25Nov2022

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Tag: Nepal Rastra Bank

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An analysis of FDI statistics of Sudurpaschim Province

ANUSHA Basnet

Foreign Direct Investment (FDI) is defined as a “category of cross-border investment” in which an investor from one country invests in another country wherein the investor has significant control over the business it invests in (IMF, 2009). It may also involve a “transfer of technical know-how, managerial and organizational skills”. For a country aiming to expedite its development process, FDI has been one of the factors aiding the development process of Nepal especially in recent years. The government has also made provisions to make Nepal a more investment friendly country. Acts such as The Foreign Investment and Technology Transfer Act (FITTA) 2019 and Foreign Direct Investment Policy 2015 have been created by the government in an effort to create a better environment for foreign investors. The FITTA states that “investors need to bring 25 percent of the pledged investment within a year from the date of registration, 70 percent by the start of operation, and the remaining 30 percent within the next two years.” The Department of Industry (DOI), Nepal Rastra Bank (NRB), and Investment Board Nepal (IBN) are three agencies that implement the laws regarding FDI. 

As of 2018/19, the stock of FDI in Nepal was Rs. 182.92 billion of which 48.2 percent was paid-up capital, 42.8 percent were reserves, and 9.0 percent was loans. Of the total FDI stock, the service sector accounts for 51.1 percent and the industrial sector accounts for 48.8 percent. Furthermore, within the industrial sector manufacturing, mining and quarrying industry accounts for 28.6 percent and electricity, gas, and water sector accounts for 20.0 percent of FDI stock. While the level of FDI pledge is high, the actual inflow of FDI is still low. 

Looking into the provincial breakdown of FDI statistics, we see the following numbers:

Figure 1: Provincial Breakdown of FDI figures (Data taken from NRB)

From the above graph, we can see that Sudurpaschim province has received the least amount of FDI in all three years (2017, 2018, 2019). The province received FDI of Rs. 13.2 million, 10.8 million, and 27.93 million for the years 2017, 2018, and 2019 respectively. The increase in FDI for the year 2019 can be attributed to the investment brought in for the manufacturing sector (cement industry) and information technology sector (software development industry). Comparatively, Sudurpaschim province lags behind other provinces in terms of being able to attract foreign investment. Years of lack of concrete development plans from the central government, lack of investment in the infrastructure sector and other factors such as a difficult geographical terrain have caused the province to lag behind in terms of development which has affected its current ability to seek investment. Furthermore, delays in current projects have not inspired confidence from the investors. 

However, the provincial government in Sudurpaschim has made efforts to bring in foreign investment. The provincial government has started a process to create a Provincial Investment Board in order to streamline projects that require higher investment (projects requiring investment from Rs. 1 billion to Rs. 5 billion). The government also put in extra effort to woo investors during the Investment Summit organized by the Nepal Investment Board. In terms of attracting foreign investment, tourism, manufacturing sector, energy sector, and transportation sector are few sectors that are being prioritized by the provincial government. The provincial policies and programs for the fiscal year 2078/79 has emphasized completing the ongoing projects in order to attract new investment. The recent agreement between the Investment Board of Nepal and NHPC for the development of Seti river hydropower projects also shows promising signs for the province. 

As the Sudurpaschim government has been creating ambitious plans to expedite the development process of the province, FDI will play an important role in the process. While the province has a lot to do in terms of catching up to other provinces for bringing in FDI, the steps initiated by the government show their commitment and dedication to the economic development of the province.

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

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