Tuesday, May 23, 2017

Can Nepal become a middle-income country by 2030?

May be, but it depends on the pace of reforms and how fast it is able to break the low growth, high migration equilibrium, according to a latest report by the World Bank. Nepal’s performance so far can be summed up as: impressive decline in absolute poverty rate (proportion of population below $1.90 a day, 2011 PPP), low growth grate (below 5%), large-scale out-migration for work, and huge inflow of remittances that is popping up revenue growth, consumption demand and more. Also, see this paper on remittance in Nepal: boon or bane.


A business-as-usual scenario (BAU) and the resulting GDP growth would lead to per capita income (GNI) of $958 in 2030 (short of $1025 benchmark for lower middle income country as per the WB definition). However, under a reform scenario (investment and productivity improve until 2021 and then level off), per capita income level will breach the lower-middle income threshold in 2027. The exercise comes out of a classic neoclassical growth model (growth accounting/long-term trend [steady state] analysis). 

The WB recommends a “systematic assault” to break the inferior equilibrium through:
  • Breaking policy barriers (ramp up public investment, promote competition, trade integration)
  • Building new sources of growth (mainly hydropower)
  • Revitalizing existing sources of growth (reform agriculture)
  • Investing in people (take advantage of the demographic dividend and invest in skills of youths)
Here is an earlier analysis (Macroeconomic Update August 2013, ADB) on prospects for graduation from LDC category by 2022. Also, here is a piece on rapid economic transformation to be a middle-income country by 2030. Here is a econ-political analysis on why is Nepal poor. And, here is a short piece on low growth trap and the unusual structural transformation

Wednesday, May 17, 2017

Nepal joins Belt and Road Initiative (BRI). Now what?

On 14 March, Foreign Secretary Shanker Das Bairagi and Chinese Ambassador Yu Hong signed a memorandum of understanding, in Kathmandu, on the framework agreement on China’s Belt and Road Initiative (BRI), or commonly referred to as One Belt One Road (OBOR). The primary interest in joining the new initiative is to increase Chinese investment and assistance in Nepal, primarily in infrastructure, technology transfer, and connectivity. The signing of MOU comes ahead of the Belt and Road Forum for International Cooperation summit in Beijing on May 14-15. 

Now, Nepal has to come up with project proposals that suit the objectives of BRI. These projects will then likely be funded, mostly concessional or non-concessional loans, through Chinese public and private investment companies (plus AIIB, which invests in projects; Silk Road Fund, which is primarily designed for equity investment in projects;  EXIM Bank; China Development Bank; New Development Bank, etc).

Unveiled in September 2013, the initiative covers 65 countries (home to 62% of world's population and constitutes one-third of global GDP). It consists of two major parts: Silk Road Economic Belt (road stretching from China to other countries/continents that will facilitate trade and investment in infrastructure projects) and 21st Century Maritime Silk Road (sea-based network of shipping lanes and port development).

Here is a list of latest pledge ($124 billion) by China for the BRI initiative:
  • an extra 100 billion yuan ($14.50 billion) into the existing Silk Road Fund
  • 250 billion yuan in loans from China Development Bank
  • 130 billion yuan in loans from Export-Import Bank of China
  • 60 billion yuan in aid to developing countries and international institutions in new Silk Road countries
  • encouraging financial institutions to expand their overseas yuan fund businesses to the tune of 300 billion yuan
  • 2 billion yuan in emergency food aid
  • $1 billion to a South–South Cooperation fund
  • $1 billion for cooperation projects in countries on the new Silk Road

Now what? Nepal joined AIIB with great fanfare, but nothing substantial has come out of it. Similar with the transit treaty with China that theoretically ended the sole dependence on India for utilizing the transit right of a landlocked country. It would be great if Nepal secures funding for projects that caters to domestic demand and subsequently facilitates cross-country trade and investments. Let me outline some of the issues that need to be kept in mind going forward.

First, some people are taking Nepal joining BRI as a response to India's heavy-handedness in Nepali politics and economy after the promulgation of constitution in 2015. The trade embargo crippled the Nepali economy. The anger arising from the trade embargo-inflicted pain is understandable. But, joining BRI should not be a retribution strategy from which Nepal gets nothing in substance. The biggest task for Nepal is to present projects that are appealing to Chinese investors, both public and private sectors that are part of BRI. But then we also know that this is where Nepal is chronically lacking. Nepal’s fiscal operation is squeezed by a lack of project readiness and its neglect/inability to prepare a stock of investment-ready projects (referred to as Project Bank). Precisely because of this, capital spending is below 80% of budged amount. Nepal is not even able to fully utilize the highly concessional loans offered by multilateral institutions (ADB and WB). 

Second, Nepal needs to first present its own version for rapid economic transformation, with broad-based political support, and then seek funding for its implementation. It should align with domestic needs and development aspirations. We should collaborate (not wholly let them do it) with Chinese or whoever is competent to draw an economic corridor blueprint and then seek funding on the most cost-effective way. We should draw lessons (on what not to do) from $45 billion China Pakistan Economic Corridor master plan. The deal comes with a lot of economic, political and geographical influence.

Third, on what terms and conditions are the Chinese investments going to flow in? It is not going to be in the form of traditional aid for sure. The emphasis is on equity investment, i.e. partial ownership of projects and assets. What would be the fiscal implication and debt liability? We need to be clear on this before its too late. Nepal may be asked for sovereign guarantee of project investments even in the case of private players. Also, Nepal may be asked to revise/modify laws to accommodate investments (for concessions) and make regulations to suit Chinese procurement (of course, it will be single sourcing without competition). The devil is always in the detail. If Japan, India or any other multilateral institutions offer loan in more concessional terms (interest plus principal payment schedule) and easier procurement rules, then Nepal should not stick for project financing with BRI just for its sake (domestic politics plus response to Indian influence). 

Fourth, there are talks about developing Nepal as a vibrant transit nation between China and India (or transform it from landlocked into land-linked). That’s appealing in principle and is a great topic for never-ending workshops. However, as the reality is now, this is a distant dream. India is opposed to Chinese investment in disputed regions in Pakistan. India will want to expand its own interest along Nepalese border and increase connectivity, which is happening at snail’s pace. The geography is also on the Indian side: plains versus the rugged mountains. We may be chasing a chicken that may not lay much eggs, but creates a lot of noise. Nevertheless, Nepal's primary interest should be to attract investment and increase exports to both India and China (and not only a 'land-linked' transit nation, which to me sounds a bit unrealistic given the political and economic realities).

Fifth, it would be prudent to first prioritize what Nepal needs now and what is needed in the future to sustain high growth? There is unanimous consensus on increasing investment in hydropower projects, domestic transport networks (including airports), urban development, tourism, agriculture and education sectors. This is where foreign investment should be flowing in, be it Chinese through BRI or Indian and Japanese bilateral aid or any kind of aid from other countries and multilateral financial institutions. Then only we need to think of large-scale inter-country infrastructure linkages with China (like railways). The returns on such investments for now is too low and markets too small. A metro rail within Kathmandu is much desired for now than cross-country rail link with China. Similarly, upgradation of poor facilities and preservation of Lumbini is much desired than just a rail link to Lumbini. 

There is much to discuss on this issue. For now here are two good readings: 
  • The EIU's report on OBOR here
  • Akhilesh Upadhyay's take on why Nepali's don't share Indian ambivalence towards China here

Thursday, April 27, 2017

NEPAL: CBS projects GDP to grow by 6.9% in FY2017

On 25 April, Central Bureau of Statistics (CBS) estimated that Nepal’s economy would likely grow by 6.9% in FY2017, sharply up from 0.01% in FY2016 and 3% in FY2015. This is the highest GDP growth rate (at basic prices, FY2001=100) since FY1994 (when GDP grew by 7.9%) and is higher than the government’s target of 6.5%. It projected agricultural, industrial and services will grow by 5.3%, 10.9% and 6.9%, respectively. Agricultural sector contributed 1.7 percentage points, industrial sector 1.6 percentage points and services sector 3.6 percentage points to the overall projected GDP growth of 6.9%. These projections are based on eight to nine months data. 

Specifically, electricity, gas and water sub-sector will likely grow at fastest rate (a whopping 13%) compared to a negative 7.4% growth in FY2016. Similarly, construction activities will likely grow at 11.7%, up from a negative 4.4% in FY2016. Wholesale, and retail trade, and manufacturing are projected to grow by 9.8% and 9.7%, respectively (up from negative growth rates in FY2016).


An obvious query is: how is this possible? Well, it’s a combination of base effect, good monsoon, improved supply of electricity and normalization of supplies following the catastrophic earthquakes in FY2015 (April and May 2015) and the crippling supplies disruption in FY2016 (September 2015-February 2016). A growth rate of around 6% was expected.

First, it’s the base effect, which refers to the tendency of achieving an arithmetically high rate of growth when starting from a very low base. Hence, only the normalization of economic activities disrupted by the crippling embargo and the lingering impact of the earthquakes would have generated a high growth rate. Note that FY2017 is compared to the performance in FY2016, when growth was almost negligible (0.01%). Even a slight improvement in the normal drivers of growth would have produced a large growth rate in FY2017. Indeed, the seven highest growing sub-sectors in FY2017 had negative growth rates in FY2016 caused by the crippling supplies disruption, which dented economic activities much more than the earthquakes in FY2015. Similarly, agriculture and forestry subsector grew at a negative 0.2% in FY2016 due to the subnormal monsoon, and continued land and harvest disruption caused by natural disasters.

Second, an above average monsoon rains led to record paddy harvest and consequently an impressive agricultural growth. This is an exogenous positive shock. The government also adequately supplied agricultural inputs (including chemical fertilizers and seeds) and restored irrigation facilities (depreciation, and disruption by earthquakes and landslides). It also helped. Paddy output is projected to grow by 21.7% (paddy alone contributes 20.7% to agricultural gross value added). Wheat and maize outputs are projected to grow by 2% and 1.3%, respectively. 

Third, the industrial sector pretty much got a facelift, thanks to the sound management and supply of electricity, improved investor confidence, and pick up in post-earthquake reconstruction works (both private and public). This is where the government’s efforts are most visible. The demand for concrete, sand, soil and other construction materials boosted mining and quarrying activities. Similarly, manufacturing activities got a boost from improved political situation (no strikes and labor disruptions) and energy supply, thanks to the NEA’s excellent efforts in managing existing stock of energy and adding additional units to the grid (domestic as well as imported). Manufacturing, and electricity, gas and water subsectors are expected to contribute 0.6 and 0.3 percentage points, respectively, to the overall GDP growth.  Furthermore, construction activities accelerated due to the pick up in post-earthquake reconstruction works and substantial improvement in works related to large infrastructure projects (Melamchi, Upper Tamakoshi, etc).

Fourth, the demand dampening from deceleration of remittances and marginal effects of demonetization were dominated by the surge in demand following the normalization of supplies and increasing tourist arrivals, thus ensuring a robust services growth. Wholesale and retail activities, which were severely crippled by supplies disruption and grew at a negative 2.5% in FY2016, are projected to grow by 9.8% (thus contribution 1.3 percentage points to the overall GDP growth). Similarly, there were improvements in tourism activities (contributed by domestic tourism as well as international tourists arrivals), transportation and communication (no notable strikes and blockade), and real estate business. Election related expenses will also give boost to services activities. 

Hence, a large base effect together with favorable exogenous factors (good monsoon rains and remittances-backed demand of imported as well as domestically produced goods, whose supplies gradually normalized) and to some extent the government’s efforts led to this impressive growth rate. An important challenge would be to sustain this rate. It is easy to move from almost nil growth to over 6% growth. But, it is difficult to sustain it at this level. It requires a rapid and meaningful structural transformation. The CBS will likely revise down this projection in April 2018, when it releases the revised estimate. The reason is that the services output growth looks a bit more optimistic.

On the expenditure side, private fixed investment seems to have increased to 26.5% of GDP from 21.7% of GDP in FY2016. Overall, fixed investment is expected to reach 33.8% of GDP. Consumption accounted for about 89.7% of GDP. Trade deficit is projected to widen to 32.3% of GDP from 29.9% of GDP in FY2016.

The economy can sustain growth of over 7% with an appropriate mix of macroeconomic strategies, financial arrangements, smart project execution, and supportive institutions and policies. Government has an important role to play in providing critical infrastructure, addressing market failures, designing a growth-enhancing tax regime, and implementing business-friendly policies to usher in a meaningful structural transformation. It also needs to enhance both the quantum and quality of public capital spending to over 8 percent of GDP annually. Given the sound fiscal space, though Nepal doesn’t have a shortage of funds until medium-term, a dearth of capacity to fully execute the budget and finish projects on time may prove problematic. 


Achieving and sustaining a high growth rate is critical to achieve the long-term goal of becoming a prosperous middle-income country by 2030. Hence, implementing the vision of a rapid economic transformation would require consistent and committed political leadership, and a competent bureaucracy. This would form the institutional fabric that helps translate good economics into good politics with economic development as the core theme. It ensures shared prosperity, makes reversibility of policies costly, enhances individual’s and firm’s confidence in the economy, and encourages the bureaucracy to provide faster and better service delivery.

Tuesday, April 25, 2017

Two years since the earthquake reconstruction work is dismal

Today marks the second anniversary of 25 April Gorkha earthquake. A catastrophic 7.8 magnitude earthquake struck Barpak of Gorkha district at 11:56 AM. In between numerous aftershocks of below 5 magnitude, two powerful 6.7 magnitude (26 April) and 7.3 magnitude (12 May) aftershocks shook a large part of the country, particularly central and western administrative regions. It caused further damage to the already weakened houses and physical infrastructure, and also triggered numerous landslides in the rural areas. The calamity added a new challenge to Nepal’s short-to-medium term economic growth and development prospects.

Over 8,800 were confirmed dead and 22,309 injured. Furthermore, 602,257 and 285,099 private houses were fully and partially damaged, respectively, forcing thousands of people to seek temporary shelter under tents and tarpaulin sheets. Furthermore, 2,673 and 3,757 public buildings were fully and partially damaged, respectively. To prioritize rescue and relief operations, the government declared 14 districts as severely affected (mostly in the central and western regions) although the earthquake has affected 31 of Nepal’s 75 districts.


According to PDNA estimates, the cumulative damage and loss amount to 33.3% of GDP ($7.1 billion) and the cumulative need for recovery is estimated at $6.7 billion (31.5% of GDP). Of the total estimated recovery needs, about 50% is for rebuilding private housing and settlement. Productive and infrastructure clusters need 17.3% and 11.1%, respectively. These amount to about 5.5% and 3.5% of GDP, respectively. The recovery needs requirement for agriculture, education, electricity, and transport is estimated at $156 million, $397 million, $186 million, and $282 million, respectively. Furthermore, recovery of the tourism sector and restoration of cultural heritage are estimated to require $387 million and $206 million, respectively.


Preliminary estimates showed that the income shock as a result of the earthquake likely pushed an additional 700,000-982,000 people below the poverty line. This translates into an additional 2.5%-3.5% of the estimated population in 2015 pushed into poverty compared to the no-earthquake baseline scenario of about 21%.

The government organized an international conference to raise funds for reconstruction, which all political parties said would be swift and free of procedural bottlenecks. Accordingly, multilateral and bilateral donors pledged around $4.1 billion (see figure below).

So, what has been the progress after two years?
  • 22,310 houses reconstructed (mostly private) 
  • Of 717,251 families eligible for housing grants, only 564,029 have received the first tranche of NRs50,000. 
  • Of 564,029 that received the first tranche, only 49,681 have started rebuilding their houses
  • Of 34,294 households that have applied for second tranche, 14,557 have be certified to receive it. 
  • Of 750 heritage structures (fully damaged 133 and the rest partially damaged), only 90 are in reconstruction process. Only 1 (Bauddhanath Stupa) was completed (that too by local initiative).
  • Schools that need reconstruction: 7,923. 1,141 construction completed. 1,059 construction ongoing.
  • Of 929 health facilities (fully and partially damaged), 200 have been reconstructed
  • 2,688 government buildings need reconstruction
  • Of 7,741 drinking water projects that need reconstruction, 363 completed
Obviously, the progress so far is disappointing. The National Reconstruction Authority (NRA) points to three factors for the slackness: 
  • lack of mobilization of competent human resources
  • weak coordination and cooperation
  • funding gap
What is surprising is that these were exactly the things folks feared during the run up to establishment of the NRA. There was strong recommendation to make the NRA as powerful as it can be (definitely not a parallel government as come interpreted it back then!) so that it doesn’t have to knock on the doors of various ministries and the Cabinet to take crucial decision as and when necessary to expedite reconstruction works. No one wanted the NRA to suffer the same fate as other ministries in spending capital budget (bureaucratic hassles, structural weakness in planning, low project readiness, weak project management, and political influence).

Unfortunately, this is exactly whats happening right now. NRA looks like another bloated ministry without much tooth. It has to depend on the Ministry of Finance to get funds. It is not given adequate discretionary expenditure to carry out tasks that may crop up as work progresses. MOF is too slow and lethargic to not only release but also to think beyond the usual bureaucratic procedures on this matter. 

Political infighting during the appointment of CEO and awarding contracts to cronies have been the most controversial moves. Initially, the NRA ordinance was deliberately allowed to lapse, which led to questions about the very existence of NRA. Then NRA Act was passed by diluting all the procedures that would have ensured faster decision-making and disbursement of funds. A robust institutional setup for reconstruction was not the priority for political parties. The coalition governments were/are more interested in having their yes-man in the leadership position and helping cronies associate with reconstruction efforts (either for project assignment or local influence). The major chunk of the blame for the disappointing pace of reconstruction so far must go to the big three political parties. 

Then comes the development partners. I still cannot understand why some donors keep on pressing for stringent verification procedures for disbursement of housing grant. Importantly, I cannot get the logic of breaking housing grant in three tranches as if it’s a robotic way to building houses. Who starts building a house with NRs50,000 and then waits for additional tranche to plan for another phase of construction? How are these folks supposed to do contract with laborers and purchase raw materials needed to build a house when the money is given in tranches subject to stringent verification procedures? The cost of construction materials and labor goes up by the time these processes are cleared. The housing grant should have been given in a big NRs200,000 chunk. Then only an orderly planning would work. I keep on thinking: how about asking the specialist/officer who proposed such an impractical tranche condition to build a house following the rules he/she set? This reflects an inadequate understanding of building houses through financing (grant or bank loan) and poor project planning & preparation. 



Anyway, the slow reconstruction so far is a shameful tragedy. Reconstruction work needs to be fast now. NRA needs to be given discretionary expenditure so that it won’t have to knock on the doors of MOF all the time. Cabinet needs to delegate procedural approval processes to NRA board itself. Donors need to be a bit flexible. Remember, some inefficiency is always inevitable if we carry out work of this scale. After all, a good cause is worth some inefficiency (so said Paul Samuelson)! Political parties need to keep out of the NRA, especially its leadership and the housing grant at local level. And the NRA needs to mobilize private sector if there is shortage of (or unwilling) civil servants to work on reconstruction tasks. Planning phase is too long already. The people need results immediately. 

At this pace I doubt if reconstruction will be completed in the next three to four years. It’s a sad story on top of the pain inflicted by the devastating natural disaster. 

Friday, April 21, 2017

Congested TIA, tourist arrivals and poor infrastructure

Tribhuvan International Airport (TIA), the sole international airport in Nepal, is too congested now
  • Handling 420 flights (100 flights by foreign carriers) daily (2x the number five years ago) 
  • 20 domestic and 28 international airlines use it daily
  • International terminal designed to handle 1,340 passengers per hour. But it is handling 2,700 passengers per hour.
  • 12,000 staff working in three shifts
  • 1.75 million passengers used domestic flights in 2016
TIA is facing severe space crunch as the demand for parking space (due to the increasing number of domestic as well as international airlines) has far outstripped supply. There is a project to upgrade/expand runway, terminal spaces and other infrastructure at the TIA so that it can handle more passengers. However, the project is struggling to pick up pace. An international contractor’s contract was terminated because it could not perform as per the schedule. Like every large scale infrastructure, this one is also affected by poor project planning and implementation, procedural delays at the bureaucratic level, and political infringement. There is a plan to construct an international airport in Pokhara under Chinese assistance (loan), but it hasn't picked up much pace lately.  Similarly, a project related to the expansion of domestic airport, which will eventually become Gautam Buddha International Airport, ran into trouble due to cash shortage arising from slack performance by a local sub-contractor, which was hired illegally. 

Here is a report from TKP:

The subcontract was extended to Nirvik Chitrakar (Khanal), son of former premier and senior CPN-UML leader Jhala Nath Khanal; Raju Gurung, a local goon and UML orter; Furbha Sherpa, a UML-affiliated contractor; Shakti Dangol, a close relative of UML leader Khanal; and Manjit Rai, a UML cadre from Ilam, leader Khanal’s constituency.
The subcontractors were appointed to supply construction materials, labourers, fuel and heavy-duty vehicles. It is said the Chinese contractor handed over money to subractors to execute these tasks without any paperwork. Initially, the subcontractor hired workers, and suppliers to provide construction materials, fuel and heavy-duty vehicles. But after the subcontractor fled, the Chinese company has been forced to foot the bill of the subcontractor.

In 2016, 753,002 tourists (15% of them Indian) visited Nepal, up form 538,970 recorded in 2015, when catastrophic earthquakes hit Nepal.  In 2012, 803,092 tourists visited Nepal. The average length of stay is 13.2 days. The government is aiming to welcome one million visitors in 2017.




Tuesday, April 11, 2017

Sustaining high growth rate in Nepal

It was published in The Kathmandu Post, 10 April 2017.


The prospect of a rosy economic outlook for FY2016-17 dominated headlines and discussions over the past two weeks. Some political analysts and commentators were quick to attribute the cautiously optimistic outlook to the work of the coalition government. Targeting the upcoming local elections scheduled for May 14, the major political parties will construct narratives around this rosy economic scenario to best suit their agenda. 

However, before being carried away by the party-centred narratives, it is necessary to note that such economic forecast is always conditional on key factors moving in the intended direction. It is also necessary to distinguish between autonomous drivers of growth and the ones that can be directly attributed to the government’s efforts. Importantly, the focus should be on implementable strategies to sustain a high growth rate. 

Bright prospects

The previous government had set a target of 6.5 percent for gross domestic product (GDP) growth and 7.5 percent for inflation in the FY2017 budget speech. Considering the dip in economic activities in the FY2016 that resulted in a GDP growth of only 0.8 percent, the target was ambitious but not entirely impossible given the expected large base effect and favourable monsoon rains. In general, base effect refers to the tendency of achieving an arithmetically high rate of growth when starting from a very low base. Hence, simply the normalisation of economic activities disrupted by the crippling embargo and the lingering impacts of the earthquakes would have generated a high growth rate. 

In its 2017 Article IV consultation report, the International Monetary Fund (IMF) revised its growth forecast showing an increase of 5.5 percent. Similarly, in its biannual Macroeconomic Update, the Asian Development Bank (ADB) also made an upward revision of its earlier forecast and estimated GDP growth to hover between 5.2 and 6.2 percent. On an average, it expects GDP growth to be around 5.6 percent.


Meanwhile, the Central Bureau of statistics (CBS), the official government agency in charge of national account estimates, will release its own provisional growth estimate later this month by analysing available data up to the first seven to eight months. The CBS will revise its FY2017 growth estimate in the next fiscal year and then finally provide an actual estimate in FY2019. A general trend is that the actual estimate is lower than the provisional estimate. A GDP growth of over 6.1 percent will be the highest since the FY1992.

Although the point estimate is slightly different among these agencies, the underlying reasons for the upward revision of growth forecasts are similar. The events observed in the first seven months or so and the expected direction of key factors in the remaining five months form the basis for such forecasts.

First, the above average monsoon rains and timely availability of chemical fertilisers have resulted in a bumper agricultural output, which according to the Ministry of Agricultural Development will be at record levels. It constitutes about 33 percent of GDP and is a significant driver of GDP growth. While monsoon rains are beyond the government’s control, a smooth supply of chemical fertilisers and, to some extent, maintenance of irrigation facilitates are definitely affected by its actions.

Second, industrial output, which registered a negative growth last year, is expected to be robust. The modest increase in capital spending (in level but not in absorption rate) and post-earthquake reconstruction activities will boost mining and quarrying as well as construction activities. Furthermore, the substantial improvements in electricity supply and its management and a favourable investment climate thanks to the notable work of the Ministry of Energy and the Ministry of Industry respectively will significantly boost manufacturing activities.

Finally, the addition of electricity from small hydropower projects as well as some improvement in the collection and distribution of water will boost growth of the electricity and water sub-sectors. These four sub-sectors collectively constitute the industrial sector, which is expected to grow at one of the highest rates in recent decades. This is where this coalition government’s actions are most visible and commendable.

Third, services output, which constitutes about 52 percent of GDP and has been the most stable and largest contributor to growth, is expected to be higher than the last two years, but not as high as in FY2014. The main reasons are the deceleration in remittance inflows and expectations of political instability in the Tarai region.

These headwinds will likely be offset by tailwinds expected from the normalisation of supplies and tourism activities, local elections-related expenses and a slight uptick in demand following the disbursement of housing grants in the last two quarters. Although the government’s direct contribution in services sector growth is marginal, it is nevertheless visible from its performance in the sub-sectors of education, public administration, defence and health care. The proactive role played by the Ministry of Health under Gagan Thapa will be especially noticeable in the improved performance of the health sub-sector.

Government’s contribution

Overall, the most notable contributions of this coalition government are that it gave continuity to the contentious budget introduced by the previous government and then made commendable efforts to reinvigorate economic activities— especially through stable electricity supply, acceleration of post-earthquake grant disbursement, nudging the line ministries to scale-up the pace of capital spending (including Melamchi project related works), improving investors’ confidence and making remarkable improvement in the health sector.

That said, a larger contribution to the overall growth will still come from two key exogenous factors: monsoon rains and remittance-backed demand in the services sector. Optimistically higher growth would depend on the government’s efficacy in budget execution and fewer hassles in administrative procedures in the remaining months.

This sort of seemingly one time spurt in growth does not mean that the economy has changed its structure and will sustain high growth in the coming years. We are miles away from reaching a stage where we can sustain a high growth rate and bring about a rapid and meaningful economic transformation. The favourable monsoon rains and remittance-backed demand of imported goods are the default factors that help maintain an average growth of about 4 percent. Achieving and sustaining growth of over 7 percent requires consistent and committed political leadership, a competent bureaucracy and inclusive institutions.

Saturday, April 8, 2017

USD 666.2: Per capita consumption in FY2016 in Nepal

Interesting data from Annual Household Survey 2015-16 (CBS hasn't yet uploaded the report on its website).

Per capita consumption
  • Per capita consumption: NRs70,680
  • Per capita consumption in urban area: NRs101,659
  • Per capita consumption in rural area: NRs52,007
  • Per capita consumption increased by 8.8% between FY2015 and FY2016
Household consumption
  • Average household consumption: NRs322,730
  • Average urban household consumption: NRs431,337
  • Average rural household consumption: NRs248,893
  • Average household expense on food: 53.8% 
  • Total household consumption: NRs1,825 billion
Consumption inequality
  • Per capita consumption expenditure of the top 10 percent is almost 11 times more than per capita consumption expenditure of the bottom 10 percent.
  • Per capita average spending by those in the top 10 percent: NRs243,535
  • Per capita average spending by those in the bottom 10 percent: Rs20,556
  • Average urban household spending on food: 44.9%
  • Average rural household spending on food: 59.8%
Average household size in rural and urban areas is 4.8 and 4.2, respectively.

Exchange rate in FY2016: USD1 = NRs106.1