News Roundup: Highlights from H2 2011

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

The JNK government unveiled 2011/12 budget amounting to Rs. 385 billion in early July. One of the provisions was the increase in salaries of public servants by a whopping 30%-43%. On August 29, 2011, Dr. Baburam Bhattarai became the PM of Nepal, the 36th in Nepal's short history.

Nepal's economy continues to chug along with a small segment of the society enjoying opulence while the significant majority struggling with the daily living. The case in point is the wedding costs in the capital. If you want to host one at a fancy location, prepare to pony up at least Rs. 1,100 plus tax per person. If you want to welcome the new Gregorian year, be ready to fork out at least Rs. 1,700 per person. Given the increased demand from high-end consumers, the retail giant Bhat-Bhateni Group is increasing its footprint in Kathmandu and expanding into Pokhara - you can even order online at bhatbhatenionline.com.

The average folks have to deal with rising food inflation, which is likely to persist for a foreseeable future if the famed investor Jim Rogers is right. He is super-bullish on agricultural commodities. In Nepal, the number of food deficit districts in Terai, the bread-basket of the country, has increased to 10. Food price are up across the board - chicken (Rs. 160 per kg), mutton (Rs 600 per kg), fruits (Rs. 130 kg for apple, Rs. 60 per kg for orange), sugar (Rs 75 per kg), imported coffee, noodles and mustard oil (Rs 135 per liter). The good news is that ag production is rising - Nepal is self-sufficient in paddy for the first time since 1990 - and poultry output is also on the rise.

Energy policy in Nepal is a mess. The NOC continues to incur massive losses. It has implemented price hikes, diesel and kerosene recently but not enough of offset rise in global prices and had to get government loans to pay off its debt. That's resulting in shortage of diesel. Government is trying to attract private investment in the fuel sector but the investment necessary is huge (Rs. 20 billion for crude oil & refinery, Rs 10 billion for refined products and Rs. 3 billion for LPG). Shortage of electricity continues with load-shedding increased to 69 hours per week. The government is trying to alleviate the problem by increasing import of electricity from India to 245MW by 2013 from 100MW currently.

On the macroeconomic front, the BoP surplus swelled to Rs. 34 billion in Q1 2011/12 on the back of Rs. 76 billion in remittances. The NLSS 2010 is set to declare 13 percent poverty rate in Nepal. Poverty is defined as less than 2,200 calorie consumption per day.

Tourism is a relatively bright spot with introduction of skydiving and expansion of paragliding in Pokhara, and enlargement of Nagarkot resort. Annapurna area saw 100K visitors during 2009/10. On the flip-side, Oberoi Group has sold Rs. 123 million stake in the Soaltee Hotel to NE Group.

Telecom is another hot area. MoF's Economic Survey confirms the strength of the sector. Around 42% of the population has access to telecom service (90% of that is mobile). Not surprisingly, NT's daily revenue has reached Rs. 90 million.

Investment climate in Nepal is not conducive and that's a well known fact. Bhrikuti Paper and Pulp Limited closed after 25+ years in service. Also more than 32 factories have closed in the Sunsari-Morang Industrial Corridor. One of the problems is militant labor but an agreement between FNCCI and big trade unions on no-work-no-pay could help towards solving that issue. Government is also trying too enable investment by establishing SEZ in different parts of the country - Panchkhal (Kavre) and 12 other locations.

Interesting tidbits - Nepal TV is going digital by 2017. Khetan Group sold 22% stake in Bottlers Nepal to Gorkha Brewery for Rs 725 million. Now you can order your daura Suruwal online from a variety of vendors. Biratnagar has the first apartment complex but ready to pay Rs 2.2 milion for 470 sq ft "hole in the wall".

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.

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).

News Roundup: Waiting for Two Key Decisions

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

The country is waiting for two major decisions, one political, the other economic. The political decision is the formation of a permanent government. The economic decision is the passing of full-year budget. Unfortunately, the likelihood of anything happening on those two critical fronts in the near future is very low. On the political side, the NC's Mr. Ram C Poudel is holding fast on to his candidacy for the PM despite the withdrawal of Mr. Puspa K Dahal following the Maoist-UML pact. After 15th rounds of inconclusive voting, his candidacy looks pretty ridiculous, but there is a reason for his obstinacy. This OpEd does a good job explaining it. On the economic side, a lack of budget is having some ramification but the country can survive and even flourish without it. For better or for worse, Nepal's economy is doing well without must doing by the country's political, policy-making and bureaucratic elites.

Macro: The IMF and the ADB expect Nepal's economy to grow 4% in 2011. Such growth rate is not quite good enough. Economic and regulatory reforms are needed to help push the growth trajectory higher. As such Nepal is joining the IMF's Extended Credit Facility (ECF) to facilitate the reform process. One way to promote growth is to take advantage of zero-tariffs on certain items exported to China but Nepal is yet to take advantage of it. 60% of Nepal's trade is with the SAAR countries and it is time to diversify the country's export markets.

Monetary Policy: The NRB was surprised by a shortage of currency this time last year, and this year it made sure it didn't face the same problem. Unfortunately, signs of liquidity shortage are emerging. A part of the reason for the crisis last year was the BofP deficit. As such, this year the NRB imposed ban on gold imports (in 2009/in 2009/10, Nepal imported Rs. 42 billion worth of gold). In order to meet a huge demand for gold during Dasain, the NRB had to auctioned off 100k gold - the NRB owns 6 tons of gold in its reserves and another 1.2 tons in Luxemburg.


Fiscal Policy: The top 3 garners of government budget last year were irrigation, police and education. Foreign junkets for ministers and their cohorts absorbed another Rs. 107 million. Given a public outcry, the government has banned this outlandish privilege ($300/day allowance). One spending government cannot avoid is on the Maoists combatants - almost Rs. 2 billion was spent in the last fiscal year. On the revenue side, Rs. 3 billion went missing from local government bodies and another Rs. 3 billion from state coffers.


Agribusiness: Mustang farmers earned Rs. 180 million selling 3,500 tons of apples this year. Jumla, who declared itself as the "organic district" produces 5,000 tons of apples and is trying to export to Thailand and Malaysia. This is quite an ambition given that only 20% of Karnali's 18,000 tons apple have found any market. Remote Rukum is also facing the same problem. At least, Jumla can claim that it produces award-winning honey. Nepal is the 4th largest producer of ginger in the world after India, China and Indonesia, and exports 99 percent to India earning Rs. 1.37 billion. Nepal is also exporting green tea from Illam to India (Darjeeling) after 3 years ban. On the flip side, milk has to be imported from India because domestic farmers cannot meet the demand. The DDC is proposing a plan to increase dairy production. Meanwhile, Kailali dairymen are making a killing milking cows. Poultry farmers are also doing a brisk business. In this festival season, while Kathmandu and Pokhara are feasting on an ample supply of goats, chicken and fruits other parts of the country including Humla, Baitadi and Bajura are not so lucky. There is shortage of grains there as paddy production has declined by a whopping 153K tons. The FAO's seeds could be the cause for this catastrophe as the production of pulses have gone up at the same time. Low grains supply has forced the NFC to issue a global tender for 20,000 tons of rice. The government is set to import 42K of fertilizer and is hiking fertilizer prices by 30% given higher prices globally. A piece of favorable news, Nepal at 56th position is ahead of India and Bangladesh in the Global Hunger Index.

Energy: It appears that companies in the LPG industry are nickling and diming the NOC into a Rs. 1.7 billion loss. The NOC succumbed to tanker operators' demand and resumed imports from leakage-prone Barauni.

Financials: Banks in Nepal continue to do brisk business - EBL, NNF, BoK, NMB. Not surprisingly existing banks are opening new branches (219 added last year) and new banks are joining the frey - Commerz and Trust Bank, Civil Bank, Century Bank and Mega Bank. According to the World Bank Nepal has 4.19 branches for every 100,000 adults. Shangrila Development Bank and Bageshowri Development Bank are merging, the first development banks to do so. This merger comes on the heels of failed NIBl-EBL merger. Another merger, NBB-NSMBL is awaiting regulatory approval. The Rs. 16 billion Nepal Army Fund lacks skilled investment professionals but it has found ways to invest in a Medical School. The SEBON has given green-light to the Indian-financed CDS, a clearing and settlement system following an approval by the MoF. The MoF has also decided to approve mutual fund regulation to facilitate the development of the industry. The NRB is joining a global trend by attempting to cap bankers' salaries. The government is getting serious about money laundering as pressures continue to build. They are clamping down on informal channels and imposing new rules on remittance companies. The government is getting pushbacks on its attempts. The NCC is complaining that restrictions are hurting foreign investment. On a side note, the 45 year old RBB held its first ever AGM.

Hydropower: The NEA is planning to increase electricity tariff by 30% to close its deficit. But importing Rs. 24 million of electricity from India for Nepalgung alone during 2009/10 is not consistent with that goal. Small hydro developers are lamenting about the low PPA rate structure which they argue is discouraging investment. But new small-sized projects are being developed in spite of such protests. The 2.17MW Mahesh Khola is the case in point. Despite Maoist threat to obstruct 14 Indian-owned hydro projects, 7 mega project including 5 with Indian participation is signing the PDA with the government. Another mega project, the 880MW Tamkoshi III is starting construction in 2012.

Infrastructure: The first 6-lane road in Nepal has opened for service and 5 more are planned. Meanwhile, works on the Outer Ring Road Project has stalled owing to opposition by the locals. The 1,764km Mid-Hill Highway is set to finish this year. The ADB is giving a grant of USS$49 million for the Sub-regional Transport Enhancement Project. The government is considering PPP to encourage investment in roads. TIA is over-load, handling 41 aircrafts/hour instead of its optimal capacity of 30 per/hour. To compound its problem, there was a conveyor belt incident. The legendary Mugling Bridge is in dis-repair. The goverment is taking over the Kakarvitta dry-port after failing to lure private management companies.

Labor: Remittance growth slowed to 10.5% in 2009/10 despite a 35% increase in labor outflow. Sending Nepalese to Japan under JITCO has hit a snag due to lack of skills. Nepalese going to Korea under EPS can only work in manufacturing sector for the same reason. Afghanistan is trying to curtail the role of Nepalese working in private security companies. Malaysia has stopped taking in Nepalese maids. The government is looking into regulate labor going to the Gulf more tightly given a raft of abuse cases especially domestic workers - one way is to stop people from going there on visitor visas. The government also wants to regulate how much manpower agencies charge for their services. SOS Manpower is the top dog in the manpower industry. On the domestic front, labor-management conflict has erupted at the Fulbari Resort and Spa in Pokhara.

Manufacturing: The Birgung-Pathlaiya has been running smoothly for the last nine months but not Nepalgunj. The largest clinker factory in the country has opened in Rupandehi district. Looks like the domestic shoe industry is doing brisk business. Debt-laden Janakpur cigarette factory is back on service. China has surpassed India with the largest numbers of JVs in Nepal in 2o09/10. Garment industry is not quite dead yet. It exported Rs. 4.5 billion in 2009/10. India' Liverpool retail is taking 33% stake in Momento Apparel, Nepal's largest ready-made garment manufacturer for IRs 200 million.

Media/Entertainment: Unregistered foreign channels with "indecent" content is flourishing in Nepal and authorities are trying to crack it down. Kollywood grossed Rs. 350 million last year from 59 films. On the branding side, the comedian duos Ma-Ha are the new faces of Western Union in Nepal.

Real Estate: The NRB's new directive appears to have given a renewed boost to the housing market although that's not so clear - realty transaction in Kathmandu is down 49%, and in Pokhara it is down 60%. Platinum Developers' 500 apartment Soaltee City project is in offing. Land owned by Guthis of former royals will be annulled and properties of the late King Birendra are going to go into a Trust.

SOEs: The government is ready to off-load NAC to the private sector. A divestment of the government's 30% stake in ADBL is also in the pipeline. More than a dozen years and Rs. 100 million later the Rastriya Beema Sansthan has stopped "incentive allowance" .

Telecom: The NTA wants to connect all 75 district with fiber optics within 3 years. GSM users in Nepal are up a whopping 92% to 6.9 million; 3.96 million use NT and 2.94 million use Spice Nepal. Ncell, which is owned by TeliaSonera along with Spice Nepal plans to invest US$100 million in 2011. NT's bid to award contracts to ZTE and Huawei has drawn attention of the CIAA. Internet users are up 160% to 1.35 million. The NTA has made ID mandatory in internet cafes to curb online crimes. Take this Google, Nepal has its own search engine, ebuzz asia.

Tourism: Tourism in September was up 20% year/year. Pokhara also saw an increase of 20% in tourist visits. Oman's air became the 27th international airline to service Kathmandu. India's low-fare SpiceJet has also commenced Kathmandu-New Delhi service. Two Malaysian airlines are set to start flying to Nepal. Nepalese government is encouraging Chinese airlines to join the frey. State-owned NAC plans to add to its fleet despite recurring controversies. Recently one of its two Boeing aircrafts used for international flights was grounded causing cancellation of half of the schedule flights. Ghorepani is getting a tourism boom and "homestay" is becoming popular in Panchase region in the mid-west. Locals in Upper Mustang have lifted restrictions on tourists from visiting their areas. The tourism conglomerate Yeti Group has taken 49% stake in Gokarna Forest Resort for Rs. 760 million. Oriental Hotels, the owner of Radisson Hotel, earned Rs. 51.4 million last year.

Personalities: Dinesh K Chuke, a Chitwan-based entrepreneur is making a big splash in his hometown.

Interesting Tidbits: An interesting story on the legendary Ranjana Film Hall.

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