Stay the course

Currency peg with India

The International Monetary Fund (IMF) in its 2012 report makes an explicit remark that the exchange rate peg of Nepali rupee (NRs) with Indian rupee (IRs) has served as a pillar of macroeconomic stability in Nepal. India is the largest trading partner of Nepal, a small open economy.

The current freefall of IRs has made us contemplate whether we should terminate or revalue the currency peg with India. In 2003, IMF had issued a study paper stating that Nepal may want to rethink the currency peg, but that would not be a good idea given the impact of Indian economy on Nepal and the open border. Moreover, some pragmatic economic factors should be borne in mind while revisiting Nepal’s currency peg with India.

The historical background of the peg is one factor we need to take into account. There was a floating exchange rate system between the two countries from 1932 to 1960. This created a lot of uncertainty, which had negative effect on our economy. There were several money exchangers in different parts of the country. Speculation and hoarding of currencies was rampant, while the market was not operating as expected since money changers made people’s lives difficult.

Since early Shah Period, Nepal has relied heavily on India for its foreign trade—more than two-third of its foreign trade is with India now. Prior to 1932, the metallic currency of Nepal was valued at NRs 128 NRs for IRs 100. The rate was fixed in 1877 by the then Rana Prime Minister Ranoddip Singh. The exchange rate had remained constant until 1932. It had been quite stable from 1960 to 2002 when the rate saw seven adjustments, the last one in February 1993. That adjustment of NRs 1.60 equaling IRs 1.00 prevails to this day.

At that time, one US dollar was equivalent to NRs 49. Both the Nepali and Indian economies, including the global economy, have witnessed massive changes in the last two decades, mostly owing to the 2008 global financial crisis. But the exchange rate between the two currencies has stayed the same. The Indian economy started progressing after sweeping liberalization by the minority government of P V Narasimha Rao in 1991. The Nepali economy started falling after a record growth rate of 7.5 percent during the fiscal 1993/94.

The question of whether to revalue or end the pegged exchange rate regime is not new. It had surfaced a couple of years ago as well. The then Finance Minister, Surendra Pandey, and Finance Secretary had to make a statement that the exchange rate would not be changed immediately. Today, voices are rising that the country should gradually prepare to end the pegged exchange rate regime with India by consolidating its domestic economy. That could be an option, if we could strengthen our economy.

But before jumping to end the pegged exchange rate, we need to look at how the two economies have evolved in the last couple of decades. Now, the pessimism over the sluggish growth of the Indian economy has compelled foreign investors to pack up, resulting in the fall of IRs. However, the Nepali economy that was struggling to maintain a mere four percent economic growth must remember that the Indian economy grew at five percent even at its lowest.

Meanwhile, our economy faces two-way pressures, one from the trade that we do in IRs, and another from the trade in convertible currency (US dollar). Here, we have to think about our import basket, which is mostly full of Indian goods, mainly petroleum products and automobiles. Due to the freefalling currency, Nepal Oil Corporation (NOC) has already asked for a loan worth NRs 4 billion for petroleum imports.

A statement from the governor of the Central Bank that the exchange rate should not be tampered with at the moment is understandable. The peg with IRs is good for the economy; it forestalls the possibility of currency speculation of the kind witnessed during 1932-1960. Nonetheless, we do not have the luxury to sit back and do nothing as the currency continues to fall without a foreseeable end.

The governor is floating the option of import substation, but that would be a dangerous step, maybe even suicidal in the long run. Import substitution mechanism, which had been adopted by Jawaharlal Nehru in India after Independence in 1947, had taken Indian economy to a deadend. Nepal government, rather, needs to work on reducing the size of informal economic activities, which constitutes around 40 percent of total economy today.

Some government officials and economists are in favor of increasing the export basket, which is not a viable option either. Our goods and services cannot be competitive in the global market unless we have smooth electricity supply to our industries. And this we cannot do for the next four to five years.

The government has to work with the Central Bank to identify measures needed to take advantage of this situation. There are several steps that the government can take, such as streamlining remittance flow into productive sector, launching different programs to lure foreign tourists, and even asking Non-Resident Nepalis to invest in productive sectors while the US Dollar is appreciating.

There are several steps that the Central Bank can take to make the situation favorable for the country, though it cannot do anything directly to accelerate growth. The double digit inflation hitting people’s lives hard can be tackled by the Central Bank through different measures. Neither readjustment of the exchange rate, nor termination of currency peg will favor domestic economy. People’s sentimental reasons for terminating the currency peg with India should be countered with sound economic reasoning.

PEs & Productivity

The government’s move to improve the condition of Public Enterprises should be clear in terms of broader political framework. Most of the PEs are suffering from constantly changing approach from the government. The Kathmandu Post reports, “Finance Ministry is working to assess the status of each PE and determine whether it should run that particular PE.

Most of the PEs have more or similar kind of problems. Overstaffing, lack of adequate capital, power shortage and among others are the major problems that are limiting PEs for efficient productivity. The government should take some immediate measures on how to utilize the property that the total 37 PEs have in the country

ANTUF-R demands Rs 15,000 as minimum pay

The All Nepal Trade Union Federation-Revolutionary (ANTUF-R) affiliated to the CPN-Maoist has threatened to shut down all industrial establishments across the country for indefinite period if minimum monthly remuneration and daily wage of workers are not raised to Rs 15,000 and Rs 700, respectively, within five days from Friday.
The warning comes four days after the government raised minimum monthly remuneration of workers to Rs 8,000 --including basic salary of Rs 5,100 and dearness allowance of Rs 2,900 -- from Rs 6,200. The daily wage of workers was also raised to Rs 318 from Rs 231.
“We had to issue this ultimatum as the new deal reached between the government, employers and trade unions is not in the interest of workers,” says an ANTUF-R statement issued on Friday.
The ANTUF-R claims a delegation led by the trade union had met with Chairman of the Interim Election Council Khil Raj Regmi in March and handed over a 25-point memorandum seeking radical changes to minimum remuneration and daily wage structures. After the trade union´s calls were not heard, it issued a seven-day ultimatum on May 15 and announced a series of protests.
“But instead of listening to our genuine concerns the government reached a deal with trade unions that had deviated from our movement,” says the ANTUF-R statement, adding, “The newly reached agreement on minimum remuneration and daily wage is not acceptable to us.”
The Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the largest umbrella body of the private sector, has called the demands and ultimatum of the ANTUF-R as “unfortunate”.
“Such demands would only discourage private and foreign investment. This would ultimately affect job creation process and force more youths to leave the country,” Manish Agarwal, vice chairman of FNCCI´s Employers´ Council, told Republica.
He also said it would not be appropriate to initiate any discussion on wage revision at the moment as “we had just raised minimum remuneration and daily wage of workers in a significant manner”.
A high-ranking official of the Ministry of Labor and Employment said, “At a time inflationary pressure is creating hole in the pocket of ordinary citizens, the demands of the trade union sound genuine. But we also have to take the condition of industrial establishments into account as many are not operating in full capacity due to various problems ranging from power outage and labor-related problems to lagging economic growth rate.”
Asked why the ANTUF-R was not included in the wage negotiations between the government, employers and trade unions, the official, on condition of anonymity, said the government sends its invitation to the Joint Trade Union Coordination Committee, a group of leading trade unions operating in the country. “It is up to the committee to send representatives to participate in the wage-related negotiations,” the official further said.

IBN, SN Power hold PDA talks

The two-day negotiation talks on project development agreement (PDA) between the government and SN Power, a Norwegian power developer, for Tamakoshi III (650 MW) hydropower project concluded here on Monday.
Officials of the Investment Board Nepal (IBN) said the talks became successful in setting the ground for further discussion. Both the sides have agreed to hold next round of meeting soon, according to a source that attended the meeting.
Radesh Pant, CEO of IBN, had led the government side in the meeting while Dr Sandeep Shah, vice president and country director of SN Power, led the Norwegian firm in the meeting.
The IBN, which was formed around one and half years ago with the aim of facilitating the implementation of large scale projects on a fast track mode, held the discussion based on the PDA template developed with the help of London-based legal consulting firm Herbert Smith.
SN Power is the first power development to sit in PDA negotiation for the development of large scale hydropower projects (above 500 MW).
The PDA negotiation indicates that SN Power is serious about developing the project.
“The project will materialize if the government concludes PDA negotiation with the developer successfully," an official at the Office of the Prime Minister and Council of Minister (OPMCM) told Republica.
The IBN and SN Power signed the project negotiation agreement (PNA) a couple of weeks ago. As per existing rules, PDA talks should be finalized within one and half years of signing the PNA.
SN Power had received survey license of the mega hydropower project in 2007. It has already completed the environment impact assessment (EIA) of the project that is estimated to cost Rs 120 billion.
Meanwhile, the IBN is also trying to finalize PDA with two Indian power developers -- Sutlej Jal Vidyut Nigam and GMR. Sutlej is developing the Arun III (900 MW) project, while GMR is involved with Upper Marsyangdi and Upper Karnali projects.

Deloitte India presenting report on bond market next week

Deloitte India, a consulting firm, is presenting its preliminary study report on regulatory and institutional framework for bond market to the government next week.
The consulting firm was hired by the government to conduct study on three components -- regulatory and institutional framework on bond market, private sector on infrastructure development, and identifying projects that can be developed under public-private partnership (PPP) model.
“We have received some of the preliminary drafts of the reports prepared by Deloitte India,” Nava Raj Bhandari, joint secretary at the Ministry of Finance (MoF), told Republica. "We are trying to manage public debt efficiently so that the government can gain higher returns from it."
The government hired Deloitte India under ´Capital Market and Infrastructure Capacity Support Project´ with assistance form the Asian Development Bank (ADB).
According to information posted on the website of ADB, the government has received assistance of US$ 5 million for the project.
The project, which will continue till 2015, has been tasked with the responsibility of preparing a comprehensive report on how public debt of the country can be managed and utilized with comparatively higher rate of returns.
The government implemented the project, realizing its low investment in infrastructure development, underdeveloped bond market and loose implementation of PPP models.
"Long-term committed funding for infrastructure projects is best supported by a mature and vibrant bond market. But Nepal´s bond market remains constrained, accounting for just 12.6 percent of the gross domestic product at the end of 2009," reads the project concept paper available on the ADB website.
The concept paper further says, "There is no coherent public debt management strategy to guide decisions on the volume and maturity of each issuance, which are done on an ad hoc basis, preliminary to meet short-term needs."
An official at the finance ministry said, “We are hoping that the report that comes from the Deloitte will help the government to manage public debt more effectively in long-term goals."
Meanwhile, the government is also envisioning establishing a different institution for bond market management. However, the Nepal Rastra Bank (NRB), the central bank of the country, and the finance ministry are divided over establishing a separate agency for bond market management.
According to a source privy to the issue, the ministry wants to establish the agency under it, whereas the NRB says the agency should be an autonomous body.
At present, Public Debt Management Department at the NRB is looking after the country´s bond market.

NRB to let more imported goods against convertible currency from India

The Nepal Rastra Bank (NRB) has decided to increase the number of goods in the list that are imported from India by paying convertible currency.
The central bank, through the Monetary Policy 2013/14, aims to reduce the cost of goods that are imported from the Southern neighbor. "Additional goods will be included in the list of goods that are imported from India by paying convertible currency," reads the full text of Monetary Policy that the NRB unveiled last week.
As of now, there are 161 different goods that are imported from India against convertible currency.
"The Nepali traders shouldn´t pay additional taxes when they import goods from Indian market against convertible currency," Bhaskar Gayawali, spokesperson of the NRB, told Republica.
The NRB had added only one good in the list, namely, Mango Pulp, in last fiscal year 2012/13.
Businessmen have welcomed the NRB´s move. "We want the NRB to include goods pertaining to the automobile and service sectors," Pashupati Murarka, the vice-president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said.
According to Muraraka, Nepali businessmen have to pay 12.36 percent as a service charge to the Indian government while importing different consulting services. “We even pay a trading charge to the Indian government when we carry out transactions in dollar,” Murarka said.
Similarly, the central bank has also stated that it would simplify the procedure of exchanging amount of currency that is required for transport.
The NRB will include the goods in the list only on the basis of the recommendation made by the Department of Industry (DoI). "We will request the DoI to add goods from the automobile industry and service sectors," Murarka informed.
Additionally, the NRB has increased the amount of one-time payment money from USD 25,000 to 30,000 while importing goods from third countries.
However, trade experts aren´t that upbeat about the NRB´s move. "This move is not going make any significant difference to the bilateral trade between Nepal and India," trade expert Dr Ratnakar Adhikari at the South Asia Watch on Trade, Economics and Environment (SAWTEE), said. "Nonetheless, this is a good move."

Unclear benefit sharing mechanism hindering growth of energy sector: Report

Nepal´s energy sector is not becoming competitive mainly due to politicization, unclear mandates to the responsible institutions and unclear benefit sharing mechanism, a study report shows.
"The development of energy sector and its competitiveness have some binding constraints such as political and market uncertainties," a report on ´Practical Approach on Supporting Competitiveness in Carbon Constrained World´ reads.
The report, which is in the final state of production, is being prepared by South Asia Watch on Trade Economics and Environment (SAWTEE) and Overseas Development Institute (ODI) -- a UK based think tank.
The report, which has taken three sectors, namely, energy, forestry and tourism, has made some policy recommendation on how to achieve a higher level of economic growth and maintaining low carbon emission.
"All three sectors -- energy, forestry and tourism -- are important in case of Nepal and we have to be careful while exploiting the natural resources," Asish Subedi, research officer at SAWTEE, who is also involved in the preparation of the report, said.
Presenting the findings of the study on Friday, Subedi said public-private dialogues should be carried out in order to improve the livelihood of people.
The three sectors that have been accommodated in the report should be linked up with each other, Dr Posh Raj Pandey, executive chairman of SAWTEE, said.
"We have to think of achieving higher economic growth and maintaining competitiveness in the long run," Pandey said.