Views of a Nepali Economist

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This is exactly how I feel when I watch the TV pundits talk about the Economy:

Source: http://abstrusegoose.com/

Labels: abstrusegoose, Nepalese Economy

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The Republica link is here.

In case you have not heard it, Nepalese banking and financial system is going through a crisis phase. The central bank has liquidated a number of banks while urging others to merge. Although Nepal receives remittance money equivalent to almost 30 percent of its GDP, our banks seem to be running out of cash. Nepalese banking and financial system is under a liquidity crisis.

Where is all that remittance money going then? Well, the 2010 National Living Standard Survey’s preliminary finding shows that 79 percent of remittance income coming into Nepal is spent on household consumption. Only 2.4 percent is invested in capital formation activities. And, that is one of the reasons why banks in Nepal are having problems. People are not saving their money in banks; they’re spending it.

However, to put the blame of Nepalese liquidity crisis on the public is foolish. The main culprits of this crisis are the banks themselves. They used to have money in their vaults. In fact, they had so much money that they did not know what to do with it. So, they gave it to anyone who came asking for it.

So, who came asking for it? The land plotting and housing people did. In their bid to collect some quick cash as interest payments, the banks distributed the money without proper documentation and backing. Through reckless lending, they created the artificial asset bubble that we have experienced in the last few years. As long as the asset market was hot, the brokers and the banks were getting richer. But, like all good things, the merry did not last. Housing and land market has cooled off since last year. As a result, the brokers are unable to pay interests on their loans. Therefore, banks now have no money to collect and play with.

Historical data will show that liquidity creation right before any liquidity crisis is always high. This suggests that maybe the crisis isn’t really a crisis but a downward adjustment towards the equilibrium steady state. But, this is no time to point fingers or regurgitate history.

Like any financial crisis, the solutions for this mess are carried out by Nepal Rastra Bank (NRB) through its monetary policy. The NRB has been putting some efforts to mitigate the crisis by liquidating some banks and urging others to merge. It also lowered the Cash Reserve Ratio (CRR) from 5.5 to 5 percent. This was expected to infuse Rs 3-4 billion into the market and ease the liquidity crunch. However, that is akin to feeding peanuts to a starving elephant.

During normal conditions, the NRB’s monetary policy is effective in tackling liquidity problems. Approximately 90 percent of bank liquidity is created by large and medium sized banks. A monetary policy, however, does not significantly affect the liquidity creation of large and medium sized banks. These banks are impervious to most monetary policy tightening or loosening due to their own structural compositions. So, loosening the monetary policy by NRB will have insignificant effects in creating liquidity. Also, worldwide evidences show that monetary policy during a liquidity crisis becomes weaker in creating liquidity in banks of all sizes, not just the large and medium size banks.

NRB has two tools that it can use to minimize this crisis: interest rates and liquidity injection. So far, it has done very little in terms of liquidity injection. If it cannot infuse liquidity into the market, it can lower the interest rates. Lowering the interest rates will make it easier for everyone to borrow money. That would ease the crunch. The failure of NRB in cutting down the interest rates could be eroding the financial stability of Nepalese financial sector. That is why our banks could be going bankrupt.

Or, maybe the whole situation should be seen from a different angle. Maybe NRB’s reluctance in lowering the interest rates stems from the fact that lower interest rates in Nepal would encourage people to send money to India due to high interest rates in India. Their money could earn more interest income in India. It doesn’t help that the NRs and IRs are pegged, and the two currencies can be converted from one to another very easily. If the peg and easy convertibility could be avoided, lowering the interest rates in Nepal would definitely help ease the liquidity crunch we face today.

The other real danger of lowering the interest rates is that inflation, which is already very high in Nepal, can spiral out of control. NRB cannot lower the interest rates without giving the impression of loosening its anti-inflationary stance. It is difficult to convince the market that lower interest rates are being pursued without affecting NRB’s anti-inflationary stance.

Even if monetary policies could ease the crisis, they should not be pursued. A monetary policy should be pursued only if a financial disturbance has the potential to affect inflation or the real economy. It should not be pursued to solve a financial distress. Today’s liquidity crisis in Nepal has the tendency to affect neither the inflation nor the real economy. Any monetary policy, such as lowering the CRR or lowering the interest rates, has a high probability of aggravating the inflation situation without contributing much to easing the liquidity. So, monetary policy is not the intervention that our market needs to solve this crisis.

Fiscal policy is a better solution for the current mess. The government could incur expenditure to purchase the debts of these struggling banks. If our government does not have enough cash, it should print money to make the purchases. Now, in most instances, printing money is not a good idea. If the money were to be spent on consumption, it could aggravate the inflation. But, my suggestion is to spend that printed money not on consumption but on asset purchase i.e. buying the private banks. Therefore, the printed money would be used in stabilizing the balance sheet of the Nepalese banking and financial system.

I am not advocating for changing the size of our financial balance sheet. I am simply advocating an alteration to the composition of the financial balance sheet. Unlike consumption expenditure, this will actually count as an asset purchase. Once the private banks are purchased and made public, the government can sell the banks back to private buyers when the financial system stabilizes, and the banks become sustainable. Through such intervention, the government can actually make capital gains on its investment.

This would be a win-win situation. The banks would survive, and the government would make some money during the process.

This opinion piece was published in the Republica on August 7, 2011

Labels: central bank of nepal, liquidity, liquidity crisis, nepal rastra bank, Nepalese Economy

The Republica link is here


Inflation in Nepal during the 1990s was high. Everything in the market—from a nail to a kilogram of rice to a car—was expensive. Nepal had just got democracy in 1990, and needed time to bring things in order. Policymaking—monetary or fiscal—was affected due to multiple changing of governments throughout the 1990s. Therefore, inflation during that decade stayed high, with the highest being 21 percent in 1992. After 1992, it started declining and was 7 percent in 1995. But, the unstable civil, political, and economic climate created by the start of the Maoist rebellion in 1996 resulted in inflation creeping up again to 11 percent by 1999.

Despite the political fracas and the strengthening Maoist rebellion, decade of 2000 brought better policies and saw decent economic growth. Inflation kept falling, and was even negative during 2004. When Maoists stepped up their final push, the resulting disorder, chaos and frequent shutdowns hampered economic policies. Inflation rose to 11 percent in 2005. When Maoists laid down their arms in 2006, their subsequent inclusion in the political process was followed by lower inflation in 2006 and 2007.

Average inflation in Nepal was 6.2 percent in 2006/07. By 2008/09, it more than doubled to 13.1 percent—the worst in the decade. Most of the increase could be explained by the frequent shutdowns and roadblocks during that year. Despite being relatively unaffected by the worldwide financial crisis of 2008, poor economic conditions meant that inflation stayed at 13 percent in 2009. Improved conditions in 2009/10 lowered it to 11 percent in 2010. However, this was still higher than what we as consumers had bargained for. Today, the good news is that it has been falling again. The bad news is that it is not falling fast enough.

International Monetary Fund (IMF) has predicted that average inflation is going to be around 8 percent in 2011, 5.5 percent in 2012, and 5 percent thereafter until 2015. But, it is not clear if IMF’s predictions are for core inflation or for headline inflation. There is a difference because core inflation does not include the inflationary impacts from the volatile fuel and food sectors. Even if IMF’s numbers are correct, these predictions have to be taken with a pinch of salt because these seem to be nominal values. Real inflation is still high. It will stay high unless rising fuel and food prices are not contained.

Technically, inflation is measured as a change in the Consumer Price Index (CPI) where CPI represents the prices in the market for various goods and services. Economists and policymakers do not like inflation. An increase in inflation reduces a person’s real purchasing power in the market with his/her level of income. Higher and fluctuating inflation rates make the market conditions unstable and uncertain. That, in turn, results in monetary policies becoming ineffective in obtaining their objectives.

Inflation is especially important to monetary policymakers in Nepal Rastra Bank (NRB). However, two major problems confound the NRB’s policymakers and make their jobs difficult. First, inflation is a self-fulfilling prophecy in the sense that inflationary expectations of people—about what the future inflation could be—contributes to the actual inflation in the future. Second, when NRB implements a monetary policy this quarter to tackle inflation, the results of its effectiveness will not appear until the next quarter or two. These two problems make their decision of implementing effective monetary policy against inflation all the more difficult.

Although very little can be done to avoid these, we can at least attempt to measure them. In many countries, these are estimated through surveys that measure consumer confidence. A survey this quarter would ask consumers about their inflationary expectations of the future. Thus, such surveys would provide policymakers with at least some reasonable information about consumer expectations, and therefore, direction of future inflation.

Conducting such a survey in Nepal would help NRB’s policymakers. After all, nobody knows the market better than the consumers who deal with changing market prices day in and day out. Collective wisdom of everyday consumers engaging in the market is a lot better than that of two NRB policymakers trying to figure out market behavior in their office rooms. These surveys are very easy to conduct. Frankly, I don’t know why NRB has not conducted them, yet.

In recent years, there have been improvements in some sectors in Nepal, and prices have stabilized in many parts of the economy. But, high inflation persists today with 70 percent of the rise being attributed to the rise in basic food prices. Changing climate, erratic rainfall, shortage of agricultural labor, reduced agricultural productivity and rapid urbanization in the last decade have been the main reasons why food prices have risen by an exorbitant rate. That, in turn, has fed the rising headline inflation.

Food prices are the largest part of Nepal’s CPI. So, rising food prices are the reason why inflation has not fallen faster in Nepal. Any drop in inflation from other sectors keeps being negated by the increase in food prices. Our increasing population and increasing per-capita income has meant that our demand for food is also increasing. However, a huge percentage of food that we consume is imported. Duties, taxes, transportation costs, and competition among consumers make the food that we consume expensive for us. Unless increasing demand is met by increasing supply, we will keep suffering due to food deficit and food-caused inflation.

There are two choices to significantly reduce inflation in Nepal: We increase our food production, or we switch our diet to include more locally grown food. The second option is improbable because no consumer likes being told what or what not to eat. So, the only option left is to increase production. But, given how our agriculture and food production has been on a decline for years, an increase in production is not going to happen anytime soon. Therefore, we are stuck with high inflation rates, hovering at a minimum of 8 percent, for another decade. Our only hope is a miracle.

This opinion piece was published in Republica on July 25, 2011

Labels: central bank of nepal, inflation, Nepalese Economy

Sushil Koirala finally gets to meet Sonia Gandhi---Telegraph Nepal


India feels its friendship with Nepal straining due to Nepal's silence on Mumbai blasts---MSN India
They claim that if Girija Prasad Koirala were alive, he would have called and expressed his sorrows within minutes of the news of the blasts. My take on this news is that India(ns) are overreacting. Nepalese lawmakers are busy squabbling with one another during the budget announcement time. So, maybe they could not "immediately" and "within minutes" send their condolences. But, they sent it after a few hours. If only India(ns) were this sensitive about other issues, as well, both the neighbors would be so much better off. Are we really good friends? Okay, then. Let us sit down and talk about our borders. Let us talk about re-writing the old treaties that were heavily favored against us. Let us sit down and talk about various dams and power projects. Calling oneself a good friend and expecting condolences is one thing. Proving your duties as a good friend is another. Let us stop whining, shall we?

Nepal signs a pact with World Bank for 1000 MW cross-border electricity share with India---MSN India
 I very much doubt that this will be in favor of Nepal.

China very eager to spend in Nepalese hydropower---Hydro World 
We could do with more work and less talk. Also, China actually seems to put the money where its mouth is. So, if this works, it's going to be great.

Nepal attracting Indian investments in Tourism and IT---Orissa Diary
I do think Nepal has a good pool of engineers for making Nepal a decent hub of IT activities. Tourism sector needs something more than investment. It needs professionalism, which it severely lacks today. 

Ram Sharan Mahat blames communists in Nepal for squandering money---Himalayan Times
This reminds me of an anecdote. When the Maoists won the majority in the Nepalese elections, my American friends came to me and paid their condolences. "Mukesh, we're very sorry to hear that the communists, especially the Maoists, won the elections in your country." they said to me. I laughed. I said to them, "Guys, you think you are Capitalists? You haven't seen Capitalists if you haven't seen the communists in my country. Communists in Nepal are more capitalist than Capitalists in America."


Nepal Rastra Bank eases its loan policy---Republica
The mergers. The defaults. The easing of loans. The easing of loan policies. I'm just waiting to see how many more tricks the NRB has in total.


Finally, since I love Mathematics, I really like the comic strip below (Source: Saturday Morning Breakfast Cereal):

Labels: central bank of nepal, communists, hydroppower, IT, Nepalese Economy, tourism

My latest article in Republica is on socioeconomic impact of remittance in Nepal. It is co-authored by Dr Vikas Raj Satyal, an ex-colleague from IIDS and Chair of the Statistics Department at Amrit Science Campus.

We have been going overseas for work ever since the British recruited us after the Anglo-Nepal war of 1814-1816. First, we were recruited in the British Army in India, then in the Indian Army after the British left India in 1947. However, the floodgates really opened after the democracy in 1990. The democracy, and the subsequent opening up of the Nepali economy and labor market, has meant that we have been going overseas, in droves every year, either for work or studies or both.

Nepal Rastra Bank has estimated that only 3 percent of Nepalis use banks to send money home. Similarly, the living standard survey discovered that only 0.8 percent of workers outside Nepal use other institutional channels. Last year, remittance received from official channels was about Rs 210 billion, which was 22 percent of the total GDP. However, this ratio is much higher if we include unofficial transactions. So, to say that remittance has become a significant player in our economy is an understatement.

Given this huge impact, it becomes imperative for economists and policymakers to assess what kind of socio-economic impact remittances have caused in Nepal. Some common consternation that experts have with remittance in Nepal is its impacts such as brain drain, general shortage of labor, trade imbalance, increasing inflation, impact on poverty, increasing fraud and rent-seeking in emigration procedures.

Obviously, the most significant impact is on the labor force. The trend of last few years shows that around 65 percent of those going overseas are between the ages of 15 and 29, and the rest are between the ages of 30 and 44. Those who have left the country have left behind a void in the labor market. However, growing sectors like education and banking require high skills and higher knowledge—both of which our youths lack. Therefore, despite such mass exodus of labor, around 13 percent of youths—between 15 and 24 years of age—in Nepal today still find themselves unemployed. Our failure to give them jobs means they will, eventually, leave the country, just like others.

But, going overseas for work is a process that has increased the inequality in Nepali society. The poor cannot afford to apply and go to lucrative destinations. Instead, they settle for jobs in India because it requires no visa and cost of reaching there is low. For them, even the acquisition of official emigration documents, such as a passport, is sometimes an insurmountable hurdle. Therefore, those who go to lucrative areas are already in the lower- to upper-middle class.

Given this context, it is difficult to swallow the claims of Nepali policymakers who are in praise of the remittance economy because they feel it reduces poverty. Let us look at the numbers. Workers from India send Rs 18,400 per year on average. Those in the Middle East and other countries send around Rs 80,000 per year on average. These numbers suggest that remittance income might help a lower-middle class family enter upper-middle class, or an upper-middle class family become rich. But, that is not what “reducing poverty” means. Remittance is not helping a poor family enter middle-class.

Also, there is a lack of empirical evidence to support the role of remittance on our economic growth. Instead, the product moment correlation shows a high positive correlation of remittance with consumption, imports and CPI. This means, remittance contributes to our gluttony, high imports, and high inflation. In remittance heavy economies, remittances do not serve as investments but rather as social insurance to help family members finance everyday purchases. Consumption does not cause economic growth. Consumption coupled with savings and investment does. And, the latter two are missing in today’s Nepali economy.

A cross sectional study of 111 countries showed empirical evidence of remittance fostering rent-seeking behaviour and corruption. Institutional quality, even after controlling for potential reverse causality, was found to be declining as a result of remittance. Creation of rent-seeking and corruption can be observed via various channels and brokers who send workers overseas. Often, poor and under-educated workers are cheated by middlemen and manpower agencies. Our newspapers have reported about workers receiving much lower wages than promised. And, news of abuse of Nepali workers in the Middle East has become a regular feature.

Households that receive remittance income also experience the “spoil effect”. It means that easy availability of remittance money sent from abroad creates distortion in the work efficiency and working mentality of the recipient members. A study in Kosovo showed that remittance made the youths reluctant toward seeking higher education and reduced their incentives to work. Similar results have been observed in remittance heavy economies like the Philippines, Egypt and Somalia. Are such spoil effects present in Nepali society? Do we risk losing our youths to poor education and poor skills?

On the face of constant hurdles and abuses that migrant laborers face from day one, even our policymakers understand that the talk of economic growth through remittance is nothing but a mirage. So, what have they done to reduce our dependency on remittance income? Not much. Instead, in 2010, our government initiated plans to train our workers according to the demand in source countries. It initiated negotiations with foreign governments to expand our overseas job markets. Also, the Department of Foreign Employment has formed teams to inspect and monitor the institutes that provide orientations and vocational trainings to workers seeking overseas employment.

These are not the actions of a government that is seeking to reduce remittance’s impact on Nepali economy. These are the actions of a government that has no idea how to create jobs at home. These are the actions of a government that does not know how to stop our labor force in its prime from going overseas to make someone else’s country better off.

This opinion piece was published in Republica on July 12, 2011.

Labels: Nepalese Economy, remittance

In Republica, Chandan Sapkota writes:

In trading across borders, which is one of the indicators of Doing Business ranking, Nepal is ranked 164 out of 183 countries. Moreover, Nepali exporters have to produce at least 9 documents and takes 41 days to process them before they are cleared for export. These numbers are one of the highest in the region. Furthermore, Nepal has one of the worst logistics related to exports and ranks 147 out of 155 countries in the latest Logistics Performance Index ranking. Nepal’s logistics ranking is worse than that of Afghanistan.

Chandan's main argument is about the cash assistance that Nepalese government hands out to the exporters. Chandan  believes that cash assistance to exporters won't do much good. He writes

Cash incentives to a few sectors and businessmen will do nothing to alleviate these problems. Instead the government should be looking into investing the allocated sum to reduce these hurdles for exporters. It will eventually make our exports competitive and might increase both exports volume and revenue.

 ......Another reason why cash incentives will not increase exports earnings (share of GDP) is that it will not address the underlying cause for eroding export competitiveness at the first place: Supply side constraints such as poor infrastructure network, lack of reliable and adequate power supply, excessive labor unionism and militancy, lack of raw materials needed for our firms, and very few opportunities and avenues, on top of bureaucratic red tapes, for new entrepreneurs to enter the market.

 In the same newspaper, the editorial mentions

.....the economy expanded by a meager 3.5 percent-- the lowest rate in the last three years.

.....The non-agricultural sector grew by only 3.1 percent, far below last year’s rate of 5.4 percent. The economic survey once again shows the persistent weakness of the manufacturing sector. It grew by 1.5 percent, an insignificant increase from last year’s 1.2 percent.

.....Our list of exportable commodities is shrinking and our imports are rising fast, leaving a bloated trade deficit. This year alone, the ratio of trade deficit to gross domestic product (GDP) doubled to 23.6 percent. As this is clearly an unsustainable trend, the country must take measures immediately to reverse the trade deficit.

...The number of health institutions did not grow at all during the entire fiscal year but stayed put at 4,393. The only achievement in the sector was the upgrading of 500 sub-health posts to health posts. And 100 hospital beds were added during the entire fiscal year.

...170,000 more children were enrolled in primary schools, raising the enrolment rate to 95.5 percent from 94 percent. But a lack of trained teachers in schools in the rural areas and regular strikes across the sector raise serious questions about the quality of education in our public schools.

 Nepalnews writes that the Nepal Oil Corporation has decided to increase the price of petrol and diesel.

The Nepal Oil Corporation (NOC) has again increased the price of diesel and kerosene by Rs. 5 each per litre effective from Sunday.....The price of diesel and kerosene has now reached Rs. 73.50 per litre from Rs. 68.50....Following the hike in its price, the monthly loss of the NOC is expected to drop to Rs. 740 million....NOC had increased the price of the petrol to Rs. 102 per litre from Rs. 97 last month.

The same online newspaper reports that:

Experts have urged the government to introduce new monetary policy to help the country find a way out of the present economic crisis.

...economist Tulraj Basyal said that as the bank and financial institution (BFIs) are suffering from weak internal management, the government should bring in policy that could terminate these problems. .....Basyal also urged the government to prepare the policy on the basis of other cooperatives and development banks' statistic as well, as previous monetary policies are only based on central bank statistics.

...former governor Dipendra Bahadur Chettri also said that the new monetary policy should discourage the informal transaction of Indian Currency in the terai regions to achieve the goal aimed by the central bank.

Labels: central bank of nepal, nepal, Nepalese Economy

Labels: IRs, Nepalese Economy, NRs