News Roundup: The NOC & the NEA

Roundup of Nepali Economic and Business News for Jan 1-May 3
By: NepaliEconomy.com
Archive: Roundup of Economic and Business News

In politics, the landmark event of the first 4 months of 2011 was the election of Jhala Nath Khanal as the 34th PM of Nepal on February 3, 2011. His election in the 2nd round of voting with the Maoist's support ended a 7 month long political stalemate that followed the resignation of MK Nepal on June 30, 2010. The JNK government is yet to take full shape but there has already been a change of guards at the National Planning Commission, the nation’s highest economic policymaking body.

In economics, the two state-owned enterprises (SOEs), the NEA and the NOC continue to wreck havoc in the country. They have accumulated Rs 19 billion and Rs 15 billion losses respectively.

Due to losses, the NOC has to be continually bailed out by the government. On March 1, it received Rs 1 billion and that followed Rs 1.3 billion on January 19. Now the government is arranging another Rs 2 billion loan to help pay the IOC in order to get normal supply of petroleum products and to alleviate the ongoing shortage. In fact, the NOC has been demanding Rs 1.3 billion monthly loan from the government.

Shortage of petroleum products started on April 13 when the NOC cut supplies to Kathmandu by a third to just 277KL because the IOC cut its own supplies to the NOC by that amount. Within a week the shortage had spread to the rest of the country including Pokhara (supply cut to 36KLD from 50KLD). The IOC’s decision was prompted by the NOC’s failure to pay its dues after the IOC raised prices for second time. When the IOC raised prices earlier, the NOC was able to offset the increase. It raised prices twice, on March 14 (petrol went up by Rs 9 to Rs 97) and on December 6, 2010. The government also raised transport fares by 9% and domestic airfare by 13%-49% in early February although it withdrew a 30% airfare hike to remote areas later. Even with those increases, the NOC still loses Rs 6.30/L (petrol), Rs 11.25/L (kerosene), Rs 23.25/L (diesel) and Rs. 288.86/C (LPG). In fact, government-installed commissions have repeatedly recommended the NOC raise prices automatically but no government had the political will to do so.

Load-shedding is another fact of life in Nepal. Currently it runs 14 hours a day and it is expected to get worse over the next few years. The reason is simple, supply-demand imbalance, 900MW demand but only 390MW supply. The government has recognized the problem, and as such has declared "Energy Crisis" for the second time in 3 years. This emergency measure will last 4-1/2 years, and will include creation of a super-bureaucracy to expedite the development of 2,500MW of electricity in the next 5 years. The government has received political support from the Maoists. In the short run, the NEA is trying to alleviate the problem by trying to stop massive leakage (it has put 7 districts with leakage in excess of 50% on notice) and by trying to encourage private investment with a proposal to increase tariffs by 30%, the first in 10 years.

Despite anemic economic growth, projected to be mere 3.8% in 2011 and 500K Nepalese being pushed into poverty due to high food prices, the World Bank and the IMF say Nepal is going to meet the MDGs set for 2015. Still puzzling is that Nepal’s per capita GDP is expected to increase 15% in 2011 to $642.

Governance: The abrupt resignation of the Finance Ministry Secretary on March 30th became the talk of the town. In a BBC interview, he accused the UML-affiliated finance minister Bharat M Adhikari of trying to change laws to allow blacklisted defaulters, who number 156 and owe at least Rs 2.5 million each to go free. At least the SC is taking strong actions against corrupt officials, past and present. Those caught in the SC’s dragnet include a UML lawmaker, Chiranjibi Wagle, Khum Bahadur Khadka, Govind R Joshi and Depak Bohara.

Fiscal Policy: YTD revenue collection has been dismal, just Rs 107 billion versus the target of Rs 217 billion. The main reason is sluggish imports but others also share blame including a weak stock market, which has led to a 78% drop in capital gains taxes to just Rs 42 million. Another is VAT avoidance. In order to prevent VAT leakage, estimated to be Rs 4 billion, the government is planning to make e-billing mandatory. E-billing has proven to be effective at curtailing leakage of vehicle tax. But the government can only do so much. The case in point is retailers, who avoid 13% VAT by either under-reporting costs or providing fake VAT receipts, even if that means breaking laws that disallow more than 20% profits. Still the revenue department is making an effort. It imposed Rs 1.35 billion fine on 20 companies, including top business houses in the country for faking bills to avoid VAT. Also under investigation are Business Ad and Laxmi Steel. While some cheat on VAT, others simply don’t pay taxes such as casinos (Rs 300 million), VoIP rackets and medical colleges.

With the fiscal year coming to an end in two months, the government has spent only 25% of its development budget (Rs. 33 billion versus Rs. 129 billion total). It is trying to change policies that prevent it from spending more than 40% of development budget in Q4 and 20% in the last month of the fiscal year but that met with opposition.

BoP: The country's BoP deficit reached Rs 11 billion in the first 8 months of 2010/11 and this despite the NRB’s prediction that it will turn positive for the year. This deficit could have been worse if not for a reduction in outstanding reimbursement from foreign donors (a bizarre oversight) from Rs. 32 billion to $10 billion.

Agribusiness: Nepal is importing 100K of fertilizers from India to avoid a shortage like last year. On the crop side, Nepal produces 2.5 million tons of pulses, and exports of pulses rose 23% in H1 of 200/11 to Rs 2.75 billion. The country also produces 1,000 tons of honey. Although honey is a targeted exports item, Nepal has not been able to export them in a significant amount due to trade restrictions including in Europe, which banned in 2002 citing quality control. Quality control is a big factor hindering growth of Nepal's exports. Nepal produces 2.82 million tons of vegetables worth Rs 45 billion. Poultry is also a big industry with turnover of over Rs 41 billion in 2010/11, up 24% from the previous year. Another growing sector is the dairy. The NDDB is trying to encourage milk production by implementing a cattle insurance pilot project in 13 districts whereby farmers pay 25% of premium and the NDDB pays the rest. In Kathmandu, the DDC plans to double its production capacity at Balaju to 200K liters at the cost of Rs 80 million and is raising milk price by 10% to Rs 44 per liter. Nepal’s dairy industry was affected after India banned exports of powdered milk.  It is interesting to note that demand for Lokta, indigenous paper is growing briskly.

FDI: In the first 8 months of 2010/11, total FDI increased 21% to Rs 3 billion. That is still a low figure. Lack of intellectual property right in Nepal is among factors hindering FDI in Nepal. Another factor is physical safety of investment. In fact, the visiting Foreign Minister of India SM Krishna demanded Nepal protect India’s investment in Nepal. He has reasons to be concerned given that India is the biggest foreign investor in Nepal. NRN are also keen to invest in Nepal. They organized another talk-shop to discuss their proposed US$100 million investment fund.

Financials: Reports of credit crunch are again resurfacing despite the NRB pumping liquidity through repo operations. This has forced the NRB to commit to become the lender of the last resort. Credit crunch has caused interest rates to soar and has prompted bankers to demand that the NRB let them raise money internationally. To assuage anxious depositors and as per the NRB's directive, 68 Class B and C FIs have insured Rs 22 billion of deposits with DCGC. Despite weak regulations and embezzled of Rs 140 million by more than 50 cooperatives in the past 8 years, 20,000+ cooperative that hold 17% of deposits (Rs 100 billion) don’t have to insure deposits.

Much hyped Mega Bank has made headlines opening 12 branches at once. Janakpur has become a new hub for banks. Given mushrooming of FIs, the NRB is trying to curtail their growth two ways. First, it is encouraging consolidation by making it difficult for banks to move from lower grade to higher grade. Earlier it tried but had to back-off from a proposal that gave it powers to enforce a merger. Banks have reasons to merge also given meager profit growth in Q2, just 1.9% to Rs 7.33 billion. Second, it has stopped issuing licenses to FIs to operate in urban areas and that has already affected a few. On the SOE side, ADBL has restored 35 branches closed during the Maoist insurgency, and now has a total of 243 branches.

Insurance sector is ripe for M&A given higher capital ratios requirement in the new Insurance Act but consolidation has yet to happen. The NRB has promulgated regulations allowing BFs with Rs 1 billion in equity to open mutual funds. To comply with that rule, Rs 22 billion CIT received Rs 12.5 million from the government to increase its paid-up capital to Rs 250 million. Separately, CIT said it plans to diversify investment into infrastructure projects. The government owns 10% of CIT, and the rest is owned by RBB (26%), NRB (13%), NEPSE (10%) and public (20%).

Illegal/informal trade with India is causing shortage of IC. Not surprisingly, fake ICs are rampant in bordering towns.

Hydro: The ADB wants to invest US$300 million in 127MW Upper Seti Hydro Project in Damauli. Chilime Hydropower Company, which constructed the first indigenous 22MW power project, plans to develop a total of 500MW by 2020. China is providing soft loan totaling US$100 million for the construction of $109 million 60MW Upper Trishuli 3 "A". The promoters of 750KW West Seti, which got license in 1997 under BOOT want to revive the project under PPP model after it was cancelled last year. Domestic IPPs also want to speed up hydro investment and want government to speed up PDA for 7 projects. With respect to licenses, in H1 of 2010/11, the NEA issued 11 survey licenses, 8 generation licenses with total capacity of 512MW and 4 construction licenses with capacity of 25MW. Talks on much-hyped 140km 400kV cross-border transmission line with carrying capacity of 1,000MW to facilitate cross-border trade in electricity continues despite the fact that it was supposed to have been completed in 2009.

Mr. Khadga Bahadur Bista has authored a book, "Hydropower Nepal", a hundred year history of hydropower development in Nepal.

Industrial: The Manufacturing Production Index (MPI) rose 1.23% in Q1 of 2010/11 and the culprit was a 52% decline in biscuit production. Be as it may, it shows the dismal state of industrial sector in Nepal. When factories in Sunsari-Morang cut production by 60-90 percent due to power cut by India (from 70MW to 3MW) it shows the vulnerability of the sector. On the flip side, Pokhara is seeing a revival in its industrial landscape. Nepalese drug makers produce Rs 6 billion output and can replace 70-80% of imports worth around Rs 8 billion. Despite such statistics, 10 foreign pharma companies got permission to enter Nepal including 2 from India. CG bought a majority take in Raybot Springs Minerals Water for undisclosed sum to export and to meet Rs 500 million domestic demand. The domestic bottled water industry is large with 85 registered companies but a third have quality control issues.

Infrastructure: The most ambitious road project in the country is the 1,776km Mid-Hill Highway estimated to cost Rs 44 billion according to a detailed feasibility study (DPS). Construction of Ghurmi-Chatara section will commence this year. Another priority project is the 76km US$800 million Kathmandu-Terai fast track. Although the government has earmarked Rs 680 million in the current budget, the PAC has directed the government to cancel the bidding process for EoI and invite new bidders. Meanwhile the NA has already started works on the project and completed 27km but has experienced delays due to lack of direction from the PAC and delay in acquisition of land. Also in the government's priority list is upgrading of 62km Beshisahar-Manang road. Then there is 1,540km Terai Road Project, and there India is helping to conduct the DPRs for 27 roads spanning 885km to be built at the cost of Rs 9 billion.

A DFS for 2nd international airport at Nijgadh in Bara district has been completed. The airport could come into operation by 2015 at the cost of US$ 650 million. The proposed Department of Railways (DoR) has sought a budget of Rs 7.30 billion to conduct detailed survey of 8 railway projects, including the much-touted East-West Electric Railway. Given the number and size of infrastructure projects, Nepal is getting help from China as well as the WB and the ADB. The latters are providing US$125 million, half loan, half grants.

NEPSE: The NRB plans to divest 35% stake in NEPSE. In violation of the NEPSE bylaws, 42 listed companies have failed to provide Q2 2010/11 financial statement by the deadline, which is within a month of the completion of the quarter. At least it is better than a month ago when only 69 of 195 listed companies complied with the regulation. The SEBON is giving out 27 new brokerage licenses after much delay but 2 candidates have withdrawn their applications and 3 have been granted Letter of Intent (LoL). In the H1 of 2010/11 9 companies raised Rs 580 million through IPOs.

Real Estate: The NRB has relaxed rules on real estate loans (less than Rs 6 million won't be considered as one) to support the sector. Supposedly, real estate price in Kathmandu has plummeted 30% in January because developers wanted to attract buyers given that banks are pressuring them to repay loans to comply with 10% loan exposure to realty and 25% to housing. Such headwinds have not stopped construction of Class A office complex like Rs 500 million Trade Tower Nepal in Thapathali or Rs 1 billion investment by CG in residential sector or planning of Rs 20 billion World Trade Center.

Remittances:/Labor Out migration of workers jumped 20% in the first 9 months of the fiscal year to a whopping 240K including 6K women despite the turmoil in the Middle East. The government plans to do a full headcount of citizen working in the Middle East. Korea plans to hire 7,100 Nepalese next fiscal year under EPS. Thus far 6,500 have already left for Korea. Outflow of workers abroad has hurt carpet industry that needs 30K workers (NepaliEconomy.com finds it hard to believe there is labor shortage in Nepal). The British government will reduce the size of the Gorkha Brigade by 8% by 2015 i.e. from 3,600 to 2,900 because of the UK government’s austerity programs. Also affected is the BBC Nepal Service. This austerity will not affect Gurkha pension because it is set to increase 10%.

The Maoist affiliated ANTUF has been dissolved because of intense fighting amongst 3 factions supporting the 3 top leaders. Before their dissolution, ANTUF along with trade unions affiliated with NC and UML signed 11-point agreement with the FNCCI and the CNI and pledged not to strike for the next 4 years. That’s hard to believe given that labor strife continues in all segments of the economy: BP Koirala Memorial Hospital, NAC, NEPSE, NRB, tea estates and tourism industry.

Services: Goma Air with just 2 Cessna is a new player in the domestic charter/cargo flight industry. 5 established domestic airlines have formed a JV to start a new international carrier by May 2011. By the way, Buddha Air has already started flying Kathmandu-Lucknow route. Not to be outdone, NAC has slashed the Kathmandu-Delhi roundtrip fare 50% to Rs 3,000. The number of flights to Pokhara increased 20% to 25,658 in 2010 while the number of passengers touched 360K. Recall, the all time high was 22,775 flights in 2000. Overall domestic air passenger has also increased, up 13% in 2010. To deal with increased traffic the TIA is planning to operate 24 (from current 18 hours) starting October. The row over transport syndicates continues with transporters arguing that they need to get returns on Rs 45 billion investment, and the FNCCI and the SC saying otherwise. Interestingly, the SMTOA has volunteered to end its syndicate system. The government has also tried to go around the syndicates by implementing fixed prices on 43 additional truck routes, now it has oversight over 429 routes nationwide. Sajha Yatayat is ending 50-years of government control by becoming a cooperative. The company has only 8 buses running, down from 182 at the peak. Lastly, Biratnagar is seeing a boom in healthcare sector, with Rs 3 billion investment in recent years.

Telecom: The PMO's is going hi-tech with intra-net service. Ncell subscribers doubled over the year to 5 million in April and the company plans to introduce 4G in 2012. NT has added 0.93 million new subscribers in H1 of 2010/11 to 6.4 million and is competing aggressively on price. Lately, Ncell has been catching up with NT in the subscriber “rat-race”. Apparently 40% of Nepalese have access to telecom services (35% mobile, 3% fixed lines and 2% others). As of last year, there were 8.9 million telecom service users using NT (5.46 million), Ncell (2.94 million), UTL (461K), Nepal Satellite (55K) and STM (5K). With respect to the internet, 8% of Nepalese subscribe to ISPs up from around 3% last year.

NT has awarded China's ZTE a US$ 4.9 million contract to build the next generation network. It also plans to increase Base Transcriber Station (BTS) by 500 within the next 3 months, and then increase it to 4,000 (from 1,800) by the end of next fiscal year.

The NTA is in a row with telecom providers for unpaid fees. UTL owes over Rs 1 billion while NT and Ncell owe Rs 206 million and Rs 957 million respectively.

Trade: Nepal-US signed the lapsed TIFA agreement on April 15. This agreement could facilitate export of Nepalese goods especially readymade garments (RMG), whose value has declined to Rs 1 billion in 2009/10 from Rs 12 billion in 2001/02. This treaty will offset a 10% countervailing duty (CVD) on RMG imposed by India to all countries including Nepal. Notably, India continues to levy CVD on Nepalese pashmina despite promising not to do so. Given such facts, the SAFTA's goal of bringing import duties to zero amongst the SAARC members by 2016 sounds like a fantasy. It is a well-known fact that India uses trades to influence Nepal, and its attitudes have hardened since the formation of UML-Maoist government. Despite misgivings, Nepal continues to make requests during trade talks, and in early March India agreed to let Nepal import LGP from third countries. Nepal is also lobbying India to allow Indian importers to pay Nepali exporters in US dollar instead of IC because Nepalese exporters get 2% rebate for earning foreign currencies but that’s unlikely to happen.

Carpet exports saw a surprising rebound, up 16.5% in the H1 of 2010/11 to Rs 2.37 billion. Business associations like the FNCCI and the NCC are opposed to new government proposal on Certificate of Origin (CoO) which makes it voluntary for monetary reasons.

Tourism: Visit Nepal Year 2011 was formally launched by President Yadav on January 14. The goal is to bring in 1 million visitors including 700K by air and 200K LGBTIs. To prepare for VNY, 25 new hotels opened in Pokhara in H2 2010 making the total 444. Pokhara had reason to be optimistic because it had 230K visitors in 2010, up 13% from 2009, and it aims to bring in 500K in 2011. Also, its neighbor Annapurna saw record 88K trekkers in 2010, 10K more than 2009. With respect to mountaineering, in the Spring of 2011, 26 expedition with 251 climbers are attempting to ascend Mount Everest, thus far 3,128 people have made it to the top.

Despite extensive promotions for VNY, tourists are not coming in droves. From January through March, 118K tourists came in. That’s up 12% but still 50% off the target number. Ironically, increase in number of tourists has not led to increase in tourism revenues. The government is trying to encourage Chinese tourists by making a commitment to waive their visa fee.  Tourism entrepreneurs want to develop Bhotekoshi River as an adventure tourist destination.

Kathmandu: Kathmandu has been living without an elected Mayor since 2002 and that's caused the deterioration of city's quality of living. One measure of quality of living is water supply. On that measure, Kathmandu will have to wait until at least September 2013 for completion of Melamchi project expected to bring in 170ML of water a day to meet the 190ML gap, 320ML demand  versus 130ML supply. Currently 50% of supply is met by groundwater.

Big Mart is expanding its operations in Kathmandu by taking over Bluebird's storefront in Lazimpath and wants to go national eventually. Bluebird's Thapathali location is being taken over by KFC and Pizza Hut. Star Mall with Rs 750 million investment has opened in Putalisadak. Despite the glitz, people appear to be spending less on nightlife causing a 50% drop in revenues for 200 dance bars, 20 discos, 30 lounge bars, 45 pubs, 40 live bands, 20 gazhal restaurants and around 100 dohori restaurants in the capital. The erstwhile Royal Palace occupies 753 ropanies and has 52 rooms and has earned Rs 47 million as a museum in 2 years since it opened.

Lastly, congrats to Mr. Ashutosh Tiwari for being selected as the Young Global Leader of 2011 by the WEF.