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अमेरिकामा ब्याजदर बढ्दा संसारभर किन पर्छ असर ?

– NISCHAL Dhungel, Non-Resident Fellow

The opinion piece originally appeared in the Naya Patrika Daily on 22 August 2022. Please read the original article here.

विश्वव्यापी अर्थतन्त्र अझै पनि कोभिड–१९ महामारीबाट गुज्रिरहेका वेला, उन्नत अर्थतन्त्रमा रहेका केन्द्रीय बैंकहरूले ब्याजदर बढाइरहेका छन्, जसले विश्वको बाँकी देशहरूमा ठूलो प्रभाव पार्नेछ । अन्तर्राष्ट्रिय मुद्रा कोषको (आइएमएफ)को ‘विश्व आर्थिक परिदृश्य’ प्रतिवेदनले विश्वव्यापी वृद्धि घट्ने अनुमान गरेको छ । विशेष गरी उदीयमान र विकासशील राष्ट्रहरूका लागि बढ्दो सामाजिक र आर्थिक जोखिमहरूको पूर्वानुमान पनि गरेको छ । रुस–युक्रेन द्वन्द्वले नीतिगत ट्रेड अफलाई सन्तुलनमा राख्न चुनौतीपूर्ण बनाएको छ ।

मुद्रास्फीतिसँग लड्न, आर्थिक सुधारको संरक्षण गर्न, अर्को कमजोरहरूलाई मद्दत गर्न र वित्तीय बफरहरू पुनस्र्थापित गर्न चुनौती छ । रुस–युक्रेन द्वन्द्व र आपूर्ति शृंखला अवरोधका कारण खाद्यान्न र इन्धनको मूल्यवृद्धि बढ्दै जाने देखिन्छ । विशेष गरी कम आय भएका देशहरूको कमजोर जनसंख्यालाई हानि पुर्‍याएको छ । हालै संयुक्त राज्य अमेरिकाको फेडरल रिजर्भले उपभोक्ता मूल्य ८.७ प्रतिशत बढेपछि मुद्रास्फीतिविरुद्धको लडाइँलाई तीव्र पारेको छ । १५ जुन २०२२ मा फेडले १९९४ पछिको उच्च ब्याजदर वृद्धिको घोषणा गर्‍यो । फेडले आगामी दिनमा ब्याजदर अझ बढाउने योजना बनाएको छ । अमेरिकामा ब्याजदर बढाएर मुद्रास्फीति घटाउने फेडरल रिजर्भको प्रयासले बाँकी विश्वलाई नोक्सान पुर्‍याउन सक्छ । अमेरिकाको बढ्दो ब्याजदर मध्यम र न्यून आय भएका देशहरूका लागि दुस्प्रभावी हुने थुप्रै कारण छन् । 

पुँजी पलायन
विकसित राष्ट्रहरूमा कम ब्याजदरको लामो युगपछि लगानीकर्ताले उच्च प्रतिफलको खोजीमा विकासशील र उदीयमान बजारहरूमा आफ्नो अधिक पुँजी केन्द्रित गर्न थाले । विकसित देशहरूमा ब्याजदरमा भएको तीव्र वृद्धिले अमेरिकामा ठूलो पुँजी प्रवाह र विकासोन्मुख देशहरूबाट निकासी बढ्नेछ । अमेरिकामा ब्याजदर बढ्दै जाँदा उदीयमान बजारहरूमा लगानी गर्ने लगानीकर्ताले उच्च प्रतिफलको फाइदा लिनका लागि अमेरिकामा पुँजी स्थानान्तरण गर्ने निर्णय गर्न सक्छन्, किनभने उनीहरूका लागि अमेरिकामा लगानी गर्नु बढी फाइदाजनक हुनेछ । 

ऋण संकट र मुद्रा अवमूल्यन
इतिहासले देखाउँछ कि राष्ट्रहरूको तीव्र आर्थिक विस्तारक्रममा ऋण बढ्ने गर्ने गर्दछ । विशेष गरी विकासोन्मुख देशहरूमा ‘ऋण पासो’ (डेब्ट ट्र्याप) तब हुन्छ, जब उत्पादकता र ऋण सन्तुलनमा रहँदैन । अमेरिकामा बढेको ब्याजदरका कारण विश्वव्यापी ब्याजदर बढ्न सक्छ । धनी देशहरूको केही केन्द्रीय बैंकले ब्याजदर बढाइसके । अन्तर्राष्ट्रिय मुद्रा कोष (आइएमएफ)का अनुसार ३८ उदीयमान अर्थतन्त्र खतरामा छन् वा हाल ऋण संकटमा छन् ।

सन् २०१९ र २०२१ को बीचमा महामारीले विकासशील अर्थतन्त्रहरूमा सार्वजनिक ऋणमा (जिडिपीको ५४ प्रतिशतबाट ६५ प्रतिशतसम्म तीव्र वृद्धि ल्यायो । कम्तीमा २५ विकासशील अर्थतन्त्रले आफ्नो सरकारी आयको २० प्रतिशतभन्दा बढी विदेशी सार्वजनिक ऋण सेवामा खर्च गर्छन् । आइएमएफले विकसित अर्थतन्त्रहरूमा ब्याजदर वृद्धिले उदीयमान बजार र विकासोन्मुख देशहरूका लागि बाह्य वित्तीय अवस्थालाई असर पार्न सक्ने उल्लेख गरेको छ ।

विकासोन्मुख देशहरूको मुद्रा अवमूल्यन, जसले क्रय शक्तिलाई कम गर्छ र अमेरिकी डलरजस्ता विदेशी मुद्राहरूमा ऋण तिर्न गाह्रो बनाउँछ । यस कारण बढ्दो ब्याजदर उदीयमान अर्थतन्त्रका लागि अर्को जोखिम हुन सक्छ । सन १९८० को प्रारम्भमा फेड ब्याजदर वृद्धिले संयुक्त राज्यमा दोहोरो अंकको मुद्रास्फीति कम ग¥यो, तर विश्वव्यापी रूपमा धेरै देशमा नराम्रो असर पर्‍यो । विशेष गरी ल्याटिन अमेरिकी देशहरूमा ऋण डिफल्ट भयो । बेरोजगारी र गरिबी बढ्यो र जिडिपीमा ठूलो गिरावट आयो । त्यो समयलाई ‘हराएको दशक’ (लस्ट डिकेड) भन्ने गरिन्छ, जहाँ ल्याटिन अमेरिकी देशहरू क्रमिक र असमान पुनरुत्थानमा गुज्रिरहेका थिए । अफ्रिकाका भारी ऋणी राष्ट्रहरूले ल्याटिन अमेरिकाजस्तै समान समस्या झेल्नुपर्‍यो ।

चीनको उदाहरण : ऋण दिगोपन र ऋण व्यवस्थापन
उच्च र बढ्दो ऋण–जिडिपी अनुपात सामान्यतया गैरजिम्मेवार उधारोपनाको संकेत हो । यस्तो गैरजिम्मेवार उधारो कटौती गर्नुपर्छ । बढ्दो ऋणलाई उच्च सरकारी तलब वा ठूला निवृत्तिभरणका लागि उपभोग गर्ने कि शिक्षा र पूर्वाधारजस्ता उत्पादनशीलता बढाउने सार्वजनिक वस्तुहरूमा लगानी गर्ने भन्ने कुरामा ध्यान दिनुपर्छ । ऋण–जिडिपी अनुपात बढ्दा दीर्घकालीन पूर्वाधारमा लगानी कति भयो र उत्पादनशीलता र प्रतिफल कति बढायो भन्ने कुरा महत्वपूर्ण हुन्छ । यस विषयमा श्रीलंका र अफ्रिकी मुलुकबाट पाठ सिक्न सकिन्छ ।

चीनले १९९७–१९९८ र २००८–२००९ मा वित्तीय संकटबाट बच्न विस्तारित वित्तीय र मौद्रिक नीतिको प्रयोग गरेर पूर्वाधार र सामाजिक खर्चहरूमा सार्वजनिक लगानीलाई प्रोत्साहन गरेको थियो । आफ्नो पुँजी खातालाई पूर्ण रूपमा उदारीकरण नगर्दा पनि चीनले राम्रो आर्थिक नतिजा हासिल गरेको छ । विगत ४७ वर्षमा चीनको आक्रामक वृद्धिलाई प्रभावकारी आर्थिक योजना र कार्यान्वयनलगायत स्थिर नीतिले बल दिएको छ ।

नेपालजस्तो देश विकासको प्रारम्भिक चरणमा छ र छोटो अवधिको राजस्व आर्जनलाई परियोजना छनोटका लागि प्राथमिकता दिनुपर्दछ । चीनजस्ता धेरै देशले विकेन्द्रीकृत वित्तीय प्रणाली अपनाएका छन्, जसले वित्तीय स्थायित्वको विश्लेषणलाई जटिल बनाउँछ । चीनमा धेरैजसो सार्वजनिक सामाजिक खर्च स्थानीय सरकारहरूमा निहित हुन्छ, जबकि राजस्व विनियोजन केन्द्र सरकारले नियन्त्रण गर्छ । स्थानीय सरकारहरूले आफ्नो आवश्यकता पूरा गर्न ऋणपत्र जारी गर्छन् र स्थानीय सरकारले आफ्नो वित्तीय प्रणाली बुझ्न महत्वपूर्ण छ । 

अर्थतन्त्रको आकार र संरचनामा धेरै फरक भए पनि नेपाल र श्रीलंकाजस्ता देशले चीनको विकास अनुभवबाट फाइदा लिन सक्छन् । चीनको विकेन्द्रीकृत आर्थिक विकासले स्थानीय सरकार र वित्तीय संस्थाहरूलाई संघीय सरकारभन्दा बढी महत्व दिन्छ, जसले गर्दा लगानी र वित्तीय निर्णय गर्न मद्दत हुन्छ । दीर्घकालीन विकास लक्ष्य हासिल गर्न स्थानीय विकास रणनीति र नीतिहरू राष्ट्रिय प्राथमिकतासँग मिल्नुपर्छ । तर, स्थानीय आर्थिक कार्यसम्पादनका लागि स्थानीय निकायलाई जवाफदेही बनाउनुपर्छ । 

नेपालको सन्दर्भ 
नेपाल एउटा यस्तो राष्ट्र हो, जसलाई संरचनात्मक परिवर्तनको नितान्त आवश्यकता छ । समस्या मौलिक भएकाले संरचनात्मक सुधार नै छोटो र दीर्घकालीन जवाफ खोज्ने एक मात्र उपाय हो । भुक्तानी सन्तुलन कायम गरी बाह्य क्षेत्रमाथिको दबाब कम गर्न ऋण विस्तार र क्षेत्रगत वितरणको व्यवस्थापन, अत्यधिक आयात घटाउने र औपचारिक माध्यमबाट रेमिट्यान्स आप्रवाहमा सुधार गर्न आवश्यक छ । मौद्रिक नीतिले बैंकिङ र निजी क्षेत्रहरूलाई वर्तमान वातावरणमा ऋण प्रयोग गर्दा बढी सावधानी र जवाफदेहिता अपनाउन निर्देशन दिनुपर्छ । तीन दशकसम्म उच्च कर्जा वृद्धि भए पनि आर्थिक वृद्धिदर ४.४ प्रतिशत मात्रै रह्यो । यसले हाम्रो कर्जा वृद्धि नीतिले आर्थिक वृद्धिमा सकारात्मक प्रभाव पार्न नसकेको देखाउँछ । आगामी दशकमा आर्थिक वृद्धिलाई प्रत्यक्ष रूपमा सहयोग गर्ने क्षेत्रमा ऋण प्रवाह केन्द्रित हुनुपर्छ । कर्जाको वृद्धि पनि निक्षेप वृद्धिसँग मिल्दो हुनुपर्छ ।

आयात प्रतिस्थापनको सन्दर्भमा निजी क्षेत्रले जिम्मेवार र सक्रियताका साथ काम गर्नुपर्छ, आयातको सट्टा स्वदेशी उत्पादन वृद्धि गर्नुपर्छ । निजी र बैंकिङ क्षेत्रले घरेलु उत्पादन बढाउन सहयोगी सरकारका नीतिहरूसँग मिलेर काम गर्नुपर्छ । आयात र व्यापारमुखी अर्थतन्त्रलाई उत्पादक अर्थतन्त्रमा परिणत गर्ने, अर्थतन्त्रलाई विश्वव्यापी मूल्य शृंखलामा जोड्ने, घरेलु कच्चा पदार्थमा आधारित औद्योगीकरणलाई प्रोत्साहन गर्ने, खुला सिमानाका कारण लामो समयदेखि चलिरहेको आर्थिक घाटा कम गर्ने केही दीर्घकालीन उपाय हुन् ।

हालको कोभिड प्रकोपको सामना गर्न र कठिन परिस्थितिमा विकासका आवश्यकता पूरा गर्न केही नीतिगत विकल्प छन् । संयुक्त राष्ट्रसंघको व्यापार र विकास सम्मेलनले सार्वभौम ऋणको पुनर्संरचनाका लागि बहुपक्षीय कानुनी ढाँचाका लागि वकालत गरेको छ, जसले निष्पक्ष र व्यवस्थित ऋण संकट समाधान ल्याउनेछ, जसले सार्वजनिक र निजी ऋणदाता दुवैलाई समावेश गर्दछ । आइएमएफले थप ऋण जारी गर्न सक्छ । आइएमएफ, विश्व बैंक समूह र क्षेत्रीय वित्तीय व्यवस्था (आरएफएएस)लाई थप आपत्कालीन तरलता ऋण जारी र वितरणलाई छिटो गर्न सकिन्छ । पहिले नै सम्पन्न सार्वजनिक सम्पत्ति परियोजनाहरूमा आधारित नवीन वित्त पोषण र पुनर्वित्त योजनाहरू डिजाइन गर्ने अर्को उपाय हुन्छ, जसलाई ‘सम्पत्ति–आधारित पुनर्वित्त’ पनि भनिन्छ । विश्वव्यापी ऋण–राहत संयन्त्र, जसले संघर्षरत राष्ट्रहरूमा वित्तीय संकट रोक्न सक्छ र थप विवेकपूर्ण उधारो र ऋणका लागि दिशानिर्देश आवश्यक हुन्छ ।

अन्त्यमा, उन्नत देशहरूको ब्याजदर वृद्धिले न्यून आय भएका देशहरूलाई प्रत्यक्ष वा अप्रत्यक्ष रूपमा असर गर्छ । कम आय भएका देशलाई संरचनात्मक सुधारको आवश्यकता छ, जुन आफ्नो ऋण व्यवस्थापन गर्न छोटो र दीर्घकालीन समाधान खोज्न एकदम महत्वपूर्ण छ ।

Research Commentaries

US interest rate hikes trample on developing countries

– NISCHAL Dhungel, Non-Resident Fellow

The commentary originally appeared on the East Asia Forum, a forum based at the Crawford School of Public Policy at the Australian National University, on 18 August 2022. Read the original article here.

The International Monetary Fund’s recent World Economic Outlook report paints a bleak economic future. It has downgraded global growth predictions from 6.1 per cent in 2021 to 3.2 per cent in 2022. While the global economy is still recovering from the COVID-19 pandemic, central banks in advanced economies are hiking interest rates — a policy change that will have a significant global impact.

The depressing growth predictions are a consequence of tighter monetary policy and the increasing threat of social and economic risks, particularly for emerging and developing nations. Food and fuel prices have skyrocketed due to the Russia–Ukraine war and supply chain bottlenecks. The Russia–Ukraine conflict has made it challenging to balance fighting inflation, supporting the global economic recovery, helping the vulnerable and restoring fiscal buffers.

The US Federal Reserve (Fed) stepped up its fight against inflation after consumer prices increased 8.6 per cent in the United States. On 15 June 2022, the Fed voted to raise the target range for the federal funds rate to 0.75–1 per cent. It plans to implement additional hikes for the rest of 2022. But efforts to reduce inflation by increasing interest rates in the United States could harm the rest of the world.

As interest rates rise in the United States, those who invest in emerging markets to receive higher rates of return may invest in the more appealing US market. This will result in massive capital inflows to the United States and increased outflows from the developing world. Without proportionally tighter domestic monetary policies, the ensuing rise in borrowing costs will deplete foreign reserves, appreciate the US dollar and result in balance sheet losses for nations with US dollar-denominated net obligations.

Rising US interest rates have the greatest impact on economies with higher macroeconomic vulnerabilities. Between 2019 and 2021, the COVID-19 pandemic caused a sharp rise in public debt in developing economies — on average increasing from 54 per cent to 65 per cent of GDP.

Thirty-eight emerging economies are now in danger of a debt crisis or are currently experiencing one. At least 25 developing economies spend over 20 per cent of government income on servicing foreign public debt. This is why interest rate hikes in advanced economies could tighten external financial conditions for emerging markets and developing countries.

There is a worrying comparability between today’s economy and the economy of the 1970s and early 1980s which was rife with high inflation, slow growth and rising borrowing costs. In the 1970s, oil exporters benefitting from increasing energy prices used their surpluses to increase funding for debt markets in emerging market economies. Fed rate hikes in the early 1980s reduced inflation in the United States but drove up global interest rates, causing many emerging economies to default on their debts.

The debt crisis that followed the Volcker shock was distressing for developing nations. The Fed interest rate hike had a devastating effect on Latin America. The region experienced plummeting GDP and ballooning unemployment and poverty. The subsequent decade was lost to gradual and uneven economic recovery. The consequences of the Latin American debt crisis were similarly experienced in Africa’s heavily indebted nations. The Fed did not pay enough attention to how its choices would affect the rest of the world.

Though today’s economic situation has similar origins to that of the 1970s and 1980s, there are some significant distinctions. Today, oil producers acutely feel the world’s reducing dependence on oil. Real oil price increases are smaller than they have been historically. Policy tightening in response to the economic downturn has also begun sooner than it did in the 1970s and 1980s, especially in certain emerging markets and developing nations. Unlike the 1970s and the 1980s, there has not been as much time for recycled petrodollars to fuel imbalances in developing and emerging market economies.

Despite these encouraging developments, new risks have emerged. Due to increased exposure to sizeable bilateral creditors and the recent COVID-19 pandemic, public debt has risen and stunted the growth potential of many countries.

While international financial institutions are doing their part to provide debt relief and stop punitive measures like surcharges — additional fees imposed on countries that fail to make debt repayments —  there needs to be swift and systematic action on debt resolution. This must involve collaboration with private creditors and large state creditors like China. Major food and fuel businesses must be prevented from profiteering and speculating.

Special drawing rights (SDRs) — a foreign reserve asset issued by the IMF that can be used for foreign exchange stability in addition to gold or US dollars — must be redistributed to those countries that urgently require them. A new release of special drawing rights with an equivalent value of US$650 billion is necessary for immediate relief. The UN Conference on Trade and Development has advocated an alternative way to facilitate fair and orderly debt crisis resolutions. It would involve a multilateral legal framework for restructuring sovereign debt using both public and private creditors.

Interest rate increases in advanced countries will always impact low-income countries. But that does not negate the need to pursue structural reform in low-income countries. Structural reform is the only way to find short and long-term solutions to debt management.

SAB Blog

SAB Blog – Bangladesh

Domestic Updates

Bangladesh Nationalist Party (BNP), the marginalized opposition party in Bangladesh, held a protest against Prime minister Sheikh Hasina for her ‘defamatory’ remarks. During a press conference, Prime Minister Hasina insinuated that Khaleda Zia, chairperson of BNP, be dropped from the Padma Bridge. Hasina and Zia were political rivals, but Hasina and her party, Bangladesh Awami League (BAL), have dominated Bangladesh politics since 2009.

Human rights violations and marginalization of the opposition have been a hallmark of the BAL regime. Khaleda Zia was sent to jail after she was sentenced to five years imprisonment by a special court in the Zia Orphanage Trust corruption case on 8 February 2018. In addition, observers have questioned the integrity of the 2014 and 2018 elections held under BAL.

BNP has been a shadow, with little representation in the national parliament. Currently, they are protesting against inflation, demanding elections under a neutral government and the release of the party chairperson. However, questions remain over their sustenance and impact on Bangladesh politics.

Bangladesh has seen spectacular economic growth in the last two decades. Yet, Bangladesh’s foreign reserve peaked at USD 48 billion in August 2021 but dropped to USD 42 billion by May 2022. Global price increase of oil and wheat because of the Russian invasion of Ukraine, import growth due to Covid-19 free situation, and low remittance inflow are the significant causes. This has raised fear in some quarters that Bangladesh is following Sri Lanka’s path. As a result, the Bangladesh Bank has hardened its import policy for luxury and non-essential items like sports-utility vehicles, washing machines, air conditioners, and refrigerators to mitigate the situation.

Regional Engagement

Bangladesh’s foreign minister, Abdul Momen, attended a two-day NADI-3 (Natural Allies in Development and Interdependence) Conference, which began on 28 May in Guwahati, Assam. Indian External Affairs Minister S. Jaishankar and Chief Minister of Assam Himanta Biswa Sarma also attended the conference. In his inaugural speech, Momen said, “We have developed strong connectivity with our neighbours, particularly India. We have developed robust connectivity by road, railways, waterways, and air routes. We have more to do in waterways because it is cost-effective. I am looking forward to a new Indian subcontinent where we can help improve the connectivity of all the waterways. We also developed connectivity in our energy sharing.” Momen urged Nepal and Bhutan to join in connectivity. However, BBIN motor-vehicle agreement (MVA), which brings all four countries together, is languishing.

Global Engagement

Bangladesh observed 29 May as the International Day of United Nations (UN) Peacekeepers. Nearly 7000 Bangladeshis serve as the UN peacekeepers, 9.2 percent of a total of 75,516. Bangladesh is the largest troops contributor to peacekeeping operations. Hasina has assured that Bangladesh is ready to contribute more peacekeepers.

The Ukraine war has also resulted in the price hike in necessary food items, especially wheat. Even though India banned wheat export, it will continue to export to neighbouring countries. Bangladesh, which had successfully engaged China, India, and other major powers through open regionalism, is facing a new challenge because of increasing competition between China and the US (and Quad). All Quad members are key development partners of Bangladesh.

Research Commentaries

NRC0018 – Credit Reporting for Improved Business Environment in Nepal

Prashanta Pradhan

Synopsis

Nepal ranked 94 in the recently published World Bank’s Doing Business Report with an increase in score from 59.7 to 63.2 in just a year. Improvements were reported in scores on dealing with construction permits, trading across borders and enforcing contracts but the highest increase was reported in getting credit with substantial improvement by 25 basis points from 50 to 75. Within various indicators on getting credit, the highest improvement was seen on credit bureau coverage of adults from mere 2.7% in 2018 to 7.3% this year covering 1,301,061 individuals and firms.

Credit Bureau and Credit Reporting System

Credit reporting systems consist of institutions, individuals, infrastructures and procedures that facilitate the flow of information enabling decisions related to provision on loans. Credit reporting systems aim to address information asymmetries that exist for evaluating whether to extend credit to debtors or not. Credit Bureau is an actor in the credit reporting system whose primary function is to improve the quality and availability of data for creditors to make better informed lending decisions. There are three other main actors – Data Subjects (individuals and businesses whose data are collected), Data Providers (financial institutions and utilities that provide information and data subjects) and Data Users (banks, central banks, and employers who use credit information provided by credit bureau).

The Credit Information Bureau of Nepal was established in 1989. The shareholders of the bureau are central bank along with commercial banks and financial institutions. Nepal Rastra Bank Act 2002 states that NRB will establish or cause to establish one credit information centre for the primary purposes of obtaining information on the flow of credit from commercial banks and financial institutions as well as information on debtors not paying loans on time or misusing the loans.

Non-Performing Loans and SMEs’ Access to Finance

  • According to Nepal’s Central Bank, between FY 2016/17 and FY 2017/18, the volume of Non-Performing Loans (NPL) of commercial banks increased by 8.14% reaching Rs 29.85 billion. The increase was seen in both public and private banks by 7.93% and 8.27% respectively.
  • IMF has reported that 70% of total lending is concentrated on real estate sector which may be difficult to avoid due to less developed and less diversified banking system. Moreover, bank’s loans books indicate half of loans as overdraft and working capital loans which rollover continuously with the quality of loans difficult to gauge.
  • As per Nepal Rastra Bank’s 2019 study findings, only 16% of SMEs in Nepal are taking credit from banks and financial institutions as initial capital compared to 33% from family assets and 26% from savings. On average, 50% of SMEs have taken credit from banks and financial institutions. On average it takes 38 days for SME to access credit.

Information Asymmetry and Business Environment

Access to finance plays a significant role in improving business environment and economic growth in an economy. However, information asymmetry hinders access to growth in many developing economies, especially for SMEs that contribute a large share of employment. In Nepal, SMEs on average employ 1.7 million people and contribute to 22% of GDP. In developing economies, enforcement of contracts and functioning of legal systems are relatively weak. Hence, the role of information gathering and sharing are important to enhance creditors’ protection. Taking past behavior of borrowers as a reliable predictor of future behavior, crediting reporting systems minimize risks creditors have to bear with borrowers.

On the one hand, credit reporting system support regulators in supervision and monitoring credit risk whereas on the other hand, financial institutions can enhance access credit to small firms, reduce interest rates and improve borrower discipline. NRB study has indicated collecting information about SMEs and speedier credit approval are among the top ways to enhance access to SME financing. A World Bank study done across 63 countries covering more than 75,000 firms indicated that after the introduction of credit bureau, there were greater possibilities for firms to access finance, lower interest rates, lengthen maturity and increase the share of working capital financed by banks.

Today, credit bureaus operate in many countries around the world and there is growing emphasis on strengthening them. Some of the drivers of growth of credit bureaus are growth in retail credit, reform stemming from financial crisis, the rise of digital technologies all of which increase need as well as opportunities to expand access to credit information services.

Alternative Sources of Data to Serve Underserved Segments

While traditional sources of data like commercial banks and financial institutions enable data users to access data and associated analytics on existing borrowers. However, this does not cover new borrowers. Hence, there is also growing need for tapping alternative sources of data, for example, from utilities operators on payment history, telecom companies etc. The ability of a system to tap into these alternative sources of data shall greatly contribute to enhancing access to finance and reducing credit risk of lenders. In general payment data, social media data and behavioural data are considered to be useful to contribute to credit scoring.

Conclusion

Nepal Rastra Bank’s Monetary Policy 2019 as well as the International Monetary Fund’s Country Report 2019 refer to the need for improving credit reporting in Nepal. It is crucial for credit reporting agencies to embrace advanced digital technologies and big data analytics to collect and analyse credit and payment data collected from various sources. Moreover, in order to strengthen the financial sustainability of credit bureaus and enhance value creation in the economy, value added services from credit data analytics also needs to be developed which could be relevant for many industries and businesses other than banks and regulators, for example, retail services with high reliance on digital payments, employers who would like to understand credit behavior of their potential applicants or existing applicants. However, regulatory frameworks and data protection procedures should be strongly put in place too.

References

  1. IMF. (February, 2019). IMF Country Report No. 19/61. Retrieved from https://www.imf.org/en/Publications/CR/Issues/2019/02/15/Nepal-Selected-Issues-46623
  2. Peria, M. S. M, and Singh, S. (August, 2014). The Impact of Credit Information Sharing Reforms on Firm Financing. World Bank Policy Research Working Paper 7013. Retrieved from https://openknowledge.worldbank.org/bitstream/handle/10986/20348/WPS7013.pdf
  3. Nepal Rastra Bank. (2019). Bank Supervision Report. Retrieved from https://www.nrb.org.np/bsd/reports/Annual_Reports–Annual_Bank_Supervision_Report_2018-new.pdf
  4. Nepal Rastra Bank. (2002). Nepal Rastra Bank ActNepal Rastra Bank Act, 2058 (2002). Retrieved from https://www.nrb.org.np/lgd/acts_ordinances/Nepal%20Rastra%20Bank%20Act,%202002%20(English)2074.12.21.pdf
  5. Nepal Rastra Bank (2019) SMEs Financing in Nepal. Retrieved from https://www.nrb.org.np/red/publications/study_reports/Study_Reports–नेपालमा_साना_तथा_मझौला_उद्यममा_वित्तीय_साधन_परिचालन_2076-new.pdf
  6. World Bank Group. (2019). Doing Business 2020 – Comparing Business Regulation in 190 Economies. Retrieved from https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf
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