Average annual growth rate, FY1993-FY2010
Nepal's trade with India (Rs billion)
Exchange rate (NRs/IRs)
Friday, March 29, 2013
Sunday, March 24, 2013
The figure shows the monthly change in inflation, which is an aggregate measure of the change in prices of goods and services, in the last three years and the first seven months of FY2013 (ending 15 July 2013). The inflation in a month of a particular fiscal year is the change in prices in that month compared to the prices in corresponding month in the preceding year. In other words, inflation of 10.1% in mid-August of FY2010 means that on average prices of goods and services have increased by 10.1% compared to the prices in mid-August of FY2009. The most widely yearly inflation data is computed by taking the average of monthly inflation in a fiscal year (in the figure, it is mentioned as annual average in the legend). The Nepal Rastra Bank gives 46.82% weight to food prices and 53.18% to non-food and services prices while determining overall inflation.
The figure shows that inflation in the first five months of this fiscal year has been consistently higher, though in a decreasing trend, than the levels reached in corresponding months of previous years. Compared to previous year, it essentially means that households have been paying higher prices, in general, for all goods and services purchased this year. High inflation is eroding household’s, whose income hasn’t kept pace with the inflation rate, purchasing power and is especially hitting poorer households hard. With the government’s failure to clamp down on inflation, which is hovering above 8% since 2008/09, people have built up expectations that prices will not come down in the near future (or say embedded expectations at a higher base). Unfortunately, we are living in times where inflation above 8% is becoming a ‘new inflationary normal’. Just for comparison, inflation was as low as 2.9% in 2000/01.
Traditionally, high inflation has its roots on too much money chasing too few goods, i.e. when the demand for goods (backed by too much money in hands of people) outstrips supply of goods. The central bank controls the flow of money (by changing interest rates and imposing regulatory restrictions) in the economy. However, given the pegged exchange rate with India, Nepal Rastra Bank’s monetary policies have little traction on inflation in Nepal. Alternatively, an irresponsible government with a knack for higher spending also pushes prices higher (or rather helps keep prices high).
Now, the question is: what really is pushing prices higher? Several factors come into play here. The very fact that our currency is pegged to Indian rupee and over 60% of trade occurs with India means that the inflation in India will naturally affect prices here. Research shows that about one-third of the price variability in Nepal is determined by prices in India. The rest is determined by domestic factors, including prices of administered petroleum fuel.
First, inflationary expectations are embedded in people’s consumption behavior due to the incompetency of government to control rising prices. Wholesalers and retailers deliberately jack up prices, irrespective of market supply and demand, each year during festival season (Dashain and Tihar) and the prices hardly come down after the end of festivals. This behavior is also apparent immediately after bandas and temporarily disrupted distribution of essential items.
Second, middlemen are distorting prices and deliberately keeping them high. For instance, transportation cost and some leakages do not fully justify more than 50% increase in prices of fruits and vegetables after they reach Kalimati from Dharke of Dhading. Powerful politically affiliated middlemen and associations act both as monopsonists (only they purchase food from farmers), and monopolists (only they sell food to wholesalers), in effect depriving farmers of the true price by stifling competition and also burdening consumers with artificially inflated prices.
Third, the frequent hike in administered fuel prices, high transportation costs, and long load-shedding hours have increased cost of production, which is ultimately reflected in retail prices. It affects costs at production site, distribution chains, and retail stores. Fourth, the continually rising imports of goods, especially those from outside of India, and the depreciation of the Nepali rupee have further pushed up prices as non-food and services have more weight in determining overall inflation.
All of this shows the failure of government leadership to lower inflation and make people’s lives easier. The ineffective market monitoring against anti-competitive practices, control of supply chains and market distortions, and to some extent a rise in cost of production are associated with government leadership and governance structure in practice. Recently, we have had leaders favoring high budget spending (unproductive ones) and cash handouts along with lax market monitoring because the supplies (ranging from construction materials to food items) are essentially controlled by party associates, who rake in huge commission by distorting market incentives. At some point controlling inflation becomes a political economy issue rather than a pure economic issue in developing countries like Nepal due to political, institutional and regulatory weaknesses along with immature linkages between and within sectors.
In effect, Nepali economy is destined to have high inflation, and with it people’s lives will get harder each year. Unless the market distortions are dismantled, unproductive spending are checked, and a sound macroeconomic framework (that doesn’t depend on remittances for sustenance) is created, we will continue to have a high inflationary normal, i.e. high inflation will be a new normal and people will experience continued erosion of purchasing power.
Thursday, March 21, 2013
There has been quite an interest in interpreting the latest findings from UNDP’s Human Development Report, which, based on multidimensional poverty index (MPI), noted that of the 22 countries analyzed in the latest report, Nepal was the top performer in reducing MPI poverty. The MPI headcount poverty fell from 64.7% in 2006 to 44.2% in 2011, an astounding 4.1 percentage points decline per year. The latest survey used for this analysis was NDHS 2011.
From South Asia region, Bangladesh was another start performer with MPI poverty reduction of 3.4 percentage points per year between 2005 and 2010. The MPI poverty rate in South Asia is highest in Bangladesh (58%), followed by India (54%), Pakistan (49%) and Nepal (44%).
According to the latest HDR, while Sri Lanka is in the high human development group, Maldives, India and Bhutan are in the medium and the remaining ones in South Asia (Bangladesh, Pakistan, Nepal and Afghanistan) are in the low human development group. Nepal’s HDI value for 2012 was 0.463 (ranking was 157 out of 187 countries). Between 1980 and 2012, Nepal’s HDI value increased from 0.234 to 0.463, an average annual increase of about 2.2%. When HDI value of 0.463 is discounted for inequality, the HDI falls to 0.304, a loss of 34.2% due to inequality in the distribution of the dimension indices. The average loss in South Asia is 29.1%.
The MPI replaced the Human Poverty Index (HPI), which used country averages to reflect aggregate deprivations in health, education, and standard of living. However, incorporating ten indicators in these three broad categories, the multidimensional poverty index [MPI = incidence (deprived in at least one-third of the weighted indicators) * intensity (proportion of weighted indicators in which households are deprived)] captures overlapping deprivations (prevalence) and deprivations on average (intensity). It also can be used to compute depravations using disaggregated data at the sub-regional level.
The education (years of schooling and school attendance) and health dimensions (nutrition and child mortality) are based on two indicators each while the standard of living dimension is based on six indicators (cooking fuel, sanitation, water, electricity, floor and asset ownership). A person is multidimensionally poor if the weighted indicators in which he or she is deprived add up to at least 33.3%. Households with a deprivation score greater than or equal to 20% but less than 33.3% are vulnerable to or at risk of becoming multidimensionally poor.
The MPI headcount differs substantially from CBS’s and WB’s poverty estimate. This is because the last two estimates are based on (consumption based) monetary measures, but the MPI is based on ten indicators that reflect multidimensional deprivations. It requires a household to be deprived in multiple indicators at the same time. The MPI shows the interconnectedness among deprivations and combines several MDG indicators into a single measure. So, while 44.2% of the population lived in MPI poverty, an additional 17.4% were vulnerable to multiple deprivations. [Note that the * sign adjacent to 2011 for CBS’s data refers to the change in consumption aggregates used to compute poverty. Without this one, the poverty rate fell even steeply. See this blog post.]
The point here that whatever measure of poverty you look at, there has been a substantial reduction in poverty and as a share of population, headcount poverty rate is not the highest in Nepal (when compared to other countries in the region). For more on national poverty line, see this blog post. The explanatory story also remains more or less the same, i.e. remittances backed reduction along with provision (mostly access) of basic necessities. The MPI shows that improvement in asset ownership, electricity and nutrition contributed the most in reducing poverty (both among overall population as well as among poor only).
The pie chart below shows the contribution of different indicators to the MPI. Nutrition followed by years of schooling child mortality, cooking fuel, sanitation and assets among others had the largest contribution (not in reduction in poverty but in pushing households below poverty line).
Region-wise breakdown shows that MPI poor (% of regional population) was the lowest in Western region and highest in Mid-western and Far-Western. Western and Eastern regions had MPI poor below the national average.
Further sub-regional breakdown reveals a surprising trend: Terai region reduced poverty the most. The figure below ranks regions from poorest (far left) to least poor (far right) and shows the rate of poverty reduction of each region between 2006 and 2011. Far-Western Terai region (even though fourth in terms of MPI headcount poverty when compared to all sub-regions) saw the largest rate of poverty reduction. It is followed by Western Terai and Central Terai. Central Hill and Mid-Western Terai reduced multidimensional poverty the least.
Western Terai more than halved its poverty rate (67% in 2006 to 33.4% in 2011). Far-Western Terai and Eastern Terai also achieved significant reduction in poverty rate (from 82.3% to 50.1% and from 61% to 32.5% respectively). Headcount poverty in Western Terai, Eastern Terai, Western Hill, and Central Hill was lower than the national average of 44.2%.
Before closing off this long post, few things to keep in mind:
- The MPI supplements $1.25 a day and national poverty measures by looking at deprivations across 10 indicators. It is not one versus the other.
- All three measures of poverty show a drastic decline in poverty.
- The outstanding performance (regional comparison) of Nepal may not remain so in the days ahead because survey data for all countries was not for uniform time period. As new survey data are available, the relative position of Nepal might also change. But, still the story is that there has been a drastic reduction in poverty.
- Improvements in asset ownership, access to electricity and better nutrition contributed the most to reduction in poverty. The role of remittances in all of these is loud and clear. Rural roads (leading to price reductions), increase in rural wages, social expenditure, vibrant civil society and active women's participation are also stressed upon.[Still, since nutrition followed by years of schooling child mortality, cooking fuel, sanitation and assets are the factors keeping poor people poor, the policy focus should be on improving access to and availability of these basic services.]
- Sub-regional poverty analysis shows that largest multidimensional poverty reduction occurred in Terai region.
Wednesday, March 20, 2013
The move back toward political cooperation and consensus could help address the sharp reduction in government spending that has arisen in the absence of a formal, detailed government budget for 2012/13—known in some circles as Nepal’s “fiscal cliff”.
There are several reasons for this regrettable state of affairs. First, the 2011/12 government budget was under-executed—particularly for investment spending where only about 73 percent of the budget was actually spent. This under-performance was then used as the base for the spending ordinance passed in late November 2012.
Second, the 2012/13 budget ordinance of Rs 351 billion is a nominal figure—taking no account of inflation. So if projections for year-end inflation turn out to be accurate, spending could fall by another 9 percent in real terms.
The lack of a full budget with line-item allocations has further dampened expenditures. The budget ordinance was politically expedient, but lacked the detail that would allow government ministries to spend—and spend wisely.
Consequently, more money is being taken out of the economy via tax than is being put in by expenditure. As a result, government deposits are rising at the central bank, and liquidity available to commercial banks has dropped, putting upward pressure on interest rates and challenging monetary policy.
[…]Quick executive action on an appropriation ordinance (to allow line ministries to spend) would be the first step. Speeding up the approval process for investment projects would also help. Looking ahead, another year of badly-needed economic growth should not be lost to infighting and indecision over the next budget. The risks are high given the short time left to hold elections and forge a new consensus government before the beginning of the 2013/14 fiscal year in July. Political cooperation is needed to put the budget above the political fray, manage government spending in line with existing national priorities, and “do business” as normally as possible. How this is to be done should be decided now, as the budget is being formulated. Transparency and an inclusive dialogue on budget priorities should be an integral part of political parties’ agenda for the next several months, with the common objective of starting 2013/14 with a full-year budget in place. This opportunity to step back from the edge of Nepal’s fiscal cliff should not be missed.
Sunday, March 17, 2013
The nature of federal fiscal relations, the concentration of power in state capitals and the absence of a venue for cross-state exchange of ideas are all biased against a more competitive federalism in India. If India’s states are to truly serve as effective laboratories for improving public policy, they must be liberated from these institutional impediments. Institutions are notoriously sticky, yet there are a few signs of hope on the horizon. Notwithstanding incentives to the contrary, India’s states often do manage to spur policy experimentation—but it just is not always clear how these experiments add up. We have Chhattisgarh linking smart cards to the Public Distribution System, Andhra Pradesh evaluating the impact of contract teachers on primary education, Gujarat reforming electricity by linking higher user fees to guaranteed service provision—the list goes on. This demonstrates that state governments can take initiative and ministers are able to carve out space to experiment when the conditions are right. But the next step is much harder: fostering an environment of learning across states. One positive development in this regard is the Planning Commission’s recent proposal to streamline the number of centrally sponsored schemes while increasing the amount of flexibility that states have with respect to programming funds. According to the draft proposal, centrally sponsored schemes would set aside up to 20 percent of allocated funds (10 percent for flagship schemes) for “flexible spending” by the states, which would give them the space to encourage local experimentation.
Inadvertently, the recent reform to allow greater foreign direct investment (FDI) in multi-brand retail could also provide a learning opportunity for states. Although it was characterized as a defeat at the time, the center’s decision to allow states to decide whether to the implement the new FDI regulations will create, as it were, a “treatment” and “control” group. Those states standing on the sidelines waiting to see whether the adopters sink or swim will have a golden opportunity to learn from their peers. If this counts as a policy defeat, India may well need many more like it.
Friday, March 15, 2013
Previous dispute or unsatisfactory performance of issuing banks
Issuing bank’s low credit ratings
Low country credit ratings
Basel regulatory requirements
Issuing bank’s weak capacity
Lack of dollar liquidity
High transaction costs or low fee income
Wednesday, March 13, 2013
This paper evaluates the effects of the FAMEX export promotion program in Tunisia on the performance of beneficiary firms. While much of the literature assesses only the short-term impact of such programs, the paper considers also the longer-term impact. Propensity-score matching, difference-in-difference, and weighted least squares estimates suggest that beneficiaries initially see faster export growth and greater diversification across destination markets and products. However, three years after the intervention, the growth rates and the export levels of beneficiaries are not significantly different from those of non-beneficiary firms. Exports of beneficiaries do remain more diversified, but the diversification does not translate into lower volatility of exports. The authors also did not find evidence that the program produced spillover benefits for non-beneficiary firms. However, the results on the longer-term impact of export promotion must be interpreted cautiously because the later years of the sample period saw a collapse in world trade, which may not have affected all firms equally.
Saturday, March 9, 2013
Tuesday, March 5, 2013
Domestic passenger movement dropped 0.55 percent to 1.575 million in 2012 (attributed to high domestic prices due to high fuel charges, less bandhs and more luxury coaches, slow economic growth and real estate activities, and low capital spending).
The Nepali skies saw 70,877 flights in the review period, a drop of 10.49 percent.
An average 195 planes took off and landed at TIA daily (Thats about 16 take offs and landing per hour if the domestic terminal opens for 12 hours a day).
High fuel surcharge:
Flying from Kathmandu to Bhadrapur now costs Rs 6,550 (Rs 3,250 fare and Rs 3,300 fuel surcharge), compared to Rs 4,200 in 2010.
The normal airfare to Pokhara has soared to Rs 4,035 from Rs 2,500 two years ago. Fuel accounts for more than 30-35 percent of their overall operating cost
Buddha Air secured 60 percent of the market share among the seven commercial domestic airlines. The carrier flew 881,611 travelers in 2012, up 27.59 percent. Yeti Airlines took 28.74 percent.
Yeti flew 452,806 travellers in 2012, a slim growth of 0.74 percent compared to 2011.
Apart from these two rivals, all five airlines saw a negative growth.
Collapse and irregular operation of struggling airlines like Agni Air, Guna Airlines and Sita Air benefited Buddha and Yeti.
Sunday, March 3, 2013
The global trade landscape is changing along with the development of sophisticated global value chains (intra-firm or inter-firm, regional or global). The gross trade figures hide the real value addition that takes place while a good or service is produced in a country or across countries. The WTO already has a website that details value added trade. Here is an earlier blog post based on it. Also, here is more on why value added is a better measure of trade.
In its latest report on global value chains, the UNCTAD argues that 80% of global trade takes place in value chains linked to transnational companies. It states that as much as 28% of gross exports is actually double counted due to non adjustment of value addition during each production process scattered across many countries. It also shows that production and trade of goods and services are linked at some stage.
It recommends developing countries to “engaging” in GVCs, “upgrading” along GVCs, and “leapfrogging” and “competing” via GVCs. The ideal outcome for developing countries would be to an increase in global value chain participation with higher value added goods and services. GVCs participation could help developing countries build their productive capacities (through technology dissemination and skill enhancement).
Excerpts from the latest UNCTAD report:
GVCs make extensive use of services. While the share of services in gross exports worldwide is only around 20 per cent, almost half (46 per cent) of value added in exports is contributed by services sector activities, as most manufacturing exports require services (such as engineering work, software development, and marketing) for their production. In fact, a significant part of the international production networks of TNCs is geared towards providing services inputs, with more than 60 per cent of global foreign direct investment (FDI) channelled to services activities. By comparison, 26 per cent of FDI goes to manufacturing and 7 per cent to the primary goods sector. The picture is similar for developed and developing economies.
The majority of developing countries, including the poorest, are increasingly participating in GVCs. The developing-country share in global value-added trade increased from 20 per cent in 1990 to 30 per cent in 2000, and is over 40 per cent today. Again, the role of TNCs is critical, as countries with a higher presence of FDI relative to the size of their economies tend to have a higher level of participation in GVCs and a greater relative share in global value-added trade compared to their share of global exports.
GVC links in developing countries can play an important role in economic growth. Domestic value-added – that is, an improved capacity of an economy to produce a broader variety of goods, and goods of greater complexity – resulting from GVC trade can be very significant relative to the size of local economies. In developing economies, value-added trade contributes some 28 per cent to countries’ GDPs on average, as compared to 18 per cent for developed economies. Furthermore, there appears to be a positive correlation between participation in GVCs and GDP per capita growth rates. The economies with the fastest-growing GVC participation have GDP per capita growth rates some 2 percentage points above average.
Saturday, March 2, 2013
Utilizing a nationally representative sample of households from Sri Lanka, this study examines gender differences in the long-term impact of temporary labor migration. We use a propensity score matching (PSM) framework to compare households with return migrants, households with current migrants, and equivalent nonmigrant households in terms of a variety of outcomes. Our results show that households that send women abroad are relatively poor and utilize migration to catch up with the average household, whereas sending a man abroad allows an already advantaged household to further strengthen their economic position. We also find that remittances from females emphasize investment in home improvements and acquisition of farm land and nonfarm assets, whereas remittances of men are channeled more toward housing assets and business ventures.