Thursday, June 30, 2011
Time to Ditch the Peg of NRs with IRs
The Treaty of Peace and Friendship that Nepal signed with India in 1950 was a landmark moment for both nations. India had just gained independence in 1947 after centuries of British occupation. The treaty was a way for India to start building relations with its closest neighbor. The treaty resulted in the creation of an open border between the two nations. Labor, capital, goods and services, as well as all sorts of economic activities started to flow and be carried out freely between the two countries.
In addition to such forms of mobility, Nepalese were also free to convert the Nepali Rupee into Indian Rupee without any obstruction, and in unlimited quantity. However, when Nepal Rastra Bank (NRB) was established in 1956, one of the very first things it did was to promote the use of NRs within Nepal’s borders. The primary aim was to, effectively, get rid of the dual-currency system in place at that time in Nepal where both IRs and NRs were considered legal tenders. Despite NRB’s good efforts, dual-currency system persisted, and we used both IRs and NRs within Nepal’s borders until 1961.
Before the NRB entered the financial arena, the exchange rate between the two currencies would float, and was determined by private money changers. Although the ability to hold both currencies was helpful for Nepalese carrying out cross-border trade, the frequent swings in exchange rate due to availability or lack thereof of the Indian currency was getting problematic to the Nepalese. So, in order to help businesses and general public who conducted businesses and made everyday purchases across the border, the NRB pegged the Nepalese rupee to the Indian rupee at 1.6 to 1 ratio. So, NRs 1.6 became equal to IRe 1.
The exchange rate is, still, the same today even after the Foreign Exchange Regulation Act of 1962 initiated convertible exchange rates of NRs with currencies of other countries. There have been various attempts to get rid of this peg, but the enormous volume of every day cross-border trade has made the process impossible to implement. Also, frequent adjustments between IRs and NRs are impossible given the massive amount of trade and purchases that occur every minute. As a result, the IRs and NRs are still pegged today in the same ratio of 1:1.6.
Now, there is no doubt even among policymakers that the peg has been very popular for the citizenry of both countries who are involved in the increasing cross-border trade. However, this peg has resulted in some challenges, especially when it comes to monetary management and policies in Nepal. The mere existence of Indian currencies inside Nepal has been a hindrance while determining the demand and supply of money in the Nepalese market.
In addition, the easiness with which the two currencies can be substituted for one another has made it difficult to carry out effective monetary policy in Nepal. This easy substitutability dampens the monetary effect when NRB changes domestic money supply. To put it bluntly, effectiveness of monetary policies in Nepal has been hampered due to the ready supply of Indian currency in Nepalese market. The peg between the two currencies and the easy supply of IRs within Nepal’s borders has limited the extent to which the NRB can flex its muscles in carrying out its monetary policies.
The NRB has a set of tools to carry out its monetary policies. The most often used tool is the contraction or expansion of money supply. A contractionary policy reduces the amount of money available in the market, and expansionary policy increases the amount. However, NRB cannot simply gather money from the market and hide it if it wants to pursue contractionary policy. Nor can it spray money in the market if it wants to pursue expansionary policy. It has to do it using legitimate means, and the most common means is the changing of interest rates.
When NRB increases the interest rates in the market, it becomes expensive to borrow money from banks. On the other hand, if the NRB reduces the interest rates, individuals and businesses find it cheaper to borrow money. In today’s Nepal, people have been looking for cheaper loans to invest in a variety of economic activities. Every Economist as well as people in the NRB know that lowering the interest rates is the best way to help Nepalese businesses and individuals get cheaper loans to increase their investments. So, what, then, is the reason for historically high interest rates in Nepal? The culprit: the peg of NRs to IRs.
How? If NRB lowers the interest rates in Nepal to help improve the investment climate by making it cheaper for investors to borrow money in the Nepalese market, money from Nepal will simply move to India to take advantage of the comparatively higher interest rates in India. In order to avoid this from occurring even during normal times, NRB has always kept the interest rates in Nepal slightly higher than that in India. This has hurt the investment climate in Nepal because investors cannot get low interest loans.
To combat the effects in Nepal’s monetary climate, the NRB has used a host of sterilization techniques but all have failed in achieving the objectives. The failure of sterilization techniques result due to relatively inflexible exchange rate system in Nepal with regards to IRs. If we had a rather flexible exchange rate system with regards to IRs, we would not be experiencing high interest rates and excess monetary growth. If the pegging is removed, the variable exchange rate will help generate more capital within Nepal as well as bring in more FDI’s into Nepal. A variable exchange rate will also make our exports cheaper and thus Nepali exporters will also benefit.
The message from Nepal’s monetary policy experience is loud and clear: it is time to ditch the peg of NRs and IRs. And, we don’t have to go very far to learn the aftermath. Look at how well India has done after it ditched its peg of IRs with the US dollar. Its monetary policies have been much more effective, investment climate has improved and growth rate has been staggering. Ditching our pegging system will make the NRB much more independent and autonomous in its applications of monetary policies, the investment climate in Nepal will improve, and the economy will flourish. The end result justifies taking the risk.
This opinion piece was published in The Republica daily on 29 May 2011 under the title "Ditch the Peg".
Labels: IRs, Nepalese Economy, NRs
Rights Shares: Wrong News
Issuing rights shares has become too common in Nepal now-a-days. Everest Finance, Birat Laxmi Bank and Bank of Asia published notices for rights shares on April 8. Malika Bikas Bank on April 10, and Royal Merchant Banking and Finance Limited on April 20 could not sell the rights shares issued to promoters, and had to start auctioning them. Kaski Finance Limited on April 13, Lord Buddha Finance Limited on April 18, Sunrise Bank Limited on April 20 announced opening for rights shares. There are more examples from the months before.
On the face of it, the concept of issuing rights shares seems harmless and innocuous. The shareholders buy more shares from their company, often at lower prices, and help raise capital for their company. And, that is all that the CEOs, Directors and promoters of these financial institutions think will happen when they announce rights shares. It is clear that they have not learnt any lessons from the history of rights shares issued by other financial institutions.
If you observe the share prices of the financial institutions that have issued rights shares in the past, a couple of patterns are immediately noticeable.
First, financial institutions, generally, tend to announce rights shares when the price of their shares starts falling. The falling share prices cause the institutions to come up with extra cash to balance their accounts. So, the institutions that tend to announce rights shares are usually the ones that seem to be in trouble.
Second, share prices tend to fall even further after the announcement of rights shares. So, announcing rights shares could help the institutions collect some capital, but it lowers the price of each unit of share in the market. Although the intention of announcing rights shares might have come out of necessity for generating more capital, the announcement actually ends up hurting the financial institutions’ standing in the market.
This trend holds true for almost all the financial institutions that have announced rights shares in the past. So, the evidence suggests that issuing rights shares does not help the financial institutions. Why, then, do Nepalese financial institutions keep issuing rights shares? Is it because the promoters don’t care about the share price stability? Or is it because they wish to raise large capital, flee with it, and leave the public shareholders hanging high and dry?
However, the worst feeling to come out of this is the realization that these institutions fail to apply the knowledge of basic economics into their equation. Issuing rights shares is a bad idea, and it will eventually result in a decline in share prices of the institution that issues such shares. How? Well, let’s look at the first thing that every introductory Economics course teaches us about demand and supply.
The theory of demand and supply states that price of a share is determined by how much shares are available in the market and how much demand is for those shares. Initially, the supply of shares is given by S1 and demand is given by D1. The market price and total quantity traded is determined at the point where suppliers and buyers agree on the price and quantity of the shares to be traded. Demand and supply of shares become equal at point E1. Therefore, the total shares bought and sold in the market is q1, and the price paid and received for each share is p1. This is what introductory Economics teaches us about market price and quantity determination of any product, whether it is a packet of Wai-Wai noodles or a share of a bank.
When financial institutions issue rights shares, there occurs an increase in the total number of shares available for trade in the market. This causes the supply of shares to shift from S1 to S2. Since demand is still D1, a new equilibrium is created at E2 where total number of shares traded is q2, and the price of a share is p2. Therefore, when supply of shares increases in the market, the price that each share fetches decreases. It does not matter whether all the rights shares that were announced get sold or not. The basic economic theory suggests that the mere existence of an increased supply of shares will drive the price of a unit of share downwards.
Now, those in charge of managing the financial institutions might argue that all is not bad with a lower price if they can generate a large amount of capital. However, they should realize that raising large amount of cash is not their only job. They are responsible for austerity and fiscal stability of their institutions in the long run. A decline in their share prices helps neither their austerity nor the long run fiscal stability.
Also, there is another half to this story that makes the situation even worse. Psychologists have studied human behavior for years, and have concluded that when it comes to handling stress from risks and confrontations, humans have two natural instincts: fight or flight. They have observed that very few fight, and that most choose to flee. This fleeing-from-danger element of human psyche causes a cascading effect in the market price when the rights shares are announced.
Once the price of a share falls from p1 to p2, the general public, that owns the shares of that institution, starts panicking. The dominant natural instinct of “flight” kicks in. Realizing that the price of a unit of share has fallen, the shareholders sell their shares to avoid incurring any more losses on their investment due to any further decline in share prices. Thus, a perfectly logical human reaction results in a lower demand for shares of this institution. The demand curve shifts from D1 to D2. And, a new equilibrium occurs at E3 where q1 number of shares is traded at a price p3.
So, the number of shares traded in the market, which is q1, is the same as before the announcement of rights shares. However, the new price p3, which a unit of share now fetches, is much lower than the initial price of share, p1. And, this is why issuing rights shares is a bad idea. The financial institutions are not doing anyone any favors by pursuing this approach of capital generation. It hurts the shareholders, it hurts the financial institutions themselves, and it hurts the overall financial market of Nepal. Last decade’s data of share market prices of financial institutions before and after the announcement of rights shares shows the pattern repeating itself again and again.
This opinion piece was published in The Republica daily on May 1, 2011.
Labels: banks, financial institutions, rights shares, share market
Bank Mergers: A Bad Idea
Recently, during his presentation of mid-term review on monetary policy, Nepal Rastra Bank governor Yubraj Khatiwada suggested to the bankers that they should engage in mergers and acquisitions. He posited that the increase in credit interest that has been observed was the result of increase in interest rates on deposits. Therefore, funds for further growth have been difficult to obtain due to the resulting higher costs of obtaining such funds. A merger of banks, the governor believes, will help reduce the costs of operating a financial institution. However, it is a dangerous suggestion.
Like many other economists, the governor believes that a merger or acquisition will result in an institution that is bigger than its individual parts. This bigger institution will experience lower costs due to economies of scope and scale, increase in market power, diversification, and reduced operational expenses. Thus, the perception is that this consolidation will accrue higher gains than the simple sum of gains from two separate institutions.
The perceived gains arise out of the belief that the newer and larger organization is considered to be efficient in allocating resources—human and capital—to maximize the output gains. The same personnel and infrastructure can deliver different services and products. Thus, redundant operating costs will be minimized. The belief is also that the larger bank, with more resources now at disposal, can even offer more products and services than before. In essence, the larger entity could take the best tools and methods from the pre-merger entities to maximize efficiency and capabilities.
However, these perceived gains do not occur, at least not to the extent that is perceived. Research on mergers and consolidations has shown that there is no conclusive evidence of such gains existing in real life. Hence, the governor’s suggestion to the bankers was based on little factual evidence. While the suggestion might have been genuine and made in earnest, the repercussions could be devastating. In this case, the idea of bank mergers creates risk of underperformance and loss in overall valuation of the banking industry. Therefore, the governor needs to be careful while dispensing his wisdom.
A prominent effect of bank mergers observed around the world has been the reduced availability of loans to the customer base in the aftermath of the merger. This reduced availability mainly results due to the decline in competitiveness that arises due to the mergers. When a market becomes less competitive, it becomes difficult for people and businesses to obtain loans at reasonable rates. The unreasonable interest rates for loans, in turn, results in lower investment in real estate, and devaluation of real estate property prices. If mergers are going to cause similar cascading aftereffects in real estate, which is our fastest growing economic sector, bank mergers are an ill advice for today’s Nepali banks.
Studies have shown, time and again, that diversification, efficiency, enhanced production and service have largely been found missing as results of a merger. Also, whatever the varied intentions provided for mergers, the underlying incentives have always been cost reduction. And, cost reduction is not an issue that is severe enough to grant merger and acquisition rights from the central bank. Our central bank has to be cautious in this regard.
Cost reduction can be done in a variety of ways. Mergers should be advised as the last option, and should only be allowed if one of the merging banks is facing a dire consequence, such as bankruptcy, if not merged. It helps to be cautious because mergers often result in anti-trust issues. Well-meaning intentions before the merger go haywire after the merger. Companies have been observed engaged in activities ranging from anti-competitiveness to corruption after the merger.
Also, mergers do not work, most of the time, in achieving the stated objectives. They don’t increase efficiency, don’t promote diversification, and don’t reduce costs in the extent that are touted before the merger. In fact, just the opposite has been observed in real world. Although the results from post-mergers vary from one country to the next, empirical studies have shown that only 14 to 17 percent of mergers result in lower costs. However, the question could then be asked: could the costs have been lowered by other means before deciding that the merger was the best option? There are many methods for cost-cutting, and numerous austerity measures can be implemented if the banks are in trouble. Mergers should be the last option, and not the first, that should come into the minds of Nepali bankers and the central bank’s governor, when there’s trouble.
The main argument that economists and policymakers put forward to support mergers has been the supposed creation of scale economies. In simple terms, it means there are advantages in cost reduction when a company becomes larger. However, there is strong evidence of uncertainty over the very existence of economies of scale. And, in cases where economies of scale have been observed, there is significant uncertainty over how wide the range of the scale is. In addition, in cases where scale economies have been observed, the banks that merged have always been two smaller banks.
However, the gains are very small and likely attributable to technological progress rather than economies of scale. The gain is not observed in instances when two large banks have merged to create an even larger bank. Therefore, in Nepal, if the central bank does grant permission for banks to merge, it has to ensure that the banks that are merging are not large. Such precautions have to be taken because those kinds of mergers have been shown to reduce market competition among banks and create unfair market power, anti-trust issues, and corruption.
Another argument policymakers use to support mergers has been the creation of scope economies because of subsequent diversifications of the portfolio. It means a large bank is able to utilize more resources to render diverse and wide range of products and services. However, customers that have accounts in the merged banks experience deteriorating customer service, increasing fees, new and unfair account features and structures applied without prior notification. These are not desirable results from a merger.
In addition, in order to prevent closed accounts, banks have practiced activities such as lowering the fees and rates in the short-term. When the competition fades off and the merged banks gain significant market power due to their large size, they have hiked their fees and charges. Economists at the Federal Bank of New York have observed that, even when there was no competition with rivals, the merged banks always lowered the interest rate paid to customers on savings. That is a practice meant to increase shareholders’ profits by harming the customers. It is not a desirable outcome for the market.
The most important question in our case could be whether the Nepali banking industry needs mergers at all. The banking industry in Nepal is still growing, and doesn’t seem to be in much trouble. If the central bank feels that there are too many banks in Nepal, it should stop issuing new permits. Issuing too many permits, and then asking the banks to merge, is a bad way of doing business. It also makes the central bank look like it is run by a group of amateurs. And, that is the last thing you want people to think about the central bank. This type of amateurish activity deteriorates the confidence that the consumers and businesses have in our central bank, and can have devastating economic consequences.
This opinion piece was published in The Republica on 12 April 2011.
Labels: banks, central bank of nepal, mergers, nepal rastra bank
Tackling Nepal's Unemployment Problem
The exact unemployment rate in Nepal has always been debatable. Some agencies report it to be around 20 percent while others report it to be around 40 percent. So, the unemployment rate of Nepal depends on who you ask. What is not debatable is the fact that solutions that have been tried have always been a blanketed approach to reduce unemployment throughout the nation. What our policymakers have to realize is the fact that blanketed approaches don’t usually work.
There are three kinds of unemployment: structural, frictional, and cyclical. Frictional unemployment occurs when people move from one place to another or when they quit one job to find another. Cyclical unemployment occurs when people lose their jobs due to business-cycle fluctuations. It increases when an economy is in a decline. Structural unemployment occurs when the labor force lacks the necessary skills and training to make itself useful in the new way of doing things.
In Nepal, people from low-opportunity areas have always moved to areas where jobs are aplenty. Also, a dearth of jobs means quitting one to find another has not been a luxury available to Nepali workers. So, frictional unemployment isn’t really a big issue for us. Also, the Nepali economy has been growing steadily at around 3 percent a year. We are not in a recession, and thus, we should not worry too much about cyclical unemployment.
Financial sector in Nepal is flying high. Despite what we believe, private education in Nepal has become an industry in itself. It has been growing rapidly all over the country. The construction sector is also booming. But, manufacturing industry is in the dumps, and agricultural production is in decline. This has resulted in an increase in net unemployment because the declining effects far outweigh the positive effects. Manufacturing and agricultural labor force in Nepal lacks the necessary training and skills to succeed in construction, education or financial sectors. This lack of transferable skills among the labor from different sectors has resulted in growing structural unemployment in Nepal.
Growth in financial and banking sector has resulted in lots of jobs. Education and housing industry boom has given jobs to thousands. Manufacturing industry, which depends on huge amounts of energy for production, has become severely handicapped due to load-shedding and lack of alternative energy options. Competition from other countries along with lower returns has all but destroyed the agricultural industry which, according to the latest National Labor Force Survey, still employs around 51 percent of the labor force. In comparison, the construction and financial industries, which are booming, each employ only about 1 percent of the labor force.
The solution, currently in use and promoted by our government, has been to send these low-skilled laborers abroad for jobs. While remittance money from overseas workers has been helping us in the short-run to fulfill our consumption desires, it is not a viable option in the long-run. Studies in many nations have shown, repeatedly, that remittance does not create jobs and has no contribution in reducing inequality. Our policymakers seem oblivious to this fact, seeing how they have been going about their business of signing agreements with other nations to send our labor force overseas for jobs.
What, then, is the solution? We know that agriculture can no longer remain our number one industry. As in all other nations that have developed before us, other sectors are bound to surpass agriculture as our leading contributor to GDP. However, we should not give up on agriculture right away because it still employs the largest share of our labor force. We should design programs to reform agriculture; provide technical support to farmers; provide healthcare; improve irrigation facilities; introduce scientific farming techniques, for example, drip irrigation; and provide storage facilities to farmers. Agriculture in Nepal cannot sustain itself without government intervention and reforms. The industry is too huge to sustain itself via individual efforts from farmers.
More importantly, youth unemployment in Nepal is at an all-time high. We are losing our labor force during its prime and most productive years to some other country due to lack of a better opportunity here at home. It is a shame. Most youths going overseas for jobs are rural youths involved in agriculture. These youths leave Nepal because they lack the necessary skills and education to become employed in other sectors in Nepal. The best way to stop this mass exodus is to initiate a nationwide program to educate and employ the youths. We should encourage our youths to finish school, and go to college. If they cannot afford to do so, the government needs to step-up and provide then with benefits, subsidies and, if need be, free education all the way until they finish college. Only then can we have educated youths capable of finding employment within the nation’s boundaries.
Why does our government mimic failed European tax policies but not their successful and free college education policies? Our leaders, time and again, claim to turn Nepal into Singapore. Here’s my response to these leaders: if you can get our education system to mimic that of Sri Lanka, I’ll never ask you for a Singapore.
Along with education subsidies for youths, providing businesses with incentives, such as tax breaks and subsidies, to relocate will help balance the unemployment figures nationally. Despite what we see in Kathmandu, where people from all over the country are flowing in for jobs, most of Nepal’s labor force is uncomfortable when it comes to moving and relocating for jobs. The government, via designed programs, should encourage the jobless to relocate to where the jobs are. People with little or no education should be provided with vocational training.
Finally, since most youths who go overseas for jobs are engaged in construction jobs, we should provide such jobs at home while ensuring, at the same time, that we are also sending more of them to schools and colleges. Our roads and highways are crumbling and are also in need of widening; bridges are falling apart; and there aren’t enough roads and bridges to smoothen the trade flow. So, the best way to tackle Nepali unemployment is to engage in a highway construction effort in a scale that this country has never seen before. We have the necessary labor to do the job. All we need is the necessary capital. I am sure the guys at IMF, ADB, World Bank, India and China will be happy to help out.
This opinion piece was published in The Republica on March 22, 2011.
Labels: central bank of nepal, migration, remittance, structural unemployment, unemployment
Get Rid of the VAT
Currently, in Nepal, there is a growing speculation that the government is going to increase the Value Added Tax (VAT) from the 13 percent that it is today to a higher percentage. Nobody knows for certain what it will be after the increase, but the general consensus is that it is rumored to increase. In this context, it seems reasonable to ponder if the increase is good or bad. Also, a more specific question that could be asked would be: is the VAT doing any good to Nepal?
The concept of VAT started in France in 1956, and, later, spread to other countries. It taxes the transfer of goods and services, and, thus, is entirely taxed on the consumer. In its initial implementations around the world, the VAT was imposed on top of the existing sales tax. But, in Nepal, as in other developing economies, the VAT has replaced the sales tax. The Inland Revenue Department of Nepal clearly mentions that VAT includes the value added to a commodity during each stage of its production, and that it is not an addition, but a replacement to the sales tax.
For years, nations have used the VAT to raise an incredible amount of money to finance the federal deficits. However, the VAT in Nepal has not, really, been for deficit reduction purposes. The government seems to have favored it simply because of its huge revenue generating capability. And, that is the major problem with VAT in Nepal. It has been implemented not for deficit reduction and economic growth but as a cash-cow for the government.
There is a popular misconception that VAT is a simple method to generate huge revenue for the government. Leading economists and policymakers in Nepal are not immune to this misconception. If anything, VAT is an immensely complicated system requiring different taxation policies for different types of goods and services. Given its complicated nature and a requirement of heavy personnel to monitor its implementation, we need to ask ourselves if the VAT is an appropriate taxation system for a poor country like Nepal. We do not have the necessary capital and manpower to monitor the VAT to avoid exploitation and evasion. It is not the right taxation policy for this country.
Yes, there are other alternatives of raising revenue, but they are mostly bad alternatives. According to Gregory Mankiw, the Economic advisor to President Bush during his term in office, VAT is the best among the bad alternatives. However, the label ‘bad’ still applies to it. Should the Nepalese, really, be choosing the best out of the bad? Is this what we have come to? Can’t we do better? Why can’t the policymakers come up with something that is not bad? It doesn’t even have to be excellent; a ‘fair’ taxation system will still be better than a bad taxation system.
Nepal got the idea to implement the VAT by observing its success in many European nations. The main reason why developed economies in Europe favored the VAT was because of improved compliance and lesser evasion when compared to a sales tax. Our Inland Revenue Department claims the low evasion to be the prime reasoning behind implementation of VAT in Nepal. And, their reasoning is quite sound given the general consensus among VAT implementing nations that VAT is not as easy to evade as the sales tax.
However, you don’t have to be a rocket scientist to know that non-compliance and evasion are still a major problem in Nepal. Anyone who has ever bought anything in the store or eaten lunch in a restaurant knows that VAT compliance in Nepal is severely lacking. Unlike the European economies, Nepal has a chronic shortage of resources—capital and human resource—to monitor the VAT compliance. Then, the question arises: should we really be using a taxation system that we are not capable to monitor and enforce?
Compliance and evasion issues are very significant when it comes to VAT in Nepal. In the UK, VAT related fraud like Carousel fraud and Missing-trader fraud resulted in a loss of 13 billion Euros in 2006. The UK has since then tried to improve their VAT system through various changes, but has only succeeded minimally. Europe loses around 180 billion Euros every year due to VAT related fraud. In case the magnanimity of that loss is not readily comprehensible, note that 180 billion Euros is the budget of the European Union for two years.
Therefore, to say that Europe loses a huge amount of money through VAT related fraud and non-compliance would be an understatement. If advanced economies in Europe with massive resources at their disposal are struggling to control VAT related fraud, we have no basis to be assured that such fraud has not occurred in Nepal.
Not only does VAT have a major non-compliance and evasion issue, it also hurts the economy. Yes, it fills the government coffers, but it hurts employment situation in the economy. Economists in the US have done research and discovered that even a small 3 percent VAT (which policymakers were proposing in the US) would destroy 2.1 million jobs by the fifth year of its implementation. If a VAT could have such an enormous impact in a big economy like the US, we can only imagine how much it has been hurting a growing and developing economy like Nepal. Also, some economists blame the current problems in the Greek economy to the 19 percent VAT in Greece. Do the Nepalese policymakers know if the VAT is helping or impeding our economic growth?
The VAT in Nepal, at 13 percent today, is already one of the highest VAT rates among the developing countries. In the thirst for quick revenue, government policymakers in Nepal seem to be forgetting the evidence from previous research that an implementation of VAT always results in higher prices in the market for consumers. This result has been shown to hold by numerous researches. Studies have shown that VAT seems good in the short-run, but it tends to slow the long-term economic growth.
Can a poor country like Nepal really afford to have higher consumer prices as a result of the VAT? We are a growing economy. The VAT is not helping our economy if consumers end up paying higher prices for all products. Anyone with the most basic knowledge of economics can tell you that higher consumer prices always slow down the economic activities. VAT in Nepal is really a bad policy if it has in any way hampered the long-term growth of our economy. Being a developing nation that we are, we do not really want anything to slow our economy. Therefore, in today’s context, VAT seems to be more of a problem than a solution in Nepal.
Another major problem with the VAT is the stage-wise levying of the tax. In simple terms, VAT is a multi-layered tax, and it is levied in each stage of manufacturing. This multi-layered levying of VAT provides increased opportunities of evasion and fraud in each stage. In addition, the multi-layered tax does result in higher cost of the final product, although policymakers claim that it doesn’t.
In today’s Nepal, the manufacturing industry is struggling to survive. Therefore, it seems to be the wrong time to implement the VAT in Nepal. Maybe it can be implemented later, in the future, when we have solid economic growth and our manufacturing industry is booming. But, given today’s economic scenario, VAT is not the best tax alternative for us to pursue.
This opinion piece was published in The Republica on 12 March 2011.
Labels: nepal, taxation, value added tax, VAT
Job To Do
In the United States, the technology boom in the 1990s brought an abundance of money. With so much money at their disposal, banks started lending almost for free to whoever wanted them. People started buying houses and land with the loans, and real estate prices were artificially inflated. Around 2005-07, the entire real estate market in the US crashed. People were thrown out into the streets from their houses that they could never have afforded in the first place if not for reckless loans from banks.
The exact scenario is unfolding in Nepal. We have experienced a growth in remittance income. Banks are overflowing with remittance deposits, and have no idea what to do with it. Brokers are being given house and land loans at very low interest rates. ‘Plotting’ has become a popular vernacular, and real estate is being bought and sold at artificially inflated prices. This real estate bubble in Nepal will burst; it’s only a question of when. We will not be able to handle such a crisis as our savings are low and most of the remittance money has gone into unproductive sector. Once the bubble bursts, millions of Nepalis will see their entire life savings vanish in thin air.
One good thing about remittances is that it gives people some capital. Some use it to send their children to school and some invest it. However, most of the remittance money that enters Nepal has been spent on consumption of goods and services, and does not contribute much to the economic and social growth. Thus, for the nation as a whole, our labour going overseas for employment and sending back remittance money is not desirable for many reasons.
Nations all over the world have been feeling the impact of globalisation, and most are struggling to provide jobs to their citizens. Nepalis who go to work overseas should know that they are going there as a cheaper substitute of the local labour force. There have been news reports, and issues have been raised about Nepalis workers being treated unfairly in some Middle Eastern countries. Nepali workers have complained that their passports get taken away. In many instances, the workers have not been paid for months, and have returned with no savings at all.
The fact that we have a system geared for remittance inflow at the expense of health and dignity of our citizens raises ethical, moral and legal questions. Also, we should understand the reason why many Nepalis migrate. Although highly educated and high-skill people have also left Nepal, the focus here is not on exceptions but on the majority. Most of Nepali labour force is uneducated (or undereducated) and low-skilled (or un-skilled). We have a difficult time finding them well-paying jobs in Nepal because of these shortcomings. Until these shortcomings are addressed via regular and vocational education and training, we will always have to find them places overseas in labour-intensive jobs. This is not a desirable outcome for Nepal.
We also have a labour force that is mostly employed in agriculture. The agricultural labour force is the most uneducated and unskilled out of all sectors in our economy. Most of this labour force lives in rural areas, and therefore, lacks basic education, training and healthcare. Public spending on education and health has not increased since 1990. As a result, our labour force has low education, low skill and poor health. Until the government increases its efforts and expenditure on educating and training, Nepalis will always be looking for low skilled jobs overseas.
We still rely on animal and human labour while others use technology in farming and irrigation. In this situation, agriculture in Nepal cannot compete with advanced agricultural practices in countries like US, Australia and China. Our crops and grains are never going to fetch us profitable prices in the market due to heavy competition.
Declining sales and productivity in agriculture has resulted in falling agricultural contribution to GDP, and high unemployment among the agricultural labour force. An average agricultural labourer’s skills are not easily transferable. As a result, most Nepalis who seek jobs overseas are agricultural labourers who have become unemployed.
As nationalistic fervor heats up in many countries in the wake of worldwide increasing unemployment rates, inflation, and sagging economic growth, the pressure in most foreign countries is sure to mount against employing foreign labour. Some countries like Malaysia and Singapore are already feeling the heat, and have reduced the number of Nepalis employed there. Iraq and Afghanistan have been attracting and employing many Nepali workers these days.
But the wars and reconstruction efforts in those countries are surely going to end some day. In addition, Dubai and Qatar will eventually complete their massive construction efforts, and the Nepali labour will not be needed anymore.
Nepalis will, eventually, have to return to their own country. Job creation in Nepal is the only surefire way of keeping the Nepali labour force employed in the long run. There is a widespread belief that remittance income is beneficial to the society, that it lowers poverty and reduces inequality. While remittance income has encouraged an increased consumption and expenditure on education, studies have shown that it does not contribute to lowering poverty or inequality, nor help in job creation.
Remittance has already exceeded 20 percent of GDP, and while this statistic is easy on the eyes (and our pockets), it’s bad news overall. Remittance income depends on foreign workers, and foreign workers depend on demand of workers in the respective countries. If a large destination country suddenly decides that it does not need Nepali labour, we’re in trouble. That is the main problem with foreign employment: the demand for our labour is uncertain and could end any time.
Despite the criticisms, we should be thankful to the remittance income for sustaining our economy during the time of intense crisis in the last few years. If it were not for remittance income, our economy would have collapsed during these turbulent times. However, remittance income has not created jobs, and has made no significant impact in lowering poverty and inequality. It is stupid to let remittance become the largest contributor in our GDP because it is uncertain and volatile.
We cannot afford to lose our laborers in their prime and productive years to some other country. Sending our laborers to other countries because they lack skills, training and education is not a healthy option in the long run. Shouldn’t the government be responsible for the health, education and training of its citizens? Such issues need to be addressed quickly, and solutions need to be found. The best way forward is to educate and train our labour force, and create jobs at home. Otherwise, few years down the road, the country is likely to find itself in hot waters.
This opinion piece was published in The Kathmandu Post on 14 August 2011.
The exact scenario is unfolding in Nepal. We have experienced a growth in remittance income. Banks are overflowing with remittance deposits, and have no idea what to do with it. Brokers are being given house and land loans at very low interest rates. ‘Plotting’ has become a popular vernacular, and real estate is being bought and sold at artificially inflated prices. This real estate bubble in Nepal will burst; it’s only a question of when. We will not be able to handle such a crisis as our savings are low and most of the remittance money has gone into unproductive sector. Once the bubble bursts, millions of Nepalis will see their entire life savings vanish in thin air.
One good thing about remittances is that it gives people some capital. Some use it to send their children to school and some invest it. However, most of the remittance money that enters Nepal has been spent on consumption of goods and services, and does not contribute much to the economic and social growth. Thus, for the nation as a whole, our labour going overseas for employment and sending back remittance money is not desirable for many reasons.
Nations all over the world have been feeling the impact of globalisation, and most are struggling to provide jobs to their citizens. Nepalis who go to work overseas should know that they are going there as a cheaper substitute of the local labour force. There have been news reports, and issues have been raised about Nepalis workers being treated unfairly in some Middle Eastern countries. Nepali workers have complained that their passports get taken away. In many instances, the workers have not been paid for months, and have returned with no savings at all.
The fact that we have a system geared for remittance inflow at the expense of health and dignity of our citizens raises ethical, moral and legal questions. Also, we should understand the reason why many Nepalis migrate. Although highly educated and high-skill people have also left Nepal, the focus here is not on exceptions but on the majority. Most of Nepali labour force is uneducated (or undereducated) and low-skilled (or un-skilled). We have a difficult time finding them well-paying jobs in Nepal because of these shortcomings. Until these shortcomings are addressed via regular and vocational education and training, we will always have to find them places overseas in labour-intensive jobs. This is not a desirable outcome for Nepal.
We also have a labour force that is mostly employed in agriculture. The agricultural labour force is the most uneducated and unskilled out of all sectors in our economy. Most of this labour force lives in rural areas, and therefore, lacks basic education, training and healthcare. Public spending on education and health has not increased since 1990. As a result, our labour force has low education, low skill and poor health. Until the government increases its efforts and expenditure on educating and training, Nepalis will always be looking for low skilled jobs overseas.
We still rely on animal and human labour while others use technology in farming and irrigation. In this situation, agriculture in Nepal cannot compete with advanced agricultural practices in countries like US, Australia and China. Our crops and grains are never going to fetch us profitable prices in the market due to heavy competition.
Declining sales and productivity in agriculture has resulted in falling agricultural contribution to GDP, and high unemployment among the agricultural labour force. An average agricultural labourer’s skills are not easily transferable. As a result, most Nepalis who seek jobs overseas are agricultural labourers who have become unemployed.
As nationalistic fervor heats up in many countries in the wake of worldwide increasing unemployment rates, inflation, and sagging economic growth, the pressure in most foreign countries is sure to mount against employing foreign labour. Some countries like Malaysia and Singapore are already feeling the heat, and have reduced the number of Nepalis employed there. Iraq and Afghanistan have been attracting and employing many Nepali workers these days.
But the wars and reconstruction efforts in those countries are surely going to end some day. In addition, Dubai and Qatar will eventually complete their massive construction efforts, and the Nepali labour will not be needed anymore.
Nepalis will, eventually, have to return to their own country. Job creation in Nepal is the only surefire way of keeping the Nepali labour force employed in the long run. There is a widespread belief that remittance income is beneficial to the society, that it lowers poverty and reduces inequality. While remittance income has encouraged an increased consumption and expenditure on education, studies have shown that it does not contribute to lowering poverty or inequality, nor help in job creation.
Remittance has already exceeded 20 percent of GDP, and while this statistic is easy on the eyes (and our pockets), it’s bad news overall. Remittance income depends on foreign workers, and foreign workers depend on demand of workers in the respective countries. If a large destination country suddenly decides that it does not need Nepali labour, we’re in trouble. That is the main problem with foreign employment: the demand for our labour is uncertain and could end any time.
Despite the criticisms, we should be thankful to the remittance income for sustaining our economy during the time of intense crisis in the last few years. If it were not for remittance income, our economy would have collapsed during these turbulent times. However, remittance income has not created jobs, and has made no significant impact in lowering poverty and inequality. It is stupid to let remittance become the largest contributor in our GDP because it is uncertain and volatile.
We cannot afford to lose our laborers in their prime and productive years to some other country. Sending our laborers to other countries because they lack skills, training and education is not a healthy option in the long run. Shouldn’t the government be responsible for the health, education and training of its citizens? Such issues need to be addressed quickly, and solutions need to be found. The best way forward is to educate and train our labour force, and create jobs at home. Otherwise, few years down the road, the country is likely to find itself in hot waters.
This opinion piece was published in The Kathmandu Post on 14 August 2011.
Labels: migration, nepal, unemployment
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