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Nepalnews, 17-Mar-09
Prime Minister Pushpa Kamal Dahal has said the government is preparing to import some 400 to 500 MW of electricity from India in order to address the ongoing power crisis.
Ministers and secretaries had gathered at the PM’s office Tuesday afternoon to discuss solutions to the ongoing power crisis.
The PM also said the feasibility of constructing two 133KVA transmission lines connecting Janakpur-Dhalkebar and Dhalkebar-Kathmandu to import electricity from India would be discussed with other political parties and experts at the meeting, according to Om Sharma, the PM’s press advisor.
The meeting was participated by home minister, finance minister, labour minister, industry minister, and the respective secretaries along with experts in the field.
Meanwhile, finance minister Dr Baburam Bhattarai has blamed the coalition partner UML for the long loadsheding hours.
The plans to install a thermal plant to provide immediate relief to people from load shedding was delayed as the water resource minister was busy in the UML general convention, Bhattarai told journalists at his office Tuesday.
Minister Bhattarai also informed that funds would not be a problem to install such plant. “There should be no load shedding next year,” minister Bhattarai said. “We will install a 200 MW multi-fuel plant and also buy some electricity from India in order to meet the power demand.
Migrant Workers Sending Less Money to Latin America
Wall Street Journal, 17-Mar-09
By MIRIAM JORDAN
Funds sent by overseas workers back to Latin America and the Caribbean are expected to drop steeply in 2009, shrinking a crucial source of cash for many families in the region.
Remittances to the region began to slow in 2008 after a decade of growth, according to the Inter-American Development Bank, as countries such as the U.S., Spain and Japan, slid into recession.
This year, remittances to the region are likely to decline for the first time since the bank began tracking annual flows in 2000, according to a new study by the Washington-based multilateral institution.
Migrant workers -- the lifeline for millions of families in Latin American and the Caribbean -- sent home a record $69.2 billion last year, nearly 1% more than in 2007.
For countries that have reported data for January, totals were down significantly.
Mexico, which receives the lion's share of U.S. remittances, experienced a 12% drop compared to January 2008. In the same month, Colombia suffered a 16% drop, while Brazil saw a 14% decline. Guatemala and El Salvador each experienced an 8% decline.
"While it is too early to project by how much remittances may decline in 2009, this is bad news for millions of people in our region who depend on these flows to make ends meet," said IDB President Luis Alberto Moreno.
Economic pain in Europe and Japan is also likely to echo in Latin America. Brazil and Peru boast significant populations in Japan. Europe attracts many migrants from Andean countries.
U.S.-based migrant workers who send money home -- many of them undocumented immigrants who entered the country illegally -- have been under pressure for some time. The gradual economic slowdown, negative immigration environment and mortgage meltdown have all taken a toll on workers.
Despite the challenging economic climate, remittance flows recently kept growing, even if at steadily declining rates. All told, they rose by 6% in 2007 over the previous year and remained steady throughout the first half of 2008. Remittances began to show the impact of the recession on migrant workers' earnings in late 2008. Following a flat third quarter, in the fourth quarter the money they sent home declined by 2% relative to the same quarter in 2007.
A significant proportion of money that workers send home is used for daily necessities, prompting concerns that a decline will put more pressure on social safety networks and result in less investment on items that help lift people out of poverty.
When remittances shrivel, "families will spend less on health care and education, because providing food, clothing and shelter come first," says Robert Meins, a remittances specialist at the IDB.
Remittances are the top foreign-exchange earner for Guatemala, at $4.3 billion in 2008, ahead of coffee, sugar and other exports. Some 1.35 million Guatemalan citizens -- 10% of the country's population -- live in the U.S. Some 3.5 million people still living in Guatemala depend on these remittances , according to the Central American Institute of Social and Development Studies, an independent think tank in Guatemala.
The appreciation of the U.S. dollar in late 2008 provided some respite for families dependent on remittances, particularly in Mexico, Brazil and Colombia. Remittances from the U.S. to those countries increased the purchasing power for recipients, offsetting at least in part the decline in volume.
Countries in the Andean region that receive money from Spain benefited from the strong euro during the first half of 2008 but since then have been hurt by declines in the European currency.
Ecuador has been hit hardest, according to the IDB, because it boasts both a dollarized economy and a large population in Spain, which has been buffeted by unemployment and the depreciating euro. Remittances to Ecuador, which receives 45% of its flow from Spain, were down 22% in the fourth quarter of 2008.
The economic crisis has especially hurt industries that employ low-skilled foreign workers world-wide, particularly construction, manufacturing, hotels and restaurants.
Despite the discouraging economic picture, the IDB said it saw "scant evidence" that migrants are prepared to return en masse to their countries of origin. In Spain, where there are some five million foreign workers, a government plan to pay welfare benefits in a lump sum to those who return home has enticed few takers.
"Migrants have proven that they adapt to tough conditions," said Mr. Moreno. "They change jobs, work longer hours, cut back on spending, move to another city and even dip into savings in order to continue sending money to their families," Mr. Moreno said. "Going home is usually a last resort."
ekantipur, 13-Mar-09
Finance Minister Dr. Baburam Bhattarai said on Friday that the 7 percent growth target set for the current fiscal year was most unlikely to be met due to the Koshi floods, strikes and power outages and the outbreak of bird flu.
The government had set this goal as a foundation to achieve double-digit growth within three years. Dr. Bhattarai, however, said that the government would make all-out efforts to achieve the target. Releasing the mid-term review of the budget, the finance minister added that the government would not be able to spend the entire budget allocated for the current fiscal year due to the slow pace of expenditure.
"Only Rs. 215 billion is expected to be spent this year against the budgetary allocation of Rs. 236 billion," he said. The government has been able to spend Rs. 88 billion as of March 6, with an increment of 17.5 percent.
Dr. Bhattarai said that the slow progress in spending the development budget had been the main challenge for the government. According to the Finance Ministry, the total capital expenditure during the first six months of the current fiscal year plummeted by 15.75 percent to Rs. 10.71 billion.
Dr. Bhattarai blamed the absence of local bodies and the delay in announcing the budget this year for the slow progress in development expenditure. He, however, expressed optimism that development expenditure would go up as the period of procedural activities have been completed.
However, revenue collection has been very good with a 36.2 percent growth. Revenues amounted to Rs. 79.6 billion. The government had targeted achieving a growth of 31.7 percent in revenue collection. The government aims to collect revenues worth Rs. 141.72 billion this year.
Dr. Bhattarai stated that soaring inflation, which reached 14.4 percent during the first six months of the current fiscal year as per the latest Nepal Rastra Bank report, was the major challenge before the government.
He added that the government was intensifying the process of intervening in the market by increasing the supply of goods at cheaper prices through state-owned enterprises and taking action against black marketers.
The government aims to keep inflation at 7.5 percent in the current fiscal year.
The Finance Ministry also said that foreign aid mobilisation increased by 34.6 percent to Rs. 18.51 billion this year. The government aims to obtain aid amounting to Rs. 65 billion this year. The report said that the government attained satisfactory progress in areas such as road building, fertilizer distribution, national literacy campaigns and self-employment programmes.
NepaliTimes, Issue #443 (13-Mar-09 to 19-Mar-09)
Suresh Neupane
The housing bubble is intricately linked to the credit market
Despite the downturn in the economy, there is one sector that is booming: real estate and construction.
With more than $1.5 billion coming into the country from remittances, people have nowhere to invest but in land and housing. The last year has seen a continued boom in construction with house and land prices sky rocketing.
As the competition to buy houses and apartments get hotter by the day, banks are racing each other to offer loans to prospective buyers. Anyone able to pay Rs10,000-12,000 a month as EMI can easily obtain a housing loan. This trend is catching on even in the Karnali. "Every day 20-30 people come to inquire about home loans," says Susan Lal Shrestha of Bank of Kathmandu, "if they have all the papers right we give the loan within a week."
The commercial banks are more ready to hand out private loans than they are to invest in industry and development projects because they consider it less risky and they can get better overall returns. Nepal Rastra Bank says that in the last six months of 2008, commercial banks granted housing loans worth Rs29.5 billion, offering loans even for interior decoration and furtniture.
Abhishesh Dhakal, manager at Everest Bank says, "The emphasis is not just on the house but on the environment as well. The appeal of home loans has increased not just in the capital but in other districts such as Ittahari, Biratnagar, Butwal and Dhangadi." Dhakal says that 80 per cent of Everest Bank's consumer banking is based on home loans.
While some are highly critical of this booming investment in housing an official at the central bank says this is good for the economy because of the downstream effect on creating employment in the brick, cement, iron, paint and furnishings industries.
But if remittances from those working overseas continues to decline, middle class consumers will have difficulty re- paying their loans. Bhupendra Pandey, head of corporate banking in Rastra Banijya Bank says: "Families use the money to buy land and houses in the districts. Some come into the capital and turn to the banking sector for additional financing. With remittances seeing a slowdown, the housing sector will surely be affected." The fall in remittances will also decrease the loan capacity of the banks as deposits drop.
Some believe the banking sector is sound and will not be buffeted by a potential bursting of the property bubble. In the 1990s the buyer had to put down a 20 per cent cash deposit before getting an 80 per cent loan. Now buyers have to put down a 60 per cent deposit. But Himalayan Bank's Thamel branch manager, Rabindra Pradhan concedes: "The whole financial sector is after the housing business and so the risk is increasing."
It is not just the private and new banks that have turned their attention to the housing sector, the country's oldest Nepal Bank and Rastra Banijya Bank are also investing in this area. Binod Atreya, CEO of Nepal Bank says, "Although the sector is an attractive investment option, we have to investigate thoroughly before making any decision." Nepal Bank has granted home loans of over Rs1 billion to more than 900 customers.
Home loans are the chief focus at Nabil Bank as well. Raveena Joshi of Nabil says: "A few years ago our focus was on car loans, now it has shifted to housing." Nabil offers an interest rate of 10 -10.5 per cent for a period of five to 20 years. Everest bank, which was probably the first bank to introduce home loans, has helped over 2,800 homeowners. It offers 8.5 per cent interest for five years and at 10 per cent for 20 years.
With such high interest rates, it is not surprising that commercial banks are inclined towards home loans.
Forty per cent of the total loans by newly opened banks are for home loans.
With government spending on development low and the financial sector channeling all its investment in one area, bankers admit that this is like putting all our eggs in one basket.
ekantipur, 12-Mar-09
BISHWAMBHER PYAKURYAL
A country where almost 48 percent of the children below age five are underweight and 75 percent of the pregnant women are anaemic largely because of inadequate dietary intake, escalating food prices are a serious policy challenge. Households that are net buyers of food are hit hard by an increase in food prices. The Household Budget Survey 2008 conducted by Nepal Rastra Bank shows the average monthly expenditure of rural households to be Rs. 11,942, out of which food accounts for 44.09 percent. Since there is a strong link between the expenses of the poor and food price fluctuations, this expenditure pattern shows that Nepal's low-income groups are facing a severe economic hardship because of food price inflation.
In the past, when the inflation rate in India was high, panchayat bureaucrats used to blame India for exporting its inflation to Nepal. The domestic policy was not very often questioned. It is, therefore, a matter of surprise why the government now keeps quiet instead of informing the people that despite India's inflation being at a historic low and food prices showing a declining trend, the country has failed to import India's lower inflation rate.
The inflation rate in India has come down to a 15-month low of 3.36 percent for the week ended mid-February, 2009. This has happened because of cheaper food items and manufacturing products due to an economic slowdown in the Indian economy. Therefore, as there was a fall in the overall wholesale price index-based inflation, there has been an overall fall in the inflation rate.
Nepal's year-on-year consumer inflation remains at 14.4 per cent. The 14 plus percent rate of inflation has remained stable since the last quarter of the fiscal year 2007/08. This price rise has been driven by a significant rise in food and beverages prices (18.3 percent) and high prices in the non-food and services group. Bandhs, infrastructural difficulties and high transportation costs are, of course, responsible. But how is it possible that Nepal's high price economy is inelastic to India's low level inflationary regime under open border informal economic practices?
There is plenty of literature available on the Indo-Nepal informal trade. A study conducted by Nepali and Indian scholars shows that informal trade from India to Nepal stands at US$ 196 million and from Nepal to India at US$ 193 million. Interestingly, this situation shows that tariffs and quantitative restrictions between the two countries are not barriers. If this was the case, it would have been inevitable for Nepal's imported goods to be made accessible at much lower prices.
The Nepalese people have been denied moderate food prices for both domestic products and Indian imports. Compensating the loss from the trade in goods has also not been possible for the last few years. Statistics released by the Central Bureau of Statistics shows the manufacturing production index declining by 1.4 percent in 2007/08 compared to a growth of 2.6 percent in the previous year. Recent evidence shows that despite some successes in creating supporting infrastructure, trade in manufactured goods is going through difficult times in most South Asian nations. In 2007/08, the merchandise trade deficit widened by 22.2 percent to Rs. 165.3 billion compared to an increase of 19.2 percent in the previous year. Nepal's alarming trade deficit with India is largely because of a decline in the export of vegetable ghee, textiles, chemicals, rosin and readymade garments.
Nepal's policy has failed to link export trade with other sectors such as agriculture, forestry and tourism. There are incomplete legal and institutional reforms. No alternative schemes have yet been brought out to address the declining trade and competitiveness of readymade garments after the expiry of the Multi-Fibre Agreement. Nepal still faces inadequate and poor infrastructure and underutilization of the existing dry ports.
The success of a trade policy is reflected in its impact on government revenues, the well-being of the people and strength in creating an investment environment. As trade has not been directed towards this end, the Three-Year Interim Plan's objective to reduce the trade deficit by 15 percent of GDP seems difficult to achieve.
South Asia's future in trade in services has recently been presented in a regional work entitled Trade in Services in South Asia: Opportunities and Risks of Liberalization. Edited by Saman Kelegama of the Institute of Policy Studies, Colombo, the publication offers an overview of the state of the service trade in the region. Economic growth advances when the service sector grows. In the 10 years from 1993-2003, South Asia's exports of commercial services increased fourfold, i.e., from US$ 7.9 billion to US$ 29 billion. Currently, the service sector provides more than 60 percent of the GDP in many countries. Its contribution to the GDP in South Asia ranges from 32.48 percent in Nepal to 58.1 percent in India.
India's share in world service exports has increased from 0.5 percent in 1995 to 2.3 percent in 2005. In Pakistan, service trade has been growing faster than merchandise trade. In Sri Lanka, key sectors of the service economy are linked to foreign competition by carefully assessing the impacts of liberalization on the economy. Bangladesh has seen a growth in the service sector for the last three decades. This sector has grown faster than the overall GDP in the past decade.
After its accession to the WTO, Nepal has liberalized the service sector rather aggressively with the participation of the private sector including the foreign sector. Given a strong institutional foundation to discourage anti-competitive practices, Nepal has potential in tourism, higher education and health services. The Maldives has visible advantages from the service sector largely from tourism. Bhutan has begun to explore the possibility of benefiting from the service sector. Tourism and electricity are their major service exports.
As trading in manufacturing goods is not performing well, and trading services especially in tourism, health, education and labour can be attractive for consumers beyond SAARC, there is a strong need to develop advanced service infrastructure to boost the region's share in the global service trade.
To ensure benefits from service trade, Nepal should learn to grasp offensive and defensive interests through multi-sectoral dialogue and debate with different stakeholders. As regulation in health, education, finance and environment is crucial, it is important to correctly understand the difference between over-regulation and effective regulation.
A large part of the service trade data is intangible. Serious home work needs to be done to analyse it to develop common interests in the region. A notable challenge South Asia faces is striking a balance between the medium-term hazards of increased unemployment and the longer-term benefits of increased competitiveness. Achieving this goal would mean formulating a viable policy on trade in services for sustainable development.
The author is a professor of economics at Tribhuvan University.
Advantage, Opportunity and Thread of Foreign Direct Investment in Nepal
By: Kundan Pokhrel Majagaiya
Donghua University China
Nepal can not be far from the benefits of Foreign Direct Investment (FDI). So Nepal has been given priority for the attraction of FDI and its development but still have some of the advantages, opportunities and threads discussed below.
Advantage
FDI is expected to fill the gaps such as technology, capital investment, foreign exchange, management capability etc. FDI is recognized as a vehicle for technology transfer and integration into the world economy. Countries whose policy encourages innovation can capture the positive externalities of FDI. As a whole, attracting foreign direct investment has become an integral part of the economic development strategies for Nepal. FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. FDI has been a booming factor that has bolstered the economic life of Nepal, but on the other hand it is also being blamed for ousting domestic inflows. FDI is also claimed to have lowered few regulatory standards in terms of investment patterns. The effects of FDI are by and large transformative. The incorporation of a range of well-composed and relevant policies will boost up the profit ratio from Foreign Direct Investment higher.
Economic growth
This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in Nepal has boosted the economic life of country.
Trade
Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in Nepal both in terms of import and export production. Products of superior quality are manufactured by various industries in Nepal due to greater amount of FDI inflows in the country.
Employment and skill levels
FDI have also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of Nepal.
Technology diffusion and knowledge transfer
FDI apparently helps in the outsourcing of knowledge from Nepal especially in the Information Technology sector. It helps in developing the know-how process in Nepal in terms of enhancing the technological advancement in Nepal
Linkages and spillover to domestic firms
Various foreign firms are now occupying a position in the Nepalese market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Nepalese market.
Opportunity
Nepal is lying between two fast growing economies of the world i.e. India and China. Both are heavily populated countries, so are the largest markets of the world as well. Nepal can take the advantage of this situation and can play the role of transit country for attracting them in both trade and investment.
Compared with most other low-income countries, Nepal has the potential to attract significantly more FDI. General programs of investment promotion, linkages with national firms, and longer-term plans to improve competitiveness, will have a limited impact on Nepal's ability to attract FDI and benefit from it. Nepal has some the world’s niche sectors for the attraction of FDI listed below.
Financial Sector
Financial sector is an important sector for the attraction of FDI. Banking Sector, Finance Sector and Insurance Sector are three different sectors of Financial Sector for the attraction of FDI.
Tourism Sector
Nepal has natural and historical sceneries with different culture so considered as “Garden of the world ". Tourist lodging, motel, hotel, restaurant, resort, travel agency, skiing, gliding, water rafting, cable car complex, pony-trekking, trekking, hot air ballooning, Para sailing, golf course, polo, horse riding, etc. are the main tourism sector for the attraction of FDI.
Communication Sector
Communication sector is also one of the important sectors for the attraction of FDI. In this sector not so foreign investor has been involved even though this sector is huge one.
Manufacturing Sector
Manufacturing Sector is one of the largest sectors for FDI. Manufacturing Sector can be categorized in different sector like(i) Energy-Based sector (Industries generating energy from water resources, wind, solar, coal, natural oil, gas, bio-gas or any other sources), (ii) Construction Sector (Construction and operation of Road, bridge, ropeway, railway, trolleybus, tunnel, flying bridge & industrial, commercial & residential complex; Construction, management of sewerage system; Construction, management & operation of water supply pipeline Infrastructure; Construction, management & operation of Irrigation infrastructure; Construction, management & operation of Electricity power station and electricity transmission infrastructure, (iii) Agro and Forest based Sector (Mainly on agriculture or forest products such as integrated sericulture and silk production, horticulture and fruit processing, animal husbandry, dairy industry, poultry farming, fishery, tea gardening and processing, coffee farming and processing, herbiculture and herb processing, vegetable seed farming, mushroom vegetable farming or vegetable processing, tissue culture, green house, bee-keeping, honey production, rubber farming, floriculture production and forestry related businesses such as lease-hold forests, agro-forestry, etc., (iv) Mineral Sector (Mineral that includes Stone and Limestone; Talc; Silica; Dolomite; Iron-ore; Oil and Natural Gas) , (v) Service Sector (Workshop, leather and textile, pasmina ,garments, pharmaceutical, printing press, consultancy service, ginning and baling business, cinematography, construction business, public transport business, photography, hospital, nursing home, educational and training institution, laboratory, cold storage and (vi) Information Technology Sector.
Threats /Constraints
It has already been established through earlier discussion that there are various potentialities of foreign direct investment in Nepal. In spite of this prospect, investment from the countries is not yet satisfactory. Because some hindrances prevailing in Nepal that are acting as bottlenecks to the smooth flow of investment. Some of the constraints for FDI in Nepal are highlighted below
Political Instability
Sandwiched between China and India, Nepal is facing serious political instability with a crisis in the ruling government on one hand and insurgency by Small groups on the other. Investigation into the impact of long-term political instability is prerequisite for developing a sustainable growth model. It necessitates finding out the link between low level of economic and social achievements, and political instability. There has been a great deal of literature on the macro-level analysis of the impact, but little micro-analysis. A recent study of Aisen Ari hints at a high level of political instability in Nepal, measured by the number of cabinet changes in comparison to other SAARC countries. Average growth rate in Nepal has been around 1-1½ percentage points during 1970 through 2000. The findings also show political instability accounting for roughly ½-¾ percentage point of the difference in average growth rates. Nepal’s climate, natural beauty, declining risk profile and huge market potential with two of the world’s largest economies, China and India, are constrained by weak investment promotion programs coupled with corrupt administrative practices and political instability.
Poor Physical and Non-Physical Infrastructure Facilities
One of the important preconditions for attracting FDI in a country is the presence of developed infrastructure. Nepal is small and locked country with limited resources, weak infrastructure and small size. Besides this, Nepal is still facing some problems for the attraction of FDI because of lack of direct access to seaports, difficult land transportation ,lack of trained personnel’s, scarce raw materials ,inadequate power, insufficient water supply etc.
Absence of Effective Banking Network
Presence of develop banking network with other countries is another essential factor in any international business. The banking network is poorly developed; the level of cooperation between the banks is not developed properly.
Trade Barriers
Nepal is affected by the presence of many trade barriers including tariff and non-tariff barriers, such as different standardization and certification processes, subsidies on agricultural products and different custom rules and regulations. The differences in tax laws and regulations, exchange rates, interest rates, duty structure as well as macroeconomic policies in general have proved to be a major factor inhibiting investment flows.
Lack of Cross-Border Facilities
Lack of sufficient cross border facilities like transportation, and communication, etc. is another threat for the attraction of FDI. For smoothening production and marketing of goods and services in the region, inter country roads, rail, waterways, and airways modes of transportation must be available at the required level. But still it is yet to have an integrated transport network for helping the easy movement’s people and products.
Nepalnews, 17-Mar-09
