Tuesday, February 25, 2014

NEPAL: Recent macroeconomic analysis

[This write-up is adapted from economic analysis of ADB's Nepal Country Partnership Strategy 2013-2017.]

A. Overview

1. Despite internal and external challenges, Nepal has managed to maintain overall macroeconomic stability through prudent fiscal and monetary policies. The average gross domestic product (GDP) growth rate during the fiscal year (FY) 2007–FY2013 period since the end of its civil conflict has been 4.4%, compared with an average 3.8% during  the conflict (FY1996–FY2006). Growth has been largely driven by agriculture and services and has been sluggish in the industrial sector. Growing remittance income and tourism receipts have been crucial in maintaining balance of payments stability despite a widening trade deficit. Even with rising recurrent expenditures, the fiscal deficit has remained below 2.2% of GDP, due mainly to rapid growth in revenue mobilization, but also to low capital expenditure. On the social development front, remarkable progress has been made in reducing absolute poverty, and the country is on track to achieve a majority of the Millennium Development Goal (MDG) targets. A resolution of pressing challenges—an ongoing political transition and structural bottlenecks in particular—combined with reforms to improve the investment climate and the continued growth of internal and external market opportunities would allow Nepal’s growth to accelerate. The economy has the potential to grow at a higher rate than the 5.0% achieved during FY1992– FY1996, the period after its economy was first liberalized but before the onset of its armed civil conflict.

B. Economic performance

2. Economic growth. Despite the global economic slowdown and a difficult and protracted post-conflict political transition, Nepal’s economic growth and overall macroeconomic situation have been stable, if modest. Nepal maintained an average real GDP growth rate (basic prices) of 4.0% during FY2010-FY2013. Service sector growth, aided by a high inflow of remittances and tourism receipts, and good agriculture harvests due to a favorable monsoon have been principally responsible for the growth, despite the weak performance of the industrial sector. In FY2012, the GDP growth rate (basic prices) was 4.5%, the highest achieved during the 2010-2012 period covered by the previous country partnership strategy. The major contributors to service sector growth were hotels and restaurants; transport, storage, and communications; and wholesale and retail trade. All grew at more than a 5.0% annual average between FY2010 and FY2012. The manufacturing growth rate was barely 2.0% a year during the same period. A slowdown in real estate and housing markets impacted construction activities, whose growth declined  from  a  high  of  6.2%  in  FY2010  to 0.1%  in  FY2012.  Following  an  unfavorable monsoon and a shortage of chemical fertilizers, GDP growth dropped to 3.6% in FY2013.

3. Structural  transformation.  The  economy  is  not  following  the  traditional  mode  of structural transformation, i.e., through a decline in dependence on the agriculture sector and an increase in dependence on the industrial sector, including manufacturing. Instead, it is increasingly driven by the service sector, which is resulting in a slow structural transformation. While the contribution of agriculture sector has averaged 35.0% of GDP since FY2004, the contribution of the industrial sector declined to 15.0% of GDP in FY2013 from more than 17% in FY2004. The contribution of the service sector increased from about 46.0% of GDP in FY2004 to 51.0% in FY2013. The structural transformation is largely driven by service sector growth, especially in real estate, housing, construction, tourism, and retail activities that is in turn driven by high foreign remittances. The stagnant industrial sector is a cause for concern.

4. Fiscal performance. Fiscal performance has been sound and the budget deficit low and stable.  Some challenges  persist,  however.  These  are  related  in  particular  to  high recurrent expenditures, increasing subsidies, and a potential decline in the growth of revenue mobilization due to slowing growth in remittances, which primarily is used to finance most of the imports. Customs and value-added tax on imported items form the largest portion of the overall revenue mobilization. A limitation on changing the rates and composition of taxation as a result of a partial FY2013 budget—an outcome of the lingering political disagreements—is another issue. The government’s increasing expenditure is being partly met by foreign assistance, which has helped  keep  the fiscal deficit  at  around  2.2% of  GDP.  Post-conflict  expenditures  related  to rehabilitation  and  reintegration  of  former  insurgent  fighters,  along  with  the  rising  subsidies (mainly  for  petroleum  fuel),  have  increased  recurrent  expenditures  from  12.7%  of  GDP  in FY2010 to 15.2% of GDP in FY2013. Meanwhile, capital expenditures have declined from 6.4% of GDP in FY2010 to an estimated 3.1% of GDP in FY2013. This has reflected a difficult political transition, repeated delays in bringing out a full budget, and the low absorption capacity of government agencies. About 34% of capital expenditure is financed by foreign aid.

5. Revenue   mobilization.   Despite   the   challenging   political   environment,   revenue performance has been strong. Total tax and non-tax revenue mobilization has increased in the post-conflict period, reaching an estimated 17.0% of GDP in FY2013. While tax revenue increased to 15.0% of GDP in FY2013 from just 8.8% of GDP in FY2006, non-tax revenue has on average remained around 2.0% of GDP. Reforms for enhancing the efficiency of tax administration, strengthening the tax monitoring and audit system, and widening the tax net have paid off. In 2012, the government unveiled a 2012–2015 reform plan and a 2012–2017 strategic plan for the Inland Revenue Department. These plans aim to increase tax revenue mobilization to 18.0% of GDP in FY2017.

6. External sector. Remittances of citizens working or living abroad have been crucial in maintaining overall external sector stability. While merchandise exports have been declining and were only 5.1% of GDP in FY2013, due primarily to loss of competitiveness and weak external demand, merchandise imports have been increasing. They equaled 32.2% of GDP in FY2013, resulting in a trade deficit equivalent to about 27.1% of GDP. The high demand for imported goods  is  largely  created  by  the  high  remittance  inflows,  which  reached  25.6%  of  GDP  in FY2013, as well as the absence of domestically produced goods. The remittances have also been a key to maintaining a current account and balance of payments surplus despite the wide trade  deficit. The  stability of  the  external sector  remains  vulnerable  to fluctuations  in  these inflows. For instance, the negative impact of a global economic slowdown on the growth of remittance inflows pushed the current account balance into negative territory in FY2010 and FY2011 and also resulted in a negative balance of payments in FY2010. In FY2013, high remittance  inflows  and  a favorable  services  account  led  to  current  account  and  balance  of payments surpluses. Foreign exchange reserves were sufficient to cover 8.9 months of imports of goods and non-factor services.

7. Debt  sustainability.  Nepal’s  external  debt  declined  sharply  from  27.6%  of  GDP  in FY2009 to 19.6% of GDP in FY2013. Total national debt decreased in the same period from 41.0% of GDP to 31.7%. Nepal has succeeded in managing and servicing its debt in a timely manner, with no defaults so far. Prudent fiscal policy (an overall fiscal framework and sustained improvement   in   revenue   mobilization),   timely   repayment   of   debt   obligations,   and   the concessional nature of the country’s external debt continued to contribute to the stability of its debt position. However, the possibility of a negative shock to remittance inflows and potential for turmoil in the country’s financial sector present risks to the country’s debt sustainability.

8. Inflation. A rise in global food, fuel, and commodity prices have  impacted prices in Nepal, as has inflation in India. The inflation rate reached double digits in FY2009 before subsiding to 9.6% in 2010–2012 and 8.3% in FY2012, thanks to a consistent decline in food and beverage prices. However, inflation inched up to 9.9% in FY2013, largely because of a low agriculture  harvest,  successive  increases  in  petroleum  prices,  a  continuing  depreciation  of Nepal’s currency against the United States (US) dollar, the impact of supply bottlenecks, and high inflation in India, which is Nepal’s largest trading partner. The Nepalese rupee is pegged to the Indian rupee.

9. Financial  sector.  Prudent  and  timely  policy  interventions  and  regulatory  reforms  by Nepal Rastra Bank (NRB), the central bank, have stabilized the financial sector after a severe liquidity crisis in FY2011. Credit flows increased by more than 15% during FY2011-FY2013. In FY2011, lower growth of claims on the private sector and low public expenditure resulted in net savings in the government account. The liquidity crisis in FY2011 was triggered by a slowdown in  the growth  of  remittances  and failure  to pass  a full budget  on time. The NRB  launched corrective policy measures swiftly to contain the situation. It instructed bank and financial institutions (BFIs) to reduce the share of real estate and housing loans in their overall portfolios to 25.0% by FY2012. It also placed limits on credit-to-deposit ratio BFIs and reintroduced a minimum statutory liquidity ratio for banks. The NRB has also  reformed the country capital adequacy framework of 2007 to bring it into line with the new BASEL II standards, and since FY2009 it has started full implementation of class A commercial banks. Based on the Basel II updated standards, it also started implementing the framework for class B (development banks) in FY2011. To increase access to finance and encourage BFIs to widen their operations beyond the urban areas, the NRB is offering special interest rate-based benefits to those that expand their businesses into rural areas. The financial sector is still vulnerable to fluctuations in remittance inflows, a slowdown in real estate and housing markets, and any financial turbulence involving the roughly 24,000 credit and savings cooperatives in the country. These cooperatives are outside the NRB’s regulatory purview and have amassed more deposits than development banks and finance companies combined.

10. Migration and remittances. More than 1,200 Nepalese leave the country every day due to the lack of job opportunities at home and the lure of high wages abroad. This outmigration to find work in destinations such as Malaysia and the Gulf States  has resulted in a shortage of workers in the agriculture and industrial sectors. Growing internal migration from rural to urban areas has further impacted the agriculture sector.  Against the backdrop of the weak industrial sector, lack of adequate investment, and an economy where demand for goods and services is largely met by imports, remittance inflows have been crucial in supporting not only macroeconomic stability but also household consumption and expenditures. A massive rise in these remittances, which more than 56% of households receive, has fuelled consumption of imported goods, contributed to a multifold rise in real estate and housing prices, and facilitated the rise of the number of banks and financial institutions. It has also supported high revenue mobilization,  increased  foreign  exchange  reserves,  helped  maintain  balance  of  payments stability  despite  a  widening  trade  deficit,  and  reduced  absolute  poverty.  Remittances  are impacting almost all levels of the economy. They also contributed to problems related to the so- called Dutch Disease, which foreign funds inflows drive up the value of a country’s currency, making its export prices uncompetitive, and results in a decline in activity in the tradable sector (mainly manufacturing) compared with that in the non-tradable sector (mostly services).

11. Emerging challenges. The country’s key economic challenge is to generate the high, inclusive, sustainable growth that is necessary to create employment opportunities for Nepal’s people, as well as more rapid and sustainable poverty reduction. To do this, the country must address its acute power shortage and overall infrastructure deficit. Both steps are critical to promoting private sector investments and effective public service delivery. The severe infrastructure deficit has combined with difficult labor–industry relations to form a key obstacle to the growth of the industrial sector, which is necessary for an economic structural transformation and the creation of  more jobs. Inadequate access to finance is also  a critical constraint to private sector investment and growth. Another challenge lies in the financial sector, which is vulnerable due to weak monitoring and supervision. This has left many BFIs, especially the smaller  ones,  poorly  managed  and  suffering  from  high  ratios  of  nonperforming  assets. Economic planning has also been inadequate. The country’s substantial remittance income has served to help maintain macroeconomic stability but it has not been channeled into productive investments for achieving higher, long-term, sustainable growth.

12. Competitiveness.  Although  it  enjoys  the  benefits  under  the  General  System  of Preferences of entry to the developed country markets and free trade with India, Nepal’s exports are declining. This is mainly due to its abundant domestic supply-side constraints, all of which limit the competitiveness of Nepalese products and inhibit private sector development. The country’s electricity shortage is crippling the industrial sector, and most firms operate below capacity. Manufacturing plants are compelled to use petroleum fuel generators when there is no electricity supply. This increases their cost of production and makes the final price of their goods uncompetitive. Nepal’s inadequate and insufficient electricity and transport infrastructure has been identified as a principal binding constraint on economic growth.  The poor state of labor relations is also a burden. The occasional strikes along the main highways and country-wide strikes have been disrupting production, supply, and distribution, especially after FY2006. Labor uncertainty has increased the lead time between the placement of an order and the receipt of goods from Nepal’s manufacturers, resulting in a drop in demand for the country’s exports. The combative labor–industry relationship has resulted in the closure of several factories, including those of multinational companies. Nepal’s labor costs are rising faster than productivity levels. The minimum wage, which has been raised many times since 2006, is the highest in South Asia. The lack of qualified workers has also affected production and wages.

13. Constraints  to  doing  business:  Successive  perception  surveys  of  the  business community incorporated in the World Economic Forum’s annual Global Competitiveness Report during 2010-2013 showed that government instability, corruption, inefficient government bureaucracy, policy instability, and restrictive labor regulations were the five greatest obstacles to  doing  business  in  Nepal.  The  other  negative  factors  identified  in  the  surveys  were  poor access to finance, a poor labor force work ethic, high inflation, crime and theft, an inadequately educated work force, tax regulation, tax rates, insufficient capacity to innovate, foreign currency regulation, and poor public health. A business survey conducted in 2012 by the Federation of Nepalese Chambers of Commerce and Industry identified political instability as the most critical challenge facing the economy, followed by the insufficient energy supply, poor governance, labor problems, strikes, and financial sector instability.

C. Economic outlook

14. Higher growth potential. In FY2013, the growth rate (at basic prices) was an estimated 3.6%, down from 4.5% in FY2012.  Growth slowed main because of a delay in the monsoon and a shortage of chemical fertilizers during the peak paddy planting season, both of which affected agriculture production.  GDP growth was also adversely affected by delays in passing a full budget  and  a  deceleration  of  remittances  inflows, which  impacted  service  sector  growth, financial sector stability, and the balance of payments. Nevertheless, the growth rate since 2008 has been 4.4%, demonstrating the economy’s resilience in the face of political instability. Nepal has natural resource endowments; access to the large, fast-growing, nearby markets of the People’s Republic of China and India; and comparative advantages in key sectors such as hydropower, tourism, and agriculture. The country has the potential to achieve growth rates of 6%–7%. For this to happen, however, it must tackle its binding constraints, the foremost being its infrastructure bottlenecks. The acute electricity shortage, which exists despite the country’s enormous hydropower potential, is severely constraining all economic activities and private investments above all.  The inadequate transport networks, urban infrastructure, and irrigation systems also limit the expansion of economic opportunities. At present, the country’s economic base is narrow and heavily dependent on remittance incomes. Agriculture and services activities are characterized by low productivity. Manufacturing sector activities remain stagnant due to infrastructure  bottlenecks,  difficult  industrial  relations,  and  an  unfavorable  business environment.

15. Inclusive growth. While Nepal made impressive progress in the past decade toward achieving  inclusive  growth,  much  more  needs  to  be  done  to  sustain  and  accelerate  this success. High, sustainable growth is fundamental to generating greater and better employment opportunities. To be inclusive, the country’s growth needs to be employment-centric. Under the current  economic  situation,  however,  the  vast majority of  the  450,000 entrants to the  labor market every year resort to either low-skilled jobs overseas or low-value-added service sector activities domestically. A weak education system and a low skills base are key constraints to promoting economic diversification and higher competitiveness. The technical and vocational education sector needs to be expanded and restructured to respond to the needs of the labor market  more  effectively.  The  quality  of  education  also  requires  major  upgrading  to  provide greater access to secondary and tertiary education and make that education more relevant to the students’ and the economy’s needs. To diversify its economy and accelerate inclusive economic growth, Nepal also needs to improve other basic services, such as health, water and sanitation, and electricity, as well as provide better manufacturing production and delivery, enhance the capacity of small and medium-sized enterprises, open appropriate microfinance avenues for promising enterprises, and make other reforms that support inclusion. It must strengthen its social protection programs to prevent extreme depravation and shield the poor and vulnerable groups from negative exogenous shocks to their incomes and livelihoods. It also requires more work on labor market policies and programs, social insurance programs, social assistance and welfare schemes, child protection programs, and disaster risk management that focuses on vulnerable populations.

16. Accelerating inclusive growth will require a substantial increase in capital investments. The government’s capital expenditure stood at barely 3.1% of GDP in FY2013, sharply down from 6.6% of GDP in FY2013. Public capital investment should be raised to at least 8% of GDP by (i) rationalizing recurrent expenditures, including though reforms of loss-making public enterprises such as the NEA and the Nepal Oil Corporation (NOC); and (ii) enhancing  the capacity of public agencies to deliver and sustain quality infrastructure in a timely and effective manner. Strategic planning of infrastructure is critical to maximize growth and the employment impacts of industrial growth. Private investments in infrastructure need to be promoted, particularly in the energy sector to address the crippling domestic power shortage and tap huge potentials for exports. This calls for creating an enabling environment for PPP. PPPs will provide a basis for developing private industries. Labor-intensive manufacturing, agroprocessing, and modern services must grow. Private investments, including foreign direct investment (FDI), need to be attracted by improving the investment climate, incentives, labor relations and laws, and social security systems. Growth frontiers should be identified and nourished to promote exports and  substitute  imports  in  areas  where  Nepal  can  be  competitive.  Pursuing  integration  with rapidly growing neighboring economies can further accelerate the process.

17. Investment. The total domestic capital investment commitment by registered industries reached NRs84.4 billion in FY2012, or 5.5% of GDP. The largest share of investment is usually in the energy sector (3.6% of GDP in FY2012), followed by manufacturing (1.1% of GDP), services (0.3% of GDP), and tourism (0.1% of GDP). While still very small, the upward trend in FDI inflows is likely to continue, given the high investments, both existing and planned, in the hydropower, transport, and services sectors. Total FDI inflows, as recorded in the balance of payments, increased from $5.45 million in FY2008 to $103.60 million (0.5% of GDP) in FY2012. There is much scope for FDI to increase—the existing inflow is a mere 0.3% of total FDI in South Asia. While domestic and foreign investments are increasing in the infrastructure (particularly hydropower), tourism, and retail sectors, the same is not true for agriculture and manufacturing, and in other services subsectors. A gradual relaxation of the supply-side constraints (such as the electricity shortages, market distortions produced by middlemen and syndicates, poor industrial relations, a lack of qualified workers, the skills gap, and inadequate supply of  agricultural and  industrial inputs)  would  attract more  investment,  which  is  vital  to generate enough employment opportunities to absorb the nearly half a million new entrants to the labor force each year. While the capital market needs to be developed for long-term private sector investment in infrastructure, the PPP modality seems a good option for investment needs in the interim. 

18. Inflation and monetary conditions. Inflation will be largely determined by the prices in neighboring India, international fuel prices, food prices, and rigidity in the supply bottlenecks. Given  the  impact  of  unfavorable  rainfall,  droughts  in  major  crop-producing  countries,  and potential trade restrictions that might be imposed by major grain exporters, global food prices are projected to remain high in the coming years. This could be reflected in domestic prices to some extent, leading to high inflation. In FY2013, inflation was 9.9%, up from 8.3% in FY2012. Meanwhile, in the financial sector, a market correction is ongoing in real estate and housing prices, and the BFIs are adjusting their loan portfolios to comply with the NRB’s directives. Aiming to consolidate the BFIs and reduce their numbers, the NRB and the Ministry of Finance MOF  are  encouraging  mergers.  The  government   is  also  planning  to  introduce  stricter regulations and supervision of proliferating credit and savings cooperatives, whose risky deposit and lending behavior might negatively impact the financial sector at large and, through it, the real sector. Assuming a steady increase in the growth of remittances and tourism receipts, the balance of payments will remain positive.

19. Exchange rate volatility. As a result of the peg with the Indian rupee, the Nepalese rupee has also depreciated rapidly against the US dollar. Concerns over a prospective winding down of quantitative easing by the US Federal Reserve triggered the depreciation of the Indian rupee. The decline was complicated by India’s slow economic growth and a widening current account deficit. The depreciation of Indian rupee is automatically reflected in the exchange rate of the Nepalese rupee against the US dollar (declines of 19.9% in FY2012 and further 6.7% in FY2013). If Nepal’s currency continues to weaken at this rate, (i) the government’s debt service payments will rise; (ii) the NOC will incur heavy losses as it procures petroleum products and liquefied gas at higher prices and sells them at subsidized prices in the domestic market; (iii) the NEA’s payments to the independent power producers with which it has power purchase agreements in foreign currency will go up, further exacerbating its balance sheet issues; and (iv) Nepal’s  import  bill will increase. These factors may influence macroeconomic  stability,  debt sustainability,  and  balance  of  payments  stability.  The  government’s  liabilities,  including  the losses of the NOC and the NEA, would increase and the credibility of the NEA as an energy offtaker could further erode. The higher cost in Nepalese rupees to service external debts might impact debt sustainability. However, given the incentives that such a continued current depreciation could provide for workers abroad to remit more money, the balance of payments might not see much deterioration despite the likely rise in the trade deficit. While the exchange rate volatility has severe negative implications for certain public entities and macroeconomic variables (state-owned enterprises, inflation, and balance of trade), it may have mild and mixed impact on other variables such as GDP growth, debt sustainability, and external sector stability.

20. Overall,  Nepal is  expected  to  maintain  macroeconomic  stability,  thanks  to  continued revenue administration reforms and growth in revenue mobilization, high remittance inflows, and prudent fiscal and monetary policies. If it can made progress in its political transition, resolve its supply-side constraints, and carry out further reforms to boost private sector investment, Nepal has the potential to achieve a high growth rate in the years ahead.

Saturday, February 22, 2014

Empowerment Line based poverty stands at 56% in India, McKinsey Global Institute (MGI)

McKinsey Global Institute (MGI) has come up with the Empowerment Line (full report here), an analytical framework that determines the level of consumption required to fulfill eight basic needs—food, energy, housing, drinking water, sanitation, health care, education, and social security—that are above the bare subsistence level and are essential to  achieve a decent standard of living.

Using this approach, they show that 56% of the population lacked the means to meet essential needs in 2012—about 680 million Indians, which is 2.5 times higher than 270 million people below the official poverty line. 

The study notes that “if India’s recent weak economic performance continues and no major reforms are undertaken, we project that in 2022 more than one-third of the population will remain below the Empowerment Line and that 12 percent will remain trapped in extreme poverty.”

The study also found that Indian households lack access to 46% of the basic services they need and there is wide geographical disparities in the provision of social infrastructure. It comes from their Access Deprivation Score, which shows the availability of basic services at the national, state or district level.

The study recommends four key inclusive reforms/priorities, which if implemented then India can bring 90% of its people above the Empowerment Line in  decade:
  1. Accelerate job creation (Indian needs to add 115 million new nonfarm jobs over the next decade; manufacturing and construction sectors along with labor-intensive services sectors could be the backbone for this)
  2. Raising farm productivity (increase investment in agriculture infrastructure and implement reforms to improve market access, rationalize price support measures, adopt new technology, and streamline agriculture extensive services)
  3. Increasing public spending on basic services (increases in real terms by at least 6.7% annually through 2022)
  4. Making basic services more effective (learn from success stories in basic services delivery in best-performing states; at present half of public spending on basic services does not translate into improved outcomes) 

Monday, February 17, 2014

Quality of electricity supply and income growth

Interesting finding of a new study by Chakravorty and Pelli (2013), who show that 16% increase in households connected to the grid led to an increase in non-agricultural income of about 9%, and 32% increase in quality of electricity supply (decrease in the number of blackouts, or equivalently an increase in the average number of hours per day during which electricity is available) resulted in an increase in income by 28.6%.

Excerpts from the paper:

In a recent paper, we estimate the effect of a new connection to the grid and of a more reliable power supply for a typical Indian household, using data from a nationally representative sample of about 9,800 rural households (Indian Human Development Survey (IHDS) 2005 and Human Development Profile of India (HDPI) 1994) (Chakravorty, Pelli and Ural Marchand 2013). We construct an index for the quality of supply, in which an improvement in quality is defined as a decrease in the number of blackouts, or equivalently an increase in the average number of hours per day during which electricity is available.
We find that the increase (16%) in the number of households in the dataset that were connected to the grid between 1994 and 2005 led to an increase in non-agricultural income of roughly 9%, which corresponds to about Rs. 574 ($9.5 approx.) per person for the average household. This result is similar to what has been found by studies in other parts of the world. For example, Dinkelman (2011) studies the labour market effects of an electrification project in South Africa and finds that a grid connection leads to an increase of roughly 16% in male earnings. Barham et al. (2013) examine the case of Brazil and show that an increase in the share of electrified households by 10% increases income by 9%.
Our study goes a step further by looking at the effect of the quality of power supply on non-agricultural incomes. There was a 32% increase in the quality of electricity supply in the sample households, between 1994 and 2005. The rise in quality is estimated to have resulted in an increase in income of 28.6% (Rs. 1,852 or approx. $30) per person for the average household. This number includes new connections and the improvement in the quality of electricity supplied to households already connected to the grid. These results suggest that the impact of electrification on households cannot be considered independently of the quality of electricity. While the initial connection is important as it can induce reallocation of labour and capital within the household, this impact increases significantly with improvement in quality. This highlights the importance of providing a high quality supply of power, as the potential benefits of electricity are not completely realised by just providing a grid connection and low quality power.

Wednesday, February 12, 2014

NEPAL: 633,000 people to enter job market annually by 2020

In its Least Developed Counties Report 2013, UNCTAD argues that the number of young people of working age in Nepal is currently increasing by 550,000 a year (465,000 in 2005), and by 2020 it will climb to 633,000 a year. Globally, young population is projected to rise to 1.7 billion by 2050. By 2050, one in four young people worldwide will live in an LDC.

The report recommends improving GDP growth via:
  • the generation of employment, particularly work that pays a stable living wage and has safe employment conditions
  • investment to develop the capacities of economies to produce broader varieties of goods, and goods of greater sophistication and higher value
The report states that employment grew by 2.7% per annum during 2000-2012, higher than the average population growth of 1.7% but below GDP growth of 4%.

Sector-wise employment breakdown shows the following:
  • Agriculture accounted for 71% of total employment, down from 75% in 2000.
  • Industry accounted for 12% of Nepal's total employment in 2013, up by 2% compared to 2000.
  • Services accounted for 17% of employment in 2013, up by 2% compared to 2000.
The figure below shows LDC’s employment elasticity to GDP growth. Nepal has elasticity below 1, which suggests that employment growth is dominated more by labor productivity growth than broad-based employment generation. Elasticity greater than 1 indicates that employment grows in more proportion than GDP growth. Employment elasticity to GDP growth in LDCs is found to average 0.7.

It seems growth in per capita GDP is accounted more for by the change in share of working age population (demographic structure) in Nepal and less by output per worker. Other developing countries have seen growth in per capita GDP coming more from productivity growth (output per worker). In Nepal, demographic transition (alternatively, decreasing dependent population) generated per capita growth equivalent to 42.8% of the actual observed growth in per capita GDP.

Furthermore, rather than within sector productivity growth, contributions to growth in per captia GDP came more from inter-sectoral shifts (structural change) in Nepal, especially from a shift to service sector. Exogenously, about 42.8% contributions came from demographic shifts. These are pretty unique to Nepal when compared to other LDCs, where growth in per capita GDP is driven largely by productivity growth within sector, i.e. moving from lower productivity to higher productivity activities within sectors (and then across sectors).

For more on Nepal's structural transformation, see this blog post and the links within.