Chandan Sapkota's blog

Links of Interest (2013-05-17)

noreply@blogger.com (Chandan Sapkota) — Fri, 17 May 2013 05:19:00 +0000

Are microcredit participants in Bangladesh trapped in poverty and debt ?

Both participants and non-participants have gained as the economy has grown; however, the rates of poverty reduction have been higher for participants.The paper's econometric estimates show significant welfare gains resulting from microcredit participation, especially for women. They also show that the accrued benefits of borrowing outweigh accumulated debt. As a result, households' net worth has increased, and both poverty and the debt-asset ratio have declined.

Rethinking the state's role in finance

There is now evidence that, for example, lending by state-owned banks has helped in mitigating the impact of the crisis on aggregate credit. But evidence also points to negative longer-term effects of direct interventions on resource allocation and quality of intermediation. This suggests a need to rebalance the state's roles from direct to less direct involvement, as the crisis subsides. The state does have very important roles, especially in providing well-defined regulations and enforcing them, ensuring healthy competition, and strengthening financial infrastructure. One of the crisis lessons is the importance of getting the basics right first: countries with complex but poorly enforced regulations suffered more during the global crisis. Evidence also suggests that instead of restricting competition, the state needs to encourage contestability through healthy entry of well-capitalized institutions and timely exit of insolvent ones

Rainfall shocks and tariff setting in the agricultural sector

The impact of a negative rainfall shock on optimal import tariffs is generally ambiguous, depending on the weight placed by the domestic policy maker on tariff revenue, profits and the consumer surplus. The more weight placed on domestic profits, the more likely it is that the policy maker will respond to a rainfall shortage by reducing import tariffs. These findings are robust to alternative assumptions about market structure and the timing of the game. Using detailed panel data on applied tariffs and rainfall for 70 nations, the authors find robust evidence that rainfall shortages generally induce policy makers to set lower tariffs on agricultural imports.

Political economy aspects of fuel subsidies

A political process is modeled whereby a promise of low fuel prices is used in democracies to attract voters, and in autocracies to mobilize support among key groups. Subsidies to fuels are viewed as either easier to observe, easier to commit to, easier to deliver, or better targeted at core groups, than other public goods or favors offered by rulers. Easier commitment and delivery than for regular public goods can explain the high prevalence of such policies in autocracies, and also in young democracies where the capacity to commit to or deliver complex public goods is not yet fully developed.

Growth and structural transformation

Structural transformation refers to the reallocation of economic activity across the broad sectors agriculture, manufacturing and services. This review article synthesizes and evaluates recent advances in the research on structural transformation. We begin by presenting the stylized facts of structural transformation across time and space. We then develop a multi–sector extension of the one–sector growth model that encompasses the main existing theories of structural transformation. We argue that this multi–sector model serves as a natural benchmark to study structural transformation and that it is able to account for many salient features of structural transformation. We also argue that this multi–sector model delivers new and sharper insights for understanding economic development, regional income convergence, aggregate productivity trends, hours worked, business cycles, and wage inequality. We conclude by suggesting several directions for future research on structural transformation.

Does microfinance impact development outcomes?

noreply@blogger.com (Chandan Sapkota) — Mon, 13 May 2013 10:49:00 +0000

Not necessarily.

According to a new paper, based on randomized evaluation in 104 slums in Hyderabad, by Duflo et al. (2013), microfinance did not lead to “changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women’s empowerment.”

Major findings of the study (extracted from the abstract of the paper):

Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan.
They were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses.
There was no effect on average monthly expenditure per capita. Expenditure on durable goods increased in treated areas, while expenditures on “temptation goods” declined.
Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs ), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts.
Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end.
We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women’s empowerment.

Read the full paper here.

Exports and cost of production in Nepal and India

noreply@blogger.com (Chandan Sapkota) — Wed, 08 May 2013 08:53:00 +0000

Here is an interesting article about how the rising cost of production and the resulting loss of overseas markets are shifting carpet production from low-end to high-end lately.

Excerpts from the article:

Hurt by rise in production cost of carpets and tough competition in the market, Nepali carpet producers and exporters have shifted focus on high-end carpets on which competition is relatively low.

Nepali exporters are facing tough time retaining their market in overseas countries due to flooding of cheaper low-quality carpets there.

“We are gradually losing our markets for normal carpets. To stay in the business and beat our competitors, we are gradually switching to production and export of high-quality carpet,” Anup Bahadur Malla, president of Nepal Carpet Exporters´ Association, told Republica.

Lengthy economic slowdown in European countries and high competition in US has dragged down the demand for Nepali carpets as customers there prefer cheaper carpets supplied by other countries.

“That is why we are putting focus on high-end carpets on which we have comparative advantage,” said Malla. He further added that share of high-end carpets on total carpet exports has increased to around 50 percent from less than 20 percent recorded a couple of years ago.

Nepali entrepreneurs are producing and exporting 100-knot carpets which are made from a mixture of natural fiber and wool.

Cost of production

Excerpt related to the cost of production in Nepal and India.

Cost of production of 60-knot carpet hovers around $80 per square meter. Production cost of the same variety hovers around $45 per square meter in India, according to the exporters.

It is not that Nepal’s production (export sophistication) is shifting up the value chain due to product innovation and high productivity. The incongruous shift in production to high-end carpets is due to the compulsion arising from the inability to compete in even low-end production— an odd phenomenon given that Nepal still has one of the lowest per capita GDP in Asia and is largely an agriculture-based economy [but high consumption is fueled by increasing remittance inflows, which fund burgeoning imports]. Traditionally, with this sort of income level, comparative advantage should be on the production of low value added goods and services due to cheap labor costs, and as innovation kicks in and income rises, production shifts to high value added goods and services. It is essentially a structural transformation from low value added production, low productivity sectors (usually comparative advantage based) to high value added, high productivity sectors (both comparative as well as competitive advantage based). Also, increasingly high productivity in agriculture sector usually provides a foundation for high growth in industrial sector.

Unfortunately, this is not happening. Due to low growth and the dearth of job opportunities, thanks to protracted political uncertainty and half-hearted policy initiatives on this front, a large number of youths are going abroad for jobs, consequently creating a shortage of workers in almost all sectors. As an upshot of this, share of remittances backed, consumption driven services sector is growing at a rapid pace (about 50% of GDP) while industry sector is squeezing (about 15% of GDP, which is almost equal to the share of retail and wholesale trade).

Some might argue that its like in India where services sector is also huge and growing relative to agriculture and industry. However, in Nepal’s case, the rising share of services sector in GDP is not coming from high value added production (ITC, BOPs, innovation, etc.), but from low value added production, which too is dependent on remittances for growth (exogenous factor). Hence, the whole process is not ‘organic’ but kind of distorted (and without much multiplier effect).

A course correction is needed, which will require boosting productive capacity of the economy (supply-side stuff driven by both public and private investments) and the proper management of increasing remittance inflows so that more of it is spent on capital formation and less on consumption (currently stands at 2.4% and 78.9%, respectively).

Anyway, going back to the faltering exports, below are some of the reasons, mostly arising from rise in production costs (more here):

Political instability and strikes, and its impact on production costs
Lack of electricity (also see this, this and this)
Poor industrial relations, plus highest minimum wage in South Asia but low productivity
Lack of innovation and R&D by private sector, and reliance on concessions for survival
Policy inconsistency and policy implementation paralysis
High inflation, which increases nominal cost of production
High cost of inputs (arising from globally high prices and lately the depreciation of Nepali rupee against third currencies)

With this background, the solutions to break this cycle are no-brainer!

Remittances revisited: Bilateral remittance inflows to Nepal

noreply@blogger.com (Chandan Sapkota) — Sun, 05 May 2013 08:32:00 +0000

A lot has already been written about remittances in Nepal. Below I present two charts showing bilateral remittance inflows in 2011 and the total monthly inflows to Nepal over the years. All data sourced from the World Bank’s database and this latest brief.

In 2011, Nepal received an estimated US$4.22 billion in remittance from 30 countries. The top five destinations were Qatar (US$1.69 billion), India (US$1.39 billion), the US (US$276 million), the UK (US$192 million), and Thailand (US$112 million). Remittance inflows in 2011 was about 22% of GDP, making Nepal the six highest remittance receiver (as a share of GDP).

The table below shows the latest estimates of remittance inflows for 2012 (previous estimate here). It is in an increasing trend. Total remittance inflows in 2012 is estimated at US$4.95 billion.

Migrant remittance (US$ million)
Year	Inflows	Outflows
2008	2727.1	5.3
2009	2985.6	12.3
2010	3468.9	32.4
2011	4216.9	39.2
2012e	4953.3

Nepal's economy is largely dependent on remittances and migration for growth (services sector), consumption, imports, poverty reduction, jobs, and overall macroeconomic stability.

Remittances have been crucial in supporting services sector growth, which then affects overall economic growth. The expansion of services sector to over 50% of GDP is partly attributed to the rise in consumption demand backed by remittances. Its impact is quite visible in sectors such as real estate and housing, financial intermediation, retail and wholesale trade, transportation and communication, hotels and restaurants, and education. Similarly, it has ensured external sector stability by pushing current account and balance of payments in surplus despite ballooning trade deficit. Had it not been for remittances, Nepal would not have been able to afford such a high level of imports (around 25% of GDP). Foreign exchange reserves contribution by remittances is about 63% (24% of GDP). Gross national savings are also high (35% of GDP).

Meanwhile, it has supported revenue mobilization, with about 70% of tax revenue coming from customs duty and consumption tax (consumption fueled imports supported by higher purchasing power due to high remittances).

At the household level, the decline in poverty and inequality (Gini coefficient based on consumption) is largely attributed to increasing remittances, which 56% of households received in 2011. Household consumption is primarily financed by remittances (about 79% of remittance is used for consumption purpose). Similarly, the extra boost to income from remittances has enabled households to send children to private schools and afford better healthcare services.

At the institutional level, it has fostered policy complacency as policy makers do not have to do much to balance the macroeconomy or reduce poverty as it is automatically done by remittances. Unfortunately, it is leading to a ‘vicious policy cycle’—high inflow of remittances is exerting low pressure to improve policy weaknesses, which then is leading to inadequate investment climate reforms and low private investment. It leads to subdued growth rate with limited job opportunities, forcing more migration and more inflow of remittances.

The biggest risk to Nepal’s economy is to sustain this process. Given the lackluster policy attention devoted to this issue, it is unlikely that the policymakers will do anything substantial to address the issues in the near future. Nepal needs to channel remittances to productive usages, especially to finance long term development needs such as infrastructure, urban development and municipal services. The main challenge for the government, private sector, and development partners is to find out a way to decrease remittance income going to consumption and channel it to productive usages. As of now, only 2.4% of remittance income of a household is used for capital formation.

India’s existing economic institutions could not cope with strong growth: Raghuram Rajan

noreply@blogger.com (Chandan Sapkota) — Thu, 02 May 2013 05:55:00 +0000

Raghuram Rajan, the chief economic adviser to India’s Ministry of Finance, argues that economic growth slowed down in India due to two reasons:

As India’s existing economic institutions could not cope with strong growth, its political checks and balances started kicking in to prevent further damage.
Investment slowdown began as political opposition to unbridled development emerged. The resulting supply constraints exacerbated inflation.

He prescribes the following solutions:

India must improve supply, which means shifting from consumption to investment.

By creating new, transparent institutions and processes, which would limit adverse political reaction.

Over the medium term, axe the thicket of unwieldy regulations.

One example of a new institution is the Cabinet Committee on Investment, which has been created to facilitate the completion of large projects. By bringing together the key ministers, the committee has coordinated and accelerated decision-making, and has already approved tens of billions of dollars in spending in its first few meetings.

India needs less consumption and higher savings.

The government has tightened its own budget and spent less, especially on distortionary subsidies.
Households also need stronger incentives to increase financial savings.

New fixed-income instruments, such as inflation-indexed bonds.
Lower inflation.
Lower government spending and tight monetary policy are contributing to greater price stability.

Urbanization and politics in Bangalore

noreply@blogger.com (Chandan Sapkota) — Tue, 30 Apr 2013 04:15:00 +0000

Here is an interesting article about the urbanization challenge in Bangalore, the IT hub of India, that has a population of 8 million and more than 5 million vehicles ply the city’s roads.

Below is an excerpt from the article:

In the heart of the city, a Congress party candidate, Dinesh Gundu Rao, greeted voters in a middle-class neighborhood this month. His campaign workers burst firecrackers, beat drums and showered him with marigold petals. Women peeped from balconies and windows. “Remember to vote for me, sister,” Gundu Rao called out.

“Remember to get clean water for us,” replied a woman in a green sari. Another told him about the broken sewage pipes, and a third pointed to a foul-smelling garbage pile on the road.

Very much applicable to Nepal's rapidly growing urban centers as well.

Nepal-India Trade: State of non-tariff barriers

noreply@blogger.com (Chandan Sapkota) — Sun, 28 Apr 2013 08:14:00 +0000

[This blog post is sourced from one of the studies (workshop presentation slides here) yours truly was involved in about a year ago while working at SAWTEE. I think sharing analytical excerpts from the comprehensive report will be helpful to interested readers and researchers. This blog post focuses on non-tariff barriers on Nepali exports to the Indian market. Here are earlier blog posts on the state of tariff barriers and para-tariff barriers; the issues surrounding pegged exchange rate between Nepal and India; the confidence on the Indian rupee in Nepal; and the size of Indian market for Nepal.]

State of non-tariff barriers

[Unless otherwise noted, most of the information in this section is sourced from Trade Policy Review of India by the WTO Secretariat, (WTO 2011)]

The Indian government requires importers to satisfy various procedural measures. According to Doing Business 2012, it takes 9 documents, 20 days and US$1070 per container to import goods into India.

Table 1: Import procedures in India

Import procedures	Duration (days)	Cost (US$)
Documents preparation	8	400
Customs clearance and technical control	4	120
Ports and terminal handling	5	200
Inland transportation and handling	3	350
Total	20	1,070

Source: World Bank

Meanwhile, the following import documents are required to import goods in India for various purposes, including imports for consumption, warehousing, transshipment, transit, re-importation, and imports for special economic zones (SEZs):

Bill of entry/landing
Cargo release order
Certificate of origin
Commercial invoice
Customs import declaration
Inspection report
Packing list
Technical standard certificate
Terminal handling receipts

Importers need to file a bill of entry either electronically (Electronic Data Interchange system—EDI) or manually. They also need to fill in supporting documents such as packing list, and bill of lading/airway bill if the bill of entry is processed manually. Furthermore, import licence, whenever it is applicable, must be obtained from the Director General of Foreign Trade (DGFT) and sanitary and phytosanitary certificates from the Ministry of Agriculture. Custom declaration should also be submitted.

For goods imported under a preferential trade agreement or under an export incentive scheme and for qualification for duty reduction, additional documentation such as country of origin (COO) is required. It applies to most of the Nepalese goods exported to India. According to the Indian Customs’ rule, the bill of entry may be filed prior to the arrival (within 30 days of arrival) of goods to allow for faster clearance. Furthermore, a landing charge (for loading, unloading, and handling) of 1% of the c.i.f. value is added to the c.i.f. value to compute transaction value.

Goods imported for consumption in the Indian market are cleared after payment of applicable duties and charges. But, for imports cleared for warehousing, a bill of entry, filed with all supporting documents as required for goods for home consumption is required. The applicable duty is determined by Custom and is paid at the time of ex-bond clearance, for which an ex-bond bill of entry[1] has to be filled. The final duty rate is determined when an import declaration is presented for warehoused goods to be imported into the domestic tariff area (DTA). The warehoused goods may be moved from one warehouse to another without payment of taxes (including inter-state taxes). Inter-state tax would be payable only if the movement from one warehouse to another constitutes an inter-state sale on which case the transaction would be subjected to sales tax, entry tax (charged by some states[2]), and octroi if goods are sold to a warehouse located in the State of Maharashtra.

There could be delay in clearance of goods exported to India for the following reasons, for which a custom officer may raise doubt:

A significantly higher value at which identical or similar imports at (or about) the same time, in comparable quantities and comparable commercial transaction, were assessed
The sale value involves an abnormal discount/reduction from the ordinary competitive price
The sale involves special discounts limited to exclusive agents
There are mistakes in the declaration of goods such as description, quality, quantity, country of origin, and year of manufacture or production
The import declaration is incomplete, e.g. lack of brand, grade, and any other specification that could have a bearing on assessing the value of the goods
Fraudulent manipulation of documents

Rules of origin (ROO)

Preferential rules of origin are applied under regional and bilateral trade agreements. The maximum foreign content requirements range from 30 percent to 70 percent. For Nepal, it is 70 percent and change in 4-digit tariff classification. The other criteria to determine origin is sufficient transformation and change in tariff classification. There are also product specific ROO under the SAFTA (for 180 products).

Table 2: India’s ROO under PTAs, 2011

Preferential trade agreements	Maximum foreign content requirements	Minimum cumulative local content requirements
South Asian Free Trade Areas (SAFTA)^a	60% of the f.o.b. value (LDCs: 70%; Sri Lanka: 65%) and change in tariff classification	50% of the f.o.b. value, 20% of the f.o.b. value^b and change in tariff classification
South Asia Preferential Trade Arrangement (SAPTA)	60% of the f.o.b. value (LDCs: 70%)	50% of the f.o.b. value (LDCs: 40%)
Nepal	70% of the f.o.b. value and change in four-digit tariff classification	n.a.
Least developed countries (LDCs)	70% of the f.o.b. value and change in tariff classification for not wholly produced or obtained category	70% of the f.o.b. value and change in tariff classification for not wholly produced or obtained category

n.a.    Not applicable.
a    Product specific ROO apply.
b    Domestic value content in the exporting country.

Source: WTO. 2011. Trade Policy Review India: Report by the Secretariat. Trade Policy Review, Geneva: World Trade Organization (WTO).

Import restriction depending on import price

The imports of certain goods (24 tariff lines) are subject to import restrictions depending upon their import price (see Table 2). These imports are restricted (i.e. subject to a license) when the c.i.f. price is lower than the minimum price. According to the Indian authorities, the minimum import prices are set taking into account domestic and international prices and quality (WTO 2011).

Table 3: Items whose import is free, subject to minimum import price, 2010/11

HS code	Description	Minimum import price
0802.90.11	Betel nuts: whole	IRs 35/kg
0802.90.12	Betel nuts: split
0802.90.13	Betel nuts: ground
0802.90.19	Betel nuts: other than above
4012.11.00	Retreaded tyres, of a kind used on motor cars,	US$175/unit for buses, lorries, bigger size vehicles, and light commercial vehicles
4012.12.00	Retreaded tyres: of a kind used buses or lorries
4012.13.00	Retreaded tyres: of a kind used on aircraft	US$25/unit for passenger vehicles
4012.19.10	Other tyres: for two wheelers
4012.19.90	Other tyres
4012.20.10	Used pneumatic tyres: for buses, lorries, and earth moving equipment	US$175/unit
4012.20.20	Used pneumatic tyres: for passenger automobile vehicles	US$25/unit
6802.10.00	Tiles, cubes, and similar articles	US$50/kg
6802.21.10	Marble tiles
6802.21.20	Marble monumental stone
6802.21.90	Other monumental or building stone
6802.91.00	Marble, travertine, and alabaster
6802.92.00	Other calcareous stone
6810.11.10	Cement bricks	US$50/kg
6810.11.90	Other building blocks and bricks
6810.19.10	Cement tiles for mosaic
6810.19.90	Other articles of cement
6810.91.00	Articles of cement: prefabricated structural components for building or civil engineering
6810.99.10	Concrete boulder
6810.99.90	Other articles of cement

Source: WTO. 2011. Trade Policy Review India: Report by the Secretariat. Trade Policy Review, Geneva: World Trade Organization (WTO).

Import quotas

India maintains import quotas for marble and similar stones (HS 2515.11.00, 2515.12.10, 2515.12.20, and 2515.12.90) and for sandalwood (HS 4403.99.22). Quotas are established annually and administered on an MFN basis and it does not maintain bilateral quotas. Imports of the products in 415 sensitive items (up from 300 items in 2007) are monitored by the authorities. The monitored sensitive items include milk and milk products, fruits and vegetables, pulses, poultry, tea and coffee, spices, food grains, edible oils, cotton and silk, marble and granite, automobiles, parts and accessories of motor vehicles, products produced by small scale industries, and other products (bamboos, cocoa, copra, and sugar).

Anti-dumping and countervailing measures

India imposes anti-dumping duties and countervailing measures to protect domestic industry from the impact of unfair trade practices. The anti dumping duties may remain in place for five years unless revoked earlier or extended by the relevant authority. According to the WTO, between January 2006 and 31 December 2010, India initiated 209 anti-dumping investigations against 34 trading partners (WTO 2011). The products involved included chemicals and products thereof, plastics and rubber and products thereof, base metals, and textiles and clothing. As of December 2010, 207 anti-dumping measures were in force, compared with 177 on 30 June 2006. According to the WTO, India did not take any countervailing actions during the same period. Measures were applied on 30 trading partners.[3] The majority were applied on China (67 or 32.4 percent of the total), Korea, Rep. of (19 or 9.2 percent), Chinese Taipei (19 or 9.2 percent), Thailand (14 or 6.8 percent), the EU or its members states (12 or 5.8 percent), and Japan, Malaysia, and the United States (9 or 4.3 percent each).

Standards

Indian standards are established based on the provisions of the Bureau of Indian Standards (BIS) Act 1986 and BIS Rules 1987. The BIS is responsible for formulating and enforcing standards for 14 sectors. These include production and general engineering; civil engineering (as of 1 January 2011); chemical (15 October 2010); electro-technical (1 July 2009); food and agriculture (9 June 2010); electronics and information technology (1 April 2010); mechanical engineering (1 April 2010); management and systems (1 Oct 2010); metallurgical engineering (6 July 2010); petroleum, coal, and related products (1 July 2010); transport engineering (1 January 2011); textile (1 April 2008); water resources (1 April 2010); and medical equipment and hospital planning (1 January 2011).[4] There were around 18,623 Indian standards as of 31 March 2010 and about 84 percent were harmonized with international standards.

Table 4: Standards imposed by BIS, 2007-10

	Aug-07	Sep-08	2009/10^a
Total number of standards in force	..	..	..
Total number of Indian standards in force	18,470	18,592	18,592
Per cent equivalent to international standards	..	..	84

.. Not available.
a 31 March 2010.

Source: WTO. 2011. Trade Policy Review India: Report by the Secretariat. Trade Policy Review, Geneva: World Trade Organization (WTO).

Certification and conformity assessment

Around 81 products are subject to the mandatory BIS certification mark.[5] As of May 2011 there were more than 1,000 products under voluntary certification. The requirements for the use of the BIS certification mark are the same for domestic and imported products. Foreign producers who wish to export products subject to mandatory certification must obtain a license from the BIS. Foreign manufacturers must set up a liaison/branch office in India to obtain a license if the BIS has not signed a MOU with the country where the manufactured goods originate. The fees under the Foreign Manufacturers Certification Scheme, in place since 1999, are INRs1000 for the application, US$300 for processing, US$2,000 for marking, and a unit rate fee, which varies according to the product. The BIS license is granted to the factory address at which the manufacturing takes place and the final product is tested to assess compliance with the relevant Indian standards. After receiving a license the user must pay an annual fee of INRs 1,000, as well as a quarterly fee for units of production marked. The latter is fixed according to product.

Labeling

Packaged commodities must bear a label securely affixed. These labels should include the: name, trade name or description of food contained in the package; ingredients used; name and address of manufacturer or importer; net weight or measure of volume (in accordance with the metric system based on the international system of units) of contents; item/package sale price (MRP INRs __) (inclusive of all taxes); month and year of manufacture or packaging; date of expiry[6]; license number where relevant; and name, address or e-mail if available of person or office to be contacted in case of a complaint.

For products containing natural flavoring substances, the common name of the flavors should be mentioned on the label. The label should also indicate the animal origin of gelatine in products that contain it. The Ministry of Health and Family Welfare has recently notified the quantitative ingredient declaration requirement as an additional labeling requirement for food. More specific labeling requirements exist for specified products, such as infant milk substitutes and infant foods, bottled mineral water, and milk products.

Labels must be in Hindi (Devnagiri script) and in English. In certain instances, they must be written in the language of the locality where the product is ultimately sold. This increases distribution costs, since India has 16 official languages, and food processing companies often do not know which pallet of food products will be transported to a specific State. The requirement that packaging must specify the maximum retail price of the product, including taxes, is a further complication, since sales taxes are levied at the state level.

Sanitary and phytosanitary measures (SPS)

The main institutions involved in the establishment and implementation of SPS measures for food items are the Ministry of Health and Family Welfare, the Department of Animal Husbandry, Dairying, and Fisheries; the Directorate of Plant Protection, Quarantine and Storage; the Bureau of Indian Standards; and other state government agencies.

The imports of animal products into India require sanitary import permits issued by the Department of Animal Husbandry, Dairy and Fisheries and the permits must be obtained prior to shipping from the country of origin. The Department approves or rejects the application after an import risk analysis on a case-by-case basis. Permits are valid for six months and may be used for multiple consignments. A sanitary import permit is not a license, but a certificate verifying that India's sanitary requirements are fulfilled. Some imports of animal products also require an import license issued by Director General of Foreign Trade. The imports of animal products are only allowed through designated ports where animal quarantine and certification services are available (Amritsar, Bangalore, Chennai, Delhi, Hyderabad, Kolkata, and Mumbai). Imports of fish products are allowed through the port of Vishakhapatnam (in the State of Andhra Pradesh) and the land custom station at Petrapole (for imports from Bangladesh only).

Imports of plants and plant materials are regulated under the Destructive Insects and Pests Act 1914, the Plant Quarantine (PQ) (Regulation of Import into India) Order 2003, and international conventions. All plant and plant material consignments must be accompanied by a phytosanitary certificate issued by the national plant protection organization of the exporting country and an import permit issued by the officer in charge of the plant quarantine station. Products listed in Schedule VII of the PQ Order 2003may be imported without import permit but may be required to fulfill other conditions, such as fumigation. As in the case of imports of animal products, imports of plant and plant products may only enter the Indian territory through designated ports.[7]If commodities are found free from pests, they are cleared for import. If not, they must undergo fumigation with the accredited fumigation operators according to the Schedules V, VI, and VII of PQ Order 2003.[8] Fumigation is done at the importer's cost.[9]

[1] It is used for clearance from the warehouse on payment of duty and is printed on green paper. See here. Goods imported for home consumption are cleared under bill of exchange for same and for re-export purpose under ex-bond clearance.

[2] Entry tax on goods is levied in several states, including Jammu and Kashmir, Himachal Pradesh, Rajasthan, Uttar Pradesh, Uttaranchal, Haryana, Punjab, Andhra Pradesh, Karnataka, Tamil Nadu, Kerala, Bihar, Assam, Orissa, Arunachal Pradesh, Chhattisgarh, West Bengal, Maharashtra, Goa, Madhya Pradesh, and Gujarat.

[3] Australia; Belarus; Bulgaria; China; the EU; France; Germany; Hong Kong, China; Indonesia; Iran; Japan; Kingdom of Saudi Arabia; Korea; Malaysia; New Zealand; Oman; Qatar; Russian Federation; Singapore; South Africa; Sri Lanka; Sweden; Switzerland; Chinese Taipei; Thailand; Turkey; the United Arab Emirates; the United Sates; and Viet Nam (WTO document G/ADP/N/209/IND, 19 April 2011).

[4] Bureau of Indian Standards online information, "Composition of Technical Committees". See http://www.bis.org.in/sf/composition.htm.

[5] For items subject to mandatory certification, see Bureau of Indian Standards online information: http://www.bis.org.in/.

[6] For products containing aspartame, it should not be more than three years from the date of packing.

[7] For the list of seaports, airports, and land frontiers in operation through which imports of plants are allowed, see Plant Quarantine (Regulation of Import into India) Order 2003, Schedule I.

[8] There are 357 registered fumigation agencies for methyl bromide fumigation and 157 for aluminum phosphide fumigation.

[9] Fumigation generally takes 24 hours with methyl bromide, and 7 to 10 days with aluminum phosphide.

Capital spending and economic growth in Nepal

noreply@blogger.com (Chandan Sapkota) — Wed, 24 Apr 2013 16:56:00 +0000

This blog post is adapted from the issue focus of the ADB’s latest Macroeconomic Update (April 2013).

Need to accelerate capital spending

In addition to the declining capital budget allocation in recent years, the actual capital expenditure itself is consistently lower than the budgeted amount (Figure 1). The struggle and consistent inability to spend on time the allocated capital budget has put the issues surrounding the quality of spending on the backburner. For a developing country with tremendous need to scale up infrastructure investments to tackle head-on the binding constraints to accelerated economic activities, reduced as well as underspent capital budget is a cause of concern. ‘Crowding in’ of private investments has not happened due to the failure to ensure adequate physical prerequisites, including infrastructure. Consequently, it is not only having an impact on productivity, but is also suppressing economic growth and jobs creation below the potential. Scaling up both quantum and quality of capital spending is vital to creating the foundations for the lackluster growth to take off on sustainable path.

Figure 1: Receding capital expenditure

Source: ADB estimates based on data from Ministry of Finance

The budget allocation for capital expenditure was Rs 129.5 billion (38.3% of total budget) in FY2011, which dropped to Rs 92.6 billion (18.9% of total budget) in FY2012 and Rs 66.1 billion (16.3% of total budget) in FY2013.[1] While the budget utilization in the first six months of FY2012 was Rs 9.6 billion, it was Rs 7.7 billion in the corresponding period in FY2013, a decrease of 19.9%. The budget utilization in the same period in FY2011 was Rs 41.8 billion.

According to the line-wise budget headings for FY2013, capital expenditure consists of expenditure for the acquisition of fixed assets, including land acquisition, purchase and construction of building, furniture and fixtures, vehicles, machinery, public construction, capital improvement, and research and consultancy related to capital. Compared to the level of expenditure in the first six months of FY2012, expenditure in all of these headings except for capital formation, and research and consultancy declined in the corresponding period in FY2013 (Figure 3).[2] In the first six months of FY2013, capital expenditure was the highest in public construction (Rs 5.9 billion), followed by building construction, research and consultancy, capital improvements and land acquisition, among others. Capital spending usually starts to pick up beginning mid-year and then accelerates in the last trimester. Unfortunately, on top of low capital budget this fiscal year, expenditure has failed to pick up thus far. Even more worrisome is the indication that expenditure under public construction (roads, bridges, airports and other productive assets), which registered a negative growth of 16.6% in the first half of FY2013, is not going to pick up as expected.

Figure 2: Mid-year capital expenditure

Source: Mid-term FY2013 Budget Review, Ministry of Finance.

The lack of a timely full budget has been the main factor behind the low and ineffective capital expenditure. In FY2012, the delay in unveiling a full budget led to a dismal capital expenditure (about 3.3% of GDP, down from about 6.5% in FY2011). Worse, the delayed full budget for FY2013 has created shortage of funds in many development projects, including those funded by development partners. The projects supported by ADB alone are facing budget constraints of about Rs 17 billion.[3] As a result, disbursements of all donor-funded projects have been low. This will delay the completion of several development projects and programs. The procedural delays in requesting authorization for release of funds and the cumbersome procurement processes have further delayed capital spending. It is very likely that actual capital expenditure in FY2013 might be below 3.0% of GDP, which is lower than the level reached in FY2012.

The inability to ramp up capital spending is affecting the financial sector as well. On a cash basis, the government was running a surplus of about Rs 44 billion in the first six months of FY2013. The inability of the government to spend money, which usually flows via the banks and financial institutions, on time is also contributing to liquidity constraints. Consequently, the interbank lending rate is gradually increasing and reached 2.3% in the seventh month of FY2013, from 0.5% in the first month (Figure 17). Additionally, public capital expenditure dependent sectors (Figure 24) such as construction are not expected to pick up this year as well from a negative growth last year.[4] It not only affects employment creation, but also revenue mobilization, overall economic growth rate, and poverty reduction.

Figure 3: Construction sector and construction related capital spending, FY1975-FY2011

Source: ADB estimates based on data from MoF and CBS.

During the rest of FY2013, the government needs to accelerate capital spending through expedited approval of funding requests for projects, and allocating and releasing adequate funds for projects facing funding constraints, while cutting down delays in procurement process. However, it is also critical that the government is mindful of the quality of capital spending by ensuring sound allocation and quality utilization of the funds through sufficient internal and external control. Towards accelerating capital spending and augment its impact on economic growth, revenue mobilization, and job creation, the government should prepare and unveil a timely and full budget in FY2014 with sufficient capital budget allocation. At the same time, actions to enhance accountability and transparency of public management need to be accelerated, including the reforms for public financial management, public procurement, and other public governance functions.

[1] The partial budget initially allocated Rs 51.3 billion (14.6% of partial budget) for FY2013.

[2] Further disaggregated data is not available yet.

[3] Based on ADB’s Second Quarterly Country Portfolio Review (QCPR) assessment.

[4] Figure 3 depicts the close relationship between construction sector (which is one of the components of GDP) and construction related capital spending by the government. It also shows the contribution of construction sector to GDP growth (computed as the share of construction in GDP multiplied by construction sector’s growth rate). Construction related capital spending consists of actual government expending in land development; industry & mining; transportation (roads, bridges, aviation & others); and electricity. On an average, these spending cumulatively account for over 50% of total capital spending.

Renewable energy diffusion in Asia: Can it happen without government support?

noreply@blogger.com (Chandan Sapkota) — Tue, 23 Apr 2013 17:01:00 +0000

Below is an abstract of one of my research papers (co-authored) recently published in Energy Policy journal:

Renewable energy diffusion in Asia: Can it happen without government support?

The dramatically increasing population of Asia necessitates equally as dramatic increase in energy supply to meet demand. Rapidly increasing energy demand is a major concern for Asian countries because the increase in demand is being met through the increased use of fossil fuel supply, largely domestic coal and imported fuel. Renewable energy supply presents a lower emission pathway that could be a viable option for steering off the higher emissions path. However, several market, economic, institutional, technical, and socio-cultural barriers hinder countries in moving from high to low emission pathway. Following a discussion on the rising demand for energy in Asia and the prospects of partly satisfying it with renewable energy, we outline the reasons for government support to tackle the barriers for widespread diffusion of grid-based renewable energy. Additionally, we also discuss workable models for strategic government intervention to support diffusion of grid-based renewable energy in Asia.

Can revenue catch up with rising recurrent expenditure?

noreply@blogger.com (Chandan Sapkota) — Fri, 19 Apr 2013 12:55:00 +0000

Expenditures are already high and rising fast in Nepal. For FY2013, recurrent expenditure allocation is 68.9% of total budget of Rs 404.8 billion. While capital expenditure allocation as well as actual expenditure is declining, recurrent expenditures are rising (thanks to sharp upward revision of public sector wages, cost escalation due to high inflation among others, ad hoc spending programs in the post-conflict situation, increasing subsidies that are not well targeted to reach the real beneficiaries, etc) very fast. It could very well be unsustainable, leading to widening of budget deficit and destabilizing the macroeconomic balance maintained thus far.

At the core of it, the tax revenue (Rs 212.2 billion in FY2012) Nepal is generating might not be even sufficient to cover recurrent expenditures (Rs 243.5 billion in FY2012). The financing of capital expenditure (Rs 51.4 billion)— which is the one that contributes to building productive capacities to stimulate economic activities and generate more job opportunities— is declining, and largely financed by donors. Growth is mostly driven by agriculture (dependent largely on monsoon) and services (driven largely by remittances-backed consumption) sectors. The rising recurrent expenditure has little impact on growth. The one that could is capital expenditure (think of construction sector, financial intermediation, etc.), which, unfortunately, is declining. Below, I present some interesting charts. Readers make their own judgment.

Recurrent expenditure as a share of total actual expenditure was 76.3% in FY2012, up from 61% in FY2002. However, capital expenditure as a share of total actual expenditure declined to 16.1% in FY2012 from 30.9% in FY2002. Similarly, as a share of total budget allocation, recurrent expenditure allocation jumped from 49.4% in FY2002 to 69.3% in FY2012 and capital expenditure allocation dropped from 50.6% in FY2002 to 24.1% in FY2012 (its 16.3% in FY2013).

Looking at the growth rates, recurrent expenditure grew on an average between FY2008-FY2012) by 26.3% and capital expenditure by 14.6%. Over the same period, revenue (tax and non-tax) grew by 23.4% (overall revenue including grants grew by 22.9%). It would be hard to manage finances if expenditure growth continues to outpace revenue growth, which is largely backed by increase in tax revenue mobilization on consumption of imported goods (VAT, customs, excise, etc).

As a share of GDP, total expenditure was 20.8% of GDP (recurrent and capital expenditures were 15.9% and 3.3%, respectively) and revenue was also around 15.9% of GDP. Total trade deficit (including grants) in FY2012 was about 2.2% of GDP.

Nepal-India Trade: State of para-tariff barriers

noreply@blogger.com (Chandan Sapkota) — Tue, 16 Apr 2013 16:41:00 +0000

[This blog post is sourced from one of the studies (workshop presentation slides here) yours truly was involved in about a year ago while working at SAWTEE. I think sharing analytical excerpts from the comprehensive report will be helpful to interested readers and researchers. This blog post focuses on para-tariff barriers on Nepali exports to the Indian market. Here are earlier blog posts on the state of tariff barriers; the issues surrounding pegged exchange rate between Nepal and India; the confidence on the Indian rupee in Nepal; and the size of Indian market for Nepal.]

State of para-tariff barriers

Besides the tariffs, India imposes other duties and charges as well on imports. These are

Additional duty of customs (ADC)
Special additional duty (SAD)
Education cess and the secondary and higher education cess
Some product-specific charges and cesses

The additional duty of custom (ADC) is aimed at removing or reducing a pro-import bias as a result of the application of central excise duties to domestically manufactured goods, in accordance with India's trade legislation. The ADC rate is equivalent to the central excise duty, which is also referred to as Central Value Added Tax (CENVAT), on domestically produced goods of the same tariff classification.[1] The general ADC rate was 10% in 2010.

The 4 percent special additional customs duty (SAD) continues to be imposed on imports, with few exceptions (14.8 percent of all tariff lines),[2] to partially compensate for sales tax, state value-added tax, local tax or other charges leviable on similar article on its sale, purchase or transportation in India. However, since the SAD is an across-the-board tax applied at a flat rate on most goods, it may not always be equivalent to local sales taxes on similar domestically produced goods, which may be higher or lower. The SAD paid on imports subsequently sold within India and for which the importer has paid state-level value-added taxes, may be refunded. In 2007, India was dragged to the WTO dispute settlement body for the application of ADC and SAD.

Since 2004, an education cess of about 2 percent of all aggregate customs duties (excluding safeguard, countervailing or anti-dumping duties if applicable) has been charged on imports. For instance, if the import duty for a certain product is 10 percent, the education cess on that product would be 2 percent of 10 percent, i.e. 0.02 percent.The secondary and higher education cess of 1 percent is also levied on all imports since 2007. This cess is calculated on the aggregate value of all excise duties (including the additional and the special duties or any other duty or excise), but excluding the education cess and safeguard, countervailing or an anti-dumping duty if applicable.

The calculation of all charges applied on imports including landing charges, the effective customs duty, the additional customs duty, the special additional customs duty, and the education cess shows an average protection of 25.6 percent compared to just 12 percent on what is said as an effective applied MFN rates (see Table 1).

Besides these duties and charges levied by the central government, additional taxes/charges are imposed by the state governments. For example, the State of Maharashtra levies an entry tax (octroi) on entry of domestic and imported goods (particularly petroleum products, tiles, and air conditioners) with rates ranging from 10 percent to 34 percent based on the product. Additionally, entry taxes are applied in several states, including Jammu and Kashmir, Himachal Pradesh, Rajasthan, Uttar Pradesh, Uttaranchal, Haryana, Punjab, Andhra Pradesh, Karnataka, Tamil Nadu, Kerala, Bihar, Assam, Orissa, Arunachal Pradesh, Chhattisgarh, West Bengal, Maharashtra, Goa, Madhya Pradesh, and Gujarat.

Table 1: Summary of India’s import charges, 2010/11

a    Calculation for averages with extra charges include landing charges, effective custom duty, additional duty, special additional duty, and education cess.
b    ISIC Rev.2 classification. Electricity, gas, and water is excluded (1 tariff line).
Note:      Calculations exclude specific rates and include the ad valorem part of alternate rates.
Source: WTO. 2011. Trade Policy Review India: Report by the Secretariat. Trade Policy Review, Geneva: World Trade Organization (WTO).

[1] The excise and tariff nomenclatures are harmonized at HS 8-digit level.
[2] Some 12 lines in HS71 (articles of jewellery) have SAD duty of 1%.

Nepal’s FY2013 budget brief

noreply@blogger.com (Chandan Sapkota) — Fri, 12 Apr 2013 05:50:00 +0000

The government finally released a full budget (in 9th month!) for FY2013. On 9 April 2013, the President endorsed Appropriation Ordinance 2013, Financial Ordinance 2013 and Ordinance to Mobilize Internal Debt 2013. Earlier, the government released one-third budget on 15 July 2012 and two-third budget on 20 November 2012, keeping the expenditure limit at Rs 351 billion. Below is a breakdown of expenditure allocation and projected revenue for FY2013.

FY 2013
GDP growth rate (%)- revised	3.6
FULL budget allocation for FY 2013
	Rs billion	%
Projected total expenditure	404.8
Recurrent	279.1	68.9
Capital	66.1	16.3
Financial provision	59.7	14.7

Projected total revenue	341.0
Revenue	289.6
Foreign grants	47.0
Principal repayment	4.4

Deficit financing	63.8
Foreign loans	25.8
Domestic borrowing	38.0

ADB forecasts Nepal’s GDP to grow by 3.5% in FY2013

noreply@blogger.com (Chandan Sapkota) — Wed, 10 Apr 2013 04:38:00 +0000

The Asian Development Bank (ADB), in its flagship publication Asian Development Outlook (ADO) 2013 released today, forecasted Nepal’s GDP growth at 3.5% for FY2013 (2012/13) and 4.2% in FY2014. Furthermore, the ADO 2013 estimated regional economic growth in the Asia Pacific region to pick up to 6.6% in 2013 and reach 6.7% in 2014.

This year’s ADO focuses on Asia’s energy challenge. It notes that:

Developing Asia's energy needs will expand in tandem with its growing economic influence, but its own endowment is insufficient;
Expanding renewable energy sources will not be enough to meet future demand. Consequently, Asia needs to invest in making conventional power cleaner and more efficient; and
Asia must aspire to the degree of regional cooperation and integration in energy by 2030 that currently prevails in Europe.

Below are highlights from the Nepal chapter of the ADO 2013:

Economic performance in FY2013

GDP growth

Growth to rebound to 4.5% in FY2012
- Agriculture sector grew by 5.0%, the highest in 4 years
- Services sector grew by 4.5%
- Industry sector continued to perform poorly (growth dropped to 3.0% in FY2012 from 4.4% in FY2011) -- Unfavorable business and investment climate (labor disputes, persistent electricity shortages, political uncertainties)

Inflation

Inflation eased to 8.3% in FY2012 (food prices declined during most of the year)
Stubbornly high inflation caused by:
- Rising prices of non-food items (reflected by inflation in India)
- Upward adjustment of administered fuel prices
- Depreciation of Nepali rupee against third world currencies
- Rising wages
- Persistent supply-side constraints (power outages; market distortions by monopolists and monopsonists; infrastructure hiccups; strikes)

Fiscal sector

Budget deficit narrowed narrowly to 2.2% of GDP in FY2012
- Lower capital expenditure
- Greater revenue mobilization
  - Increase by 22.5%, reaching 13% of GDP
  - Improved efficiency in tax administration and widening of tax base
Not a desirable outcome for a country with large development needs and significant absorption capacity as well as multiplier effect from investment in infrastructure
Total expenditure was 20.4% of GDP, slightly higher than in FY2011
- High recurrent expenditure, reaching 15.6% of GDP in FY2012 from 12.4% of GDP in FY2011
  - To cover large subsidies on fuel and ad hoc expenditure programs
Capital expenditure low, dropped to 3.3% of GDP in FY2012 from 6.5% of GDP in FY2011
- Lower project disbursements due to lack of timely budget
- Sharp drop in capital spending allocation itself

Monetary sector

Central bank’s proactive role and corrective policies led to containment of the fallout of real estate and housing prices
Robust remittance inflows boosted deposits and increased liquidity
Interbank rates dropped to 1.1% in FY2012 from 8.1% in FY2011

External sector

Current account recorded a large surplus of 4.9% of GDP in FY2012 from negative 0.9% in FY2011
- Massive rise in remittance inflows
- Modest import growth of 4.5% relative to export growth of 5.4%
Overall balance of payments surplus reached $1.6 billion
Foreign exchange reserves reached $4.2 billion, enough for 7.9 months of import of goods and services.

Prospects for FY2013 and FY2014

GDP growth

GDP growth in FY2013 expected to decline

Unfavorable monsoon
Shortage of fertilizers
Low business confidence
Lack of full budget
Subdued growth in India

GDP growth in FY2014 expected to rebound

Favorable monsoon
Adequate fertilizer supply
Timely and full budget
Moderate expansion of remittances

Inflation

Inflation in FY2013 expected to increase

Lower agriculture harvest
Wage pressures
Upward adjustment of administered fuel prices
Power shortages
Supply-side constraints

Inflation in FY2014 expected to moderate

Good harvest
Underlying pressures of FY2013 to persist
Cautious policies

External sector

Trade deficit to markedly widen in FY2013

Exports growth to decline
Subdued growth in India
Sluggish activity in Euro area and the US
Rising cost of production
Imports growth to sharply increase
Driven by remittances (lag effect as well)

Current account balance to be negative

Wide trade deficit
More moderate remittance growth

Fiscal sector

Lack of a full-fledged budget for FY2013

Revenue policy guided by Finance Act 2012
Capital budget allocation and actual expenditure low
Impressive revenue mobilization
Domestic borrowing not allowed
Fiscal deficit may marginally widen

Moving forward, a full and timely budget for FY 2014 is essential

Timely passage to allow for change in revenue policy, allow for domestic borrowing , and accelerate development activities
Quality of public spending, aid effectiveness and governance issues need to be addressed

CBS projects GDP growth at 3.6% in FY2013 in Nepal

noreply@blogger.com (Chandan Sapkota) — Sun, 07 Apr 2013 11:46:00 +0000

The Central Bureau of Statistics (CBS) released its annual national account estimate on 5 April 2013, projecting GDP at basic prices to grow at 3.56%, down from 4.48% revised estimate for FY2012 (fiscal year ends on 15 July). In FY2012, agriculture growth of around 5% and services growth of 4.5% propelled overall GDP growth (revised estimate) to 4.5%, up from 3.9% in FY2011. Industry sector growth dropped to 2.96% in FY2012 from 4.4% in FY2011. In 2012, the CBS’s GDP growth projection for FY2012 was 4.6%.

GDP_NEPAL	FY2011	FY2012R	FY2013P
GDP growth rate (basic prices)	3.85	4.48	3.56
Primary Sector	4.48	4.98	1.31
Secondary Sector	4.4	2.96	1.49
Tertiary Sector	3.42	4.51	6.03
Composition of GDP (%)
Primary Sector	37.37	36.31	35.32
Secondary Sector	14.94	14.30	14.35
Tertiary Sector	47.69	49.39	50.33

In FY2013, the CBS projects services sector to grow by 6.03%, industry sector growth to further drop to 1.49%, and agriculture sector to grow by a mere 1.31%. The sharp drop in agriculture growth is attributed to the unfavorable monsoon and shortage of chemical fertilizers during peak paddy planting season. The industry sector continues to be beset by persistent supply-side as well as structural constraints, including power outages, labor disputes, low productivity, high cost of raw materials and production, inadequate investment climate reforms, lack of innovation and research and development, corruption, and political instability. Given the slowdown in growth of remittances, it appears services sector might grow lower than what CBS’s is projecting. Hence, 3.56% GDP growth projection is very optimistic. Taking into account the latest developments and updates, GDP will likely grow between 3.2% (the IMF says it might be even below 3%) and 3.5%. Anyway, as in previous years, services sector will contribute the largest push to GDP growth rate in FY2013.

At the sub-sectoral level (GDP consists of 15 sub-sectors broadly categorized under three sectors, namely agriculture, industry and services), the highest growing (revised estimate) sub-sectors in FY2012 were health and social work (9.95%); electricity, gas and water (8.41%); fishing (7.55%); community and social activities (6.65%); hotels and restaurants (5.96%); mining and quarrying (5.03%) and education (5.02%). Construction registered the least growth(0.22%).

In terms of contribution to GDP growth rate (sub-sectoral growth rate times its share of GDP at factor cost), agriculture and forestry had the major role, followed by transport, storage and communication; wholesale and retail trade; education; community and social activities; and real estate, renting and business activities.

In FY2013, the CBS projects wholesale and retail trade to register highest growth (9.54%), followed by health and social work (6.95%); hotels and restaurants (6.84%); transport, storage and communication (6.73%); and mining and quarrying (5.45%). The three lowest growing sub-sectors are construction (1.57%); agriculture and forestry (1.21%); and electricity, gas and water (0.2%).

In terms of contribution to GDP growth in FY2013, the largest contributor is projected to be wholesale and retail trade, followed by transport, storage and communication; agriculture and forestry; financial intermediation; and education. The least contribution would come from mining and quarrying; fishing; and electricity, gas and water. Again, the real story here is that the optimistic CBS projections for services sector might not be realistic and hence the related sub-sectoral growth, contribution to GDP growth rate, and overall GDP growth rate.

In terms of productivity and a meaningful structural transformation with higher value added jobs, the most important sector is industry (specifically, manufacturing sub-sector within it). Unfortunately, manufacturing’s share of GDP is continuously shrinking (revised estimate of 6.28% in FY2012 and projected 6.17% in FY2013). Its growth is projected to drop to 1.85% in FY2013 from 3.63% in FY2012. As mentioned earlier, it points to the persistent supply-side as well as structural constraints.

Interestingly, in US dollar terms, projected per capita GDP for FY2013 ($717) is lower than the actual per capita GDP in FY2011 ($718). Nepalese people are getting poorer! Real per capita GDP growth is projected to slowdown to 2.27% in FY2013 from 3.46% in FY2012.

Looking at the GDP figures from expenditure category, it is evident that the economy is overwhelmingly consumption based and imports are rising fast (net exports is expanding on the negative side). No surprise where the remittances are going.

Meantime, while gross domestic savings are declining (down from 14.47% of GDP in FY2011 to projected 9.34% of GDP in FY2013), gross national savings are increasing rapidly (up from 28.56% of GDP in FY2006 to projected 38.41% of GDP in FY2013). Imports of goods and services are projected to reach a record 38.79% of GDP. Exports of goods and services are projected to be just 10.34% of GDP.

Links of Interest (2013-04-05)

noreply@blogger.com (Chandan Sapkota) — Fri, 05 Apr 2013 17:43:00 +0000

Links of interest series is back again. Below are links (and excerpts) to some of the interesting papers and articles.

Does gender inequality hinder development and economic growth?

[The evidence is not conclusive, i.e. a definitive causal link between inequality and growth is not established yet. But, this doesn’t mean “imply that inequality-reducing policies are ineffective.”]

Economics versus Politics: Pitfalls of Policy Advice

[Acemoglu and Robinson argue that “sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria.”]

Cash transfers and child schooling : evidence from a randomized evaluation of the role of conditionality

[Akresh, de Walque and Kazianga: “The results indicate that unconditional and conditional cash transfer programs have a similar impact increasing the enrollment of children who are traditionally favored by parents for school participation, including boys, older children, and higher ability children. However, the conditional transfers are significantly more effective than the unconditional transfers in improving the enrollment of "marginal children" who are initially less likely to go to school, such as girls, younger children, and lower ability children. Thus, conditionality plays a critical role in benefiting children who are less likely to receive investments from their parents.”]

Trends in developing country trade 1980-2010

[Michalopoulos and Ng: “This paper reviews trends and patterns in developing countries' trade from 1980 to 2010. During the 30-year span, world trade expanded rapidly, especially in developing countries in the last decade. A similar picture emerges in trade in services. These overall trends, however, mask different trade patterns during some of the time periods and among different developing countries and groups. For example, except for Asia, the 1980s were pretty much a "lost" decade for many developing countries and groups. But that changed in the 1990s and 2000s, with trade by all major developing countries growing faster than developed countries. From 1980 to 2000, trade by Least Developed Countries grew much more slowly than that of developing countries as a whole. But those countries saw the fastest growth in trade in the following decade. This strong overall trade performance -- with some exceptions (for example Sub-Sahara Africa in the manufacturing trade) -- raises questions about sustainability, trade policy and the architecture of the trading system.”]

Does access to finance matter in microenterprise growth ? evidence from Bangladesh

[Khandker, Samad and Ali: “The findings suggest that households engaged in microenterprise activities, in addition to farm and other nonfarm activities, are much better off (in terms of income, expenditure and poverty) than those not engaged in such activities. Fewer than 10 percent of the enterprises have access to institutional finance (formal banks or microcredit), although the rate of return on microenterprise investments is more than sufficient (36 percent per year) to repay institutional loans. The research suggests that credit constraints may reduce the enterprises' profit margin by as much as 13.6 percent per year. As the returns to microenterprise investment are found to be high, microfinance institutions can play a larger role in supporting microenterprise growth in Bangladesh.”]

A brighter future for renewable energy with private sector involvement in Nepal

[ Friis Bach and Pokharel write: “The National Rural and Renewable Energy is innovative as it seeks to realize the great scope of credit financing of renewable energy. The private sector and public-private partnerships are keys to the success of the program. The public sources and development assistance is simply not enough, if we want to ensure universal access to sustainable energy. At the same time, there should be a sound profit to earn for private sector, if they engage in new models for financing investments in renewable energy. The Government of Nepal and development partners have therefore agreed to establish a new Central Renewable Energy Fund (CREF) mechanism–the CREF to be handled by a bank–with an estimated budget of US $ 115 million for the next five years. We are not creating a new institution, but buying into existing commercial and development banks, which is more efficient and sustainable. Through subsidies and credits, the CREF will facilitate bankable renewable energy solutions to rural Nepal on an even larger scale. Once established and proven as an effective financing mechanism for the sector, it is expected that further funds will be committed to CREF, from public, development and private sources.”]

Nepal-India Trade: State of tariff barriers

noreply@blogger.com (Chandan Sapkota) — Thu, 04 Apr 2013 09:12:00 +0000

[This blog post is sourced from one of the studies (workshop presentation slides here) yours truly was involved in about a year ago while working at SAWTEE. I think sharing analytical excerpts from the comprehensive report will be helpful to interested readers and researchers. This blog post focuses on tariffs on Nepali exports to the Indian market. Here are earlier blog posts on the issues surrounding pegged exchange rate between Nepal and India; the confidence on the Indian rupee in Nepal; and the size of Indian market for Nepal.]

State of tariff barriers

According to the trade treaty between Nepal and India signed on 27 October 2009, there are virtually no tariffs imposed on most of the Nepalese exports to India.[1] The import of vegetable fats, copper products, acrylic yarn, and zinc oxide are subject to annual quotas. The import of alcoholic liquors/beverages (except industrial spirits[2]), perfumes and cosmetics with non-Nepalese/non-Indian brand names, and cigarettes and tobacco are not allowed preferential entry into India.

The applied ad valorem equivalent (AVE) tariffs[3] are between 0.01 percent and 22.69 percent on nine of the total product categories at HS2007 2-digit classification (see Table 1). At the HS2007 6-digit level, estimated applied tariff of up to 75 percent is slapped on 25 different products. The highest tariff is on liquors and spirits (product code 220870 and 220820 respectively), estimated to be AVE equivalent tariffs of 75 percent and 50 percent, respectively.

Table 1: Applied ad valorem equivalent tariffs on Nepalese exports to India (HS2007 2-digit level) in 2009

Product codes	Product description	Number of tariff lines	Total AVE tariff (estimated)
'24	Tobacco and manufactured tobacco substitutes	44	22.69%
'22	Beverages, spirits and vinegar	64	4.98%
'18	Cocoa and cocoa preparations	15	4.48%
'74	Copper and articles thereof	95	0.87%
'33	Essential oils and resinoids; perfumery, cosmetic or toilet preparations	124	0.53%
'15	Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes	119	0.08%
'54	Man-made filaments	244	0.04%
'28	Inorganic chemicals; organic or inorganic compounds of precious metals, of rare-earth metals, of radioactive elements or of isotopes	327	0.01%
'85	Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles	594	0.01%
All others			0.00%

Source: ITC’s Market Access Map (data for the latest year available)

In general, India's tariffs are higher for agriculture goods and processed goods than for semi-manufactures. The tariff structure in India for fiscal year 2010/11 is summarized in Table 2.

Table 2: Tariff structure, 2006/07 and 2010/11 (%)

	Tariff category	MFN effective applied rates		Final bound rate^a
	Tariff category	2006/07	2010/11	Final bound rate^a
1.	Bound tariff lines (% of all tariff lines)	75.2	75.6	75.6
2.	Simple average rate	15.1	12.0	46.4
	Agricultural products (HS01‑24)	38.2	35.1	119.1
	Industrial products (HS25‑97)	11.8	8.6	33.7
	WTO agricultural products	36.2	33.2	118.3
	WTO non‑agricultural products	12.0	8.9	32.0
	Textiles	12.2	9.6	26.9
	Clothing	12.5	10.0	37.1
3.	Duty free tariff lines (% of all tariff lines)	2.7	3.2	1.9
4.	Domestic tariff "peaks" (% of all tariff lines)^b	2.5	2.2	6.5
5.	International tariff "peaks" (% of all tariff lines)^c	12.5	11.9	87.7
6.	Overall standard deviation of tariff rates	15.0	14.2	40.8
7.	Coefficient of variation of tariff rates	1.0	1.2	0.9
8.	Non‑ad valorem tariffs (% of all tariff lines)	6.1	6.1	8.0
9	Nuisance applied rates (% of all tariff lines)^d	0.5	0.7	0.0

a    Based on 2010/11 tariff schedule. Implementation of final bound rates was completed in 2005. Calculations are based on 8,567 bound tariff lines, of which 8,503 are fully bound and 64 partially bound.
b    Domestic tariff peaks are defined as those exceeding three times the overall simple average applied rate.
c    International tariff peaks are defined as those exceeding 15%.
d    Nuisance rates are those greater than zero, but less than or equal to 2%.
Note:    The 2006/07 tariff is based on HS02 nomenclature, consisting of 11,695 tariff lines; the 2010/11 tariff is based on HS07 nomenclature consisting of 11,328 tariff lines. Calculations exclude specific rates and include the ad valorem part of alternate rates. MFN applied rates include exemptions, applicable at the full eight digit tariff line.

Source: WTO. 2011. Trade Policy Review India: Report by the Secretariat. Trade Policy Review, Geneva: World Trade Organization (WTO).

India grants preferential tariff rates for certain articles under Global System of Trade Preference (GSTP), regional,[4] and bilateral agreements[5]. Under the GSTP, India has granted tariff concessions to 12 countries on a limited number of products. Only preferences under the SAFTA II (at 2.3%) and under the Sri Lanka FTA (at 2.3%) are significantly lower than the simple average applied MFN of 12% (See Table 3).

Table 3: Summary analysis of preferential tariff, 2010/11

a   The 2010/11 MFN tariff consists of 11,328 tariff lines, of which 359 are duty free. The number of preferential lines includes only lines on which the rates, at fully applied eight‑digit level, are lower than the corresponding MFN applied rate.
b   Preferential rates for Pakistan and Sri Lanka.
c   Preferential rates apply to SAFTA LDC members: Bangladesh, Bhutan, the Maldives, and Nepal. For Bangladesh, duty‑free in‑quota rates apply to textiles.

Source: WTO. 2011. Trade Policy Review India: Report by the Secretariat. Trade Policy Review, Geneva: World Trade Organization (WTO).

[1] The official provisions concerning export of goods are related to tariffs (on the negative list items), rules of origin and safeguards.

[2] Nepalese beer can be exported to India on payment of the applicable liquor excise duty equal to the effective excise duty as levied on Indian beer.

[3] An ad valorem equivalent (AVE) tariff is a tariff presented as a percentage of the value of goods cleared through customs.

[4] These are: Agreement on South Asian Free Trade Area (SAFTA), Asia Pacific Trade Agreement (APTA, also known and Bangkok Agreement), Southern Cone Common Market (MERCOSUR), and Association for South East Asian Nations (ASEAN).

[5] These are bilateral agreements with Chile, Singapore, South Korea, and Sri Lanka.

Pegged exchange rate between Nepali rupee and Indian rupee and competitiveness

noreply@blogger.com (Chandan Sapkota) — Fri, 29 Mar 2013 05:55:00 +0000

This blog post relooks at some of the issues surrounding the pegged exchange rate between Nepali rupee and Indian rupee, and its impact on competitiveness. For an earlier posts on exchange rate, see these posts: Stay the course on exchange rate; Q&A on exchange rate; confidence on the Indian rupee in Nepal; and services exports competitiveness.

Nepal has been maintaining a pegged exchange rate to the Indian rupee for a long time. The peg of NRs1.60= IRs 1.0 has not been revised since 1993. With the changing pattern of trade, especially exponentially rising imports and small volume of exports together with low productivity, there are calls to either change the peg or float it freely with all currencies.[1] However, in successive Article IV reports, the IMF has been arguing that maintaining exchange-rate peg to the Indian rupee should be the key near-term policy priority because “abandoning it now would create significant uncertainty given weakness in the banking sector, likely leading to deposit and capital flight”(IMF 2011). Meanwhile, there is already a depreciation of exchange rate in the informal market, which was quite visibly seen in the border areas (IRs 1.0 = between NRs 1.65 and NRs 1.68).

The main reason for the calls to change the exchange rate is that it does not reflect the changes in trade and economic fundamentals since the time India and Nepal opened up their economies in the early 1990s. Between FY1993 and FY2010, the average annual GDP growth rate of the Indian economy and Nepalese economy was 7.0 percent and 4.4 percent respectively (see Table). On an average, the Indian economy had sectoral growth in agriculture, industry and services of around 3 percent, 7.3 percent and 8.6 percent respectively. The Nepalese economy had sectoral growth in agriculture, industry and services of around 3.1 percent, 4.4 percent, and 5.3 percent respectively. The simple average annual growth rate of the major indicators shows that the sectoral growth in Nepal had been lower than in India, except for that in agriculture. The trade deficit widened from Rs 10.92 billion in FY1993 to Rs 177.12 billion in FY2010. This alarming rise in trade deficit has been the main concern and rationale for revising exchange rate so that exports are encouraged and imports discouraged.

Table: Changes in Nepalese and Indian economies, FY1993-FY2010

Average annual growth rate, FY1993-FY2010
	Nepal	India
Real GDP	4.39	7.03
Agriculture	3.14	3.03
Industry	4.13	7.30
Services	5.26	8.61
Exports	9.50	14.05
to India	22.27
Imports	15.24	14.35
from India	18.31
Inflation	6.90	7.10
Nepal's trade with India (Rs billion)
	FY1993	FY2010
Exports	1.62	39.99
Imports	12.54	217.11
Trade deficit	10.92	177.12
Exchange rate (NRs/IRs)
Nominal	1.6	1.6
Real	1.36	1.92

Source: ADB and NRB data

Looking at the evolution of exchange rate between Nepalese rupee and Indian rupee and that with the dollar, it is clear that the existing exchange rate of IRs 1 = NRs 1.60 was prevalent even in FY1965. But, the Nepalese rupee has been revalued and devalued as per the evolving nature of Nepal’s and India’s economies. On June 6, 1966 following the devaluation of the Indian rupee, the exchange rate of Nepalese rupee vis-a-vis the Indian rupee appreciated by 57.5 percent (IRs 1 = NRs 1.0125). On December 8, 1967 the Nepalese rupee was devalued by 24.8 percent (IRs 1= NRs 1.35).

Following the realignment of currency on December 17, 1971, the exchange rates of the Nepalese rupee vis-a-vis, Deutsche Mark, Japanese Yen and Indian rupee were revised effective December 22, 1971 (IRs 1 = NRs 1.39). Then effective from October 9, 1975, the exchange rate of the Nepalese rupee vis-a-vis the US dollar was revised. The exchange rate of other convertible currencies was quoted daily with reference to the US dollar rate in the international currency market. On June 1, 1983, the exchange rate system pegged on US dollar and Indian currency was replaced by a basket of currency system. On November 30, 1985,[2] the Nepalese rupee was devalued against foreign currencies (IRs 1 = NRs 1.68).

On July 1, 1991 the Nepalese rupee was revalued against Indian currency by 1.8 percent. And, on March 4, 1992 the Nepalese rupee was made partially (65:35) convertible on current account. It was followed by a change in proportion to 75:25 on July 12, 1992. On February 12, 1993 Nepalese rupee was revalued against Indian rupee by 3 percent to NRs 1.60 for 1 IRs and Nepalese rupee was made fully convertible on current account.

Figure: Exchange rate between Nepalese rupee and Indian rupee and US dollar

Source: Quarterly Economic Bulletin April 2011, Nepal Rastra Bank

As mentioned earlier, the main rationale for the calls for the revision of exchange rate, whether going for fully flexible system or devaluing the exchange rate, is to narrow down widening trade deficit. The prevailing perception among some analysts and policymakers is that the existing peg has to be devalued—a deliberate downward adjustment to the official exchange rate—so that Nepal’s export price competitiveness is improved and hence exports boosted.[3] The computation of the real exchange rate[4] also corroborates this argument.

Rodrik (2008) showed that undervaluation of currency (i.e. a high real exchange rate) not only reduces trade deficit, but also stimulates economic growth in developing countries. The caveat of this finding is that the operative channel is the tradeable sector (mainly industry), which should have a pretty strong foundation so that it can benefit from the devaluation of exchange rate.[5] In other words, developing countries that can increase relative profitability of their tradables are most likely to achieve higher growth from currency devaluation. Unfortunately, at present, Nepal does not have a strong industrial base due to persistent structural constraints to economic activities (also see why is Nepal poor?).

Figure: Real and nominal exchange rates between NRs and IRs after 1993

Source: Author’s computation using data from WDI (for inflation) and NRB (for nominal exchange rate); RER= Real exchange rate; NER= Nominal exchange rate

Though the existing economic fundamentals and widening of trade deficit with India necessitate a devaluation of the exchange rate, it can only work if Nepal has the prerequisites in place for the export-oriented sectors to take off. The prerequisites are mostly related to addressing the supply-side constraints such as power outages, labor disputes, increasing cost of labor and raw materials, strikes, and policy paralysis in terms of implementing already committed provisions in Trade Policy 2009 and Industrial Policy 2010, among others. It is expected that addressing these constraints would lower cost of production, encourage innovation, and research and development, which will make exports competitive and substitute a portion of import demand by domestic production.

However, given the current fluid political situation, it is easier said than done. Hence, it is wise to think of favorably revising the pegged rate after the political situation is stable and the basic prerequisites for industrial sector to take off are in place, i.e. after institutional and market failures are duly taken care of.[6] Maintaining a stable and competitive real exchange rate requires a “supportive policy environment which would include prudent macroeconomic policies, a strong financial sector, and credible institutions” (Yagci 2001). For a developing country with limited links to global financial markets, low diversified production base and export structure, underdeveloped financial markets, lack of monetary credibility, and prone to bouts of high inflation, staying put on the existing peg until the necessary foundations are in place seems to be a good option (see Caramazza and Aziz (1998) for the pros and cons of fixed or flexible exchange rate regimes).

Note that hastily devaluing the exchange rate would risk adverse impact on the already deteriorating trade deficit because of the J-curve effect. In the short run, a real devaluation might not necessarily reduce total import volume as export and import connections are confirmed in advance. It would mean that the value of the current import volume would be higher in terms of domestic currency, leading to adverse impact on balance of trade. In the long run, as import volume gets affected by increased relative prices, total imports might decrease. Hence, a real depreciation might cause more damage initially before the expected changes start to kick in, that also provided that Nepal already has the prerequisites for export-oriented sectors to take off. Additionally, if the share of intermediate goods and raw materials used in production of export items are high in imports or the share the import demand is pretty much price inelastic,[7] (such as demand for petroleum fuel and LPG) then a real devaluation of exchange rate might not necessarily lead to reduction in imports and trade deficit. A devaluation of exchange rate will work only if the prerequisites are in place and institutional and market failures taken care of.

References

Caramazza, Francesco, and Jahangir Aziz. Fixed or Flexible? Getting the Exchange Rate Right in the 1990s. Economic Issues 13, Washington, D.C.: International Monetary Fund, 1998.

Chinn, Menzie D. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation." Open Economies Review, 2006: 115-143.

IMF. NEPAL Article IV Consultation. IMF Country Report, Washington, DC: International Monetary Fund, 2011.

Rodrik, Dani. "The Real Exchange Rate and Economic Growth." In Brookings Papers on Economic Activity, by Douglas Elmendorf, Gregory Mankiw and Lawrence Summers, 1-47. Washington, D.C.: Brokings Institution, 2008.

Sapkota, Chandan, and Adnan Kummer. "Exchange rate: Stay the Course." Republica, March 23, 2010: 6.

Yagci, Fahrettin. Choice Of Exchange Rate Regimes For Developing Countries. Africa Region Working Paper Series No.16, Washington, D.C.: World Bank, 2001.

[1] For a discussion on the pros and cons of changing the peg, see Sapkota and Kummer (2010)

[2] Nepal initiated the Structural Adjustment Program.

[3] Technically, devaluation of exchange rate makes exports less expensive, and discourages imports, which could help reduce both trade deficit and current account deficit.

[4] Real exchange rate is computed as RER = e*(P_I/P_N), where e is the nominal exchange rate, which is adjusted by the ratio prices in India (P_I) to prices in Nepal (P_N). Here, prices mean consumer price index (annual growth rate). The decline in real exchange rate value is interpreted as an appreciation of the exchange rate (or loss of cost competitiveness of exports). The assumption is that the cost differential between Nepal and India are closely related with the relative price structures in the two economies. For a detailed discussion on computing various real effective exchange rates, see Chinn (2006).

[5] Furthermore, maintaining a devalued real exchange rate requires higher saving relative to investment, or lower expenditures relative to income. Rodrik (2008) lists various policy tools to achieve these: fiscal policy (a large structural surplus), income policy (redistribution of income to high savers through real wage compression), saving policy (compulsory saving schemes and pension reform), capital-account management (taxation of capital account inflows, liberalization of capital outflows), or currency intervention (building up foreign exchange reserves). With low saving rate, high consumption rate, restrictive capital account, and remittance-fueled forex reserves to the tune of Rs 263 billion (imports from India alone was Rs 262 billion in 2010/11), Nepal is not in a position to fulfill these conditions right now.

[6] Sapkota and Kummer (2010) argue that at present devaluation is “definitely a better case than revaluation but a weaker case than status quo”, i.e. staying the course with IRs 1 = NRs 1.60. Specifically, devaluation could increase inflation in a highly import-dependent economy and could spur currency speculation as the market would want to hold stronger currency against weaker currency of a nation with waning industrial base for fear of repeated devaluation to keep up with further weakening of economic fundamentals.

[7] The top imports from India such as petroleum and coal products; ferrous metals; chemical, rubber and plastic; mineral products; and machinery and equipments do not have substituting industries in Nepal and hence the demand for these products will see marginal impact even if the peg is devalued right now to make them expensive in terms of domestic currency.

New inflationary normal in Nepal?

noreply@blogger.com (Chandan Sapkota) — Sun, 24 Mar 2013 05:35:00 +0000

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.

NEPAL: Multidimensional headcount poverty falls to 44.2% in 2011 from 64.7% in 2006

noreply@blogger.com (Chandan Sapkota) — Thu, 21 Mar 2013 09:42:00 +0000

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.
For those interested in the Alkire and Ravallion debate on MPI and $1.25 a day, see this blog post. Here is a summary of MPI released in 2010. Most of the figures in this blog post comes from Alkire’s presentation and the Nepal chapter of the report and related datasheet.

Nepal’s fiscal cliff

noreply@blogger.com (Chandan Sapkota) — Wed, 20 Mar 2013 04:09:00 +0000

Todd Schneider, IMF’s mission chief for Nepal, argues that the lack of a full budget and the expenditure for FY2013 thus far set at the actual expenditure in FY2012 is leading to a situation where real expenditure (i.e., accounting for inflation) is contracting while rising revenue mobilization is pulling off money from people’s hands and storing it in the savings account of the government.

The inability of the government to spend money when so much of development works—particularly those related to infrastructure, which helps boost productivity— need to be accomplished is simply exerting unnecessary inertia on Nepal’s growth engine. Consequently, high government savings are resulting in liquidity strain (not the only reason, but one of the main reasons) in the banking sector. All of these will surely hit growth rate, which is already restrained by expected low agriculture production due to unfavorable monsoon, which IMF expects not to cross 3%.

In effect, there is a real expenditure contraction. This could be Nepal’s unintended “fiscal cliff”, emanating, as usual, from the lack of political consensus and the inability to separate basic budgetary processes from political influence.

Excerpts from Todd’s article:

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.

Todd has hit the nail on the head here. Highly recommended article.

Even if we account for 10% inflation, the actual expenditure allocation should have been around Rs 396 billion (including Rs 7 billion for election and Rs 3 billion for rehabilitation of Maoist combatants). The budget allocation is usually higher than actual expenditure, probably around Rs 430 billion for FY2013.

The political parties need to reach a consensus that FY2014 budget will not end up having the same fate as FY2013 budget. If not, there will be even more real expenditure contraction (and even more steeper ‘fiscal cliff’). For the sake of accounting purpose as well, Nepal needs to present a full budget for FY2013 however late it is, and set the stage for a full budget for FY2014. More on these in later blog posts when I have free time.

Fostering competitive spirit among federal states

noreply@blogger.com (Chandan Sapkota) — Sun, 17 Mar 2013 08:14:00 +0000

Milan Vaishnav of Carnegie Endowment explains the lack competition in good policy formulation, experimentation and implementation among Indian states in this article. He states: “Federalism, in theory anyway, creates a marketplace for public policy, in which the best policies eventually take hold and are replicated across units, while the worst are relegated to the dustbin of history.”

Excerpts from the article below:

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.

Trade finance gap in Asia is estimated at $425 billion

noreply@blogger.com (Chandan Sapkota) — Fri, 15 Mar 2013 06:00:00 +0000

Based on a survey conducted in the fourth quarter of 2012 to identify and quantify gaps in trade finance, the Asian Development Bank (ADB), in its latest brief, estimates that $1.6 trillion of demand for trade finance is unmet (Asia’s share of unmet global trade finance is $425 billion).

Furthermore, it estimates an increase of 5% in availability of trade finance could result in an increase of 2% in production and 2% more jobs. Trade finance affects trade volume, business expansion, and job creation.

For international banks, the main factors that was perceived to aggravate the trade finance gap are

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

Does export promotion programs work in long term?

noreply@blogger.com (Chandan Sapkota) — Wed, 13 Mar 2013 07:41:00 +0000

The evaluation of export promotion program in Tunisia shows that while beneficiaries initially saw faster export growth and greater diversification across destination markets and products, after three years the growth rates and the export levels of beneficiaries were not significantly different from those of non-beneficiary firms.

Excerpts from the paper by Cadot, Fernandes, Gourdon and Mattoo below:

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.

Chart of the week: Favored channels of ODA delivery in fragile and non-fragile nations

noreply@blogger.com (Chandan Sapkota) — Sat, 09 Mar 2013 09:15:00 +0000

Below is an illustrative chart (sourced from OECD’s publication Fragile States: Resource Flows and Trends) that shows the amount of aid money entering a country through various channels.

In Nepal, a large portion of foreign aid goes "non reported" and those reported are channeled through public sector, followed by NGOs, multilateral agencies, and others. No aid flowing through PPP (understandably so considering the lack of viable PPP institutional and regulatory frameworks). The report notes that Nepal is chronically under-aided (p.88, Box: 3.1).

NEPAL: Interesting flights data in FY2012

noreply@blogger.com (Chandan Sapkota) — Tue, 05 Mar 2013 04:13:00 +0000

Here are interesting stats that I picked up from Sangam’s article in The Kathmandu Post:

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

Oligopolistic market:

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.