nefport issue 6

Docking Nepal’s Economic Analysis 1

Contents

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Editorial

Part I : General Overview

Political Overview

International Economy

Macroeconomic Overview

Agriculture

Energy

Foreign Aid

Health

Infrastructure

Manufacturing & Trade

Real Estate

Remittance

Telecommunication & Media

Tourism

Macroeconomic Outlook

Part II: Review

Education

Capital Market

Banking

Endnotes

Nepal Economic ForumP.O.Box 7025,Krishna Galli, Lalitpur - 3, NepalT: 554-8400E: [email protected]: www.nepaleconomicforum.orgOctober 2011, Issue 6Editorial team:Pranab Man Singh and Akira DhakwaContributors:Aalok Pandey, Ami Shrestha, TrishagniShakya, Tejesh Pradhan, Shristi Singh,Raju Tuladhar and Rojesh ShresthaLayout and Design:Aavishkaar MarketingCommunicationBakhundole - 3, Lalitpur, NepalT: 5010679

The document is solely the work ofthe Nepal Economic Forum and theinformation documented in and theviews expressed by this economicperiodical is of Nepal EconomicForum.

Docking Nepal’s Economic Analysis2


With our sixth issue of the nefport, we are happy to bring to you an overview ofNepal’s economy over the past three months. First off, we would like to thank allour readers for their invaluable feedback. Your input helps us develop thispublication and better cater to your needs. With your support, we hope that thispublication will prove to be essential to business executives and developmentpractitioners in Nepal.

This issue builds upon the general structure established in previous issues andis divided into two sections. The first section provides a general overview of theoverall macroeconomic state of Nepal’s economy. It goes into some depth withineach sector and provides an overview of key stories that have developed over thelast quarter. It also provides an outlook for the next quarter.

Like with previous issues, the second part of nefport is more analytical. In thisissue, we have decided to look into three specific areas – the education sector,capital markets and banking. We provide a detailed overview and assessment oneach of these topics. We hope that this will be beneficial for those who makecritical decisions in these sectors, as well as those interested in the generaleconomic well being of the country.

While the US dollar has appreciated in value considerably over the past fewweeks, we have used a USD conversion rate of NPR 71.69 to a dollar, the oneyear average.

Nepal Economic Forum is a not for profit organization and a wing of beedmanagement. We would like to thank beed invest and beed management for theirsupport in making this issue possible. We also thank all our readers who continueto encourage us.

We are eager to receive your valuable feedback on how to make future issues ofnefport more useful and user friendly. Please email us your suggestions [email protected]

Sujeev ShakyaChairmanNepal Economic Forum

Editorial



GENERALOVERVIEW

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5

Political Overview

Outlook

The government missed the constitution drafting deadlineof August 31, 2011 but was able to extend the term of theConstituent Assembly by another three months withoutany major problems. Prime Minister Jhalanath Khanal’sstruggled to appoint a full cabinet and failed to move thepeace process forward. This eventually led to hisresignation and the election of the Baburam Bhattarai asNepal’s newest Prime Minister. The primary challenge ofthe new government is to successfully complete theintegration and rehabilitation of Maoist combatants anddraft the new constitution.

Highlights

Another PM: After a few weeks of Prime Minister Khanal’sresignation and the failure of efforts to form a nationalunity coalition, Baburam Bhattarai was elected as the newPrime Minister on August 28, 2011. The Vice Chairman ofthe Maoist party, Bhattarai won by a majority of 340 votesagainst Ram Chandra Poudel of the Nepali Congress andis now Nepal’s fourth PM in four years.

Third time extension of the CA: Having missed severaldeadlines to draft the constitution, including the August

Economic performance will be strongly influenced by politicaldevelopments in the country. The prime minister is likely to

face major challenges over the modality of integration andrehabilitation of former Maoist rebels. This remains a crucial issueand is a necessary step before the drafting of a new constitution.

31, 2011 deadline, the government has managed to extendthe term for a third time for another three months.

Budget 2011-2012: The finance minister, Bharat MohanAdhikari, presented the budget for 2011/12 on July 15,2011. There was a delay of one day caused by the UnitedDemocratic Madhesi Front (UMDF) as they cited thegovernment failed to address the issue in the Terai region.The total proposed expenditure stands at NPR 384.9 billion(USD 5.5 billion), representing a 14% increase from the2010/11 budget.

New Indian Ambassador: Jayant Prasad was appointedthe new ambassador to Nepal and took office on August26, 2011. He replaces Rakesh Sood who had left aftercompleting his three-year tenure in Kathmandu.


International EconomyGlobal economic growth appears more sustainable as thedeveloped economies continue to recover and emergingmarkets maintain their rapid pace of growth. The IMFacknowledged that global economic activity is set toaccelerate again and has maintained global growthforecasts for 2011 and 2012 at 4.2% and 4.4% respectively.Major areas of uncertainty for the global economy haverevolved around the crisis in the Euro zone and the futurepath of monetary and fiscal policy in the United States.

The U.S. and Euro zone: The slowdown in activity in theUnited States should be temporary as oil prices stopclimbing and international supply chains are restored afterthe Japanese earthquake. The recovery is still weak andis prone to relapses. The recent economic turmoil couldbe a precursor to a double-dip recession in the US andhas dented consumer and producers sentiments. On abrighter note, some of the growth worries about theAmerican economy were alleviated when weekly joblessclaims fell below the 400,000 mark coupled with afavorable retail sales report. Both in Europe and the US,

fiscal concerns pose big challenges for policymakers. Assolvency concerns have not been fully addressed, thesovereign debt crisis in Europe intensified. There is a riskof it becoming systemic as it spreads beyond Greece,Portugal and Ireland to Spain, Italy and Belgium. Morerecently, the last hour deal reached in Congress to endthe U.S. debt crisis and to prevent a national default, hassignificantly dented investor confidence. The deal raisedthe debt ceiling in two steps from USD 2.1 trillion to USD2.4 trillion and cuts an initial USD 1 trillion in spendingover ten years.

Global equities markets: Global equities have beenvolatile with large swings of over 4% in either direction.1

Recent weeks have begun on a distinctly down note afterS&P’s downgraded U.S. debt to AA+ from AAA. As aresults, even Japanese and Chinese stock markets sawmassive declines. Investors were unsure what this wouldmean to them and fled to safe havens including U.S.treasuries, the Swiss franc, and the Japanese yen.2

Emerging markets: Emerging economies continue toshow risks of overheating, although as a whole, growthhas slowed down due to commodity price increases andthe earthquake in Japan. However, inflation in emergingeconomies remains a concern.3 Overall, developing nationshave made a significant contribution to the global economicgrowth.

Outlook

With predications of an American recession in the remainingmonths of 2011, the global economy still looks shaky.

Though slow, the impact will be felt even in the smallest ofeconomies like Nepal via reduced exports and remittances.However, the lasting double-digit growth nearby in India andChina provides some cushion.

Figure 1 Contributions to Global GDP Growth


Macroeconomic OverviewAt the turn of the century, Nepal’s GDP for the 2000/01fiscal year stood at NPR 413 billion (USD 5.62 billion).Since then, Nepal’s economy, as estimated for the 2009/10 fiscal year, has painstakingly grown to NPR 619 billion(USD 8.42 billion) at 2000/01 prices. The decade sawmomentous change in Nepal’s political spectrum throughthe removal of the monarchy and the end of the civil war.However, economic progress has at best trudged forwardwith socio-political issues consistently trumping theeconomy. According to the Central Bureau of Statistics(CBS), Nepal’s per capita Gross National Income (GNI)during this time period doubled from NPR 19,144 (USD260) in 2000/01 to NPR 42,291 (USD 575) in 2009/10.However, this still keeps Nepal close to the bottom ofglobal income tables.

Agriculture

Agriculture is the primary source of food, income, andemployment for a majority of Nepalis, particularly thepoorest. Marred by low labor productivity, 66% of the laborforce is employed in the agricultural sector but is able tocontribute only 33% to national GDP.4 Agriculture has beenthe highest priority sector since the formulation of theFifth Five-Year Plan (1975-80). Economic growth isdependent on increasing agricultural productivity anddiversifying the agricultural base. Accordingly, the budgetfor this fiscal year emphasizes the agriculture sector as apriority sector and highlights plans to commercialize it.The Asian Development Bank expects the agriculturesector in Nepal to grow by 4.0% in 2011 (up from 1.3% in2010), primarily due to weather-induced recovery in theoutput of key summer crops.5

Transform and commercialize the agricultural sector:In this year’s budget speech, Finance Minister BharatMohan Adhikari put a strong emphasis on the need totransform the traditional feudal system of subsistencebased agriculture and commercialize it to establish a self-reliant economy. Adhikari highlighted the need to partnerwith cooperatives and the private sector to set upagriculture farms. The government will provide subsidies

to mechanize agricultural production and has allocatedNPR 3 billion (USD 41.85 million) as subsidies for farmersto access chemical and organic fertilizers. In addition,the government has given continuity to the “One Village,One Product” program, and intends to develop pocketareas in order to encourage specialization and facilitateproduction.6

Boost in production this season: By July, 80% of totalpaddy fields had been planted because of an earlymonsoon and continued downpours throughout theseason.7 This figure increased to 94% as the first week ofAugust ended. According to the Ministry of Agricultureand Cooperatives (MoAC), less than 86% of total paddyfields were used in the same period last year. Nepal hasregained the status of a food surplus country after twoyears and increased hopes of a bumper harvest this year.The MoAC plans to almost double the supply of subsidizedchemical fertilizers in the current fiscal year based on theassumption that this input is the most important variabletowards boosting output. The Agriculture Perspective Plan(APP) 1992-2015 estimates that chemical fertilizerscontribute to a growth of 64-75% in the agriculture sectorand recommended that the supply of fertilizers beincreased by 8.5% per annum.8

Foreign aid for agriculture and food security: TheGlobal Agriculture and Food Security Program (GAFSP)has decided to award Nepal a grant of USD 46.5 million(NPR 3.33 billion) for the enhancement of household foodsecurity in the poorest and most food-insecure regions.9

Similarly, the World Bank (WB) is providing a grant ofUSD 75 million (NPR 5.38 billion) to the Poverty AlleviationFund10 and USD 35,000 (NPR 2.48 million) to improve thecommercial and technical capability of coffee farmers11 inSyangja, Kaski, Kavre, Lalitpur, Tanahun and Lamjungdistricts.12

The technique to feed more with less: The governmenthas been accused of “paddy politics” in its collusion withthe International Rice Research Institute (IRRI), which onlypromotes rice varieties and technologies established bythe organization.13 Experts claim the System of Rice


Intensification (SRI) can double Nepal’s rice production.The National Agriculture Research Council (NARC), thesole authority to suggest policy measures to thegovernment, is not backing SRI. Nevertheless, the Foodand Agriculture Organization (FAO) is training farmers inthe technique from transplantation to harvest in fieldschools. Though SRI is more labor intensive, this techniqueproduces 150 quintals of rice per hectare for a land thatyielded 20 to 30 quintals using the traditional method whileusing 35% less water, 10% of the seeds, and 50% lessfertilizers.14

Nepali farm goods to face additional competition: Inaccordance to the agreements signed during bi-lateraltrade talks held with India in March, the Ministry ofCommerce and Supplies (MoCS) has proposed to thegovernment to gradually reduce the 5% AgriculturalReforms Fee (ARF) imposed on Indian farms products.Nepali trade experts have been opposing the reduction inARF, which they claim will weaken the competitive powerof Nepali farm goods. Subsidies and other incentives fromthe Indian government already give Indian farm products acompetitive advantage. In addition, the MoCS also seeksto increase the margin of preference on Indian goodsbetween 5 to 7%. This is likely to make Indian productsmore competitive in the Nepali market. On the other hand,in a bid to promote exports, the MoCS has also proposeddifferent incentives including the waiver of export duties,reduction of import duties on raw materials, and exemptionof other taxes on around a dozen products like blackcardamom, ginger, pulses, honey, tea, jute, handicraft,medicinal herbs, carpet, betel nuts and tanned leather.15

Unstable food prices: Rising food prices is the chief driverof the high inflation in the country. According to NepalRastra Bank (NRB), the consumer price index (CPI) easedto 9.5% in mid-May, down from the 10.6% a month ago.During this period, food and beverage prices increased by16% due to soaring vegetable prices,16 however, by mid-August, vegetable prices of seasonal vegetables droppeddue to high production. Due to a lack of proper storagefacilities, the price of major vegetables like dry onion, localcauliflower, cowpea and pumpkin increased by as much

as NRS 10 (USD 0.14) over the period of a week.17 TheDepartment of Commerce (DoC) has drafted a PriceControl Policy that allows the government to fix the priceof essential commodities taking into consideration factorslike cost of production, buying price and profit margin forthe sellers.18

Ostrich farming in Nepal: Ostrich products are all setto hit the Nepali market, thanks to the commercial farmingof the world’s biggest flightless birds that began in thecountry two years ago. Ostrich Nepal, a private companywhich started the farming in Rupandehi with an investmentof NPR 300 million (USD 4,184,684), is all set to supplyostrich products including meat, leather and feathers tothe market in 2011. The company started farming to marketthe products in the international market where the priceof one kilogram of ostrich meat costs up to USD90 (NPR6452).19

Energy

A string of positive reforms have been witnessed in theenergy sector after the appointment of Gokarna Bista tothe Ministry of Energy. The Nepal Electricity Authority(NEA) has also undergone core changes.20 However, thestate run Nepal Oil Corporation (NOC) is still runninglosses despite hiking prices to an all time high.21

NEA to control power thefts: In an attempt to control powerthefts and leakages, NEA has launched a campaign underthe new Energy Minister, Gokarna Bista. Officials haveseized equipments used to steal electricity in addition totaking legal action. To further discourage theft, defaulterswill be subject to load shedding and also be removed fromthe priority list for maintenance. The aim of the NEA is tobring down leakages to a total of 9% from a whopping29% which was the case when Bista took office inFebruary.22

Reforms in the Energy Sector: The Ministry of Energyrecently appointed Dipendra Nath Sharma as the newmanaging director (MD) of NEA through open competition.


Until now, the selection was made through a cabinetdecision.23 Breaking the 26 year old tradition, the ministerstepped down as chairperson of the NEA board, allowingfor the Energy Secretary to take up the position.24 Thesestructural changes are expected to free the state ownedauthority from political interference.

Dues being collected by NEA: Only once the total tallyof electricity bills owed by various ministries reached analarming NPR 400 million (USD 5.6 million), has the NEAinitiated serious actions against defaulters. Starting August10, 2011, it cut electricity supplies to ministries who haven’tcleared their dues in areas such as Nawalparasi, Kawasoti,Dhangadi, Pokhara and even Kathmandu. Such measureshave led to the collection of arrears amounting toapproximately NPR 200 million (USD 2.8 million) in threedays. The next step as outlined by the Managing Directorof the NEA is to act against private establishments andindividual defaulters. It has already published a list of suchdefaulters owing more than NPR 100, 000 (USD 1,395) tothe NEA.25

Petroleum products: Petroleum products are thecountry’s largest import, accounting for 21% of the nationalbudget. In the last five years, Nepal has seen an increaseof approximately 52% in the import of oil.26 The NOCestimates oil imports to touch a value of NPR 100 billion(USD 1.4 billion) in the current fiscal year. Diesel accountsfor 60% of the total fuel imports, mainly due to persistentpower cuts/load shedding. NOC Director Digambar Jhaclaims that Liquid Petroleum Gas (LPG) and diesel importcould be reduced by 75% and 50% respectively if thecountry could produce self-sufficient electricity.

New bill finalized: The government has finalized thePetroleum Product’s and LPG Bill, which will put an endto the three decade long state monopoly in the sector.The new bill welcomes private sector investment into thebusiness but specifies the requirement of a heavy paid upcapital from interested private players. The paid up capitalrequirement to import crude oil, refined products and LPGare NPR 20 billion (USD 279 million), NPR 10 billion (USD139.5 million), and NPR 3 billion (USD 42 million)respectively.27 If the bill is endorsed by the parliament,the government will have to raise the paid up capital of theNepal Oil Corporation (NOC) to NPR 10 billion (USD 139.5million). The significant capital provision was included toensure only competent players enter the sector. The billalso seeks to establish a seven member Nepal PetroleumAuthority (NPA), for which the government will appoint themembers. The NPA will put an end to the regulatoryfunction currently being carried out by NOC.

Increase in Fuel Prices: NOC increased petrol pricesto NPR 102 (USD 1.42) from NPR 97 (USD 1.35) on June13 2011.28 Diesel and kerosene prices rose to NPR 73.5(USD 1.02) on July 10, 2011.29 NOC has introduced a flatcommission rate to petroleum dealers instead of the

Year wise total import ofpetroleum productsFigure 2


prevailing 3% commission rate. The new price list releasedby the Indian Oil Corporation shows a drop in LPG prices,although the prices of petrol and diesel have increased.The overall effect is positive and coupled with the increasein selling prices, NOC’s losses will be reduced from NPR793 million (USD 11 million) in July to an estimated NPR714 million (USD 10 million).30 The Commission for theInvestigation of the Abuse of Authority (CIAA) has prohibitedNEA from distributing bonuses on account of it beingunethical with the existence of huge losses.31 The NOC’sprofit/loss owing to per liter of sale of the various petroleumproducts for August is provided below.

Source: http://www.nepaloil.com.np/main/?opt1=mediacenter&opt2=news

DoMG to tap natural gas beneath Kathmandu Valley:The Department of Mines and Geology (DoMG) isexpected to conduct a feasibility report on the possibilityof tapping into natural gas from under the Kathmanduvalley.32 The DoMG will initiate processes whereby theymight extract some of the gas for a trial by the end of thefiscal year 2011/12. Findings from previous studies revealthe existence of lithium gas which cannot be liquefied,but can be supplied to households through pipelines. Thestudy states that the source can produce enough energyto meet the demand of 20,000 households for 50 years.

Foreign Aid

Foreign aid is the one of the principle drivers of the Nepalieconomy. A major portion of the finance for developmentprojects is made possible through foreign aid.

Budget 2010/11 and the foreign aid: Looking at thepast few years, the government has become increasinglydependent on aid to meet expenses. In fiscal year 2007/08, grants contributed to 13.8% of the total budget.However in the current fiscal year 2010/11, the Governmentof Nepal expects foreign aid to cover 24.65% of itsexpenses. The total expected aid for the current year isNPR 70.13 billion (USD 978 million).33

Source: Budget Speech 2011/2012, Ministry of Finance

EU’s support for peace in Nepal: The European Unionhas given a NPR 2.2 billion (USD 30.69 million) grant tothe Government of Nepal for peace related activities.34

These activities are to be implemented under the NepalPeace Trust Fund under the Ministry of Peace andReconstruction. The European community wants thegovernment to use this fund for the implementation of the2006 Comprehensive Peace Accord.

Per Liter Profit/Loss on Sale ofPetroleum Products in August, 2011Table 1

Item

Petrol (MS)Diesel (HSD)Kerosene (SKO)LP GasAviation Turbine Fuel (JET A-1)Aviation Turbine Fuel (JET A-1)Estimated Total Loss

Profit/(Loss) perliter in NPR

1.51(11.22)(0.87)

(260.05)20.97 (Duty Paid)

21.04 (Bonded)(714,500,000)

Profit/(Loss) perliter in NPR

0.02(0.16)(0.01)(3.63)0.290.29

(9,966,522)

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Figure 3 Foreign Aid to Nepal


World Bank’s efforts to reduce poverty: The WorldBank has provided additional finances of USD 75 million(NPR 5.38 billion) to the Poverty Alleviation Fund.35 Thegrant is set to directly benefit 2.65 million people, almosta tenth of the total population. The Poverty AlleviationFund (PAF) has successfully increased incomes of itstarget groups by 80% in the areas it supports.

World Bank to NRB’s rescue: The World Bank hasagreed to provide Nepal with technical assistance in orderto prevent the exacerbation of its financial problem.36 Nepalfaced a liquidity crisis, which was aggravated when largedepositors withdrew their deposits. The World Bank willassist Nepal Rastriya Bank (NRB) to study the causes ofthe liquidity crisis and assess the steps taken by theauthorities.

Nepal may lose Asian Development Bank (ADB)grant: Lawmakers expressed concerns regarding thegovernment’s inability to implement the ADB’s Informationand Communication Technology (ICT) project. This couldresult in the withdrawal of the USD 6 million (NPR 430.14million) grant.37 The ADB provided the grant for introducingVoice over Broadband services in 38 districts. The projecthas not been implemented because of a lack of co-ordination between ministries.

DFID to help create jobs, infrastructure: The UK AidAgency, Department for International Development (DFID)has unveiled an assistance plan of NPR 38.72 billion (USD540 million) for Nepal.38 This is a four-year operational plan(2011-2015) which will focus on government, security,inclusive wealth creation, human development, climatechange and disaster risk reduction. Through this plan,DFID aims to create 23,000 jobs, build 532 kilometers ofroad and maintain 3,700 kilometers of road. In addition,DFID will continue its support of the peace process throughthe Nepal Peace Trust Fund.

World Bank to fund two projects: The World Bank haspledged USD 75 million (NPR 5.38 billion) to promotevocational education and improve governance in emerging

towns.39 Through this grant, 75,000 Nepali youth areexpected to gain access to short-term skills training andtechnical education. The project is aimed at youth frompoor and marginalized backgrounds. On the other hand,Urban Governance and Development Program: EmergingTowns Project is going to finance the construction andrehabilitation of infrastructure in six municipalities.

Nepal receives from the Forest Carbon Trust Fund:Under the first ever Forest Carbon Trust Fund (FCTF),Nepal received USD 95,000 (NPR 6.81 million) inLudikhola, Kayarkhola and Dolakha where the FCTF waspiloted.8 The main focus of the FCTF project is thesequestering of carbon through community-based forestmanagement. The project covers 10,000 hectares ofcommunity-managed forests and 16,000 households.According to ICIMOD (International Centre for IntegratedMountain Development), the organization involved inimplementing FCTF, this is one of the first community-based carbon offset project.

Health

Health care still does not reach many areas of Nepal. Thecurrent budget allocates NPR 24.51 billion (USD 350million) towards health care services, the expansion offree basic health care and the promotion of infant andmaternal health.

Integrated Health Plan: The Integrated Health Programis to be implemented in Jajarkot, Mugu, Bajura, Rukum,Taplejung, Kapilvastu, Rautahat and Siraha districts whichlag behind in Human Development Index.41 The Ministryof Health and Population (MoHP) plans to spend aroundNPR 2.5 million (USD 35,715) for carrying out varioushealth programs in each of these districts.

Progress in National Health Survey: New Era, a non-government, non-profit research organization, under theguidance of the MoHP, is conducting the fourth NepalDemographic and Health Survey. The survey is being


conducted in 11,095 households among men and womenbetween the ages of 15 to 49. According to recent claims,the organization has finished 58% of its fieldwork.42 Thedata obtained from the survey will facilitate the calculationof various demographic details on the general health ofthe population.

Epidemic outbreak measures: Banke, Dang, andGorkha districts have reported over 1200 cases of diarrheain the past year.43 The main reasons were polluted watersources, contamination due to the recent floods and alack of awareness. Similarly, with reports of dengue andencephalitis in many parts of the country, campaigns arebeing undertaken to fight the diseases. In Chitwan, theDistrict Public Health Office (DPHO) launched an operationto search and destroy the pupa and larva of denguemosquitoes. It also started a campaign to distributevaccines for encephalitis.

Further aid for Child Malnutrition: To reduce high levelsof child malnutrition, the Japan Fund for Poverty iscontributing USD 2 million (NPR 143.38 million) for socialprotection programs.44 According to the World HealthOrganization (WHO), 38.8% of children (below age 5) sufferfrom malnutrition in Nepal.45 The project will run for threeyears and is expected to be completed by early 2014.

Trade and tariff barriers discourage the export ofNepali Drugs: Domestic drug manufacturers are seekingto grow and enter international markets. The intendedexport countries are India, Sri Lanka, Cambodia, Myanmar,Vietnam, and some African countries. However, variousnon-tariff barriers, registration charges of up to NPR 3.58million (USD 50,000), renewal fees and delays in sampletesting procedures have been discouraging drugmanufacturers from attempting to export their products.

Infrastructure

Economic development is largely dependent upon theaccess to and quality of its infrastructural facilities. The

Government of Nepal has consistently invested ininfrastructure development. Nepal’s geography, theresources required for construction, and endemic structuralcorruption has meant that many infrastructure projectsare delayed or compromised upon quality.

Hydropower: To enhance investment in the energy sector,the Government of Nepal registered a HydropowerDevelopment and Investment Company with a paid upcapital of NPR 8 billion (USD 111.6 million).46 Comparedto the last fiscal year, the budgetary allocation forhydropower projects has also increased by 13.61% toNPR 16.69 billion (USD 232.81 million). As per the budget,tax incentives will be provided to both domestic and foreigninvestors to attract investment in hydropower andinfrastructure development. Any hydropower project thatstarts construction within 24 August, 2014 and beginscommercial production by mid-April 2018 will be fullyexempted from paying income taxes for the first ten years.Thereafter, a 50% income tax exemption will be providedfor the next five years.47

Source : ‘Red Book 2011/12’, Ministry of Finance,www.mof.gov.np

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Budget allocation for some of hydropowerprojects & electricity grid extensionsTable 2

Project Name

Middle Marsyangdi Hydro Electricity Project (70 MW)

Kulekhani Third Hydropower Project (14 MW)

Chameliyagaad Hydropower Project (30 MW)

Rahughat Hydropower Project (27 MW)

Upper Tama Koshi Hydropower Project (309 MW)

Upper Trishuli 3A Hydropower Project (60 MW)

Kabeli ‘A’ Hydropower Project

132 KV and other Transmission Line Extension

Hydro power Strengthening Project

Community and other rural electrification

Micro Hydro and Alternative Energy Program

BudgetAllocation (NRP)

505 million

150 million

1.4 billion

2.1 billion

100 million

2.6 billion

780 million

5.67 billion

1.01 billion

1.57 billion

1.49 billion

BudgetAllocation (USD)

7.04 million

2.09 million

19.53 million

29.29 million

1.39 million

36.27 million

10.88 million

79.09 million

14.09 million

21.89 million

20.78 million

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Road Projects: The 2011/12 budget has allocated fundsamounting to NPR 178.61 billion (USD 2.49 billion) forroad projects. The fund allocated for the roads increasedby 46.89% to NPR 27.16 billion (USD 378.85 million) fromthe last fiscal year with ongoing projects like the Mid-hillhighway, Kathmandu –Terai Fast Track, Terai – HulakiRoad and the North – South Highways given a priority.

Source : ‘Red Book 2011/12’, Ministry of Finance,www.mof.gov.np

Irrigation: The budget speech stated that the constructionof the 15 kilometer long major canal section of the SiktaProject will be completed with a capacity to irrigate 35,000Hectares of land in the fiscal year 2011/12. NPR 996.45million (USD 13.90 million) has been allocated to theproject. Further NPR 780 million (USD 10.88 million) hasbeen allocated for Ranijamara-Kulariya irrigation projects

in Kailai District. A detailed feasibility study will also beconducted to irrigate the Dang Valley.

Ten new cities: A feasibility study carried out by RIBSEngineering Consultant has identified 10 potentiallocations to set up modern cities. These cities will have acapacity to accommodate a population of 30,000 - 50,000.The government has given this project a high priority andhas allocated NPR 50 million (USD 697,447) to startintegrated physical and social infrastructure developmentplanning.48

West Seti Hydropower Limited (WSHL) licenserevoked: The cabinet on July 27, 2011, revoked WSHL’slicense, a company promoted by Australia’s SnowyMountain Engineering Corps.49 The license was acquiredby the company in June 27, 1997. As per the cabinet’sdecision, the Energy Ministry will explore the possibilityof constructing the 750 MW reservoir based project throughgovernment investment. The estimated cost of the projectin 2007 stood at USD 1.2 billion (NPR 86.03 billion).50

Preliminary works for the projects such as EnvironmentalImpact Assessment and Detailed Engineering Report havealready been prepared. The project lost its investmentsupport amidst allegations of poor governance, lack ofpublic support and a hostile foreign investment climate.On May 2011, the China Three Gorges Corporation (CTGC)expressed interest in investing in the West Seti Hydroproject. The Ministry of Energy recently revised theestimated current cost to USD 1.6 billion (NPR 114.7billion).

World Bank assistance for electricity project: TheWorld Bank approved of assistance for the Nepal IndiaElectricity Transmission and Trade Project (NIETTP). Theassistance package comprises credit worth USD 84 million(NPR 6.02 billion) and a grant of USD 15 million (NPR1.08 billion). The credit carries a 0.75% service charge,10 year grace period and a maturity of 40 years.51 Theproject is expected to provide at least 100 MW of additionalelectricity which will help minimize power outages. Theproject will also see the establishment of cross bordertransmission capacity of about 1000 MW and develop key

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Budgetary allocation for some of majorroad projectsTable 3

Project Name

Pushpa Lal Highway (Ilam – Baitadi)

North South Highway (Syaphrubesi – Rasuwagadhi)

North south Highway (koshi, Kaligandaki and

Karnali river corridors)

Kathmandu – Terai Fast Track

Sagarmatha Highway ( Gaighat-Diktel Section)

Biheswor Prasad Koirala Highway Benapa,

Sindhuli, Bardibas

Karnali Highway (Kalikot-Jumla section)

Mahakali Highway (Darchula-Tinchar section)

Saljhandi -Sandhikharla-Dhortpatan Road

Road Upgrade Project

Sahid Marg (Tila-Gharti Gaon-Thawang-

Rukumkot)

Road Sector Development Project

Kathmandu-Bhaktapur Road expansion

Kathmandu valley Road construction and

development

Kathmandu valley Road Extension Project

Road Connectivity Project

BudgetAllocation (NRP)

1.75 billion

254.7 million

629.5 million

710.46 million

71.02 million

1.19 billion

34.6 million

187.79 million

113.85 million

2.06 billion

107.5 million

3.5 billion

109.15 million

350 million

354.6 million

805.6 million

BudgetAllocation (USD)

24.41 million

3.55 million

8.78 million

9.91 million

990,654

16.60 million

482,633

2.62 million

1.59 million

28.73 million

1.5 million

48.82 million

1.52 million

4.88 million

4.94 million

11.24 million

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segments of the high voltage system to help expandaccess to electricity across Nepal.52

Dry port to be constructed in Larcha: In order tosystematize the ever increasing trade between Nepal andChina, a dry port in Larcha, Sindupalchok will beconstructed and will include a customs office in Rasuwa.A team has been deployed to prepare a report with thecooperation of United Nations Development Programme(UNDP). Currently, a makeshift dry port is beingconstructed53 with an investment of NPR 10 million (USD139,489) from the Government of China.54

Manufacturing and Trade

Power shortage and political interference have beenidentified as the main reasons for the slow growth of theIndustrial Sector. Growth was limited to just 1.5% in thefiscal year 2010/11. Government assistance to Small andMedium Enterprises (SME), which employ more than 70%of the work force, is limited. The government needs toprioritize SMEs if long term sustainable growth is to beachieved. It needs to consult SMEs when making rulesand regulations and then communicate these changes.The budget for the current fiscal year was largely unableto increase investor confidence in the private sector.Instead, the budget gave a higher priority to distributingmoney through cooperatives rather than investing inprojects that could lead to sustainable growth in the future.

Employment Guarantee Act: The government hasdrafted the Employment Guarantee Act, promising toprovide a job for at least 100 days per year to a memberof each household living below the poverty line. Thegovernment will rely on records held by village developmentcommittees (VDCs) and district development committees(DDCs) for implementation. Local bodies will monitor andregulate the program and hold public hearings every fourmonths to identify grievances.

New Labor Policies and its effect: The implementationof labor policies in the workplace has resulted in damaging

consequences. Surya Nepal’s garment factory inBiratnagar implemented the policy on ‘no work no pay’after strikes by its employees. The strike lasted for eightdays as employees demanded a hike in wages. Thecompany’s refusal to pay for the eight days led to workerstaking 37 employees as hostages. Police intervention wascalled for the rescue of the hostages. At present, the factoryhas been shut down. Similarly, a nation-wide industrialshutdown called by ten fringe trade unions was called offwith the implementation of the governments new paypackage. This fixed the minimum monthly salary of workersat NPR 6200 (USD 86.50) and daily wages at NPR 231(USD 3.23).

Ratification of the ILO Convention 87: Trade Unionshave demanded that the International Labor Organization(ILO) convention 87 be ratified by the government. Theconvention provides laborers the right to be affiliated toany organization and guarantees core labor standards toall workers. This would help laborers unite, and guaranteethe right to work independently and ensure social securityto them. However, this convention does not cover peoplein the army and police.

New system of additional checks: From August 1, 2011India imposed a new system of additional checks on thirdcountry containers in transit to Nepal. This allows Indiancustom officials to unlock any sealed containers in transitat Kolkata. Reported incidents of illegal trade in India beforearriving in Nepal lead to India imposing this new system.With this in place, Nepali traders face longer transportationperiods and higher transportation costs. The Governmentof Nepal has requested India to withdraw the newlyimposed system as Nepali officials argue that it is againstthe bilateral transit treaty between the two countries.55

Trade Policy Review to be finalized by February2012: Nepal will be finalizing the Trade Policy Review (TPR)by February 2012 to reduce the gap between Nepal’scommitment to the World Trade Organization (WTO) andits actual fulfillment. The TPR will also give importance tothe service sector, which dominates global trade. Thisemphasis is to enhance the service sector in Nepal and


get it up to speed with the global standards. Currently,the Ministry of Commerce and Supplies (MOCS) has sentthe report to different ministries for their suggestions andcomments.56

Trade of gold and silver drops: The price of gold in thedomestic market reached an all time high of NPR 50,500(USD 704.43) per tola (11.664 grams). An increase in theprices has resulted in a drop in the transaction of gold bymore than 75%. Along with reaching an all time high,yellow gold has surpassed the price of platinum for thefirst time since 2008. Silver prices have also reached ashigh as NPR 1350 (USD 18.84) per tola (11.664 grams)due to a weakening dollar, high crude prices and increasinguse of silver in the industrial sector. Nepal has been facinga decline in the export of silver.57 Silver products, a majorexport commodity, saw a decline of 61.6% from NPR168.52 million (USD 3.5 million) in the first 11 months of2009/10 to NPR 64.74 million (USD 902,497) in the sameperiod for 2010/11. Nepali silver is completely hand-madedue to which massive orders cannot be taken and alsodoes not have a cadmium free certificate.

Source: Nepal Rashtriya Bank

Imposition of excise duty on metal products: Goingagainst the provision of excise duty on metal products,India has recently imposed a 5% excise duty on metalproducts. This hike is discouraging for Nepali metalexporters and makes it difficult for them to compete inthe Indian market.

Bhutan and Nepal to sign trade pact: After signing thetrade pact on the Most Favored Nation basis with

Bangladesh, Nepal is currently speeding up the processto sign a trade treaty with Bhutan. Growing trade betweenthe two countries encouraged such a pact. However,discussions on providing entry points for trading are yetto take place with Indian officials. During trade talks heldin June, Bhutanese officials were positive towards Nepal’sproposal for zero tariffs for its products.58 Trade indicatorsshow a significant growth of exports to Bhutan with majorexport products being iron, steel, transformers, soaps,standard wire and noodles. From 2005 to 2010, exportshave increased from NPR 238.27 million (USD 3.32 million)to NPR 1.55 billion (USD 21.62 million). In FY 2010/2011,Nepal exported a total sum of NPR 421.4 billion (USD5.87 billion) to Bhutan, out of which NPR 240.45 billion(USD 3.35 billion) consisted of iron and steel products.During the fiscal year 2009/2010, imports from Bhutanstood at NPR 133.1 million (USD 1.85 million).59

Source: Trade and Export Promotion Centre

Inland Revenue Offices (IRO) cracks VAT racket: InlandRevenue Offices (IRO) has been entrusted withinvestigating 518 firms that use fake VAT receipts to evadetaxes. So far they have completed investigations into 216firms, slapping taxes and fines totaling NPR 2.78 billion(USD 38.8 million). Losses to the government throughthese fake transactions are assessed to be NPR 1.09billion (USD 15.2 million) in income tax and NPR 5.82million (USD 81,183) in excise revenue. So far a sum inthe form of a collateral amount of NRP 400 million (USD5.58 million) has been was deposited by 21 out of the 24firms while appealing for administrative review. The existinglaw gives these firms 60 days to settle their liability, afterwhich stringent action is allowed to recoup the revenue.

Figure 4 Export of Silver

Figure 5 Total Exports to Bhutan


Separate Intellectual Property body: A separate wingto address the issues related to intellectual property rightsis to be set up by the Ministry of Industry (MoI). Currently,it is being taken care of by the Industrial Property Division(IPD) under the Department of Industry (DoI). The newbody will have a wider scope to exercise its authority byhaving claims registered from other fields includingacademics and arts, while at the same time helping Nepalexecute its commitment to the World Intellectual PropertyOrganization (WIPO) and the World Trade Organization(WTO).

Export Incentives: Exporters have not received thebenefits of cash incentives on exports. NPR 600 million(USD 8.37 million) has been set aside for cash incentivesbut due to the delay of the Department of Industry (DoI) infollowing the standard for incentive distribution, this is yetto materialize. The scheme promises incentives of 2%,3%, and 4% on export of goods generating 30-50%, 50-80%, and more than 80% in value addition. The currentbudget has increased the allocation towards incentivesby NPR 60 million (USD 836,937), but failed to elateexporters earning in Indian Currency. The Ministry ofFinance overlooked the proposal of the MoCS thatexporters earning in India should receive incentives aswell.60

Customs Review and Evaluation: The Department ofCustoms (DoC) conducted its periodical review on thereference prices of 305 imports. This was conducted onthe basis of rules for custom valuation set by the WorldTrade Organization (WTO). The review revealed that outof 305 imports, 181 items were third-country imports whilethe rest come from India. The review was also conductedto discourage undervaluation and the smuggling of goodsto Nepal. In order to systematize the whole import processand collect higher volume of import customs revenue, theFinance Ministry is preparing to introduce an importer

identity card system. The mandatory provision of fillingcustoms declaration forms while importing goods worthmore than NPR 100 through land and NPR 5000 throughair has had a positive impact. In the first 29 days of thecurrent fiscal year, the DoC collected customs revenuesumming up to NPR 6.53 million (USD 91,087) and has atarget of NPR 100 billion (USD 1.4 billion) for the currentyear 2011/12.61

Real Estate

The housing market is an indication of the state of theeconomy as a whole. People buy new homes only whenthey are confident that they’ll have enough income to payfor it, so economic downturns can depress the housingmarket considerably.

Real estate market still shaky: The realty and housingsector of Nepal during the last one and a half year hasgone into near recession after the central bank, fearingthe creation of realty bubble, capped the credit floated tothe sector in 2009. During the same period a directiveissued by the Nepal Rastra Bank (NRB) requiredindividuals to disclose income sources while purchasingland worth more than NPR 3 million (USD 41,846) andhouses worth more than NPR 5 million (USD 69,744).The imposition of a capital gain tax further impacted therealty market. Adding to the woes of the realty sector, theliquidity crunch tightened the credit flow to the housingand real estate sector. As a result, the government wasable to collect NPR 3.2 billion (USD 44.6 million) for thefiscal year 2010/2011 as against the target of NPR 6.3billion (USD 87.88 million) from the realty sector. Revenuefrom land transaction, alone decreased by 46.5% againstthe NPR 6 billion (USD 83.69 million) collected in the fiscalyear 2009/2010.62


Figure 6 Remittances in USD Millions for 2011

Source: Department of Land Reforms and Management

Changes in provisions: The 2011/2012 fiscal year budgetintroduced much awaited changes in the provisionsgoverning the real estate sector. Some of the provisionsintroduced are as follows:

The capital gain tax has been reduced by 50% from10% to 5%.

The budget has relaxed the income disclosure provisionon the purchase of land and houses raising the limit toNPR 5 million (USD 69,744) and NPR 10 million (USD139,489) respectively.

Provision for settling real estate transaction only throughregistered broker companies holding Personal AccountNumber (PAN) cards issued by Inland Revenue Offices.

Provision for allowing Non Resident Nepalis (NRN)including foreign nationals or companies to purchasehouses or apartments amounting to USD 200,000 (NPR14.34 million) or more. However such buyers will beprohibited from selling their houses or apartments forfive years from the date of purchase.

Likewise, as per the NRB circular dated 14 July 2011,real estate loans taken from banks and financial institutionscan be renewed only after the due interest is paid by 16July 2011. Further, the NRB in the same circular has raisedthe personal home loan limit from NPR 6 million (USD83,693) to NPR 8 million (USD 111,591). Such personalloans are to be separated from real estate loans and neednot be included in the calculation of real estate loans so

as to comply with the cap set by the NRB for realtylending. However if the personal home loans are morethan NPR 8 million (USD 111,591) then such loans are tobe included as real estate loans.

Home loan rates hiked: Amidst the relaxation providedby the budget, commercial banks have hiked home loanrates by as much as 1.5%. This has increased the industryaverage rate of home loans to over 16%. The hike in ratescan also be attributed to the central banks’ directive toclose the interest rate gap between different savingschemes to 2% or less.

Remittance

Remittances accounted for 22% of Nepal’s GDP in 2010.63

Remittance inflows have successfully reduced absolutepoverty by 13% and the Gini coefficient rate from 0.41 to0.35.64 Unsurprisingly, the practice of migration for foreignemployment has seen an increasing trend. The benefitsof a high remittance in the household level are povertyreduction, decline in inequality, more income andconsumption. This however, comes with the cost of familyseparation, exploitation by recruitment agencies, andexpensive remittance services. At the macro level, thebenefits are an increase in foreign exchange and BOPstability, increase in disposable income, and higheraggregate consumption. However, they have a directimpact on inflation, labor supply, wage increases, higherreal estate prices, and a heavy dependence on remittancebased growth.

Source: Nepal Rastra Bank, http://www.nrb.org.np

Table 5 Revenue Collection in Kathmandu Valley

LROsDillibazaarChabahilKalankiLalitpurBhaktapurTotal

FY 2009/2010‘NPR’936.69451.27671.75527.52386.742974

FY 2009/2010‘USD’13.076.299.377.365.39

41.48

FY 2010/11‘NPR’564.5

338.93217.41254.8

171.351547

FY 2010/11‘USD’7.874.733.033.552.3921.57

in millions

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The Dutch Disease: According to the World Bank, Nepalmay be suffering from the Dutch Disease. Dutch Diseaseis a conundrum that generates from a country gettingincreasing amounts of revenues either from naturalresources or increasing inflows in remittances. This highdemand in currency leads to currency appreciation, whichhas been witnessed in Nepal until late July of this year.65

According to the theory, increase in the price of exportsdue to currency appreciation results in a loss ofcompetitiveness in the world market.66

Source : World Bank, Remittances Benefits and Costs,Shishido, 2011, Nepal Rastra Bank, http://www.nrb.org.np

NLSS III: utilization of remittances: The third NationalLiving Standard Survey (NLSS) published by the CentralBureau of Statistics states that only 2.4% of remittancesgo towards capital formation. It also adds that 78.9% ofthe remittances are used on daily consumption byhouseholds struggling below poverty line. 7.1% is usedto repay loans, 4.5% is used for household properties,3.5 % on education and 2.4% on capital formation.67

Kuwaits takes action on Illegal Migrants: Kuwaitissued a warning to arrest and deport illegal migrantworkers in the country. The Kuwait government issued afour-month amnesty period (ended on June 30, 2011) withinwhich these illegal immigrants were to return to Nepaland complete legal procedures for re-entry into Kuwait.According to Kuwait’s administrative records, over 40,000Nepalis are living and working in Kuwait out of which 3,500

Nepali workers hold expired visas. This issuance hasplaced the risk of deportation on many Nepalis who travelwithout documentation.68

Visa restrictions to Hong Kong: According to the HongKong immigration department and the Nepali consulate,there has been a drastic increase from 17,555 Nepalipeople in February 2009 to 29,433 in May 2010. Thenumber of Nepalis residing in Hong Kong with an IdentityCard stood at 30,756 as of February 2011.69 However, theimplementation of a ban on visa issuance for Nepalilaborers has put restrictions on pursuing one of the mostlucrative destinations for Nepali migrants. Human rightsorganizations have been urging the Hong Kong Governmentto restart visa issuance under International LaborOrganisation (ILO) convention 189 passed by the 100thInternational Labor conference held in Geneva, Switzerland.ILO 189 is a comparatively new law that grants legalrecognition to domestic workers.70

Telecommunication and Media

Telecom services are expanding their reach to all parts ofNepal. This is evident from the penetration rate of 44.89%as of July 2011.71 This has given rise to fierce competitionbetween Telecom operators Ncell and Nepal Telecom (NT)which has led to additional services at affordable rates.

Source: Nepal Telecommunications Authority

Figure 7 Remittances and Export Trends

Figure 8 Penetration Rate as of July, 2011


NTA proposal for Unified Licensing Policy: The NepalTelecommunication Authority (NTA) has proposed a singleoperator’s license for all telecom services to thegovernment.72 NTA believes this will help rural operatorsexpand.

NTA formulating policy to regulate .np domain: Withprivate internet service provider MercantileCommunications providing the .np domain for over adecade, the NTA has finally realized the need to formulatea policy that regulates the National Internet Registry.73

The lack of a proper regulatory framework increases therisk of the domain being misused. A study on the .npdomain management was conducted in 2010. Howeverits findings were not implemented, but with the use of .npdomain on the rise, NTA has understood the gravity of thesituation and will formulate a policy within the fiscal year.

Nepal Telecom to improve quality of service: NT hasalready started the process of providing landlines throughOptical Network Units (ONU) and will introduce the MultiService Access Node (MSAN) technology after it installsthe Next Generation Network (NGN). The contract for theNGN was given to Chinese Company ZTE Corporation inApril, 2011.74 After, the Public Accounts Committee (PAC)scrapped NT’s attempt to procure GSM and CDMA lineswithout a bidding process,75 NT put forth its largest tendertill date for its mobile network expansion project whichwill add 10 million lines in the country at a cost of NPR 15billion (USD 209 million) to NPR 20 billion (USD 279million).76 The connections will be based on Global Systemfor Mobile Communication (GSM) and Universal MobileTelecommunications System (UMTS) and are to comeinto operation in 15 to 20 months. It aims to improve servicequality. The tender will help NT deal with the scarcity ofsim-cards in the markets.

NT to be compensated for faulty equipments: ZTE issaid to have exported faulty equipments to NT in the year2004. As a result, the quality of service was compromised.ZTE is providing NT with a compensation package aftersix years which includes equipments worth NPR 36 million(USD 508,332).77

Government request to waive UTL liabilities: ActingPrime Minister Jhalanath Khanal had called a meetingwith the Ministry of Information and Communications(MoIC) to discuss the possibility of waiving outstandingroyalties due to paid by UTL. The Nepal TelecommunicationAuthority (NTA) has stated that the outstanding liabilityamounts to NPR 896 million (USD 12.5 million).78 UTL onthe other hand claims that they have suffered a loss ofNPR 4.44 billion (USD 62 million) at the hands of the NTAas it did not fulfill the terms of the license for which itshould be compensated.

Journalists attacked: CPN-UML affiliated Youth Forceactivists, Rohit Koirala and Manoj Rai, attacked theBiratnagar correspondent of Nagarik Daily, KhilnathDhakal.79 Parshuram Basnet has been charged withmasterminding the attempt to murder Dhakal. WhileKoirala was arrested on the night of the assault, Rai wasarrested 9 days later.80 Youth Association Nepal (YAN)Chairman Mahesh Basnet, in a gathering held in Biratnagar,threatened the police and the government to drop chargesagainst Parshuram Basnet.81Another journalist KishorBudhathoki was assaulted by Bikash Rai and Rupak Raiin Sankhwasabha for publishing news about domesticviolence concerning Bikash, one of the attackers.82 Noneof the assailants have been caught yet. Bikash has alsobeen making threats to the police.83

Journalists prohibited from entering Singha Durbar:The government has posed a ban on journalists enteringthe premises of Singha Durbar to prevent them fromcovering the protests being conducted by civil servants.The reason for protests was dissatisfaction with their salarystructures announced in the budget.

Tourism

The Nepal Tourism Year 2011 has successfully attracteda higher number of tourists as compared to previous years.The tourism sector has seen an average growth of 25% inthe first half of the Tourism Year and has witnessed asignificant growth in the number of tourists arriving via air.


The total number of tourist arrivals via air covering theperiod April- July is 34.5% higher as compared to the sametime the previous year. However, despite the increase intourist arrivals, revenue generation has been on the declinedue to the reduction in high end clients.

Source: Nepal Tourism Board.

The Government proposes a Tourism Master Plan: ATourism Master Plan is being prepared and includes thedevelopment of physical infrastructure and tourism servicesto make Nepal one of the best tourist destinations withinthe next 15 years. The concept seeks to develop 17 touristdestinations around the country and has allocated thenecessary budget to establish and operate an IntegratedTourism Service Centers for employment generation withinthe tourism sector. Quality improvement works will becarried out at the Tribuvan International Airport andinfrastructural improvements will be made in other regionalairports.84

Visitors estimated to triple in Lumbini Region:According to the Lumbini Development Trust (LDT),Lumbini, the birthplace of Gautam Buddha, has 133 sites,including monuments and archaeological remains. Thesesites have attracted as many as 50,000 foreigners,

excluding Indian tourists coming via land, in the first fourmonths of Nepal Tourism Year 2011. Rajendra Thapa, theSecretary of LDT has said that the region is yet to witnessthe main tourist season. LDT’s estimates the number ofvisitors in 2011 will be three times more as compared tothe 102,059 and 82,443 visitors in 2010, and 2009respectively. Most of the tourists visiting the region areSri Lankans followed by Koreans, Japanese, Chinese andVietnamese. LDT also claims that in order to enhancesecurity, a team of 90 Armed Police Force personnel hasbeen deployed in the region.85

Promotional Programs implemented for NepalTourism Year 2011: The Nepal Tourism Year 2011Implementation Committee claims that promotionalcampaigns were carried out in 25 international fairs. Fromthe NTY 2011 Promotion Budget of NPR 230 million (USD3.21 million), NPR 130 million (USD 1.81 million) has beenput aside for international promotion alone. NPR 60 million(USD 836,936), NPR 30 million (USD 418,468), and NPR40 million (USD 557,958) has been allocated for tourismpromotion in India, China and other destinationsrespectively. The government is expecting 400,000 visitorsfrom India and China alone.86

High-End Clients Decline: Although there has been asignificant growth in the number of tourist’s arrivals withinthe first half of the NTY 2011, the growth did not reflect intourist activities like trekking, and adventure sports whichare taken up by high-end clients. Tourists who come fortrekking stay longer and spend significantly more thanthose who come for sightseeing.87

Political Instability hits the Tourism sector in Chitwan:During the month of May, Chitwan witnessed a bandaevery second day due to which many tourists cancelledtheir trip. 90% of hotel bookings in the Sauraha area werecancelled due to political disturbances. Although thepolitical parties declared Chitwan a non-strike zone threeyears ago, the unrest within the government resulted instrikes and a significant decline in visitor number.88

Figure 9 Number of Tourist Arrival


Macroeconomic OutlookThere is some good news for the agricultural sector due to the boost in the production of summer crops owing to a favorable monsoon. However,there is little else to be happy about. The budget does not adequately addresses the food security and price shock issues. While there is an increasein the foreign aid into the agricultural sector, this needs to be closely monitored to ensure its effectiveness in improving food security.

The commercialization of agriculture is essential for the development of the sector and the government needs to address the constraints toagricultural commercialization like the lack of infrastructure, fragmented land holding, and the lack of proper market links. It is necessary to promotecommunity based farming in which agricultural land is consolidated to take advantage of economies of scale, allowing for the mechanization ofproduction while maintaining individual ownership. New techniques such as System of Rice Intensification (SRI) that have been tested and provenin Nepal and abroad must also be experimented with.

Within the energy sector, the control of leakages will lead to a significant increase in revenue generation for NEA and NOC. According to the MD ofNEA, a reduction of leakages by a mere 6% will help generate revenues equivalent to NPR 2.5 billion (USD 34.9 million).89 Further, if the arrearsare collected in total, the NEA will recuperate losses equivalent to NPR 660 million (USD 9.2 million).90 With regards to the oil crisis, if the new bill ispassed by the parliament, private investors will enter the market, which might provide a competitive environment thereby reducing prices in thefuture. Additionally, projects which involve locating new sources of energy should be encouraged if the import of petroleum products is to be curbed.

Although the Ministry of Health and Population aims to improve the access and quality of health services in Nepal, there is much to be done to ensureequitable access and quality services in both rural and urban areas. These services also have to become self-sustaining, require communityparticipation and efficient management. A key constraint remains the availability of skilled doctors. Nepal faces significant challenges in terms of its bestdoctors leaving the country for more lucrative jobs abroad. This trend is set to continue.

The pace at which Nepal has been constructing power plants, highways and ports have for years lagged behind the demand of the nation. Thishas had a negative impact on economic growth and helped keep inflation uncomfortably high. The budget is a positive sign for infrastructuredevelopment but the funds allocated are not sufficient to meet the infrastructural needs of the country. The infrastructure sector is a capital intensiveindustry and the Government of Nepal alone is not in a position to fund all projects. Instead, it must create a suitable business environment forattracting foreign direct investment and private equity into the sector. Complete tax exemption benefits for the hydropower industry may lure moreinvestments in the power sector. Strategic efforts like focusing on “on-going projects” rather than setting aside funds for new projects is likely to makea big impact.

The government must take necessary measures to support the growth of the economy through the private sector and SMEs. Training anddevelopment of SME’s are necessary as they contribute to over 70% of total employment. Disruptions in operations through trade union activitieswill likely to be addressed with the implementation and adoption on the new pay structure. Initiatives to ratify ILO convention 87 will preventdeprivation and ensure higher standard of living for workers in various sectors.

The incentives approved by the cabinet towards export need urgent implementation. The Trade Policy Review will allow the service sector to growand work along the lines of the global service sector. Creation of an effective independent body dealing with IP rights will give IP a greater scopein the country while at the same time help to execute commitments effectively. The government could increase its revenue if strict actions are takenagainst businesses found creating fake VAT bills and if measures are undertaken to avoid future rackets. The current increase in export to Bhutanis positive and due to low transportation costs, Nepal could find a bigger market there for its products. However, the fall in the export of silver andthe imposition of excise duty on other metal products by India will lead to a reduction in foreign currency earnings.

Real estate is a capital intensive industry and is facing a liquidity crunch emanating largely from the cautious approach of banks towards financingreal estate companies. The tightened monetary policy of the NRB to control the bourgeoning real estate asset bubble has considerably slowed therealty sector. More stringent regulations could lead to a disastrous correction in the land and house prices increasing the vulnerability of BFI’s loansand threaten the macroeconomic stability of Nepal. During the earlier boom period, a seller’s market existed. But now the market has perceptiblyshifted towards the buyer, hence products must be designed to respond to market requirements. Currently the demand in affordable housing isencouraging and developers need to meet this demand.


With Nepal showing signs of Dutch Disease syndrome due to high dependence on remittance, sensible fiscal management is necessary to reducean over dependence on remittance. However, Nepal’s remittance market is likely to remain unchanged and reducing this dependence will be achallenge. Constructive utilization of remittance into productive sectors is necessary. The government’s failure in attracting remittance through bondsfor productive investments makes it necessary to explore other means of attracting remittance. Redirecting of remittance flow from informal channelsinto formal channels also needs to be addressed.

Once the government opened the telecom sector to private sector investment, intense competition has led NT to add more value added services andimprove its connectivity. Ncell’s aggressive marketing strategies, launch of new services and infrastructure expansion led to a rapid increase in itssubscriber base. On the contrary, NT’s growth slowed down due to inefficient management and government instability. Moreover, scarcity in sim-cards during times of high demand prevented NT from capitalizing upon demand. However, in order to recapture its lost market share, NT is finallymaking amends and improving its operations. The NT-Ncell rivalry has benefitted customers as tariffs have fallen and the quality of service isimproving.

The recent attack on media persons for reporting objectionable news is a blatant violation of the right to freedom of speech and independentjournalism. If the guilty are not penalized, journalists will be cautious in their reporting and will be subject to self-censorship. At such a critical stageof transition, the government must ensure the freedom of the press and take strong action against those who commit crimes against journalists.

Although the tourist numbers are up, there has been a decline in the revenue earned by trekking operators. Out of the budget allocated towards thepromotion of tourism, trekking activity should be a major focus as it generates a major portion of the foreign currency revenue. Political stabilitycontinues to be an important factor in maintaining the consistency of tourist arrivals.

Overall, Nepal’s macroeconomic future is shadowed by the inability of the political class to move the peace process forward and write the newconstitution. The political instability affects all sectors of the Nepali economy and is a genuine cost of operations in Nepal. Until there is an assuranceof relative political stability, Nepal’s economy will not see major improvements on its growth figures.



REVIEW2


With an emphasis on delivering quality education,developing the necessary infrastructure, and providinginternet access to most schools, the government allocatedNPR 63.91 billion (USD 891.45 million) amounting to16.61% of the national budget towards education thisyear.91 However, Nepal’s state run educational institutionsremain weak and struggle to provide quality education. Tosome extent, the private sector has stepped in to bridgethe gap, but the general perception remains that the qualityof education in Nepal is of a poorer quality and standardthan that of abroad. Thus, it is unsurprising that the trendof seeking education abroad continues to occur.

Although the government is implementing the SchoolSector Reform program in the hopes of improving theeducation quality, it allocated less than 20% of its budgeton education, a drop of 1.3% points from that of last year’sbudget.92 The international benchmark for educationspending is 20% of the budget.

School Leaving Certificate (SLC)

The first major examination for Nepali Students is theSchool Leaving Certificate (SLC). It holds great importancebecause its results define the future of many Nepalistudents. Taken by grade ten students, the SLC is aprerequisite to higher education. The figure below presentsthe number of students enrolled in these programs inNepal.

Source: Ministry of Education, Nepal Education Figures 2011at a Glance, June 2011

The results of the last three years show a decline in thenumber of successful students passing the SLC. In 2011,397,759 students sat for this examination, out of whichonly 220,766 (55.5%) passed. Out of the 176,993 studentsthat failed, 144,000 are allowed to take the supplementaryexam this year of which only 122,505 have registered forthis exam.93 It remains inconclusive what those who didnot register and the 32,993 who were ineligible doafterwards.

Review : Education

Figure 10 The Education Statistic-Pyramid ofNepal for 2011


Source: Ministry of Education, Education in Figures 2011 At-A-Glance

A point of concern is the disparity between the results ofpublic schools and private schools. Only 46.02% of theexam takers from public schools managed to pass theexam whereas 85.82% of the students from privateschools passed.94 With over than 75% of the total studentswho took the SLC coming from public schools, the qualityof skilled manpower that Nepal produces will not besatisfactory, unless the quality of public education isimmediately improved.

Higher Secondary Education

After SLC, Nepali students have an array of programs tochoose from. These include the Higher SecondaryEducation Board (HSEB) 10+2 program, A-Levels,International Baccalaureate (IB), Indian Certificate ofSecondary Education (ICSE) and Intermediate degrees.Internationally recognized programs like the A levels andIB, though relatively expensive, have gained in popularityas they offer international standards and increase thechance of taking up education abroad.

The 10+2 Program: In order to make the Nepali educationmore competitive in the world market, HSEB 10+2program was created in 1992.5 This program has beenthe most popular among post-SLC students. The fourstreams available to the students in this program arescience, commerce, humanities, and education. In theHSEB, once a student chooses a subject stream, it isdifficult to explore other options. In the academic year

2010/11, there were 322,735 students enrolled in theeleventh grade, of which 193,083 students were registeredin public schools. In addition, there were 300,631 studentsenrolled in the twelfth grade, of which 177,140 went topublic schools. The numbers seem implausible if wecompare the numbers with students who passed the SLClast year (247,689). However, this high enrollment in gradeeleven could be because of students returning to academiaafter a respite. Tuition fees at most 10+2 programs arearound NPR 3,500 (USD 48.82) per month.96

The Intermediate Degrees: Prior to 1992, the onlyavailable option for students who completed their SLC wasthe Intermediate System. Intermediate in Science (ISc.),Intermediate in Commerce (ICom.), and Intermediate inArts (IA) were the most popular degrees. Today TribhuvanUniversity and Kathmandu University are the onlyuniversities in Nepal that run the Intermediate Programs.Although planned for phasing out since the introductionof the 10+2 program, it is still running normally. Accordingto the education statistics of the Ministry of Education,there are 37,223 students enrolled in this program.

A levels and The International Baccalaureate: TheCambridge International Examinations (CIE) AdvancedLevel degree and newly introduced The InternationalBaccalaureate (IB) are gaining popularity. The A-Levelallows students to explore a wide range of subjects. A-Level is also perceived to be more practical than the HSEB,providing students with the ability to answer the questionsbased on one’s understanding and less through thetechnique of rote memorization.

The IB system is the newest addition to the existingprograms in Nepal. Although ULLENS is the only schoolin Nepal to run this program, it is considered to be one ofthe most competitive high school programs in the world.The major constraint of A-Levels and IB is cost. An A-Level student typically takes four to five subjects and thecost of taking the exam for these subjects is usually aroundNPR 30,000 (USD 429)97 in addition tuition fees of aroundNPR 11,500 (USD 161)98 per month. The two year A-Levelscosts around NPR 306,000 (USD 4,268) in total. The IB

Figure 11 SLC Pass Percentage


is an equally expensive program. The monthly fee atULLENS is NPR 40,000 (USD 558)99 and students haveto pay a separate exam fee at the end of two years. Themajority of the Nepalis are unable to afford these optionsmaking it the government’s responsibility to reform theHSEB program to make it more competitive, applicableand flexible.

Higher Education

Undergraduate and graduate program in Nepal are beingoffered in several government and private colleges. Themost popular degree is the Bachelors in BusinessAdministration (BBA) and Masters in BusinessAdministration (MBA). Business and management schoolsare being run by Tribhuvan University, KathmanduUniversity, Pokhara University and Purbanchal Universityalong with their affiliates. The Bachelor of Medicine,Bachelor of Surgery (MBBS) in Nepal has been attractingmany students within the country and abroad since theinception of the course by the Institute of Medicine in1978.100 Due to high costs and limited scholarships, veryfew students are enrolled in this course.

Very few enroll in the Doctor of Philosophy (PhD) program.There are only 393 students enrolled in this program. Sucha low figure can probably be attributed to the lack of goodeducational institutes or due to the lack of general interestand perceived need to pursue this degree. According toKathmandu University, a two and a half year PHD coursecosts NPR 320,000 (USD 4,463).

Education Abroad

Based on the ‘No objection letter’ issued by the Ministryof Education (MoE) in the Fiscal Year 2067/68, there were11,392 students who went to pursue education abroad.Some of the countries popular among Nepalis for highereducation are India, United States of America (USA),United Kingdom (UK), Australia and Japan.

While many students remain in Nepal for further education,an increasing number of students are going abroad forhigher education. Studying abroad is an attractive optionfor students who can afford it mainly because of theunsatisfactory quality of the education system in Nepal.Other reasons why students chose to go abroad arepolitical instability, better job prospects and the appeal ofan independent life. However, contrary to the trend, thenumber of students going abroad dramatically decreasedfrom 11,392 students this year in contrast to 26,222 theprevious year.101 This huge decrease in the number ofstudents going abroad is possibly due to stricter visaregulations employed by the British High Commission inDelhi and anti-immigration policies of the UK.

Even with a significant decrease in numbers leaving forthe UK, it is still a popular destination followed by Australia,Japan, USA and India. As recorded by the ministry ofeducation, 482 students went to India to study for highereducation.102 However, this figure seems incredibly low,possibly because of the lack of documentation requiredto go to India since Nepal shares an open border withIndia and No Objection Letters are not required toexchange currency.

CourseBABBABEMBBSMBAPhD

Enrollment 201146,45390,4131,328

10,06618,312

393

Duration (years)34442

NA

Average Costs (NPR)88,470

364,376467,078

3,078,333286,946

-

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Table 6 Enrollment figures in Higher Education

Figure 12 Private Tuition Costs in Nepal


Outlook

To meet the expectation of students, the government mustconsider reforming the entire education system to add a wider

variety of subjects and improve the quality of learning. Suchchanges cannot happen overnight and require a significant amountof resources. Nepal does not have enough qualified teachers.Improvements in the quality of education in Nepal will not occuruntil better teachers are available. Thus in the short-term, theschool system will not see any significant changes. Given that asmaller group of students seek higher education, the governmentcan address and improve the quality of higher education with theresources it has at its disposal.

While people are aware of the benefits of private education, themajority of Nepali students are unable to afford this option. Theoverall state of the Nepali economy and the quality of educationavailable here means that many students will continue to seekbetter opportunities abroad. But few students can afford to goabroad for higher education. For those who study in Nepal, it isimperative that higher education is made accessible and attainable.

Source: Ministry of Education, Nepal Education Figures 2011At-a-Glance, June 2011

According to the data provided by the EducationalConsultancy Association of Nepal (ECAN), more than 250of its 300 member agencies operate in Kathmandu Valley.These agencies not only provide coaching classes forinternational standardized tests but also assist studentsin document and visa preparations. The average price ofcounseling comes to around USD 139.49 (NPR 10,000)where as coaching classes range from USD 142.279 toUSD 153.43 (NPR 10,500 to NPR 11,000) depending onthe standardized test.103 Orbit Educational Consultancyalone claims that on average, 25 students come to seekcounseling every day.104

Counselors at consulting agencies list four major reasonswhy students chose to go abroad:1. Students are frustrated over the limited scope of

education in Nepal2. The educational system here is outdated and as a result

an international degree is more recognized and saleable3. The prospect of better jobs4. The lure of independent living105

Figure 13 Issue of No Objection Letters Figure 14 Number of Students going abroadfor the academic year 2010/11

Source: Ministry of Education, Nepal Education Figures 2011At-a-glance, June 2011.


The Nepal Stock Exchange Index (NEPSE) continued withits downward spiral as it plunged by 24.12% to close thefiscal year 2010/11 at 362.52 points. During this period,the market also witnessed the lowest index level sinceSeptember 1, 2005 at 292.32 points. At the end of fiscalyear 2010/11, 209 securities were listed at the NEPSEwith a total market capitalization of NPR 323.48 billion(USD 4.51 billion) having fallen from NPR 376.87 billion(USD 5.25 billion) on July 2010.

Source: NEPSE

Led by the dominant financial sector, all major sub-indicesshed value during the year. The commercial bankingsector (-28.06%) plunged by 128.22 points to close at328.71 points. The development banking sector (-38.53%)slumped by 38.53 points to close at 294.15 points.Finance companies also (-23.93%) fell by 95.11 points toend at 302.29 points. Likewise, the Insurance sector (-25.79%) slid by 141.51 points to end at 407.01 pointsand the Hydropower Sector (-25.04%) plummeted by220.62 points to close at 660.38 points.

Review : Capital Markets

Source: NEPSE

The number of listed companies on NEPSE has reached209. However, almost 85% of these listed companiesrepresent the financial sector which only contributes toaround 4.5% to the national GDP. The dominance offinancial companies is because of mandatory regulatoryrequirement set by the NRB. However, till date, the capitalmarket has failed to attract other types of businessenterprises. Except for a few companies, general investorshave limited confidence in other companies listed onNEPSE, largely due to their lack of accountability,credibility, transparency, and poor governance.

Source: SEBON

Along with low market capitalization, the secondarymarket has also been experiencing an increase in thesupply of securities in the form of right shares and newissues. During the fiscal year 2010/11, SEBON granted

Table 7 NEPSE index performanceFiscal YearFY 2003/04FY 2004/05FY 2005/06FY 2006/07FY 2007/08FY 2008/09FY 2009/10FY 2010/11

NEPSE Index222.04286.67386.45657.47963.36749.11477.73362.52

% change

29.11%34.81%70.13%46.53%-22.24%-36.23%-24.12%

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Figure 14 NEPSE’s Performance in the FiscalYear 2010/11

Table 8 Listed Companies at the NEPSE

S.no.123456789

SectorCommercial BanksDevelopment BanksFinance CompaniesInsuranceManufacturing and ProcessingHotelsHydropowerTradingOthersTotal

Number of listed companies24617121184442

209

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Table 9 Details of Public issue approvals by SEBON

DetailsTotal Number of Listed CompaniesTotal Number of IPO’sTotal Amount of IPO’s issue approved(in NPR millions)Total Right Shares approvedTotal Amount of Rights issue approved(in NPR millions)

FY 08-0915910

2,383.5751

11,486.42

FY 09-1017637

3,144.7035

10,962.74

FY 10-1120917

1,778.4431

5,049.33

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permission to 17 different companies to float primaryshares worth NPR 1,778.44 million (USD 24.80 million).It also granted permission to 31 different companies toissue rights shares worth NPR 5,049.33 million (USD70.43 million).

Developments

During the fiscal year 2010/11, the regulatory bodies,Securities Board of Nepal (SEBON), Nepal Rastra Bank(NRB) and NEPSE initiated various strategic activities andregulatory changes to facilitate and strengthen the Nepalicapital market. The Central Depositary System (CDS) isin its final stage of implementation and will replace thecurrent manual practice with a computer based bookkeeping system. The operations will be carried out byCDS and Clearing Limited, a wholly owned subsidiary ofNEPSE which was established on March 31st, 2011.However, in a recent development, the company failed toobtain an operating license from SEBON as the companyfailed to provide the necessary documents from its boardmembers.

During the year, SEBON introduced the Mutual FundsRegulation 2067 which came into effect from September27, 2010. The entry of mutual funds is expected providesmall and retail investors a chance to derive the benefitsof a well-diversified portfolio. Moreover, NRB paved theway to allow BFIs to act as sponsors for mutual funds byissuing a specific circular. As of now, Siddhartha Bank,NMB Bank, Nabil Bank and Laxmi Bank have applied toSEBON for obtaining licenses to operate mutual fund inNepal.

The new stock broker’s addition process is in its finalstage, SEBON has already granted operating license to16 new stock brokers and they are expected to beginoperations from first week of September, 2011. After theadditions, the total number of stock brokers will reach 41.

Nine other aspirant stock brokers are yet to receiveoperating licenses from SEBON. The addition of stockbrokers is expected to end the current monopoly of theexisting brokers and provide a much needed wider networkwhich will effect trading volume.

SEBON also implemented the Portfolio ManagementGuidelines 2067 during the fiscal year. The guidelines allowportfolio managers to provide three kinds of services:discretionary, non-discretionary services and investmentadvisory. Moreover, it also allows NRNs to invest in capitalmarket through Portfolio Managers.

SEBON also issued the Credit Rating Regulation 2068.Investors are expected to benefit from the credit rating asit will be mandatory to do credit ratings for the issuanceof any debenture and other debt instruments, Initial PublicOffer (IPO), right issues, preference shares, issues ofshares with premium, and Further Public Offer (FPO). Itis required to disclose the outcome of the rating carriedout in the offer document or the prospectus and otherpublic disclosures before the issuance of such securities.SEBON has granted a letter of intent to ICRA Limited,India for the establishment of a credit rating agency inNepal. ICRA Limited will hold 55% ownership of CreditRating Agency while the other key promoters will be theCredit Information Bureau (CIB), Banks and FinancialInstitutions, Himalayan Infrastructure Fund Limited andother business professionals.106

Five-Year Capital Market Development Master Plan

With the assistance of the World Bank, SEBON hasprepared a five year master plan for the capital market. Asteering committee comprised of senior officers from allthe main agencies has been formed and given the mandateof implementing the master plan. The governmentannounced the five year plan will begin in a phase wisemanner from the next fiscal year.


The key themes of the strategy for developing the Nepalesecapital markets as outlined in the master plan are:1. To rebalance the supply of and demand for securities,

particularly by phasing out distorting factors, removingcurrent barriers to listing and investing, and considertax incentives

2. To increase the capacity of SEBON to enforce theregulations

3. To address gaps in regulation by completing theregulatory regime

4. To develop an effective enforcement regime thataddresses the concerns about the manipulation ofthe market and the poor disclosure performance of listedcompanies

5. To strengthen the trading and settlement infrastructure6. To provide education for investors and intermediaries

so as to increase the level of understanding of themarket107

Fiscal and Monetary Policy

The current liquidity crisis seen in the financial system islikely to get some respite, as the budget introducedprovisions for voluntary declarations that the money beingdeposited is not earned through illegal means.108 Thecapital market is expected to benefit from sucharrangements. To encourage investors, the governmenthas reduced the capital gain tax from 15% to 10% forinstitutions and 10% to 5% for individuals.109

The borrowing limit against the collateral of securities(Margin Loans) has been removed .With the change, Bankand Financial Institutions (BFIs) are free to decide themargin loan amount. Earlier BFIs could only lend up to60% of the average market value of shares put up ascollateral.110 The market was witnessing unnecessaryselling pressure as both investors and the lending bankswere required to sell the pledged securities to stay in linewith the margin requirement. Now, with the discontinuation

of such ceilings, the capital market can expect to benefit,as investors will have an additional cushion even whenthe share prices plummet.

The budget has also directed SEBON to prepare thenecessary guidelines to allow NRNs to invest in the Nepalicapital market by mid-October 2011. For this purpose, acommittee consisting of representatives from SEBON,NRB, Company Registrar Office (CRO) and InsuranceBoard was formed.111 The budget for the fiscal year 2010/11 allows NRNs to invest in the Nepali capital marketthrough portfolio managers.

The budget also provides concessions to investmentscoming from institutional investors such as mutual funds,but the degree of such concession has not been specified.To support the fiscal policy, the monetary policy for thefiscal year 2011/12 has declared that NRB will co-ordinatewith SEBON to motivate banks to carry out mutual funds.

Himal Power Company to issue USD denominatedbonds

For the first time, the Nepali capital market may witnessthe issuance of USD dominated bonds. This is expectedto provide substantial support for the development of thebond market. However, the approval from SEBON and NRBis expected to take some time as both regulators arepreparing the required directives.

Himal Power Company will issue the USD 60 million (NPR4.30 billion) bonds and Ace Capital Limited, the merchantbanking subsidiary of Ace Development, will be the issuemanager. The debenture will yield 6% as coupon rate perannum and will mature in five years with a roll over optionthat will be declared in 2013. The bond will be offered tocommercial banks and development banks via privateplacement.112


Outlook

The continuing downward momentum seen in the secondary market can be primarily attributed to various macroeconomic factors like sluggisheconomic growth, regulatory inadequacy and a liquidity crunch coupled with the political deadlock. Investor’s confidence remains low as an

influx of new shares in the form of bonus and right shares to meet regulatory capital requirements flooded the market, diluting their earnings.

To ease the ongoing liquidity crisis and marginalize the high exposure of BFIs in the real estate sector, NRB has made some significant changes.It increased the home loan ceiling, excluding home loans up to NPR 8 million. Likewise, NRB has allowed BFIs to reschedule their realty lendingfor one more year, if the borrower pays all outstanding interests for the current fiscal year. Moreover, the budget has also made key changes to easethe real estate sector crisis; it has reduced the capital gain tax on land and housing transactions by 5%. It has relaxed the income disclosureprovisions on land and housing purchases, raising the limit to NPR 10 million for land and NPR 3 million for a house. The above changes can havea domino effect in the secondary market as both the earnings and liquidity position of BFIs can be expected to be favorable and as the NEPSE indexis dominated by BFIs stocks.

However, capital market cannot be expected to revive in the immediate future. Due to the above mentioned changes, albeit weekly, a short term up-trend is possible, as investors may be lured by the financial results of BFIs offering higher than expected yields at bargain prices. Furthermore, withthe ongoing reforms to support and strengthen the capital market along with the Five Year Capital Market Development Master Plan in the pipeline,the capital market can experience a sustainable bull run in the near future, if accompanied by economic stability and a positive political environment.


Despite significant economic challenges, the NepaliBanking industry got to close the last fiscal year (FY)2010/11 on a positive note due to a stronger bankingsystem and vigilant regulatory supervision.

The number of institutions in the banking industry hasalmost doubled in the past six years largely. At the end ofFY 2010/11, 31 commercial banks, 87 developmentbanks, 79 finance companies and 21 micro creditdevelopment banks were operating in Nepal. Thecompetition has enhanced the efficiency of the bankingindustry and has contributed to financial development andeconomic growth. However, due to the larger number ofplayers in a small economy, there is the emergingchallenge of financial stability. Currently, NRB has haltedthe process of granting license to new aspirants until furthernotice. The monetary policy for the FY 2011/12 only grantsClass “D” Micro Credit Development Banks operatinglicenses for establishing banking facilities in remote areas.

Source: NRB

Deposit Mobilization and Liquidity Management

During the past fiscal year, mobilizing deposits in a highinflation and tight liquidity environment remained achallenge for BFIs. This aggravated the imbalance betweendeposit mobilization and lending in the banking industry.During the first ten months of FY 2010/11, depositmobilization of Class ‘A’, ‘B’ and ‘C’ financial institutionsincreased by 8.2% or NPR 59.62 billion (USD 831.63million) to reach NPR 788.72 billion (USD 11 billion)whereas it increased by 9.7% or NPR 60.77 billion (USD847.67 million) in the same period of the FY 2009/10.Likewise, during the eleven months of FY 2010/11, depositmobilization of commercial banks increased by NPR29.68 billion (USD 414 million) as compared to an increaseof NPR 40.97 billion (USD 571.48 billion) during the sameperiod in FY 2009/10. On the other hand, the loans andadvances of commercial banks increased by NPR 69.24billion (USD 965.82 million), which had increased by NPR71.20 billion (USD 993.16 million) during the same periodin FY 2009/10. On a positive note, despite the sluggishdeposit growth rate, credit to the private sector increasedby NPR 51.10 billion (USD 712.79 million).

The role played by NRB to manage the liquidity crisisthrough its open market operations and timely refinancingand liquidity facility was highly effective. During the elevenmonths of the FY 2010/11, NRB injected a net liquidity ofNPR 61.40 billion (USD 856.46 million) through secondarymarket operations and NPR 82.40 billion (USD 1.14 billion)was injected through repo auctions. NRB injected a netliquidity of NPR 160.64 billion (USD 2.24 billion) throughthe purchase of USD 2.22 billion (NPR 159.15 billion) fromthe exchange market. During the same time period, inter-bank lending surged to NPR 344.58 billion (USD 4.80billion) from NPR 245.82 billion (USD 3.42 billion). Duringthis time, the weighted average 91-day Treasury bill ratestood at 7.1%, up from 6.5%. Likewise, the weightedaverage inter-bank rate stood at 8.13%, up from 7.74%.

The monetary policy for FY 2011/12 made some criticalchanges to tackle the ongoing liquidity problem. Itannounced the Statutory Liquidity Ratio (SLR) to be fixed

Review : Banking

Figure 15 Growth of BFIs in Nepal

Budgetary allocation for some ofmajor road projectsTable 10

CategoryCommercial Banks (Class ‘A’)Development Banks (Class ‘B’)Finance Companies (Class ‘C’)Micro Credit Development Banks (Class ‘D’)

2000137457

200517266011

2010/1131877921

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○○ ○ ○ ○ ○ ○ ○ ○ ○

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○○ ○ ○ ○ ○ ○ ○ ○ ○

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○○ ○ ○ ○ ○ ○ ○ ○ ○


at 15% of total deposits in which cash in vaults, the balancein NRB, and the deposits remaining in ATM machinescan also be counted. To increase lending to productivesectors, the Cash Reserve Ratio (CRR) has beendecreased to 5% from 5.5%. This is expected to increaseliquid cash in the market by NPR 4 billion (USD 55.79million). The current liquidity crisis is primarily due to aslow deposit growth rate and is likely to improve as thebudget introduced a provision allowing for the voluntarydeclaration for deposits exceeding NPR 1 million (USD13.94 thousand) stating that the money is not earned fromillegal sources.

Mergers

Since the government announced special concessionsfor BFI’s opting for merger, especially through the fiscalpolicy for FY 2010/11, many BFI’s have sought to mergewith other suitable BFI’s. Narayani Finance and NationalFinance were the first BFIs to merge in Nepal. Recently,Himchuli Development Bank has merged with BirgunjFinance to become H&B Development Bank. Similarly,Nepal Sri Lanka Merchant and Finance merged with NepalBangladesh Bank. Currently over a dozen plus BFIs arein the process of merging, amongst them are BhajuratnaFinance and Vibor Bikas Bank, NMB Bank and CleanEnergy Development Bank, Infrastructure DevelopmentBank and Swastik Merchant and Finance, NepalBangladesh Bank and Nepal Credit and Commerce Bank,Shikhar Finance Limited and Kasthamandap DevelopmentBank.

In a period where the existence of a large number ofparticipants in the financial system of Nepal is beingcriticized and questioned, the enthusiasm shown by BFI’sto merge with other BFI’s could be a positive signal forthe stability and growth of the Nepali financial system. Toencourage BFI’s, the fiscal policy for the FY 2011/12waives the registration fees of merged entities. Thegovernment is also exploring the feasibility of merginggovernment owned banks.

Banking Crisis

The Nepali Banking system is presently experiencing achallenging period, some BFI’s are in a weak financialposition. A banking crisis is possible in the near future.Till date Nepal Development Bank and Samjhana Financeare being liquidated. During the last fiscal year, a numberof BFI’s witnessed severe problems starting from GorkhaDevelopment Bank, Nepal Share Markets and Finance(NSM), Vibor Bikas Bank, CMB Finance, and PeoplesFinance. The problem faced by these BFI’s was largelydue to poor liquidity management, weak corporategovernance, over concentration in a single sector andbanking fraud.

NRB recently announced that a single person can’t bethe chairperson of the board as well as the chief executiveof the bank. Most of the banks facing problems were ledby the executive chairman. The NRB has also discouragedthe tendency of chief executives who run financialinstitutions from the capital but have head offices in anotherdistrict.

Deposit Insurance

In a bid to boost public confidence in the banking system,the government made deposit insurance mandatory forClass ‘B’ and ‘C’ licensed financial institutions. The fiscalpolicy 2011/12 now requires Class ‘A’ commercial banksto also come under the insurance policy. The governmentintends to gradually increase the deposit amount to NPR500,000 (USD 6,970) from NPR 200,000 (USD 2,780).

Performance Analysis:

The overall performance of commercial banks in 2010/11fiscal year was satisfactory. Out of 31 commercial banks16 commercial banks saw double digit growth. Four newcommercial banks – Mega Bank Nepal, Civil Bank,


Commerz and Trust Bank and Century Commercial Bank– entered the market. Net profits increased by a marginal2.22% with Rastriya Banijya Bank possting the highestnet profit of NPR 175.9 crores (USD 24.53 million). NabilBank led the way with NPR 129.4 crores (USD 18.04million) among private banks. In terms of capital, exceptfor the public sector banks, most commercial banks arein a comfortable position to meet the regulatory capitalrequirement.

Commercial banks deposit grew by 8.2% during the lastfiscal year. Excluding the new banks, NMB Bank wasable to increase its deposit base by impressive 27.25%followed by Lumbini Bank with a 17.42% increase.Similarly, borrowing increased by 12.6% with NMB Bankincreased its borrowing by 43.02%, followed by Nepal SBIBank with 22.23%.

During the nine months of the last fiscal year, BFI’s NonPerforming Loans (NPL) increased to reach 3.4%, up from2.5%. However, the average NPL had decreased to 2.44%at the end of the fiscal year (unaudited). The NPL ratio,reflective of financial stability, indicates the seriousnessof the problem of the Nepalese banking industry. The highlevel of NPL is also an indication of higher intermediation

OutlookThe government through fiscal and monetary policies for thecurrent fiscal year has made some significant changes to addresskey issues. This includes:

The relaxation on income disclosure for deposits and real estatepurchases

Mandatory deposit insurance for commercial banks Grants NRB the right to supervise and monitor savings andcredit co-operatives with the annual transactions exceedingNPR 50 million (USD 697,000) along with the department ofCo-operatives

Relaxation of the Cash Reserve Ratio (CRR) Continuation of acute liquidity and re-financing facility Encourage mergers Special focus on risk management and stress tests

These positive changes made by the regulators should beappreciated and is expected to bring some respite to the bankingindustry. Despite the above changes, the days ahead for thebanking industry may still be challenging as macroeconomic factorsincluding the political environment have not shown any form ofadequate progress.

costs that ends up costing good borrowers more tocompensate for bad ones.


Endnotes1 Global Economic Outlook 2011: Q 3, Delloitte Research, July 2011

2 Global Economic Outlook 2011: Q 3, Delloitte Research, July 2011

3 IMF World Economic Outlook Database, 2011

4 Madhab Karkee, Nepal Economic Growth Assessment Âgriculture,USAID, 2008.

5 Asian Development Outlook 2011: Nepal

6 Deputy Prime Minister and Finance Minister Bharat Mohan Adhikari,Budget Speech of Fiscal Year 2011-2012, July 15 2011, Accessedon August 1, 2011. http://www.mof.gov.np/publication/speech/2010_1/index.php#

7 Plantation Recorded in 80 pc of paddy fields, Republica, July 27,2011, accessed August 1, 2011. http://www.myrepublica.com/portal/index.php?action= news_details&news_id=33986

8 Paddy plantation reaches 94pc due to timely rains, Republica, August10, 2011, accessed August 16, 2011. http://www.myrepublica.com/portal/index.php?action= news_details&news_id=33986

9 Nepal gets $46.5m from GAFSP, Republica, June 10, 2011, accessedon August 17, 2011. http://www.myrepublica.com/portal/index.php?action= news_details&news_id=32212

10 US$ 75Million WB grant for PAF, July 13, 2011, accessed on August18, 2011. http://aidmonitor.org.np/inner.php?do=news_detail&id=384

11 Kriti Bhuju, Nepali coffee attracts WB assistance, June 19, 2011,accessed on August 17, 2011. http://www.myrepublica.com/portal/index.php?action= news_details&news_id=32527

12 Counterpart Fund for Sericulture,June 4, 2011. accessed on August18, 2011. http://aidmonitor.org.np/inner.php?do=news_detail&id=379

13 Himalayan News Service, Govt. Ignores high rice production method,July 13, 2011, accessed on August 15, 2011. http://t h e h i m a l a y a n t i m e s . c o m /fullTodays.phpheadline=Govt+ignores+high+rice+production+method+&NewsID=295318

14 Rubeena Mahato, Nepal’s Hunger Solution- New Method of RiceCultivation Doubles Harvest with Less Water and Less Seeds, June24, 2011, accessed on August 10, 2011, http://www.nepalitimes.com/issue/2011/06/24/Nation/18312

15 Prabhakar Ghimire, MoCS proposes to lower ARF on Indian farmimports, July 12, 2011, accessed on August 17, 2011. http://w w w . m y r e p u b l i c a . c o m / p o r t a l /index.php?action=news_details&news_id=33373

16 Inflation eases to single digit, Republica, June 21, 2011. accessedon August 17, 2011. http://www.myrepublica.com/portal/index.php?action= news_details&news_id=32636

17 Vegetable Prices Fluctuating, August 17, 2011, accessed on August18, 2011, http://www.myrepublica.com/portal/index.php?action=news_details&news_id=34859

18 Draft of Price Control Policy ready, Republica, June 27, 2011,accessed on August 18, 2011, http://www.myrepublica.com/portal/index.php?action= news_details&news_id=32852

19 Madhav Dhungana, Ostrich products to hit Nepali market, June 04,2011, accessed on August 16, 2011. http://www.ekantipur.com/the-kathmandu-post/2011/06/04/top-story/ostrich-products-to-hit-nepali-market/222483.html

20 “Departure from the past: Bista steps down as NEA Chairman”,The Kathmandu Post, August 4, 2011

21 Siromani Dhungana, “NOC hikes petrol price to Rs 102 per liter, TheHimalayan Times, June 13, 2011

22 Prem Dhakal, “NEA punishes over 15,000 customers for powertheft, Republica, June 23, 2011

23 “NEA GETS MD through free competition”, The Kathmandu Post,July 29, 2011

24 “Minister Bista relinquishes NEA chairmanship”, Republica, August4, 2011

25 “Ministries owe NEA Crores in power dues, The Himalayan Times,August 13, 2011

26 Sangam Prasain, “Oil Imports jump 35pc to Rs 70b”, The KathmanduPost, July 21, 2011

27 Milan Mani Sharma, “New Bill to end NOC monopoly, Republica,July 6, 2011

28 Siromani Dhungana, “NOC hikes petrol price to Rs 102 per liter, TheHimalayan Times, June 13, 2011

29" Kerosene and Diesel price hike”, Nepali Times, July 10, 2011

30 Laxman Kafle, “NOC loss going down”, Rising Nepal, August 2,2011

31 Suprabha, “No bonus for NOC staff: CIAA, Breaking News Nepal,July 20, 2011

32 Ashok Thapa, “With Rs 10m in hand, DoGM aims to tap natural gas,Republica, July 27, 2011

33Ministry of Finance, Public Statement on Income and Expenditure ofthe Fiscal Year 2011-12, Annex of Budget Speech, July 2011.

34 Press Release, July 10, 2011. http://mof.gov.np/publication/press/2011/10july11.pdf July 10, 2011

35 “Poverty Alleviation Fund Receives US$ 75 Million in AdditionalFinancing”, World Bank, July 13, 2011. Accessed 18 July 2011, http://go.worldbank.org/J8ZWY3OXS0

36 Milan Mani Sharma, “WB steps in to help manage financial woes”,Republica, June 16, 2011

37 “Nepal May Lose $6m ADB grant”, Republica, June 10, 2011


38 “Operational Plan 2011-2015” and “Summary of DFID’s work inNepal 2011-2015", DFID Nepal, April 2011, http://www.dfid.gov.uk/nepal

39 “WB pledges $75m for two projects”, Republica, June 30, 2011

40 “ICIMOD pilots first Forest Carbon Trust Fund in Nepal – Helpscommunities benefit from forest conservation and sustainable use”,15Jun 2011, http://www.icimod.org/?q=3743

41 Om AsthaRai, “Govt. Approves Integrated Health Plan”, MyRepublica, June 5, 2011

42 New Era Web Page, http://www.newera.com.np/research(Accessed On: Aug 15, 2011)

43 Nepal Monthly Situation Update, Issue No. 63, 11 August 2011.http://www.un.org.np/sites/default/files/situation_updates/tid_188/2010-08-11-Nepal-Monthly-Situation-Update-11-August-2010.pdf

44 Quarterly Newsletter of Asian Development Bank, June 2011. http://beta.adb.org/sites/default/files/news-from-nepal-201106.pdf

45 World Health Statistics 2011, World Health Organization http://www.who.int/whosis/whostat/EN_WHS2011_Full.pdf

46 ‘Budget Speech 2011/12’ Ministry of Finance

47 ‘Budget 2011/12’, Ministry Of Finance.

48 ’10 Locations Chosen for hill cities’, eKantipur, Dated July 29, 2011

49 “West Seti Hydro power Project notice for Cancellation of projectagreement” Dated 27th July, 2011, Ministry of Energy; http://www.moen.gov.np/pdf_files/press_release-west_seti.pdf

50 ‘Environmental Assessment Report – Nepal West Seti HydroelectricProject’ 2007. Prepared by West Seti Hydro Limited for AsianDevelopment Bank.

51 ‘World Bank approves $99m assistance for Nepal-India PowerTransmission Line’, ekantipur, Dated 23 June 2011.

52 ‘Nepal-India Electricity Transmission and Trade Project’, accessed15 August, 2011, http://www.worldbank.org.np/WBSITE/EXTERNAL/C O U N T R I E S / S O U T H A S I A E X T / N E P A L E X T N /0 , , c o n t e n t M D K : 2 2 9 4 6 0 7 6 ~ m e n u P K : 1 4 8 7 0 7 ~ p a g ePK:2865066~piPK:2865079 ~theSitePK:223555,00.html

53 1 Ropani equivalent to 5476 Sq.ft.

54 ‘Landslide kills four persons in Dhading’, The Rising Nepal’, DatedJune 26, 2011.

55 “Government to ask to withdraw additional locks”, Republica, 5th

August 2011.

56 "Trade Policy Review by Feb 2012", Republica, 7th August 2011.

57 "Silver exports down 61%”, Republica, 9th August 2011

58 Prabhakar Ghimire, “Trade pact with Bhutan on cards”, Republica,8th August 2011

59 Prabhakar Ghimire, “Iron, steel lead country’s exports to Bhutan”,Republica, 27th July 2011

60 Prabhakar Ghimire, “ Red Tape Delays Export Incentive Distribution”,3rd August 2011

61 KritiBhuju, “DoC Revises Reference Prices of 305 import items”,Republica, 15th August 2011

62 Sanjeev Giri, ‘LROs achieved only half of revenue target lastfiscal’, The Kathmandu Post, Money, August 12, 2011

63 Migration and Remittance Factbook 2011, World Bank

64 Central Bureau of Statistics, Nepal, Nepal living standard Survey 2

65 http://www.exchange-rates.org/history/NPR/USD/G

66 Emmanuel K.K. Lartey, Federico S. Mandelman, and Pablo A. Acosta,“Remittances, Exchange Rate Regimes, and the Dutch Disease: APanel Data Analysis”, Federal Reserve Bank of Atlanta, March 2008

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68 Om Astha Rai, “Kuwait to Crack down on Illegal migrants”,Republica, 1st July 2011

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71 Nepal Telecommunications Authority, “Management InformationSystem May 15 to June 14, 2011”, Vo. 79, http://www.nta.gov.np/articleimages/file/NTA_MIS_51.PDF

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80 “Attack on journalist: House panel wants assailants in dock”, TheKathmandu Post, June 13, 2011

81 Khila Nath Dhakal, “Basnet threatens to shut Nagarik, jail editorWagle”, Republica, August 13, 2011

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83 Siddha Raj Rai, “ “Journo’s assailants face attempted murdercharge”, Republica, August 16, 2011

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August 2011.

88 Dipendra Baduwal, “Tourists Avoid Chitwan due to ConstantBandas” Ekantipur, 26th May 2011

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96Ministry of Education, “Nepal Education in Figures 2011 At-A-Glance”, June 2011

97 Email correspondence, Megha Amatya, Examination ServicesMarketing Officer, British Council Nepal

98 Average School Fees of 10 A-Level institutions in Kathmandu

99 Phone correspondence, ULLENS School, Lalitpur, Nepal.

100 Institute of Medicine, http://www.iom.edu.np/exam/mcampus/mbbs.html, Accessed August 16, 2011



103 Primary Data Collection, Phone conversations with consultingagencies

104 Interview, Rishi Timilsina, Director of Academics, Orbit InternationalEducation, Putali Sadak

105 Interview, Students and Consultants at Orbit International Educationand Universal Education Foundation106 www.sebon.gov.np/sebon/publications/news.aspx

107 Pratt, Richard, April 2011, “Five-Year Capital Market DevelopmentMaster Plan”, Draft Final Report

108 Ministry of Finance, Monetary Policy, FY 2068/69, www.mof.gov.np



111 “NRN investment guide to capital market”, The Himalayan Times,21 July 2011

112 "Himal Power to Issue US dollar debenture”, the Himalayan times,4 Aug, 2011

Documents

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