Tourism income rose by 25.5% and remittances grew by 39.6% and Foreign Direct Investments grew by 32.8%. On the contrary, merchandise trade deficit rose by 16.7% to USD 4.1 billion(NPR 339.3 billion) in the first eleven months of the FY 2011-12, the deficit was at 5.8% in the corresponding period in FY 2010/11.
REAL ESTATE
During the Fiscal Year 2011/12, all five Land Revenue Offices (LROs) within the Kathmandu Valley accumulated a total of NPR 1.78 billion (USD 21.43 million) through house and land registration revenue, an increase of 16% compared to the NPR 1.53 billion (USD 18.63 million) collected during
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DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
the same period last year. Kathmandu LRO witnessed the highest revenue collection amounting to NPR 647 million (USD 7.88 million) while Bhaktapur recorded the lowest revenue collection of NPR 187 million (USD 2.28 million). However, Lalitpur saw the highest growth rate of 22.6% amongst the five LROs within the Kathmandu valley.67 The growth of the realty sector can be attributed to the government’s decision to reduce capital gain tax by 50%, extend the time for renewing realty loans, and increasing the ceiling for source of income disclosures from NPR 5 million (USD 60,872) to NPR 10 million (USD 121,743). Other reason cited for an increase in realty transaction is the decrease in land prices. Land developers, after resisting price cuts for almost a year, have finally lowered prices of residential plots by almost 33% thereby injecting life into the long stagnant realty sector. A year ago, land developers in Thankot refused to sell land at NPR 650,000 (USD 7,913) per anna, however, in the present context they are willing to offload land at NPR 500,000 (USD 6,087) per anna. Similarly land developers in Lalitpur and Bhaktapur have slashed prices by almost 33%. Table 3: Registration revenue collection of Kathmandu valley In NPR million Land Revenue Office
2010/11
2011/12
Kathmandu
564
647
Kalanki
216
258
Chabahil
331
382
Bhaktapur
170
187
Lalitpur
252
309
Total
1,533
1,783
Source: Department of Land Reform and Management
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Financial exposure of banking and financial institutions towards real estate: As per the Nepal Rastra Bank
(NRB) monthly statistics report dated mid-May 2012, the total real estate lending of BFIs amounted to NPR 95.09 billion (USD 1.26 billion) out of the total loan and advances of NPR 763.5 billion (USD 9.3 billion) which constitutes 12.5% of the total loan portfolio of BFI. The real estate exposure of commercial banks stood at 11.8% of its total lending of NPR 592.57 billion (USD 7.21 billion), where as that of development banks and finance companies stood at 12.04% and 18.2% respectively of its total lending. Similarly, out of the total loan portfolio of BFI’s towards the real estate sector amounting to NPR 95.09 billion (USD 1.26 billion), the exposure of commercial banks stood at 73.4%, development banks at 12.01% and finance companies at 14.55%. Credit to construction sector to become more expensive: The Nepal
Rastra bank has directed all BFIs to make an additional provision of 20% loan loss provision for credit extended on the back of collateral pledged by a third party, which means that the extra costs required to mitigate risk generated by such credit will be passed on to the borrower. In context of Nepal, about 50% of the loans secured by construction companies are backed by assets pledged by persons or firms other than the borrower.68
REMITTANCE
Analyzing past trends, it is apparent that remittance inflows have been steadily increasing over the years. Comparing the compounded annual growth
rate (CAGR) for remittance amounts and migrant workers from 2006 to 2012, the CAGR for the former stood at 28%, whereas for the latter, it was 21%. This means that the remittance amounts have grown at higher rate than the number of migrant workers. This is because of the appreciation of the US Dollar and a rise in the wages earned by migrant workers due to better negotiations between the government and manpower agencies. Foreign Employment bond fails third time around: The third consecutive
foreign employment bond has failed to attract investments, selling a meager 8.6% of the total bonds issued. This time around, Non-Resident Nepalis (NRN) were also allowed to subscribe to these bonds. Of the NPR 1 billion (USD 12.2 million) bond, only NPR 8.6 million (USD 104,700) have been issued, despite an attractive coupon rate of 10%.69 This is the third time the government has issued the foreign employment bond. The first one was issued in FY 2009/10, with a subscription of NPR 4.6 million (USD 56,000) of NPR 1 billion (USD 12.2 million) at 9.5% interest. In FY 2010/11, subscription fell to NPR 4 million (USD 48,700) of the total issue worth NPR 5 billion (USD 60.9 million). The reason for the failure of these bonds has been attributed to the absence of proper marketing channels. Since remittance companies in India did not apply for agencies, the whole Indian market has been left out. Additionally, it was assumed that the NRNs would subscribe to a significant portion of the bond which did not materialize. Therefore, the target market consisted of migrant workers who have very little disposable income, due to which subscription levels have been low.
DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
Figure 8: Number of Migrant Workers from Nepal for the past 6 years 600000
530250
500000
Total Migrant Workers
400000
354716
300000 200000
204533
249051
294094 219965
100000 0 FY 2006/07 FY 2007/08 FY 2008/09 FY 2009/10 FY 2010/11 FY 2011/12 Source: Department of Foreign Employment
Figure 9: Remittance Amount (In NPR Billions) for the Past 6 Years 350
320.38
300 250
Remittance Amount 209.769
231.73
253.55
200 150 100
142.7 100
50 0 FY 2006/07
FY 2007/08
FY 2008/09
FY 2009/10
FY 2010/11 11 months of FY 2011/12 Source: Nepal Rastra Bank
Qatar - top destination for migrant workers: Displacing Malaysia, Qatar
has become the most popular destination for Nepali migrant workers in FY 2011/12. According to data released by the Department of Foreign Employment, a total of 103,371 migrant workers left for Qatar as compared to 98,339 Nepalis who left for Malaysia in the same fiscal year. In addition to the two countries, Saudi Arabia, UAE and Kuwait were
among the top five recipients of Nepali workers. The number of migrant workers leaving for Malaysia between the FY 20010/11 and FY 2011/12 saw a decline of 7.14%.70 The reason for the decline was due to legislation carried out by the Malaysian Government. Additionally, with lifting of the ban on Bangladeshi workers by the Malaysian Government, Nepali workers are likely to face increased competition starting August, 2012.71
Gurkha sackings continues in the British Army: As part of the British
Defense Restructuring, a total 320 Gurkhas out of a total of 2900 in the British Army are set to lose their job in the second round of redundancies.72 As per the press statement released by the British Embassy, the number of Gurkhas in the British Army will be fixed at 2600. Since the Brigade of Gurkhas has been growing in size since modernization in 2007 as they were allowed to serve for 22 years instead of 15, the reduction in numbers was anticipated. The affected personnel were given 12 months’ notice and will be given a comprehensive program for resettlement into civilian life and help with future employment. New passport stickers controls forgery: Passport forgery cases have
decreased after the Department of Foreign Employment (DOFE) adopted the new informative stickers and online access codes since May 23. Under the new provision, red colored stickers have been assigned to workers flying to Gulf countries via manpower agencies and blue to those traveling through individual efforts. Additionally, the new stickers contain the type of work and the name of the foreign company providing employment. The DOFE provided the Nepali Embassy with an access code of the stickers so that the authenticity can be checked from Delhi.73 After the implementation of these stickers, the Nepali Embassy in New Delhi has not reported a single case of forgery. Future plans include barcodes with stickers, however these will take time due to the high costs involved. Forex Reserves and BoP reach record high: According to the sta-
tistics in the ‘Current Macroeconomic Situation of Nepal’, the Balance of
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Macroeconomic Overview
Payments recorded its highest ever surplus of NPR 113.22 billion (USD 1.38 million) during the first eleven months of FY 2011/12 as compared to a deficit of NPR 335.6 million (USD 4.09 million) during the corresponding period of the previous year. The foreign exchange reserves surged up by 56.9%to NPR 427.01 billion (USD 5.2 million) in mid-June 2012from NPR 272.15 billion (USD 3.31 million) in mid-July 2011. The growth has been attributed to an increase in remittance flows, service accounts exports and tourism.
TELECOMMUNICATION AND MEDIA
Figure 10: Market Share of telecom companies 2% Others 0.01%
46% 47%
4% NTC
UTL
Ncell
STM
NSTPL
Smart
Others
Source: Nepal Telecommunication Authority “MIS report dated Jun, 2012.
24
Nepal Telecom (NT) added a net 1.12 million mobile subscribers including CDMA users in the last one year time while fellow GSM provider Ncell added the single largest net gain of 2.68 million mobile users during the same period. The table below depicts the market share of the telecom operators. As part of Nepal Telecom’s mega project of adding 10 million mobile lines for 2G, 3G and 4G services, Huawei Technologies a Chinese telecom giant has bagged the USD 71.2 million (NPR 5.85 billion) contracts through international bidding for installing 4.8 million GSM lines. Huawei will supply and install equipment as well as commission the new lines within the next two years. Negotiations are underway with another Chinese vendor ZTE for the remaining 5.2 GSM lines. Under the mega project, 50% of the GSM lines consist of 2G lines while remaining 50% will consist of 3G and LTE (long-term evolution) lines.74 To monitor the supervision and implementation of its mega project, Nepal Telecom, for the first time, has hired an International consultant, Detecon International. As part of the agreement, Detecon International shall provide consultancy service for the project period of four years and NT in return will pay 2.5 million (NPR 269.6 million) as consultancy fee. The consultant will be an independent body; hence, vendors Nepal Telecom’s mega project:
The Telecommunication industry is one of the fastest growing sectors in Nepal. The Management Information System (MIS) report dated June 2012 of Nepal Telecommunication Authority (NTA) shows that there were 16.65 million telecom users in mid-May 2012 an addition of 4.2 million users, compared to
STM 1% 0.03%
the same period last year. The overall tele-density as of May 2012 stood at 62.56% that reflects a growth of 43.32% as compared to the same period last year. The significant growth is attributed to the strong growth in mobile users which currently stand at 55.40%.
| DOCKING NEPAL’S ECONOMIC ANALYSIS
will not be able to claim any amount if the consultant finds their work unsatisfactory. Further, Nepal Telecom will also have to abide by the norms of the consultant leaving no room for political influence. Nepal Telecommunication Authority (NTA) directed to collect Radio Spectrum Fees: NTA has been
directed by the Government of Nepal to hasten its collection of unpaid radio spectrum from mobile networks. Currently Nepal Telecom and Ncell have outstanding amounts of NPR 710 million (USD 8.64 million) and NPR 350 million (USD 4.26 million) respectively.75 : In a bid to monitor the Quality of Service (QOS) provided by telecom operators Nepal Telecommunication Authority (NTA) is gearing up to implement automated software system so as to analyze the service provided by telecom operators and regulate them effectively. QOS is an indicator of the performance of a telecom service network and of the degree to which the networks conform to the stipulated norms and standards specified by the regulator. NTA has started the procedure for a detailed system design for incorporating the hardware and software solutions by hiring an independent consultant for developing the software system known as a QOS Data Warehouse or QOS bank. Usually the telecom operators submit their QOS report to the NTA on a quarterly basis. NTA has been carrying out quality survey and performance test of wire line and wireless networks of telecom operators through an independent consultant since last year in the main cities of Nepal.76 Telecom service quality:
DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
Figure 11: Growth Trend of VoiceTelephone and Data Service Penetration 70.00 60.00
Penetration Rate
50.00 40.00 30.00 20.00 10.00 ‐
May/Jun 2011
Jun/Jul 2011
Jul/Aug Aug/Sep Sep/Oct Oct/Nov Nov/Dec Dec/Jan Jan/Feb Feb/Mar Mar/Apr Apr/May 2011 2011 2011 2011 2011 2011 2011 2011 2011 2012
Fixed
2.93
2.93
2.94
3
3.16
3.17
3.17
3.18
3.18
3.19
3.20
3.19
Mobile
39.53
40.59
41.70
42.52
47.38
49.21
50.16
51.10
52.00
53.39
54.46
55.40
Other
2.43
2.52
2.63
2.68
2.96
3.03
3.13
3.28
3.46
3.75
3.76
3.95
Total
44.89
46.04
47.27
48.14
53.50
55.41
56.46
57.56
58.64
60.33
61.42
62.54
Data/Internet
10.28
10.89
11.46
11.72
13.49
14.09
14.55
15.20
15.75
16.67
17.53
18.28
Source: Nepal Telecommunication Authority “MIS report dated Jun, 2012.
TOURISM
Nepal has a powerful appeal as a tourist destination. The recently concluded Nepal Tourism Year (NTY) 2011, the ongoing Visit Lumbini Year (VLY) 2012, and the long term Tourism Vision 2020 are all part of the government’s plans for the tourism industry. The budget for 2012-13 has setan optimistic vision for the tourism industry. The total arrivals to Nepal in the first seven months of 2012 stood at 332,472, an increase of 18.5% as compared to the same period last year.77 Tourists from India and China account
nationals accounted for the percentage of tourist arrivals through air. A total of 58,463 visitors from India and 9,289 visitors from China lead to an increase of 16.65 % and 30.35 % as compared to the same period last year. Among European nations, 19,826 tourists visited the country. Danish and the German nationals reported the highest share with 709 and 2,272 arrivals, an increase of 61.14 % and 15.45 % respectively as compared to last year.
Figure 12: Market Share of telecom companies 2012
2011 38,453
July
35,212 43,238
June
37,226 42,820
May
39,179 Source: Nepal Telecommunication Authority “MIS report dated Jun, 2012.
Between May to July 2012, Indian and Chinese for the highest chunk:
Tourists account
from India and Europe for the biggest share:
Amongst the South Asian Association for Regional Cooperation (SAARC)
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Macroeconomic Overview
Table 4: Total Tourist arrivals in July, 2012 Country of Nationality
July
Total ( Jan-July) 2011
2012
% Share ‘12 Jan-July
2011
2012
ASIA (SAARC)
14,031
16,602
18.30%
43.20%
100,996
125,699
24.50%
37.8%
ASIA (OTHER)
7,570
8,216
8.5%
21.4%
53,966
64,142
18.9%
19.3%
EUROPE
7,412
7,811
5.4%
20.3%
67,796
78,828
16.3%
23.7%
OCEANIA
697
708
1.6%
1.8%
9,003
9,389
4.3%
2.8%
2,694
2,836
5.3%
7.4%
25,104
28,432
13.3%
8.6%
AMERICAS
% Share ‘12 July
% Change
% Change
OTHERS
2,808
2,280
-18.8%
5.9%
23,710
25,982
9.6%
7.8%
Total
35,212
38,453
9.2%
100.0%
280,575
332,472
18.5%
100.0%
Source: Immigration Office, TIA complied by Nepal Tourism board
nations, Indian tourists accounted for the highest proportion of visitors between January to March 2012. In March alone, 37,543 Indian tourists visited the country, an increase of 43.6% compared to the same period last year. Meanwhile, European tourist arrivals accounted for 39,736 in which the United Kingdom (UK) and the German nationals reported the highest share with 8,589 and 7,314 arrivals respectively. Swiss tourists also saw a tremendous growth in the first three months with arrivals increasing by 126% to 1,915 arrivals as compared to the same period last year.67 BB airways to start flights from September: BB Airways, promoted by
the treasurer of the Non-Resident Nepali (NRN) Association, Bhawan Bhatta will start its maiden flight to Kuala Lumpur on September 13, 2012 after receiving the Air Operator Certificate (AOC) from Civil Aviation Authority of Nepal (CAAN). They have also received permission to fly to Hong Kong, Kuala Lumpur, Bangkok, New Delhi, Doha, Singapore and Japan. There will also be two direct flights a week from Kathmandu to Narita International Airport, Tokyo starting October 13, 2012. The company
26
| DOCKING NEPAL’S ECONOMIC ANALYSIS
will also be starting flights to Hong Kong and Taiwan from September this year. Chinese firms in race for developing the International airport in Pokhara:
Three Chinese contractors are in the race for the construction of a regional international airport in Chinnedanda, Pokhara. They have submitted technical proposals to the Civil Aviation Authority of Nepal (CAAN). China CAMC Engineering quoted the lowest amongst the three firms with a quotation of USD 305.13 million. Sinohydro Corporation and China International Water and Electric Corporation quoted USD 337.82 million and USD 349.28 million respectively. CAAN estimated the project cost at around USD 180 million with the government planning to use soft loans of around USD 145 million from the Export-Import Bank of China (Exim Bank) to fund the project. The planned airport will have a 3000 metre-long runway, an apron, international and domestic terminal buildings, an air traffic control tower, a cargo terminal building along with an airport hangar.79 Chitwan National Park (CNP) resorts lease agreements not to be renewed:
Seven Jungle resorts located inside the
Chitwan National Park (CNP) will not get their rental lease agreements renewed from July 15, 2012 onwards. Ministry for Forest and Soil Conservation said that the government will not be extending the lease agreement. It cited possible harm to the park’s ecology affecting wildlife and other environmental concerns. The original time limit of their lease agreements had expired on 2009, but the government gave the resorts an additional 3 years to relocate because of Nepal Tourism Year 2011. Tiger Tops Jungle Lodge, Hotel Narayani Safari, Chitwan Jungle Lodge, Machan Wildlife Camp, Gaida Wildlife Camp, Island Jungle Resort and Temple Tiger have been given 5 additional months till mid December 2012 to relocate the hotels if the lease agreement is not renewed. The Inland Revenue Department (IRD) has also instructed them not to take their property out without first clearing outstanding dues to the government. The IRD states that the hotels have outstanding dues ranging from NPR 6,000 to NPR 10.70 million.80 Investments towards hospitality in Dhankuta hill stations increase:
Popular tourist destinations in Dhankuta district, Bhedetar and Hile Bazaar, have seen a major increase in investments in the tourism sector with the development of new hotels and the refurbishing of existing hotels and lodges. Entrepreneurs from both the hill stations have invested more than NPR 250 million into new hotel developments. Bhedetar, being the gateway to the Arun valley, is becoming increasingly popular among visitors and has started to attract massive investments. The rising number of hotels has also attracted Meetings, Incentives, Conference and Exhibitions
DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
Table 5: Major developments planned according to the budget 2011/12: Projects
Status
Tourism Master Plan for developing necessary infrastructure
Ongoing
Development programs of exotic places for integrated tourism development of mid and far western regions
No action
Feasibility study of multidimensional tourist route connecting Rara, Sinja, Pupal, DhorpatanSisne, Jaljala area
No action
New trekking routes in Annapurna and Manaslu area
No action
Tourism service development in 17 destinations
No action
Establishment and operation of Integrated Tourism Service Centers
No action
Construction of second international airport
No action
Development of airport infrastructure with modern technical facilities Government to guarantee purchase of necessary aircraft for Nepal Airlines
(MICE) tourism to Bhedetar besides sightseers. Meanwhile, the hill town of Hile Bazaar has also witnessed huge investments in the hospitality sector. Hile is the starting point for trekking around Kangchenjunga. Hotel owners of that area have already invested over NPR 86 million to develop five hotels.81 Government fails tourism projects:
to
implement
The governmentannounced major developmental projects in its budget for the 2011/12 Fiscal Year but has failed to achieve and implement a majority of them. The budget had assured tourism development and promotion programmes to be carried out to establish the tourism sector as a strong backbone of the national economy.82 Solo trekkers to compulsorily appoint guides: Trekking Agencies Association
of Nepal (TAAN) from September 1, 2012 will make it compulsory for Free Independent Travelers (FIT) to take a guide along while trekking around the country. This came into existence
Low progress No action
after the Government banned FIT in Langtang National Park after some solo trekkers went missing in the past few years. The Home Ministry enforced this rule from July 3, 2012 following request from the District Security Committee, Rasuwa. Of the total tourists visiting Nepal, around 40 % of them go for trekking or hiking. Nepal currently has more than 10,000 professional tourist guides including porters.83 Action plan for the Tourism sector: A 12-member high-level tourism committee led by the Prime Minister´s Office Secretary Lila Mani Paudel has recommended the government to recognize tourism as a national priority industry. The final report recommends exemption income tax for 10 years for hotels, restaurants, resorts and other tourism related industries in 22 least developed districts and 13 underdeveloped districts identified by the government. The report has further suggested that the government provide bank loans to the tourism sector at a concessional rates.
Tourism entrepreneurs of Ilam and Kaski districts to promote each other’s campaign: Tourism entre-
preneurs from the Ilam and Kaski districts have agreed to work jointly for tourism promotion of their respective districts. Entrepreneurs of both districts met at a program organized by Paschimanchal Hotel Association Pokhara (PHAP) to promote each other’s tourism campaign. A delegation of 47 tourism entrepreneurs led by the Hotel Association of Ilam organized a program to promote domestic tourism in Pokhara, termed as “Ilam Ghumau Jibanbhar Ramau” (‘let’s visit Ilam and feel good for lifetime). They have also proposed to start a luxury coach between Pokhara and Pashupatinagar to boost tourism, the border town connecting Darjeeling, India. A total of 385 hotels and 65,000 internal and external tourists visit Ilam every year and around 300,000 tourists visited Pokhara during Nepal Tourism Year 2011.84 Nepal a growing market for International airlines: Air Asia X, the long-haul
operations brand of Malaysian’s budget carrier Air Asia, commenced flights to Nepal from July 3, 2012. The airline is operating two scheduled flights a week and is increasing its frequency to four times week from September. The airlines are targeting a diverse segment including business travelers, migrant workers, students and tourists. Presently around 350 workers leave for the Malaysian capital everyday from Tribhuvan International Airport (TIA). Malaysia Airlines, the national carrier of Malaysia, has also followed the footsteps of Air Asia and is introducing its maiden flight from September 1, 2012. It will have thrice weekly direct flights from Kuala Lumpur. Another
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Macroeconomic Overview
airline flying to Nepal soon is Tibet Airlines. Tibet Airlines is a subsidiary of Air China, the national carrier of China, which is being promoted by the Tibetan Government. The airline started its operations a year ago and has identified Nepal as its first international destination.85 TAAN to seasons:
promote
Nepal
for
all
Trekking Agencies’ Asso-
ciation of Nepal (TAAN) is planning to develop trekking routes that are feasible during the monsoons, the offseason in Nepal’s tourism business. The objective to promote off-season tourism is to help the industry survive during the lean period. The total earning of the industry in Nepal Tourism Year (NTY) 2011 recovered to 2002 levels. TAAN along with the trekking entrepreneurs are jointly pro-
moting and developing short trekking packages for the monsoon season in areas around Shivapuri, Nagarkot, Bandipur and Kakani. Another sector identified was Agro-tourism, mainly paddy plantations – the traditional way of agriculture farming. TAAN is planning to promote the routes once they are operational to make Nepal a tourism destination throughout the year. 86
macroeconomic OUTLOOK Nepali economy met the failure of the Constituent Assembly (CA) to complete their mandate of drafting a new constitution with disappointment. The failure of the political class in working collaboratively towards successful resolution of the peace process and the drafting of the new constitution has hit investor confidence. There are concerns over the long term stability and prosperity of Nepal given the crass politics that have become a common feature of Nepali politics. The current caretaker government has the onus of resolving the current political stalemate and deciding upon a course of action. Until this happens, there will be a political vacuum within Nepal and limited possibility of any major reforms or development agendas being taken up. The government also has to deal with the immediate needs and daily administrative responsibilities. With a poor harvest expected this year, the government needs to make food provision for this year and must chart out a long term plan to better meet the needs of farmers and to increase agricultural productivity. Given the potential of agri-based products, the government needs to encourage the agriculture sector by providing the right infrastructure and investment opportunities. The current trend of relying on remittance is not sustainable, especially when considering the fact that remittance is used for consumption instead of productive investment in the economy and the subsequent influx of imports puts pressures on the balance of payment. In order to do this, the government must create a business climate that encourages entrepreneurs to invest in agriculture and farmers to learn new techniques and utilize modern technology to improve
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| DOCKING NEPAL’S ECONOMIC ANALYSIS
productivity. A good source of financing for such projects is through foreign aid. However, greater transparency in foreign aid has become a critical issue. With foreign aid constituting 20% of the national budget, a transparent and accountable system must be implemented. Foreign aid grants have focused primarily in the sectors of construction, infrastructure development, hydroelectricity, agriculture and peace building. As per the Development Cooperation Report 2010/11 by the Ministry of Finance, the top five multilateral donors to the Government of Nepal are World Bank, Asian Development Bank, United Nations, European Union and the Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM) with the World Bank Group topping the list. The top five bilateral donors were United Kingdom, Japan, India, United States and Norway, with UK topping the charts. Foreign aid has been of considerable help in assisting Nepal meet the Millennium Development Goals set for maternal and child healthcare despite hindrances such as poor infrastructure, high levels of poverty and the political instability that is plaguing the country. However, even though Nepal continues to improve in the health sector, it still does require some policy revision. As the studies have shown, maternal health care continues to require special attention and government officials need to act on this. Strategies for better access to maternal healthcare throughout the nation can include decentralization of services, maintaining neutrality among factions, strengthening community-based health services
DOCKING NEPAL’S ECONOMIC ANALYSIS
Macroeconomic Overview
and developing mobile clinics. Apart from this the government should continue to carry out timely surveillances to prevent diseases such as dengue and diarrhea in the future. This not only saves the country from a looming epidemic but also further strengthens overall health services. The lack of a constitution has meant many policy level reforms are in the doldrums. Until a new constitution is passed and a representative parliament is instituted, policy level reforms will always take a long time. The lack of a government combined with inadequate institutional capacity, fiscal risk, lack of bankable projects, weak regulatory and institutional environments have made public private partnership (PPP) difficult. This has led to low investments in key infrastructures. The country needs to clarify the role, responsibility as well as the involvement of private sector in PPP projects to ensure smooth execution of projects. Nepal spends a mere 3% of the total gross domestic product in infrastructure, which is insufficient to achieve the economic growth targets set each year. In fact, weak investment in infrastructure has had a domino effect on other priority sectors of the economy such as tourism, industrial development and hydropower. The NRB has also introduced the directive of 20% loan loss provision on third party collateral so as to protect the interest of depositors rather than corporate and businesses houses who borrow beyond their capacity. The latest directive of NRB will affect the funding of lucrative projects as well as the profits of banks as a single person will not be able to put together the collateral needed for large loans for big projects. It may have negative effect on infrastructure development works as it would be difficult to carry out big projects without third party collateral thereby encouraging international contractors to bid for big projects. In a bid to control losses, the dual pricing system for LPG can be regarded as a positive step towards curbing losses of NOC. However, questions on implementation and acceptability arise. LPG dealers have already started revolting against the dual pricing system. Also, in the absence of a strong control
mechanism, chances of manipulation and leakages rise. With regards to hydro power projects, despite the mushrooming of such projects, none have been implemented. There have been government interventions in this regard and hopefully, these will be catalytic in implementing them. On a positive note, with the onset of the monsoon season, load shedding hours will fall in the coming months. Tourism is one of the largest industries in Nepal and is an integral part of its economic. As per the report published by the World Travel and Tourism Council (WTTC), the sector employed around 3.3% of the total employment in the country in 2011 generating around 412,500 jobs. The travel and tourism sector attracted capital investments worth NPR 12 billion (USD 146 million) in 2011 and is expected to rise by 5.4% in 2012 and by 4.9% annually over the next 10 years. The report has also projected a rise of 3.7 % to the country’s employment in the travel and tourism sector in 2012. The government needs to commit itself to developing tourism and must start executing and implementing many of its plans that have so far only made it on paper. Other than tourism, remittances remain Nepal’s biggest earner and contributor to its foreign currency reserves. However, increased dependence on remittance inflows for any economy has its drawbacks. Undoubtedly, for a country where unemployment is extensive, foreign employment provides a means of livelihood to the deprived.Large amounts of foreign exchange inflow have led to the appreciation of the exchange rate. However, it brings with it social costs. Every year, the death toll of Nepali workers increases. Heavy migration has led to an absentee population of youths and males, resulting in a shortage of labor in both the agriculture and manufacturing sectors. Due to this cause and effect relationship, hindrances to the growth of the economy are becoming more pronounced. There is an urgent need to create domestic employment opportunities in order to free the country from sinking further into the Dutch Disease.87
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REVIEW
Monetary Policy 2012-13
The 2011/12 fiscal year (FY) was a challenging one for the economy. A mounting trade deficit, week industrial activity, and a contraction in investments were the primary factors. Additionally, factors including high inflation, depreciation of the Nepali Rupee (NPR), sluggish real estate and capital markets, and a political deadlock have also contributed to it.
On an optimistic side, the economic performance of the FY 2011/12 in comparison with the previous fiscal years can be considered satisfactory. Preliminary estimations of the Central Bureau of Statistics (CBS) show that GDP grew by 4.6% in the FY 2011/12, against the anticipated growth rate of 5%, the economy had grown by 3.8% in FY 2010/11. As per the preliminary report, the agriculture and non-agriculture sector grew by 4.9% and 4.3% respectively as compared to 4.5% and 3.4% the previous year. Likewise, in FY 2011/12, total consumption as a percentage of GDP is expected to be 90% while total investments as a percentage of GDP is expected to be 32.5%, against 91.4% and 32.5% respectively the previous year. Key Targets-Monetary Policy 2012-13:
• To achieve an economic growth rate of 5.5% and control inflation within 7.5%
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| DOCKING NEPAL’S ECONOMIC ANALYSIS
Table 6: Key Indicators Data Categories
Units
Preliminary Estimation
Forecasted
FY 2011/12
FY 2012/13
GDP Growth Rate
%
4.6
5.5
Inflation-CPI
%
8.0
7.5
Broader Money
%
22.5
15.0
Domestic Credit Growth Rate
%
9.9
16.0
Credit to Private Sector
%
12.5
16.0
Deposit Growth Rate
%
22.4
15.1
12,500.0
11,322.0
Balance of Payment (BOP)
Crore NPR
Source: Monetary Policy 2012/12, NRB
• To maintain a minimum foreign currency reserve sufficient for financing merchandise and service imports for eight months. • Domestic credit is expected to increase by 16%.
• Bank and Financial Institutions (BFIs) credit to private sector is expected to grow by 16%. • BFIs lending to the government is expected to grow by 15.8%. • The BFIs total deposits is expected
DOCKING NEPAL’S ECONOMIC ANALYSIS
Review
to increase by 15.1% to NPR 1,160 billion (USD 14.12 billion).
KEY INSTRUMENTS
• The bank rate and general refinance rate has been fixed at 8%, last year the rate was fixed at 7%. • The provision for determining the interest rate on the Statutory Liquidity Facility (SLF) by adding 3% points onto the weighted average of the 91-days treasury bills rate or prevailing bank rate, whichever is higher, has been changed. From now onwards, the SLF will be provided on the bank rate itself. • To encourage investments in productive sectors, Nepal Rastra Bank (NRB) will continue to provide refinancing to BFIs against performing loans and has decreased the refinancing rate; o Agriculture and Hydropower at 6% from 6.5% o Productive sectors at 6% from 7% o Fisheries and poultry farming at 6% • Moreover, BFIs can only charge the consumers up to a maximum of 9% for loans of the type given above • Special refinancing rate for sick industries, cottage industries, export oriented business and foreign employment will continue at 1.5%. BFIs can charge a maximum of 4.5% interest on such loans.
• Lending to “deprived sectors” has been increased by 0.5% as per the target set by the monetary policy of FY2011/12. Commercial banks, development banks and finance companies need to increase its “deprived sector” portfolio to 4%, 3.5% and 3% respectively. • Due to tight liquidity, the “Cash Reserve Ratio” (CRR) was decreased by 0.5 basis points to 5% in the last fiscal year. However, with the ease in liquidity, the CRR has been changed. From now onwards, commercial banks, development banks and finance companies will have to maintain CRR at 6%, 5.5% and 5% respectively. • The Repo and Reverse repo bidding period has decreased to 28 days from 45 days. • The Inter-bank transactions between BFIs should be of a maximum 7 days. • Provisions will be made to make online bidding system for Treasury Bills and Development Bonds. Moreover, a feasibility study will be conducted to understand the viability of active transactions of government bonds in the secondary market. • New license approvals for commercial banks, development banks and finance companies are on hold; however it will not implement this provision on approval sought for establishment of special institutions focused on agriculture, power and physical infrastructure developments. • To encourage mergers between BFIs
and to work on introducing policies for acquisition. • To formulate a National Financial Literacy Policy and Financial Sector Development strategy to increase people’s access to formal financial services. Also, to establish a new Financial Stability Unit to ensure financial stability and publish financial stability reports. • As per the policy, gradually increase the deposit insurance amount to NPR 500,000 (USD 6,088), the deposit insurance amount will be increased to NPR 300,000 (USD 3,652) from the existing NPR 200,000 (USD 2,435) by the end of FY 2012/13. • Prompt Corrective Action (PCA) can be implemented based on liquidity and Non-Performing Assets (NPA) in addition to the current provision for Capital Adequacy. • Productive sector lending by BFIs, especially in agriculture, energy, tourism, small and cottage industries must be a minimum of 20% of their total loan portfolio. • BFIs having deposits above NPR 2 billion (USD 24.35 million) should implement stress testing as per the Stress Testing Guidelines. • BFIs should conduct system audit and comply with the Information Technology guidelines. • Separate directives to be developed for Micro-finance Companies. • Customers applying for loans from BFIs above a certain limit should
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compulsorily provide their PAN number. • Provisions will be made so that commercial banks will be allowed to invest up to 30% of its deposits in foreign banks in low risk investment instruments such as; call deposits and Certificate of Deposits (CDs) for up to 2 years. • While importing goods through Draft or Telex Transfer (TT) other than from India, the cap has been increased from USD 25,000 (NPR 2 million) to USD 30,000 (NPR 2.5 million). • The limit on the foreign exchange of USD 5000 (NPR 410,700) for a year against the passport has been removed. Now onwards a person can avail up to USD 2,500 (NPR 205,350) for each trip during the year. Moreover, individuals will be able to avail up to USD 5,000 against the passport if the purpose of trip is to participate in promotional activities such as trade fairs and seminars. • Nepali citizens having foreign currency accounts will be able to withdraw up to USD 5,000 (NPR 410,700) per year without going to the central bank for approval.
INTEREST RATE CORRIDOR
One of the highlights of the 2012/13 Monetary Policy is about gradually introducing an ‘Interest rate corridor’. This is in response to yield on short term money market instruments, which have been minimal but volatile, and the weak relationship between yields on short term rates verses lending
and deposit rates. The monetary policy seeks to addresssuch this market volatility and discrepancies by bringing the ‘base rate’ for lending and short term money market instruments rates within a certain ‘band’. With the introduction of the ‘base rate’, BFIs will have to determine their interest rates according to the ‘base rate’; this is expected to control the huge gap between rates on deposits and lending. Table 7: Yield on short term investments S.N
1
2
Short Term Interest Rates (%)
15-July2010
15-July2011
15-July2012
Weighted Average Treasury Bills 28-Days
7.89
8.42
0.06
91-Days
8.51
8.72
0.27
182-Days
9.2
8.69
1.17
364-Days
9.2
8.64
2.2
Weighted Average Interbank
2
6.81
0.55
Source: NRB
The ease in liquidity has led to a dramatic drop in the yield on short term money market instruments. Amid limited avenues to invest surplus funds, the minimal return on such instruments means BFIs will not be able to reduce their cost of funds. Hence, they are not been able to reduce their lending rate and have been transferring this cost to borrowers.
• Only one individual from the same family, firm, company, unified corporation or single group will be allowed to be a member of the board/chief executive of BFIs. • NRB has allowed financial institutions, including Development Banks and Finance Companies, to maintain interest fetching call accounts for one more year. • Board members, chief executives, and management-level employees of BFIs have been barred from acquiring loans, other than education, hire purchase and home loans, and loans for household purposes from any BFI in the country. However, the central bank has clarified that it has forbidden them from taking personal loans, and that they are free to take business loans. The directive has also instructed BFIs not to renew such loans at the appropriate time. • NRB has directed all BFIs to manage an additional 20% loan loss provision for third party collateralized loans. Furthermore, the directive directs them to make a 20% additional provisioning on third party collateralized loans as their condition deteriorates from good to sub-standard, doubtful and bad loans.
KEY DIRECTIVES
• To control haphazard lending, the NRB has put a cap on overdraft and personal loans to a single borrower atNPR 10 million (USD 121,744). This rule comes into effect immediately in cases of fresh loans; however, BFIs which have issued overdraft loans in excess of NPR 10 million can renew them till mid-July 2013.
Some recent directives and provisions issued by NRB to reform the banking industry:
• BFIs are not allowed to extend any other type of loans to businesses to
DOCKING NEPAL’S ECONOMIC ANALYSIS
Review
OUTLOOK FOR CAPITAL MARKETS clear Trust Receipt (TR) loans. If issued, they have to be categorized as a non-performing loan (NPL). • BFIs will no longer be allowed to cash postdated checks in advance. • The NRB has directed BFIs to allow for the repayment of loans at the existing rate of interest in case the borrower wants to repay outstanding dues following an interest hike without any pre-payment charges.
COMMERCIAL BANK PERFORMANCE ANALYSIS
Most of the commercial banks managed to turnaround their financial results at the end of the fourth quarter of FY 2011/12. As per the published unaudited data, of the 32 commercial banks, 21 banks saw their net profit increase. However, only 13 banks saw their operating profit increase as compared with the previous fiscal year. Likewise, during FY 2011/12, the operating profit margin of commercial banks has only grown by a marginal 1.28% whereas the net profit margin has grown by 12.6% as compared to the previous fiscal year. The commercial banks were able to increase its deposit base by 25.1% while it’s Loans and Advances rose by 16.6%. Moreover, the overall cost of fund for commercial banks decreased by 0.31 points to 8.18% from 8.49% during the fiscal year.
Last year, the Monetary Policy was introduced amidst a high Balance of Payment (BOP) deficit, high inflation, a severe liquidity crisis, and a high Credit to Deposit (CD) ratio in the banking sector. This year, the scenario has changed dramatically with liquidity at a very high rate within the banking system. The structure of this year’s monetary policy is cautious and balanced as a tight policy could adversely affect investments and economic growth, while a loose policy could increase investments in unproductive sector and accelerate consumption, leading to inflationary pressures. The target of controlling inflation within 7.5% seems ambitious, especially with a huge trade deficit and a depreciating Nepali Rupee. Recently, Nepal’s neighbors India and China have loosened their monetary policy to counter a decline in economic growth which is expected to increase inflationary pressure on imports. Reducing the refinancing rates for productive sectors like agriculture and hydropower to 6% and the introduction of an ‘interest rate corridor’ are welcome steps. However, the NRB is yet to reveal how the “interest rate corridor policy” will be executed. Proper homework is needed to ensure that the policy is able to address the current issues with the interest rates discrepancy. Likewise, the NRB’s decision to increase the cap for foreign exchange against the passport is another appreciable step. The central bank has increased the CRR ratio to control money supply in the system. However, the question remains - is it too early to increase the CRR ratio or should the central bank adopt other measures to control the money supply? Since BFIs are struggling to reduce its lending rate due to a high cost of funds, the new provision will further impact its position and make credit even more expensive as the money parked in CRR yields zero return. Question must be raised on what the central bank is looking at. Is the policy looking towards regulating prudently or exerting more control over BFIs?
On a positive note, the NRB plans to introduce a policy on acquisitions which is the need of the day, as it would differentiate mergers from acquisitions. The acquisition of BFIs in distress or their good assets is the proper modality. However, news of a forceful merger policy against BFIs reluctant to merge appears to be more controlling than regulatory. Some of the recent directives and provisions issued by NRB are also encouraging from a governance perspective. Not allowing board members, chief executives and top level management of BFIs to take personal loans is an appreciable step. However, a clear time frame should have been provided for not renewing such loans. Similarly, allowing borrowers to make advance repayment of loans without any pre-payment charges is another sound step. However, directing BFIs to manage an additional 20% loan loss provision for third party collateralized loans seems bit harsh to a large stakeholders group. The stagnant real estate sector has continued to sabotage BFI profits as their provisioning for non-performing loans has seen a surge. However, the monetary policy hardly speaks of the real estate sector or the capital market. Surprisingly, most of the commercial banks have managed to end the fiscal year on a positive note despite their weak financial performance till the third quarter of the FY 2011/12. Since only 13 commercial banks were able to increase their operating profit during the fiscal year, it signals a doubt over the sustainability of profit booked by these banks. Many banks have managed to book net profit due to huge write backs and foreign exchange gain. BFIs have failed to capitalize on the ease in liquidity as demand for credit has seen a nose dive with a drop in economic activities. Banks have also failed to reduce lending rates due to the high cost of funds. It will be a challenge for BFIs to manage their portfolios efficiently in days ahead, amidst a tighter Monetary Policy and unfavorable business environment.
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301.3
161.0
240.0
210.3
200.1
139.2
160.4
140.0
131.2
143.0
247.9
160.4
169.4
161.8
218.5
210.2
224.6
200.0
201.5
200.0
200.0
200.0
140.0
163.1
140.0
120.0
108.0
201.6
Nepal Investment
Standard Chartered
Himalayan Bank
Nepal SBI Bank
Nepal Bangladesh
Everest Bank
Bank of Kathmandu
NCC Bank
NIC Bank
Lumbini Bank
Machhapuchchhre
Kumari Bank
Laxmi Bank
Siddhartha Bank
Global IME Bank
Citizens Bank
Prime Commercial
Bank of Asia Nepal
Sunrise Bank
Grand Bank
NMB Bank
KIST Bank
Janata Bank
Mega Bank
Commerz & Trust
Civil Bank
Century Bank
Sanima Bank
38.0
549.8
947.4
6,831.4
Nepal Bank
Rastriya Banijya
Agriculture Dev.
Total
Sector
203.0
Nabil Bank
Public Banks
Paid up Capital
Bank
2,039.5
484.9
-829.5
-445.0
22.4
7.8
2.8
3.9
15.2
13.4
24.4
26.7
30.2
27.8
37.5
58.1
35.6
59.3
70.0
77.6
88.6
16.8
61.3
108.1
52.8
143.9
280.5
83.8
120.4
264.8
323.7
346.7
425.5
Reserve & Surplus
69,394.1
3,439.5
7,394.1
4,680.4
635.7
135.9
295.2
248.8
537.3
350.2
1,580.8
1,286.6
932.3
1,339.2
1,367.7
1,893.9
1,347.8
1,506.6
2,157.6
1,830.0
1,698.6
1,641.0
677.3
1,839.4
1,095.1
2,101.8
4,112.8
1,151.2
4,241.5
4,092.1
3,799.9
5,013.8
86,786.1
4,323.9
8,777.5
5,604.3
1,117.9
446.1
880.8
628.2
919.3
772.3
2,017.4
1,598.3
1,502.3
1,875.6
1,535.1
2,399.1
1,735.5
2,693.4
2,594.9
2,283.2
2,198.5
2,154.5
766.9
2,211.2
1,648.5
2,499.1
5,000.6
1,695.3
5,333.7
4,773.1
3,596.6
5,701.1
5,502.4
4 QTR
4 QTR
4,970.0
FY 11/12
FY 10/11
DEPOSIT
25.1
20.5
15.8
16.5
43.1
69.5
66.5
60.4
41.5
54.7
21.6
19.5
37.9
28.6
10.9
21.1
22.3
44.1
16.9
19.9
22.7
23.8
11.7
16.8
33.6
15.9
17.8
32.1
20.5
14.3
-5.7
12.1
9.7
% Change
52,656.0
3,446.0
3,685.1
2,671.0
637.1
118.7
312.4
249.1
476.8
358.4
1,343.7
1,134.3
904.3
1,191.0
1,163.9
1,689.5
1,251.4
1,277.9
1,838.4
1,538.9
1,492.6
1,473.1
621.3
1,493.4
923.0
1,795.7
3,166.2
1,023.7
2,136.6
3,296.8
1,866.2
4,188.8
3,890.5
4 QTR
FY 10/11
61,389.9
3,939.3
4,044.9
2,969.9
953.0
420.2
775.2
559.9
793.4
746.1
1,496.7
1,246.8
1,142.7
1,438.1
1,225.5
1,903.7
1,441.5
2,076.4
2,021.8
1,669.7
1,787.8
1,610.6
697.9
1,724.2
1,290.1
1,931.9
3,616.7
1,094.3
2,614.2
3,596.8
1,982.9
4,291.2
4,286.8
4QTR
FY 11/12
16.6
14.3
9.8
11.2
49.6
253.9
148.2
124.8
66.4
108.2
11.4
9.9
26.4
20.7
5.3
12.7
15.2
62.5
10.0
8.5
19.8
9.3
12.3
15.5
39.8
7.6
14.2
6.9
22.4
9.1
6.2
2.4
10.2
% Change
LOANS AND ADVANCES
1,617.4
-52.2
71.7
22.1
24.2
1.3
0.2
3.6
3.8
5.4
36.3
32.5
14.2
7.5
32.9
56.9
30.6
21.4
47.0
58.9
38.1
11.0
22.6
76.1
28.1
90.3
141.8
42.4
67.4
124.3
170.7
178.4
208.1
4QTR
FY 10/11
1,638.2
-22.9
41.52
37.8
19.4
0.3
4.3
2.5
11.2
9.2
18.6
6.0
26.7
12.0
32.7
51.9
26.3
45.6
51.8
55.3
43.0
-44.9
22.4
61.7
12.5
88.3
153.9
36.9
66.7
164.2
169.4
179.5
254.5
4 QTR
FY 11/12
1.28
-56.16
-42.08
71.34
-19.68
-75.38
2,272.22
-32.69
193.98
71.88
-48.75
-81.51
87.68
60.67
-0.55
-8.87
-14.10
113.30
10.19
-6.11
12.88
-508.27
-0.71
-18.85
-55.36
-2.25
8.52
-12.84
-1.14
32.05
-0.77
0.64
22.27
% Change
OPERATING PROFIT
1,376.7
157.6
171.6
38.3
15.5
0.8
0.1
2.3
2.4
3.4
5.4
22.2
8.9
4.4
21.0
36.0
19.8
22.5
31.1
37.8
25.1
0.9
39.0
49.6
22.1
60.5
93.1
-13.8
46.5
89.3
111.9
117.6
133.8
4 QTR
FY 10/11
1,550.0
186.1
144.6
40.7
12.1
0.3
2.4
1.5
7.1
5.7
10.0
5.8
18.4
14.7
22.1
33.9
22.3
35.3
33.0
35.6
27.6
1.1
19.3
39.4
17.6
60.8
109.1
70.3
47.6
105.3
116.9
131.8
171.8
4 QTR
FY 11/12
NET PROFIT
12.6
18.1
-15.7
6.1
-22.1
-64.6
2,045.5
-32.2
193.8
67.5
85.6
-73.6
106.3
231.7
5.2
-6.0
12.4
57.0
6.1
-5.7
21.3
-50.4
-50.4
-20.5
-20.2
0.4
17.1
609.0
2.4
17.8
4.5
12.1
28.4
% Change
2.51
8.99
10.91
5.29
0.00
0.00
0.00
0.00
0.00
0.00
2.54
0.27
1.95
3.51
1.40
0.57
1.17
2.52
0.79
0.90
1.12
4.17
0.96
0.60
3.82
1.82
0.34
17.99
1.10
4.22
0.62
0.94
1.77
4QTR
FY 10/11
1.99
6.35
7.27
5.23
0.48
0.00
0.00
0.00
0.49
0.00
3.94
2.45
1.25
3.03
3.29
0.47
2.01
1.54
1.52
0.62
2.24
2.49
0.47
0.73
2.73
2.30
0.84
4.29
0.54
2.06
0.78
1.98
2.26
4 QTR
FY 11/12
NPL (%)
TABLE 8: FINANCIAL HIGHLIGHTS OF COMMERCIAL BANKS-UNAUDITED AS OF 4TH QUARTER FOR THE FY 2011/12 (NPR IN 10 MILLIONS)
8.49
5.89
NA
5.33
10.48
10.83
9.74
10.78
10.26
9.51
8.72
9.96
8.85
9.19
10.28
9.77
9.60
9.08
9.06
9.15
9.56
8.75
9.18
8.76
8.54
6.79
6.91
6.47
5.19
7.15
3.94
8.10
7.34
4 QTR
FY 10/11
8.18
6.84
NA
5.03
9.91
10.44
10.52
9.45
8.49
9.30
8.41
9.02
8.74
9.34
9.63
9.61
7.74
8.50
8.88
8.69
8.43
9.84
9.24
8.87
8.50
7.00
6.66
7.29
5.49
6.94
3.44
7.80
5.43
4 QTR
FY 11/12
-0.31
0.95
NA
-0.30
-0.57
-0.39
0.78
-1.33
-1.77
-0.21
-0.31
-0.94
-0.11
0.15
-0.65
-0.16
-1.86
-0.58
-0.18
-0.46
1.09
0.06
0.06
0.11
-0.04
0.21
-0.25
0.82
0.30
-0.21
-0.50
-0.30
-1.91
Change
COST OF FUND (LCY)
DOCKING NEPAL’S ECONOMIC ANALYSIS
REVIEW
Capital Markets
After three years of consecutive downward momentum, the Nepal Stock Exchange Index (NEPSE) finally showed some resilience in FY 2011-12 as it gained a valuable 27.2 points to close the fiscal year on a positive note at 389.72 points.
During the fiscal year, the market slumped to as low as 298.79 points in March 2012, while soaring to as high as 432.82 points in May 2012. Moreover, albeit weekly, investors’ sentiment has seen a notable improvement. Total annual market turnover increased by an encouraging 56.37% in FY 2011/12 as compared with the previous FY 2010/11.Even though the index has surged by 7.50% in FY 2011/12, looking at year on year performance, the marginal surge can be considered satisfactory especially after booking massive losses in the past three Unlike the previous fiscal year, except for the Development Banking sector and the Finance Companies Sector, all other sub-indices ended in the green. The Insurance sector (+22.32%) followed by the ‘Others’ sector (+20.04%) were the biggest gainers of the year. Similarly, the Hotels Index (+18.52%) also booked decent gain. On an optimistic side, the most weighted Commercial Banking sector (+9.08%)managed to gain a valuable 29.86 points, and the
Hydropower Sector (+3.51%) also gained slightly. Development Banks (-16.56%) continued to shed value as it lost 48.72 points to close at 245.53 point similarly, Finance Companies (-12.11%) toppled by 36.63 points to close at 265.66 points. NEW DEVELOPMENTS
Mutual Fund
The much awaited mutual funds may be rolling out in the Nepali capital market some time soon as Securities Board of Nepal (SEBON) has approved the mutual fund guidelines which is expected to provide operational clarity to mutual fund companies. Siddhartha Capital, a subsidiary of Siddhartha Bank, and Nabil Invest a subsidiary of Nabil Bank obtained licenses from SEBON to operate mutual fund. However, as mutual fund guidelines were not approved they were awaiting for its approval.
The Ministry of Finance has also approved amendments to the Mutual Fund Regulation, 2067. As per the new amendment, Non-Resident Nepali (NRN) Investment companies will be allowed to hold up to 49% stake in an asset management company. Table 9: NEPSE Index performance over the years Fiscal Year
NEPSE Index
% change
FY 2003/04
222.04
FY 2004/05
286.67
29.11%
FY 2005/06
386.45
34.81%
FY 2006/07
657.47
70.13%
FY 2007/08
963.36
46.53%
FY 2008/09
749.11
-22.24%
FY 2009/10
477.73
-36.23%
FY 2010/11
362.52
-24.12%
FY 2011/12
389.72
7.50% Source: NEPSE
NEFPORT ISSUE 10 SEPTEMBER 2012
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35
Review
Figure 13: NEPSE Index Performance in the FY 2011-12
OUTLOOK
CDS
Central Depositary System and Clearing Limited (CDSCL) finally started its operation from the beginning of FY 2012/13. However, the dematerialized shares (to convert physical paper certificate into electronic form) through CDS will not be able to trade on NEPSE until a provision for online clearing and settlement that supports CDSCL is installed at NEPSE. The
Indicators
FY 2010-11
FY 2011-12
% Change
NEPSE Index
362.52
389.72
7.5
Total Turnover ( In NPR billion)
6.58
10.29
56.37
As of now, two merchant bankers, Ace Capital and Civil Capital have received the Depositary Participant (DP) license from CDSCL. Ace Capital has already started to render dematerialization services to investors. Moreover, only the share certificates of Agricultural Development Bank and Ace Development Bank could be dematerialized at the moment as only these companies have under gone an agreement with CDSCL. As per CDSCL, six additional listed companies are in the pipeline to sign an agreement with them to dematerialize their shares.
Commercial Bank Index
328.71
358.57
9.08
Margin Lending
Development Bank Index
294.15
245.53
-16.56
Hydropower Index
660.38
683.56
3.51
Finance Index
302.29
265.66
-12.11
Insurance Index
407.01
497.86
22.32
Others Index
492.31
590.98
20.04
Hotels Index
412.59
489.04
18.52
Table 10: Key market indicators
Source: NEPSE
36
full-fledged operation of CDSCL and online trading of dematerialized shares is expected to start from mid-January 2013.
| DOCKING NEPAL’S ECONOMIC ANALYSIS
Both SEBON and Nepal Rastra Bank have agreed to allow margin lending based on stock brokers guarantee. Stock brokers can now function as an enabler between financial institutions and share investors who want to have a share purchase loan (margin loan) against share purchase invoices. Earlier, BFIs used to issue margin loans only against share certificates which were in the name of the borrower itself.
At the end of the first month of the current fiscal year 2012/13, the market has gained 2.29 points to close at 392.01 points. After booking losses in three consecutive years, the NEPSE index managed to book a moderate gain of 7.5% in the fiscal year 2011/12, this should be taken as an indication of improving investors’ confidence in secondary markets amidst deepening political instability. This is further justified by a notable surge in the annual turnover by 56.37%. On a fundamental side, the fourth quarterly results or the annual result of listed companies are slowly coming out. Since almost 80% of listed companies on the NEPSE are BFIs, the future direction of the market depends upon the financial performance of these listed BFIs and their ability to distribute good returns to its shareholders. Moreover, improvements made at introducing mutual fund and bringing the CDS into full operation, appointing Citizens Investment Trust (CIT) for the role of market maker, paving the way to allow NRNs to invest in Nepali capital market, decreasing yields on bank deposits, and arrangements being made for easy credit availability for share purchases through BFIs will definitely help to strengthen market dynamics in the days ahead.
DOCKING NEPAL’S ECONOMIC ANALYSIS
Review
18.
Endnotes 1.
2. 3.
4.
5.
6.
7. 8. 9.
10.
11.
12.
13.
14.
15.
16.
17.
Agriculture and Forestry, Economic Survey 2011-12, Ministry of Finance, Accessed August 27,2012, http://www.mof.gov.np/ contentFiles-Content-dW0= Fertilizer Scarcity, Accessed August 27, 2012, http://thtimes.pugmarks. in/fullNews.php?headline=Fertilizer+scarcity&NewsID=337171 Recent Macroeconomic Situation 2068-69, Accessed August 27, 2012 http://www.nrb.org.np/ofg/press.php?tp=recent_ macroeconomic&&vw=15 Government to Distribute Organic Manure, Accessed August 27, 2012, http://www.ekantipur.com/the-kathmandu-post/2012/03/24/nation/govtto-distribute-organic-manure/233029.html Government to Distribute Organic Manure, Accessed August 27, 2012, http://www.ekantipur.com/the-kathmandu-post/2012/03/24/nation/govtto-distribute-organic-manure/233029.html Agriculture and Rural Development, Accessed August 27, 2012, http:// data.worldbank.org/indicator/AG.LND.IRIG.AG.ZS/countries/NP-8SXM?display=graph National Agricultural Research Council, Accessed August 27, 2012, http://narc.gov.np/narc/index.php Energy based food security in Nepal, Acccessed August 10, 2012, http://www.moad.gov.np/geed/art16.pdf WTO aid for ginger production, Accessed August 10, 2012, http://www. ekantipur.com/the-kathmandu-post/2012/06/18/money/wto-aid-forginger-production-export/236198.html Nepal Trade Integration Strategy, Accessed August 10, 2012, http:// www.mocs.gov.np/uploads/NTIS%202010%20exe%20sum%20 160610.pdf China agree to import Nepali Citrus Fruits, Accessed August 10, 2012, http://www.ekantipur.com/2012/07/08/business/china-agrees-to-importnepali-citrus-fruits/356799.html Government Private Partnership in Education Expenditure Priorities, Accessed August 27, 2012, http://thehimalayantimes.com/fullTodays. php?headline=Government-private+partnership+in+education+Expen diture+priorities+&NewsID=344497 ‘Baglung VDCs find novel idea to increase child enrollment’, Accessed July 10th, 2012, http://ekantipur.com/2012/06/20/national/baglungvdcs-find-novel-idea-to-increase-child-enrolment/355848.html ‘SLC results out; 47.16 pc pass’, Accessed July 23rd, 2012, http:// www.ekantipur.com/2012/06/13/editors-pick/slc-results-out-47.16-pcpass/355504.html Poor SLC Results point to School Sector Reform Programme Failure, Accessed August 27, 2012, http://www.ekantipur.com/the-kathmandupost/2012/08/02/nation/poor-slc-results-point-to-school-sector-reformprogramme-failure/237939.html ‘1136 Children in Myagdi Have No Access To Education’, Accessed July 23rd, 2012, http://myrepublica.com/portal/index.php?action=news_ details&news_id=38089 ‘School Children Injured as Baidya Aligned Unionists Attack, Burn
19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.
34. 35.
36.
37.
38.
39.
40. 41.
Buses’,Accessed July 24th, 2012, http://www.myrepublica.com/portal/ index.php?action=news_details&news_id=38458, Students Target Foreign-Named Varsities in Nepal’, Accessed July 24th, 2012, http://www.hindustantimes.com/world-news/Nepal/ Students-target-foreign-named-varsities-in-Nepal/Article1-892825.aspx “Diesel, kerosene dearer by Rs 4 per liter”, Republica, June 19, 2012 “Govt approves Rs 1.40 billion loan to NOC; normal supply of fuel to resume today”, www.nepalnews.com, June 21, 2012 “Electricity tariff up 20%”, Republica, June 29, 2012 “Govt to finalize plan for separate electricity transmission company”, Republica, July 14, 2012 “Dual LPG pricing from Aug 17”, Republica, July 22, 2012 http://nepaloil.com.np/main/ “IOC to send details of pipeline construction”, The Himalayan Times, July 24, 2012 “Task force formed to ease hydro projects’ access to finance”, Republica, June 6, 2012 MukulHumagain, Ashok Thapa, “A glimmer of hope: PDA template gets final shape, finally”, The Kathmandu Post”, June 14, 2012 Nepal Oil Corporation,http://nepaloil.com.np/main/ “NOC’s accounting system under scanner”, The Himalayan Times, June 26, 2012 “NOC to diversify business”, The Himalayan Times, July 7, 2012 “NEA to buy electricity generated from waste”, The Kathmandu Post, July 4, 2012 Development Cooperation Report 2010-11, Ministry of Finance Accessed August 02, 2012, http://www.mof.gov.np/files/DCR.pdf ADB to aid water projects worth USD 11 million, Accessed August 03, 2012, http://epaper.thehimalayantimes.com/PUBLICATIONS/ THT/THT/2012/08/03/ArticleHtmls/ADB-to-aid-water-projects-worth11m-03082012010038.shtml?Mode=1 NPR 5.5 billion Japanese grant for Sindhuli Road, Accessed August 03, 2012, http://www.np.emb-japan.go.jp/ann/100712.html Japan’s Assistance for the Project for Improving Livelihood of Farmers in the Hilly Areas of Sindhuli District, Accessed August 03, 2012, http:// www.np.emb-japan.go.jp/ann/050712.html Nepal get USD 8 million from UN Peacebuilding Fund, Accessed August 03, 2012, http://www.thehimalayantimes.com/fullNews.php?he adline=Nepal+gets+%248+Million+from+UN+Peace+building+Fund&N ewsID=337803 World Bank Links Financing to Results under a new Bridges Maintenance and Improvement Program, Accessed August 03, 2012, http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK: 23231312~pagePK:64257043~piPK:437376~theSitePK:4607,00.html USDA provides USD 6 million grant, Accessed July 31, 2012, http:// www.wfp.org/news/news-release/united-states-boost-school-feedingprogramme-nepal OFID pledges USD 20 million loan assistance, Accessed July 31, 2012, http://thehimalayantimes.com/fullTodays.php?headline=OFID+pl edges+%2420m+assistance+loan&NewsID=334705 Nepal, Project Portfolio, Accessed July 31, 2012, http://www.ofid.org/ COUNTRIES/Asia/Nepal.aspx Kuwait okays soft loan of USD 30 million for Budhi Ganga Hydropower, Accessed July 16, 2012, http://www.ekantipur.com/the-kathmandupost/2012/05/10/money/kuwait-okays-30m-soft-loan-for-budhi-
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ganga/234742.html 42. Kuwait Fund for Arab Economic Development, Accessed July 16, 2012, http://www.kuwait-fund.org/index.php?option=kfaedprojectdetails& id=4132 43. 10ADB pledges assistance of USD 56.8m for urban development , Accessed July 09, 2012, http://pid.adb.org/pid/LoanView.htm?projNo=4 2161&seqNo=02&typeCd=2&projType=GRNT 44. Aid Transparency Study Findings, Accessed August 01, 2012, www. freedomforum.org.np%2Fcontent%2Fnews-and-events%2F190sharing-workshop-on-aid-transparency-study-findings.html&ei=UlwbUITDIjVrQeuw4HQAg&usg=AFQjCNEYEUeCSm8dbeZpAYTOFm BS-w9uKw 45. Development Cooperation Report, Accessed August 2, 2012,http:// www.mof.gov.np/files/DCR.pdf 46. ChandniHamal, “Separate ward for elderly in Bharatpur Hospital”,Republica, 9 July (http://www.myrepublica.com/portal/index. php?action=news_details&news_id=37618) 47. “20 smokers arrested,” The Himalayan Times, 8 July (http://www. thehimalayantimes.com/fullNews.php?headline=20+smokers+arrested &NewsID=338931) 48. ArjunPoudel.,”Dialysis for just Rs 250”, Republica, 11 July 49. ArjunPoudel. “Dengue, chikungunya surveillance in Ktm in July,” Republica. 26 June. (http://www.myrepublica.com/portal/index. php?action=news_details&news_id=36929) 50. Buddha Basnyat, “Worse than cigarettes”, The Nepali Times, 22 June 2012 51. Oxford University Press, (http://heapol.oxfordjournals.org/content/ early/2012/07/06/heapol.czs062.short) 52. “Nepal Economic Survey 2011-12” 53. “Expression of Interest for Kathmandu-Nijgadh-PathlaiyaTerai/ Madhes Expressway Project”, Ministry of Physical Planning, Works and Transport Management. 54. http://thehimalayantimes.com/fullTodays.php?headline=SC+stays+govt +plan+to+upgrade+TIA+&NewsID=341485 assessed August 8, 2012 55. MukulHumagain, PranabKharel “ TIA MGMT handover row: IL&FS seeks domestic airport mgmt” The Kathmandu post, July 13, 2012 56. http://www.ekantipur.com/the-kathmandu-post/2012/07/17/money/ pokhara-regional-intl-airport-bid-quotations-higher-than-governmentestimation/237324.html assessed August 8, 2012 57. SamikshaKoirala “Gautam Buddha airport cost doubles to $77m”, Republica, June 26, 2012 58. “Buddha Air to get IFC loan”, The Himalayan Times, July 18, 2012 59. “Government lifts ban on rice export,” The Himalayan Times. 11 July 2012. Accessed on 12 August 2012.http://thehimalayantimes.com/ fullTodays.php?headline=Government+lifts+ban+on+rice+export+&Ne wsID=339277 60. Trade and Export Promotion Center, “Trade Statistics ( First ten months of fiscal year 2068/69).”http://www.tepc.gov.np/news-events/details. php?id=4 61. “Exports up due to plunging rupee,” The Kathmandu Post. 8 July 2012. Accessed on 12 August 2012.http://www.ekantipur.com/thekathmandu-post/2012/07/08/money/exports-up-due-to-plungingrupee/236952.html 62. The exchange rate was USD 1=NPR 71 per US dollar at the beginning of FY2011-12 and USD 1= NPR 86 at the end of the first 10 months of FY2011-12
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63. UN Economic and Social Commission for Asia and the Pacific (ESCAP), “Economic and Social Survey of Asia and the Pacific 2012.” 64. Terms of trade refers to the value of a country’s exports relative to that of its imports. 65. “Nepal’s terms of trade declined by 31pc annually over last decade,” The Kathmandu Post. 12 July 2012. Accessed on 13 July 2012. (http:// www.ekantipur.com/the-kathmandu-post/2012/07/12/money/nepalsterms-of-trade-declined-by-31pc-annually-over-last-decade/237127. html) 66. Nepal Rastra Bank. “Macro-economic Situation (Based on the Eleven Months’ Data of FY 2011/12)” 67. “Optimistic outlook: Revenue collection in the valley witnessed progressive growth”, The Himalayan Times, July 28, 2012. 68. “The Unified Directives 2069” Nepal Rastra Bank dated mid july 2012 69. “Foreign employment bond fails”, The Himalayan Times, July 12, 2012 70. “Qatar top hirer of Nepal migrant worker”, The Kathmandu Post, July 17, 2012 71. “Nepali workers to face competition in Malaysia”, The Himalayan Times, July 12, 2012 72. “British Army redundancies”, http://ukinnepal.fco.gov.uk/en/ news/?view=PressR&id=775008582 73. Mahesh Acharya, “New passport stickers helping curb forgery”, The Kathmandu Post, July 18, 2012 74. “Huawei bags Nepal Telecom’s 4.8 million GSM lines order”. The Economic Times, June 26, 2012 & “NT hires German firm to oversee 10m GSM lines Project”, Republica, July 19, 2012. 75. “http://www.cellular-news.com/story/54780.php” assessed August 8, 2012. 76. “Government to monitor telecom service quality”. The Kathmandu Post June 26, 2012. 77. Tourist Arrival statistics, Nepal Tourism Board (http://welcomenepal. com/promotional/about-us/tourist-arrivals/) 78. “BB Airways to fly to Japan from October 13, The Himalayan Times, 25th July, 2012 79. “Pokhara regional Int’l Airport Bid: Quotations higher than Government estimation”, The Kathmandu Post, 18th July,2012 80. “Resorts inside CNP to operate at least till mid-December”, Republica, 14th July, 2012 81. “NPR 250m invested in new hotels in Bhedetar, Hile”, The Kathmandu Post, 7th July, 2012 82. “Government fails to implement tourism projects”, The Himalayan Times, 4th July, 2012 83. “TAAN mulling compulsory guides for solo trekkers”, The Kathmandu Post, 21st July, 2012 84. “Tourism entrepreneurs of Ilam, Kaski join hands”, Republica, 24th June,2012 85. “AirAsia X commences flights to Kathmandu”, Republica, 4th July,2012, “Malaysia Airlines Introduces New Promo Fares To Kathmandu”, www. malaysiaairlines.com, “Tibet Airlines to fly to Kathmandu”, Republica 28th July, 2012 86. “TAAN to promote Nepal for all seasons”, Republica, 24th July,2012 87. Dutch Disease is a conundrum that generates from a country getting increasing amounts of revenues either from natural resources or increasing inflows in remittances. This high demand in currency leads to currency appreciation, resulting in loss of competitiveness in the world market
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