Wednesday, January 1, 2014

2013 ends with positive economic developments

KATHMANDU, Dec 31: Despite excess liquidity, depreciation of Nepali currency against US dollar, record high trade deficit and continuation of low performance in capital spending, the year 2013, has ended with a positive beginning.

The successful Constituent Assembly (CA) election has rekindled confidence of the private sector. Surge in Nepal Stock Exchange (Nepse) index - one of the key barometers of the confidence of private sector -- indicates that 2014 will see positive economic developments.

Though the government has made attempts to restore business confidence and shore up public spending, there is excess liquidity in banking system due to lack of new investment avenues and slow progress in capital expenditure. In the first five months of 2013/14, development expenditure reached 9.34 percent of the total allocated budget of Rs 85.1 billion.

The deprecation of Nepali rupee against the greenback created both challenges and opportunities to Nepal. The fall in value of Indian currency, with which Nepali rupee is pegged, pushed down the value of Nepali currency to all time low of 109.3 per US dollar on September. Though depreciation of Nepali currency increased earnings of exporters and remittance receivers, strong dollar drove up imports bill leading to significant rise in trade deficit. Low export-base and rise in imports resulted to record high trade deficit of Rs 1.5 billion per day.

Rising import cost and import bills is all set to push up inflation beyond the government estimation of 8 percent. It will be difficult for the government to achieve economic growth of 5.5 percent due to rising cost of production, lower industrial productivity, low progress in capital spending and soaring trade deficit.

"Though confidence level has increased among business people following the CA election, low capital spending will affect the government plan of achieving 5.5 percent economic growth," Keshav Acharya, former chief economic advisor at the Ministry of Finance (MoF), said. "Even the non-political government could not boost development spending despite unveiling budget in time."

The year 2013 was a normal year for the agriculture sector which contributes more than one-third of total Gross Domestic Product (GDP). The poultry sector suffered major setback with bird-flu outbreaks in different parts of the country. It inflicted huge loss on the entrepreneurs. On the backdrop of weak implementation of 20-year Agriculture Prospective Plan (APP), which is ending in 2015, the government released Agriculture Development Strategy (ADS) for the next two decades focusing on commercialization of the farm sector.

However, double-digit rise in paddy (12 percent) and maize (10 percent) production has raised hopes of improvement in food supplies in the domestic market, which experienced food surplus of 720,000 tons, in the review year.

Country´s capital market, which slowed over the past several years, saw significant improvement in the last quarter of 2013. The benchmark index hit six-year high of 806.82 points on December 18. Consolidated confidence among investors with positive political development after the election and drop in bank rates encouraged investors to put more money on stocks.

Acharya said bankers failed to explore new sectors of investment even though the banking system has excess liquidity. "Despite soaring deposits, lack of fresh investment in new sectors by banks has emerged as a challenge to the economy," added Acharya.

Trade sectors saw new developments in bi-lateral negotiations. Trade talks with major trade partners -- India, Bangladesh and China -- gave momentum to long-stalled negotiations.

In a major push to resolve longstanding trade and transit issues between Nepal and India, the two South Asian neighbors held inter-governmental committee (IGC) meeting - a commerce secretary level talks - in Kathmandu on December 21-22 after a gap of two years. The 14-point bilateral pact signed at the meeting paved the way for Nepal to use additional routes for international trade via the southern neighbor.

The 4th Nepal-China Tibet Trade Facilitation Committee (NTTFC) meeting was held on August 11-12 to seek measures for minimizing trade obstacles including infrastructure deficit, quarantine, quality certification, and lack of harmonization of time in customs points of both countries. The meeting also created a forum to discuss pertinent trade problems existing between two countries at a time when Nepal is facing annual trade deficit of over Rs 65 billion with the northern neighbor.

Nepal-Bangladesh bilateral talks held in February also provided opportunities to openly discuss on trade issues with Nepal´s second largest trade partner in South Asia. Offer from Bangladesh, with which Nepal has been enjoying trade surplus, to provide duty-free access to 108 Nepali goods created opportunity to increase exports there.
However, the long overdue trade talks with the US -- Trade and Investment Framework Agreement (TIFA) -- could not held in 2013.

The 9th Ministerial Meeting of WTO held in Bali of Indonesia in December provided Nepal an opportunity to lead the lobbying process as the chair of Least Developed Countries (LDCs) for greater international market access for their products and other trade related assistance.

At a time when Nepal has been suffering soaring trade deficit, expansion of trade opportunities through bilateral negotiations and WTO meeting is expected to create opportunity to facilitate supplies of Nepal to global market. However, it is still challenging to bring down the yawning trade deficit on the back of declining growth of industrial sector, which contributes around 15 percent to the GDP.

In the review year, the government raised minimum remuneration of workers to Rs 8,000 per month and daily wage to Rs 318 from Rs 6,200 and Rs 231 respectively.
Data compiled by the Central Bureau of Statistics (CBS) shows that industrial sector growth stood at 4.3 percent, 3 percent and 1.6 percent in 2011, 2012 and 2013, respectively.
Cases of financial frauds also marked the review year. The involvement of top management of Kist Bank, including its CEO, in financial fraud created sensation in the banking sector.

Country´s insurance sector was also in the headlines in 2013. Insurance Board (IB), the insurance sector regulator, had to sack its then executive director Binod Aryal for his involvement in forgery. The IB also took punitive action against Everest Insurance and NB Insurance for flouting insurance laws.

Price of commodities saw massive fluctuations this year. Gold price climbed to all time high of Rs 63,000 per tola (11.664 grams) due to rise in prices in the international bullion market. Onion, a popular vegetable in Nepali kitchen, was sold at as high as Rs 150 per kg due to drop in supplies.

In bid to give impetus to the energy sector, the government allocated a record Rs 30 billion in the budget for the current fiscal year. It also announced different incentives for investors. Almost all political parties put economic agendas with high priority in their election manifestos. This gives an indication that economic issues are gradually gaining importance over political agenda.

Tourism sector suffered a major setback this year due to 10-day strikes by 33-party alliance led by CPN-Maoist on the eve of CA election and the European Union (EU) decision to ban Nepali airlines from flying to EU member countries.

Raids of Commission for Investigation of Abuse of Authority (CIAA) on different firms and action against more than five dozen officials from different government agencies like Nepal Electricity Authority (NEA), the Immigration Office at Tribhuwan International Airport and the Department of Foreign Employment (DoFE) in suspicion of financial irregularities created headlines.

Despite some positive initiations, crucial laws like the Labor Act, Special Economic Zone Act and Industrial Enterprises Act, among others, could not be enacted this year in the absence of parliament.

"The government should improve good governance so that a favorable environment for trade and investment is created," said Acharya.

Published on 2014-01-01 05:23:31

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