Monday, January 25, 2010

Praying for a 'happy accident'

Praying for a 'happy accident'

by: Bhim Prasad Bhurtel

None of the economic theories work in Nepal

The Nepali economy has been somewhat jittery in recent months. There has been a liquidity crunch for the past five months while inflation has been tormenting the public for the past 18 months. The Balance of Payment (BoP) deficit reached Rs 20 billion due to diminishing growth rate in remittance inflow caused by global financial meltdown and deteriorating exports and escalating imports in the first quarter of fiscal year 2009/10. Foreign trade deficit reached nearly Rs 100 billion and export-import ratio soared to 84:16. The symptoms indicate that the economy is headed for a serious crisis.

The government recently formed a taskforce headed by the National Planning Commission’s vice chairman to formulate counter policy measures to mitigate possible crisis. Nepal Rastra Bank (NRB) issued a new directive to commercial banks and financial institutions to fix a ceiling on real estate and housing lending to prevent possible financial systemic failure. NRB is also mulling to hike up interest rates. Meanwhile, controversies are rising over NRB’s directive to forestall up-and-coming systemic failure of the financial system. Some of the economists believe that NRB took a hasty decision and it will directly affect the growing housing and real estate sector in the short run and the whole banking and financial system eventually. Whatever may be the arguments, it is apparent that the real estate and housing bubble will create problems in the economy in the future.

Although I am not a fan of Lucacian rational expectation hypothesis, it is worth reflecting upon the theory. The hypothesis is one of the important monetary economic theories and was developed by Nobel Laureate Robert Lucas in the aftermath of the oil crisis of the 1970s. The major argument of the hypothesis is that monetary policy never works. I doubt whether NRB’s directive will help prevent a possible financial system collapse.

First, our economy has been perennially experiencing low growth. The incentives to make business investments are very limited in the real sector as the economies of scale do not work in an entrepreneur’s favor due to the limited size of our economy. Our market is in no position to compete with the huge markets of India and China. Political instability and uncertainties also contribute in limiting private sector investment in the real sector. Investment in infrastructure such as hydropower, highways and railways are a few possible alternatives but policy ambiguity, long gestation period, uncertainties and risks due to economic and non-economic factors act as retarding factors.

The major argument of the Lucacian hypothesis is that monetary policy never works. I doubt whether NRB’s directive will help prevent a possible financial system collapse.Besides, our economy is suffering from supply deficiency due to various bottlenecks. The counter policy measures of demand-deficient economy may not work in a supply-deficient economy. Economic stimulus ignites the economy at times of effective demand deficiency. However, our case is totally different when compared to others because of supply deficiency, liquidity crunch with high inflation and BoP deficits.

Second, the main factor for an increase in investments on real estate and housing are availability of easy and cheap bank loans due to inward remittances and the lack of real sector investment incentives and opportunities. So, remittance is one of the key factors leading to asset price bubble in real estate and housing. Our remittance is almost the size of our budget contributing to maintain gross national consumption and maintain BoP. Due to the lack of investment incentives and innovations in diversifying the portfolio management in real and productive sectors, the main share of remittance is spent on consumption. Remittance is substantially contributing to the mushrooming of the banking and financial institutions. Banks and financial institutions’ portfolio on real estate and housing has reached Rs 114 billion, which is 12 percent of gross domestic product of our country. The cooperative sector’s portfolio on the same is nearly Rs 35 billion.

Third, donors and INGOs are spending a substantial amount of money in Nepal. A total of Rs 12 billion has been spent to support the constitution-drafting process. Similarly, donors and I/NGOs have been investing a huge amount of money in other development sectors. A remarkable portion of their spending goes in the form of salaries of Nepali staff, which is spent partly on consumption and the rest on investment on real estate and housing.

Fourth, cooperatives such as Oriental, Guna and Kantipur are as huge as commercial banks in terms of their asset and liabilities, according to a recent remark of the NRB governor. They are not regulated by NRB. Their portfolio is huge on the real estate sector. They will continuously invest in real estate and housing in the future and it will nullify the effects of the policy measures that NRB has come up with.

Fifth, the open border with India causes problems in money and capital market and BoP. Imports are paid through the banking system. Conversely, more than 40 percent exports to India are done through smuggling causing extreme pressure on our BoP. The underground capital flight also deteriorates BoP.

Lastly, our investors’ behavior is irrational. Provincial capitals will be established in certain areas after we delineate federal units which will lead to a rise in real estate prices by another 300-400 percent because people will rush to invest in these capitals.

What are the solutions?

First of all, to monitor the financial and banking system and keep it away from danger, an Early Warning System should be formulated in coordination with the Ministry of Finance, NRB and the association of banking and financial institutions. Second, fiscal measures in coordinating monetary measures should be applied. Tax and non-tax measures should be applied to control the real estate asset pricing bubble. Similarly, remittance should be channeled to productive sectors, Diaspora Bond should be issued to raise funds for ambitious infrastructure projects, which also could increase employment. Third, monetary measures should put a ceiling on real estate and housing lending and interest rates.

Likewise, monetary and capital market legislations and policy should be simplified to attract development investment. Fourth, real sector development incentives should be given to private sector investment through fiscal measures such as subsidies and tax exemptions. The political and security situation must also be improved. Fifth, the market should be monitored and smuggling and underground businesses should be controlled. Sixth, necessary legislation and guidelines should be formulated in giving mandate to NRB for regulation of cooperative sector. Seventh, national economic integration should be done by removing the supply side bottlenecks. The policy should concentrate to expand the supply side and to eliminate economic repression and market imperfections.

Last but not least, the present situation definitely demands policy-based precautionary measures and bold steps. However, they must not overlap each other. One policy measure to solve a problem should not augment another problem in the economy. For example, solving liquidity crunch should not create a problem of toxic mortgage. I may sound cynical but I believe that even such policy measures might not work well because none of economic laws are applicable in the Nepali economy. I think, as Lucas thought, if policies work here, that will simply be a happy accident.


Tuesday, January 12, 2010

Earthquake Day Walkathon March

You are cordially invited to join Earthquake Day Walkathon March organized by Nepal Insurance Professionals Society (NIPS) to be held on Saturday 16th January, 2010 (2nd Magh, 2066 B. S.).

Venue: Maitighar Mandala, Maitighar to Bhugol Park, New Road, Kathmandu
Time: 8.30 AM.
Chief Guest: Prof. Dr. Fatta Bdr. K. C., Chairman, Beema Samiti (Insurance Board of Nepal)

Thursday, January 7, 2010

Nepal to procure mln-dollar bullet-proof car for president

KATHMANDU, Jan. 6 (Xinhua) -- The Nepali president's office is preparing to procure a special bullet-proof car at a cost of almost 1 million U.S. dollars for President Ram Baran Yadav and future presidents' use possibly within this fiscal year, the Annapurna Post daily reported on Wednesday.

"We are consulting manufacturing companies for purchasing the car," said Baman Prasad Nyaupane, secretary at the President's office.

The President's office is talking directly with the manufacturers as there is no authorized dealer for such high end cars in Nepal.

Moreover, the companies have been setting their own specifications for a car to be used by a head of state. Such car is not available at manufactured state, but needs to be ordered.

Yadav has been using a bullet proof car used by former King Gyanendra Shah at present. The government started the procurement plan for a new vehicle after it felt the necessity of an additional bullet proof vehicle for the president for security reasons.

Former King Shah had ordered a Toyota car at the cost of 30 million Nepali rupees (some 405,405 U.S. dollars) during his direct rule in 2005 from the budget earmarked to the army.

However, he was not able to use the car, as he was ousted before the car arrived.


Sunday, January 3, 2010

Citibank goes for single management set-up

CITIBANK India has restructured its management set-up. The bank today said it has simplified its management structure and moved towards a singular reporting system for its corporate and consumer banking businesses. Earlier, these businesses operated inde pendently reporting directly to the region's functional heads.

Under the new structure, Mr Nanoo G. Pamnani, CEO and Head of Consumer Banking of Citibank in India, will now be responsible for Citibank's activities in the region as cluster head of Citibank's corporate and consumer banking businesses in India, Sri Lan ka, Bangladesh and Nepal.

Mr Sanjay Nayar, former Managing Director for Salomon Smith Barney in New York, will take over as corporate business head for India, Sri Lanka, Bangladesh and Nepal from September 15.

Mr Sarvesh Sarup, who was heading the bank's M&A and new business operations in London, is returning to India to take over as the Consumer Business Head. Both Mr Sanjay and Mr Sarup will report to Mr Pamnani.

Mr Sujit Banerji, who was until now the Corporate Business Head, will now relocate to Brussels, Europe where he assumes responsibilities for strategic and operational planning as well as corporate alliances for Central Eastern Europe, Middle East and Afr ica (CEEMEA) region.

Announcing the management changes at a press conference here today, Mr Victor Menezes, Chairman & CEO of Citibank N.A., said increasingly, corporate clients and retail customers want a total solution. By integrating the consumer and corporate franchises under a single leadership at all levels, the bank is better positioned to capitalise on its brand equity and realise the inherent synergies across its businesses.

Creating a single management structure is expected to help build on the synergies of the corporate and consumer banking businesses and enable Citibank to respond to emerging customer needs within the region and capitalise on growing opportunities to cros s-sell products and services across both franchises, Mr Menezes said.

Mr Nanoo G. Pamnani said, the experience gained from products like `Suvidha' enabled the bank to realise the potential of cross-selling of products and services across franchises.

``The efficiencies that come from integrating and improving our businesses will enhance our service to our customers and provides a strong platform for growth, consistent with emerging market opportunities,'' he said.

Mr Menezes said the bank targets a 15 per cent customer growth in corporate and consumer segments in India.

Citibank India's customer base currently includes over 700 companies in the corporate sector, 14,500 customers in the emerging local corporations (ELC) segment and more than 70,00 non-resident Indian (NRI) customers.

Mr Menezes, who is currently on a visit to India, said the Citibank which will complete 100 years in India next year, will grow as a local bank with a global perspective.

The bank with 13 branches in the country, currently focuses on organic growth though it is open to acquisition route which is currently constrained by the existing regulations in the country, Mr Menezes said.

Responding to a question on the downgrading of India's rating by Standard and Poor's, Mr Menezes said the agency may have its own rationale in revising the rating but the bank goes by its own assessment before making any investment decisions in any country.


Door open for foreign banks to set up shop in Nepal

Foreign banks are allowed to expand their physical presence in Nepal through branch offices beginning from Friday.

As per Nepal's commitment made to the World Trade Organisation (WTO) during its accession on April 23, 2004, foreign banks can make their foray in Nepal to do only wholesale banking from Jan. 1, 2010.

According to a new policy of Nepal Rastra Bank (NRB), foreign banks willing to open a branch in Nepal are required to bring in at least US$ 30 million (Rs. 2.24 billion) to get a license to start banking services here.

Similarly, banks are required to invest at least another US$ 5 million (Rs. 374 million) for each branch they want to set up here.

According to the central bank, the capital requirement was fixed as per the WTO's principle of national treatment for foreign companies.

NRB has defined wholesale banking as deposits above Rs. 100 million and lending above Rs. 300 million.

Foreign banks wishing to expand their presence in Nepal must be at least 'B' rated as per the evaluation of international rating agencies such as Moody's and Fitch, as per NRB policy.

They are also legally bound to produce a no-objection letter issued by the regulatory authority of their home country to apply to open a branch here.

Foreign banks are also obligated to follow the rules and regulations of NRB. They can repatriate their profits to their home country after paying taxes, fees and other liabilities as per the laws of Nepal. But they have to obtain the approval of the central bank before taking away the income.

The NRB policy also states that branches of foreign banks which are scrapped or liquidated could get their licenses scrapped in Nepal too.

According to experts, the arrival of foreign banks to do wholesale banking could well stimulate Nepali banks to invest in major projects.

Technology as well as knowledge transfer can be yet another advantage the Nepali banking system can get with the entry of foreign banks, they argue.


Friday, January 1, 2010

NEA set to announce 12 hour daily load-shedding

Nepal Electricity Authority (NEA) is going to increase load-shedding period 12 hours a day shortly.

The NEA said that increasing load-shedding would reach 10-12 hours a day this winter, which will go up to 7-8 hours a day (51.5 hours a week) from Wednesday.

However, there will be little relief for the people compared to the 16-hour (108 hours per week) long power outage a day last year.

Danda Pani Bashyal, director of the NEA, said that the NEA was compelled to extend the power outage because of the massive reduction of power generation due to gradually decreasing the label of water in the river. The NEA did not able to generate power as per their capacity due to decrease the label of water in the river, he said.

He said that the country currently had more than 250 MW deficits, around 754-MW electricity demands every day but the NEA was supplying around 469 MW a day. Out of total supply, the NEA was importing around 85 mw electricity from India .

Bashyal said the consumers would face power outage 51.5 hour a week where they face power cut seven hours for five days, eight hours for one day and eight and a half hours for a day. The consumers have been facing around 28 hour power outage a week recently.

He said that the time of load-shedding would possibly increase and reach around 10 to 12 hours a day this year.

He, however, said that the NEA was thinking seriously to decrease load-shedding hours and they would try their best to cut the power outage hours if there was enough power.


Power cut to be up to 8 hrs daily

Kathmandu residents will now face a loadshedding of up to eight hours within few days. Nepal Electricity Authority (NEA) has said that the loadshedding in the valley may rise anywhere between six to eight hours within the next few days. However, the systems department of NEA has yet to work out a new loadshedding schedule.

“Situation is not good, so we will have to increase the power cut timing for sure,” Sher Singh Bhat, Director of Systems Operation Department at NEA, said.

He added that the decision to this effect will be taken on Tuesday as NEA is currently working out detail of the demand and supply to increase the loadshedding.

The Ministry of Energy sources, on the other hand, told on Sunday that loadshedding will reach eight hours at least by the end of the week as per NEA´s own plan. “NEA is now looking at seven to eight hours, not just six,” a ministry source said on condition of anonymity.

As per the NEA´s monthly load-shedding projection for the winter brought out earlier last month, the projection for the month of Poush was seven hours. The NEA officials have thus said that the need for increase in loadshedding is as per the projection and the ongoing demand.

The increase in loadshedding hours will also be contingent upon import of additional power from India . As per the initial plan, Nepal was to import 125 MW of additional power from India , especially from the West Bengal state of India , as Bihar state is itself facing an acute shortage of electricity supply. A price of IRs 8 per unit was fixed for the same. But now even the price has gone up.

“Power from India can no longer be bought now at IRs 8, it has gone up to IRs 12 to 13,” the ministry source said, adding, “NEA is still negotiating the price.”

With the government´s plan to put in place a new thermal plant from Germany in limbo, and its plan to upgrade the existing thermal plants in the country and generate 25 MW more from them also uncertain, the loadshedding in the driest month may now be more than 12 hours a day by the driest month beginning Chaitra.