News Roundup: May, May be an inflexion month in Nepali politics

Roundup of Nepali Economic and Business News for May 1-June 12
By NepaliEconomy.com
News Archive

For better or for worse, May 2010 could be an inflexion point in Nepali politics. It is the month when CPI (M) experienced its first political setbacks. Following its massive May Day parade, the group launched indefinite general strike but withdrew it only after 6 days following public backlash, and without getting anything in return from the government. On May 28th it made a last minute compromise with the ruling coalition to extend the tenure of the CA by one year, supposedly to prevent a vertical break-up of itself. Again, it got the short-end of the stick because MK Nepal is adamantly clinging to power. It has become obvious that although the Maoists are the most dominant political force they are not powerful enough to impose their will on the country. The result is that the country has multiple centers of powers and is heading towards fragmentation along ethnic/regional lines much like the Warlord era in China in the early twentieth century post-Manchu dynasty and in Afghanistan post Soviet withdrawal. The bottom-line is that political instability in Nepal is likely continue for a long time.

With the bandh over, it is time to take account of the damages. Total economic cost is anyone's guess - Industry Mahendra Raya Yadav estimates Rs. 250 million a month from bandhs - but there are few concrete claims of losses: Tourism Rs 15 billion, Kurintar Cable Car Rs 150 million and movie industry Rs 27 million. And politicians still talk of ending strike culture in Nepal.

Nepal’s economy continues to chug along despite unfavorable political backdrop. World Bank expects 2010 growth to be around 3%. Nepali government revised down its own forecast from 5.5% to 3.5% because of weaker than expected agricultural output; grain output fell 4% this year; not a surprise given the government has not been able to supply enough fertilizer. Given the country’s anemic economic growth, it is mind-boggling that the government is unable to spend allocated development budget. At least on one measure the government claims a success; it has reduced poverty rate from 31.0% to 25.4%.

BOP deficit is the country's top economic problem according to the NRB Governor. Nepal received $42 from the IMF’s rapid credit facility to finance its CA deficit but that is not quite enough or is the long-term solution. The NRB Governor talked about devaluing NRs vs IRs but that idea was officially shot down the very same day. For whatever reason the country suffers from acute shortage of IRs. Without any concrete policy, trade deficit continues to worsen; it widened 58% in the first 10 months of 2009/10 on the back of weaker exports. China is trying to help Nepal's exports by signing an accord that will allow zero-tariff entry facility to 4,721 Nepali exportable items in the Chinese market but that's more PR than anything given Nepal's widening deficit with China. Taking about trade, there is funny war going between CNI-FNCCI over issuing certificates of origin.

Financial sector continues to be under pressure. Deposits were down in Q3 vs Q2 probably because banks are limiting deposits rates to only 12%. Real estate remains weak with realty transactions in Kathmandu down 25% and aggregate loans down 3% in Q3 vs Q2. Auto sector is in the most severe recession in recent memory, the low-end more so than the high-end. Talking about cars, vehicle theft has gone up in the capital. On the regulations side, the NRB penalized 90 development banks and finance companies for not meeting Statutory Liquidity Ratio (SLR) but bankers were able to push back government’s plans to have deposits of Rs 1 million or more verify the source. On the flip side, the NRB rejected request from the NBA to relax terms of collateral for refinancing from the central bank.

Government has endorsed a new industrial policy but not sure what that means. The country has no respect for law and order; case in point despite the government's opposition truckers are forming syndicates to monopolize their routes. The country suffers from lack of power. Load-shedding first came down by half from 12/day to 6hr/day and then rose again to 9 hours/day. Most importantly for business, Nepal is the most corrupt country in South Asia according TI.

Remittances, which are already affected by the global economic slowdown might get hit more by country-specific issues like in Malaysia where Nepalese are going to compete with cheaper Bangladeshi workers. On positive news, Brunei wants to hire more Nepalese in its security agencies but shortage of passports is hampering those who want to get out.

SOE are a suffering bunch. NOC raked up losses of Rs 10 billion in 2066/67, up from Rs 9 billion in the previous year and is seeking Rs 1 billion loan from the government. NEA is losing Rs 4 billion a year and has accumulated Rs 12-14 billion debt and could go bankrupt. The government wants to privatize NAC which has Rs 12 billion asset at Rs 28 billion enterprise value and is expected to lose its monopoly over ground handling at the Tribhuvan International Airport. NAC is key to the success of Nepal Tourism Year 2011 and wants to expand its fleet by acquiring 9 aircraft but is having difficulty getting government’s loan-guarantee. In the east, Udaypur Cement Factory is on the verge of being closed due to mis-management.

The one sector doing well in Nepal is telecommunications and broadcasting. 81 foreign TV channels have applied for downlink permission with the Ministry of Information and Communications (MoIC) to broadcast in Nepal. NT has slashed 3G subscription price by more than 40%, while price wars in telecoms has move to international calls. And the government has unveiled IT Policy 2010.

There was a major financial scandal in Nepal. Unity Life Insurance Company (ULI), a multi-level marketing company, popularly known as a pyramid scheme, got lot of headline as its business practice came under question. ULI boasted that it had 650,000 clients and collected more than Rs 6 billion mainly from the working poor but the government found that it had only Rs 1 billion in assets. After lot of news coverage, the government froze the account on May 17. Before the government closed ULI’s 34 holding companies, had a money losing hospital in Pokhara and a dairy in Chitwan. The government has charged several ULI's managers. The government also issued order banning networking business but that decision was appealed. Supreme Court issued its judgment but one report says SC agreed with the government but another says it did not; go figure!