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.

7% growth target unlikely to be met: Bhattarai

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.

ADB expects 3.5 percent growth in Nepal

REPUBLICA, 5-Feb-09

The country director of the Nepal Resident Mission of Asian Development Bank (ADB) Barry J. Hitchcock said despite the global down turn, Nepal will see a 3.5 percent growth rate this year.

“Given the economic performance of Nepal, we have expected that Nepal’s economic growth would hover around 3.5 percent this year. However, the growth depends on what will happen in the agriculture sector, the main stay of Nepal’s economy,” said Hitchcock, while delivering a statement about the ADB-financed projects during 2008 at a press conference on Thursday.

Answering queries about future assistance to Nepal, Hitchcock said that the ADB would double the volume of its assistance to more than US$ 200 million each year in the next two years, including 2009, where the ration of grant and loan will be equal.

“However, the future assistance will be based on the performance of Nepal in implementing the development programs,” Hitchcock said.

The ADB had approved the grant assistance of US$ 8 million and US$25 million for the education sector, and information and communication development.

A grant of US$ 106.3 million was approved for the development of local governance and community development.

The ADB office’s mission statement issued during the press conference stated the portfolio for Dec 31, 2008 comprised of 18 loans worth US$586 million net, 10 investment grants worth US$ 332 million, and 33 ongoing technical assistance projects totaling US$ 29 million.

The ADB’s contract awards and disbursement to Nepal reached US$145 million and US$127 million, respectively.

Hitchcock painted the encouraging picture based on the assistance modality in different projects in Nepal.

“The year 2008 was a good year for the ADB in term of assistance, as all of our assistance for investments projects are in the form of grants,” said Hitchcock.

The ADB statement said no projects were considered at risk at the end of 2008, a remarkable achievement compared with 14 percent in 2007 and 17 percent in 2006.

The resident representative also categorically mentioned that the price increase for construction materials in high fuel prices delayed approval of government budget and Koshi flooding were the major challenges in development works during the review year.

“Now, shortage of electricity has emerged as a major change, as in the absence of electricity we cannot think of desirable economic activities,” Hitchcock said.

He also said that the ADB would take the initiative to fund more hydropower projects to deal with the ever-increasing power shortage in the country.

“We are looking for the possibility of funding storage project to solve the problem of the power crunch during the winter when water level in the rivers recedes,” he added.

He also noted that the successful completion of the CA election in April has paved the way for the establishment of lasting peace and enhanced prospects for sustainable growth in Nepal.

NRB MACRO-ECONOMIC report : Revenue generation satisfactory

NRB MACRO-ECONOMIC report : Revenue generation satisfactory
ArthaExpress, 11-Oct-07

Revenue mobilisation during the first month of current fiscal year 2007-08 has been satisfactory, as it grew significantly by 41.2 per cent to Rs 7.13 billion in comparison to the corresponding period last year. The revenue generation had gone up by 11.3 per cent during the same period last year.

High rate of growth in VAT and some non-tax revenue has contributed to such a high acceleration in revenue mobilisation, according to the macroeconomic report published by Nepal Rastra Bank (NRB).

In the review period revenue from VAT and excise duty recorded a higher growth, compared to that of the corresponding period of the previous year. However, customs revenue has declined in the review period, the revenue from income tax witnessed a decelerated growth.

In the first month of 2007-08, total government spending increased by 25.3 per cent to Rs 3.64 billion in contrast to a decline of 17.3 per cent in the corresponding period of the previous year. The increase was due to a rise in recurrent as well as freeze expenditure. The recurrent expenditure rose by 63.8 per cent to Rs 1.24 billion. In the corresponding month of the previous year, recurrent expenditure had increased by 33.9 per cent.

The increase in the salary of civil servants and the compensation to conflict-hit accounted for such a high growth in recurrent expenditure.

During the review period, the government received foreign cash loans of Rs 127.70 million and foreign cash grants of Rs 359.3 million. It had received foreign cash loans of Rs 99.6 million and foreign cash grants of Rs 605.2 million in the corresponding period of the previous year.

In the foreign trade front, exports rose by 10 per cent in contrast to a decline of 2.6 per cent in the corresponding period. Out of the total exports, export to India went up by 8.3 per cent, while the exports to other countries soared by 13.3 per cent.

The rise in the exports to India was attributed to the upsurge in exports of zinc sheet, chemicals, jute goods, MS pipe and polyester yarn. Similarly, exports to other countries took an upward trend owing to growth in exports of pulses, silverware and jewellery, packing materials of paper and buttons.

Total imports also increased by 13.8 per cent comp-ared to a growth of 7.1 per cent in the corresponding period last year. While imports from India went up by 14.5 per cent, imports from other countries rose by 12.6 per cent in comparison to growth of just 0.2 per cent last year.

A rise in the import of petroleum products, MS billet, vehicles and spare parts, cold rolled sheet among others, from India and gold, crude soybean oil, telecommunication, transport equipment and parts and polythene granules, among others, from other countries led to a rise in total imports during the review period in comparison to last year.

BOP posts a deficit of Rs 1.6b: Nepalis spent more on foreign education, travel and transportation

BOP posts a deficit of Rs 1.6b
Nepalis spent more on foreign education, travel and transportation
eKantipur.com, 10-Oct-07

The country registered a deficit of Rs 1.60 billion in balance of payment (BOP) in the first month of this fiscal year, indicating

that Nepalis spent more money on foreign education, travel and transportation during the period.

The BOP had a surplus of Rs. 2.83 billion in the corresponding month last year.

“More money went for financing education, travel and transportation outside the country while what we received from foreign tourists, however, did not go up,” said Nar Bahadur Thapa, director of the Research Department of Nepal Rastra Bank (NRB), explaining the reason behind the BoP deficit.

Exports and imports, however, showed some improvements during the period, says a central bank's report on the latest macro-economic situation of the country.

According to NRB, total exports rose by 10 percent during the period - thanks to upsurge in the export of zinc sheets, chemicals, jute products, polyester ion, pulses, silverware and jewelries, among others.

Likewise, the import grew by 13.8 percent as the country consumed more vehicles and spare parts, cold-rolled sheets, gold, crude soybean oil, telecommunication equipments and other parts.

During the month, Nepal received remittance totaling Rs 9.36 billion, which is a rise of 21.4 percent compared to the same period last year.

"Inflation slightly eased down to 6.3 percent from 7.3 percent," says the report, adding that strengthening of Nepali currency vis-à-vis US dollar made imports cheaper and impact of previous rise in prices of petroleum product also withered away during the period.

During the month, total government spending increased by 25.3 percent to Rs.3.64 billion. The spending soared due mainly to whopping growth in the recurrent expenditure resulting from the rise in salary of civil servants and compensation given to conflict-affected people.

On the revenue front, NRB report portrays a remarkable good picture. According to the report, the government recorded a 41.2 percent rise in revenue collection to Rs.7.13 billion.

NRB macroeconomic report - Salarymen, wage earners gain

NRB macroeconomic report - Salarymen, wage earners gain
eKantipur.com, 8-Aug-2007

Salaried staff and wage earners found their living conditions ease, as their salary and wages grew at higher rate than prices of goods and services in the market during the first 11 months of 2006/07, shows a latest Nepal Rastra Bank (NRB) report.

The report on macroeconomic situation of the country for the period says the average inflation stood at 6.6 percent during the period, whereas salary and wage rate index rose by 11.6 percent.

In the same period last year, prices of goods had grown by 7.9 percent, whereas salary and wage had grown by 5.7 percent.

The central bank has attributed the easing in prices to the moderation in the prices of both food and beverage items as well as non-food and services. “The impact of recent appreciation of the Nepali currency against the US dollar also eased consumer prices of imported commodities,” says the report.

The Nepali currency vis-à-vis the US dollar appreciated by 13.30 percent in mid-June 2007. Likewise, prices of food and beverages rose by 5.8 percent only, compared to a rise of 9.1 percent a year ago.

Rise of salary and wage rate index, on the other hand, is attributed to ten percent increase in allowances of civil servants, rise in the wages of industrial laborers in recent months, and labor supply constraints in rural areas.

Among the wage earners, industrial labor saw their wages increase by 20.7 percent, construction laborer by 11.2 percent and agriculture labor by 9.4 percent. During the period, inflow of remittances grew by mere 3.9 percent, compared to the substantially higher growth of 48.4 percent in the first eleven months of 2005/06. In dollar terms, remittances rose by 5.7 percent.

Increased flow of remittance, meanwhile, grew consumer confidence, thereby contributing in higher collection of value added tax and import duty, among others. Rise in consumption shot up revenue collection of the government up by about 21 percent.

Despite rise in consumption, imports grew at slower rate of 11 percent during the period, compared to 16.6 percent growth of the same period last year. Exports also slowed down, and grew by mere 0.8 percent.

The central bank has attributed the deceleration in the growth of exports to factors such as the lack of improvement in the investment climate and security condition, regular bandas and power shortages.

According to the report, exports to India rose by 2.1 percent in the first 11 months of 2006/07, while exports to other countries declined by 2 percent. Imports from India increased by 10.8 percent, and imports from other countries rose by 11.3 percent.

As a result of appreciation of the currency, foreign exchange reserves of the country declined by 1.6 percent to Rs 162.41 billion over the 11 months of the fiscal year.

Investors, who bet their money on shares, reaped handsome returns during the first eleven months of the last fiscal year, as NEPSE index increased by 54.6 percent to 575.04 points in mid-June 2007 and market capitalization increased by 67.2 percent to Rs 155.24 billion during the period.

GDP per capita up 8.8 percent

GDP per capita up 8.8 percent
eKantipur.com, 12-Jun-2007

Despite deepening economic sluggishness, per capita income in Nepali rupee terms increased by 8.8 percent to Rs 27,209 in the current fiscal year 2006/07 - thanks to continued healthy remittance income, which is expected to cross the Rs 100 billion mark this year.

Similarly, per capita GDP (Gross Domestic Product) in dollar terms increased to US$ 383 from last year's US$ 350, a 9.4 percent increment which is much higher than the annual average population growth rate of 2.25 percent.

According to the national accounts for fiscal year 2006/07 prepared by the Central Bureau of Statistics and circulated among top government officials, the overall economy of the country is estimated to expand by 2.29 percent to Rs 486.84 billion (US$ 6.85 billion when calculated at an annual average exchange rate of Rs 71.06 per dollar) at constant prices of 2000/01.

The expected GDP growth for the current fiscal year is less than half the targeted rate. The government had set a target of achieving 5 percent GDP growth this year.

In addition, given the growth rate estimate for this year, which is also the last fiscal year of the Tenth Plan, the average growth of the plan period remained 3.3 percent, as low as nearly half the targeted growth rate.

However, at current prices that also accommodate annual inflation, the size of the economy is expected to touch Rs 670.6 billion (US$ 9.4 billion), which is 11.1 percent more than the size of economy last year.

Among the major sectors in the national accounts, which were re-categorized into 15 sub-groups with 2000/01 as a new base, the agricultural sector, which contributes 34 percent to the national economy, increased by a mere 0.7 percent mainly due to erratic monsoon. The growth in fact is the lowest in the last five years.

Likewise, the non-agriculture sector is expected to grow by 3.6 percent, one percentage point less than last year's 4.6 percent. Among the major sub-sectors of the non-agriculture sector, industry grew by 2.2 percent while the services sector went up by 4.1 percent.