BoP Deficit & Remedies

One of the better columns on Nepal's Balance of Payment (BoP) problem. Couple of comments (a) in every year going back to 1975 (that's when NRB data become available), Nepal has suffered trade deficit (b) 85% Nepal's trade deficit is in the big 4-items machinery, fuel, mfg good and chemicals&drugs. Those items ex-fuel already have very high import tariffs; so Nepal may not be able to do much to curtail them. The solution is therefore to increase exports competitiveness (c) talking about exports competitiveness, NRs depreciation must be on the agenda. NRs160/IRs100 exchange has been intact since 1992 and that absolutely does not make sense given the relative growth of India and Nepal, and more importantly, ballooning trade deficit with India - between 2002-08 Nepal's trade deficit increased by Rs. 102 billion, and of that Rs. 75 billion increase was with India.

BoP deficit & remedies
Republica
Bhim Prasad Bhurtel
b.p.bhurtel@gmail.com

Presently, Nepal is witnessing a negative Balance of Payment (BoP) after more than seven years. A BoP is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country’s exports and imports of merchandise trade and service, financial capital and transfer payments for a specific period, usually a year, and is prepared in a single domestic currency for the country concerned. BoP deficit means the payment exceeding the receipts of any country to the external sector particularly in one year. A BoP deficit is a particularly serious issue for a supply-deficient economy like Nepal.

In the current fiscal year 2009/10, Nepal’s foreign trade deficit reached nearly 100 billion and the export-import ratio soared to 84:16. Previously, despite a huge trade deficit, the BoP situation was in favor of Nepal because of huge remittance inflow. According to Nepal Rastra Bank, in the last fiscal year, the total size of merchandise goods and service was 220 billion which was balanced by 210 billion of remittance inflow, 27 billion foreign loans and grants, 18 billion of transfer payments such as pensions and gratuity earned abroad. The BoP surplus was 41 billion during the last fiscal year.

However, in the first quarter of the current fiscal year, BoP deficit stood at 20 billion. Alternatively, it can be said that Nepal had to pay 20 billion more than its earnings from abroad. In other words, Nepal’s net foreign asset declined by 20 billion and the foreign currency reserve declined by 31 billion during the same quarter. This includes the increase in IMF quota by 6.28 billion and the 4 billion that declined due to exchange rate fluctuation. The merchandise trade deficit reached 96.21 billion, an increase of 48.9 percent, and the service sector deficit reached 5 billion.

CAUSES OF BOP DEFICIT
There are two primary reasons: Implicit and explicit. The implicit causes of BoP deficit are the decline in remittance inflow after the global financial meltdown and the recent Dubai crash, decline in export capacity and escalating import of goods, especially gold. Import records of the first quarter of the current fiscal records 12billion worth of petroleum imports, 8 billion worth of vehicles and spare parts and, surprisingly, 19.26 billion worth of gold.

The explicit causes are policy-related. The first inherent cause of BoP deficit is the perennial low economic growth despite an increase in aggregate demand and national income due to remittance inflow, as a result of which people have more disposable income to consume luxury and necessary goods. However, our economy suffers from supply deficiency as domestic products could not meet the larger section of aggregate domestic demand and supply depended heavily upon imported goods.

The second cause is the fixed exchange rate of the Indian and Nepali currencies and corresponding adjustment with the US Dollar. The trade deficit with India in the last fiscal year was 103 billion. Nepali currency was overvalued with dollar while it remained fixed with Indian currency for more than ninth months that resulted in imports becoming cheaper, which soared. On the other hand, exports became uncompetitive and fell.

Third, Nepal has a high marginal propensity to imports because we do not have comparative advantage in the production of manufactured goods due to lack of adequate infrastructure, the small economy of scale in production, lack of investment incentives, colossal energy crisis, low industrial productivity, political instability and perennial labor disputes. Therefore, increase in national income due to remittance inflow and the “cosmetic” growth in domestic product due to foreign aid and remittance are marinating the gross domestic consumption— it will eventually result in a big increase in imports.

Fourth, after joining World Trade Organization (WTO), Nepal now has to struggle to compete with developed countries due to mandatory provisions. This has caused a considerable decline in Nepal’s export, manufacturing and agriculture sector. For example, the garment and the carpet industry were seriously impacted after the enforcement of the Multi-Fiber Agreement and agro-export suffered because of Sanitary and Phyto-Sanitary Measures—this has led to a persistent deficit in the balance of trade. On top of it, we are flooded by the massive surge of foreign goods due to liberalization of international trade.

The fifth reason – recession in developed countries – also escalated Nepal’s trade deficit. Exports could not increase because Nepal’s main trading partners in North America, Europe and Japan experienced negative economic growth in 2008-9 and they imported less from abroad and obviously our exports too declined worsening the current account.
The sixth key reason for the BoP deficit in Nepal is the growing trend of studying abroad in the UK, USA, Canada, Australia and other countries. Similarly, capital flight also contributed to BoP deficit.

Last but not least, the foreign currency earning tourism sector has not fully revived due to political uncertainty and ultimately it contributed to the BoP deficit.

REMEDIES
The short-term measure should aim at immediate response measures such as controlling wayward gold import, currency devaluation and imposing extra duties on imported luxury goods to minimize total import.

Long-term remedies are more policy-based. The first is to develop the economy’s competitiveness by enhancing national production capacity to meet the aggregate domestic demand and thus overcome the problem of supply deficiency. The energy crisis should be tackled as soon as possible. Import of petroleum should be reduced through alternative energy, including promotion of bio-fuel. Second, as tourism is a key to increasing foreign reserve, its development will help to amortize the BoP deficit. Third, to tackle the ongoing gold hoarding caused by speculation, the portfolio investment opportunities should be created and the stock market should be made reliable.

Fourth, the import substitution industry such as pharmaceuticals should be promoted. Export industries should be provided heavy subsidizes to make them competitive domestically as well as dump goods abroad. Fifth, to improve and sustain remittance inflow, the quality of foreign-bound workers should be developed by implementing skill-development programs. If a skilled human resource can be sent abroad, even a small number of them can earn significant remittance. Sixth, some tariff and non-tariff protectionist measures should also be used to prevent the BoP deficits within the WTO framework for least developed countries.

Seventh, Nepali currency should be devaluated with Indian currency to correct the virtual strength of Nepali currency. Eighth, the exchange rate policy, export-import policy, industrial policy, fiscal policy and monetary policy should be used simultaneously. Ninth, the Nepal-India trade deficit being another key factor should be resolved. Nepal should take political as well as diplomatic initiatives to do so.

Lastly, to create a conducive environment for investment, the new constitution should address the overall grievances of the people within the stipulated time and end the chaotic transition phase as transition results in more panic than an economic recession. BoP will always favor Nepal only if we are able to execute these tasks effectively. Myopic policy measures won’t serve in the long term.

BOP Crisis: Dire problem, few options

BOP Crisis: Dire problem, few options
Myrepublica, 21-Dec-09
By PREM KHANAL

[NOTE: NepaliEconomy.com disagrees with the author's arguments. Please read the comment at the end of the post]

The impact of deepest slump in the global economy since World War II to Nepal´s economy was far less calamitous than many had feared.

However, emerging indicators in the domestic front have deepened fears that the aftermath of the global financial crisis will be more dangerous than many expect, as the country faces the worst-ever Balance of Payment (BOP) deficit.

Worrisome is the fact that the unexpected decline in the growth rate of remittance -- country´s economic backbone, which many believe as the time-lag effect of global crisis -- has pushed the economy on the brink, with no immediate sight of stabilization.

Not that all these cracks in the economy appeared all of a sudden. There were enough warnings, overheated consumption to be the main. When annual date was released in July, government experts, at least the central bank, could have easily sensed the looming crisis when national disposable income recorded an alarming increment of over Rs 200 billion in a year to touch Rs 1,193 billion last year.

Wasn´t it predictable that the economy was about to see a huge misbalance in foreign trade when consumption reached 92 percent of GDP last year while domestic production continued to shrink and exports remained stagnant? However, the authority concerned blissfully ignored such warnings.

Though it is too early to gauge the gravity of the BOP crisis and jump into a pessimistic conclusion, worst is that Nepal has too little things in hand to correct it.

Worsening foreign trade balance needs to be blamed first for the crisis. Country´s trade deficit -- that grew by a whopping 47.6 percent during the first quarter of the current fiscal compared to same period last year -- was one of the principal causes for the over three-fold increment in BOP deficit in a year. In theory, a country needs to boost export and curb imports to check the widening trade deficit.

Grim exports data of the country itself speaks volumes about intensity of the crisis. Nepal´s persistent problem is that any attempt to boost exports is constrained by lack of products that can compete in the foreign market. Even some past efforts to find new exportable commodities capable of competing with Chinese products in global market failed.

However, Nepal can at least make renewed efforts to breathe a new lease of life to dying traditional twin export pillars -- woolen carpets and readymade garments. The government can restart a fresh diplomatic effort to secure the US and European markets to revive these two commodities. It can think of providing a short-term subsidy for sheep farming in Nepal´s mountainous region to alter long-running dependency on expensive imported wool to make our woolen carpet competitive in the global market.

Checking imports by raising taxes or imposing additional duties can be one option to curtail consumption. But, such a step will fuel the already high inflation and will also hurt domestic demand that can ultimately add woes to long-running economic sluggishness.

Still tourism is one sector where we have a clear and undisputed advantage and it is the only sector that has the potential to correct BOP misbalance. But, current political landscape is less hospitable to promote the sector, as the political turmoil seems deepening rather than moving toward settlement.

Promoting Foreign Direct Investment (FDI) is one of the powerful and widely used instruments to make financial account, which witnessed an alarming 118 percent decline during the first quarter, surplus. However, Nepal can expect no FDI as long as the activities of militant trade union are not brought under control and labor laws are made flexible to balance the interests of both employers and employees.

Make no mistake, the BOP crisis is just a flicker for now. The divesting bang is imminent if prudent action is not taken immediately.

NRB: Remittance up despite global blues

NRB: Remittance up despite global blues
ekantipur, 2-Feb-09

Despite a global recession, the inflow of remittances increased by 65.8 percent during the first five months of the current fiscal year, according to a report on the latest micro-economic situation of the country released by Nepal Rastra Bank (NRB) on Monday.

The surge in remittances contributed to a surplus in the current account of Rs. 12.3 billion from a deficit of Rs. 7.5 billion during the same period last year. The growth of remittance flow was 17.6 percent last year.

However, recent moves by Malaysia and the United Arab Emirates (U.A.E.) to discourage foreign workers might affect remittances in the future. Remittances account for 17.4 percent of Nepal's Gross Domestic Product (GDP).

The balance of payments also recorded a significant surplus of Rs. 22.8 billion during the first five months of the current fiscal year compared to a surplus of Rs. 31.1 million during the same period last year.

According to NRB, the country's exports also grew by 30.9 percent during the period against a decline of 4.4 percent during the same period last year. Exports to India grew by just 15.1 percent compared to a 64 percent rise in third country exports.

An increase in the export of readymade garments, shoes and sandals, tooth paste, G.I. pipes and noodles was primarily responsible for the increase in exports to India. A surge in the export of pulses, woollen carpets, pashmina, readymade garments and herbs accounted for the tremendous growth in third country exports.

Likewise, imports also grew by 32.6 percent this year against an increase of 8.2 percent last year. Imports from India were up by 17.1 percent compared to 57.2 percent for third country imports. Inflation rose to 14.1 percent this year against 5.7 percent last year, according to the central bank.

During the five-month period under review, the government budget showed a surplus of Rs. 2.2 billion against a deficit of Rs. 9.8 billion previously. An increase in revenue and foreign cash grants accounted for the budget surplus during the period.

Domestic credit was up 6.5 percent compared to a growth of 10.4 percent last year. NRB stated that low government expenditure contributed to the slowdown in the growth of domestic credit in the review period.

The growth of private sector credit also went down marginally during the first five months of the current fiscal year compared to the corresponding period last year. Credit to the private sector increased by 10.1 percent this year against 10.9 percent last year, according to NRB.

Remittance inflow jumps 80.7 percent

Remittance inflow jumps 80.7 percent
ekantipur, 30-Nov-08

Inflow of remittance from Nepali workers in foreign countries shot up by 80.7 percent during the first three months of the current fiscal year, according to a central bank report released Sunday.

Remittance growth in the first quarter of the previous fiscal year was 17.2 percent, Nepal Rastra Bank (NRB) said.

The big jump in remittance also helped boost the country's overall balance of payments (BOP) during the period pushing it into positive territory after a long time, the report said.

According to the quarterly report on the current macroeconomic situation of the country, Nepal's BoP recovered from a deficit of Rs. 5.6 billion recorded in the first quarter of Fiscal Year 2007/08 to a surplus of Rs. 7.7 billion in the first three months of Fiscal Year 2008/09.

Similarly exports witnessed an upsurge of 27.1 percent during the first quarter of the current fiscal year against a mere 4.3 percent rise in the corresponding period last year. NRB said that exports to both India and third countries swelled this year.

It said exports to India during the period increased by 10.1 percent against a 0.6 percent rise recorded during the corresponding months last year. Likewise, exports to countries other than India swelled by 58.3 percent compared to an increase of 11 perrcent last year.

Exports to India increased due to a rise in export of readymade garments, shoes and sandals, polyester yarn, copper wire rods and G.I. pipes. An upsurge in export of pulses, woolen carpets, pashmina, herbs and tanned skin mainly contributed to an increase in overall exports to third countries.

Meanwhile the country imported 30.6 percent more in the first quarter this year. In the corresponding period last year, imports had gone up 13.1 percent.

Imports from India went up 19.3 percent in the review period, compared to a 13.7 percent rise in the corresponding period last year. NRB attributed the growth to rise in petroleum imports and higher import of vehicles and spare parts, cold rolled steel in coil, hot rolled sheet in coil and cement among other from India.

On the other hand imports from other countries jumped 48.5 percent in the three months while it had grown just 12.1 percent during the corresponding period last year. NRB said higher inflow gold, MS billet, telecom equipment and parts, computers and related products, and polythene granules among others from these countries contributed to the big surge.

During the first three months of the current fiscal year, total government spending decreased by 2.4 percent to Rs. 29.3 billion compared to an increase of 53.7 percent in the corresponding period last year.

The government's failure to make both recurrent and capital expenditures at significant levels resulted in the decline of overall expenditures. Given the relatively huge size of the budget, spending money has remained a big challenge for the government.

Recurrent expenditures increased by 13.2 percent to Rs. 18.5 billion compared to an increase of 35.6 percent in the corresponding period last year.

The government's budget deficit stood at Rs. 2.9 billion compared to a deficit of Rs. 9.4 billion in the corresponding period last year.

At the same time revenue collection saw an increase of 16 percent during the review period to Rs. 22.3 billion. The Ministry of Finance has said on Nov. 21 that revenue collection increased by 35.5 percent between mid-October and mid-November this year. It said Rs 32.97 billion had been collected in revenue in the first four months of this fiscal year. The government aims to increase revenue by 31.7 percent to meet its target of Rs. 142 billion, set for this year.

Domestic credit claims by non-financial government enterprises increased by 6.2 percent over the period compared to a decline of 17.3 percent in the corresponding period last year.

Higher credit claims by government enterprises like Janakpur Cigarette Factory, Nepal Oil Corporation, Nepal Airlines Corporation, Janak Education Material Center and Nepal Electricity Authority contributed to the increase, NRB said.

However, claims on government financial institutions declined by 6.7 percent in the review period. Meanwhile, overall domestic credit increased by 6.8 percent during the period against 6.9 percent recorded in the corresponding period last year.

Gross foreign exchange reserves stood at Rs. 230.8 billion in mid-October, an increase of 8.5 percent compared to a decline of 4.1 percent in the corresponding period last year. The current level of reserves is adequate for financing merchandise imports for 10.1 months, and merchandise and service imports for eight months, according to NRB.

Remittances soar 74pc, exports rebound: NRB

Remittances soar 74pc, exports rebound: NRB
ekantipur, 7-Nov-08

Nepal has witnessed a strong growth in remittance inflow and exports -- two critical sectors of the economy -- in the first two months of the current fiscal year, says a report of Nepal Rastra Bank (NRB).

During the period, the country received Rs. 31.88 billion in remittances from Nepalis working abroad. The figure is a whopping 74 percent rise over the receipts for the same period last year.

The gain has been attributed to an increase in the number of Nepalis leaving for overseas jobs and also to depreciation of the Nepali rupee vis-à-vis the US dollar. During the two months, the number of Nepali foreign workers grew by 17.75 percent and the Nepali currency lost value by 6.48 percent.

Likewise, the country’s total exports bounced back by more than one-third and touched Rs. 13.46 billion in the first two months of 2008/09, compared to a decline of 3 percent in the same period last year.

Of the total exports, sales to India -- Nepal’s largest market - went up by over 12 percent to reach Rs. 7.28 billion. Exports to other countries also soared by 82 percent and amounted to Rs. 6.17 billion.

The NRB report released on Friday has credited the rise to an upsurge in exports of readymade garments, copper wire, tooth paste and zinc sheets to India and increased sales of Nepali pulses, woollen carpets, herbs and pashmina in other countries.

Propelled by strong consumption on the back of greater remittances, Nepal’s total imports also rose by 43.3 percent during the period and touched Rs. 48.22 billion.

“Imports from India grew by over 34 percent to Rs. 26.85 billion and from other countries by 56.5 percent to Rs. 21.37 billion,” says the report.

With imports growing faster than exports, the country’s trade deficit swelled by over 46 percent to reach Rs. 34.76 billion.

The report portrays a gloomy picture for consumers, as consumer inflation rose to 13.5 percent in mid-September 2008 compared to mid-September 2007. Prices of food items and beverages increased by 14.2 percent while non-food items and services went up by 12.8 percent during the period.

“A sharp rise in prices were recorded in the case of sugar, oil, ghee, grains, rice, pulses, restaurant meals, milk and milk products, meat, fish and eggs and spices,” says the report.

The cost of transportation and communication and housing goods and services rose by 23.1 percent and 18.1 percent respectively in mid-September 2008 compared to a year ago.