News Roundup: Finally a Budget and then a Casino War

Roundup of Nepali Economic and Business News for Nov 1-Dec 31
By NepaliEconomy.com
Archive: Roundup of Economic and Business News

After much delay, MoF announced Rs. 338 billion budget on November 19, 2010. 38% (127B) goes to capital expenditure, 57% (192B) to recurring expenditure and 6% (19B) to interest payments. On the revenue side, 64% (215B) is from tax collection, 26% (88B) is from foreign aid and 10% (35B) is from domestic borrowing. The NPC is on a hot-seat over allocation of district budgets - 46% of development budget is given to districts and 54% is allocated at the national level. Excise duties on luxury products and all vehicles except buses and trucks have gone up, and as a result purchases of motorcycles have plunged. On hydro, Budhi Gandaki (600 MW), Naushyalgad (400 MW), Tamor (300 MW), Upper Seti (127 MW) and Aandhikhola (175 MW would be brought into operation under appropriate partnership this year.

The ongoing tussle between casino owners and the government has escalated to the PAC and the cabinet. The government is threatening to revoke casinos' operating licenses. Recall that the DRI claims that Casino Nepal owes Rs. 100 million and Casino Anna Rs. 63 million. Looks like the rise and the fall of casino honcho Rakesh Wadha follows the ebbs and flows of Nepali politics.

Fiscal Policy: The MoF wants to raise Rs. 6.30 billion from the realty sector this year but YTD (5 months) revenue collection in Kathmandu LRO office is down more 50% owing to (1) more stringent NRB policy for real estate and (2) income source disclosure requirements. The MoF has collected Rs. 65 billion in the first 5 months of this fiscal year, up 11% year/year. They want to collect Rs. 25 billion in Poush alone, and have created flying squad to help. The squad recently raided facilities of Varun Beverages, the bottler of Pepsi. To aid compliance on import duties, importers will now have to declare their goods in detail. A lack of disclosure is hurting DRI's efforts to collect capital gains taxes (CGT) on stock transactions. The Khetan Group paid Rs. 265 million CGT from its sale Gorkha Brewery to Carlsberg for US$ 40 million. Traders say 13% VAT on IT products is encouraging illegal imports from India. New Baneshwor Department Store is fined Rs. 93 million for evading VAT for the last 7 years.

Monetary Policy: The NRB is purchasing 1 ton of gold from the IMF for Rs. 3.2 billion to bolster its gold reserves. It is also allowing the resumption of gold imports after 4 months hiatus but with limits - 15kg/day for gold and 200kg/day for silver. The central bank appointed Mr. Gopal P Kafle and Maha P Adhikari, both insiders, as deputy Governors.

Local Government: NVC has found misuse of development budget in Rauthat district.

Agribusiness: Chicken in Pokhara costs Rs. 230/kg, 15% higher than other places owing to a ban on chicken imports. According to the MoAC, Nepal produced 3 million tons of vegetables in 2009/10 and per capital consumption has gone up to 105kg from 60kg in 1991/92. The ministry also reports a 11% rise in paddy production in 2010/11. In 2009/10, the NFC supplied 45K tons of food to 30 remote districts although building of a road to Jumla has made the NFC depot unnecessary. The NFC is accused of not obeying the NVC directive on staff recrutiment. There is a tug-of-war over sugarcane prices between farmers and mill-owners. India supplies 95% of onion consumption in Nepal, and onion prices have jumped in Kathmandu because India stopped exporting them. On the flip side, India has banned export of Nepalese ginger. The government has provided funding for import of 200K-300K tons of fertilizers and has set aside Rs. 3 billion for fertilizer subsidy. The FAO continues to distribute paddy seeds despite them being inert. In a food deficit country Nepal, 1 in 5 urban dwellers suffer from diabetic.

Energy: The NOC has raised prices of petrol, diesel and Kerosene for 5th time this year by Rs. 3/liter to Rs. 88, Rs. 68.50 and Rs. 68.50 respectively. LPG is up Rs. 75 to Rs. 1,325/cylinder. This follows doubling of roads maintenance fee on petrol and diesel import by the government. Following the NOC price hike on the ATF, fuel surcharges on domestic flights have gone up and transport owners are demanding 15%-17% hike in fares but the government has so far refused to grant the permission - fare for diesel-run vehicles was raised by 10% on March 26. To ease pressures on consumers, the government is planning to give consumers subsidy of Rs. 300/cylinder of LPG and Rs. 10/liter of petrol per month at the cost of Rs 3.5 billion per year. It is reported that every 6 in 10 household in the capital are installing solar energy system, and in Mustang district, 50% of households are using solar power. The ETC is recommending a hike on electricity rates to offset Rs. 4 billion annual loss at the NEA. The NEA has a cumulative loss of Rs. 12 billion.

FDI: A Rs. 50 million healthcare diagnostic JV between India's Super Religare Laboratories (SRL) and Nepal's NE Group has started its operation.

Financials: The NRB is drawing attention to high interest rates charged by banks on loans (18% pa) as customers are complaining about random interest rate hikes. The NRB supports banks' paying high rate (+10%) on deposits saying it as necessary to compete against Indian banks. It also makes sense given that inter-bank rate is a whopping 9.25% but the NRB wants banks to fair to all depositors by setting a guideline to cap the difference in interest rates amongst various savings accounts to 2% and being transparent on service charges. The NRB is under political pressure to ease margin lending rates. The NRB is trying to encourage banks to open branches in 22 under-served districts by providing interest-free loan of Rs. 5- Rs. 10 million to open a branch. The regulator is also planning to revamp rules on governing expansion of development banks (1, 3, 10 and 75 districts) but Rs. 640 million paid-up for national development bank is likely to remain intact. The required equity capital are as follows, commercial banks (2B), national finance company (200M), development banks (regional:300M, 4-10:200M, 1-3:100M, Merchant banks: 300M). The NRB is again planning to issue Rs. 5 billion of foreign employment bond despite a dismal failure last year. With the entry of Laxmi Capital and Akash Investment Bankers Ltd, there are now 14 merchant bankers in the country including 7 that are subsidiaries of BFIs - this is required by a SEBON directive. The NRB found outright fraud in Samjhana Finance following its audits. Locals in Rasuwa districts are selling hard assets aka livestock to buy financials assets, namely stocks of Chilime but NepaliEconomy.com thinks it is a bad idea. Machhapuchhre Bank accuses Avco International for defaulting on LC for Hyundai vehicles. Nepal Clearning House Ltd has been established to clear checks starting October 2011. The earlier announcement on CDS shareholders looks premature and the implementation of the stock transaction clearing system will likely miss its January deadline owing to disagreement among stakeholders. The 25-company insurance industry (8 life, 16 non-life) could consolidate if a proposed Insurance Act is passed. It raises paid-up capital to Rs. 1 billion for non-life and Rs. 2 billion for life from Rs. 100 million and Rs. 250 million respectively. The SEBON has unveiled Portfolio Management Directives 2010, which allows discretionary portfolio management service on listed securities. The NRB is capping bankers' salary and benefits but some find the NRB's intentions puzzling.

Hydro: Nepal is conducting a Detailed Engineering Study of 127MW Upper Seti Hydro project with a US$2.5 million assistance from the ADB. The study is expected to be completed in 2012 and full project completed by 2016/17. The last major hydro project completed in Nepal was the 70MW Mid-Marshyangdi in 2008. Lack of funding to expand the 1,980km transmission lines was affecting PPAs with IPPs. After the MoF pledged to increase funding from Rs. 400 million to Rs. 1.6 billion, the government has re-started PDA talks with investors on 7 projects producing 3,200MW. On December 29, it signed a PDA agreement for 50MW Upper Marshyandi at 6.95 cents per unit when it goes into operation in 2016/17. CIT and RBS are lending Rs. 2 billion each for 456MW Upper Tamakoshi slated to completed in 2015 at the cost of Rs. 35 billion. Rs. 2.7 billion 15.5WM Sanima Mai Hydro project has received funding from domestic investors.

Infrastructure: The government is requesting bids for the construction of Rs. 70 billion, 75km Fast Track Kathmandu-Nijgadh road to completed in 5-years under a BOOT model. The earlier bids were nullified on order of the PAC. Some work on the project has started but Maoists are obstructing the construction. The MoPPW wants to build 2.4km Kathmandu-Naubise and 8km Kathmandu-Nuwakot tunnels at the cost of Rs. 600-700 million pending funding. India is fully financing construction of Rs. 11 billion, 1,450km road in Terai. The first of the 3 phase project starts in December. The 3,000 mobile towers in the country are not earthquake proof according to a report. Some progress has been made on Rs. 17 billion Melachi project that will bring 170M liters/day of water by September 2013. In Kathmandu, there are around 500 tube wells but only 21 are registered that pay Rs. 1oK or Rs. 20K annually based on the depth, and provide 30% of water demand. Experts estimate groundwater extraction is 6x the recharge rate. The planning for a ambitious railway project has hit a snag owing to personnel changes at the MoPPW.

Manufacturing: Orders for garment from India is up likely because it is cheaper to produce in Nepal as Nepalese businesses pay less import duties than their Indian counterparts, who pay 22%. On the flip side, $40 million garment exports to Europe could get hurt after the EU scaps special provision for Nepal starting January 2011. Notwithstanding their condition, garment industry suffers from manpower shortage. Registration of new cottage & small industries was down 26% in the last fiscal year. 13 factories are under construction in Hetauda Industrial Estate and 12 more have signed lease agreement - out of 97 factories, 56 are in operation. Durbar Nepal, whose MD is Mr. Rukma Shumsher Rana, Nepal's ambasador to India is accused of mis-labeling dates on its products. The MoFA denies the duel roles of Mr. Rana and promises to investigate.

Real Estate: Signs of rejuvunation of housing are there - in the past 5 years, 83 apartments and 33 housing projects were constructed in the capital - and could be due to slashing of prices as much as 30%.

Remittances & Labor: Government set minimum wage for workers at Rs. 190 per day (Rs. 4,600 a month) in September 2009 but unions say that's not enough and want Rs. 400 a day. The elephant manhouts in Chitwan National park have stopped working demading higher than minimum wage. Given such menial wage, people are leaving the country in droves. In the first 5 months of this fiscal year, 127K left for various destinations. According to a report 80% Nepalese working in Kuwait are illegal. Japan requested 408 trainees under a JITCo program but only 10 were sent. There are 200K child workers in Kathmandu.

SOE: The NAC Chairman and 5 senior officers are accused of corruption by the CIAA. The NOC is giving 1K liters of free fuel a month to influential people including MoCS Rajendra Mahato. The National Trading Ltd plans to sell 51 ropanies of land for Rs. 750 million to repay loans and diversify into other businessess.

Telecom: NT has to re-do the bidding process for its Next Generation Network project after the CIAA rejected the earlier winners for a US$19 million project. The government is contemplating selling some stakes in NT. Nepal has 10 million telecom subscribers. Spice Nepal has changed its corporate name to Ncell Private Ltd.

Trade/BoP: BoP deficit reached 6.88 billion in Q1 of this fiscal year but has improved in the first 4 month. To enourage exports, Nepal has budgeted Rs. 240 million cash incentives for exporters of value-added goods but those earning IRs are not eligible. 5 years on, SAFTA has been a failure. Insecurity is hindering Nepal-Khasa trade and as a result costs for per container has gone up from Rs. 50K to Rs. 90K making Calcutta-Kathmandu route cheaper. Nepal imports 5,000 tons of cotton yarn annually but a recent decision by India to ban exports to Nepal has hurt Nepal's textile industries.

Travel & Tourism: Under pressures from the NAC unions, the MoTCA revoked Air Arabia's license to operate the lucractive Kathmandu-Kuala Lumur flights. Increased tourism and higher per capita spending is leading to higher investment in resorts. The MoTCA has issued 36 permits for homestay. The 8 domestic carriers saw a 13% increase in passengers in first 10 months of 2010. Travel agents are fuming over airlines' plans to cut commissions on tickets, from 65%/15%-20% (US$/local currency) to 12%/9%. From Jan-Nov, 102,243 international tourists visited Pokhara, up 13% versus last year and that's creating shortage of manpower. Sticking with Pokhara, Buddha Air is starting Pokhara-Lucknow flight on January 7. TIA saw 21% increase in international passengers to 1.71 million from Jan-Sep and 23% increase in flights to around 14,000. Nepal wants India's aid in renovating immigration system at the TIA but help has not been forthcoming.

Tidbits: 40% of Nepalese school students lack textbooks when they start their school year. The CIAA's directive to TIA personnels to wear pockletless trousers has been called "impactical". Nepal's own indigeneously designed bicycle is in the market. Condom is a big business in Nepal, grossing Rs. 1 billion annually. The 25-year old Blue Bird Department store has closed its operations. The Maoist's spent Rs. 30 million on the Pulungtar plenum. There were 125 bands in Nepal in 2010 and the count was led by the Maoists (20).