Uncovering the role of monetary policy

Alp and Elekdag in their paper “What Role for Thai Monetary Policy?”  tries to address the question: if an inflation targeting framework underpinned by a flexible exchange rate regime had not been in place, how would the economic contractions associated with these shocks have differed?

This paper seeks to uncover the role of monetary policy in softening the impact of these shocks.

Thailand had to endure three major shocks during 2008–2011: the global financial crisis, the Japanese earthquake, and the Thai floods of 2011. Over this period, consistent with its inflation targeting framework, the Bank of Thailand (BOT) let the exchange rate depreciate and cut interest rates (to, for example, a historically low level of 1¼ percent by mid-2009).  

Counterfactual simulations based on an estimated structural model indicate that countercyclical monetary policy and exchange rate flexibility added up to a total of 4 percentage points to real GDP growth during periods when Thailand had to weather these three major shocks.

Program to revive sick industries in jeopardy

The government´s ambitious plan to extend relief package to sick industries, as per the announcement made through the Immediate Relief Program 2011/12, is unlikely to see the light of the day because of red tape and dilly-dallying by concerned bodies.
The Ministry of Industry (MoI) was asked to identify and verify sick industries around a year ago. So far, 31 industries have applied to acquire the status of ´sick´ and relief package from the government. But the industry ministry has not even carried out field study of all industries to verify their status.
"We have completed field study of only eight firms out of 31 that applied for relief package," Surya Kant Jha, under secretary at the MoI, said. According to Jha, a technical committee that was formed in the ministry to conduct the study and cross-verify the information submitted by firms is preparing the report of these eight firms.
The MoI was instructed to identify sick industries following submission of a report by the Sick-Industries Rehabilitation High Level Task Force (SITHLTF), which had recommended revival of sick industries, back in 2011.
The task force´s report has identified a slew of relief measures for sick industries like tax waiver, extension of loan repayment date, loan restructuring and interest amount waiver, among others.
"More than a year has elapsed but we are yet to know whether our request for the relief package would be approved," an entrepreneur who has applied for the package said on condition of anonymity.
Like this entrepreneur, industrialists who have applied for the relief package are also in confusion. There are also those who have totally lost hope and deem the government will not walk the talk like in the past one decade when dozens of reports and recommendations to revive sick-industries were made.
The government had first incorporated a specific program to revive sick-industries in the budget for the fiscal year 1994/95.

Sutlej, GMR, SN Power oppose new PDA template

GMR, Sutlej Jal Vidyut Nigam Ltd (SJVN) and SN Power, three international power producers which are working on three hydropower projects with collective generation capacity of 2400 MW, have opposed the government´s new Project Development Agreement (PDA) template, saying that it does not guarantee policy consistency.
They have also raised concerns over the force majeure clause, arguing that it should be applicable not just in case of natural calamities, as provisioned in the template, but also in case of political instability and bureaucratic hassles.
The Investment Board (IB) had unveiled the template of the PDA in June as its basis for negotiations with international power developers.
However, the three developers said they have strong ´reservations´ about the PDA template. "Its provisions are weak and unacceptable," an informed source quoted the senior officials of the three firms as saying during their meetings with IB officials.
During the meetings, they even asked the IB not to apply the template during their PDA negotiations. "Their argument is: their engagement in the country had begun long before the template was developed, and hence, the template´s provisions should not be imposed on them," stated the source.
Radhesh Pant, IB CEO confirmed the dissatisfaction of GMR, Sutlej and SN Power. "Yes, they have expressed concerns over the PDA template. But we have asked them to submit their concerns in detail and in writing so that we could discuss them officially," Pant told Republica.
However, he denied divulging any further details.
The source, however, said the developers have asked IB to categorically cite a provision warranting consistency of policies.
"The PDA template must assure that income tax and bonus provisions, among other things, would remain the same for us throughout the project period. It must guarantee that in case of any change in the rules, it would not apply to us," the source quoted developers´ representatives as saying during the meeting.
The developers have even asked IB to extend the concession period, which is their span of ownership of the projects to be developed under build-own-operate-and transfer (BOOT), to 35 years from 30 years.
"Thirty years would be inadequate to recover the project cost," the developers have told the IB, according to the source.
So much so, SN Power has even warned that it could withdraw from Nepal if IB did not agree to its ´request´. Sandeep Shah, country director of SN Power, could not be contacted for comments.
SN Power, Norwegian power producer that developed Khimti I (60 MW), is working on the project concept of Tamakoshi III (estimated 600 MW) in cooperation with Indian developer TATA Power.
Sutlej, India´s state-owned power producer, which has got approval from the government to invest Rs 82.5 billion for the development of Arun III (900 MW), too has said that it wouldn´t be able to work under the provisions of the PDA template.
"We have already invested so much in the project. The government can´t impose new provisions on us now," the source quoted Sutlej officials as saying.
GMR, another Indian power developer, is working to develop Upper Karnali (900 MW).
IB entrusted to implement hydropower projects of 500 MW and above, had even invited a three-member team of Herbert Smith, British consultant that drafted the PDA template, to Nepal from London last week to convince the developers that the template is in line with the country´s law and international practices, and hence, is ´bankable´.
However, the source said IB´s effort did not pay off. Officials from GMR and Sutlej could not be reached for comment.

Gloomy outlook for nat'l pride projects

Officials have expected gloomy report regarding the progress in implementation of national pride projects during the first quarter of current fiscal year in absence of full-fledged budget unlike last year when the government posted satisfactory implementation report.
“We are likely to get a disappointing report regarding the progress in execution of national pride projects in the first quarter of this fiscal year due to lack of full-fledged budget to speed up works,” Tulasi Prsad Sitaula, secretary at the Ministry of Physical Planning and Works (MoPPW) told Republica.
The government has designated eleven projects as national pride projects to ensure smooth implementation through sufficient budget and other priorities.
Kathmandu-Tarai Fast Track, Mid-hill Highway, East-West Railway, Postal Roads and North-South Highway are among the national pride projects being implemented by the MoPPW.
Similarly, Budhigandaki Hydropower Project, Sikta Irrigation Project, Ranijamara Irrigation Project, Babai Irrigation Project, Tamakoshi Hydropower Project, Melamchi Drinking Water Project, Regional airport in Pokhara and Bhairawa and West Seti Hydropower Project, second international airport in Nijgadh are also among the other national pride projects.
“The progress of these projects last year was satisfactory even though they were not moving as per the schedule. But the implementation of the projects failed to take any momentum during the last three months,” Sitaula said.
However, National Planning Commission (NPC) -- the apex policy making body of the government, which conducted an annual review of all the national pride projects this week, has also said that the progress on all the projects was satisfactory.
Progress reports of all the projects have not been submitted to the ministry as of yet.
“But as per our regular correspondence with the responsible persons from the field, the progress is not exciting,” Sitaula added.
The government has called for expression of interest (EoI) for the Kathmandu-Tarai Fast Track, a 76km express-way that connects Kathmandu with Nijghad. According to NPC, 42 km track has already been completed for construction of the expressway.
NPC report also states that 190km track has been opened for teh construction of Mid-hill Highway.
The Indian government which has agreed to provide assistance for the construction of around 1600 km postal road has said that it would speed up implementation of the projects to accomplish the target of road construction in the Tarai region.
According to Hariom Srivastav, joint secretary at the MoPPW, the Indian government has already awarded the contracts to the developers.

Nepal drops a notch in Doing Business Index

Nepal fell a notch to 108th position this year compared to last year in term of business friendly environment, according to Doing Business Index (DBI)-2013 released last week by the World Bank.
According to the report, Nepal has been ranked 108th among the total 185 economies surveyed.
Nepal ranked 107th in the DBI report of 2012. The report that was published by International Finance Corportation (IFC) evaluated the business friendly situation in different economies across the world on the basis government policies and domestic laws governing the private sector.
The DBI is a key instrument used by international investors to gauge the business environment in a particular country before making investment decisions.The report also found that investors have to spend at least 29 days to complete seven procedures before starting business.
Likewise, registration cost in Nepal stands at around 33 percent of per capita income.
Similarly, the country´s situation in terms of starting business has also worsened over the year. The report shows that DBI has ranked Nepal 105th in terms of starting a new business whereas it was in 100th rank in the DBI report of 2012.

Japan, WB to support hydropower development: FM Pun

The Japanese government, World Bank and International Finance Corporation (IFC) have committed to support Nepal on the development of hydropower sector.
“The government of Japan has said it would soon provide US$ 150 million for developing Tanahu Hydropower development project,” said Finance Miniter Barsha Man Pun.
Pun, who returned from the 67th annual meeting of the International Monetary Fund (IMF) and World Bank group in Tokyo, on Wednesday said that the World Bank and IFC too have shown keen interest to invest in development of transmission lines in Nepal-India border area. He further added that the World Bank was ready to speed up the work of Kabeli Hydroelectric project.
Interacting with the press at the Tribhuvan Internationa Airport, Finance Minister Pun said the government would soon endorse a ´common economic agenda (CEA), bringing all opposition parties on board, for announcing the full-fledged budget for the fiscal year 2012/13.
“We will not bring a full-fledged budget without a political consensus. Rather the government is working on CEA with the help of senior economists,” Pun said.
Pun also said the government was acting cautiously to avoid the confrontation with other political parties so that it could come up with much-needed fiscal policies at the earliest.
The government has formed a team of economists affiliated with all major political parties and also independent experts to develop the CEA. “Our belief is; the CEA developed by the team of economists will be agreeable for all the political parties,” Pun said. “As a finance minister, I also request the top leaders of all the political parties to forge a consensus on full-fledged budget and CEA.”
Former FMs lambaste govt´s new programs
Former Finance Ministers have lambasted the government´s 201-point new immediate programs, citing it as an outcome of intellectual bankruptcy and attempt to mislead public expenditure.
“The economic situation of the country is worsening badly each day. Most of the macro economic indicators are not well performing and investment climate is deteriorating,” a press release issued jointly by a group of former finance ministers including, Dr Ram Sharan Mahat, Dr Praksah Chandra Lohani, Surendra Pandey and Bharat Mohan Adhikari, said.
“The country is in a dire need of a full-fledged budget and that can be brought only through the broader political consensus,” states the statement. “It´s immoral and irresponsible for an acting government to introduce new program that have a long term effect and increase the economic burden to the country.”
Similarly, the group of former FMs has charged the government of distributing cash to its party cadres. “The government is distributing money to the cadres of the parties in the government in name of victims of conflict and marginalized people,” reads the release.
Protesting the government´s move to bring new programs and projects, the group of former finance ministers has warned that no governments in the future would continue those programs.

Development of Kathmandu Metro to cost Rs 330b

The construction of Kathmandu Metro Railway (KMR) would cost Rs 330 billion (around US$ 3.88 billion) and the project can be developed in 10 years, a preliminary finding of feasibility study report of the KMR said.
A consortium of five Korean and two local companies that carried out the feasibility has tagged government´s involvement in the KMR as mandatory if it seriously wishes to successfully develop and operate the KMR.
"The study team has proposed numerous modality of its development. But no matter which modality the government adopted, the team helds the view that government´s subsidy would be crucial to successfully implement the project," Rajeshwore Man Singh, superintendent engineer at the Department of Railway (DoI) told Republica
The feasibility team that shared the preliminary findings of the study with the senior government officials on Monday has further outlined that it would cost Rs 20 to Rs 30 per commuter to travel in the Metro. It did not shed light on recovery of investment though.
"The complete feasibility report is yet to come. but the government has targeted to develop the KMR in ten years period after analyzing the feasibility report,” said Singh.
The government some 10 months ago had appointed Korea Transport Institute, Chungsuk Engineering Company, Kunwa Consulting and Engineering Company, Korea Rail Network Authority and two local companies - BDA Nepal Private Limited and EMRC Private Ltd - to conduct the feasibility study of the KMR. It paid Rs 60.5 million to those firms for completing the task.
The feasibility study report has, furthermore, indicated that total length of the KMR would be around 77 kms, which is some 11 kms longer than what the preliminary inception report reckoned. There would be a total of five railway lines of which one will encircle the existing ringroad, while others will traverse through the Kathmandu city in four directions.
The study has suggested the government to develop two railway lines underground and remaining three lines in ´elevated´ form, that is above the ground. "Elevated lines have been suggested mainly considering two factors: unsupportive underground soil features and heavy cost emanating from necessary land acquisitions," said Singh.
The 27.35 km long Ring Road line, which connects different locations between kalanki, Satdobato, Chabhil and back to Kalanki, will be elevated as per the feasibility report study. Similarly, the lines that connect Maharajgunj and Satdobato and Kalanki to Koteshwore and Gongbu to Kalanki will be elevated.
“Rest of the other lines will be underground,” Singh said.
The preliminary inception report that was approved by the government in March, 2012 too had outlined five major lines to connect the entire Kathmandu through a mass rapid transport system, Metro Railway.
According to the inception report, Line 1 follows the Ring Road, Line 2 goes from Kalanki to Sinamangal, Line 3 connects Koteshwore and Gongabu, Line 4 stretches from Satdobato to Maharajgunj and Line 5 links Balkhu and Chabhil.
The government has planned to develop KMR under build-own-operate- and transfer model, inviting foreign investment. The project has been handed over to the Investment Board of Nepal for speedy development.