Inflation in Nepal

Inflation in Nepal

Summary

The Year-on-Year (Y-o-Y) inflation rate as of mid-November 2009 according to Nepal Rastra Banklsquos (NRB) latest macroeconomic report is 99

Price index of food and beverage group up 164 while price index of non-food and service group up 22 as of Mid-November 2009

The annual budget of the Ministry of Finance and the Monetary Policy report of the NRB has projected an inflation target of 7 for FY 200910

After remaining in negative territory for over 3 months Wholesale Price Index (WPI) based inflation in India as of Oct 17th 2009 is 151

As economic activities improve in major global economies inflation numbers are climbing globally

Inflation in Nepal

According to the latest macroeconomic report from Nepal Rastra Bank (NRB) the year-on-year (y-o-y) Consumer Price Inflation (CPI) moderated to 99 in mid November 2009 Though still high compared to international standards after reaching the highs of above 14 on mid Jan 2009 inflation has moderated gradually during the last few months (see figure 1) The annual budget of the Ministry of Finance (MOF) of Nepal for 200910 and the monetary policy of the NRB has projected an inflation target of 7 for Fiscal Year (FY) 200910 The annual average inflation in FY 200809 was 132 which was higher than the target of 7 In its annual monetary policy report the NRB has indentified supply side constraints as the primary cause of the high inflation

Figure 1 The Year-on Year (y-o-y) inflation figure (Source NRB)

Inflationary pressure according to the NRB macroeconomic report has been driven primarily by significant price rise of 164 in food and beverages group and a moderate rise of 22 in non food and services group Despite a recent decline in inflation figures the high price increment in food and beverage group is making an average consumer worse off whose consumption basket is predominantly tilted towards food and beverages side

Product-wise break down of Inflation figure

Food and Beverage Group Index 164

Sugar and Sugar Related Products 506

Pulses 295

Grains and Cereal Products 81

Meat Fish and Eggs 295

Vegetables and Fruitsi 387

Non-Food and Services Group Index 22

Tobacco and Related Products 116

Transport and Communication 80

Geographic breakdown of Inflation figure

Kathmandu Valley 81

Hills 103

Terai 107Figure 2 Breakdown of October 2009 Inflation numbers

Global inflation

Recently the Indian government has come out with a new guideline on disclosing inflation statistics to the public According to the new guideline Wholesale Price Index (WPI) based inflation figure will now be released on a monthly basis compared to previous weekly releases As per the new guideline the monthly WPI based inflation for October 2009 is 134 compared to 1106 a year earlier

In March 2009 the CPI based US inflation turned negative for the first time in 54 years reaching negative 038 At the end of Oct 2009 the Y-o-Y inflation in US is still negative 020 (see figure 3 for details) Low inflation in major advanced economies is largely due to the economic recession from the fallout of the financial crisis of 2008 and remarkably low oil and other commodity prices Experts however are divided over the outlook of the inflation in the United States With the fed funds rate at the lowest bound possible there is abundant liquidity in the US which could push up price levels And because of the high unemployment rate in the US the Federal Reserve is not in the position to raise the fed funds rate any time soon as a rate hike could kill the nascent US economic recovery

Japan is fighting another deflationary spiral as inflation has turned negative for last eight months According to Bank of Japan Y-o-Y inflation fell by 22 during October 2009 due to decline in gasoline prices In China however inflation has turned positive for the first time in a year largely due to massive credit expansion fueled by the Chinese governmentrsquos recent USD 500 billion stimulus plan As a result Chinese industrial output rose 192 in November ndash highest expansion since 2007 Similarly inflation in Euro Zone has also turned positive for the first time in seven months as price level in 16-countries Euro bloc climbed 06 in November 2009

CountriesEconomic Zone Inflation rate Data

United States -020 Oct 2009

India 134 Oct 2009

Euro zone 06 Nov 2009

Japan -22 Oct 2009

China 06 Nov 2009Figure 3 Global Inflation numbers

Reasons for high inflation in Nepal

While the inflation rate is falling all over the globe why inflation has been skyrocketing in Nepal is still a conundrum and worrisome for policymakers and public in general During the first half of 200809 global food crisis and huge increase in commodity prices were significant drivers of high inflation However despite sharp fall in commodity prices we have not seen commensurate decrease in domestic inflation level Officials at the Nepal Rastra Bank (NRB) and the Ministry of Finance (MOF) have attributed higher inflation to supply constraints emanating from energy crisis constant strikes and bandhs and carteling among businessmen

Figure 4 Annual Remittance for last 5 years (amount in Rs Billion)

These supply-side factors have played major role in pushing the prices up however going forward if the NRB is not able to soak up the excess liquidity in the market then inflation might further creep up especially with a larger government expenditure programs Domestic economy has been inundated with record remittance inflow ndash Rs 210 billion in FY 200809 (See figure 4 for details) Though there is no formal research on the uses of remittance inflows in Nepal anecdotal evidence shows that most of the remittance income has been used up for consumption purpose Even if the remittance incomes are used predominantly in consumption they can be productive provided that higher consumption through multiplier effects leads to expansion of production However manufacturing sector has not been able to pick up in Nepal (In FY 200809 the manufacturing sector witnessed a decline of 05) Given the above background of elevating remittance inflows and shrinking and stagnant production sector one can argue that remittance has also been instrumental in driving up the price levels

Figure 5 Annual average CPI based inflation for last 5 years

In these contexts the inflation target of 7 in FY 0910 might not be unattainable On the monetary side the NRB with the view of containing inflation has put a lower projection on the growth of M2 ndash broad money- of 17 in 200910 compared to 21 in 200810

Current Macroeconomic Situation(Based on the Ten Months Data of 200910)Monetary SituationMoney Supply1 Broad money (M2) expanded by 73 percent in the ten months of 200910 M2 hadexpanded by 175 percent in the corresponding period of the previous year Narrowmoney (M1) which had grown by 157 percent during the ten months of 20089grew by 28 percent in the review period Despite a high growth of net domesticassets in comparison to the last years figure a decline in net foreign assetsaccounted for such a deceleration of monetary aggregates in the review period2 Of the components of narrow money currency in circulation increased by 98percent in the review period compared to an increase of 232 percent during thesame period of the previous year Demand deposits declined by 96 percent in thereview period in contrast to its growth of 19 percent in the corresponding period ofthe previous year Time deposits increased by 94 percent in the review periodcompared to a growth of 182 percent during the same period of the previous year3 Net foreign assets (NFA) after adjusting foreign exchange valuation gainlossdeclined substantially by Rs174 billion in the review period It had increased byRs43 billion in the same period of the previous year An acceleration of tradedeficits in the review period contributed to such a significant decline in net foreignassetsDomestic Credit4 In the ten months of 200910 domestic credit expanded by 102 percent comparedto a growth of 139 percent in the corresponding period of the previous yearDomestic credit increased at a lower rate on account of a decline in net claims ongovernment and the lower growth in the private sector credit of the banking system5 Net claims on government declined by 152 percent (Rs159 billion) in the reviewperiod compared to a 182 percent (Rs159 billion) decline in the correspondingperiod of the previous year An increase in resource mobilization relative togovernment expenditure contributed to such a decline in claims on government inthe review period The government deposits as at mid-May 2010 stood at Rs39billion6 In the review period claims on private sector increased by 168 percent (Rs 734billion) compared to a growth of 224 percent (Rs 763 billion) in the same period a2year ago A contraction in the liquidity position of banking sector contributed to aslowdown in the growth of claims on private sector in the review period7 Claims on non-government financial enterprises declined by 177 percent in thereview period in contrast to a growth of 308 percent in the corresponding period ofthe previous year The decline in investments of commercial banks on financecompanies pension funds and insurance companies in the review periodcontributed to such a decline in claims on the non-government financial enterprises8 In the ten months of 200910 claims on non-financial government enterprisesdeclined by 101 percent compared to a decline of 88 percent in the correspondingperiod of the previous year Partial repayment of loans by National Trading LtdNepal Airlines Corporation Janak Education Material Centre Limited Nepal

Electricity Corporation and Nepal Food Corporation contributed in slowing downthe growth of claims on nonndashfinancial government enterprises in the review periodDeposits Mobilization and Credit Flow of Commercial banks9 In the ten months of 200910 deposits mobilization of commercial banks increasedby 56 percent (Rs306 billion) amounting to Rs 5805 billion as at mid-May 2010The total deposits had increased by 195 percent (Rs821 billion) in thecorresponding period of the previous year10 Loan and advances of commercial banks increased by 122 percent (Rs 635billion) to Rs 5821 billion in the review period Similarly private sector credit ofcommercial banks grew by 175 percent (Rs708 billion) compared to a growth of242 percent (Rs 743 billion) in the corresponding period of the previous year Ofthe private sector credit credit to the production sector increased by 10 percent(Rs88 billion) in the review period compared to a growth of 149 percent in thesame period of the previous year Sugar Cement and Iron and Steel industrieswitnessed a significant credit expansion under the production sector creditSimilarly credit to agriculture sector increased by Rs 15 billion in the reviewperiod In the review period credit to wholesale and retail business as well asfinance insurance and fixed assets and service sectors increased by 264 percent(Rs189 billion) 404 percent (Rs157 billion) and 244 percent (Rs 57 billion)respectively Credit to these sectors during the corresponding period in the previousyear had increased by 157 percent 44 percent and 6 percent respectively Credit toreal estate sector increased to Rs146 billion in the ten months of 200910compared to Rs119 billion in the same period a year agoLiquidity position of Commercial Banks11 The liquid assets of the commercial banks stood at Rs 1704 billion as at mid-May2010 Of the components of liquid assets liquid fund declined by 82 percent Adecline in commercial banks balance with the NRB as well as balance held abroadaccounted for a contraction of liquid funds of commercial banks In the reviewperiod the balance held abroad declined by Rs 16 billion amounting to Rs 518billion while the balance with NRB declined by Rs 86 billion Similarly another3component of liquid assets commercial banks investments in governmentsecurities declined by 114 percent (Rs 82 billion) in the review period12 On account of the higher credit disbursement relative to deposit mobilization thecredit-deposit ratio increased to 893 percent in mid-May 2010 from 812 percent inmid-July 2009 Similarly the liquidity-deposit ratio declined to 294 percent in mid-May 2010 from 342 percent in mid-July 2009Liquidity Management13 In the ten months of 200910 NRB injected net liquidity amounting to Rs1031billion During this period Rs74 billion and Rs10 billion were mopped upthrough outright sale auction and reverse repo auction respectively while Rs 1071billion and Rs 34 billion were injected through repo and outright purchase auctionrespectively In the same period of the previous year net liquidity amounting toRs97 billion was mopped up Of the total liquidity mopped up Rs75 billion andRs 133 billion were mopped up through outright sale auction and reverse repoauction respectively while Rs 11 billion was injected through repo auction14 In the ten months of 200910 NRB injected net liquidity amounting to Rs 845billions through net purchase of USD 11 billion from commercial banks A net

liquidity of Rs 1215 billion was injected through the net purchase of USD 16billion in the same period last year15 The NRB purchased Indian currency equal to 825 billion through the sale of USD18 billion in the Indian money market during the review period Indian currencyequal to 599 billion was purchased through the sale of USD 12 billion in thecorresponding period of the previous year An accelerated trade deficits with Indiaaccounted for such a higher volume of Indian currency purchase in the reviewperiodStanding Liquidity Facility and Inter Bank Transactions16 Banks and Financial Institutions used standing liquidity facility (SLF) amounting toRs919 billion in the review period The use of the SLF by commercial banks hadamounted to Rs966 billion in the corresponding period of the previous yearLikewise Inter-bank transactions of commercial banks stood at Rs2317 billion inthe first ten months of 200910 compared to Rs2482 billion in the correspondingperiod of the previous yearInterest Rates17 The weighted average 91-day Treasury bill rate stood at 741 percent in the tenthmonth of 200910 compared to 673 percent in the corresponding month of theprevious year Similarly the weighted average inter-bank rate stood at 713 percentin the tenth month of 200910 compared to 707 percent in the corresponding monthof the previous year In addition to the short-term interest rates the deposits rate ofcommercial banks also increased in the review period The maximum interest rateof two-year and more than two years fixed deposits increased from 95 percent as at4mid-July 2009 to 13 percent as at mid-May 2010 The shortfall of liquidity in thebanking system contributed to increase the interest rates in the review periodSecurities Market18 The year on year (y-o-y) NEPSE index declined by 3079 percent to 45781 pointsin the first ten months of 200910 This index stood at 66096 in the same periodlast year Likewise NEPSE sensitive index (based on July 2006) stood at 11301point in mid May 2010 which was 17413 in the same period last year The NEPSEfloat index calculated on the basis of final transaction as of August 24 2008 (asbase market value) remained at 4202 in mid May 2010 a contraction of 3423percent compared to the same period last year19 The y-o-y market capitalization increased by 4627 percent to Rs356 billion in midMay 2010 The ratio of market capitalization to GDP stood at 3011 percent in thereview period It was 2457 percent in the same period last year Of the total marketcapitalization bank and financial institutions accounted for 719 percent followedby manufacturing and processing companies (22 percent) hotels (14 percent)business entities (05 percent) hydropower (42 percent) and other economicsectors (20 percent)20 Total paid up capital of the listed companies stood at Rs 7534 billion in mid May2010 an increment of 3656 percent over the period of one year This increase waslargely due to the additional listing of securities at the NEPSE As at the tenthmonth of 200910 additional securities worth Rs2273 billion (ordinary share ofRs398 billion bonus share of Rs 344 billion right share of Rs804 billion andgovernment securities of Rs725 billion) were listed at the NEPSE21 Total number of companies listed at the NEPSE increased to 171 in mid May 2010

compared to 157 last year Among them 139 are banks and financial institutions(including insurance companies) followed by production and processing industries(18) hotels (4) business entities (4) hydropower (4) and companies in other groups(2)InflationConsumer Price Inflation22 The year on year (y-o-y) inflation as measured by the consumer price indexmoderated to 100 percent in mid-May 2010 compared to 129 percent increase inthe same period last year In the review period the price index of food andbeverages group increased by 123 percent whereas the index of non-food andservices group rose only by 72 percent The index of food and beverages and nonfoodand services group had risen by 165 percent and 88 percent respectively inthe same period last year23 Of the items in the food and beverage group price indices of spices increased by287 percent compared to an increase of 175 percent in the same period last yearSimilarly the price indices of sugar and sugar related products restaurant meal5pulses as well as meat fish and eggs sub-groups increased in the review period by226 percent 181 percent 162 percent and 159 percent respectively compared totheir respective increase of 669 percent 182 percent 263 percent and 275 percentin the same period last year The index of grains and cereal products subgroup alsowitnessed an increase of 125 percent compared to an increase of 63 percent in thecorresponding period of the previous year24 Within non-food and services group the index of education reading and recreationhousing goods and services as well as tobacco and related products increased by109 percent 98 percent and 93 percent during the review period compared to theirrespective increase of 83 percent 80 percent and 175 percent during the sameperiod last year25 Region-wise the price index of Hills rose by 120 percent followed by 98 percentin Terai and 91 percent in Kathmandu Valley in the review period The respectiverates were 118 percent 124 percent and 143 percent during the same period lastyear26 In the review period the y-o-y core inflation rose to 112 percent a moderationfrom 127 percent a year agoWholesale Price Inflation27 During the review period the y-o-y wholesale price inflation increased by 84percent compared to a rise of 155 percent a year ago The indices of agriculturalcommodities domestic manufactured commodities and imported commoditiesincreased by 106 percent 89 percent and 41 percent respectively in the reviewperiod compared to their respective increase of 234 percent 77 percent and 84percent a year ago28 Within the agricultural commodities group the price index of spices livestockproduction pulses and foodgrains respectively increased by 296 percent 217percent 187 percent and 178 percent compared to an increase of 213 percent340 percent 254 percent and 26 percent respectively during the same period lastyear29 Within the group of domestic manufactured commodities the price index of foodrelatedproducts increased by 165 percent compared to a rise of 41 percent a year

ago Within the imported commodities group the price indices of petroleumproducts and coal increased by 114 percent in the review period compared to anincrease of 15 percent in the corresponding period of the previous yearNational Salary and Wage Rate30 The overall y-o-y salary and wage rate index rose by 130 percent in the reviewperiod compared to a rise of 211 percent a year ago The increase in basic salaryand allowances in mid-August 200910 by the government of Nepal for civilservants and its simultaneous effect on salary of the private sector contributed tosuch an increase in salary and wage rate index Of the salary and wage rate indices6the salary index increased by 138 percent in the review period compared to a riseof 168 percent in the same period of the previous year The wage rate indexincreased by 127 percent in the review period compared to an increase of 225percent in the same period of the previous year Wages of agricultural industrialand construction laborers increased by 189 percent 41 percent and 82 percentrespectively in the review period These wage rates had increased by 278 percent151 percent and 213 percent respectively in the same period last yearFiscal Situation 1048576Budget Deficit Surplus31 In the ten months of 200910 government budget surplus on cash basis stood atRs71 billion compared to a surplus of Rs 61 billion in the corresponding period ofthe previous yearGovernment Expenditure32 In the review period total government spending increased by 251 percent toRs1596 billion compared to an increase of 257 percent in the correspondingperiod of the previous year The high growth in recurrent as well as capitalexpenditure accounted for such an increase in the government expenditure33 In the review period recurrent expenditure increased by 249 percent to Rs1023billion In the corresponding period of the previous year the recurrent expenditurehad increased by 265 percent An upward revision in the salary and allowances ofthe civil servants and teachers by the Government of Nepal mainly attributed tosuch a rise in the recurrent expenditure Likewise increasing expenditure on specialsecurity plan growing amount of subsidies to public school and increment in thedistribution of economic assistance accounted for such a rise in the recurrentexpenditure34 In the review period capital expenditure increased by 335 percent to Rs3475billion as against a 114 percent increase in the corresponding period of the previousyear However such amount of capital expenditure accounted for only 3270percent of the budget estimate Delay in the budget approval lingering in thecontract process absence of representatives in local bodies as well as weak law andorder situation in the country are mainly responsible for the lower performance ofcapital expenditure in the review period1048576Figure includes the reports from 7 NRB district offices 35 RBB branches (out of65 branches conducting govt transaction) 21 NBL branches (out of 42 branchesconducting govt transaction) 5 Everest Bank branches and 1 from NepalBangladesh Bank Ltd7

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

Inflationary pressure according to the NRB macroeconomic report has been driven primarily by significant price rise of 164 in food and beverages group and a moderate rise of 22 in non food and services group Despite a recent decline in inflation figures the high price increment in food and beverage group is making an average consumer worse off whose consumption basket is predominantly tilted towards food and beverages side

Product-wise break down of Inflation figure

Food and Beverage Group Index 164

Sugar and Sugar Related Products 506

Pulses 295

Grains and Cereal Products 81

Meat Fish and Eggs 295

Vegetables and Fruitsi 387

Non-Food and Services Group Index 22

Tobacco and Related Products 116

Transport and Communication 80

Geographic breakdown of Inflation figure

Kathmandu Valley 81

Hills 103

Terai 107Figure 2 Breakdown of October 2009 Inflation numbers

Global inflation

Recently the Indian government has come out with a new guideline on disclosing inflation statistics to the public According to the new guideline Wholesale Price Index (WPI) based inflation figure will now be released on a monthly basis compared to previous weekly releases As per the new guideline the monthly WPI based inflation for October 2009 is 134 compared to 1106 a year earlier

In March 2009 the CPI based US inflation turned negative for the first time in 54 years reaching negative 038 At the end of Oct 2009 the Y-o-Y inflation in US is still negative 020 (see figure 3 for details) Low inflation in major advanced economies is largely due to the economic recession from the fallout of the financial crisis of 2008 and remarkably low oil and other commodity prices Experts however are divided over the outlook of the inflation in the United States With the fed funds rate at the lowest bound possible there is abundant liquidity in the US which could push up price levels And because of the high unemployment rate in the US the Federal Reserve is not in the position to raise the fed funds rate any time soon as a rate hike could kill the nascent US economic recovery

Japan is fighting another deflationary spiral as inflation has turned negative for last eight months According to Bank of Japan Y-o-Y inflation fell by 22 during October 2009 due to decline in gasoline prices In China however inflation has turned positive for the first time in a year largely due to massive credit expansion fueled by the Chinese governmentrsquos recent USD 500 billion stimulus plan As a result Chinese industrial output rose 192 in November ndash highest expansion since 2007 Similarly inflation in Euro Zone has also turned positive for the first time in seven months as price level in 16-countries Euro bloc climbed 06 in November 2009

CountriesEconomic Zone Inflation rate Data

United States -020 Oct 2009

India 134 Oct 2009

Euro zone 06 Nov 2009

Japan -22 Oct 2009

China 06 Nov 2009Figure 3 Global Inflation numbers

Reasons for high inflation in Nepal

While the inflation rate is falling all over the globe why inflation has been skyrocketing in Nepal is still a conundrum and worrisome for policymakers and public in general During the first half of 200809 global food crisis and huge increase in commodity prices were significant drivers of high inflation However despite sharp fall in commodity prices we have not seen commensurate decrease in domestic inflation level Officials at the Nepal Rastra Bank (NRB) and the Ministry of Finance (MOF) have attributed higher inflation to supply constraints emanating from energy crisis constant strikes and bandhs and carteling among businessmen

Figure 4 Annual Remittance for last 5 years (amount in Rs Billion)

These supply-side factors have played major role in pushing the prices up however going forward if the NRB is not able to soak up the excess liquidity in the market then inflation might further creep up especially with a larger government expenditure programs Domestic economy has been inundated with record remittance inflow ndash Rs 210 billion in FY 200809 (See figure 4 for details) Though there is no formal research on the uses of remittance inflows in Nepal anecdotal evidence shows that most of the remittance income has been used up for consumption purpose Even if the remittance incomes are used predominantly in consumption they can be productive provided that higher consumption through multiplier effects leads to expansion of production However manufacturing sector has not been able to pick up in Nepal (In FY 200809 the manufacturing sector witnessed a decline of 05) Given the above background of elevating remittance inflows and shrinking and stagnant production sector one can argue that remittance has also been instrumental in driving up the price levels

Figure 5 Annual average CPI based inflation for last 5 years

In these contexts the inflation target of 7 in FY 0910 might not be unattainable On the monetary side the NRB with the view of containing inflation has put a lower projection on the growth of M2 ndash broad money- of 17 in 200910 compared to 21 in 200810

Current Macroeconomic Situation(Based on the Ten Months Data of 200910)Monetary SituationMoney Supply1 Broad money (M2) expanded by 73 percent in the ten months of 200910 M2 hadexpanded by 175 percent in the corresponding period of the previous year Narrowmoney (M1) which had grown by 157 percent during the ten months of 20089grew by 28 percent in the review period Despite a high growth of net domesticassets in comparison to the last years figure a decline in net foreign assetsaccounted for such a deceleration of monetary aggregates in the review period2 Of the components of narrow money currency in circulation increased by 98percent in the review period compared to an increase of 232 percent during thesame period of the previous year Demand deposits declined by 96 percent in thereview period in contrast to its growth of 19 percent in the corresponding period ofthe previous year Time deposits increased by 94 percent in the review periodcompared to a growth of 182 percent during the same period of the previous year3 Net foreign assets (NFA) after adjusting foreign exchange valuation gainlossdeclined substantially by Rs174 billion in the review period It had increased byRs43 billion in the same period of the previous year An acceleration of tradedeficits in the review period contributed to such a significant decline in net foreignassetsDomestic Credit4 In the ten months of 200910 domestic credit expanded by 102 percent comparedto a growth of 139 percent in the corresponding period of the previous yearDomestic credit increased at a lower rate on account of a decline in net claims ongovernment and the lower growth in the private sector credit of the banking system5 Net claims on government declined by 152 percent (Rs159 billion) in the reviewperiod compared to a 182 percent (Rs159 billion) decline in the correspondingperiod of the previous year An increase in resource mobilization relative togovernment expenditure contributed to such a decline in claims on government inthe review period The government deposits as at mid-May 2010 stood at Rs39billion6 In the review period claims on private sector increased by 168 percent (Rs 734billion) compared to a growth of 224 percent (Rs 763 billion) in the same period a2year ago A contraction in the liquidity position of banking sector contributed to aslowdown in the growth of claims on private sector in the review period7 Claims on non-government financial enterprises declined by 177 percent in thereview period in contrast to a growth of 308 percent in the corresponding period ofthe previous year The decline in investments of commercial banks on financecompanies pension funds and insurance companies in the review periodcontributed to such a decline in claims on the non-government financial enterprises8 In the ten months of 200910 claims on non-financial government enterprisesdeclined by 101 percent compared to a decline of 88 percent in the correspondingperiod of the previous year Partial repayment of loans by National Trading LtdNepal Airlines Corporation Janak Education Material Centre Limited Nepal

Electricity Corporation and Nepal Food Corporation contributed in slowing downthe growth of claims on nonndashfinancial government enterprises in the review periodDeposits Mobilization and Credit Flow of Commercial banks9 In the ten months of 200910 deposits mobilization of commercial banks increasedby 56 percent (Rs306 billion) amounting to Rs 5805 billion as at mid-May 2010The total deposits had increased by 195 percent (Rs821 billion) in thecorresponding period of the previous year10 Loan and advances of commercial banks increased by 122 percent (Rs 635billion) to Rs 5821 billion in the review period Similarly private sector credit ofcommercial banks grew by 175 percent (Rs708 billion) compared to a growth of242 percent (Rs 743 billion) in the corresponding period of the previous year Ofthe private sector credit credit to the production sector increased by 10 percent(Rs88 billion) in the review period compared to a growth of 149 percent in thesame period of the previous year Sugar Cement and Iron and Steel industrieswitnessed a significant credit expansion under the production sector creditSimilarly credit to agriculture sector increased by Rs 15 billion in the reviewperiod In the review period credit to wholesale and retail business as well asfinance insurance and fixed assets and service sectors increased by 264 percent(Rs189 billion) 404 percent (Rs157 billion) and 244 percent (Rs 57 billion)respectively Credit to these sectors during the corresponding period in the previousyear had increased by 157 percent 44 percent and 6 percent respectively Credit toreal estate sector increased to Rs146 billion in the ten months of 200910compared to Rs119 billion in the same period a year agoLiquidity position of Commercial Banks11 The liquid assets of the commercial banks stood at Rs 1704 billion as at mid-May2010 Of the components of liquid assets liquid fund declined by 82 percent Adecline in commercial banks balance with the NRB as well as balance held abroadaccounted for a contraction of liquid funds of commercial banks In the reviewperiod the balance held abroad declined by Rs 16 billion amounting to Rs 518billion while the balance with NRB declined by Rs 86 billion Similarly another3component of liquid assets commercial banks investments in governmentsecurities declined by 114 percent (Rs 82 billion) in the review period12 On account of the higher credit disbursement relative to deposit mobilization thecredit-deposit ratio increased to 893 percent in mid-May 2010 from 812 percent inmid-July 2009 Similarly the liquidity-deposit ratio declined to 294 percent in mid-May 2010 from 342 percent in mid-July 2009Liquidity Management13 In the ten months of 200910 NRB injected net liquidity amounting to Rs1031billion During this period Rs74 billion and Rs10 billion were mopped upthrough outright sale auction and reverse repo auction respectively while Rs 1071billion and Rs 34 billion were injected through repo and outright purchase auctionrespectively In the same period of the previous year net liquidity amounting toRs97 billion was mopped up Of the total liquidity mopped up Rs75 billion andRs 133 billion were mopped up through outright sale auction and reverse repoauction respectively while Rs 11 billion was injected through repo auction14 In the ten months of 200910 NRB injected net liquidity amounting to Rs 845billions through net purchase of USD 11 billion from commercial banks A net

liquidity of Rs 1215 billion was injected through the net purchase of USD 16billion in the same period last year15 The NRB purchased Indian currency equal to 825 billion through the sale of USD18 billion in the Indian money market during the review period Indian currencyequal to 599 billion was purchased through the sale of USD 12 billion in thecorresponding period of the previous year An accelerated trade deficits with Indiaaccounted for such a higher volume of Indian currency purchase in the reviewperiodStanding Liquidity Facility and Inter Bank Transactions16 Banks and Financial Institutions used standing liquidity facility (SLF) amounting toRs919 billion in the review period The use of the SLF by commercial banks hadamounted to Rs966 billion in the corresponding period of the previous yearLikewise Inter-bank transactions of commercial banks stood at Rs2317 billion inthe first ten months of 200910 compared to Rs2482 billion in the correspondingperiod of the previous yearInterest Rates17 The weighted average 91-day Treasury bill rate stood at 741 percent in the tenthmonth of 200910 compared to 673 percent in the corresponding month of theprevious year Similarly the weighted average inter-bank rate stood at 713 percentin the tenth month of 200910 compared to 707 percent in the corresponding monthof the previous year In addition to the short-term interest rates the deposits rate ofcommercial banks also increased in the review period The maximum interest rateof two-year and more than two years fixed deposits increased from 95 percent as at4mid-July 2009 to 13 percent as at mid-May 2010 The shortfall of liquidity in thebanking system contributed to increase the interest rates in the review periodSecurities Market18 The year on year (y-o-y) NEPSE index declined by 3079 percent to 45781 pointsin the first ten months of 200910 This index stood at 66096 in the same periodlast year Likewise NEPSE sensitive index (based on July 2006) stood at 11301point in mid May 2010 which was 17413 in the same period last year The NEPSEfloat index calculated on the basis of final transaction as of August 24 2008 (asbase market value) remained at 4202 in mid May 2010 a contraction of 3423percent compared to the same period last year19 The y-o-y market capitalization increased by 4627 percent to Rs356 billion in midMay 2010 The ratio of market capitalization to GDP stood at 3011 percent in thereview period It was 2457 percent in the same period last year Of the total marketcapitalization bank and financial institutions accounted for 719 percent followedby manufacturing and processing companies (22 percent) hotels (14 percent)business entities (05 percent) hydropower (42 percent) and other economicsectors (20 percent)20 Total paid up capital of the listed companies stood at Rs 7534 billion in mid May2010 an increment of 3656 percent over the period of one year This increase waslargely due to the additional listing of securities at the NEPSE As at the tenthmonth of 200910 additional securities worth Rs2273 billion (ordinary share ofRs398 billion bonus share of Rs 344 billion right share of Rs804 billion andgovernment securities of Rs725 billion) were listed at the NEPSE21 Total number of companies listed at the NEPSE increased to 171 in mid May 2010

compared to 157 last year Among them 139 are banks and financial institutions(including insurance companies) followed by production and processing industries(18) hotels (4) business entities (4) hydropower (4) and companies in other groups(2)InflationConsumer Price Inflation22 The year on year (y-o-y) inflation as measured by the consumer price indexmoderated to 100 percent in mid-May 2010 compared to 129 percent increase inthe same period last year In the review period the price index of food andbeverages group increased by 123 percent whereas the index of non-food andservices group rose only by 72 percent The index of food and beverages and nonfoodand services group had risen by 165 percent and 88 percent respectively inthe same period last year23 Of the items in the food and beverage group price indices of spices increased by287 percent compared to an increase of 175 percent in the same period last yearSimilarly the price indices of sugar and sugar related products restaurant meal5pulses as well as meat fish and eggs sub-groups increased in the review period by226 percent 181 percent 162 percent and 159 percent respectively compared totheir respective increase of 669 percent 182 percent 263 percent and 275 percentin the same period last year The index of grains and cereal products subgroup alsowitnessed an increase of 125 percent compared to an increase of 63 percent in thecorresponding period of the previous year24 Within non-food and services group the index of education reading and recreationhousing goods and services as well as tobacco and related products increased by109 percent 98 percent and 93 percent during the review period compared to theirrespective increase of 83 percent 80 percent and 175 percent during the sameperiod last year25 Region-wise the price index of Hills rose by 120 percent followed by 98 percentin Terai and 91 percent in Kathmandu Valley in the review period The respectiverates were 118 percent 124 percent and 143 percent during the same period lastyear26 In the review period the y-o-y core inflation rose to 112 percent a moderationfrom 127 percent a year agoWholesale Price Inflation27 During the review period the y-o-y wholesale price inflation increased by 84percent compared to a rise of 155 percent a year ago The indices of agriculturalcommodities domestic manufactured commodities and imported commoditiesincreased by 106 percent 89 percent and 41 percent respectively in the reviewperiod compared to their respective increase of 234 percent 77 percent and 84percent a year ago28 Within the agricultural commodities group the price index of spices livestockproduction pulses and foodgrains respectively increased by 296 percent 217percent 187 percent and 178 percent compared to an increase of 213 percent340 percent 254 percent and 26 percent respectively during the same period lastyear29 Within the group of domestic manufactured commodities the price index of foodrelatedproducts increased by 165 percent compared to a rise of 41 percent a year

ago Within the imported commodities group the price indices of petroleumproducts and coal increased by 114 percent in the review period compared to anincrease of 15 percent in the corresponding period of the previous yearNational Salary and Wage Rate30 The overall y-o-y salary and wage rate index rose by 130 percent in the reviewperiod compared to a rise of 211 percent a year ago The increase in basic salaryand allowances in mid-August 200910 by the government of Nepal for civilservants and its simultaneous effect on salary of the private sector contributed tosuch an increase in salary and wage rate index Of the salary and wage rate indices6the salary index increased by 138 percent in the review period compared to a riseof 168 percent in the same period of the previous year The wage rate indexincreased by 127 percent in the review period compared to an increase of 225percent in the same period of the previous year Wages of agricultural industrialand construction laborers increased by 189 percent 41 percent and 82 percentrespectively in the review period These wage rates had increased by 278 percent151 percent and 213 percent respectively in the same period last yearFiscal Situation 1048576Budget Deficit Surplus31 In the ten months of 200910 government budget surplus on cash basis stood atRs71 billion compared to a surplus of Rs 61 billion in the corresponding period ofthe previous yearGovernment Expenditure32 In the review period total government spending increased by 251 percent toRs1596 billion compared to an increase of 257 percent in the correspondingperiod of the previous year The high growth in recurrent as well as capitalexpenditure accounted for such an increase in the government expenditure33 In the review period recurrent expenditure increased by 249 percent to Rs1023billion In the corresponding period of the previous year the recurrent expenditurehad increased by 265 percent An upward revision in the salary and allowances ofthe civil servants and teachers by the Government of Nepal mainly attributed tosuch a rise in the recurrent expenditure Likewise increasing expenditure on specialsecurity plan growing amount of subsidies to public school and increment in thedistribution of economic assistance accounted for such a rise in the recurrentexpenditure34 In the review period capital expenditure increased by 335 percent to Rs3475billion as against a 114 percent increase in the corresponding period of the previousyear However such amount of capital expenditure accounted for only 3270percent of the budget estimate Delay in the budget approval lingering in thecontract process absence of representatives in local bodies as well as weak law andorder situation in the country are mainly responsible for the lower performance ofcapital expenditure in the review period1048576Figure includes the reports from 7 NRB district offices 35 RBB branches (out of65 branches conducting govt transaction) 21 NBL branches (out of 42 branchesconducting govt transaction) 5 Everest Bank branches and 1 from NepalBangladesh Bank Ltd7

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

Japan is fighting another deflationary spiral as inflation has turned negative for last eight months According to Bank of Japan Y-o-Y inflation fell by 22 during October 2009 due to decline in gasoline prices In China however inflation has turned positive for the first time in a year largely due to massive credit expansion fueled by the Chinese governmentrsquos recent USD 500 billion stimulus plan As a result Chinese industrial output rose 192 in November ndash highest expansion since 2007 Similarly inflation in Euro Zone has also turned positive for the first time in seven months as price level in 16-countries Euro bloc climbed 06 in November 2009

CountriesEconomic Zone Inflation rate Data

United States -020 Oct 2009

India 134 Oct 2009

Euro zone 06 Nov 2009

Japan -22 Oct 2009

China 06 Nov 2009Figure 3 Global Inflation numbers

Reasons for high inflation in Nepal

While the inflation rate is falling all over the globe why inflation has been skyrocketing in Nepal is still a conundrum and worrisome for policymakers and public in general During the first half of 200809 global food crisis and huge increase in commodity prices were significant drivers of high inflation However despite sharp fall in commodity prices we have not seen commensurate decrease in domestic inflation level Officials at the Nepal Rastra Bank (NRB) and the Ministry of Finance (MOF) have attributed higher inflation to supply constraints emanating from energy crisis constant strikes and bandhs and carteling among businessmen

Figure 4 Annual Remittance for last 5 years (amount in Rs Billion)

These supply-side factors have played major role in pushing the prices up however going forward if the NRB is not able to soak up the excess liquidity in the market then inflation might further creep up especially with a larger government expenditure programs Domestic economy has been inundated with record remittance inflow ndash Rs 210 billion in FY 200809 (See figure 4 for details) Though there is no formal research on the uses of remittance inflows in Nepal anecdotal evidence shows that most of the remittance income has been used up for consumption purpose Even if the remittance incomes are used predominantly in consumption they can be productive provided that higher consumption through multiplier effects leads to expansion of production However manufacturing sector has not been able to pick up in Nepal (In FY 200809 the manufacturing sector witnessed a decline of 05) Given the above background of elevating remittance inflows and shrinking and stagnant production sector one can argue that remittance has also been instrumental in driving up the price levels

Figure 5 Annual average CPI based inflation for last 5 years

In these contexts the inflation target of 7 in FY 0910 might not be unattainable On the monetary side the NRB with the view of containing inflation has put a lower projection on the growth of M2 ndash broad money- of 17 in 200910 compared to 21 in 200810

Current Macroeconomic Situation(Based on the Ten Months Data of 200910)Monetary SituationMoney Supply1 Broad money (M2) expanded by 73 percent in the ten months of 200910 M2 hadexpanded by 175 percent in the corresponding period of the previous year Narrowmoney (M1) which had grown by 157 percent during the ten months of 20089grew by 28 percent in the review period Despite a high growth of net domesticassets in comparison to the last years figure a decline in net foreign assetsaccounted for such a deceleration of monetary aggregates in the review period2 Of the components of narrow money currency in circulation increased by 98percent in the review period compared to an increase of 232 percent during thesame period of the previous year Demand deposits declined by 96 percent in thereview period in contrast to its growth of 19 percent in the corresponding period ofthe previous year Time deposits increased by 94 percent in the review periodcompared to a growth of 182 percent during the same period of the previous year3 Net foreign assets (NFA) after adjusting foreign exchange valuation gainlossdeclined substantially by Rs174 billion in the review period It had increased byRs43 billion in the same period of the previous year An acceleration of tradedeficits in the review period contributed to such a significant decline in net foreignassetsDomestic Credit4 In the ten months of 200910 domestic credit expanded by 102 percent comparedto a growth of 139 percent in the corresponding period of the previous yearDomestic credit increased at a lower rate on account of a decline in net claims ongovernment and the lower growth in the private sector credit of the banking system5 Net claims on government declined by 152 percent (Rs159 billion) in the reviewperiod compared to a 182 percent (Rs159 billion) decline in the correspondingperiod of the previous year An increase in resource mobilization relative togovernment expenditure contributed to such a decline in claims on government inthe review period The government deposits as at mid-May 2010 stood at Rs39billion6 In the review period claims on private sector increased by 168 percent (Rs 734billion) compared to a growth of 224 percent (Rs 763 billion) in the same period a2year ago A contraction in the liquidity position of banking sector contributed to aslowdown in the growth of claims on private sector in the review period7 Claims on non-government financial enterprises declined by 177 percent in thereview period in contrast to a growth of 308 percent in the corresponding period ofthe previous year The decline in investments of commercial banks on financecompanies pension funds and insurance companies in the review periodcontributed to such a decline in claims on the non-government financial enterprises8 In the ten months of 200910 claims on non-financial government enterprisesdeclined by 101 percent compared to a decline of 88 percent in the correspondingperiod of the previous year Partial repayment of loans by National Trading LtdNepal Airlines Corporation Janak Education Material Centre Limited Nepal

Electricity Corporation and Nepal Food Corporation contributed in slowing downthe growth of claims on nonndashfinancial government enterprises in the review periodDeposits Mobilization and Credit Flow of Commercial banks9 In the ten months of 200910 deposits mobilization of commercial banks increasedby 56 percent (Rs306 billion) amounting to Rs 5805 billion as at mid-May 2010The total deposits had increased by 195 percent (Rs821 billion) in thecorresponding period of the previous year10 Loan and advances of commercial banks increased by 122 percent (Rs 635billion) to Rs 5821 billion in the review period Similarly private sector credit ofcommercial banks grew by 175 percent (Rs708 billion) compared to a growth of242 percent (Rs 743 billion) in the corresponding period of the previous year Ofthe private sector credit credit to the production sector increased by 10 percent(Rs88 billion) in the review period compared to a growth of 149 percent in thesame period of the previous year Sugar Cement and Iron and Steel industrieswitnessed a significant credit expansion under the production sector creditSimilarly credit to agriculture sector increased by Rs 15 billion in the reviewperiod In the review period credit to wholesale and retail business as well asfinance insurance and fixed assets and service sectors increased by 264 percent(Rs189 billion) 404 percent (Rs157 billion) and 244 percent (Rs 57 billion)respectively Credit to these sectors during the corresponding period in the previousyear had increased by 157 percent 44 percent and 6 percent respectively Credit toreal estate sector increased to Rs146 billion in the ten months of 200910compared to Rs119 billion in the same period a year agoLiquidity position of Commercial Banks11 The liquid assets of the commercial banks stood at Rs 1704 billion as at mid-May2010 Of the components of liquid assets liquid fund declined by 82 percent Adecline in commercial banks balance with the NRB as well as balance held abroadaccounted for a contraction of liquid funds of commercial banks In the reviewperiod the balance held abroad declined by Rs 16 billion amounting to Rs 518billion while the balance with NRB declined by Rs 86 billion Similarly another3component of liquid assets commercial banks investments in governmentsecurities declined by 114 percent (Rs 82 billion) in the review period12 On account of the higher credit disbursement relative to deposit mobilization thecredit-deposit ratio increased to 893 percent in mid-May 2010 from 812 percent inmid-July 2009 Similarly the liquidity-deposit ratio declined to 294 percent in mid-May 2010 from 342 percent in mid-July 2009Liquidity Management13 In the ten months of 200910 NRB injected net liquidity amounting to Rs1031billion During this period Rs74 billion and Rs10 billion were mopped upthrough outright sale auction and reverse repo auction respectively while Rs 1071billion and Rs 34 billion were injected through repo and outright purchase auctionrespectively In the same period of the previous year net liquidity amounting toRs97 billion was mopped up Of the total liquidity mopped up Rs75 billion andRs 133 billion were mopped up through outright sale auction and reverse repoauction respectively while Rs 11 billion was injected through repo auction14 In the ten months of 200910 NRB injected net liquidity amounting to Rs 845billions through net purchase of USD 11 billion from commercial banks A net

liquidity of Rs 1215 billion was injected through the net purchase of USD 16billion in the same period last year15 The NRB purchased Indian currency equal to 825 billion through the sale of USD18 billion in the Indian money market during the review period Indian currencyequal to 599 billion was purchased through the sale of USD 12 billion in thecorresponding period of the previous year An accelerated trade deficits with Indiaaccounted for such a higher volume of Indian currency purchase in the reviewperiodStanding Liquidity Facility and Inter Bank Transactions16 Banks and Financial Institutions used standing liquidity facility (SLF) amounting toRs919 billion in the review period The use of the SLF by commercial banks hadamounted to Rs966 billion in the corresponding period of the previous yearLikewise Inter-bank transactions of commercial banks stood at Rs2317 billion inthe first ten months of 200910 compared to Rs2482 billion in the correspondingperiod of the previous yearInterest Rates17 The weighted average 91-day Treasury bill rate stood at 741 percent in the tenthmonth of 200910 compared to 673 percent in the corresponding month of theprevious year Similarly the weighted average inter-bank rate stood at 713 percentin the tenth month of 200910 compared to 707 percent in the corresponding monthof the previous year In addition to the short-term interest rates the deposits rate ofcommercial banks also increased in the review period The maximum interest rateof two-year and more than two years fixed deposits increased from 95 percent as at4mid-July 2009 to 13 percent as at mid-May 2010 The shortfall of liquidity in thebanking system contributed to increase the interest rates in the review periodSecurities Market18 The year on year (y-o-y) NEPSE index declined by 3079 percent to 45781 pointsin the first ten months of 200910 This index stood at 66096 in the same periodlast year Likewise NEPSE sensitive index (based on July 2006) stood at 11301point in mid May 2010 which was 17413 in the same period last year The NEPSEfloat index calculated on the basis of final transaction as of August 24 2008 (asbase market value) remained at 4202 in mid May 2010 a contraction of 3423percent compared to the same period last year19 The y-o-y market capitalization increased by 4627 percent to Rs356 billion in midMay 2010 The ratio of market capitalization to GDP stood at 3011 percent in thereview period It was 2457 percent in the same period last year Of the total marketcapitalization bank and financial institutions accounted for 719 percent followedby manufacturing and processing companies (22 percent) hotels (14 percent)business entities (05 percent) hydropower (42 percent) and other economicsectors (20 percent)20 Total paid up capital of the listed companies stood at Rs 7534 billion in mid May2010 an increment of 3656 percent over the period of one year This increase waslargely due to the additional listing of securities at the NEPSE As at the tenthmonth of 200910 additional securities worth Rs2273 billion (ordinary share ofRs398 billion bonus share of Rs 344 billion right share of Rs804 billion andgovernment securities of Rs725 billion) were listed at the NEPSE21 Total number of companies listed at the NEPSE increased to 171 in mid May 2010

compared to 157 last year Among them 139 are banks and financial institutions(including insurance companies) followed by production and processing industries(18) hotels (4) business entities (4) hydropower (4) and companies in other groups(2)InflationConsumer Price Inflation22 The year on year (y-o-y) inflation as measured by the consumer price indexmoderated to 100 percent in mid-May 2010 compared to 129 percent increase inthe same period last year In the review period the price index of food andbeverages group increased by 123 percent whereas the index of non-food andservices group rose only by 72 percent The index of food and beverages and nonfoodand services group had risen by 165 percent and 88 percent respectively inthe same period last year23 Of the items in the food and beverage group price indices of spices increased by287 percent compared to an increase of 175 percent in the same period last yearSimilarly the price indices of sugar and sugar related products restaurant meal5pulses as well as meat fish and eggs sub-groups increased in the review period by226 percent 181 percent 162 percent and 159 percent respectively compared totheir respective increase of 669 percent 182 percent 263 percent and 275 percentin the same period last year The index of grains and cereal products subgroup alsowitnessed an increase of 125 percent compared to an increase of 63 percent in thecorresponding period of the previous year24 Within non-food and services group the index of education reading and recreationhousing goods and services as well as tobacco and related products increased by109 percent 98 percent and 93 percent during the review period compared to theirrespective increase of 83 percent 80 percent and 175 percent during the sameperiod last year25 Region-wise the price index of Hills rose by 120 percent followed by 98 percentin Terai and 91 percent in Kathmandu Valley in the review period The respectiverates were 118 percent 124 percent and 143 percent during the same period lastyear26 In the review period the y-o-y core inflation rose to 112 percent a moderationfrom 127 percent a year agoWholesale Price Inflation27 During the review period the y-o-y wholesale price inflation increased by 84percent compared to a rise of 155 percent a year ago The indices of agriculturalcommodities domestic manufactured commodities and imported commoditiesincreased by 106 percent 89 percent and 41 percent respectively in the reviewperiod compared to their respective increase of 234 percent 77 percent and 84percent a year ago28 Within the agricultural commodities group the price index of spices livestockproduction pulses and foodgrains respectively increased by 296 percent 217percent 187 percent and 178 percent compared to an increase of 213 percent340 percent 254 percent and 26 percent respectively during the same period lastyear29 Within the group of domestic manufactured commodities the price index of foodrelatedproducts increased by 165 percent compared to a rise of 41 percent a year

ago Within the imported commodities group the price indices of petroleumproducts and coal increased by 114 percent in the review period compared to anincrease of 15 percent in the corresponding period of the previous yearNational Salary and Wage Rate30 The overall y-o-y salary and wage rate index rose by 130 percent in the reviewperiod compared to a rise of 211 percent a year ago The increase in basic salaryand allowances in mid-August 200910 by the government of Nepal for civilservants and its simultaneous effect on salary of the private sector contributed tosuch an increase in salary and wage rate index Of the salary and wage rate indices6the salary index increased by 138 percent in the review period compared to a riseof 168 percent in the same period of the previous year The wage rate indexincreased by 127 percent in the review period compared to an increase of 225percent in the same period of the previous year Wages of agricultural industrialand construction laborers increased by 189 percent 41 percent and 82 percentrespectively in the review period These wage rates had increased by 278 percent151 percent and 213 percent respectively in the same period last yearFiscal Situation 1048576Budget Deficit Surplus31 In the ten months of 200910 government budget surplus on cash basis stood atRs71 billion compared to a surplus of Rs 61 billion in the corresponding period ofthe previous yearGovernment Expenditure32 In the review period total government spending increased by 251 percent toRs1596 billion compared to an increase of 257 percent in the correspondingperiod of the previous year The high growth in recurrent as well as capitalexpenditure accounted for such an increase in the government expenditure33 In the review period recurrent expenditure increased by 249 percent to Rs1023billion In the corresponding period of the previous year the recurrent expenditurehad increased by 265 percent An upward revision in the salary and allowances ofthe civil servants and teachers by the Government of Nepal mainly attributed tosuch a rise in the recurrent expenditure Likewise increasing expenditure on specialsecurity plan growing amount of subsidies to public school and increment in thedistribution of economic assistance accounted for such a rise in the recurrentexpenditure34 In the review period capital expenditure increased by 335 percent to Rs3475billion as against a 114 percent increase in the corresponding period of the previousyear However such amount of capital expenditure accounted for only 3270percent of the budget estimate Delay in the budget approval lingering in thecontract process absence of representatives in local bodies as well as weak law andorder situation in the country are mainly responsible for the lower performance ofcapital expenditure in the review period1048576Figure includes the reports from 7 NRB district offices 35 RBB branches (out of65 branches conducting govt transaction) 21 NBL branches (out of 42 branchesconducting govt transaction) 5 Everest Bank branches and 1 from NepalBangladesh Bank Ltd7

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

Figure 4 Annual Remittance for last 5 years (amount in Rs Billion)

These supply-side factors have played major role in pushing the prices up however going forward if the NRB is not able to soak up the excess liquidity in the market then inflation might further creep up especially with a larger government expenditure programs Domestic economy has been inundated with record remittance inflow ndash Rs 210 billion in FY 200809 (See figure 4 for details) Though there is no formal research on the uses of remittance inflows in Nepal anecdotal evidence shows that most of the remittance income has been used up for consumption purpose Even if the remittance incomes are used predominantly in consumption they can be productive provided that higher consumption through multiplier effects leads to expansion of production However manufacturing sector has not been able to pick up in Nepal (In FY 200809 the manufacturing sector witnessed a decline of 05) Given the above background of elevating remittance inflows and shrinking and stagnant production sector one can argue that remittance has also been instrumental in driving up the price levels

Figure 5 Annual average CPI based inflation for last 5 years

In these contexts the inflation target of 7 in FY 0910 might not be unattainable On the monetary side the NRB with the view of containing inflation has put a lower projection on the growth of M2 ndash broad money- of 17 in 200910 compared to 21 in 200810

Current Macroeconomic Situation(Based on the Ten Months Data of 200910)Monetary SituationMoney Supply1 Broad money (M2) expanded by 73 percent in the ten months of 200910 M2 hadexpanded by 175 percent in the corresponding period of the previous year Narrowmoney (M1) which had grown by 157 percent during the ten months of 20089grew by 28 percent in the review period Despite a high growth of net domesticassets in comparison to the last years figure a decline in net foreign assetsaccounted for such a deceleration of monetary aggregates in the review period2 Of the components of narrow money currency in circulation increased by 98percent in the review period compared to an increase of 232 percent during thesame period of the previous year Demand deposits declined by 96 percent in thereview period in contrast to its growth of 19 percent in the corresponding period ofthe previous year Time deposits increased by 94 percent in the review periodcompared to a growth of 182 percent during the same period of the previous year3 Net foreign assets (NFA) after adjusting foreign exchange valuation gainlossdeclined substantially by Rs174 billion in the review period It had increased byRs43 billion in the same period of the previous year An acceleration of tradedeficits in the review period contributed to such a significant decline in net foreignassetsDomestic Credit4 In the ten months of 200910 domestic credit expanded by 102 percent comparedto a growth of 139 percent in the corresponding period of the previous yearDomestic credit increased at a lower rate on account of a decline in net claims ongovernment and the lower growth in the private sector credit of the banking system5 Net claims on government declined by 152 percent (Rs159 billion) in the reviewperiod compared to a 182 percent (Rs159 billion) decline in the correspondingperiod of the previous year An increase in resource mobilization relative togovernment expenditure contributed to such a decline in claims on government inthe review period The government deposits as at mid-May 2010 stood at Rs39billion6 In the review period claims on private sector increased by 168 percent (Rs 734billion) compared to a growth of 224 percent (Rs 763 billion) in the same period a2year ago A contraction in the liquidity position of banking sector contributed to aslowdown in the growth of claims on private sector in the review period7 Claims on non-government financial enterprises declined by 177 percent in thereview period in contrast to a growth of 308 percent in the corresponding period ofthe previous year The decline in investments of commercial banks on financecompanies pension funds and insurance companies in the review periodcontributed to such a decline in claims on the non-government financial enterprises8 In the ten months of 200910 claims on non-financial government enterprisesdeclined by 101 percent compared to a decline of 88 percent in the correspondingperiod of the previous year Partial repayment of loans by National Trading LtdNepal Airlines Corporation Janak Education Material Centre Limited Nepal

Electricity Corporation and Nepal Food Corporation contributed in slowing downthe growth of claims on nonndashfinancial government enterprises in the review periodDeposits Mobilization and Credit Flow of Commercial banks9 In the ten months of 200910 deposits mobilization of commercial banks increasedby 56 percent (Rs306 billion) amounting to Rs 5805 billion as at mid-May 2010The total deposits had increased by 195 percent (Rs821 billion) in thecorresponding period of the previous year10 Loan and advances of commercial banks increased by 122 percent (Rs 635billion) to Rs 5821 billion in the review period Similarly private sector credit ofcommercial banks grew by 175 percent (Rs708 billion) compared to a growth of242 percent (Rs 743 billion) in the corresponding period of the previous year Ofthe private sector credit credit to the production sector increased by 10 percent(Rs88 billion) in the review period compared to a growth of 149 percent in thesame period of the previous year Sugar Cement and Iron and Steel industrieswitnessed a significant credit expansion under the production sector creditSimilarly credit to agriculture sector increased by Rs 15 billion in the reviewperiod In the review period credit to wholesale and retail business as well asfinance insurance and fixed assets and service sectors increased by 264 percent(Rs189 billion) 404 percent (Rs157 billion) and 244 percent (Rs 57 billion)respectively Credit to these sectors during the corresponding period in the previousyear had increased by 157 percent 44 percent and 6 percent respectively Credit toreal estate sector increased to Rs146 billion in the ten months of 200910compared to Rs119 billion in the same period a year agoLiquidity position of Commercial Banks11 The liquid assets of the commercial banks stood at Rs 1704 billion as at mid-May2010 Of the components of liquid assets liquid fund declined by 82 percent Adecline in commercial banks balance with the NRB as well as balance held abroadaccounted for a contraction of liquid funds of commercial banks In the reviewperiod the balance held abroad declined by Rs 16 billion amounting to Rs 518billion while the balance with NRB declined by Rs 86 billion Similarly another3component of liquid assets commercial banks investments in governmentsecurities declined by 114 percent (Rs 82 billion) in the review period12 On account of the higher credit disbursement relative to deposit mobilization thecredit-deposit ratio increased to 893 percent in mid-May 2010 from 812 percent inmid-July 2009 Similarly the liquidity-deposit ratio declined to 294 percent in mid-May 2010 from 342 percent in mid-July 2009Liquidity Management13 In the ten months of 200910 NRB injected net liquidity amounting to Rs1031billion During this period Rs74 billion and Rs10 billion were mopped upthrough outright sale auction and reverse repo auction respectively while Rs 1071billion and Rs 34 billion were injected through repo and outright purchase auctionrespectively In the same period of the previous year net liquidity amounting toRs97 billion was mopped up Of the total liquidity mopped up Rs75 billion andRs 133 billion were mopped up through outright sale auction and reverse repoauction respectively while Rs 11 billion was injected through repo auction14 In the ten months of 200910 NRB injected net liquidity amounting to Rs 845billions through net purchase of USD 11 billion from commercial banks A net

liquidity of Rs 1215 billion was injected through the net purchase of USD 16billion in the same period last year15 The NRB purchased Indian currency equal to 825 billion through the sale of USD18 billion in the Indian money market during the review period Indian currencyequal to 599 billion was purchased through the sale of USD 12 billion in thecorresponding period of the previous year An accelerated trade deficits with Indiaaccounted for such a higher volume of Indian currency purchase in the reviewperiodStanding Liquidity Facility and Inter Bank Transactions16 Banks and Financial Institutions used standing liquidity facility (SLF) amounting toRs919 billion in the review period The use of the SLF by commercial banks hadamounted to Rs966 billion in the corresponding period of the previous yearLikewise Inter-bank transactions of commercial banks stood at Rs2317 billion inthe first ten months of 200910 compared to Rs2482 billion in the correspondingperiod of the previous yearInterest Rates17 The weighted average 91-day Treasury bill rate stood at 741 percent in the tenthmonth of 200910 compared to 673 percent in the corresponding month of theprevious year Similarly the weighted average inter-bank rate stood at 713 percentin the tenth month of 200910 compared to 707 percent in the corresponding monthof the previous year In addition to the short-term interest rates the deposits rate ofcommercial banks also increased in the review period The maximum interest rateof two-year and more than two years fixed deposits increased from 95 percent as at4mid-July 2009 to 13 percent as at mid-May 2010 The shortfall of liquidity in thebanking system contributed to increase the interest rates in the review periodSecurities Market18 The year on year (y-o-y) NEPSE index declined by 3079 percent to 45781 pointsin the first ten months of 200910 This index stood at 66096 in the same periodlast year Likewise NEPSE sensitive index (based on July 2006) stood at 11301point in mid May 2010 which was 17413 in the same period last year The NEPSEfloat index calculated on the basis of final transaction as of August 24 2008 (asbase market value) remained at 4202 in mid May 2010 a contraction of 3423percent compared to the same period last year19 The y-o-y market capitalization increased by 4627 percent to Rs356 billion in midMay 2010 The ratio of market capitalization to GDP stood at 3011 percent in thereview period It was 2457 percent in the same period last year Of the total marketcapitalization bank and financial institutions accounted for 719 percent followedby manufacturing and processing companies (22 percent) hotels (14 percent)business entities (05 percent) hydropower (42 percent) and other economicsectors (20 percent)20 Total paid up capital of the listed companies stood at Rs 7534 billion in mid May2010 an increment of 3656 percent over the period of one year This increase waslargely due to the additional listing of securities at the NEPSE As at the tenthmonth of 200910 additional securities worth Rs2273 billion (ordinary share ofRs398 billion bonus share of Rs 344 billion right share of Rs804 billion andgovernment securities of Rs725 billion) were listed at the NEPSE21 Total number of companies listed at the NEPSE increased to 171 in mid May 2010

compared to 157 last year Among them 139 are banks and financial institutions(including insurance companies) followed by production and processing industries(18) hotels (4) business entities (4) hydropower (4) and companies in other groups(2)InflationConsumer Price Inflation22 The year on year (y-o-y) inflation as measured by the consumer price indexmoderated to 100 percent in mid-May 2010 compared to 129 percent increase inthe same period last year In the review period the price index of food andbeverages group increased by 123 percent whereas the index of non-food andservices group rose only by 72 percent The index of food and beverages and nonfoodand services group had risen by 165 percent and 88 percent respectively inthe same period last year23 Of the items in the food and beverage group price indices of spices increased by287 percent compared to an increase of 175 percent in the same period last yearSimilarly the price indices of sugar and sugar related products restaurant meal5pulses as well as meat fish and eggs sub-groups increased in the review period by226 percent 181 percent 162 percent and 159 percent respectively compared totheir respective increase of 669 percent 182 percent 263 percent and 275 percentin the same period last year The index of grains and cereal products subgroup alsowitnessed an increase of 125 percent compared to an increase of 63 percent in thecorresponding period of the previous year24 Within non-food and services group the index of education reading and recreationhousing goods and services as well as tobacco and related products increased by109 percent 98 percent and 93 percent during the review period compared to theirrespective increase of 83 percent 80 percent and 175 percent during the sameperiod last year25 Region-wise the price index of Hills rose by 120 percent followed by 98 percentin Terai and 91 percent in Kathmandu Valley in the review period The respectiverates were 118 percent 124 percent and 143 percent during the same period lastyear26 In the review period the y-o-y core inflation rose to 112 percent a moderationfrom 127 percent a year agoWholesale Price Inflation27 During the review period the y-o-y wholesale price inflation increased by 84percent compared to a rise of 155 percent a year ago The indices of agriculturalcommodities domestic manufactured commodities and imported commoditiesincreased by 106 percent 89 percent and 41 percent respectively in the reviewperiod compared to their respective increase of 234 percent 77 percent and 84percent a year ago28 Within the agricultural commodities group the price index of spices livestockproduction pulses and foodgrains respectively increased by 296 percent 217percent 187 percent and 178 percent compared to an increase of 213 percent340 percent 254 percent and 26 percent respectively during the same period lastyear29 Within the group of domestic manufactured commodities the price index of foodrelatedproducts increased by 165 percent compared to a rise of 41 percent a year

ago Within the imported commodities group the price indices of petroleumproducts and coal increased by 114 percent in the review period compared to anincrease of 15 percent in the corresponding period of the previous yearNational Salary and Wage Rate30 The overall y-o-y salary and wage rate index rose by 130 percent in the reviewperiod compared to a rise of 211 percent a year ago The increase in basic salaryand allowances in mid-August 200910 by the government of Nepal for civilservants and its simultaneous effect on salary of the private sector contributed tosuch an increase in salary and wage rate index Of the salary and wage rate indices6the salary index increased by 138 percent in the review period compared to a riseof 168 percent in the same period of the previous year The wage rate indexincreased by 127 percent in the review period compared to an increase of 225percent in the same period of the previous year Wages of agricultural industrialand construction laborers increased by 189 percent 41 percent and 82 percentrespectively in the review period These wage rates had increased by 278 percent151 percent and 213 percent respectively in the same period last yearFiscal Situation 1048576Budget Deficit Surplus31 In the ten months of 200910 government budget surplus on cash basis stood atRs71 billion compared to a surplus of Rs 61 billion in the corresponding period ofthe previous yearGovernment Expenditure32 In the review period total government spending increased by 251 percent toRs1596 billion compared to an increase of 257 percent in the correspondingperiod of the previous year The high growth in recurrent as well as capitalexpenditure accounted for such an increase in the government expenditure33 In the review period recurrent expenditure increased by 249 percent to Rs1023billion In the corresponding period of the previous year the recurrent expenditurehad increased by 265 percent An upward revision in the salary and allowances ofthe civil servants and teachers by the Government of Nepal mainly attributed tosuch a rise in the recurrent expenditure Likewise increasing expenditure on specialsecurity plan growing amount of subsidies to public school and increment in thedistribution of economic assistance accounted for such a rise in the recurrentexpenditure34 In the review period capital expenditure increased by 335 percent to Rs3475billion as against a 114 percent increase in the corresponding period of the previousyear However such amount of capital expenditure accounted for only 3270percent of the budget estimate Delay in the budget approval lingering in thecontract process absence of representatives in local bodies as well as weak law andorder situation in the country are mainly responsible for the lower performance ofcapital expenditure in the review period1048576Figure includes the reports from 7 NRB district offices 35 RBB branches (out of65 branches conducting govt transaction) 21 NBL branches (out of 42 branchesconducting govt transaction) 5 Everest Bank branches and 1 from NepalBangladesh Bank Ltd7

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

Current Macroeconomic Situation(Based on the Ten Months Data of 200910)Monetary SituationMoney Supply1 Broad money (M2) expanded by 73 percent in the ten months of 200910 M2 hadexpanded by 175 percent in the corresponding period of the previous year Narrowmoney (M1) which had grown by 157 percent during the ten months of 20089grew by 28 percent in the review period Despite a high growth of net domesticassets in comparison to the last years figure a decline in net foreign assetsaccounted for such a deceleration of monetary aggregates in the review period2 Of the components of narrow money currency in circulation increased by 98percent in the review period compared to an increase of 232 percent during thesame period of the previous year Demand deposits declined by 96 percent in thereview period in contrast to its growth of 19 percent in the corresponding period ofthe previous year Time deposits increased by 94 percent in the review periodcompared to a growth of 182 percent during the same period of the previous year3 Net foreign assets (NFA) after adjusting foreign exchange valuation gainlossdeclined substantially by Rs174 billion in the review period It had increased byRs43 billion in the same period of the previous year An acceleration of tradedeficits in the review period contributed to such a significant decline in net foreignassetsDomestic Credit4 In the ten months of 200910 domestic credit expanded by 102 percent comparedto a growth of 139 percent in the corresponding period of the previous yearDomestic credit increased at a lower rate on account of a decline in net claims ongovernment and the lower growth in the private sector credit of the banking system5 Net claims on government declined by 152 percent (Rs159 billion) in the reviewperiod compared to a 182 percent (Rs159 billion) decline in the correspondingperiod of the previous year An increase in resource mobilization relative togovernment expenditure contributed to such a decline in claims on government inthe review period The government deposits as at mid-May 2010 stood at Rs39billion6 In the review period claims on private sector increased by 168 percent (Rs 734billion) compared to a growth of 224 percent (Rs 763 billion) in the same period a2year ago A contraction in the liquidity position of banking sector contributed to aslowdown in the growth of claims on private sector in the review period7 Claims on non-government financial enterprises declined by 177 percent in thereview period in contrast to a growth of 308 percent in the corresponding period ofthe previous year The decline in investments of commercial banks on financecompanies pension funds and insurance companies in the review periodcontributed to such a decline in claims on the non-government financial enterprises8 In the ten months of 200910 claims on non-financial government enterprisesdeclined by 101 percent compared to a decline of 88 percent in the correspondingperiod of the previous year Partial repayment of loans by National Trading LtdNepal Airlines Corporation Janak Education Material Centre Limited Nepal

Electricity Corporation and Nepal Food Corporation contributed in slowing downthe growth of claims on nonndashfinancial government enterprises in the review periodDeposits Mobilization and Credit Flow of Commercial banks9 In the ten months of 200910 deposits mobilization of commercial banks increasedby 56 percent (Rs306 billion) amounting to Rs 5805 billion as at mid-May 2010The total deposits had increased by 195 percent (Rs821 billion) in thecorresponding period of the previous year10 Loan and advances of commercial banks increased by 122 percent (Rs 635billion) to Rs 5821 billion in the review period Similarly private sector credit ofcommercial banks grew by 175 percent (Rs708 billion) compared to a growth of242 percent (Rs 743 billion) in the corresponding period of the previous year Ofthe private sector credit credit to the production sector increased by 10 percent(Rs88 billion) in the review period compared to a growth of 149 percent in thesame period of the previous year Sugar Cement and Iron and Steel industrieswitnessed a significant credit expansion under the production sector creditSimilarly credit to agriculture sector increased by Rs 15 billion in the reviewperiod In the review period credit to wholesale and retail business as well asfinance insurance and fixed assets and service sectors increased by 264 percent(Rs189 billion) 404 percent (Rs157 billion) and 244 percent (Rs 57 billion)respectively Credit to these sectors during the corresponding period in the previousyear had increased by 157 percent 44 percent and 6 percent respectively Credit toreal estate sector increased to Rs146 billion in the ten months of 200910compared to Rs119 billion in the same period a year agoLiquidity position of Commercial Banks11 The liquid assets of the commercial banks stood at Rs 1704 billion as at mid-May2010 Of the components of liquid assets liquid fund declined by 82 percent Adecline in commercial banks balance with the NRB as well as balance held abroadaccounted for a contraction of liquid funds of commercial banks In the reviewperiod the balance held abroad declined by Rs 16 billion amounting to Rs 518billion while the balance with NRB declined by Rs 86 billion Similarly another3component of liquid assets commercial banks investments in governmentsecurities declined by 114 percent (Rs 82 billion) in the review period12 On account of the higher credit disbursement relative to deposit mobilization thecredit-deposit ratio increased to 893 percent in mid-May 2010 from 812 percent inmid-July 2009 Similarly the liquidity-deposit ratio declined to 294 percent in mid-May 2010 from 342 percent in mid-July 2009Liquidity Management13 In the ten months of 200910 NRB injected net liquidity amounting to Rs1031billion During this period Rs74 billion and Rs10 billion were mopped upthrough outright sale auction and reverse repo auction respectively while Rs 1071billion and Rs 34 billion were injected through repo and outright purchase auctionrespectively In the same period of the previous year net liquidity amounting toRs97 billion was mopped up Of the total liquidity mopped up Rs75 billion andRs 133 billion were mopped up through outright sale auction and reverse repoauction respectively while Rs 11 billion was injected through repo auction14 In the ten months of 200910 NRB injected net liquidity amounting to Rs 845billions through net purchase of USD 11 billion from commercial banks A net

liquidity of Rs 1215 billion was injected through the net purchase of USD 16billion in the same period last year15 The NRB purchased Indian currency equal to 825 billion through the sale of USD18 billion in the Indian money market during the review period Indian currencyequal to 599 billion was purchased through the sale of USD 12 billion in thecorresponding period of the previous year An accelerated trade deficits with Indiaaccounted for such a higher volume of Indian currency purchase in the reviewperiodStanding Liquidity Facility and Inter Bank Transactions16 Banks and Financial Institutions used standing liquidity facility (SLF) amounting toRs919 billion in the review period The use of the SLF by commercial banks hadamounted to Rs966 billion in the corresponding period of the previous yearLikewise Inter-bank transactions of commercial banks stood at Rs2317 billion inthe first ten months of 200910 compared to Rs2482 billion in the correspondingperiod of the previous yearInterest Rates17 The weighted average 91-day Treasury bill rate stood at 741 percent in the tenthmonth of 200910 compared to 673 percent in the corresponding month of theprevious year Similarly the weighted average inter-bank rate stood at 713 percentin the tenth month of 200910 compared to 707 percent in the corresponding monthof the previous year In addition to the short-term interest rates the deposits rate ofcommercial banks also increased in the review period The maximum interest rateof two-year and more than two years fixed deposits increased from 95 percent as at4mid-July 2009 to 13 percent as at mid-May 2010 The shortfall of liquidity in thebanking system contributed to increase the interest rates in the review periodSecurities Market18 The year on year (y-o-y) NEPSE index declined by 3079 percent to 45781 pointsin the first ten months of 200910 This index stood at 66096 in the same periodlast year Likewise NEPSE sensitive index (based on July 2006) stood at 11301point in mid May 2010 which was 17413 in the same period last year The NEPSEfloat index calculated on the basis of final transaction as of August 24 2008 (asbase market value) remained at 4202 in mid May 2010 a contraction of 3423percent compared to the same period last year19 The y-o-y market capitalization increased by 4627 percent to Rs356 billion in midMay 2010 The ratio of market capitalization to GDP stood at 3011 percent in thereview period It was 2457 percent in the same period last year Of the total marketcapitalization bank and financial institutions accounted for 719 percent followedby manufacturing and processing companies (22 percent) hotels (14 percent)business entities (05 percent) hydropower (42 percent) and other economicsectors (20 percent)20 Total paid up capital of the listed companies stood at Rs 7534 billion in mid May2010 an increment of 3656 percent over the period of one year This increase waslargely due to the additional listing of securities at the NEPSE As at the tenthmonth of 200910 additional securities worth Rs2273 billion (ordinary share ofRs398 billion bonus share of Rs 344 billion right share of Rs804 billion andgovernment securities of Rs725 billion) were listed at the NEPSE21 Total number of companies listed at the NEPSE increased to 171 in mid May 2010

compared to 157 last year Among them 139 are banks and financial institutions(including insurance companies) followed by production and processing industries(18) hotels (4) business entities (4) hydropower (4) and companies in other groups(2)InflationConsumer Price Inflation22 The year on year (y-o-y) inflation as measured by the consumer price indexmoderated to 100 percent in mid-May 2010 compared to 129 percent increase inthe same period last year In the review period the price index of food andbeverages group increased by 123 percent whereas the index of non-food andservices group rose only by 72 percent The index of food and beverages and nonfoodand services group had risen by 165 percent and 88 percent respectively inthe same period last year23 Of the items in the food and beverage group price indices of spices increased by287 percent compared to an increase of 175 percent in the same period last yearSimilarly the price indices of sugar and sugar related products restaurant meal5pulses as well as meat fish and eggs sub-groups increased in the review period by226 percent 181 percent 162 percent and 159 percent respectively compared totheir respective increase of 669 percent 182 percent 263 percent and 275 percentin the same period last year The index of grains and cereal products subgroup alsowitnessed an increase of 125 percent compared to an increase of 63 percent in thecorresponding period of the previous year24 Within non-food and services group the index of education reading and recreationhousing goods and services as well as tobacco and related products increased by109 percent 98 percent and 93 percent during the review period compared to theirrespective increase of 83 percent 80 percent and 175 percent during the sameperiod last year25 Region-wise the price index of Hills rose by 120 percent followed by 98 percentin Terai and 91 percent in Kathmandu Valley in the review period The respectiverates were 118 percent 124 percent and 143 percent during the same period lastyear26 In the review period the y-o-y core inflation rose to 112 percent a moderationfrom 127 percent a year agoWholesale Price Inflation27 During the review period the y-o-y wholesale price inflation increased by 84percent compared to a rise of 155 percent a year ago The indices of agriculturalcommodities domestic manufactured commodities and imported commoditiesincreased by 106 percent 89 percent and 41 percent respectively in the reviewperiod compared to their respective increase of 234 percent 77 percent and 84percent a year ago28 Within the agricultural commodities group the price index of spices livestockproduction pulses and foodgrains respectively increased by 296 percent 217percent 187 percent and 178 percent compared to an increase of 213 percent340 percent 254 percent and 26 percent respectively during the same period lastyear29 Within the group of domestic manufactured commodities the price index of foodrelatedproducts increased by 165 percent compared to a rise of 41 percent a year

ago Within the imported commodities group the price indices of petroleumproducts and coal increased by 114 percent in the review period compared to anincrease of 15 percent in the corresponding period of the previous yearNational Salary and Wage Rate30 The overall y-o-y salary and wage rate index rose by 130 percent in the reviewperiod compared to a rise of 211 percent a year ago The increase in basic salaryand allowances in mid-August 200910 by the government of Nepal for civilservants and its simultaneous effect on salary of the private sector contributed tosuch an increase in salary and wage rate index Of the salary and wage rate indices6the salary index increased by 138 percent in the review period compared to a riseof 168 percent in the same period of the previous year The wage rate indexincreased by 127 percent in the review period compared to an increase of 225percent in the same period of the previous year Wages of agricultural industrialand construction laborers increased by 189 percent 41 percent and 82 percentrespectively in the review period These wage rates had increased by 278 percent151 percent and 213 percent respectively in the same period last yearFiscal Situation 1048576Budget Deficit Surplus31 In the ten months of 200910 government budget surplus on cash basis stood atRs71 billion compared to a surplus of Rs 61 billion in the corresponding period ofthe previous yearGovernment Expenditure32 In the review period total government spending increased by 251 percent toRs1596 billion compared to an increase of 257 percent in the correspondingperiod of the previous year The high growth in recurrent as well as capitalexpenditure accounted for such an increase in the government expenditure33 In the review period recurrent expenditure increased by 249 percent to Rs1023billion In the corresponding period of the previous year the recurrent expenditurehad increased by 265 percent An upward revision in the salary and allowances ofthe civil servants and teachers by the Government of Nepal mainly attributed tosuch a rise in the recurrent expenditure Likewise increasing expenditure on specialsecurity plan growing amount of subsidies to public school and increment in thedistribution of economic assistance accounted for such a rise in the recurrentexpenditure34 In the review period capital expenditure increased by 335 percent to Rs3475billion as against a 114 percent increase in the corresponding period of the previousyear However such amount of capital expenditure accounted for only 3270percent of the budget estimate Delay in the budget approval lingering in thecontract process absence of representatives in local bodies as well as weak law andorder situation in the country are mainly responsible for the lower performance ofcapital expenditure in the review period1048576Figure includes the reports from 7 NRB district offices 35 RBB branches (out of65 branches conducting govt transaction) 21 NBL branches (out of 42 branchesconducting govt transaction) 5 Everest Bank branches and 1 from NepalBangladesh Bank Ltd7

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

Electricity Corporation and Nepal Food Corporation contributed in slowing downthe growth of claims on nonndashfinancial government enterprises in the review periodDeposits Mobilization and Credit Flow of Commercial banks9 In the ten months of 200910 deposits mobilization of commercial banks increasedby 56 percent (Rs306 billion) amounting to Rs 5805 billion as at mid-May 2010The total deposits had increased by 195 percent (Rs821 billion) in thecorresponding period of the previous year10 Loan and advances of commercial banks increased by 122 percent (Rs 635billion) to Rs 5821 billion in the review period Similarly private sector credit ofcommercial banks grew by 175 percent (Rs708 billion) compared to a growth of242 percent (Rs 743 billion) in the corresponding period of the previous year Ofthe private sector credit credit to the production sector increased by 10 percent(Rs88 billion) in the review period compared to a growth of 149 percent in thesame period of the previous year Sugar Cement and Iron and Steel industrieswitnessed a significant credit expansion under the production sector creditSimilarly credit to agriculture sector increased by Rs 15 billion in the reviewperiod In the review period credit to wholesale and retail business as well asfinance insurance and fixed assets and service sectors increased by 264 percent(Rs189 billion) 404 percent (Rs157 billion) and 244 percent (Rs 57 billion)respectively Credit to these sectors during the corresponding period in the previousyear had increased by 157 percent 44 percent and 6 percent respectively Credit toreal estate sector increased to Rs146 billion in the ten months of 200910compared to Rs119 billion in the same period a year agoLiquidity position of Commercial Banks11 The liquid assets of the commercial banks stood at Rs 1704 billion as at mid-May2010 Of the components of liquid assets liquid fund declined by 82 percent Adecline in commercial banks balance with the NRB as well as balance held abroadaccounted for a contraction of liquid funds of commercial banks In the reviewperiod the balance held abroad declined by Rs 16 billion amounting to Rs 518billion while the balance with NRB declined by Rs 86 billion Similarly another3component of liquid assets commercial banks investments in governmentsecurities declined by 114 percent (Rs 82 billion) in the review period12 On account of the higher credit disbursement relative to deposit mobilization thecredit-deposit ratio increased to 893 percent in mid-May 2010 from 812 percent inmid-July 2009 Similarly the liquidity-deposit ratio declined to 294 percent in mid-May 2010 from 342 percent in mid-July 2009Liquidity Management13 In the ten months of 200910 NRB injected net liquidity amounting to Rs1031billion During this period Rs74 billion and Rs10 billion were mopped upthrough outright sale auction and reverse repo auction respectively while Rs 1071billion and Rs 34 billion were injected through repo and outright purchase auctionrespectively In the same period of the previous year net liquidity amounting toRs97 billion was mopped up Of the total liquidity mopped up Rs75 billion andRs 133 billion were mopped up through outright sale auction and reverse repoauction respectively while Rs 11 billion was injected through repo auction14 In the ten months of 200910 NRB injected net liquidity amounting to Rs 845billions through net purchase of USD 11 billion from commercial banks A net

liquidity of Rs 1215 billion was injected through the net purchase of USD 16billion in the same period last year15 The NRB purchased Indian currency equal to 825 billion through the sale of USD18 billion in the Indian money market during the review period Indian currencyequal to 599 billion was purchased through the sale of USD 12 billion in thecorresponding period of the previous year An accelerated trade deficits with Indiaaccounted for such a higher volume of Indian currency purchase in the reviewperiodStanding Liquidity Facility and Inter Bank Transactions16 Banks and Financial Institutions used standing liquidity facility (SLF) amounting toRs919 billion in the review period The use of the SLF by commercial banks hadamounted to Rs966 billion in the corresponding period of the previous yearLikewise Inter-bank transactions of commercial banks stood at Rs2317 billion inthe first ten months of 200910 compared to Rs2482 billion in the correspondingperiod of the previous yearInterest Rates17 The weighted average 91-day Treasury bill rate stood at 741 percent in the tenthmonth of 200910 compared to 673 percent in the corresponding month of theprevious year Similarly the weighted average inter-bank rate stood at 713 percentin the tenth month of 200910 compared to 707 percent in the corresponding monthof the previous year In addition to the short-term interest rates the deposits rate ofcommercial banks also increased in the review period The maximum interest rateof two-year and more than two years fixed deposits increased from 95 percent as at4mid-July 2009 to 13 percent as at mid-May 2010 The shortfall of liquidity in thebanking system contributed to increase the interest rates in the review periodSecurities Market18 The year on year (y-o-y) NEPSE index declined by 3079 percent to 45781 pointsin the first ten months of 200910 This index stood at 66096 in the same periodlast year Likewise NEPSE sensitive index (based on July 2006) stood at 11301point in mid May 2010 which was 17413 in the same period last year The NEPSEfloat index calculated on the basis of final transaction as of August 24 2008 (asbase market value) remained at 4202 in mid May 2010 a contraction of 3423percent compared to the same period last year19 The y-o-y market capitalization increased by 4627 percent to Rs356 billion in midMay 2010 The ratio of market capitalization to GDP stood at 3011 percent in thereview period It was 2457 percent in the same period last year Of the total marketcapitalization bank and financial institutions accounted for 719 percent followedby manufacturing and processing companies (22 percent) hotels (14 percent)business entities (05 percent) hydropower (42 percent) and other economicsectors (20 percent)20 Total paid up capital of the listed companies stood at Rs 7534 billion in mid May2010 an increment of 3656 percent over the period of one year This increase waslargely due to the additional listing of securities at the NEPSE As at the tenthmonth of 200910 additional securities worth Rs2273 billion (ordinary share ofRs398 billion bonus share of Rs 344 billion right share of Rs804 billion andgovernment securities of Rs725 billion) were listed at the NEPSE21 Total number of companies listed at the NEPSE increased to 171 in mid May 2010

compared to 157 last year Among them 139 are banks and financial institutions(including insurance companies) followed by production and processing industries(18) hotels (4) business entities (4) hydropower (4) and companies in other groups(2)InflationConsumer Price Inflation22 The year on year (y-o-y) inflation as measured by the consumer price indexmoderated to 100 percent in mid-May 2010 compared to 129 percent increase inthe same period last year In the review period the price index of food andbeverages group increased by 123 percent whereas the index of non-food andservices group rose only by 72 percent The index of food and beverages and nonfoodand services group had risen by 165 percent and 88 percent respectively inthe same period last year23 Of the items in the food and beverage group price indices of spices increased by287 percent compared to an increase of 175 percent in the same period last yearSimilarly the price indices of sugar and sugar related products restaurant meal5pulses as well as meat fish and eggs sub-groups increased in the review period by226 percent 181 percent 162 percent and 159 percent respectively compared totheir respective increase of 669 percent 182 percent 263 percent and 275 percentin the same period last year The index of grains and cereal products subgroup alsowitnessed an increase of 125 percent compared to an increase of 63 percent in thecorresponding period of the previous year24 Within non-food and services group the index of education reading and recreationhousing goods and services as well as tobacco and related products increased by109 percent 98 percent and 93 percent during the review period compared to theirrespective increase of 83 percent 80 percent and 175 percent during the sameperiod last year25 Region-wise the price index of Hills rose by 120 percent followed by 98 percentin Terai and 91 percent in Kathmandu Valley in the review period The respectiverates were 118 percent 124 percent and 143 percent during the same period lastyear26 In the review period the y-o-y core inflation rose to 112 percent a moderationfrom 127 percent a year agoWholesale Price Inflation27 During the review period the y-o-y wholesale price inflation increased by 84percent compared to a rise of 155 percent a year ago The indices of agriculturalcommodities domestic manufactured commodities and imported commoditiesincreased by 106 percent 89 percent and 41 percent respectively in the reviewperiod compared to their respective increase of 234 percent 77 percent and 84percent a year ago28 Within the agricultural commodities group the price index of spices livestockproduction pulses and foodgrains respectively increased by 296 percent 217percent 187 percent and 178 percent compared to an increase of 213 percent340 percent 254 percent and 26 percent respectively during the same period lastyear29 Within the group of domestic manufactured commodities the price index of foodrelatedproducts increased by 165 percent compared to a rise of 41 percent a year

ago Within the imported commodities group the price indices of petroleumproducts and coal increased by 114 percent in the review period compared to anincrease of 15 percent in the corresponding period of the previous yearNational Salary and Wage Rate30 The overall y-o-y salary and wage rate index rose by 130 percent in the reviewperiod compared to a rise of 211 percent a year ago The increase in basic salaryand allowances in mid-August 200910 by the government of Nepal for civilservants and its simultaneous effect on salary of the private sector contributed tosuch an increase in salary and wage rate index Of the salary and wage rate indices6the salary index increased by 138 percent in the review period compared to a riseof 168 percent in the same period of the previous year The wage rate indexincreased by 127 percent in the review period compared to an increase of 225percent in the same period of the previous year Wages of agricultural industrialand construction laborers increased by 189 percent 41 percent and 82 percentrespectively in the review period These wage rates had increased by 278 percent151 percent and 213 percent respectively in the same period last yearFiscal Situation 1048576Budget Deficit Surplus31 In the ten months of 200910 government budget surplus on cash basis stood atRs71 billion compared to a surplus of Rs 61 billion in the corresponding period ofthe previous yearGovernment Expenditure32 In the review period total government spending increased by 251 percent toRs1596 billion compared to an increase of 257 percent in the correspondingperiod of the previous year The high growth in recurrent as well as capitalexpenditure accounted for such an increase in the government expenditure33 In the review period recurrent expenditure increased by 249 percent to Rs1023billion In the corresponding period of the previous year the recurrent expenditurehad increased by 265 percent An upward revision in the salary and allowances ofthe civil servants and teachers by the Government of Nepal mainly attributed tosuch a rise in the recurrent expenditure Likewise increasing expenditure on specialsecurity plan growing amount of subsidies to public school and increment in thedistribution of economic assistance accounted for such a rise in the recurrentexpenditure34 In the review period capital expenditure increased by 335 percent to Rs3475billion as against a 114 percent increase in the corresponding period of the previousyear However such amount of capital expenditure accounted for only 3270percent of the budget estimate Delay in the budget approval lingering in thecontract process absence of representatives in local bodies as well as weak law andorder situation in the country are mainly responsible for the lower performance ofcapital expenditure in the review period1048576Figure includes the reports from 7 NRB district offices 35 RBB branches (out of65 branches conducting govt transaction) 21 NBL branches (out of 42 branchesconducting govt transaction) 5 Everest Bank branches and 1 from NepalBangladesh Bank Ltd7

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

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liquidity of Rs 1215 billion was injected through the net purchase of USD 16billion in the same period last year15 The NRB purchased Indian currency equal to 825 billion through the sale of USD18 billion in the Indian money market during the review period Indian currencyequal to 599 billion was purchased through the sale of USD 12 billion in thecorresponding period of the previous year An accelerated trade deficits with Indiaaccounted for such a higher volume of Indian currency purchase in the reviewperiodStanding Liquidity Facility and Inter Bank Transactions16 Banks and Financial Institutions used standing liquidity facility (SLF) amounting toRs919 billion in the review period The use of the SLF by commercial banks hadamounted to Rs966 billion in the corresponding period of the previous yearLikewise Inter-bank transactions of commercial banks stood at Rs2317 billion inthe first ten months of 200910 compared to Rs2482 billion in the correspondingperiod of the previous yearInterest Rates17 The weighted average 91-day Treasury bill rate stood at 741 percent in the tenthmonth of 200910 compared to 673 percent in the corresponding month of theprevious year Similarly the weighted average inter-bank rate stood at 713 percentin the tenth month of 200910 compared to 707 percent in the corresponding monthof the previous year In addition to the short-term interest rates the deposits rate ofcommercial banks also increased in the review period The maximum interest rateof two-year and more than two years fixed deposits increased from 95 percent as at4mid-July 2009 to 13 percent as at mid-May 2010 The shortfall of liquidity in thebanking system contributed to increase the interest rates in the review periodSecurities Market18 The year on year (y-o-y) NEPSE index declined by 3079 percent to 45781 pointsin the first ten months of 200910 This index stood at 66096 in the same periodlast year Likewise NEPSE sensitive index (based on July 2006) stood at 11301point in mid May 2010 which was 17413 in the same period last year The NEPSEfloat index calculated on the basis of final transaction as of August 24 2008 (asbase market value) remained at 4202 in mid May 2010 a contraction of 3423percent compared to the same period last year19 The y-o-y market capitalization increased by 4627 percent to Rs356 billion in midMay 2010 The ratio of market capitalization to GDP stood at 3011 percent in thereview period It was 2457 percent in the same period last year Of the total marketcapitalization bank and financial institutions accounted for 719 percent followedby manufacturing and processing companies (22 percent) hotels (14 percent)business entities (05 percent) hydropower (42 percent) and other economicsectors (20 percent)20 Total paid up capital of the listed companies stood at Rs 7534 billion in mid May2010 an increment of 3656 percent over the period of one year This increase waslargely due to the additional listing of securities at the NEPSE As at the tenthmonth of 200910 additional securities worth Rs2273 billion (ordinary share ofRs398 billion bonus share of Rs 344 billion right share of Rs804 billion andgovernment securities of Rs725 billion) were listed at the NEPSE21 Total number of companies listed at the NEPSE increased to 171 in mid May 2010

compared to 157 last year Among them 139 are banks and financial institutions(including insurance companies) followed by production and processing industries(18) hotels (4) business entities (4) hydropower (4) and companies in other groups(2)InflationConsumer Price Inflation22 The year on year (y-o-y) inflation as measured by the consumer price indexmoderated to 100 percent in mid-May 2010 compared to 129 percent increase inthe same period last year In the review period the price index of food andbeverages group increased by 123 percent whereas the index of non-food andservices group rose only by 72 percent The index of food and beverages and nonfoodand services group had risen by 165 percent and 88 percent respectively inthe same period last year23 Of the items in the food and beverage group price indices of spices increased by287 percent compared to an increase of 175 percent in the same period last yearSimilarly the price indices of sugar and sugar related products restaurant meal5pulses as well as meat fish and eggs sub-groups increased in the review period by226 percent 181 percent 162 percent and 159 percent respectively compared totheir respective increase of 669 percent 182 percent 263 percent and 275 percentin the same period last year The index of grains and cereal products subgroup alsowitnessed an increase of 125 percent compared to an increase of 63 percent in thecorresponding period of the previous year24 Within non-food and services group the index of education reading and recreationhousing goods and services as well as tobacco and related products increased by109 percent 98 percent and 93 percent during the review period compared to theirrespective increase of 83 percent 80 percent and 175 percent during the sameperiod last year25 Region-wise the price index of Hills rose by 120 percent followed by 98 percentin Terai and 91 percent in Kathmandu Valley in the review period The respectiverates were 118 percent 124 percent and 143 percent during the same period lastyear26 In the review period the y-o-y core inflation rose to 112 percent a moderationfrom 127 percent a year agoWholesale Price Inflation27 During the review period the y-o-y wholesale price inflation increased by 84percent compared to a rise of 155 percent a year ago The indices of agriculturalcommodities domestic manufactured commodities and imported commoditiesincreased by 106 percent 89 percent and 41 percent respectively in the reviewperiod compared to their respective increase of 234 percent 77 percent and 84percent a year ago28 Within the agricultural commodities group the price index of spices livestockproduction pulses and foodgrains respectively increased by 296 percent 217percent 187 percent and 178 percent compared to an increase of 213 percent340 percent 254 percent and 26 percent respectively during the same period lastyear29 Within the group of domestic manufactured commodities the price index of foodrelatedproducts increased by 165 percent compared to a rise of 41 percent a year

ago Within the imported commodities group the price indices of petroleumproducts and coal increased by 114 percent in the review period compared to anincrease of 15 percent in the corresponding period of the previous yearNational Salary and Wage Rate30 The overall y-o-y salary and wage rate index rose by 130 percent in the reviewperiod compared to a rise of 211 percent a year ago The increase in basic salaryand allowances in mid-August 200910 by the government of Nepal for civilservants and its simultaneous effect on salary of the private sector contributed tosuch an increase in salary and wage rate index Of the salary and wage rate indices6the salary index increased by 138 percent in the review period compared to a riseof 168 percent in the same period of the previous year The wage rate indexincreased by 127 percent in the review period compared to an increase of 225percent in the same period of the previous year Wages of agricultural industrialand construction laborers increased by 189 percent 41 percent and 82 percentrespectively in the review period These wage rates had increased by 278 percent151 percent and 213 percent respectively in the same period last yearFiscal Situation 1048576Budget Deficit Surplus31 In the ten months of 200910 government budget surplus on cash basis stood atRs71 billion compared to a surplus of Rs 61 billion in the corresponding period ofthe previous yearGovernment Expenditure32 In the review period total government spending increased by 251 percent toRs1596 billion compared to an increase of 257 percent in the correspondingperiod of the previous year The high growth in recurrent as well as capitalexpenditure accounted for such an increase in the government expenditure33 In the review period recurrent expenditure increased by 249 percent to Rs1023billion In the corresponding period of the previous year the recurrent expenditurehad increased by 265 percent An upward revision in the salary and allowances ofthe civil servants and teachers by the Government of Nepal mainly attributed tosuch a rise in the recurrent expenditure Likewise increasing expenditure on specialsecurity plan growing amount of subsidies to public school and increment in thedistribution of economic assistance accounted for such a rise in the recurrentexpenditure34 In the review period capital expenditure increased by 335 percent to Rs3475billion as against a 114 percent increase in the corresponding period of the previousyear However such amount of capital expenditure accounted for only 3270percent of the budget estimate Delay in the budget approval lingering in thecontract process absence of representatives in local bodies as well as weak law andorder situation in the country are mainly responsible for the lower performance ofcapital expenditure in the review period1048576Figure includes the reports from 7 NRB district offices 35 RBB branches (out of65 branches conducting govt transaction) 21 NBL branches (out of 42 branchesconducting govt transaction) 5 Everest Bank branches and 1 from NepalBangladesh Bank Ltd7

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

compared to 157 last year Among them 139 are banks and financial institutions(including insurance companies) followed by production and processing industries(18) hotels (4) business entities (4) hydropower (4) and companies in other groups(2)InflationConsumer Price Inflation22 The year on year (y-o-y) inflation as measured by the consumer price indexmoderated to 100 percent in mid-May 2010 compared to 129 percent increase inthe same period last year In the review period the price index of food andbeverages group increased by 123 percent whereas the index of non-food andservices group rose only by 72 percent The index of food and beverages and nonfoodand services group had risen by 165 percent and 88 percent respectively inthe same period last year23 Of the items in the food and beverage group price indices of spices increased by287 percent compared to an increase of 175 percent in the same period last yearSimilarly the price indices of sugar and sugar related products restaurant meal5pulses as well as meat fish and eggs sub-groups increased in the review period by226 percent 181 percent 162 percent and 159 percent respectively compared totheir respective increase of 669 percent 182 percent 263 percent and 275 percentin the same period last year The index of grains and cereal products subgroup alsowitnessed an increase of 125 percent compared to an increase of 63 percent in thecorresponding period of the previous year24 Within non-food and services group the index of education reading and recreationhousing goods and services as well as tobacco and related products increased by109 percent 98 percent and 93 percent during the review period compared to theirrespective increase of 83 percent 80 percent and 175 percent during the sameperiod last year25 Region-wise the price index of Hills rose by 120 percent followed by 98 percentin Terai and 91 percent in Kathmandu Valley in the review period The respectiverates were 118 percent 124 percent and 143 percent during the same period lastyear26 In the review period the y-o-y core inflation rose to 112 percent a moderationfrom 127 percent a year agoWholesale Price Inflation27 During the review period the y-o-y wholesale price inflation increased by 84percent compared to a rise of 155 percent a year ago The indices of agriculturalcommodities domestic manufactured commodities and imported commoditiesincreased by 106 percent 89 percent and 41 percent respectively in the reviewperiod compared to their respective increase of 234 percent 77 percent and 84percent a year ago28 Within the agricultural commodities group the price index of spices livestockproduction pulses and foodgrains respectively increased by 296 percent 217percent 187 percent and 178 percent compared to an increase of 213 percent340 percent 254 percent and 26 percent respectively during the same period lastyear29 Within the group of domestic manufactured commodities the price index of foodrelatedproducts increased by 165 percent compared to a rise of 41 percent a year

ago Within the imported commodities group the price indices of petroleumproducts and coal increased by 114 percent in the review period compared to anincrease of 15 percent in the corresponding period of the previous yearNational Salary and Wage Rate30 The overall y-o-y salary and wage rate index rose by 130 percent in the reviewperiod compared to a rise of 211 percent a year ago The increase in basic salaryand allowances in mid-August 200910 by the government of Nepal for civilservants and its simultaneous effect on salary of the private sector contributed tosuch an increase in salary and wage rate index Of the salary and wage rate indices6the salary index increased by 138 percent in the review period compared to a riseof 168 percent in the same period of the previous year The wage rate indexincreased by 127 percent in the review period compared to an increase of 225percent in the same period of the previous year Wages of agricultural industrialand construction laborers increased by 189 percent 41 percent and 82 percentrespectively in the review period These wage rates had increased by 278 percent151 percent and 213 percent respectively in the same period last yearFiscal Situation 1048576Budget Deficit Surplus31 In the ten months of 200910 government budget surplus on cash basis stood atRs71 billion compared to a surplus of Rs 61 billion in the corresponding period ofthe previous yearGovernment Expenditure32 In the review period total government spending increased by 251 percent toRs1596 billion compared to an increase of 257 percent in the correspondingperiod of the previous year The high growth in recurrent as well as capitalexpenditure accounted for such an increase in the government expenditure33 In the review period recurrent expenditure increased by 249 percent to Rs1023billion In the corresponding period of the previous year the recurrent expenditurehad increased by 265 percent An upward revision in the salary and allowances ofthe civil servants and teachers by the Government of Nepal mainly attributed tosuch a rise in the recurrent expenditure Likewise increasing expenditure on specialsecurity plan growing amount of subsidies to public school and increment in thedistribution of economic assistance accounted for such a rise in the recurrentexpenditure34 In the review period capital expenditure increased by 335 percent to Rs3475billion as against a 114 percent increase in the corresponding period of the previousyear However such amount of capital expenditure accounted for only 3270percent of the budget estimate Delay in the budget approval lingering in thecontract process absence of representatives in local bodies as well as weak law andorder situation in the country are mainly responsible for the lower performance ofcapital expenditure in the review period1048576Figure includes the reports from 7 NRB district offices 35 RBB branches (out of65 branches conducting govt transaction) 21 NBL branches (out of 42 branchesconducting govt transaction) 5 Everest Bank branches and 1 from NepalBangladesh Bank Ltd7

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

ago Within the imported commodities group the price indices of petroleumproducts and coal increased by 114 percent in the review period compared to anincrease of 15 percent in the corresponding period of the previous yearNational Salary and Wage Rate30 The overall y-o-y salary and wage rate index rose by 130 percent in the reviewperiod compared to a rise of 211 percent a year ago The increase in basic salaryand allowances in mid-August 200910 by the government of Nepal for civilservants and its simultaneous effect on salary of the private sector contributed tosuch an increase in salary and wage rate index Of the salary and wage rate indices6the salary index increased by 138 percent in the review period compared to a riseof 168 percent in the same period of the previous year The wage rate indexincreased by 127 percent in the review period compared to an increase of 225percent in the same period of the previous year Wages of agricultural industrialand construction laborers increased by 189 percent 41 percent and 82 percentrespectively in the review period These wage rates had increased by 278 percent151 percent and 213 percent respectively in the same period last yearFiscal Situation 1048576Budget Deficit Surplus31 In the ten months of 200910 government budget surplus on cash basis stood atRs71 billion compared to a surplus of Rs 61 billion in the corresponding period ofthe previous yearGovernment Expenditure32 In the review period total government spending increased by 251 percent toRs1596 billion compared to an increase of 257 percent in the correspondingperiod of the previous year The high growth in recurrent as well as capitalexpenditure accounted for such an increase in the government expenditure33 In the review period recurrent expenditure increased by 249 percent to Rs1023billion In the corresponding period of the previous year the recurrent expenditurehad increased by 265 percent An upward revision in the salary and allowances ofthe civil servants and teachers by the Government of Nepal mainly attributed tosuch a rise in the recurrent expenditure Likewise increasing expenditure on specialsecurity plan growing amount of subsidies to public school and increment in thedistribution of economic assistance accounted for such a rise in the recurrentexpenditure34 In the review period capital expenditure increased by 335 percent to Rs3475billion as against a 114 percent increase in the corresponding period of the previousyear However such amount of capital expenditure accounted for only 3270percent of the budget estimate Delay in the budget approval lingering in thecontract process absence of representatives in local bodies as well as weak law andorder situation in the country are mainly responsible for the lower performance ofcapital expenditure in the review period1048576Figure includes the reports from 7 NRB district offices 35 RBB branches (out of65 branches conducting govt transaction) 21 NBL branches (out of 42 branchesconducting govt transaction) 5 Everest Bank branches and 1 from NepalBangladesh Bank Ltd7

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

35 In the ten months of 200910 the expenditure on principal repayment declined by116 percent to Rs1241 billion In the corresponding period of the previous yearsuch expenditure had increased by 282 percentGovernment Revenue36 In the ten months of 200910 revenue mobilization of the government grew by 254percent to Rs13856 billion compared to an increase of 399 percent in thecorresponding period of the previous year A positive impact of Tax Complianceyear increase in PAN number holders mobilization of tax volunteers growth inimports control in revenue leakages and tax administration reforms mainlycontributed to such an increase in the revenue mobilization37 Of the total revenue mobilization Value Added Tax (VAT) grew by 375 percent toRs4285 billion in mid May 2010 It had increased by 245 percent in thecorresponding period of the previous year Increase in the consumptions andreforms in VAT administration are attributed for such a growth in the VAT38 In the review period custom revenue rose by 338 percent to Rs279 billioncompared to an increase of 292 percent in the same period of the previous yearReforms in custom administration and the increase in imports of high tax yieldingvehicles and spare parts contributed to such a high growth of customs revenue39 In the review period excise revenue increased by 568 percent to Rs1891 billioncompared to an increase of 450 percent to 121 billion in the same period of theprevious year Reforms in excise administration and increase in the imports of highexcise tax yielding vehicles accounted for such a growth of excise revenue in thereview period40 Income tax revenue increased by 221 percent to Rs2473 billion in the reviewperiod In the corresponding period last year such revenue had risen by 460percent A positive impact of tax compliance year and increase in PAN numberholders accounted for such an increase in the income tax revenue mobilization41 In the review period non-tax revenue declined by 73 percent to Rs176 billion incontrast to a sharp growth of 621 percent in the same period last year A decline inthe receipts of the Nepal Government from royalty principal and interest accountedfor such decrease in the non-tax revenue in the review periodForeign Cash Loans and Grants42 The government received foreign cash loans amounting to Rs358 billion andforeign cash grants amounting to Rs2084 billion in the ten months of 200910 Inthe corresponding period of the previous year the government had received foreigncash loans and foreign cash grants amounting to Rs321 billion and Rs1881billion respectively8

External Sector SituationForeign Trade43 Nepals merchandise exports declined by 112 percent to Rs 5020 billion in the tenmonths of 200910 Such exports had grown by 195 percent to Rs 5654 billion inthe same period last year On a monthly basis exports declined by 139 percent inAprilMay 200910 compared to the value of the previous month44 In terms of destination exports to India declined by 70 percent in the ten months of200910 in contrast to a growth of 104 percent in the same period last yearLikewise exports to other countries plummeted by 182 percent as against a growthof 382 percent in the same period last year The decline in the exports to India was

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

mainly ascribed to the decrease in the exports of readymade garments zinc sheetGI pipe plastic utensils and pulses among others Likewise exports to othercountries declined considerably due mainly to the decrease in the export of woolencarpet pulses readymade garments herbs as well as silverware and jewelleriesamong others45 The merchandise imports on the other hand grew by 356 percent to Rs 30988billion in the ten months of 200910 Such imports had grown by 254 percent to Rs22854 billion in the same period last year On a monthly basis the merchandiseimports declined by 153 percent in AprilMay 200910 compared to the value ofthe previous month46 Imports from India grew by 353 percent in the review period compared to a growthof 105 percent in the same period last year Likewise imports from other countriesgrew by 360 percent compared to a growth of 522 percent in the same period lastyear The growth in the import of vehicles and spare parts MS billet petroleumproducts MS wire and rods and hot rolled sheet in coil among others from Indiaand gold telecommunication equipment and parts polythene granules steel rod andsheet and silver among others from other countries contributed significantly in therise of total imports in the review period The imports of gold and vehicles whichhad increased significantly in the earlier months have however droppedsubstantially from JanFeb and FebMarch respectively47 Total trade deficit during the ten months of 200910 expanded by 510 percent toRs 25968 billion Trade deficit had risen by 274 percent to Rs 172 billion in thesame period last year Trade deficit with India rose by 510 percent in the reviewperiod compared to a growth of 105 percent in the same period last year Likewisetrade deficit with other countries expanded by 509 percent compared to a growth of565 percent in the same period last year48 As a result of the slowdown in exports and accelerated import growth the ratio ofexport to import dropped to 162 percent in the ten months of 200910 from 247percent a year ago9Balance of Payments49 The overall BOP recorded a deficit of Rs 1736 billion in the ten months of200910 as against a surplus of Rs 4306 billion in the same period last year Thecurrent account also registered a deficit of Rs 3478 billion as against a surplus ofRs 3704 billion in the same period last year The large trade deficit coupled with adecelerated remittances growth led to such a huge current account deficit50 The FOB-based merchandise trade deficit grew by 521 percent to Rs 25116billion in the ten months of 200910 Such deficit had grown by 274 percent to Rs16516 billion in the same period last year The transfer account registered a surplusof Rs 22948 billion in the review period compared to Rs 20038 billion a yearago Under the transfers subgroup grants increased by 127 percent to Rs 2223billion while pension receipts rose by 601 percent to Rs 2261 billion Likewisethe workers remittances increased only by 102 percent to Rs 18644 billioncompared to its significant growth of 555 percent in the corresponding period ofthe previous year On a monthly basis the remittance inflows grew by 147 percentin AprilMay compared to a growth of 257 percent in the same month of theprevious yearForeign Exchange Reserves

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

51 The gross foreign exchange reserves declined by 149 percent to Rs 23834 billionin mid-May 2010 from a level of Rs 27999 billion as at mid-July 2009 Suchreserves had increased by 333 percent to Rs 28343 billion in the same period lastyear NRBs reserves declined by 174 percent to Rs 18529 billion in the reviewperiod from a level of Rs 22419 billion as at mid-July 2009 The gross foreignexchange reserves in dollar terms declined by 75 percent to USD 332 billion inmid-May 2010 from a level of USD 359 billion as at mid-July 2009 Such reserveshad increased by 154 percent to USD 358 billion in the same period last year Thewidening of the current account deficit resulted in the depletion of foreign exchangereserves in the review period Based on the trend of import in the ten months of thecurrent fiscal year the current level of reserves is sufficient for financingmerchandise imports of 79 months and merchandise and service imports of 66monthsPrice of Oil and Gold in the International Market and Exchange RateMovement52 The price of oil (Crude Oil Brent) in the international market went up by 363percent to USD 7651 per barrel in mid-May 2010 from USD 5613 per barrel inmid-May 2009 Similarly the price of gold also surged by 336 percent to USD123650 per ounce in mid-May 2010 from USD 92525 a year ago53 Nepalese currency vis-agrave-vis the US dollar appreciated by 869 percent in mid-May2010 compared to mid-July 2009 It had depreciated by 1346 percent in thecorresponding period of the previous year The exchange rate of one US dollarstood at Rs 7181 in mid-May 2010 compared to Rs 7805 in mid-July 2009

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

Global recession employment and remittance Linkages are obviousDr Kamal Raj Dhungel

Since the past decade remittance has played a vital role in Nepalese economy covering more than 20 percent of the GDP However the growth rate of remittance entering Nepal has slowed down as a result of the global recession During the economic downturn Nepalese migrant workers in the developed nations were among the first to lose their jobs and many of them have well chosen to return home empty handed Policies aimed at recruiting migrant workers tend to have been based on the perception that ldquomigrants take jobsrdquo or ldquocompete for welfare benefitsrdquo However with the layoffs in Gulf countries particularly in Dubai where majority of Nepalese workers migrated for work has led to more restrictive immigration policies to protect the local labor market and in response to a demand for fewer Nepalese workers For instance reduction in the number of migrants to be employed has already been announced in notable developed countries of the world Such protectionist policies on the part of the rich nations accentuate the miseries of the developing economies

Statistics published by the government of Nepal show that the migration of people for work has been hit hard by the global financial crisis The migration in 200708 was 249051 while it declined to 219965 and 172709 in 200809 and 200910 respectively with the percentage change of (-) 117 percent and (-) 215 percent The decline rate that has nearly doubled in the latter year proves that foreign employment for Nepalese workers has become difficult as the popular destinations have been hit hard by the recession It implies that Nepal faces a problem of unemployment for its potential youths who are seeking jobs for their livelihood A potential alternative to foreign employment is the rapid development of the infrastructure sector such as roads bridges powerhouses and buildings for social sectors such as construction of new hospitals schools and many more No doubt accelerating progress in this sector could generate employment But the development of this sector has come to a halt for almost a decade and half decade now for two obvious reasons First the persistent armed insurgency during 1996-2006 due to which the nation was in inaction for the development of infrastructure as the resources was channeled towards defense expenditure Second the state restructuring with federalism based on caste and ethnic groups that has brought about political instability because more interest groups are in action for securing their rights The result is that socio-economic progress

has not been in place to create opportunities for the employment of youths which is so scarce in the formal sector As opportunities are not available in the formal sector more vulnerability and distress among the general people is on the rise People are seeking jobs in the informal sector but its growth is limited In this backdrop people themselves have to create jobs Hence the vulnerable group of people who are mostly uneducated and unskilled are selling goods and services in the streets as it requires small amount of capital as initial investment Most of the workers who lost jobs in foreign land have taken up such vending business

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

Furthermore the inflow of the volume of remittance has been increasing But its rate of increase over the years in which the global recession hit hard is not encouraging as the growth is not stable During the recession its oscillation is unexpected and high

The inflow of remittance had grown by 25 percent in 200607 However it abruptly jumped to 425 percent in 200708 and then fell to 283 percent in 200809 This indicates declining trend as the global recession deepens This unpredictable fall in growth is the result of economic meltdown that persisted in those economies in which the Nepalese workers migrate for jobs This in turn has transmitted spillover effect of global recession on Nepalese economy indirectly Unexpectedly the contribution of remittance has been increasing over the years under deep recession Its share was 138 percent 174 percent and 191 percent in 200607 200708 and 200809 respectively It is because of the slow or no progress in the rest of the domestic sectors

All these facts indicate that recession has hit employment of Nepalese youths in foreign land As explained above the countries where the Nepalese youths usually migrate for employment have slowed demand for Nepalese workers to protect the jobs of their own citizens

They have adapted protective policy that has encouraged terminating employment of migrated workers first As seen from the above figures Nepal has been affected by the global recession as the number of people migrated to foreign countries for employment decreasing over the period under consideration Thus unemployment rise in Nepal is a result of lower demand for Nepalese youths in foreign countries as well as slower economic progress at home as a result of political instability

Dr Dhungel is Associate Professor Central

Department of Economics TU

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

Local impact of global gloom Nepals poverty partially cushions us from global recession

FROM ISSUE 421 (17 OCT 2008 - 23 OCT 2008) | TABLE OF CONTENTS

SUBSCRIBE NT PRINT REFER WRITE TO EDITOR SHARE

Despite massive bank bailouts fears of global recession are keeping stock markets down worldwide

But Nepals relatively low level of globalisation and its very underdevelopment have so far protected it

issue-15296 Nation Local impact of g Nepals poverty p DEWAN RAI

Refer

15296 Nation Local impact of g

Submit

Even so economists warn that indirect effects of the worldwide economic stagnation will soon be felt

through a possible downturn in tourism a slump in Nepali exports to UK and America shrinking foreign

aid and the after-effect of slower growth in India

The effect on Nepal will be oblique economist Biswambhar Pyakurel told Nepali Times the huge

bailouts of banks in Europe and America will likely reduce their foreign aid budgets

Charities and NGOs may also be hit because of the huge losses suffered by non-profit foundations in

their stock market portfolios Nepal receives Rs 65 billion in foreign grants and about Rs 30 billion is

channelled through NGOs and charities

The governments target of bringing in two million tourists by the Visit Nepal Year in 2011 is unlikely to be

met Economist Raghab D Pant says We cant expect tourists from countries that will suffer recession

The global liquidity crisis may also affect big budget projects and foreign direct investment in Nepal The

government aims to generate 10000 MW electricity in 10 years much of which was supposed to be

financed through foreign direct investment

Nara Bahadur Thapa director at the Research Department of Nepal Rastra Bank says the global

financial meltdown is already causing psychological anxiety in domestic financial institutions They will be

cautious and even discouraged by the global gloom he says although the small size of our economy

will reduce impact we will be affected in indirect ways Nepal is not an island

In Washington for the annual meetings of the World Bank and the IMF Finance Minister Baburam

Bhattarai said the pain of world recession may be less for countries like Nepal

We are in the periphery so Nepal is not as integrated with the world economy he said adding that

there could be a fall in foreign aid to Nepal from international lenders and bilateral donors

Economists say the only positive impact of the recession may be on remittances The Gulf region so far

appears to come out of the crisis relatively unscathed and a projected appreciation of the US dollar may

increase the Rs15 billion that Nepalis send home every year through official channels Nearly as much

comes to Nepal through the hundi system

However Pant cautions that the money is probably going right back out There is no reason to be happy

about remittances going up because the money will be spent in importing more expensive goods he

says Increased dollar reserves would have helped Nepal shore up its annual Rs107 billion trade deficit

with India

More worrying is how the impact on India of global recession will affect Nepal India is concerned about

inflation and a sagging economic growth rate which has been double digit for the past three consecutive

years With Indian elections around in May 2009 political parties will be tempted to check inflation rather

than spur growth

Besides they are trying to reform their financial sector to compete in the world financial market says

Thapa

Nepals financial sector has benefited from being a relatively isolated economy Nepals banks are not yet

large or developed enough to be global players We are relatively less affected by the ongoing crisis for

the simple reason that our exposure in the products and markets which are facing the crisis is very

limited if any says Anil Shah of Nabil Bank

Nepali banks are insulated from the global crisis and it is local or national challenges that pose a far

greater risk Nepali banks have also diversified investments by reducing concentration on any one sector

or region

Shah says the real challenge for Nepal is to see how the economy can be made less India-dependent I

do not mean lessening our trade or economic ties with India for we must in fact ensure even greater

growth in this respect But we also have to look to other export import and investment partners so that

the shock suffered by one market wont resonate so strongly through our economy Shah told Nepali

Times

The global crisis may have another silver lining for Nepal by arresting capital flight especially to India

Some well-known Nepali investors are rumoured to have suffered big losses in the Indian stock market

fall last week

• Global recession employment and remittance Linkages are obvious

Besides they are trying to reform their financial sector to compete in the world financial market says

Thapa

Nepals financial sector has benefited from being a relatively isolated economy Nepals banks are not yet

large or developed enough to be global players We are relatively less affected by the ongoing crisis for

the simple reason that our exposure in the products and markets which are facing the crisis is very

limited if any says Anil Shah of Nabil Bank

Nepali banks are insulated from the global crisis and it is local or national challenges that pose a far

greater risk Nepali banks have also diversified investments by reducing concentration on any one sector

or region

Shah says the real challenge for Nepal is to see how the economy can be made less India-dependent I

do not mean lessening our trade or economic ties with India for we must in fact ensure even greater

growth in this respect But we also have to look to other export import and investment partners so that

the shock suffered by one market wont resonate so strongly through our economy Shah told Nepali

Times

The global crisis may have another silver lining for Nepal by arresting capital flight especially to India

Some well-known Nepali investors are rumoured to have suffered big losses in the Indian stock market

fall last week

• Global recession employment and remittance Linkages are obvious