28Nov2022

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Tag: Investment

OP-EDs and Columns

Trapped in migration and remittance

NISCHAL Dhungel, Non-Resident Fellow

The opinion piece originally appeared in The Kathmandu Post on 4 September 2022. Please read the original article here.

Nepal has faced tremendous hitches in the path of economic development. Keeping natural barriers (landlocked externally and challenging topography internally) aside, the nation has been undergoing a protracted era of political change over the past two decades, graduating from a monarchy to multiparty democracy, marred by armed war, ethnic unrest and frequent changes in power. Frequent changes in government, irrespective of a unitary or federal form of government, has directly hampered Nepal’s development path, compounded by poor policy decisions. Poor policy decisions have led to weak performance of the primary agricultural and industrial sectors, low public investment and capital accumulation, and low productivity growth.

Given this context, it is not surprising that foreign employment has become more pervasive, particularly in the years following Maoist conflict. The Department of Foreign Employment started issuing labour permits in the late 1990s. The number of labour permits issued peaked in 2013-14 at a high of 519,638. In 2020-21, the number of labour permits issued plunged to a 16-year low of 72,081 due to the Covid-19 outbreak and the ensuing restrictions on people’s freedom of movement. At present, formal overseas employment procedures have become cumbersome due to the bureaucracy that requires foreign employment agencies to produce authentic labour demand letters, get the demands attested from the Nepali embassies in target countries, and provide several other documents. Despite the cumbersome out-migration procedures, foreign employment has become a lucrative area to escape Nepal’s job market.

Remittance trap

Remittances in Nepal have surged at an unprecedented pace. Personal remittances received were less than 1 percent of GDP up until the late 1990s, lower than Bangladesh and India. This share dramatically increased during the first half of the 2000s, rising from 2 percent in 2000 to 22 percent in 2010 and 30 percent in 2015. Following the pandemic, it was anticipated that Nepal would experience a sharp fall in remittance inflows, impacting imports, the balance of payments, foreign exchange reserves, consumption, savings, loans and interest rates. However, according to the data released for fiscal 2020-21, Nepal performed better in remittance inflows.

Given the extraordinary increase in remittances, they are probably the main driver of the improvement in living standards seen in Nepal, directly (households receiving remittances) and indirectly (increased labour income of those that remained). Research published by Nepal Rastra Bank showed that compared to households that do not get remittances, households that receive remittances have a 2.3 percent lower chance of falling into poverty. With every 10 percent increase in remittance inflows to households, the likelihood of those households falling into poverty lowers by approximately 1.1 percent.

Large-scale migration is a symptom of underlying, long-standing issues rather than a sign of strength. One of the world’s most extensive and dense anti-poverty initiatives is likely to be found in Nepal. Unfortunately, more resources go into the process of delivering benefits to “the poor” rather than achieving impact (making “the poor” rich). Economists Yurendra Basnett, Chandan Sapkota and Sameer Khatiwada have rightly pointed out that much effort is also put into process innovation and complexity (how to get the goodies to “the poor”) while neglecting the apparent reality that a great job with a high salary would go a long way in reducing poverty in one of the chapters of the book entitled Politics of Change.

Large-scale migration and the resulting remittances have facilitated the expansion of low-productivity services. Still, they have also contributed to the low competitiveness (via appreciation of the real exchange rate). As a result, this cycle intensifies already-existing problems that Nepal has faced for a while, further impeding its competitiveness and limiting its economic potential. Because of all these factors, Nepal, home to some of the most hardworking and adventurous people in the world, may remain in a high migration and remittance trap for years to come.

Domestic employment

The pandemic provided the government with a fantastic opportunity to learn a lesson from the existing policy gap to keep the people who had returned to help with the need for the nation’s development. It is a monumental task to switch from foreign employment to domestic employment. Approximately 500,000 young people enter the workforce each year, and 80 percent of them manage to find work abroad. Due to a lack of investment that may have helped produce output, Nepal is now entirely dependent on imports. Ironically, Nepal imports even agricultural items, even though 66 percent of the country’s population is employed in agriculture. Agriculture, which accounts for two-thirds of the workforce and one-third of GDP, has to undergo reforms to increase productivity, reduce poverty and free up labour for new sources of economic growth.

For Nepal, unleashing massive hydropower investments would be a game changer. It would not only result in considerable increases in productivity and new investments, but it also has the potential to raise wages dramatically, reverse migration and boost competition in downstream industries. According to the National Planning Commission and UNICEF report Demographic Changes of Nepal: Trends and Policy Implications, Nepal will have an ageing population by 2028 and an elderly population by 2054. Therefore, Nepal has a very limited window of opportunity to capitalise on the demographic window. It is necessary to invest in the skills of Nepali youth to fully realise the demographic dividend. For Nepal to continue on a more robust and sustainable growth path, more human capital must be put to productive use.

History also shows us that Nepal has implemented significant reforms in the past and is capable of doing so again. The broad-based reforms that Nepal implemented between 1986 and 1996 positively impacted the economy. The share of commerce in GDP and exports, as well as the share of manufacturing, virtually doubled, increasing the economy’s openness and diversification. The political shift to democratically elected administrations, which also gave the populace a new purpose, served as the foundation for these reforms. Today, they serve as a sobering reminder that Nepal can undergo significant and complex reforms. To escape the out-migration and remittance trap, a clear set of plans and policies to increase domestic employment should be the top priority of the federal, provincial and local governments. Without rethinking our development model, the country cannot prosper or graduate to a middle-income country.

Research Commentaries

NRC0008 – Understanding and Correcting Nepal’s Widening Trade Deficit

Understanding and Correcting Nepal’s Widening Trade Deficit

Prashanta Pradhan

Synopsis

While trade deficit is not necessarily viewed as a problem, they tend to raise serious concerns when trade deficit persistently widens for almost two decades as in Nepal. Nepal’s trade deficit emerging from persistent growth in imports that largely cater to consumption accompanied by budget deficit cannot be ignored. The Trade Policy 2015 specifies one of the objectives as reducing trade deficit by enhancing supply side capacity. Nepal’s Monetary Policy 2019 as well as the Budget Speech of Fiscal Year 2019/2020 underscore the need to correct the trade deficit.

Nepal’s trade deficit in numbers

International Trade Centre (ITC)’s statistics indicate that trade deficit peaked in 2018 at USD 9.5 billion which is 8 times or 725 per cent higher than in 2003 when it was USD 1.15 billion. Since then, the number has only widened. The recent macroeconomic situation report published by the Nepal Rastra Bank (central bank of Nepal) indicated that in the first eleven months of the last fiscal year from mid-July 2018 to mid-June 2019, trade deficit widened by 17.2% as compared to the previous year.

Nepal’s imports have grown consistently except for a minor slump in 2015. There has been nearly six-fold increase in imports from USD 1.8 billion in 2003 to 10.2 billion in 2018 whereas while exports have increased but only marginally at 13%. In 2003, Nepal exported USD 652 million compared to USD 732 million in 2018.

Causes of trade deficit in Nepal
  • Firstly, the surge in imports have been driven by strong domestic demand for private consumption fueled by remittances from overseas and expansionary monetary policy coupled with weak manufacturing base. The share of remittances to GDP was 28% in 2018. The current monetary policy tends to be expansionary with the limit for growth of broad money (M2) set at 18% and domestic and private sector credit growth rates projected at 24% and 21% respectively. Large pool of inward remittances and increase in money supply in the context of weak manufacturing base have led to an increase in imports of inputs and capital goods driven by construction and consumer goods to meet domestic demand for private consumption. Moreover, Nepal suffers from a weak manufacturing base. As per the World Bank, the value added of services is 50% of GDP, the share of manufacturing was only 5% and including construction was 13% of GDP which added extra demand for imports of capital as well as consumer goods.
  • Secondly, poor export competitiveness along with non-tariff barriers to trade have led to poor export development. Nepal Trade Integration Strategy (NTIS) 2016 identified 12 priority goods and services for export promotion based on criteria of export performance as well as inclusive and sustainable development. The export basket is concentrated in terms of products as well as markets. While the volume of exports has been increasing, the share of markets other than India is relatively low. Nepal enjoys preferential tariffs in major international markets through multilateral, regional and bilateral agreements to which Nepal is a party including India-Nepal Treaty of Trade, South Asian Free Trade Agreement, Generalised System of Preferences, Everything But Arms etc. Most of the export products including priority products in NTIS, face non-tariff barriers. For example, sanitary and phyto-sanitary (SPS) related barriers on agricultural products, technical barriers to trade (TBTs) in manufactured goods and regulatory requirements on services. Hence, the competitiveness of Nepalese exports is hindered leading to low volume of exports. Nepal’s export development is also hindered by higher costs of moving goods across borders. Nepal scored 77.17 in Trading Across the Border by the World Bank which is higher than the South Asian average of 62.57 but lower than Bhutan (94.25) and India (77.46).
  • Thirdly, lack of adequate financial inflows have contributed to trade deficit. Although remittances account for a major share of GDP and help fund the trade deficit, with only marginal increase in exports, remittances cannot cope up with the immense volume of rising imports. Moreover, uncertainty of inflows of remittances due to changing regional and global economic dynamics poses concerns over the volume and sustainability of trade deficit.
Impact of Trade Deficit on Foreign Exchange Reserves

Increasing trade deficit has caused loss of foreign exchange reserves. As per the available data, as of mid-June 2019, gross official foreign exchange reserves held by the central bank was USD 9.25 billion whereas a year back, it was USD 10.08 billion. On the basis of the first eleven months of imports of 2018/19, existing foreign exchange reserve is sufficient to cover merchandise imports of only 8.8 months and merchandise and services imports of 7.7 months as compared to 16.8 and 14.3 months respectively in 2015/16.

Correcting Nepal’s trade deficit
  • Export Diversification: One of the objectives of Nepal’s Trade Policy 2015 is to reduce trade deficit by enhancing supply side capacity. Export diversification shall play a major role in expanding export opportunities of Nepal and reducing trade deficit. Earlier in the week, The Kathmandu Post reported that as an effort to trim the trade deficit, the Ministry of Industry, Commerce and Supplies has identified 28 goods for export promotion which is broader than the list identified in NTIS 2016. The updated list includes medicinal and aromatic plants, black cardamom, ginger and tea, leather products, footwear, readymade garments, pashmina and hand knotted carpet under items with a high comparative advantage. The International Trade Centre’s Export Potential Map shows Nepal’s export potential markets with USD 221.9 million untapped potential with India, USD 45.5 million with China, USD 30.6 million untapped potential with the United States, USD 17.2 million with Germany, for example. Moreover, diversification and development of services sectors could be an important opportunity for Nepal to increase exports. Being a landlocked mountainous country, the geographic obstacles of trading across border shall be easier in services. On the other hand, services sector contributes directly to respective sectoral GDP and employment as well as inputs to other sectors while some services like health and education have a direct impact on sustainable development.
  • Trade Facilitation to reduce Trade Costs: Nepal ratified the World Trade Organisation’s Agreement on Trade Facilitation (TFA) in 2017. The TFA includes provisions for expediting the movement, release and clearance of goods, including goods in transit involving cooperation between authorities on customs and other areas of trade facilitation. Full implementation of TFA in Nepal could reduce trade costs by 13.9-15.8%. Nepal is implementing the Customs Reform and Modernisation Strategies and Action Plans 2017-2021 aiming to reduce compliance costs and time, helping risk management and export promotion, among others. Additionally, Nepal is also part of the South Asia Subregional Economic Cooperation programme for Customs Reform and Modernisation for Trade Facilitation Programme 2017-2021. Timely and effective implementation of trade facilitation measures shall reduce the non-tariff costs of trade and promote exports.
  • Increasing foreign inflows: Remittances have been largely offsetting trade deficits. However, remittances also bear the risk associated with global economic volatilities. Hence, Nepal should enable a favourable environment to attract more foreign investments along with remittances to ensure there are adequate inflows to finance productive activities as well as support trade balance. To the extent possible, care should be taken to ensure that such foreign investments also bring transfer of technology and knowledge while building responsible business models.
References
  1. International Trade Centre. (2019). Trade Map – International Trade Statistics.
  2. Khanal, R. (2019, August 21). Ministry moves to expand the export basket to trim trade deficit. The Kathmandu Post. Retrieved from https://kathmandupost.com/money/2019/08/21/ministry-moves-to-expand-the-export-basket-to-trim-trade-deficit
  3. Ministry of Commerce, Nepal Government. (2016). Nepal Trade Integration Strategy. Retrieved from http://www.fncci.org/uploads/publication/file/NTIS_2016_20161004020748.pdf
  4. Nepal Rastra Bank. (2016). Monetary Policy for 2016/17. Retrieved from https://www.nrb.org.np/ofg/monetary_policy/Monetary_Policy_(in_English)–2016-17_(Full_Text).pdf
  5. Nepal Rastra Bank. (2019). Current Macroeconomic and Financial Situation of Nepal. Retrieved from https://www.nrb.org.np/ofg/current_macroeconomic/CMEs%20Eleven%20Months%20English%202075-76-Final.pdf
  6. Nepal Rastra Bank. (2019). Current Macroeconomic and Financial Situation of Nepal (Based on eleven months’ data of 2018/19). Retrieved from https://www.nrb.org.np/ofg/current_macroeconomic/CMEs%20Eleven%20Months%20English%202075-76-Final.pdf
  7. Nepal Rastra Bank. (2019). Monetary Policy for 2019/2020. Retrieved from https://www.nrb.org.np/ofg/monetary_policy/Monetary_Policy_(in_English)–2019-20_(Full_Text)-new.pdf
  8. World Bank. (2019). Doing Business 2019: Nepal. Retrieved from https://www.doingbusiness.org/content/dam/doingBusiness/country/n/nepal/NPL.pdf
  9. World Bank. (2019). World Bank Data. Retrieved from https://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS
  10. World Trade Organization. (2017). TFA Factsheet. Retrieved from https://www.wto.org/english/tratop_e/tradfa_e/tfa_factsheet2017_e.pdf
Newspaper Op-EdNiPoRe in News

Benefits of adding legal perspectives into Nepal’s investment policies and strategies

Sabrina Singh, in her column for The Kathmandu Post, discusses how incorporation of legal perspectives in Nepal’s prevailing investment policies and strategies may help the concerned authorities to make these documents and associated logistics more conducive by allowing the state and investors enough rooms for discuss and settle tangible and binding legal effects of investment policies.

Research Commentaries

NRC0006 – Key Aspects of India-Nepal Logistics Summit 2019

Key Aspects of India-Nepal Logistics Summit 2019

Nirnaya Bhatta

Synopsis

Last month (on July 28th), for the very first time, India-Nepal Logistics Summit was held in Kathmandu, Nepal. Co-organized by Federation of Nepalese Chamber of Commerce & Industries (FNCCI) – the custodian and largest private sector organization in Nepal, the Summit was an expression of the need felt by Nepal’s business community to integrate logistically local businesses into the global supply chain. The theme of the Summit was ‘Transforming Logistics Landscape’. While the Summit is a progressive step forward, it is too quick to judge if merely holding such an event will transform the country’s logistics landscape. This commentary first examines Nepal’s existing logistics landscape and its place in the world by referring to the highly comprehensive Logistics Performance Index. Since the Summit is between India and Nepal, a further examination is also made on the existing state of trade-related logistics between the two countries.

Background

The India Nepal Logistics Summit was jointly organized by FNCCI and Maritime Gateway, a media house based in Hyderabad, India. While the Summit was inaugurated by the Nepali Prime Minister, Mr. KP Sharma Oli, absence of his Indian counterpart – Mr. Narendra Modi – demonstrated that the event was an expression of Nepali rather than the Indian aspiration to improve its logistics landscape. Further, PM Modi’s written statement fell short of directly referring to the Summit by name and rather had a generic tone to it. It wrote, ‘India will always stand by Nepal in its quest for all-round growth. Emphasis will be on completion of connectivity projects outlined in the past.’

“Transforming Logistics Landscape”

The theme of the Summit was ‘Transforming Logistics Landscape’. Before commenting on the theme itself, it will be necessary to closely look at Nepal’s current logistics landscape first. To that end, there may not be a better reference than the Logistics Performance Index (LPI) that ranks 164 countries based on six comprehensive indicators. The LPI states that the logistics pertains to ‘how efficiently supply chains connect firms to markets.’ For Nepal, it would mean how well-connected Nepali firms are with the global supply chain and the markets abroad.

Now, let us explore the phrase used for this year’s theme word-by-word. The “Logistics landscape” comprises of the entire gambit of physical infrastructure, human capacity at the custom points, transportation endowment as well as agreements that are in place with the transit countries. While, “transformation” is defined by most dictionaries as extensive changes in the current scenario. To really transform Nepal’s logistical landscape, billions of dollars investment and an all-encompassing national plan would be required as ‘logistics is not just about connecting infrastructure but encompasses regulation of services, sustainability, and resilience, or trade facilitation.

Figure I: The six indicators on which the LPI rankings are based (Competing to Connect 2018)

 

Figure II: Nepal’s comparative rankings in the LPI (Data: World Bank)

Figure II compares Nepal performance in logistics with India, China, Germany, the South Asian and East Asian region, and finally low-income countries. These comparisons help in providing a perspective on where Nepal stands in terms of its logistics landscape.

The first column titled LPI is the aggregated scores, which is the weighted average of the country scores on the six key dimensions based on which the ranks are determined. In 2018, Nepal ranked 121 out of 167 countries that were ranked, while India stood at 42 and China at 27. South Asia, on the whole does not fare too well and is almost at par with Nepal on almost all the indicators. I have also compared South Asia with the most economically vibrant region in Asia, i.e. Southeast Asia. All countries and regions are then juxtaposed with Germany, which ranks 1st in the LPI and scores close to 5 on all indicators (a score of 5 denotes best possible performance in any given indicator).

Nepal-India Logistics Landscape

For very obvious reasons, India warrants special mentions when discussing Nepal’s logistics landscape. The economist Paul Collier observes that neighbors matter more when a country is landlocked. While comparing two landlocked countries, he writes- ‘Why is Uganda poor when Switzerland is rich? It is indeed partly that Switzerland’s access to the sea depends upon German and Italian infrastructure, whereas Uganda’s access to the sea depends upon Kenyan infrastructure.’ In 2018, while Germany ranked first in the LPI, while Kenya ranked 63. As an extension to this logic, the extent of access Nepal gets to the world depends on India’s performance in general infrastructure and how well the former negotiates to get access to the Indian infrastructure.

“If you are coastal, you serve the world; if you are landlocked, you serve your neighbors,” Colliers further contends. He also suggests, no matter how far or near a landlocked country is situated from the closest shore of the neighbor; the cost of exporting is usually very high. The coastal country’s expenditure on transport infrastructure determines the transport cost for a landlocked country. “If you are landlocked with poor transport links to the coast that are beyond your control, it is very difficult to integrate into global markets for any product that requires a lot of transport, so forget manufacturing- which to date has been the most reliable driver of rapid development”. This means, if the coastal neighbor has extremely efficient transportation system, it is favorable for its landlocked neighboring country.

Maybe it is too quick to judge if such Summits will ‘Transform Logistics Landscape’. Some points to consider why:

The Summit is clearly an expression of Nepal’s needs rather than India’s in terms of wanting to improve its logistics landscape. Hence, there is a clear asymmetry in terms of interests expressed between Nepal and India. Take for instance, from the Indian side the highest-ranking official was the Indian Ambassador to Nepal, accompanied by the Special Secretary (Logistics), Ministry of Commerce and Industry. This asymmetry necessitates Nepal to continually take initiation even when India may not proportionally reciprocate.

While the speakers and representatives from both the countries did focus on the need to improve connectivity, there was no mention of what potentially could be traded. What can Nepal possibly export is another discussion that has also come to be associated with the China-Nepal railway projects. With billions of dollars in investment, while China would inundate Nepali market with its exports, but how would Nepal take advantage of its access to Chinese markets in terms of exports? If the costs of exporting these goods come at a prohibitive cost, it hardly makes economic sense to go ahead with such projects. The discussion about improving Nepal’s industrial productivity should go hand in hand with improving its logistics infrastructure. The implication is, if trade is limited, investors will hardly find it attractive to finance in logistics infrastructure.

Key Implications
  1. On the whole, the Summit is a positive initiative. It indicates that Nepali entities other than the Government are willing to take initiative and bring the government on board eventually. Although, it needs to be considered that logistics is closely tied with the general infrastructure of a country, more than just improvement of physical connectivity. Meaning, without the Nepal Government spearheading it, there is less scope for wide-spread improvement in the logistics landscape, as the task would entail involvement of numerous ministries, central and the provincial governments.
  2. While it is laudable that organizers such as the FNCCI did initiate this important Summit, it was hard to come across any coherent plan that integrates Nepal and India’s logistics landscape- neither reflected in the presentations made by the speakers from the Indian side nor FNCCI or Government authorities. What one can find after reading these presentations and other provided documents is, they are all based on individual opinions (which does not amount to much in terms of making things happen on the ground). Nothing substantial or concrete were brought on the table, especially in terms of G2G collaboration between India and Nepal.
References
  1. Arvis, J., Ojala, L., Wiederer, C., Shepherd, B., Raj, A., Dairabayeva, K., & Kiiski, T. (2018). Connecting to compete 2018 : Trade logistics in the global economy. ().World Bank, Washington, DC. Retrieved from http://documents.worldbank.org/curated/en/576061531492034646/pdf/128355-WP-P164390-PUBLIC-LPIfullreportwithcover.pdf
  2. Collier, P. (2008). The bottom billion: Why the poorest countries are failing and what can be done about it. New York: Oxford University Press.
  3. World Bank. (2019, Aug 08). Logistics Performance Index. Retrieved from https://lpi.worldbank.org/

Contributor’s Note: All the presentations, key messages, other program and proceedings can be found here.