News Roundup: KFC Chicken is Hot in Nepal

Roundup of Nepali Economic and Business News for Jan 28-31

By NepaliEconomy.com

KFC and Pizza Hut are doing brisk business in Nepal. Their monthly sales have reached Rs. 30 million after having opened their shops on November 22, 2009. Naturally India's RJ Corp that owns them wants to open 3 more outlets, in Jawalakhel, New Baneshwor and Maharajgung.

Finance minister, Dr Bhola Chalise and Ganesh Bahadur Thapa are members of 3-person team to recommend three names to replace the current Governor of Nepal Rastra Bank (NRB) whose tenure expired on January 31, 2010. RK Regmee argues that there is a need to depoliticize and professionalize the position. In developed economies independent Central Banks is considered a norm but not in Nepal. In the past 10 years, there have been 8 NRB Governors. Disjoining politics and quasi-government institutions is hard, especially in Nepal. Look at the situation at Security Board of Nepal, where Maoists-appointed head, Dr Surbir Poudel is on a hot seat over his failure to "contribute to the development of securities market in Nepal." What?

NRB’s efforts to cool down real estate market had shown results in Kathmandu. Now other regions are following suit. Revenue at Land Revenue Office (LRO) in Pokhara has dropped by 28 percent in the six months of the fiscal year.

Cell phone services through Nepal Telecom (NT) are available in 3,515 VDCs; only 400 are inaccessible. NT has 3.48 million rural subscribers and wants to increase that number. Cell phones have changed lives of fishermen in India because it has allowed them to get access to market information in real time. Not sure if Nepalese farmers are benefiting from the cell-phone technology.

Chicken prices continue to rise, up Rs. 10 to Rs. 270 per kilo owing to lack of supply - rising commodity prices are one of the causes. Industrialists in Morang-Sunsari Industrial Corridor threaten to shutdown factories over lack of fuel subsidy to compensate for the elevated energy costs due to load-shedding.

Nano, not the Apple's iPod but Tata's super-compact car is entering Nepal in March. The 624cc car will be priced around NRs. 700,000. All the passports issued after April 1, 2010 must be Machine Readable Passports (MRP) and all passports must be MRP by April 1, 2014. Nepal’s government is determined to get them from India at US$4 per copy despite competition from other countries.

News Roundup: West Seti Hydro Project Sage Continues

Roundup of Nepali Economic and Business News for Jan 27-29
By NepaliEconomy.com

The saga of 12-year long 750MW Rs 120 billion (US$1.6 billion) West Seti Hydro Project (WSHP) continues. According to the plan 90 percent of power from the project will be exported to India and Nepal will get the rest for free. Snowy Mountain Engineering Corporation (SMEC) is the largest owner with 26 percent and the rest is owned by Nepali government (15%), Indian's Infrastructure Leasing and Financial Services (IL&FS) (15%), ADB (15%), China National Machinery and Export Corporation (CMEC) (15%) and Nepali financial institutions (14%). CMEC increased its stake to 51 percent after ADB backed out late last year. Now ADB wants to re-join, duh! Republica newspaper is calling on Maoists to call off their agitation against India's GMR's planned investment in 300 MW Upper Karnali Hydropower Project because they themselves approved it when they were in power.

National Planning Commission (NPC) finally admitted that economic growth will be less than 5 percent this year versus their optimistic target for 6 percent growth during 3-Year Plan period (2010/11-2012/13).

The meeting of commerce secretaries of Nepal and India has born some fruits (a) India has committed to remove 4 percent extra-tariff on 217 items from Nepal (b) agreed to allow Nepal's trade with third-country through the port of Vishakhapatam. However issues like (a) countervailing duties on Nepalese exports (b) non-tariff barriers like accreditation process remain unresolved.

Few interesting tidbits from Nepal Enterprises Survey 2009 (a) 62 percent of respondents said political stability to be the main problem, 27 percent power outages and only 3 percent labor regulations (b) manufacturing loses 26 percent of sales due to power shortage.

Looks like the opening of Chitwan Milk Factory is putting investors' focus on milk sector. The misnomer, Kalinchowk Cow Farm and Research Center Ltd in Dolkha district plans to start the country's largest dairy farm with 10,000 heads Holystone breed of cows with Rs 500 million investment under PPP scheme. Currently the cost of producing milk in Nepal is Rs 25 versus Rs 9 in China, and the demand is estimated at 800,000 liters a day.

Something is fishy in the fish industry. During 8 months of of this year, Kalimati Fruits and Vegetables Market Development Board (KFVM) sold 1,744 tons of fish imported from India and only 20 ton produced domestically. Last fiscal year, Nepal produced 24,294 tons of fish. According KFVM vegetable prices have come down significantly owing supply increase.

Local government employees continue to strike and bring local government business to a standstill. As such, garbage in Kathmandu had to be collected under tight security. Business climate does not look great in Bara and Parsa.

Now Non-Resident Nepalese (NRN) can get a special Nepali ID by applying through at the ministry or Nepali diplomatic missions starting January 29, 2010

What exactly does 1950 Treaty contain?

What exactly does 1950 Treaty contain?
Republica, 27-Jan-2010
By Shirish B Pradhan
sirish27@yahoo.com

Whenever high-level visits are made between Nepal and India, the matter relating to reviewing 1950 Treaty comes in the news. However, no political party has taken up the issue of reviewing the pact seriously while in power, no matter how much energy they spend making hue and cry while in the opposition. The necessity of reviewing the Nepal-India Peace and Friendship Treaty 1950 has been a juicy topic for quite a long time. The nature of this issue has been like that of old Hindi cinema songs to a significant number of Nepali people who always find them evergreen and charming.

Today the UCPN (Maoist) are raising the issue of reviewing the accord chanting slogans in the streets in the same way the CPN-UML did more than a decade ago in the streets of Kathmandu for the sake of gaining mass popularity. Ironically, none of these political parties dared to take the matter seriously while they were in power.

Many people who speak so frequently about the treaty, in fact, do not know exactly what contents the treaty has. The Maoists have been saying that the treaty should be scrapped or replaced claiming it being unequal and that Nepal was cheated while signing it some 60 years back. The pact signed on July 31, 1950 in Kathmandu by the then Prime Minister Mohan Shumsher JB Rana of Nepal and then Indian Ambassador Chandreshwar Prasad Narain Singh on behalf of India consists of ten Articles.

The opening paragraph of Article 1 states “there shall be everlasting peace and friendship between the government of Nepal and the government of India….” It further mentions “the two governments agree mutually to acknowledge and respect the complete sovereignty, territorial integrity and independence of each other”. In fact, this is the first written document whereby India recognizes Nepal as an independent and fully sovereign country. Let’s examine briefly other Articles of the accord before coming to any hasty conclusions.

Under Article 2, the two governments agree to “inform each other of any serious friction or misunderstanding with any neighboring state likely to cause any breach in the friendly relations between the two governments”, while Article 3 talks about maintaining “diplomatic relations with each other and enjoying diplomatic privileges and immunities as per international law on reciprocal basis”.

Article 5 permits that the government of Nepal is free to import arms, ammunition, equipment or logistics from or through the territory of India if deemed necessary for the security of Nepal. However, this article seems to be almost defunct as Nepal has also imported arms as per its wish from countries like USA, Belgium, and China. The treaty, however, does not speak of imposing restrictions on Nepal to import arms from third countries.

Although Article 7 has incorporated the provision of providing nationals of one country in the territory of another the same privileges in terms of residence, ownership of property, participation in trade and commerce, and free movement, in practice, however, Indian nationals are deprived of purchasing land and houses in Nepal whereas Nepalis are permitted to do so in India. Nepali nationals can also apply for jobs in India, except for certain sectors such as foreign services and police force. The pact allows both Nepali and Indian nationals to carry out businesses in each other’s territory without any obstacles.

It is estimated that there are some 7-8 million Nepali nationals living in India doing different jobs or pursuing higher education and 2-3 million Indian nationals living in Nepal currently.

It is the 1950 accord that provided a basis for a free movement of people between the two countries along the 1,800 km-long open border. The credit for establishing cultural, social, economic, and even family links between the people of these two nations naturally goes to the 1950 treaty.

However, voices have been raised that the agreement has become obsolete and it should be reviewed or scrapped as per the changing time and situation, which cannot be undermined. We should be clear, however, as to which Articles of the treaty we need to change and why, and what changes are necessary.

In fact, interestingly, the pact does not contain any provision of review. In such a case what can be done is to terminate the treaty by issuing a one-year advance notice by either side. It is interesting to note that until today no government has initiated the process of scrapping the treaty.

It is essential to bear in mind that reviewing or replacing the pact should be for further strengthening the ties between Nepal and India, not to worsen them. The revision in the accord should bring more benefits to Nepal so that it will contribute in safeguarding our national interest in a better way. In any case, it should not otherwise invite further troubles and complexities. For example, currently there are more than two dozen border points open between Nepal and India, which have provided good business opportunities and more facilities for movement. If the new pact cannot guarantee more points, it will only increase our suffering.

To sum up, the issue of reviewing the treaty should not be turned into a cheap political slogan only to gain short-term popularity without assessing its long-term implications.

News Roundup: Liquidity Crisis Redux

Roundup of Nepali Economic and Business News for Jan 25-27
By NepaliEconomy.com

Liquidity crunch in the banking system has re-emerged with the rise in inter-bank lending rates to 12 percent. Nepal Rastra Bank (NRB) concurs with NepaliEconomy's view that the problem is due to mismatch in deposits growth and investment rather than insolvency of banks (the definition of liquidity crisis). According to acting Director General of NRB, Maha Prasad Adhikari, banks raised Rs 40 billion deposits but invested a whopping Rs 75 billion in the first four months of the fiscal year 2009-10. Just look at the balance sheet of Siddartha Bank. It posted pre-provisioning profit of Rs 243 million and had Rs 17.5 billion loan and Rs 16.6 billion deposits. And in the midst of this all, another development bank comes to life, this time in Maoists stronghold Pyuthan.

NRB is trying to tighten the regulation and wants to bring fledgling Cooperatives under its folds from the Department of Cooperatives. Cooperatives are an important segment of Nepal's financial landscape. They hold Rs 63 billion in deposits compared to about Rs 500 billion at commercial banks. Two bankers are charged by NRB for fraud and charge sheet seems quite long.

Load shedding is set to increase from 9 hours a day to 11 hours starting January 28th. NEA set 9 hours a day load shedding on January 17. Nepal is importing additional 30MW from India at Rs 10.72 (IRs 6.70) per unit.

Herbal manufacturing is growing at a brisk pace in Nepal. Currently, there are 35 companies - 14 registered in 2008/09 vs 3 in the prior year. Production of medicinal herb rose 11 percent to 94,660 kg in 2008/09 from the previous year. Nepal consumes about Rs 10 billion of medicine a year and 75 percent of that imported. The ailing state-owned drug company Nepal Aushadhi Ltd (NAL) is changing its overseer from Ministry of Industry to Ministry of Health.

Employees in local bodies have been striking since January 22 demanding among other things (a) enforcing automatic promotion (uh!) and (b) making all employees working till mid-July 2009 permanent. This is affecting normal business transaction like transfer of land ownerships and obtaining of citizenship cards.

A cautionary note from Venezuela. When extreme-left Chavez government took over the country and started expropriating properties from domestic and multi-national companies, money poured out of the country. According to its Central Bank, a whopping US$ 93 billion has left the country since 2005.

Demise of garment industry

Demise of garment industry
Republica, 19-Jan-10
By Chandan Sapkota
schandan@gmail.com

Few people realized that 2010 began with unfavorable news for the Nepali economy. The garment industry, once the highest foreign exchange earner for Nepal, has almost disappeared. In fact, only one firm still exports readymade garments to the US, once the biggest market for this industry. The growing Indian market has been the focus of attention of the few remaining firms that are struggling to survive. The demise of the garment industry demonstrates the failure of our trade promotion and industrial policy. To avoid recurrence of similar event, it is vital that we assess the causes of the downfall of garment industry and learn lessons from our mistakes.

An article in Republica accurately reflects the importance of the garment industry: “Through the first 16 years of journey, the industry with over 1,200 active production units in 2000 occupied about 7.2 percent share of the total manufacturing sector, earned one-third of the total export income, witnessed investment climb to Rs 6 billion and directly employed 90,000 people, supporting livelihood of 450,000 persons.”

Alas, this glory is now lost. Exports to the US, which previously accounted for more than 80 percent of total garment exports, have been insignificant this year. Less than 10 firms remain in operation. Hundreds of thousands of employees have been laid off. The country has lost a reliable source of revenue. Worse, the failure of this industry has led to the collapse of the whole exports sector.

Where and how did it go horribly wrong? The answer lies in an inability to foresee the changes brought about by globalization. Policymakers and garment investors failed to notice the quite obvious signs of change in the international market. They failed to design corrective policies to restructure the outdated domestic garment industry. Instead of addressing the constraints that were making the garment industry uncompetitive, they basked on the already secured preferential agreements and wasted valuable time and resources in securing more of them.

In 1990, the WTO’s member countries signed the Agreement on Textiles and Clothing (also known as the Multi-Fiber Agreement), which eliminated quotas on the trade of textiles and clothing. This was to be implemented in four phases; commencing with 16 percent reduction in quota of 1990’s imports. Thus, it was known two decades ago that all quotas in this sector would be abolished. There was ample time to invest and restructure the Nepali garment industry. However, both investors and policymakers turned a blind eye to the necessity for the reorganization of this industry.

Traditionally, the Nepali garment industry grew not because its products were competitive and superior, but because it got preferential access to the markets in the US and the EU. The guaranteed market access for Nepali garments and the imposition of quota on exports from countries that had advanced capital and competitive production mechanism meant that even if our products were not competitive in terms of price and quality, they were still exported without any restriction on quantity.

Prior to the first phase of quota elimination in 1995, Nepal had five years to upgrade its production structure so that firms could expand their size and tap synergies to exploit economies of scale, i.e. as you produce more of the same good, the average cost would decline. This would, in principle, improve price competitiveness of Nepali garments. Unfortunately, it never happened. Meanwhile, garment investors in countries such as China, India, Vietnam, Cambodia, and Sri Lanka, with the help of their governments, were already working to ensure the competitiveness of their products and the consolidation of their production. They were already preparing for the competitive international garment market after 2005.

The first phase of quota elimination in 1995 was followed by further quota eliminations of 17 percent in 1998, 18 percent in 2002, and finally 49 percent at the end 2004. The second phase of quota elimination hit the Nepali garment industry and the overall exports very hard, leading to a collapse of total exports, which have not recovered to the level reached in 1997. Though this was a catastrophic blow to the whole export-based sector, it was not appropriately heeded by investors and government. During the 10-year transition phase of MFA, the production structure in Nepali garment industry hardly changed. Most of the firms had small-scale production units with little cost advantage in production. Some of the intermediate goods that were used to produce final output were simply imported from third countries whose garments’ exports were subjected to quota restrictions, marginally redesigned, and stamped with ‘Made in Nepal’ tag for export. This meant that producers were merely acting as distributors to earn quick profits, often by gimmickry. There was very little creativity used in enhancing productivity, efficiency, marketing and distribution. Meanwhile, the investors paid little attention to product diversification and eroding competitiveness of their products.

While other governments actively engaged in upgrading their garment industry by establishing Garment Processing Zones, Export Promotion Zones, increasing consultancy for better management, and extending capital and credit to their garment investors, the Nepali government ignored the aggressive steps taken by other countries and did pretty much nothing. It simply requested more preferential agreements. It also failed to encourage and help investors find niche markets abroad. In addition, the government was unable to ensure the security of investors and the smooth flow of goods across the Nepali border. Frequent strikes along the main highways led to an increase in transportation cost. This also increased the risk of delivery problems, leading to an escalation in the final price of garments. It further eroded the price competitiveness of Nepali garments. To make matters worse, trade unions and militant youth wings made a mockery of property rights by occupying and confiscating private property, and forced an increase in wages and allowances, irrespective of labor productivity. The lack of a regular power supply also aggravated the situation.

The downfall of the Nepali garment industry illustrates some important lessons, which could be used to avoid a similar fate befalling other export-based industries. The Nepali government should not be hankering after preferential export terms; it should be investing and ensuring that domestic firms are competitive in terms of price and quality and are constantly innovating to keep up with cut-throat competition in the international market. Meanwhile, it is imperative that the government keep investors and supply chains away from the clutches of the militant youth wings and the unions. An industrial policy and trade promotion policy designed to address these issues is a need of the hour to keep our industrial base intact.

News Roundup: Nepalese workers continue to pour out in record numbers

Roundup of Nepali Economic and Business News for Jan 22-24
By NepaliEconomy.com

Nepalese continue to pour out of the country in record numbers in search of work. Between mid-Jul'09 and mid-Jan'10 126,081, or 3 percent more than last year left, 80 percent of whom went to Saudi Arabia (35,940), Malaysia (30,067), Qatar (17,957) and UAE (17,191). Unfortunately it is not a smooth sailing for those who leave because there are instances of fraudulence by manpower companies.

Nepal Ratra Bank agrees with NepaliEconomy.com's view that Nepal does NOT suffer from liquidity crisis because banks are solvent and have ample capital; it is just that they are lending more than their deposit base can support. However, concerns over balance of payment (BoP) continues with the country running trade deficit of Rs. 217 billion and a decline in forex reserve to Rs. 249 billion (down 11%). While the government is trying to cool down wanton speculation on real estate, developers want exemption to ceilings on landholdings on individuals and companies in Kathmandu (15 ropanies), Hills (80 ropanis) and Terai (11 bigahs) imposed by Land Reform Act of 1964.

Retailers are willing to sell sugar at Rs. 80 versus current Rs. 90 if government sells them for Rs. 78. High sugar prices due to shortage is causing (a) surge in smuggling of sugar from India (b) higher confectioneries prices.

Nepal Telecom plans to expand 3G services in Kathmandu and Pokhara. Thus far, there are only 700 3G users paying Rs. 4,195 a month but NT has capacity for 175,000.

On other news, Nepal Oil Corporation (NOC) demands Rs. 29 million from employees and managers of Amlekhgunj depot, which handles two-thirds of oil imports, for embezzlement. Pashmina industry is trying to re-invigorate itself with international trademark (uh!). Another political outfit, CPN-Maoist (Matrika), has entered the lucrative land/property seizure business. Solahart celebrates its 15th year while RBB celebrates its 45th.

Discussion on Land Reform on BBC Nepali Service

An interesting discussion on land reform in Nepal with Haribol Gajurel (Maoist), Hem Raj Tated (CA member) and Kesav Baral (UML) (हरिबोल गजुरेल, हेमराज तातेड र केशब बडाल) on BBC Nepali Service broadcast on 10-Jan-2010.

Understanding the Liquidity Crisis in Nepal (Short Version)

This is a shorter and a more refined version of an earlier piece and is now submitted to Nepalnews' Guest Column. Not sure if it will get published.

The so-called "liquidity crisis" in Nepal has been hogging news headlines since last summer and the situation seems to be getting worse. Several policymakers and commentators have lent their opinion on the issue, but in my view, they seem to engender more confusion than clarity. The reason being that discrete economic concepts are used inter-changeably. Is Nepal suffering from liquidity crisis or from shortage of currency or from balance of payment crisis? They are all NOT the same. Let’s look at each and then figure out what's ailing Nepal.

Liquidity Crisis
In macroeconomics, the definition of liquidity goes beyond simple coins and notes. It includes broader credit instruments that grease the wheels of the economy. In strictly technical terms, coins and notes are also liabilities but of the Central Bank. Shortage of currency alone does not bring about liquidity crisis. For liquidity crisis to occur, credit system of the country must be broken because of mis-trust amongst counter-parties. It happened in the US and Europe in late 2008 following the collapse of Lehman Brothers and AIG which led to an explosion in EuroDollar spread, the global benchmark of credit risk. A corporate analogy might make it clearer. Just because a business does not have cash to pay for employees or vendors does not mean that it has liquidity problem; the owner of the business can go to a bank or to another creditor to get the money, or he/she might just issue IOUs to his/her employees and vendors. That is only possible if the business is trusted by its counter- parties. If not, it will face liquidity crisis and go into bankruptcy.

Nepal is not experiencing liquidity crisis. Credit is still flowing through the system. Moreover banks are doing brisk business. There are no stories of a bank run in Nepal.

Shortage of Currency
The amount of currency (coins and notes) needed in an economy depends on three factors; economic activity, price levels and velocity (how fast currency is re-cycled through the system). A rise in economic activity or price levels requires more currency. On the other hand, rise in velocity requires less. A sudden jump in economic activity or price levels or a sudden fall in velocity could cause currency demand to go up.

In most countries including Nepal, economic activity and price levels do not change suddenly or unexpectedly. Comments made about hoarding of currency because of Voluntary Disclosure of Income Scheme (VDIS) or to speculate on real estate suggest that velocity might have unexpectedly gone down but I doubt that to be the case for several reasons,

(a) it does not make economic sense in Nepal to hoard currency because of high inflation - cash under mattress is losing more than 10 percent of value every year.

(b) in financially under-developed country like Nepal, currency not credit is the main means of business transaction. As such, most of the currency in circulation in Nepal is already in the hands of public – Rs. 125 billion or almost 90 percent compared to less than 25 percent in the US.

(c) currency held by public has grown at a fairly steady rate since 2004. Although there have been intermittent jumps and falls they are nothing out of the ordinary.

(d) when NRB injected Rs 20-25 billion into the banking system, it did not put that amount of coins and notes into banks' vaults; instead it just credited banks' accounts at NRB - it is an accounting exercise. Moreover, NRB does not have coins and notes in its vaults because all the notes and coins outstanding in the country belong to NRB. To say NRB's interventions helped deal with currency shortage makes absolutely no sense.

Balance of Payment Crisis (BoP)
Balance of Payment (BoP) tracks the amount of money going out of the country called "debit" (paying for imports of goods and services, repatriation of income by foreigners and purchase of foreign assets) and coming into the country called "credit" (getting paid for exports of goods and services, income from foreign assets, foreign aid, remittances and selling of foreign assets or domestic assets to foreigners). In economic parlance, debit must equal credit or Balance of Payment must balance but how it does is the more important question.

To answer the "how question", it is better to look at BoP from "flow" and "stock" prospective. The flow part of BoP is called Current Account (CuA). It includes money flows due to trade, income from foreign assets and unilateral transfers (remittances and foreign aid). The "stock" part of BoP is called Capital Account (CaA). It includes transfer of money due purchases and sales of assets which can be divided into financial and non-financial assets, and government and non-government assets.

Nepal must run CuA surplus because it does not have the wherewithal or the resources to finance deficit either through attracting foreign investment (FDI or portfolio investment) or through borrowing in the international debt market. Fortunately for Nepal, it has been running CuA surplus on the back of strong remittances. The latest data from NRB website for Q3 2008-09 (Jan'09-Mar'09) shows Rs 18 billion CuA surplus made up of Rs 50 billion trade deficit, Rs 4 billion net foreign income (from foreign assets) and Rs 64 billion transfer of which Rs 56 billion was remittances. But apparently that surplus has turned into deficit in the first 4 months of this fiscal year (Jul'09-Sep'09) in the tune of Rs 20 billion on the back of slowing remittances and rising trade deficit.

Remittances come to Nepal in foreign currencies and NRB converts them to NRs. Foreign currency earned this way is used to pay for imports of goods and services, and the surplus accumulates in NRB’s balance sheet. Foreign currency in NRB’s coffer has been growing steadily in tune of Rs 219 billion by Q3 2008-09. Remittance money converted to NRs goes into the banking system (as deposits) and increases the general money supply UNLESS NRB STERILIZES it but NRB does not seem to have done that. As such, money stock as measured by M1/M2 has been growing rapidly, at 20%+ since July 2008.

CuA surplus turned to deficit in Q1 2009-10 (Jul'09 - Sep'09). This meant deposit growth stopped suddenly but banks were still making loans especially in the real estate sector resulting in an imbalance in money coming in (deposits) and going out (investments). The problem was further exasperated by NRB’s directives to banks and cooperative late in 2009 to (a) increase deposits ratio (b) lower loan-to-value ratio on real estate lending. Banks faced serious mis-match in assets (investments) and liabilities (deposits) side of their balance sheets which forced them to (a) raise interest rates on deposits to attract and retain them (b) turn to NRB, the lender of last resort.

NRB was happy to oblige because it can create money out of thin air; it has the legal monopoly to do so. A person or a business can only write checks (debit) against their deposits (credit) at a bank. Even a bank can only write checks against its reserve balance at NRB but NRB can write checks to itself. In doing so, it creates money. NRB has injected Rs. 20-25 billion into the banking system. Incidentally, this amount equaled the amount of CuA deficit. News reports are not clear about how NRB did it, but going by conventional Central Bank practices, NRB likely increased banks' reserves at NRB (debit) - which banks can withdraw to fund deposits - and offset that with the creation of Treasuries (credit) (reports in the media about Treasury auctions and repos do not make sense because those activities withdraw NOT provide liquidity).

Conclusion
Interest rates (inter-bank and on deposits) rose to record heights in Nepal but that is not a reflection of liquidity crisis or shortage of currency. Rather it is a result of sudden increase in demand for deposits due to mis-match in assets and liabilities at financial institutions. The prescription for the problem is quite simple. NRB must pressure banks to reduce their enlarged balance sheets before assets/liabilities mis-match turns into a genuine liquidity crisis.

2010: Nepal's macroeconomic outlook

2010: Nepal's macroeconomic outlook
Republica, 20-Jan-2010
By BISHWAMBHER PYAKURYAL

As a result of the ongoing economic downturn, we may not see an expansion in global economic activities. However, we should be thankful that the world economy, for now, has at least been spared from speculative damages. But in Nepal, all three villains namely recession, inflation, and depression are still going strong and hurting macroeconomic fundamentals. These three factors continue to injure Nepal’s economy. The following paragraphs attempt to justify my statement.

If recession is taken as a business cycle contraction because of reduced economic activities, this also indicates a period where there is a reduction in a country’s GDP for at least two quarters. Nepal has experienced contraction, the first symptom of recession, whereby the country has even exceeded several quarters of sustained recession. Going by the statistical information received from the Ministry of Agriculture and Co-operatives (MoAC), we can see a weak performance in the production of major cereal grains that induced a decrease in GDP. We can see, in the second quarter of FY 2009/10, there has been a decline in paddy and maize production by around 11 percent and 4 percent respectively as compared to FY 2008/09. These two products together assume 10 (paddy 7.5) percent share in GDP and about 27.5 (paddy 20.75) percent share in agricultural output. Therefore, as major crops exhibited relatively lower yield, there is not much hope to meet the growth target of 5.5 percent in the year 2009/2010. The logical estimate for growth would be around 4.2 percent. This should explain that Nepal is still under recessionary pressure and therefore has been victimized by the first villain—recession.

The second villain is inflation. Considering the trend and impact of inflation, it is found that the annual average consumer inflation increased to 13.2 percent in 2008/09 compared to an increase of 7.7 percent in 2007/08. The annual average price rise of food and beverages group was 16.7 percent. The year-on-year (y-o-y) consumer price inflation rose to 11.4 percent in mid-July 2009 from 12.1 percent in the previous year. Although less, in comparison to the level of mid-July 2009, the y-o-y inflation as measured by the consumer price index remained at 9.9 percent in mid-November, 2009. The news remains bad with regards to the price related to sugar and related products during 2008/09. During the first four months of FY 2009/10, price indices of sugar and sugar-related products increased by the highest rate of 50.6 percent compared to an increase of 37.6 percent in the same period the previous year.

Thirdly, with regards to depression, which can be defined as a situation with high unemployment rate and loss of trade, the scenario is again weird. Let us consider the labor market policies that refer to measures that target individuals or households to ensure a minimum standard of living. Labor policies have been more frequently pronounced in recent years in the expectation that it safeguards the laborers from unforeseen eventuality. The ultimate goal of the government should be to make economic growth compatible to workers’ advantages. In this regard, investment is the key element, which helps in increasing demand by creating jobs. This is what is not happening at all since no employment opportunities are being created. The labor market is still unable to address the job demands of vulnerable groups of people including youths, displaced households and freed but unemployed bonded laborers.

It is projected that the demographic transition currently underway in the region will result in population increasing by 31 percent between 2000 and 2020, compared to about 60 percent in the preceding 20 years. Given the failure in formulating policies for absorbing additional workforce, the problem of social inclusion will accelerate. At present, a number of policies are in operation, including enhancement of employment opportunities through the expansion of economic and social development activities, promotion of labor-intensive businesses for increasing access of the poor to employment opportunities, implementation of income generation and employment programs targeting the backward class and geographical regions, increasing professional efficiency and ensuring basic rights of laborers in a balanced way, and maximizing foreign employment opportunities by producing skilled human resources. Information as to how many jobs were created as a result of implementation of these policies during the plan period is, however, not yet available.

By definition, depression is also a loss of trade. From this perspective, the third enemy seems to becoming more influential in hurting Nepal’s external sector. In 2008/09, as against 13.5 percent rise in exports, imports soared by 28.2 percent in comparison to an increase of 14 percent in the previous year. It is sad that this sector has exhibited a dismal picture in the first four months of FY 2009/10. Exports declined by 23.7 percent against the upsurge of 38.1 percent in the corresponding period of the previous year. Exports to India alone fell by 19.1 percent but imports rose by 28.9 percent compared to its growth of 23.7 percent last year during the review period. An upsurge in the import of vehicles, electrical equipment, machineries, medical equipment, aircraft and communication equipment, their spare parts and tools, etc. were responsible for the rise in total imports. The continuing deterioration in external sector justifies Nepal wrestling with depression.

No doubt, there is persistent poverty (households remain in poverty over time due to their low asset base) and chronic poverty (households fall in poverty due to their inability to protect themselves from shocks), which demands both the promotional role of the state to reduce poverty by enhancing the assets base of the households and protective role that prevents vulnerable households from adverse shocks. Even though South Asia is found to have given too much emphasis on macroeconomic reforms, the study shows that liberalization efforts in this region failed in bringing about a shift of labor and other resources from low-productivity primary sector to high-productivity manufacturing sector. A modest liberalization can have significant impact on economic performance whereas piecemeal reform in many countries as a result of complex political bargaining has a greater chance of constraining the growth.

The aforementioned reasons have created a regime of uncertainty and unpredictability to guarantee acceptable level of consumption, savings and investment. Therefore, Nepal, in recent months, has considered a policy that uses higher interest rates to control the bubble created from real estate business. Similarly, as countries have experienced that substantial hikes in policy rates damage the real economy by affecting growth and employment, Nepal has to wait and see the likely impact of tight monetary policy recently announced by Nepal Rastra Bank. However, the challenge in Nepal is to understand properly if there could be any relationship between monetary policy and asset prices since the inherent contradiction in our policy could be damaging as the government has adopted expansionary fiscal policy. To conclude, the macroeconomic difficulties are certain to give birth to livelihood shocks at the household level unless the short-, medium- (Three Year Plan under preparation) and long-term policies are prepared based on professionally-acceptable economic forecasting.

News Roundup: Inflation continues to wreck havoc

Roundup of Nepali Economic and Business News for Jan 18-20
By NepaliEconomy.com

Inflation continues to wreck havoc in the economy. In December 2009 it was up 11.3 percent. Food prices which make up two-thirds of CPI weight went up 17.8 percent. Fortunately for wage earners, wages have gone up 17.3 percent during the same period. A little bit of good news; improved supplies have led to lower of prices of vegetables by around 8 percent in Kathmandu.

National Planning Commission (NPC) targets 6 percent annual growth and 200K jobs a year in its 3-year plan (2010/11-2012/13). However, Professor Bishwambher Pyakuryal, Board Member of Nepal Rastra Bank gives a very bleek prognosis of Nepal's economy in his OpEd, 2010: Nepal's macroeconomic outlook .

Looks like the super-hot real estate sector in the capital is starting to cool down following NRB's directive on curtailing real estate lending. Rising interest rates due to shortage of liquidity is affecting Micro Finance Institutions (MFIs). NRB has further tightened rules on import of gold. Liquidation of Nepal Development Bank (NDB) has started. It collapsed following a cumulative loss of Rs. 690 million.

The government collected Rs 79.68 billion in revenue in the first half of fiscal year 2009/10, up 34 percent versus last year and 6 percent above target with all sectors contributing. The top three contributors were VAT (24.30 billion), custom duties (16 billion) and income tax (15 billion). Birgunj custom alone collected a whopping Rs. 20 billion.

NEPSE plans to allow share trading in six cities outside Kathmandu (Biratnagar, Birgunj, Pokhara, Butwal, Nepalgunj and Narayanghat) starting February. Maximum of two brokers in each city will man the operation; currently there are 23 licensed stock brokers in the country. Securities Board of Nepal (SEBON) will allow local people to own as much public shares as they want in hydro and manufacturing over-riding its earlier rule that capped at 5 percent.

31,500 Nepalese hold credit cards. Himalayan Bank, Nabil Bank and Standard Chartered dominate the market with each controlling one-third share.

Nepal and South Korea, which first signed agreement in July 23, 2003 to send Nepali workers to Korea in agriculture, service, fishery, manufacturing and construction under Employment Permit System (EPS) renewed the agreement to be valid for the next two years. They have also agreed on a number of technical issues affecting individual workers. On other foreign labor news, Nepal's government wants to boost minimum wages of Nepalese workers in Saudi Arabia, Kuwait, Oman, Lebanon, the UAE, Bahrain and Malaysia, the destinations for 90 percent of Nepalese gonig overseas from current US$ 125 per month.

Agriculture Inputs Company (AIC), the state owned fertilizer distributor is finding difficult to recruit transporters of fertilizers from overseas. The reason being that transport companies don't want to take risks of delay in delivery that could result in fines. This could affect availability of subsidized fertilizer for summer crops.

Fiber-based handicraft are doing brisk business. Chandan Sapkota analyzes the "Demise of garment industry".

Cosmic Air, Yeti International and Impro Airways have lost their Air Operation Certificate (AOC). They have not been in service for at least a year.

In a bizarre news, the the Supreme Court (SC) has annulled the government plan, part of 2009/10 budget, to provide an incentive of Rs 50,000 to those who marry single women.

Nepal: Trade Data

Please click on the charts and tables for larger view.

News Roundup: Prices of Basic Commodites Continue to Rise

Roundup of Nepali Economic and Business News for Jan 16-17

By NepaliEconomy.com

Sugar shortage is hitting confectionery factories along the Sunsari-Morang industrial corridor. To alleviate this problem, the government is buying 5,000 tons of sugar from private mills and selling them at Rs 80 per kg at government outlets. Brick Kiln Owners' Association are raising brick prices by 10 percent to Rs 10,500 per thousand bricks effective mid-January. Chicken prices are also rising, up 6% to Rs 250 per kg and so are sugar prices, up 100% to Rs 90 per kg last year.

Citizen Investment Trust (CIT) will invest Rs. 2 billion in the 456 MW Upper Tamakoshi Hydroelectric Project (UTKHEP). Other investors in the Rs. 33 billion project include Employees' Provident Fund (Rs. 12 billion), Nepal Telecom (Rs. 6 billion) and Rastriya Beema Sansthan (Rs. 2 billion each).

Nepal Stock Exchange (Nepse) will implement Central Depository System (CDS) within 9 months with the help of Central Depository and Services Ltd (CDSL) of India and IRs 92 million grant assistance from India. CDS will automate stock transactions activities. Currently it takes 2 weeks (2 weeks?) to get share ownership transferred.

Chitawon Milk, a joint venture between state-owned Dairy Development Corporation (DDC) and Chitawon Co-E, and the biggest powdered milk manufacturer in the country with capacity to process 150,000 litres of milk per day or 15 tons of milk powder will start production at the end January.

EU funded The Renewable Energy Project (REP) which plan to install 669 solar power systems to generate 800 KW of energy in 21 hilly districts at the cost of Rs 1.6 billion has been re-initiated after 3 year hiatus. The project is slated to be completed by February 2011.

"Return to Everest", a sequel to docu-drama "Everest" is made for IMAX 3D at the cost of US$10 million with Nepalese investors putting in US$4.5 million.

Another bureaucracy, Central Revenue Board (CRB) is in offing to consolidate and coordinate the the duties revenue collection. It seems ridiculous to add another layer of bureaucracy.

Understanding the Liquidity Crisis in Nepal

Commentary by NepaliEconomy.com
By NepaliEconomy.com

The so-called "liquidity crisis" in Nepal has been hogging news headlines since last summer and the situation seems to be getting worse. Several policymakers, commentators and editors have lent their opinion on the issue but there seems to be no definitively convincing one.

NepaliEconomy.com will analyze the facts and will try to give a more comprehensive understanding of the issue. After doing so, it came with the following conclusions,
(a) Nepal does not suffer from liquidity crisis.
(b) Nepal also does not suffer from lack notes and coins.
(c) Nepal seems to have Current Account deficit which is causing slowdown in growth in money supply (M1 and M2). This seems to be an unexpected event because banks seem unprepared for it. While their loan growth is growing briskly, deposits are not because remittance money has stopped. They had to ask Nepal Rastra Bank (NRB), the lender of last resort, to replenish their coffer.
(d) NRB has injected Rs. 20 billion into the banking system but this is a stop-gap measure. This crisis shows that there are structural problems in the country, which easy money from abroad in the form of remittances has concealed namely (i) mis-management of monetary policy (it seems that remittances have been not be sterilized effectively) (ii) free-wheeling banking system (iii) unrealistically strong NRs which is causing trade deficit to persist especially with India.

What has been said thus far?
In one of the first commentaries on the issue, Mr. Achyut Wagle (Cash Crunch , 22 May 2009) defined liquidity crisis as the shortage of higher denomination Rs 500 and Rs 1,000 notes (make up more than 90 per cent of about Rs 137 billion in circulation) going off the market because of (a) Voluntary Disclosure of Income Scheme (VDIS) and (b) over-subscription of IPOs.

A December 17 2009 article in Kantipur citing government sources gave several reasons for the liquidity crisis (which it did not define but can be surmised as shortage of cash) (a) lending to unproductive sectors (b) money going to India (c) delay in budget endorsement (d) diminishing remittances. An editorial in Republica on 26 December 2009 defined liquidity crisis as shortage of cash (again) and blamed that on trade imbalance. Interestingly at a seminar organized by NepaliTimes on December 30 2009, the bankers and government officials gathered there avoided making reference to shortage of cash; rather they dwelled on fancier topics like repos and treasury auctions. Some of the reasons given for the crisis included (a) trade imbalance (b) diminishing remittances and (c) over-investment, and the solution to be treasury bill auction.

On January 10 2010 Deputy Governor of Nepal Rastra Bank (NBR) and a short-listed candidate for NRB Governor Mr. Bir Bikram Rayamajhi gave 3 reasons for liquidity crisis (a) political instability (b) ATM machines (c) over-investment. In a column on 15 January 2010 Artha Beed (aka Sujeev Shakya) defined liquidity crisis as shortage of cash, which resulted from (a) inability of NRB to print notes on time and (b) mushrooming cooperatives for wanton lending and for causing notes to vanish from the system.

NepaliEconomy.com does not find any of the aforementioned comments particularly insightful in explaining the crisis because discrete issues are confusingly used inter-changeably. Is Nepal suffering from liquidity crisis or from shortage of currency or from balance of payment crisis? They are NOT all the same. Lets look at each of the concepts first and then figure out what's ailing Nepal.

Liquidity Crisis
In macroeconomics (and in economics in general), the definition of liquidity goes beyond simple coins and notes. It includes broader credit instruments (along with business sentiment or animal spirit that drives them) that grease the wheel of the economy. In strictly technical terms, coins and currencies are also liabilities but liabilities of the Central Bank. Shortage of cash does not bring about liquidity crisis. For liquidity crisis to occur, the credit system of the country must be broken because of mis-trust amongst counter-parties. It happened in the US and Europe in late 2008 following the collapse of Lehman Brothers and AIG which led to an explosion in EuroDollar spreads, the global benchmark of credit risk (there are other metrix also like OIS Spreads). A corporate analogy might make it more clearer. Just because a business does not have cash to pay for employees or vendors does not mean that it has liquidity problem; the owner of the business can easily go to a bank or to another creditor to get the money, or he/she might just issue IOUs to his/her employees and vendors. That can only happen if the business is trusted by its counter- parties. If not, it will have a liquidity problem and go into bankruptcy.

NepaliEconomy.com argues that Nepal is not experiencing liquidity crisis. Credit is still flowing through the system because credit-sensitive sectors like real estate and autos are still going strong (at least based on news reports). Moreover banks are still doing brisk business. There are no stories of a bank run in Nepal.

Shortage of Currency
The amount of currency (coins and notes) needed in an economy is a function of three factors; economic activity, price levels and velocity (how fast money is re-cycled through the system). A rise in economic activity or price levels requires more money. On the other hand, rise in velocity requires less money. A sudden jump in economic activity or price levels or a sudden fall in velocity could cause money demand to go up.

In most countries including Nepal, economic activity and inflation do not change suddenly or unexpectedly. Comments made by Nepali columnists/editors about hoarding of money because of VIDS or to speculate on real estate suggest that velocity might have unexpectedly gone down but NepaliEconomy.com doubts the validity of those arguments for these reasons,

(a) it does not make economic sense in Nepal to hoard money because of high inflation - cash under mattress is losing about 10 percent value every year.

(b) in financially under-developed country like Nepal, most of the money in circulation are already in the hands of public. Of Rs 137 billion in circulation, Rs 125 billion is held by public and $12 billion by banks i.e. almost 90% of currency circulation is with public compared to less than 25% in the US. Likewise currency circulation makes up 16% of GDP of Nepal compared to only 6% of the US.

(c) cash and notes in Nepal's commercial banks has been rising steadily. The latest data shows they have about Rs 12 billion or 1.3% of GDP. In December 2007 it was only Rs 7 billion or 1.0% of GDP.

(d) when NRB injected Rs 20 billion into the banking system, it did not put that amount of coins and notes into banks' vaults; instead it just credited banks' accounts at NRB - it is an accounting exercise. Moreover, NRB does not have coins and notes in its vaults because all the notes and coins outstanding in the country belong to NRB. To say NRB's interventions helped deal with currency shortage makes absolutely no sense.

Balance of Payment Crisis (BoP)
Balance of Payment (BoP) tracks the amount of money going out of the country called "debit" (paying for imports of goods and services, repatriation of income by foreigners and purchase of foreign assets) and coming into the country called "credit" (getting paid for exports of goods and services, income from foreign assets, foreign aid, remittances and selling of foreign assets or domestic assets to foreigners). In economic parlance, debit must equal credit or Balance of Payment must balance but how it does is the more important question.

To answer the "how question", it is important to look at BoP from "flow" and "stock" prospective. The flow part of BoP is called Current Account (CuA). It includes money flows due to trade, income from foreign assets and unilateral transfers (remittances and foreign aid). The "stock" part of BoP is called Capital Account (CaA). It includes transfer of money due purchases and sales of assets which can be divided into financial and non-financial assets, and government and non-government assets.

Nepal must run CuA surplus because it does not have the wherewithal or the resources to finance deficit - no foreigner in the right mind will invest in Nepal (either through FDI or through portfolio investment) and Nepal does not have credibility to borrow in the international debt market. Fortunately for Nepal, it has been running CuA surplus on the back of strong remittances. The latest data from NRB website for Q3 2008-09 (Jan'09-Mar'09 period) shows Rs 18 billion CuA surplus made up of Rs 50 billion trade deficit, Rs 4 billion net foreign income (from foreign assets) and Rs 64 billion transfer of which Rs 56 billion was remittances. But apparently that surplus has turned into deficit in the first 4 months of this fiscal year (Jul'09-Sep'09) in the tune of Rs 20 billion on the back of slowing remittances and rising trade deficit (this data is unfortunately not available on NRB website).

Remittances come to Nepal in foreign currencies and NRB converts them to NRs. Foreign currency earned this way is used to pay for imports of goods and services. Since Nepal has been running CuA surplus, foreign currencies have been accumulating in NRB's coffers in tune of Rs 219 billion by Q3 2008-09. The remittance money converted to NRs goes into the banking system (as deposits) and increases the general money supply UNLESS NRB sterilizes it, but that seem not to be the case. As such, money stock as measured by M1 and M2 has been growing rapidly, at 20%+ since July 2008 - that could one of the causes of 10%+ annual inflation in Nepal.

CuA surplus turned to deficit due to slowing remittances and rising trade deficit in Q1 2009-10 (Jul'09 - Sep'09) and this must have come as a total surprise to policymakers and bankers. This caused a sudden stop in deposit growth but since banks were still making loans aggressively especially in the real estate sector there was imbalance in money coming in and going out. Suddenly bankers found out that there was a mis-match in their assets and liability side of the balance sheet. That's when they had to turn to NRB, the lender of last resort, for help to soar up their deposit base.

NRB can create money out of thin air because they have the legal monopoly to do so. A person or a business can only write checks (debit) against their deposits (credit) at a bank. Even a bank can only write checks against its reserve balance at NRB but NRB can write checks to itself. In doing so, it creates money. NRB has injected Rs. 20 billion into the banking system. Incidentally, this amount equals the amount of CuA deficit. News reports are not clear about how NRB injected that money, but NRB likely increased banks' reserves at NRB (debit) - which banks can withdraw to fund deposits - and offset that with the creation of Treasuries (credit) - yes, central banks can create Treasuries out of thin air and that's called writing checks to itself (reports in the media about Treasury auctions and repos do not make sense because those activities withdraw NOT provide liquidity).

Conclusion
Without having access to the latest economic/financial data NepaliEconomy.com concludes the following,

(a) Nepal does not suffer from liquidity crisis.
(b) Nepal also does not suffer from lack notes and coins.
(c) Nepal seems to have Current Account deficit which is causing slowdown in growth in money supply (M1 and M2). This seems to be an unexpected event because banks seem unprepared for it. While their loan growth is growing briskly, deposits are not because remittance money has stopped. They had to ask Nepal Rastra Bank (NRB), the lender of last resort, to replenish their coffer.
(d) NRB has injected Rs. 20 billion into the banking system but this is a stop-gap measure. This crisis shows that there are structural problems in the country, which easy money from abroad in the form of remittances has concealed namely (i) mis-management of monetary policy (it seems that remittances have been not be sterilized effectively) (ii) free-wheeling banking system (iii) unrealistically strong NRs which is causing trade deficit to persist especially with India.

News Roundup: Finding Replacement for NRB Governor Bijaya Nath Bhattarai

Roundup of Nepali Economic and Business News for Jan 14-15

By NepaliEconomy.com

The ongoing liquidity crisis in Nepal is the macro issue de jure but it seems to be getting very little attention from expert opinion makers. The few opinion I have read (Cash crunch, Liquidity crisis, Liquidity crunch or crisis?, Easing liquidity, Where has all the money gone?) do not make much sense. I was hoping someone from Nepal Rastra Bank with expertise on the issue and access to privileged data would provide sound reasons as to why Nepal is facing such a crisis but that has been a wishful thinking.

Nepal Rastra Bank (NRB) is getting a new governor for 5 year-term to replace Mr. Bijaya Nath Bhattarai whose tenure ends at the end of the month. According to news reports, the short list includes former NRB Director Deependra Bahadur Chhetri, senior finance advisor of the finance minister Shree Ram Poudel and Deputy governor Bir Bikram Rayamajhi. NRB has other things on its plates lately. It handed back management of Nepal Bangladesh Bank to its new Board of Directors. NRB is entrusted to monitor self-regulated Employees Provident Fund(EPF) and to regulate Citizen's Investment Trust (CIT). Talking about EPF, it is taking advantage of the current liquidity crisis by demanding at least 13 percent for its deposits; and it does have lot of leverage given that it has Rs 28 billion deposit in various banks.

India and Nepal are holding 2 day meeting in Kathmandu at commerce secretary level on January 27th to resolve some of the bi-lateral trade issues. Nepal wants to (a) remove countervailing duties on Nepal's exports especially on garments (b) initiate accreditation process to eliminate ad hoc certification process, a non-tariff barrier. NepaliEconomy.com wishes the Nepali team all the best because in trade negotiations with India, Nepal aways seems to get the short end of the stick.

Nepal's government wants to improve profitability of state-owned enterprise (SOEs) by reducing political interference in their operations by bringing in strategic foreign investors. The success of Rastriya Banijya Bank (RBB) provides a template on how it could be done. Currently three SOEs (Telecom (NT), Nepal Airlines Corporation (NAC) and Nepal Stock Exchange (Nepse)) are seeking partners; Couple of days ago, Minister Mahato suggested similar initiatives for Salt Trading Corporation and Nepal Oil Corporation; Janakpur Cigarette Factory (JCF) and Nepal Bank Limited might join the list. Bombay Stock Exchange has already shown interest in NEPSE.

Infrastructure development continues in Nepal albeit at a snail's pace. Indian government has initiated a study on East-West electric railway. 20km Kolati-Deurali-Chisapani road in Kavrepalanchowk has been completed.

An interesting take on the advertising industry in Nepal by Ms. Ang Sanu Lama. Her points are (a) Nepal charges maximum of NRs 50,000 to foreign channels to broadcast in Nepal compared to NRS 4 million charged by India, and this discourages foreign channels from advertising and promoting Nepali products (b) Rs 25 million goes out of the country as subscription fees for foreign channels.

The tech expo in Nepal is drawing huge crowds, about 60,000 on the first day. While not as big as the International Consumer Electronics Show, it is a respectable performance for country like Nepal.

News Roundup: Nepal's Government Gets Serious About Tax Collection

Roundup of Nepali Economic and Business News for Jan 12-13
By NepaliEconomy.com

Nepali government is getting serious about tax compliance given that only 20 percent of the population (or is that eligible taxpayers?) are paying taxes. It wants every taxpayer to get permanent account number (PAN) and is even threatening government employees of salary freeze if they don't comply. Aside from individual's taxes, the government is trying to find ways to get its fair share from real estate transactions especially when they change hands at below market price and when they are transferred as gifts. Taxes tend to be used as legal weapon against political opponents in less well-governed countries and I worry that it could be the case especially in politically volatile Nepal. However, if done well, it could be a boon for Nepal's economy.

Bee-keeping is the bright spot in Nepal's agribusiness landscape. About 1,000 tons of honey is produced in 2008/09 of which 70 percent is exported. The industry is looking for support (surprise?) from the government in the form sugar subsidy. Talking about exports, finance ministry is lobbying the parliament against the ban of exports of sand and stones to India from Terai plains and Chure-Bhawar region of Nepal. It is a relatively big business, Rs 860 million in the 8 bordering districts. The concern is mainly environmental but I am sure there are other ulterior motives.

As expected, the government is mulling over plans to raise import duties to help solve Balance of Payment crisis but NepaliEconomy.com believes that the more appropriate and effective approach is devaluation of NRs versus IRs.

The war of words between state-owned Nepal Telecom (NT) and its regulator Nepal Telecommunications Authority (NTA) continues over the latters' demand that NT give-up some of its frequency assets. Both sides make their points in jargon-filled language nobody can understand.

Surprise, suprise, load-shedding is set to increase from 51 hours a week to 63 hours a week from next week.

An interesting interview on the BBC Nepali Service with Mr Min Bahadur Gurung, the owner of Bhat-Bhateni Supermarket.

News Roundup: Nepal Oil Corporation (NOC) is Hogging News Headlines

Roundup of Nepali Economic and Business News for Jan 11-12

By NepaliEconomy.com

Rising petroleum consumption is becoming a problem in light of stress in country's balance of payment (Rs 20 billion deficit in the first 4 months of the fiscal year). According to NOC demand seems to be rising across the board - diesel up 100 percent, petrol up 80 percent and cooking gas up 50 percent. Nepal government is pressuring NOC to slow demand growth by raising prices but NOC is balking. Nepal will spend Rs 5 billion on petroleum imports in January 2009, up from Rs 3 billion August. The only silver lining in this dismal news is strengthening of NRs against the US dollar on the back of rising IRs. On another NOC related news, talk on long delayed (13 years to be exact) Raxaul-Amlekhgunj oil pipeline is going on. Nepal government is planning to privatize Salt Trading Limited and NOC but it could be just cheap talk - who in the right mind wants to invest in militant-labor infested industries?

Nepal Telecom (NT) is brushing with its regulator Nepal Telecommunication Authority (NTA) over ownership of frequencies. It is a pretty arcane subject but I think the bottom line is that NTA has to break the monopoly of NT over frequency ownership for the benefit of consumers.

Remittances continue to flow into the country. According to Nepal Rastra Bank (NRB), during the first four months of fiscal year 2009/20 Rs 67.74 billion came into the country; up 7% versus the same period the previous year. Moreover, Nepalese continue to pour out of the country at record pace; 100,051 left in the first five months of the current fiscal year, down just 2,852 from the same period last fiscal year. Nepalese workers in Qatar got a break with hike in salary and allowance to 800 Riyal (Rs 16,000) per month plus two-way ticket starting January 1. Liquidity crunch continues to take toll (a) the cabinet has formed a high-level committee to take on the issue (b) interest rates on C&I loans are going up which will likely impact the economy.

Inland Revenue Office (IRO) of Kathmandu is mobilizing 15 volunteers to collect tax on house rents. Apparently only 44,000 landlords pay such tax. The question is why volunteers and not the legal authority of the state? Is this a joke?