ECONOMIC PROBLEMS LINGER TO 2012

This commentary was first published in the Reporter Weekly. 

The year 2011 has been one of disappointment in terms of tackling the core constraints ailing the fragile economy. Prime Minister Dr Baburam Bhattrai's 'Economic Revolution' was on sale till the winter hit Kathmandu. Now, people are living in the 'darkness'. The 'hope' that PM Dr Bhattrai had rekindled while entering Baluwatar is almost dead. Welcome to the New Year 2012 with darkness and unresolved issues that are going to plague our economy like previous years.

Rising inflation, decreasing exports, more than 16 hours of daily load shedding , labor problems, Intra-party and inter-party disputes , and uncertainty over constitution making and the peace process will continue to remain the legacy of the past on the shoulder of the new Year. Shortage of petroleum in the domestic market has hit the when the new Year steps in.

The lives of people throughout 2011 were no better than in 2010. The high food inflation and frequent hike in the price of the petroleum products  hit the people everywhere,  in rural as well as urban areas, with no signs that the situation will be better in 2012.  Sudden downslide in food inflation in India has however, raised some hope here.  Economists are suggesting that this decreased rate of inflation in the Indian market will be reflected in our markets sooner or later. The food inflation rate in India has come down at 1.8 percent which is the lowest in the last four years. Our double-digit inflation might decrease slightly in 2012 though petroleum price in the international market and domestic food production would continue to put upward pressure on general price level.

The labor problems remained most challenging for industrial sector after the inadequate supply of power and infrastructures in 2011. From Surya Nepal to some of the star hotels were shut down due to the labor union politics. Political parties fueled to increase the density of problem rather than settling the issues. There are no signs of positive changes in the New Year as well until and unless political leaders stop  stepping  on the 'labor-carpet'. Industrialists are keeping the door open to see if anything positive happens in the horizon this year.

More than Rs 64 billion liquidity surplus in the banking sector has been a matter of head-ache for Nepal Rastra Bank (NRB) and the BFIs themselves. The International Monetary Fund (IMF)'s charge on NRB for its inefficient regulation of financial sector is not just a  'blame'.

After the 'almost' collapse of real estate in the domestic market most banks lost their prized area of investment. Now, Finance Minister Barshaman Pun and Governor Dr Yubaraj Khatiwada are busy meeting with bankers to ease the liquidity surplus problem. They are pushing on to decrease interest rate to ease financing for industries and people.

This tireless effort of NRB and Ministry of Finance (MoF) might lead to a decrease in lending rates in 2012. Investors and real estate brokers may have a respite as well. Banks will not be happy with this step but at the end of the day they will get some space to disperse their money. Let us hope that the financial sector will be put in order in 2012.

The food insecure population is going to increase in 2012. Chinese experts have warned that this year will remind us of year of 2008 again. Nepal has many more international agencies at home to help needy people, but equally important for us to see will be how the World Bank, United Nation Development program (UNDP) along with multilateral and bilateral donor agencies set their plans for this year, and how they go about feeding  the hungry in the mid and far west .

In short, we may not have much to celebrate the arrival of 2012.  But in the midst of all this gloomy scenario, Hope cannot be divorced from our future. Therefore, despite this end note, Happy New Year 2012!

BoP Breaks the Record since 1974

Country’s Balance of Payment (BoP) went up breaking the record since 1974/75. Nepal Rastra Bank (NRB)’s macro economic report of last four months of current fiscal year says that remittance and spending of foreign tourist have contributed for this. The BoP has reached Rs 46.31 billion in the last four months of current fiscal year till mid-November.

Here are the major points that the report of NRB has:

1) Trade deficit is still high—widened by 12.1 percent compared to the same period of last year. It has reached Rs 111.80  billion.

2) Remittance went up by 34.2 percent and has reached Rs 103.2 billion in the four months of current fiscal year.

3)  Imports grew 11.8 percent to Rs 135.49 billion compared to imports worth Rs 121.17 billion recorded during the same period in the last fiscal year.

Nepal’s BoP is continuously rising since the beginning of this fiscal year. Some of the experts here in Nepal claim that this is more like a miracle than the real improvement of situation. I think that this is not any miracle but a tremendous contribution of remittance and spending of foreign tourist—which means the NRB’s report is relied on the facts. As per one of the internal document of NRB (a senior official shared with me in his cabin) shows that the tourist flow even from Eastern Europe is increasing though the financial situation of that region is not in good condition.   

Looking for Another Failure!

Nepal has requested with World Bank for another financial sector support program. As per the information available from Nepal Rastra Bank (NRB), the program has been designed and submitted to the World Bank in November, 2011. The program has accommodated three components: regulation of NRB, loan protection and capacity building. The proposal of Government of Nepal (GoN) will be discussed in the upcoming Board Meeting of World Bank in April 2012.

The decade long '’Financial Sector Reform Program (FSRP)’ supported by World Bank was finished in 31st December 2011. The  FSRP has been failed to meet its objectives. The program was started to smoothen the financial sector of Nepal, mainly to strengthen the situation of Nepal Development Bank (NDB) and Rastriya Banijya bank (RBB). Both of these banks are still struggling to maintain the capital and protect the bad loan they had dispersed.

FOOD INSECURITY GROWS

But GON and WFP continue to squabble

This Commentary was first published in the The Reporter Weekly

There will be slight increase in the number of food-insecure population in the country this year largely because of agriculture lean season, according to the United Nations World Food Program (WFP). The number of people hit acute food insecurity across the Mid and the Far Western Hill and Mountain (MFWHM), is estimated to be 0.48 million, and WFP is running out of  budget necessary to cope with the situation during the fiscal year 2011/12.The Government of Nepal (GoN) does not have a well-grounded program to address the problem either.

As per the WFP report, the total number of food insecure population in the country stands at 3.7 million spread across 38 out of 75 districts. The MFWHM districts have recorded a 2.7 per cent increase in population (July-September) compared to the corresponding period last year. While food insecurity may not have taken into its fold new population this year, the budgetary constraints of WFP may come as a handicap to do anything substantial there in need.

WFP is  suffering from the 51% budget deficit compared to the planned budget for this fiscal year 2011/12. "The budget deficit is due to the global financial crisis," WFP Nepal Office elaborated, "many donors reduced their contribution  and some stopped the fund for WFP." And that naturally will have its impact on the lives of food insecure people in the country. The UN agency works as per the emergency needs in member countries.

The WFP is coordinating with the Ministry of Local Development (MoLD) to help the food insecure population in Nepal. The Government of Nepal (GoN) hasn't been able to show any willingness to serve the food insecure population besides repeating the cliché of 'food distribution by Nepal Food Corporation (NFC)'.

However, government authorities in Nepal do not quite agree with the projection of the  WFP regarding the  food insecure population. They allege that the WFP is just multiplying the costs of food distribution. "The GoN won't give any additional budget to the WFP," one senior official at  the Ministry of Local Development said, adding “We are not going to repeat our past follies like giving  WFP the money we had got from the World Bank. " Nepalese authorities also claim that WFP just refuses to work ‘under our government’.

The World Bank says that the global food crisis has reached 'dangerous levels'.  “As  Nepal does not produce enough food to meet the domestic requirement, we have to import food from international market. This rising food prices will definitely lead us to some problem. GoN should acknowledge this fact and have to work towards advancing the food production situation in the 38 food deficit districts”, World Banks says.

But what is likely to create more crisis in a scenario of food scarcity is the rigid stance of the government not to give budget to the WFP. “Why can’t it ask the WFP to work more efficiently? But at the same time, WFP also must realize why donors are cutting or reducing their contribution to it when the food insecurity is increasing in many countries,” ask the WB officials.

CAPITAL FLIGHT AND NEPAL

This Commentary was first published in the The Reporter Weekly

"I am surprised to know this figure," Economist Dr. Madan Kumar Dahal said when I shared with him the total amount of illicit financial outflows from Nepal in the last decade ending 2009. The report-- 'Illicit Financial Flows from Developing Countries Over the Decade Ending 2009' –released recently says that total amount of illicit financial outflow from Nepal is estimated to be US $ 6.040 billion during the period.

Trade mispricing, proceeds of corruption and bribery are cited as the three major drivers of illicit financial outflow from Nepal by the report.  Available information suggest that the trade mispricing contributes 83 percent of total l outflows from Nepal. This study by Global Financial Integrity (GFI) tracks the amount of illegal capital flow from 157 countries. The GFI has ranked all the countries on the basis of volume of total illicit financial outflows and Nepal is placed 83rd.

The total illicit financial outflow from Nepal is around 7.25 percent of our Gross Domestic Production (GDP) compared to the same time period.  The amount of money thus lost is enough to run  almost two fiscal years if the amount is compared with that  of the  annual budget of  the government.

The  GFI has taken into account  the balance of payments (BoP), bilateral trade, and external debt data reported by member countries to the International Monetary Fund (IMF) and World Bank while preparing the report. Dr Dahal who is also an expert in Macro Economics, says that this report throws a challenge to the government to  trace the way, and destination of the capital flight and those responsible for it.  Senior officials from Ministry of Finance (MoF) and Nepal Rasrta Bank (NRB) were reluctant to be quoted.

The enactment of the Anti-Money Laundering Act-2008 and Anti-Money Laundering Regulations-2010 together with the establishment of Financial Information Unit (FIU) within the Nepal Rastra Bank (NRB) may be taken as attempts to deal with the problems of illicit financial outflows. But these acts, regulations and units do not appear as effective when Nepal is losing more due to trade-mispricing. The average contribution of trade-mispricing in Asia is just 53.9 percent where as in Nepal's case, the figure is well above -- 83 percent—the mark.

The illicit financial outflow has become a global problem that the governments from different countries are trying to address. But the same cannot be said about Nepal. While some  cases of anti-money laundering in the supreme court of Nepal  filed few months back have taken their own time, government bailing out the  VAT fraud case worth billions of rupees—of late by transferring the investigating officials en masse—makes its intentions clear.

GFI, an NGO based in Washington DC defines illicit financial flows as 'proceeds from both illicit activities such as corruption (bribery and embezzlement of  national wealth), criminal activity and the proceeds of licit business that become illicit when transported across borders in contravention of applicable laws and regulatory frameworks.  And it has its own impacts. The illicit capital flight doesn't only create the illegal problems, but also weakens the capacity of economic indicators of reflecting the situation.

Illicit Financial Outflow

The Economists wondered when I shared with them the amount of money that outflows illegally from the country. The Global Financial Integrity (GFI)’s report "Illicit Financial Flows from Developing Countries Over the Decade Ending 2009” says that US $ 6.040 billion outflows from Nepal illegally between 2000-2009. The amount of money that has been estimated in the report of GFI is almost equivalent to two fiscal years’ budget of Government of Nepal (GoN).

 

Bribing for Monsanto

The hybrid seeds of maize from the American multinational company Monsanto have been distributing in Nepal with the help of some handful of people. There are several news in different local media that United State Agency for International Development (USAID) is lobbying for the entry of this particular company in Nepal.

The latest news has revealed that local contractors in Nepal are trying to push the seeds of Monsanto by bribing to the government officials in Nepal. This news has taken back to the 2009 when the Government of Nepal had to give money to the local farmers in the Terai region of Nepal when the seeds of Monsanto had cost the maize production hugely. The government had dispersed Rs 2 hundred million in the five districts of Terai region through the Ministry of Agriculture and Cooperative (MoAC).