NepaliEconomy.com: October 2008

Thursday, October 23, 2008

NRB tightens minimum reserve rules for banks

NRB tightens minimum reserve rules for banks
eKantipur, 22-Oct-08

In a bid to get sufficient capital reserves in registered banks and financial institutions and to ensure financial stability, Nepal Rastra Bank, the central bank, has enforced Prompt Corrective Action (PCA) with effect from Oct. 17.

NRB said in a statement Wednesday that any bank or financial institution under category 'A', 'B' or 'C' will immediately be punished as per the existing law if it is not found to be maintaining the capital adequacy ratio fixed by the regulator.

The central bank said it will prevent the concerned banks and financial institutions from declaring dividends and bonus shares if their minimum capital ratios are found to be up to two percentage points less than the required ratio.

Similarly if the capital reserves are found to be between 2 and 4 percentage points less than the specified limit, the central bank would impose a cap on the amount of loans to be issued by those banks and financial institutions.

For those banks and financial institutions whose minimum capital adequacy ratios are less by 4 to 6 percentage points than the level fixed by the regulator, then they will be restricted from opening new deposit accounts and issuing additional loans, NRB said.

Similarly, NRB can bar the concerned banks and financial institutions from increasing salaries and benefits of employees, recruiting additional workforce as well as promoting staff in case the capital reserves maintained by them are found to be 6 to 8 percentage points less than the minimum capital reserve ratio.

Under the new action, NRB will declare banks and financial institutions troubled, if their capital reserve is found to be 8 percentage points or more, less than the capital reserve ratio fixed by NRB.

The central bank will initiate the process of revoking licenses and liquidation of those banks and financial institutions if they fail to increase the capital reserves to the required level within six month of the date they were declared troubled, said the central bank.

Nepali rupee slips to record low

Nepali rupee slips to record low
eKantipur, 22-Oct-08

Amid huge capital outflows by foreign funds in India, the Nepali rupee has plunged to a historic low against the greenback to Rs.79.30 on Thursday. The rupee's previous low against the US dollar was in August 2002 when it dropped to Rs.78.60.

Nepal Rastra Bank (NRB), the country's monetary authority, has fixed a selling rate of Rs.79.30 for a US dollar for Thursday's trading. NRB's selling rate for Wednesday's trading was Rs.78.94, The Nepali rupee, which is pegged with the Indian currency, has already depreciated by over 24 percent this year. A rupee was traded at Rs.63.85 on Jan. 1.

According to the online edition of The Economic Times, the fall of the Indian rupee against the dollar was due to an increased demand for the dollar by importers and capital outflow of foreign funds. At the Interbank Foreign Exchange (Forex) market, the local unit, which remained steady at 49.00 on Tuesday, fell by 25 Indian paise to 49.25 against the greenback Wednesday.

The depreciation in the Nepali rupee, meanwhile, is good news for the country's export sector, which has been going through a rough patch in recent years. However, it would also make imported goods and raw materials more expensive, thereby pushing the inflation further up. More importantly, the depreciation of the Nepali rupee will increase the country's foreign debt repayment liabilities, which will put pressure on the government to manage additional resources this year.

Gold down Rs. 515

The volatile international market has brought down gold prices in Nepal pushing it down Rs. 515 per 10 grams on Wednesday.

According to the Gold and Silver Dealers Association (GSDA), prices of the precious yellow metal went down to Rs. 20,190 per 10 grams on Wednesday from Rs. 20,705 a day earlier. The price was Rs. 20,360 per 10 gram Sunday.

The price of gold in international bullion market dipped to US$759 per ounce (31.11 grams) from US$797 per ounce. However, the silver price rose marginally to Rs. 302 per 10 gram on Wednesday from Rs. 300.

GSDA President Tej Ratna Shakya attributed the fluctuation to the current global financial meltdown.

Wednesday, October 22, 2008

Roundup of Economic & Business News (Sep 1 - Sep 30)

Monday, October 20, 2008

Roundup of Economic & Business News (Aug 1 - Aug 31)

No power, no progress

No power, no progress
ekantipur, 20-Oct-08
RABINDRA NEPAL

Economic revolution is not possible when the country is reeling under an energy shortage

While economists around the globe are working on rigorous causality studies between energy consumption and economic growth, the recent government announcement of attaining double-digit growth has raised the eyebrows of domestic and international policy makers. No doubt, the concept of “double-digit” growth is a sweet surprise for a struggling economy. However, the timing of such an announcement appears to be overtly ambitious and rather spurious given the energy crisis the country is wallowing in. It also exposes the newly formed government's negligence in understanding that energy security is an urgent necessity to move the economy forward.

Like previous budgets, this year's budget also underscores the importance of the hydroelectricity sector for economic growth. This is not surprising as hydroelectricity remains and will remain the primary source of energy for the country in the foreseeable future.

Unfortunately, the sector has witnessed a distinct and deepening cleavage between theory and practice. As of 2008, the economy has an available capacity of generating 43,000 MW of electric power in economically efficient terms. Ludicrously, the installed capacity amounts to only around 611 MW after taking into consideration projects like Khimti, Bhote Koshi, Indrawati, Chilime and Kali Gandaki “A” pursued under private and public initiatives. The per capita residential electricity usage is about 65 KWh while only 39 percent of the total population benefits from using electricity.

However, that the annual growing demand exceeds the total supply implies that the power market exhibits excess demand. As a result, the system operator (Nepal Electricity Authority) is obliged to maintain a weekly power outage of more than 30 hours as a rationing mechanism. In recent years, consumers have also faced a steep rise in the electricity tariff. The tariff has increased from Rs. 5.50/KWh in 2001 to Rs. 7.50/KWh in 2008 making it one of the costliest in the world.

The inability of Nepal Oil Corporation (NOC) to meet its contractual obligations and make timely payments to the supplier keeps its supply ever vulnerable. Recently, the cash bust, state-owned and inefficient NOC has been provided Rs. 3 billion by the government just to ease the supply of petrol in the market. Transportation bottlenecks across the borders also threaten timely and adequate supply of fuel. More than 200 oil tankers are being used to bring oil from India into Nepal causing immense congestion at the border.

Nonetheless, the attitude of the current government towards the energy sector shows signs of urgency and demonstrates that Nepal remains a resource-rich but policy-poor state.

The Electricity Act of 1992 and the Electricity Regulations Act 1993 have been recently revised by the existing government with a 10-year target to generate 10,000 MW of electricity. While companies producing less than 3 MW of electricity have been exempted from license requirements, power plants generating less than 50 MW are not required to prepare environmental impact reports under the current revised policy. The former reform sounds promising in terms of reducing transaction and opportunity costs associated with unnecessary bureaucratic delays. Exempting firms from license requirements is also about reducing the regulatory burden and hence facilitating market entry.

However, the idea of exempting firms from environmental impact assessments can be seen as a short-term action to meet long-term objectives and has the potential to backfire in the long run. The failure to perceive environmental sustainability in tandem with energy policy can eventually prove to be a huge loss-making business to society. On the other hand, the government has no transparent and elaborate policy to attract foreign investment in hydropower generation from power-hungry neighbouring India and China. Though, the issue of Nepal being a net exporter of electricity to India in the future has been discussed at many forums, the reality is still harsh.

The government's recent decision to import an additional 60 MW of electricity to meet the power shortage is an epitome of the current energy crisis. However, the talk about constructing an oil pipeline connecting the Indian and Nepali markets can be perceived to be a very pragmatic and outward-looking energy policy of the current government. The estimated Rs. 1.6 billion project linking Raxaul with NOC's main terminal located 40 km away at Amlekhgunj will help ease petroleum supplies and reduce prices.

Though the Maoist-led government has shown some signs of a positive attitude towards sectoral reforms in energy and infrastructure, some unavoidable challenges and lucrative opportunities lie ahead. Huge investments are required in the capital intensive power generation industry to meet the estimated production target. One way to boost the level of investment would be through enhanced private sector participation.

Currently, so-called Independent Power Producers (IPPs) are generating 148 MW of electricity. Foreign investment from India and China will also allow for a positive spillover into the economy in terms of technology transfer, employment creation and economic growth as a whole. The Nepali government should cash in on Indian vested interests to invest in hydroelectricity. With demand for power increasing rapidly in India, Nepal's hydroelectricity generation has the potential to meet 10 percent of its electricity demand by 2016/17. Thus, creating a business-friendly environment with proper incentives, security and trust for both foreign and private investors is necessary to fuel investment in generation.

Incentives may take the form of lower taxation, higher profits and lower regulatory burden, but not at the cost of the environment. Increasing the wholesale power supply by involving multiple independent power producers will dilute the market power in generation making electricity prices competitive at the wholesale and retail markets.

Nepal's power market also lacks proper accountability and transparency. Separating transmission and distribution from the vertically integrated Nepal Electricity Authority would generate some degree of accountability, transparency and efficiency in the power sector. This may require formulation of concrete competition laws and laws to safeguard consumers against unwanted monopolistic behaviour. Also, privatization of the moribund and inefficient NOC is greatly needed to generate efficiency in the petroleum market. As old habits tend to die hard, the current government seems to be devoid of any immediate privatisation and liberalisation policies against the cash-strapped NOC. Rather than the government deciding the fate of firms, the baton should be passed to the market itself so that we have no room for inefficiency.