Diagnosis of the scientifically renowned impacts of hydroelectricity dams in the context of Nepal

Mekong River traversing through inland Southeast Asia currently has remained a hotspot of dam-building activity as cascades of hydroelectricity projects are planned to transfigure the river. The above picture portrays the Lower Se San 2 Dam (in Cambodia) known to be one of the largest dams constructed in the Tributary of the Mekong River

A simplified and feature post-styled version of this article was published in The Record Nepal

Damming of river systems has been historically observed as the key infrastructural gateway to enable human progress in the last centuries. In a nutshell, dams have allowed modern societies to achieve food security, energy security, and other advancements in infrastructure technology that has significantly contributed towards improved living standards and quality of life of the general population. Hence, human civilization has encouraged damming of almost all major river systems and tributaries across both hemispheres of the world to impound and divert natural courses of water to supply large irrigation & drinking water projects, control floods, and produce significant amounts of electricity to power industrial development and modern lifestyles.

National Geographic reports two-thirds of the major river systems of the world to have been already dammed for various purposes by 2019 amid the global dam race to build dam infrastructures. Meanwhile, the Hydropower Status Report 2020 of the International Hydropower Association (IHA) reports total global hydropower capacity has already reached 1,308 gigawatts (GW) by the same year. But the actual intensity of the damming activities across the river systems of the world can be most accurately pictured by a research letter published as early as 1995 that estimated reservoir systems behind dams to have already impounded as much as 10,000 cubic kilometers of water, equivalent to five times the volume of water in all the rivers of the world. This amount of water impoundment is estimated by the research to have likely caused a measurable impact on the earth’s rotation, the tilt of the axis, and the shape of its gravitational fields.   

Environmentalists and scientists, until today, have discovered several impacts of dam infrastructures on river geomorphology, aquatic ecosystem, and larger riparian & floodplain ecosystems consisting of terrestrial biodiversity and indigenous settlements. Patrick McCully, in his book Silenced River: The Ecology and Politics of Large Dams, identifies many dams such as Balbina Dam, Brokopondo Dam, Aswan High Dam, and Akosombo Dam to have caused notorious ecological impacts in the form of massive inundation of the riverine & floodplain biodiversity hotspots and habitat, intensive alteration of river microbiota, and coastal erosion in tropical environments. These dams are also recognized to have inundated the most hectare of terrestrial & wetland biodiversity and displaced the greatest number of populations per Megawatt of electricity generated as per the World Bank report published in 2003. A similar observation was also made recently in the context of the newer dams such as the Lower Sesan 2 Dam that dams another major tropical tributary downstream of the Mekong River recognized to be the current hotspot of dam-building activity. These revelations paint a worrying consequence of large dams that contrasts the popular perception of dams as the clean and green intervention to economic growth and sustainable development.

Ecological impacts of dams installed in the mountainous physiography of Nepal

The nature of the ecological impacts of dam projects majorly depends on the physical geography of the locations where the dams are installed and the type & purposes of the dams in general. Specifically, in the context of Nepal, river dams have been majorly installed on the upstream regions of the snow-fed river systems located in the high and middle mountain physical zones featuring vegetation above the sub-tropical climate. The dams have been constructed mainly to generate hydroelectricity through Run-of-the-River (RoR) generation systems that do not maintain reservoirs and depend on fast-flowing waters of high-gradient river sections to run turbines. The mountainous geographical feature where the portfolio of hydroelectric dams is located in Nepal along with the specific type of generation mechanism that is feasible based on topographical limitations and opportunities provided generate ecological impacts that are dissimilar in type or intensity from commonly observed impacts of dams hosting large reservoir systems often with flood control purpose other than electricity generation. Hence, a diagnosis of the impacts of damming rivers at steeper gradients in the mountainous physiography of Nepal can contribute to understanding how the specific type of dam infrastructures currently built in the mountainous environment uniquely impact the local ecological and social scene.

 River damming and the Issue of terrestrial land cover submergence

A study on the impacts of hydroelectricity projects on apex wildlife predators reports that hydroelectricity dams built in steeper topography tend to produce equivalent amounts of power without occupying large ecological footprints, thereby having smaller impacts per unit of electricity generated than projects developed in tropical flatlands. Pravin Kumar, serving in the capacity of water resource engineer for the Ministry of Energy, Water Resource, and Irrigation (MoWRI) of Nepal, affirms that dams built in steeper topography dominated by mountain reliefs limits upstream ecological impacts in the form of inundation of riverine ecosystem, biodiversity, and habitat primarily because of the practice of flooding very limited area of land per megawatt of electricity generated in ROR projects in comparison to hydroelectricity dams with reservoir facilities. The mere size of head ponds behind the dams of the ROR projects in Nepal which is multiple times smaller than reservoir systems of storage-type projects is also the reason behind such projects in Nepal have only minimally affected the riparian ecosystem and local habitats due to inundation of terrestrial land cover, says Balaram Bhattarai.  Bhattarai, serving in the capacity of the senior environmental officer at Hydro-Consult Engineering Limited, also confirms that the formation of head ponds behind the dams of ROR projects built at high and middle mountain physiography has yet not required mass involuntary resettlement of the local riparian population to submerge former settlements.

However, ROR hydroelectricity projects installed in the mountainous landscape of Nepal suffer from the technical disadvantage of having to completely rely on the variability of the natural flow rate of the rivers which affects the ability of the projects to generate electricity consistently. Kumar confirms that the absence of reservoir systems behind dams of ROR-type projects leaves the system vulnerable to the issue of variability, whereby the magnitude of the impact of change in flow rates amplifies the generation instability. In the meantime, experts expect more variability in the hydrological flow regimes of the perennial snow-fed rivers of the Hindu Kush Himalaya (HKH) owing to the impact of Climate Change that adds further stress to ROR projects installed in the mountain physiography of Nepal to maintain consistent electricity generation. Kumar recognizes the limitation of generation instability for ROR-type hydroelectricity projects to be a significant reason for the government and power producers in Nepal to have pledged for reservoir-type systems in lower geological belts in near future.

Sardar Sarovar Dam submerges forest and displaces village livelihood in the Madhya Pradesh State of India

Issue of Eutrophication, Salinization, and thermal stratification

Eutrophication is another major issue that troubles large reservoir systems that worsen the chemical and physical properties of the huge amount of lacustrine or still water stored behind dams. It is a phenomenon that occurs in reservoir systems mostly due to the mass decomposition of the inundated terrestrial vegetation that causes a considerable release of non-synthetic Greenhouse Gases (GHGs) such as carbon dioxide (CO₂) and methane (MH₄). The phenomenon also drastically depletes the level of Dissolved Oxygen (DO) in the reservoir water while increasing the level of foul-smelling Hydrogen Sulfide (H₂S) known to be hazardous to human health. Meanwhile, the enrichment of nutrients following the phenomenon of massive underwater decaying also causes phototrophic organisms to proliferate (algae bloom) at the surface of the reservoir water.

This change in the physical and chemical composition of the reservoir water involving increased level of nutrient load and decreased level of dissolved oxygen particularly sever the survival rate of endemic fish species and benthic macroinvertebrates and facilitates invasion of the local aquatic environment by the exotic fish species and non-native biota. The entire process of eutrophication also results in the accumulation of dangerously high levels of mercury in fishes as they intake bacteria that transform originally harmless inorganic mercury present in decomposing matter into methylmercury (CH₃Hg) toxic to the central nervous system of humans. It is important to note that the deteriorative change in aquatic biodiversity and ecosystem can spread tens of kilometers or more below the dam as the altered reservoir water eventually connects with the downstream aquatic environment.

Research concerning the identification of the process and occurrence of eutrophication suggests that the phenomenon is often acutely prevalent in dams supporting large hydroelectric reservoirs in tropical forests. The worst of which was observed in Brokopondo Dam only 72 meters above sea level in Suriname, whereby the massive emission of Hydrogen Sulfide (H₂S) in the reservoir required workers to wear masks for two years after the reservoir started to fill. However, water in a small head pond behind a run-of-river dam is known to undergo very little or no chemical or physical deterioration as such. Speaking of which, Gauri Shankar Conservation Area Project (GCAP) field officer Pramod Regmi who has been involved in monitoring the ecological and wildlife impacts of built construction in the conservation area is not aware of the eutrophication phenomenon in the head ponds behind ROR dams within the periphery of the protected zone that hosts several ROR hydroelectricity projects including the Upper Tamakoshi Hydroelectric Project (UTKHEP) with the largest installed capacity in Nepal. Regmi speculates that the vegetative land cover, temperature, and climate above the sub-tropical belt in which the ROR hydroelectricity projects in Nepal are mostly located may not be favorable for the process of eutrophication to occur in head ponds behind dams. Meanwhile, Bhattarai believes the phenomenon of eutrophication has not remained an environmental concern for ROR projects in Nepal also because waters in the head ponds are not stored or kept still until long enough for the process of eutrophication to occur. While the still water or lacustrine phenomenon in the head ponds behind dams is permanent, the water that forms the pond itself turns over very frequently in comparison to that of reservoir systems.   

On the same note, the current environmental mandates also do not recognize the eutrophication of head ponds as a probable environmental concern and therefore do not warrant measures to prevent and control the issue during the construction and operation of hydroelectric projects. Bhattarai confirms that tests for the physical and chemical parameters of the river water that also measure the level of Dissolved Oxygen (DO) in the water are however conducted during the phase of environmental assessments before the construction of the project. But periodic monitoring of such parameters that rather helps in recognizing the phenomenon of eutrophication in the river system above and below the dam during the operational phase of the project is not guaranteed.  

Excessive eutrophication turning the water green behind Hartbeespoort Dam in South Africa

Similar remarks are also made in regard to the issue of salinization of reservoir water most commonly observed in the tropical and coastal environment due to evaporation of the exposed surface water of the reservoir to heat and sunlight. Kumar believes that the ecological issue of salinization is unlikely in head ponds behind ROR dams in Nepal because the stored water is purely composed of freshwater originating from the mountain glaciers or cryosphere, and is at least not immediately connected to the saltwater of the oceans as commonly observed for river systems belonging to tropical environments. However, not much scientific research has been conducted yet to understand the issue of salinization of head ponds formed above sub-tropical belts. Regardless, the issue of reservoir salinization has remained a severe problem for major river systems across the globe with large cascading reservoir dams including the Colorado River known to be the lifeline of the Southwestern United States of America (USA). Increased salinity of the reservoir systems owing to evaporation of reservoir water is known to increase soil salinity affecting agricultural productivity in the river basin, affecting surface and groundwater quality making it unfit for drinking and other household purposes, and disturbing freshwater ecosystem and biodiversity.

Meanwhile, there are other ecological impacts of reservoir systems that are simply attributable to the conversion of naturally flowing water into still water with the help of permanent anthropogenic interventions such as dams. Since flowing (lotic) water environments such as rivers and streams are hydrologically different to still (lentic) water environments such as lakes, ponds, and oceans, imposing still water dynamics into a flowing water environment is bound to alter the hydrological property of a river system with considerable implication to the aquatic system accustomed to flowing water regime. In such context, installing a dam across naturally flowing river systems to create a large pool of still water behind them causes the lower (hypolimnion) level of the stored water to become anoxic (or depleted of dissolved oxygen) and cooler in comparison to the upper (epilimnion) level due to the thermal stratification of reservoirs. A such phenomenon involving reductions in oxygen levels and changes in water temperature below a certain height of the stored water severely disturbs the lifecycle of freshwater aquatic organisms comprising of breeding, hatching, and feeding activities dependent on thermal cues. Moreover, the impact is also observed in the downstream aquatic ecosystem whilst the cooler and anoxic water from the bottom of the reservoir is discriminatively channeled to the penstock to ensure maximum water pressure.

Bhattarai confirms that the tests for still water thermal stratification of head ponds behind hydroelectric dams or measures to prevent the impact of such phenomenon in downstream river systems are neither undertaken by the power producers nor required by the environmental regulation in Nepal. Bhattarai instead claims that thermal stratification of head ponds behind ROR dams is unlikely for the same reason it is unlikely for head ponds to eutrophicate. As such, water in the head ponds behind dams is not kept still long enough for it to thermally stratify at different depths of the pond. However, Kumar finds thermal stratification to be a prevailing ecological issue for multiple river diversion projects being pledged across the length of the country to facilitate surface water irrigation systems for agricultural lands in the southern belt of Nepal. Kumar argues that any abrupt change in the river temperature of the target river systems following the anthropogenic diversion of another river system with different thermal dynamics into the target river will adversely impact the endemic aquatic ecosystem below and above the artificial confluence.

Lake Mead behind Hoover Dam in Colorado State of USA is known to suffer an extreme level of evaporation and salination

Issue of sediment trapping and its implications

Although scientifically untested, statements from dam engineers and conservationists imply that the ecological impact of dams as the result of the formation of reservoir systems may be theoretically unfounded or minimally pronounced in the case of dams supplying ROR hydroelectricity projects in Nepal with mere head ponds instead of larger reservoir systems. However, the same cannot be implied for a widely recognized set of ecological implications of dams that are attributed to creating a divide between a flowing river that disturbs the flow and migration of various elements crucial to the river ecosystem and biota apart from water.

In such context, sediment trapping is a popular phenomenon that follows damming of river systems whereby sedimentary matters such as gravels, rocks, cobbles, and soils that form and sustain the geomorphology of the river beds and channels are unable to flow downstream due to blockage of the passage by the dams.  Sediment trapping deprives downstream river systems of sediments that cause geomorphological deterioration of downstream river beds, channels, and floodplains with a visible impact on the river and riparian ecosystem. This phenomenon accelerates the incision of river beds and narrows river channels, resulting in disfiguration and deterioration of the river.

Kumar has witnessed this phenomenon occurring in multiple river beds in Nepal during his canal surveys for irrigation projects. Kumar particularly identifies the impact of river bed incision to severe the status of groundwater and aquifer systems that depends on the surface water of the flowing river to recharge. As the height of the river beds falls below a certain level due to bed incision, the surface water of the river becomes unable to contribute to the groundwater system thus causing a simultaneous drop in the water table. Kumar believes that the occurrence of river system incision due to dam building and river bed mining activities is severely affecting the groundwater regime of the Terai and Churegeological belts that heavily depends on snow-fed surface water systems flowing from the upper and middle mountains belts for aquifer recharge. Today, groundwater depletion is commonly observed in the southern belt of the country also owing to disruption in the linkage between ground and surface water systems due to anthropogenic interventions. However, the monitoring and management of groundwater and aquifer systems in Nepal is still in its infancy. Meanwhile, a comprehensive assessment report prepared by International Cooperation for Integrated Mountain Development (ICIMOD) sights a significant lack of data concerning hydrogeological characteristics and spatial distribution of aquifers in the HKH region including Nepal to support policy decisions. Meanwhile, whatever of the limited available data is yet to surface in the policy decisions and practices of the governments in the federal arrangement of the country.

River bed incision or erosion also diminishes the ability of the river to support aquatic and terrestrial biodiversity within the river and riverine ecosystem. For instance, erosion of sedimentary cover in river beds limits the ability of the river to support the freshwater aquatic lifecycle and ecosystem such as the spawning ability of fishes and other benthic macroinvertebrates that require gravel and soil to provide necessary spawning grounds. Likewise, sediment entrapment behind dams also limits the flushing of soil nutrients such as Silica (SiO₂), Phosphorus (P₄), Nitrogen (N₂), etc. into riparian agricultural fields to sustain soil fertility and agricultural productivity. Hence, this phenomenon also impairs the soil fertility of downstream river floodplains and forces the use of larger amounts of artificial fertilizers that only accelerates soil degradation in the long term. On such a note, Bhattarai asserts that the tests and research to acknowledge the impact of river damming projects on the agricultural productivity of the downstream floodplains are largely overdue in Nepal.

Hydroelectricity dam infrastructures in Nepal, nevertheless, are commonly accompanied by settling basins or desilting tanks that capture sediments of the river at the bottom of the desilting tank to ensure that only sediment-free water safe for the generation infrastructure is flown through the penstock. Meanwhile, the sediments settled at the bottom of the tanks are periodically dredged downstream from the dams to get rid of the sediments accumulating in the tank. Although the desilting process may contribute towards flushing trapped sediments downstream from the dam, Kumar believes that the process is visibly ineffective in replicating the natural hydraulics of sediment transport and recapturing the downstream sedimentation flow advantages. Kumar conveys that the uninterrupted flow of sediments in a river system is a delicate process that naturally meets specific flow requirements consistent with the hydrological flow pattern. Hence, this natural fluvial phenomenon cannot be replicated after separating the sediments from the river water while letting the two entities pass downstream with a significant anomaly in time, load, and distribution from their natural pattern.

Settling basin built to capture sediment at the Upper Tamakoshi Hydroelectricity Project located in the Dolakha district of Nepal

Issue of fish migration blocking

Apart from sediment entrapment, dams across river systems also block the migratory pattern of fishes that migrate upstream and downstream to fulfill their lifecycle process. For instance, dam structures are known to prevent fish from traveling to their traditional area of spawning and feeding, thus leading to their survival stress. At present, dams in North America are known to have caused disastrous impacts on salmonoid species that traverse between the ocean and rivers following the diadromous migratory pattern. Meanwhile, a report published in the Nepalese Journal of Aquaculture and Fisheries discovers barrages and dams of ROR hydroelectricity projects in Nepal to have impacted the migratory pattern of common endemic species such as Schizothorax (Common snow trout) that migrate in the potamodromous pattern (within the freshwater system) in response to thermal cues and search of food.

Although fish ladders and passages are commonly integrated with the dam infrastructure to let fishes pass through the infrastructural divide, they have often not remained sufficiently effective in allowing fishes of all species or in all stages of the lifecycle that retain differentiated capabilities to negotiate the passage. Adarsha Man Sherchan, a conservation biologist and founder of the Bagmati Biome Project, complains that fishing passages built by dam builders are inconsistent with the migratory pattern, capability, and behavior of endemic fishing species found in river systems in Nepal. More so, the passages are often too high from the downstream river surface and are only usable for fish during the monsoon season when river beds rise to their highest level at par with the height of the dam or fish ladder. A report published by the Asian Development Bank (ADB) in 2018 notes that there is a severe absence of baseline information regarding the migratory pattern of endemic fish species in Nepal. And, such has also naturally led fish ladders and passages to remain ineffective in assisting fish migration. The study notes that the separation of the river system by dams with less effective fish passages has disturbed the natural spawning and feeding habit of migratory fishes, led to changes in the composition of upstream and downstream species forming metapopulation structure across the dam infrastructure, and have also caused loss of the species altogether. Meanwhile, Bhattarai notes that conducting a preliminary survey of the status of fisheries and aquatic biodiversity is mandatorily required as part of the Environmental Impact Assessment (EIA) before constructing dams. However, the quality and ingenuity of the assessments are heavily doubted.

Meanwhile, dams are not the only obstacles that deny connectivity, flow, and migration between the stretches of a river system. The significantly reduced flow rate of the river as the result of the diversion of the upstream flow into the penstock also denies passage for endemic migratory fish species to traverse between the river system. Although the environmental provision of the Hydro Power Development Policy of Nepal, 2001 in section 6.1.1 mandates ten percent of the minimum monthly average discharge of the river as instream or environmental flow to ensure sufficient passage for fish migration, dam operators are known to have been popularly compromising the mandate during the dry seasons to secure maximum flow rate for power generation. It has led to the occurrence of dry beds between the intake and outlet sections of the river stretches during dry seasons, thus severing fish migration despite fish ladders being installed at the dam sites. Bhattarai ironically notes that hydroelectricity projects owned and operated by the government are mostly engaged in flouting regulations concerning instream flow regarding which the cascading hydroelectricity projects of the government in the Marsyangdi river can be taken as a classical case. Meanwhile, Kumar recognizes the lack of a proper monitoring mechanism to ensure the enforcement of the instream flow provision by the regulating entity is also the reason behind dam operators to have not taken the regulation seriously in the first place.

The ADB study report, on the other hand, indicates that blanket mandates for environmental flow applicable to all rivers can be insufficient for certain river systems based on the unique ecological characteristics of the regulated rivers. Instead, it recommends environmental flow mandates be determined by scientific studies depending on the type of fish, local ecosystem, and river gradient. On the contrary, Bhattarai informs that the current regulation requires dam operators to also maintain the level of instream flow as directed in their respective Environmental Impact Assessment (EIA) report based on the unique ecological and anthropogenic characteristics governing the river system on top of a minimum ten percent mandate. Hence, the issue seems to majorly originate from the weakness in the implementation of the regulation than due to lack of it.

Concluding Remarks

The hydropower industry of Nepal is currently in the phase of developing larger reservoir-type projects with higher installed capacity as it follows the aspiration of the federal government to ramp up the total generation capacity of the industry by more than five folds before the end of this decade. Hence, larger reservoir or storage-type projects such as the 1200-MW Budi Gandaki Hydroelectricity Project and 750-MW Upper Seti Storage Hydroelectricity Project have surfaced in the list of national pride projects of Nepal.

Technically, the development of reservoir-type projects will help the industry leapfrog its hydroelectricity generation capacity and create a portfolio of projects that do not need to rely on the natural flow rate of rivers for power generation. However, forming large reservoirs behind dams in lower geological regions with sufficient flat lands to submerge will directly expose the industry to a range of adverse ecological issues concerning reservoir systems and significantly escalate tensions with local riparian communities as reservoirs shall claim significant portions of the upstream riverine habitats. In such context, the 40-km long reservoir system of the pledged Budi Gandaki Hydroelectricity Project (BGHEP) is already expected to displace 50,000 people of the local community and submerge a substantial area of ecological, agricultural, and cultural significance. But visible lapse remains in the capacity of the governments in Nepal to arrange compensation and resettlement plan suitable for the affected communities. An academic thesis on Development-forced Displacement and Resettlement (DSDR) in Nepal notes multiple political and social challenges for arranging compensation and resettlement needs for habitat and livelihood impacts resulting from large dam constructions. In the meantime, marginal communities settling on unregistered lands and relying on common natural resources such as rangelands, local water bodies, and forest products for socio-economic livelihood fall into the risk of not being properly aided and left in despair if such land covers are inundated. 

Transitioning to the phase of mega hydroelectricity projects in Nepal with taller dams and larger reservoir systems in lower geological belts of the country also calls for the hydropower industry, its regulators, and the larger stakeholders to expect severe ecological impacts across the length of the river systems that naturally follow such developments. As such, it is time that the hydropower industry largely contributed towards conducting a comprehensive study of the dynamics of the hydrosphere, biosphere, and cryosphere of the transboundary river basins flowing through the landscape of Nepal to significantly acknowledge, model, and estimate the nature of impacts that will result into such domains from the expedited development of large dam projects in Nepal. Such baseline studies shall particularly help the power producers to take precautionary measures to limit the anticipated impacts, and conduct periodic monitoring of the impact to acknowledge its severity. At present, ICIMOD studies conducted under the Koshi Basin Initiative (KBI) serves as a notable reference portal to initiate such basin-level assessments also in respect to the development of hydroelectricity project in the watersheds of the respective basins. Meanwhile, Kumar confirms that the Water and Energy Commission Secretariat (WECS) of the federal government is already initiating basin-level studies that touch upon the needed scope of assessments.   

Apart from establishing astute regulatory arrangements for environmental assessment and monitoring of dam impacts, Kumar claims that a paradigm shift is also required in the organizational culture of the hydropower industry in Nepal which is yet to support improvement and innovation in the field of environmental assessment to initiate novel tests to acknowledge previously undiscovered ecological or social impacts of dam construction. At present, the industry needs to develop sufficient flexibility and agility to continuously experiment with novel assessments and tests that are outside the conventional mandates for it to become proactive in researching, preempting, and mitigating the wider social and ecological implications of larger hydroelectricity projects in Nepal.

Advancing hydroelectricity sector in the western frontier region of Nepal

The Nepali text version of this article was published on a Birenderanagar based regional daily Sajha Bisaunee

The establishment of hydroelectricity plants in Nepal have visibly clustered around the central and eastern river basins of the country. As such, Province 1, Bagmati, and Gandaki jointly representing Koshi and Narayani river basins have managed to host hydroelectricity plants contributing approximately 96.48% of the total electricity generated within the country as of today. On the contrary, Karnali and Sudoorpaschim provinces jointly representing the western river basin of Karnali and Mahakali have reportedly been only able to contribute towards producing approximately 1.27% of the entire current electricity generation in the country amounting to 42.25 MW despite the frontier western provinces having potentiality to generate 24,969.41 MW by theoretical calculations. While there could be sufficient technical and geological justifications behind the observed skewness, substantial weight of the explanation casually draws from the fact that the frontier western regions of the country have also remained the victim of centralized and east-fronted development in the energy sector. 

The centralized development and governance in the hydroelectricity sector is yet witnessed in the current federal setup of the country as federal government is solely responsible for raising royalties applicable for hydroelectricity generation, and sharing it across the three tier governments pursuant to schedule-4 of the Intergovernmental Fiscal Arrangement Act, 2015. This legislative feature regarding a crucial aspect of fiscal federalism directly recognizes subnational governments merely as the passive agents of the entire procedure concerning administration of royalties obtained from the hydroelectricity sector.Whereas, the central government persists as the exclusive governing body for issuing permits and collecting royalties from the hydroelectricity producers even after the recent transition towards political and fiscal federalism.  

Meanwhile, an important remedy towards correcting the skewedness, or more so encouraging hydroelectricity development in the Karnali and other river basins or the frontier western provinces can come from the narrative of the federalism itself, or specifically the fiscal aspect of it. Speaking of which shall require overhauling the current arrangement for natural resource revenue (royalty) administration in the direction towards devolving the authority for raising and sharing natural resource royalties from federal to provincial governments at least in the hydroelectricity sector. Also, the provincial governments need to be remunerated with higher share of royalty revenue in comparison to what is enlisted at present by Intergovernmental Fiscal Arrangement Act, 2015 in order to justify the added function of entirely administering the royalty revenue from hydroelectricity sector in along with other functions discussed in this article.Speaking of which, the provincial governments also need to be authorized to issue both survey and construction licenses for establishing hydroelectricity at least up to capacity below 200 MW above which the approval of Investment Board of Nepal (IBN) is required. On the similar front, the recently drafted electricity bill being submitted at the federal parliament for approval already directs provincial and local governments to authorize developments of hydroelectricity plants with capacity below 20 MW. 

Such devolution of authorities concerning regulation of hydroelectricity sector and administration of royalties raised from hydroelectricity projects at provincial level can precisely incentivize the governments of Karnali and Sudoorpaschim provinces to encourage and initiate investments in the western frontier regions comprising of hugely potential Karnali river basin. The incentive derives from the fact that such activity shall directly boost the revenue of such governments in the form of royalties and licensing fees. In fact, this aspect of fiscal devolution is an expected outcome of the federal effort to regionalize & decentralize development in regions afar from Kathmandu that were historically overlooked by the erstwhile unitary political order.

Besides, given the fact that the entire revenue from electricity, gas, and water industrial classification as per International Standard Industrial Classification (ISIC) for GDP computation represents only between 1.84% – 2.7% of the national GDP in last five fiscal years, the direct economic significance of hydroelectricity apart from rhetorical significance to fuel national economic development is trivial or relatively inconsequential at present. Also, the potentiality for generating hydroelectricity is fairly distributed geographically across the provincial boundaries of the country in exception to Province 2. Hence, given the relative direct economic insignificance of the sector in along with sufficient geographic distribution regarding the potentiality to reap economic benefit from hydroelectricity generation, the possibility for interregional fiscal imbalance and regional fiscal inefficiency & vulnerability to trigger as the result of regional government being unable to manage often volatile nature of windfall resource gains as feared in the study of extractive mineral resources is hugely unlikely. Also, given that the characteristics of activity concerning generation of hydroelectricity from running river resources being visibly different to that of mineral resource extraction, the observations and conclusions from either sector may not be accurately interposed between each other.

Amid all this, the likely interprovincial externality that may arise from exploitation of river basins straddling across multiple provinces can be addressed or resolved through appointment of constitutional agencies as Intergovernmental fiscal council or Inter-coordination and facilitation committee. In fact, specific basin commissions under the authority of the given constitutional agencies may as well be established to address interprovincial externality that may arise in specific river basin from works related to hydroelectricity generation. For instance, a specific basin commission for Karnali river basin under one of the given authorities may be established to handle interprovincial impacts and arrange compensations when hydroelectricity projects established within the authority of Karnali in upstream Karnali basin affects the territorial jurisdiction of downstream Karnali basin falling within the Lumbini province.

Lastly, it is largely in the purview of the National Natural Resource Fiscal Commission (NNRFC) to progress the current nascent resource revenue sharing framework by also incorporating the recommendations provided. Meanwhile, the eligibility of the current sharing framework to be revisited every five years with ample consideration for ideas and effective practices across the world leaves sufficient opportunity to also have this recommendation considered by the commission.

Envisioning trade and transit from Kazakhstan to Karnali

The Nepali text version of this article was published on a Birenderanagar based regional daily Sajha Bisaunee

An article published recently on the Diplomat reported on the progress of the joint Kazakhstan – China projects signed between the Republic of Kazakhstan and the People’s Republic of China (PRC) recognized under “Intergovernmental Framework Agreement on strengthening cooperation in the field of Industrialization and Investment”. Signed in 2015 between the two neighboring governments, the agreement pledges to fulfill 56 industrial capacity development projects of Kazakhstan worth USD 27.6 billion in industrial sectors listed as metallurgy, oil and gas processing, chemical industry, mechanical engineering, power engineering, transport, production of building materials and agro-industrial complex.

The framework agreement comes as a flagship development of Silk Road Economic Belt (SREB) apart from Urumqi-Tehran railway project and China-Pakistan Economic Corridor (CPEC) that aspires to connect and create industrial and trade corridors between Central Asia, Middle-East Asia, and China. As part of the framework, China vows to export is excess industrial capacity in primary commodity manufacturing and processing industries to Kazakhstan while it looks forward to climb the global industrial value chain by becoming the exporter and standard-setter of advanced manufacturing technologies in high-speed railway transport, telecommunication, medicine, and energy across Asia and beyond. In the meantime, Kazakhstan is likely to witness advancement in its processing technologies in oil & gas sector in along with other industrial capacity so in order to be able to diversify its industrial and export portfolio in various industrial and refined petrochemical products. Until present since 1997, nascent oil & gas infrastructure of Kazakhstan has only been able to export low-grade oil in exchange of processed gasoline and motor oil from China.

Most importantly, apart from industrial connectivity, trade development, and strategic economic ambitions, the purpose of China to invest on the framework agreement with Kazakhstan also reveals its geostrategic interest of diversifying its oil supply from sea-route to in-land based route. Regarding which, the article reports the signing of design contract for a new China-Kazakhstan cross-border LPG pipeline in May 2020 as part of the latest progress of the framework agreement. Not to mention, 11 projects of the agreement that relates with oil & gas sector have either completed, in progress, or is pledged to begin in coming years.

Burang city to Kasghar CITY via CHINA NATIONAL Highway 219

Amid the revitalization of the silk road era trade and transit interaction between Central Asia and China, certain benefit from it may as well be imagined for the countries across the Himalayas.Specifically, in the context of Nepal, one can conceptualize the likely possibility for the Karnali region to be able to establish trade and transit connections with the Central Asia-derived economic and trade ambitions of China. This conceptualization derives from the spatial observation that the Hilsa region of upper-Karnali appears to be less than 2000 KM from Kasghar city of Xinjiang Province of China from Burang City of Tibet connected by the China National Highway 219. Meanwhile, the Kasghar and Urumqi city recognized to be the spout of SREB is expected to be multifacetedly connected with the Central Asian capital cities including through the railways and gas pipelines.

This spatial observation is in fact the western aspect of what is dubbed as Trans-Himalayan Multi-connectivity Network (THMCN) that strives to find alternative tract for trade & transit possibility through the Trans-Himalayan route with Nepal being at the center. Meanwhile, the historic ten-pact trade agreement signed between China and Nepal in 2016 during the last visit of Prime Minister KP Oli to Beijing has allowed Nepal to take a leap forward towards realizing the revitalization of its own Himalayan silk road with upper-Karnali region being at the crux of this development.

Specifically, the first point of agreement to allow Nepal to use China to conduct third-country trade and import critical resources, and the second point of the agreement to construct, manage, and maintain the Xiawara boundary river bridge in Hilsa bordering China is what brings Karnali a step closer to be able to regionally find avenues to trade with Central Asia. Having said that, it even improves the chances for Karnali to be able to find its development trajectory independently from the central government. Least to say, such conceptual arrangement can be the difference between Karnali province finding its space in the dawn of trade, transit, and economic revitalization of in-land Asia through SREB and helplessly depending upon the grant of the central government to sustain the livelihood of Karnali known to have historically suffered the incidence of poverty in Nepal.

Moreover, the likeliness of Nepal to also be able to diversify its oil-importing sources also through in-land route from Kazakhstan via Western China by taking advantage of the said energy infrastructure projects between Kazkhstan and China can establish upper-Karnali or specifically the Humla district as the northern dry custom and storage point for petroleum products. In fact, extended trade with Western China and Central Asia through upper-Karnali can even establish the Humla district as the landlocked trade city or strategic hub facilitated by trade-conducive industries as freight & warehousing, banking & insurance within it. In the meantime, the surge in number of tourists from in-land Asia would naturally follow given the natural beauty and socio-cultural destinations throughout the Karnali corridor. Given that, the contribution of such transit connectivity can be phenomenal for the economy of the Karnali.  

While this Karnali-derived idea of THMCN to establish trade and transit linkage with in-land Asia might appear a far-fetched dream, it however should not be taken in a very light note. At least, the developments in Central and in-land Asia as part of the SREB efforts needs to be continuously watched while constantly deliberating the possible ways to integrate the Karnali region with economic momentum in the region to allow Karnali to find its alternative launchpad to economic growth. Suffice to say, the geostrategic significance of upper-Karnali to connect with West China and Central Asia should not be readily dismissed at present.  

The peculiar policy recipe of China in Xinjiang (that may not work)

The demographic composition of the countries around the world is often characterized by ethnic diversities with the prevalence of ethnic minorities vulnerable to socio-economic marginalization and discrimination. Such vulnerabilities have often resulted in minority populations resenting against their government mostly represented by ethnic majority.  On such account, addressing the grievances of the ethnic minorities has always been a challenging yet crucial task for any prevalent government given the sensitivity of the cause to determine the national harmony and peaceful rise of a country. Despite, world history has presented scenarios depicting severe mishandling of the resentment of the ethnic minorities by different governments in Eastern Europe and Central Africa leading to distressing events reckoning to ethnic genocide and mass-murder.

Nevertheless, every government maintains a peculiar method of resolving the grievances of ethnic minorities mostly based upon the political ideology they subscribe to. The responses of the governments can be as diverse as lately seen in the southern region of Asia. As such, the government of Nepal in its outfit of multiparty democracy constitutionally addressed the legitimate concerns of the Madhesi and Tharu ethnic minorities of Southern Nepal, while the military influenced democratic government of Myanmar instead committed atrocities against the Rohingya minority of the Rakhine state with military crackdowns.

On a similar note, the response of the government of the Communist Party of China (CPC) to address the resentment of the Uyghur Muslim ethnic minority in Xinjiang-Uyghur Autonomous Region (XUAR) of Northwest China maintains its own peculiarity as a method to culminate the ethnic tension relating to Uyghur minority.  Besides. the strategy of the CPC government to resolve this domestic conflict ignited from ethnic differences even maintains significance on the international scale as China gradually undertakes leadership in the diverse global society.

Peacebuilding resolution of the CCP government in XUAR

It has been well acknowledged that the CPC government is deploying a two-fronted resolution model in responding to the resentment of the agitating Uyghur Muslim minority to create a state of peace in the troubled XUAR. The model includes (1) pushing development and uplifting economic momentum in XUAR and (2) imposing heavy-handed security & surveillance mechanisms and stringent laws that even repress the cultural lifestyle of resenting Uyghur Muslims for the so-called cause of building sustainable peace in the very North-western autonomous region. On one hand, the government pledges to nourish and fulfill the population of this hinterland North-western province with economic prosperity by promoting industrialization, sectoral development and establishing XUAR as the strategic midpoint of the government’s flagship Silk Road Economic Belt (SREB) program. While, on the other hand, the communist government deploys repressive interventions as tight security checks, intensive surveillance measures, and control on religious-cultural life of the Uyghur ethnic population in XUAR to eliminate the threat and occurrence of security crises known to be erupting from the ethnic cause.  More or less, this peacebuilding resolution of the CPC government resonates with the strategy of connecting the minority ethnic population of the isolated western provinces of China with the core economic value-chain of the country mostly limited to the prosperous eastern provinces. Such is however packaged with forcible seclusion of the very minorities from their own distinct cultural and religious values that are distortedly believed to keep them away from submitting unconditionally to the Communist principles of China devised by the CPC.

How CCP perceives the XUAR ethnic crisis and the Carrot-Stick resolutions with which it believes it can contain such

 

Beholding the criticisms

Amid the peculiarity of this two-fronted resolution mechanism, it has received multiple criticisms that disregard the success of this strategy for the CPC government to maintain harmony with the Uyghur ethnic minority to secure ultimate peace in XUAR. Some critics fear the potentiality of these repressive methods that denies fundamental cultural rights of ethnic minorities to backfire as it may rather “risk fanning the flames of resentment that energize extremism” in marking the words of Ben Hillman of Crawford School of Public Policy from his article published in the East Asia Forum. Others including the spokesman of World Uyghur Congress, Alim Seytoff believe the authoritarian development push in XUAR to rather bring more repression for native Uyghurs.

Besides, the chances for the government’s infrastructure and economic programs in XUAR to reach the marginalized Uyghur community are also meager. With XUAR in along with other western provinces of China acknowledged to be least economically liberal in compared to other eastern provinces of China as per China Economic Research Institute’s Free Market Index, the possibilities for the centrally planned economic programs for XUAR to narrowly fall within the clutches of government bodies, State Enterprise, and individuals with political mileage is rather significant.

It is safe to conclude that the CPC government must have remained insensitive and oblivious to the actual needs of the situation and of the opposing Uyghur ethnic minorities that reside in distance from Beijing. In its attempt to build harmony with the ethnic minority mostly composing the demographic structure of this North-western autonomous region, the Chinese government must have instigated a naïve strategy to forcibly draw patriotism of the ethnically distinct Uyghur minorities towards the atheistic Chinese nationalistic values while exclaiming unconsulted development initiatives at XUAR as the consolation prize.

 

The Sino-Nepal agreements that can work towards the political and economic benefits of Nepal

The signing of the trade and transit agreement with China in March 2016 (of which the protocol was signed in April 2019) followed by becoming one of the signatory countries of the Belt & Road Initiative (BRI) in May 2017 were of strategic importance to Nepal. These treaties directly serve as the transitional gateway for Nepal to improve its political position in China-Nepal-India geopolitical complex and its state of International trade and economy. These two agreements succeeded within the short period of couple of years drastically heightens the diplomatic relationship between Nepal and China. Meanwhile, it even challenges the Indo-Nepalese bilateral relationship that privileged India to maintain ubiquitous foothold in the economy and internal political affairs of Nepal.

As of now, complete reliance on India to allow passage for the landlocked Nepal to conduct its third-country trade and import critical energy resources has advantaged India with trade passage monopoly over Nepal. Such advantage has allowed India to also maintain substantial influence in the domestic political and economic affairs of Nepal to its benefit. On such ground, Kathmandu’s attempt to unilaterally pursue certain foreign and domestic policy ambitions unsuitable to the interest of New Delhi have even been met with unpleasant responses from the Southern regional giant. The responses primarily refer to the imposition of border blockades orchestrated against Nepal in the periods of 1989 and in 2015. Furthermore, the context of Nepal’s international trade scenario that has historically oriented towards India has also not remained economically beneficial for this Himalayan state. Such argument founds on the fact that Nepal suffers an average of 80% trade deficit in the last five fiscal years with India as it reportedly conducted an average of 60% of its total trade volume with the South Asian giant in the same fiscal years. While internal lackluster within Nepal ranging from unfavorable policy environment till infrastructure adequacy is partially to blame for Nepal’s trading incompetency, there are also certain arguments that acknowledge Nepal to have a very limited comparative advantage with India mostly in agricultural trade. It ultimately signifies the gradual need for Nepal to diversify its scope of trading partners in order to improve its international trade position.

At first and foremost, achieving the trade and transit agreement with China as part of the 10 pacts agreement package importantly allows Nepal to use ports in China to conduct its third-country trade and import critical resources. It emancipates Nepal from the need to completely rely on Calcutta and Vishakapatnam based seaports in East-Coast India for such purposes. In addition, the subsequent agreement between Nepal and China on the construction, management, and maintenance of the Xiarwa boundary river bridge in the Hilsa of Northwest border of Nepal (see agreement no. 2) further visualizes the distant potentiality for Nepal to directly import petroleum commodities from the gulf oil fields via West China. Such conceptualization founds on the aspiration of the China government to build corridors to connect West-China border cities with the Persian Gulf as part of the Silk Road Economic Belt (SREB) initiative to also open inland transshipment alternative for China’s energy supplies. And, with the potential to extend the inland connectivity from the Kashgar city of West China until Hilsa border via the 219 National Highway of China and Xiarwa bridge, the very alternative inland avenue for oil importation also remains feasible for Nepal. Most importantly, this diversification of avenues for procuring critical oil resources shall grant necessary geopolitical mileage for Nepal to take unfettered political-economic pathway that entirely suits its national economic well-being. Meanwhile, the subsequent pledges in second BRI forum and during auspicious visit of President Xi in 2019 by both governments to incorporate Nepal into BRI under the banner of Trans Himalayan Multidimensional Connectivity Network (THMCN) substantially improves the chances of such Trans-Himalayan connectivity of great strategic nature.

Nevertheless, the idea of diversifying Nepal’s trading avenues and routes away from being virtually dependent on India does not pertain to obviating India as a trading partner per se. Instead, this platform of BRI rather assists Nepal to more intensely engage with both Indian and Chinese economy to graduate its international trade context from being Indian dependent to Trans-Himalayan Interdependent in order to improve its trading platforms and avenues.

Last but not the least, the trade benefits for Nepal by engaging in the BRI can especially be pictured in terms of potentiality for generating Tri-country multipurpose tourism economy involving the regions of Tibet, Nepal, and the Uttar-Pradesh (UP) & Bihar respite with historically significant religious-cultural heritage and natural sceneries. Besides, the concept of aspiring Nepal as the gateway for the inland trade between China and South-Asia (see pp.21-23 of the issue link) also holds ample opportunity for Nepal to venture into trade assistive service industries to support its ascending service economy.

 

Underperformance Back-to-Back: Gross Fixed Capital Formation

The simplified version of this article was published in The Kathmandu Post on 26th August, 2016

The preliminary Economic Survey Report for FY2015/16 yet again makes the same old assertion regarding the economic performance of Nepal by exhibiting the underperforming state of capital expenditure that has been hampering the real economic growth of the country since multiple years. It is of no surprise that yearly Gross Fixed Capital Formation (i.e., an indicator of Investment expenditure) is again below the required criteria warranted for the Nepalese Economy that is characterized with considerable Capital/Infrastructure deficit and strong potentiality of Marginal Productivity of added Capital (MPK). As I mentioned, it is reasonably legitimate to recognize strong potentiality of MPK of Nepal on technical grounds as it is categorized as a low-income country with Gross Capital formation way below the steady/optimum level of Capital (refer Fig 1 to know steady level of capital).

Statistically speaking, the Gross Fixed Capital Formation (GFCF) for FY 2015/2016 in basis to preliminary Economic survey conducted by Ministry of Finance (MoF) was NRS 562,458 Million, which only makes up to about 25% of the GDP for the FY2015/16 (MoF, 2016). However, in midst of this statistical figure, Sapkota (2016) draws the minimum threshold for GCFC (% of GDP) of about 30% in order to boost required real economic growth of the country that can uplift per-capital income and generate further employment based on Investment Expenditure. On this regard, the negative disparity between the required Gross capital formation and acquired Gross Capital formation in terms of %GDP is numerically observed, whereas the felt observation of this deficit is highly relevant as every layman can relate the lack of adequate infrastructure as major barrier to national progress.

And only to bolster this argument regarding the state of Capital formation deficiency in the Nepalese Economy, we can always refer the graphical comparison of GCFC (% of GDP) of Nepal with the average of low-income countries in last 8 years that is being developed by retrieving data from World Bank’s database and Economic Survey Report 2016. Since the countries belonging to the low-income category (inclusive of Nepal) share the common resolution (i.e., more Investment expenditure) to fuel growth, the comparison is relevant to recognize relative performance of Gross Capital Formation in Nepal.

As it can be observed from the provided comparative graphical representation, the GFCF (% of GDP) of Nepal fell below the average of its kind in last couple years even though it appears to be in the trend of reconvergence. Whatsoever, the GCFC (% of GDP) of Nepal is considerably below the minimum threshold of 30% recommended for the nation’s real economic growth by Sapkota (2016).

If dug down deeper regarding the component of the Gross Fixed Capital Formation of the Nepalese economy, it is surprising to discover wide inequality in the volume contribution of Private Fixed Capital investment and Government/Public Fixed Capital investment throughout the timeline. This figure stays put even though the planned expenditure commitment of the Government is ballooning (The FY 2016/17 budget crosses NRs 1000 Billion) in midst of huge required role of Government to fund Infrastructure development. While the ratio of Private Contribution on GFCF to Government Contribution was about 3.23 times in FY2015/16 as per the Economic Survey 2016, the wide difference in contribution of the two parties through the period of 8 years is exhibited in comparative contribution graph developed below.

In observing the stark difference in contribution towards Gross Fixed Capital Formation by two parties throughout the timeline, it would be reasonable to conclude the underperforming role of Government in inhibiting the growth of GFCF/GDP ratio while the leading role of Private party even in midst of not so friendly regulatory environment exhibits strong enthusiasm. The persistent low absorption rate of the Government budget hovering at about 75% as per Sapkota (2016) due to lagging delivery capacity of the performing stakeholders appears to be relatable to observed underperformance from Government side. On the flip side, the minuscule role of Government in economic affairs might seem reasonable to allow the Free Market system take hold. But, given the huge output gap in merit and social sectors (as Public Infrastructure, Health and Education sector) in our underdeveloped economy that cannot be fulfilled by Private party due to lack of excludability and rivalry features of the sectors, Government is sought to be primarily and emergently responsible to close this output gap (Singh, 2015). And therefore, the demand for larger role of the government/ Public party in Capital formation is legitimate. Besides to it, Sapkota (2016) also recommends jacking up of the Public Fixed Capital Investment (% of GDP) to 10% (presently at 5.9% as per Economic Survey Report) further bolsters the argument for needed higher Public role in Capital formation.

Theoretical Consideration connecting Gross Fixed Capital Formation (GCFC) to National Income (Y) growth:
                  The pattern of statistical data definitely recognizes the Government/public sector as culpable in observed underperformance of Capital Expenditure/Gross Fixed Capital Formation. And as certain level of GFCF is recommended to achieve real economic growth in this paper, there of course is theoretical model to support the causative relationship.

Theoretically, the Solow Growth Model (i.e., an important aspect of classical economics) acknowledges the relationship of National Income per worker (y) with Stock of capital per worker (k) to be y = √k. While holding other ingredient of production (importantly labour (l)) constant, Solow Model, with support from Cobb-Douglas production function has come to this causative relationship that remains valid regardless of the size of the economy based on labour (l) size. Moreover, while this positive causative relationship between some form of National Income/GDP (Y) and Capital stock (K) remains valid, the function is only valid unless an economy reaches the state of steady/Optimum level of capital. Essentially, an economy reaches a steady/optimum level of capital when further addition in-Investment expenditure for capital formation is cancelled by equal unit of accumulated depreciation causing null change in Capital stock/formation (i.e., ∆k = 0). Obviously, the Nepalese economy from every lens is way below steady level of capital, thus it leaves considerable leeway for Capital formation and National Income/GDP growth before it reached steady/optimum level of capital.

given figure recognizes the steady of level of capital at k* at which the economy remains at equilibrium. The goal of every rational economy (including the Nepalese economy) is to reach the steady level of capital (Golden level of Consumption). On a rough guess, Nepalese Economy possibly lies closer to “0” than “k*” at the moment. And, the resolution to it higher Gross Fixed Capital Formation coupled with higher GGCF (% of GDP).

References:

Ministry of Finance (2016). Economic Survey Report 2016. Government of Nepal.

Singh, S.K. Dr, (2015). Public Finance in Theory & Practice. 9^th Ed. S.Chand Publishers.

Sapkota, C. (23 May 2016). Why capital spending is chronically low and what can be done about it. The Kathmandu Post.

World Bank (2016). Gross Fixed Capital Formation (% of GDP). World Bank Group.

Theoretical Foundation:
Mankiw, N. (2010). Macroeconomics (7th ed.). New York, NY: Worth.

Nepal: The Supply-side story of Nepal’s Inflation paradox

This paper redirects the scope of my previous compilation paper (Collaboration Paper: What actually guides inflation scenario in Nepal) that attempted to constitute multiple viewpoints on factors that are significant in determining contemporary inflation scenario in Nepal. The previous paper concentrated on Indian inflation transmission and monetary policy transmission to enquire the significance of Indian inflation (in respect to fixed-pegged exchange rate and voluminous trade activity) and domestic monetary policy measures over the Nepalese inflation scenario. On the other hand, this paper redirects the overall inquiry towards acknowledging the role of supply-side constraint (supply shock or disturbances) towards the contemporary inflation scenario in Nepal.

The quest or the inquiry of identifying the role of supply-side variables in determining the contemporary period of running inflation can always start with the study of the mechanism of Indian inflation transmission towards the Nepalese inflation scenario. Though the law of one price of the theory of Purchasing Power Parity (PPP) in the event of fixed peg regime would warrant virtually complete price-taking behavior of the smaller economy from the larger trading economy (Ginting, 2007), Dobrescu, Nelmes, & Yu (2011) observes strong deviation of Nepalese inflation scenario from Indian inflation scenario since the period of 2007/2008 even when the condition for law of one price remained. As Dobrescu, Nelmes, & Yu (2011) observed in Fig 1, the upward escalation of the Nepalese inflation scenario against the Indian inflation scenario since 2007 was spectacular, and the upward escalation difference of Nepal-India food price inflation quadrupled in compared to analogous escalation difference in the non-food price difference.

In explaining the observed departure from the constraint of law of one price given the fact that Nepal fulfills the condition of being a small open economy having fixed exchange peg regime with a larger Indian economy from whom the import trade activity is voluminous, one has to consider the limitation of the theory of PPP itself that derives this very law. While multiple approaches have already questioned the ignorance of PPP theory regarding the influence of non-tradable factors in its law of one price, the theory also appears to be undermining the influence of persevering temporary domestic shocks (v) that can effectively disturb the pass-through of inflation rate even in the fulfillment of required conditions (Ginting, 2007). In fact, the interplay of one or both of these undermined variables could be the reason behind the observed deviation in the Indo-Nepalese Inflation scenario in Fig 1 causing inflation overshoot in Nepalese economy (especially on food-price).

In respect to that, while Ginting (2007) observes long-term converging relationship of core-inflation in Nepal (inflation measure excluding factors of strong temporary volatility and shocks) with Headline inflation of India (unadjusted inflation measure), he logically assumes the role of temporary shocks (v) originating from Nepal to contribute towards deviation in Indian and Nepalese headline inflation. As Ginting (2007) comes to this finding after conducting ADF test on relevant dataset from the period of 1996 to 2006, the observed deviation in Fig 1 can be relevantly regarded as a figurative proxy of Ginting’s finding of deviating Indo-Nepalese headline inflation due to temporary supply-shocks originating from Nepal itself. In fact, the figurative proxy (i.e., Fig 1) that accounts dataset from 2001-2011 also depicts strengthening magnitude of Indo-Nepalese headline inflation deviation exposing larger role of so-called temporary supply-shock (disturbances) in persistently causing headline inflation overshoot (especially in food-price) in Nepal since 2007.  Importantly, as the enquiry of Ginting (2007) with data limit until 2006 was not suggestive of this portion of the figurative proxy (i.e., Fig 1) that observes dramatic persistent influence of this so-called temporary supply shock since 2007, he believed the temporary shocks to evaporate in the long-run, thus boiling down to acute Inflation convergence of India and Nepal in the long-run.

Subsequently, Sapkota (2011) disregards the guiding principle of Ginting (2007) finding that regards the headline inflation deviating temporary supply-shock factors (v) to not prevail in the long-run. While Sapkota (2011) acknowledges the role of temporary supply-shock factors (v) in causing Indo-Nepalese headline price deviation, he also argues over the persistency of these so-called temporary supply shock factors (v) since the period of 2007/08 that observed temporary rise in International Oil-food-commodities price. Ultimately, Sapkota (2011) conforms to figurative proxy (i.e., Fig 1) exposing the role of persistent supply-shock (or disturbance) in gradually strengthening the magnitude of Indo-Nepalese headline inflation deviation and causing Nepalese Inflation overshoot since 2007/08. In fact, Sapkota (2011) further regards supply-disrupting activities (factors) as

1. Black-marketeering
2. Supply-hoarding on irrational inflation expectation
3. Conducting public strikes and
4. Creating difficulties at Custom points from India’s side

to be the reason behind occurred long-run stickiness of the price level on the high ground even though the price level was supposed to fall back following the cooldown of temporary rise in International oil-food-commodities price rise sometimes after 2008. In a nutshell, the disturbing activities (factors) noted by Sapkota (2011) appear to be non-economic in nature and therefore can be beyond the realm of fiscal or monetary policy.

On contrary to overall findings observing the deviation in Indo-Nepalese headline inflation, the findings of Budha (2015) observers Inflation pass-through from Indian Inflation scenario to Nepalese inflation scenario in the period of  4-8 months (i.e., rate of 7-12pc convergence each month) in his observation of price-levels from the period of 1994 to 2014.

In alike to the findings of Budha (2015), Dobrescu, Nelmes, & Yu (2011) in their separate Vector Auto-regression (VAR) analysis of full-dataset ranging from 2000-2011 and partial dataset ranging from 2007-2011 (signifying event after 2007) also observed strong influence of India’s inflation and International oil price movement in determining Nepal’s inflation scenario (see Fig 3a and 3b). While these two factors were accounted to be responsible for more than 1/3 of the Nepal’s inflation variability, International Oil price movement was reckoned to reserve stronger influence in Nepal’s inflation variability mainly after 2007 (Dobrescu, Nelmes, & Yu, 2011) (see Fig 3b). However, although recognizing the significant influence of Indian inflation and International oil price movement in Nepal’s inflation variability, the significance of Supply-side shock (v) in determining the current inflation scenario in Nepal cannot be undermined at all. After all, the significant drop in Brent Crude Oil price Index by more than 50pc during the mid of 2015 until the beginning of 2016 didn’t exert much cooling impression in Nepal’s  inflation scenario that was already wrestling with different forms of supply-shocks (v) (Trading economics, 2016).

As the implication of Supply-side shock (v) on Nepal’s current inflation scenario is discussed while accounting for renowned influencing economic variables as Indian Inflation transmission and International Oil price movement, it is also very important to test this implication while acknowledging the demand-side economics. As, it is another significant economic variable vibrantly guiding the inflation scenario in developed economies.

In acknowledging Sapkota (2010), he doesn’t observe much influence of Domestic demand-side factor in determining the inflation scenario in Nepal. Elaborately, he doesn’t see the significance of sparse volatility in domestic private Investment Expenditure (I), Net Export (NX) in along with stagnancy of domestic consumption expenditure (C) accounting for 90 pcs of GDP since last five years (before 2010) in determining the past volatile inflation scenario in Nepal. Therefore, given the lack of correlation in past trend, it may not be accurate to hold domestic demand-side factor strongly responsible for observed headline Indo-Nepalese inflation deviation or current inflation scenario in Nepal since 2007/08. However, given the fear of Sapkota (2016) of government policy being unable to suppress the inflation rate to 7.5pc in eventuation of jumbo NRs 1 trillion worth National budget, the upward pressuring potential of Demand-side economics over Nepal Inflation scenario cannot be ignored in near future. But again, it still doesn’t challenge the logic behind the strong perseverance of supply-shock (v) in guiding Nepal’s running inflation scenario.

Now that we have tested and approved the persistence and impact of should-be short-run temporary volatility (supply shock or disturbance) (v) on Nepal’s running Inflation scenario after acknowledging various influential economic factors (i.e., Indian Inflation transmission, International Oil price movement, and Demand-side pressure), observation of tools and techniques that can eliminate this non-core inflationary pressure needs to be studied as well.

Having said, monetary policy transmission or adjustment is recognized to be an important nominal tool in doctoring the inflation scenario of an economy as it often deployed by central banks all over the world in meeting their preferred macroeconomic target or to stabilize the economy. Federal Reserve Bank of America, Bank of Japan (BOJ), and European Central Bank (ECB) are prominently renowned in deploying their monetary arsenals in stabilizing their respective sophisticated economy by mostly manipulating interest rates to adjust inflation rate. While prominent economist Milton Friedman also argues Inflation rate to be a complete monetary phenomenon, Roger (1997) instead emphasizes the constraint of monetary authority to only influence the core-inflation scenario but not the temporary shock factors (or persistent temporary supply shocks in case of Nepal). And it happened to be so that the finding of this paper observed major role of persistent temporary supply shock in guiding Nepal’s running inflation scenario. Therefore, on subscribing to logic of Roger (1997), Nepal’s central monetary authority (i.e., Nepal Rastrya Bank (NRB)) has highly limited ability to dictate the Nepal’s contemporary inflation scenario.

Sapkota (2009) also regards the contemporary running headline inflation of Nepal to be completely outside the boundary of traditional monetary instruments at the disposal of the central bank. As Sapkota also maintains strong argument regarding the role of persistent supply-shock incidence (or disturbances that appears non-economic) as the major culprit to Nepal’s running headline inflation, he doesn’t find any remedy to this issue through the vault of monetary arsenals that is limited to realm of economics. In fact, he instead proposes an array of political, legal, regulatory and diplomatic measures to counter this issue.  Statistically, Sapkota (2010) observes random regression between M2 growth (a proxy of monetary policy) and Inflation behavior in Nepal since the past decades in Fig 4.

In alike to Sapkota’s consideration, Ginting (2007) also disregards the effectiveness of monetary measures in countering the temporary shock factors that he observes to be disturbing the convergence of headline inflation between Nepal and India on his own ADF test of relevant variable from 1996-2006. His paper however remains silent regarding the effectiveness of monetary policy transmission in Nepal.

On the contrary regarding the ineffectiveness of monetary policy in countering Nepal’s headline inflation overshoot, Dobrescu, Nelmes, & Yu (2011) on their VAR analysis of full dataset ranging from 2000 to 2011 observes short but strong influence of Broad Money (M2) in Nepal’s non-food price inflation (see Fig 5). Given the fact that they also observe almost similar influence of Broad Money (M2) in Nepal’s food price inflation, they encourage intense role of Nepal Rastrya Bank (NRB) in curbing and adjusting Nepal’s inflation scenario in oppose to Sapkota (2009) and Ginting (2007).

Likewise, Budha (2015) also finds impressive ability of his identified independent Nepalese Monetary policy to influence the inflation scenario of Nepal. After all, he identifies the role of expansionary monetary policy to let CPI of Nepal reach its peak level at 6^th quarter after which the effect totally fades out by 10^th quarter.

Conclusion:
As the paper tested the persistent role of supply-side constraint in determining Nepal’s running inflation scenario while acknowledging other significant economic phenomenon as Indian inflation transmission, International Oil price movement, and demand-side economics, it comes to its approval, and therefore its presence. Again, in concern to it after considering various past papers (Sapkota (2009, 2010, 2011) & Ginting (2007)), the recommended resolution to this issue of price-level stickiness on high ground has mostly been non-monetary measures relating to political, regulatory and diplomatic avenues.

However, the observed independence of Nepalese Monetary Authority and influence of domestic monetary operations on Nepal’s CPI in couple of past papers (Budha (2015) & Dobrescu, Nelmes, & Yu (2011)) signals necessity to reconsider the deployment of available monetary arsenal of Nepal Rastrya Bank on specifically countering inflation overshoot. Especially, if the potential monetary policy transmission of the observed monetary independence has any implication over the core-victims of food-price inflation (i.e., the poor & deprived ones). And, also if the food-price inflation can be linked to the rise in price of urban non-tradable factors (i.e., rent, building & land prices) known to be caused by demand-side pressure.

Keeping aside everything else, just in acknowledging the finding of Asian Development Bank (ADB) regarding the ability of 20pc food price inflation in Nepal to increase the poor population by more than 1 million, (i.e., 4 percentage points increase in poverty ratio), the purpose to research on political, regulatory and economic policies & avenues to counter this unnaturally rising inflation having strong hit on food-prices seems urgent.

References:

Dobrescu, G., Nelmes, J., & Yu, J. (2011, September 26). Inflation Dynamics in Nepal. International Monetary Fund Nepal, 2-8. Retrieved July 18, 2016.

Budha, B.B. (2015). Monetary policy transmission in Nepal. NRB Working Paper No. 29. Nepal Rastrya Bank

Ginting.E. (2007). Is inflation in India attractor of Inflation in Nepal? IMF Working Paper WP/07/269. International Monetary Fund.  

Sapkota, C. (2011). The Source of Food and Non-food Inflation in Nepal. Accessed from:http://sapkotac.blogspot.jp/2011/11/sources-of-food-and-nonfood-inflation.html

Sapkota, C. (2010). Will Nepal’s fiscal budget 2010-2011 increase inflation? Accessed from:http://sapkotac.blogspot.com/2010/12/will-nepals-fiscal-budget-2010-2011.html

Sapkota, C. (2009). Sticky inflation and policy option for Nepal. Accessed from:http://sapkotac.blogspot.com/2009/08/sticky-inflation-and-policy-options-for.html

Sapkota, C. (2016). Budget Blues. The Kathmandu Post. Accessed from:http://kathmandupost.ekantipur.com/news/2016-06-17/budget-blues.html

 

 

Collaboration Paper: What actually guides the inflation scenario in Nepal

The motivation to consider and present this interesting economic issue came over me as my attention got caught in an ongoing friendly economic debate between two economic enthusiasts (one being the prominent Chandan Sapkota himself) in Facebook. The originating Facebook post from Chandan Sapkota doubted the ability of the government to restraint the inflation rate to 7.5pc mentioned in the budget speech for the upcoming FY 2016/2017, and then it ignited an interesting debate from one of the Nepalese economic enthusiast on what actually guides the inflation scenario in Nepal.

Of course, the debate evolved on the foundation of statistically backed research papers traded on the comment space of the post. But whether or not, the debaters were interested in peeking at each other’s evidence, I as an opportunist audience surely couldn’t miss the opportunity to go through the information rich evidence papers. And thus, after having a thorough understanding of the papers, I happened to synthesize this blog post that attempts to consolidate the key points of the evidence papers by acknowledging the potential relativity among them.

Basically, through this article post I attempt to comprise different factors that are believed to be active and significant in determining the inflation scenario in Nepal as it was studied, analysed and presented by various economic researchers. As the papers that carved this article were also deployed to debate an opinion, contradicting pieces of information among the papers is naturally expected. And in fact, this article revolves around the differences in opinions being advised.

After all, the evolving and distorted nature of Nepalese Economy would surely not always allow straightforward answers to any paradox, and therefore contradicting viewpoints are obvious too. As Sapkota (2010) himself puts through, “Inflation (a vital economic indicator) apparently is one of the least understood macroeconomic variable in Nepalese economy.”

In general, after thoroughly going through the prior research papers, this article chooses to leverage upon this macroeconomic discussion by presenting diverse viewpoints in existence of Indian Inflation transmission (i.e., whether Nepalese inflation scenario is determined by Indian Inflation scenario) and Monetary Policy transmission (i.e., if Nepal Rastrya Bank (NRB) has any leeway in influencing the Nominal economic indicator as Inflation rate).

Viewpoints on Indian Inflation transmission: 

In starting out, Budha (2015) subscribes to the outcome of previous literature exploration (Nepal and Nepal (2010)) indicating two third (i.e., substantial) of the Nepal’s inflation scenario to be attributed to Indian Inflation scenario (p.7). He regards the existing fixed peg given Nepal’s high trade integration, labour mobility and long-porous border with India (1800 km) as a driver of existing convergence between Nepal’s Inflation rate and India’s inflation rate. On his own test of co-integration relationship between Nepalese price level and Indian price level in along with his estimation of short-run dynamics using the Vector Error Correction Model (VECM), he observes convergence of Nepal price level to the price level in India in about 4-8 months (i.e., 7pc to 12pc convergence each month in times of price level deviations) (p.9). In general, Budha (2015) (published as NRB working paper) adheres to the conclusion of Ginting (2007) (published as IMF working paper) exposing acute convergence of Indian price level to Nepalese price level in the long-run.

On the other hand, while insisting one third (i.e., not so substantial) of the variability in the domestic inflation to be attributed to Indian Inflation rate and global oil price, Sapkota (2011) expresses decreasing intensity of Inflation transmission from India to Nepal since the period of 2007 that observed oil price overshoot. In confirming the uneasy event of non-economic factors guiding the macroeconomic indicator (i.e., inflation rate) of Nepalese economy, Sapkota (2010) regards the eventuation of price level stickiness in the following years after the record high price level observed during the rise of global commodity price, food price and oil price in 2007 and 2008. Sapkota (2009) accuses irrational inflation expectation in the Nepalese market along with supply disruption and Black Marketeering practice to eventuate such price stickiness in labour rate and price level. Sapkota (2009) collects an effective data purporting the contribution of Black Marketeering and stock hoarding by stockist and wholesaler (especially on expected inflation rise) over increased price level to be 30pc and 20pc respectively. Likewise, Sapkota (2009) also regard supply operation disruption activities as strikes to contribute to 10pc of increased price level whereas export hurdles from India to contribute to whooping 40pc of the increased price level. Having said, it is not impractical to believe the existence of price level overshoot hangover from the times of Gurkha earthquake and so-called Indian blockade in guiding the contemporary inflation scenario at alarming level. All In all, Sapkota acknowledges the distortion in inflation convergence between Nepal and India in contemporary times due to unnatural price level stickiness hovering even until the long-run and also due to domestic supply operation disruption. Sapkota therefore discounts the overall idea of Indian Inflation scenario acutely determining the Nepal’s inflation scenario in present context.

(Conceptual idea regarding price level stickiness and the mechanism of inflation expectation in determining inflation rate may be warranted in event of technical unawareness)

Viewpoints on Monetary policy transmission:

Before acknowledging the effectiveness of monetary policy transmission in the domestic market, Budha (2015) attempts to analyse the monetary independence of the Nepalese economy in determining the domestic interest rate independently from Indian interest rate and independence of Reserve Money (RM) from changes in Net Foreign Assets (NFA) even if the domestic economy is compelled to automatically adjust the capital flows to maintain the fixed peg. Interestingly, Budha (2015) after his co-integration tests identified larger monetary independence in both grounds and therefore approves it. Other than that, in following the theory of impossible trinity or trilemma of monetary policy, Budha (2015) also theoretically acknowledges partial monetary independence of Nepal Rastrya Bank in midst of partial capital control even when adjusting with stable/fixed exchange rate.

(Conceptual knowledge in regards to impossible trinity/Monetary policy trilemma is warranted in event of technical unawareness)

After gaining positive results in regards to monetary independence in the monetary system, Budha (2015) attempts to identify the effectiveness of monetary transmission in the wider financial system through the avenue of bank lending channel, Interest rate channel, and Asset price channel (p 16-19). In contrary to the prior results in monetary policy independence, the transmission of monetary policy operation (mainly bank rate, interbank rate and liquidity level) in the domestic economy is not as influential while acknowledging the given three avenues. The effectiveness of bank lending channel in terms of observed lending growth through Banks and Financial Institutions (BFIs) during the period of high liquidity level and vice-versa is sub-par due to high information asymmetry and the considerable adjustment cost in Nepalese Financial Market (p.16). Likewise, the effectiveness of interest rate channel in terms of adjusted deposit and lending rates in event of fluctuating interbank rate is also not as encouraging due to stickiness of bank lending and deposit rate in along with lack of data availability  in Financial Market (p.17). Having said, it is interesting note the contamination of long term price-level stickiness in diverse sectors of the economy including BFIs. However, the effectiveness of monetary transmission in the asset price channel is noteworthy given the timely increment in corporate share prices and Real-estate price during the event of liquidity fluctuation (p.19). In a nutshell, Budha (2015) does not observe impressive level of policy transmission effectiveness mostly due to glitches in the financial system itself.

On the other hand, Sapkota (2009) goes a little forward in completely undermining the causation relationship of demand-pull pressure brought up by Domestic Consumption and Investment over the domestic inflation rate in Nepalese economy. On such condition, the effectiveness of monetary transmission (if ever reaches impressive level) would result futile as it is only effective in building sensitivity of market demand pressure from adjustments in monetary policy operations and shock events.

While acknowledging the Macroeconomics 101, Sapkota (2011) does believe that Inflation rate to be primarily determined by monetary policy intervention in the long-run. However, he observes the elongation of the short-run inflation causing factor (i.e., demand-supply pressure) to be guiding the inflation scenario even until the long-run due to unnatural stickiness in the price level. Importantly, Sapkota (2009) regard the advent of such high price level (that was further elongated until future years) to be rather guided by the supply-side constraint than demand-side pressure itself. Technically, it directly discounts the ability of the monetary policy intervention of the Central bank to determine the inflation scenario as it can only influence the demand side factor of an economy. Sapkota (2009) undermines the influence of demand side factor in large to determine the inflation scenario by recognizing the past events when overshoot of price level could not be justified by relatively stable consumption demand and Investment demand.

All in all, Sapkota (2009, 2010 & 2011) regards contemporary inflation scenario (esp. after 2007) to be outside the boundary of Rastrya Bank’s policy disposal and instead can only be normalized through political, legal and regulatory interventions.

However, Budha (2015) observes the influence of Monetary policy shock in Consumer Price Index (CPI) (i.e., corollary to inflation rate) while he performs Structural VAR models in the attempt to isolate exogenous monetary policy shock from endogenous response to macro variables. Technically, the result leads to increment of CPI to its highest level during the 6^th quarter while completely decaying by 10^th quarter in the event of expansionary monetary policy shock (p.21). Ultimately, this confirmation runs in contradiction to Sapkota’s logic of monetary intervention or Demand-side pressure having any major say over Nepal’s inflation scenario.

Interestingly on his latest article in regards to Budget declaration for FY2016/2017 published in The Kathmandu Post, Sapkota (2016) however fears the ability of the government to contain the inflation rate to 7.5pc given the increment in public sector wage in along with large government planned spending (both being the facets of demand-side pressure) in midst of supply-side constraint. Of course, Macroeconomic scenario in Nepal is more intricate then we can imagine.

 

FIG:

The following Figure represents how an independent monetary policy adjustment in Nepal is supposed to pass through the economy during normal economic scenario. However, other variables are also influential in determining the inflation scenario of an economy.

Reference:

Budha, B.B. (2015). Monetary policy transmission in Nepal. NRB Working Paper No. 29. Nepal Rastrya Bank

Ginting.E. (2007). Is inflation in India attractor of Inflation in Nepal? IMF Working Paper WP/07/269. International Monetary Fund.  

Sapkota, C. (2011). The Source of Food and Non-food Inflation in Nepal. Accessed from: http://sapkotac.blogspot.jp/2011/11/sources-of-food-and-nonfood-inflation.html

Sapkota, C. (2010). Will Nepal’s fiscal budget 2010-2011 increase inflation? Accessed from: http://sapkotac.blogspot.com/2010/12/will-nepals-fiscal-budget-2010-2011.html

Sapkota, C. (2009). Sticky inflation and policy option for Nepal. Accessed from: http://sapkotac.blogspot.com/2009/08/sticky-inflation-and-policy-options-for.html

Sapkota, C. (2016). Budget Blues. The Kathmandu Post. Accessed from: http://kathmandupost.ekantipur.com/news/2016-06-17/budget-blues.html

 

Reccommended read Read

Mankiw, N. (2010). Macroeconomics (7th ed.). New York, NY: Worth.

 

 

 

Nepal: Agriculture development in relevance to Economic Development and Food security

Agriculture can be regarded as major source of capital and labour for modern economic growth, and the strength of agriculture has remained as one of the features of successful development of the Newly Industrialized Countries (NICs) and the Southeast Asian economies (Dowling & Valenzuela, 2004). Lewis-Fei-Ranis (LFR) economic model of structural change regards surplus income earned from agricultural productivity gains as acutely essential for investment in industrial sector in order for a nation to shift from agrarian economy to an industrial one (p.68).

Having said, with more than 75 percent of the total labour force engaged in agriculture and still contributing to about 38 percent of the national Gross Domestic Production (GDP), Nepal, in no doubt can be regarded as an Agrarian economy in route to industrial development (Adhikari, 2014). However, most of the agriculture that occurs in Nepal is still dominated by subsistence farming, and there is a long way before the nation’s agricultural economy is able to support industrial growth.

Despite, in acknowledging Nepal’s Agricultural economy in relation to international trade, Nepal is understood to retain Revealed Comparative Advantage (RCA) in 8 agricultural commodities out of 24 classification enlisted in UN Comtrade database (Nanda, 2012). As Vegetable plaiting material tops the list with highest RCA value, Nepal retains potentiality to develop further comparative Advantage in Fruits and Nuts commodity as well. Technically, RCA is calculated by comparing the trade profile of the country of interest with the world average, whereby the RCA value greater than 1 until infinity indicates export specialization or comparative advantage in that particular commodity or commodity group for the nation (Nanda 2012).

Likewise, in order to trade the Agricultural commodities on which Nepal retains Comparative advantage, Nepal retains highest export complementarity with Pakistan and Sri-Lanka within South-Asian region whereby the Trade Complementarity Index (TCI) results to the value of 36 and 35 respectively (Nanda, 2012). Interestingly, the neighbouring India only scores third in the list with TCI value of 33 (p.16).

Given the fact that Nepal retains highest agricultural export complementarity with third countries over India in South Asia, Nepal’s agricultural trade success with these third countries much depends upon the ease of access of the exported goods to the importing nation via Indian route (i.e., the most feasible gateway for Nepal to conduct international trade). In this matter, the latest successful treaty between India and Nepal to also allow Nepal to use Vishakhapatnam Port (besides for Calcutta Port) to trade with third countries is cherished as a major push in Nepal’s international trade (Kathmandu Post, 2016). Furthermore, numerous customs related intricate issues reserve with India that remains significant in determining Nepal’s success in International trade.

Table 2: Chronological highest export trade complementarities of India and Nepal

Export	Import
Nepal	Pakistan (TCI=36)	Sri-Lanka (TCI=35)	India (TCI=33)
India	Nepal (TCI=56)	Bhutan (TCI=53)	Maldives (TCI=51)

Technically, TCI is calculated by aggregating the absolute value of the difference between the sectoral import shares of one country and the sectoral export shares of the other (Nanda, 2012). Important to note, TCI also includes the trade potential which may not be realized due to distance and other trade barrier (p.15).

After acknowledging Nepal’s agriculture based trade profile in South Asian platform, it is however important to recognize that Nepal suffers from Agricultural trade deficit. Statistics that depict agricultural trade deficit value in Nepal is required. Of all the factors that contribute to Nepal’s Agricultural trade deficit, Supply-side constraint in terms of availability of road infrastructure connecting the farmlands from the ports has been regarded as one of the major culprit of all. As Nanda (2012) himself puts, “In countries like Nepal, traders in Kathmandu might find it difficult to access hinterland farms in Nepal and find it easier to import agricultural goods from India, contributing to agricultural trade deficit (p.27)”.

In regards to it, the then Finance Minister had rightly addressed this issue related to agricultural road in his Budget Speech of FY 2015/2016.  The budget speech at least made a provision to spend Rs.15.25 Billion for the construction of rural and agricultural roads and bridges in order to facilitate the movement of agricultural products from farms to market though it doesn’t specify the exact routes and locations (Ministry of Finance, 2015). However, if whether the provision has been fulfilled is already apparent as we reach near the end of FY 2015/2016. Besides, poor agricultural policies, credit facilities, and primitive farming technology have also been regarded as other internal hindrances for improved trade performance of Nepal in Agricultural sector (Nanda, 2012).

In fact, Primitive agricultural technology is not only hampering trade balance in agriculture sector, but also creating food security issues around the country. It is because most of Nepal lies in Himalayan-Kush region which is understood to be one of the hotspots of climate change (IPCC, 2007). And having said, Primitive agricultural technology in Nepal which is mostly rain-fed (for about 64 pc of the cultivated areas) with limited irrigation facilities, and a significant lack of water conservation and harvesting practices appears to be extremely vulnerable to climate change, thus further surging the threat of food scarcity in most part of the nation where subsistence farming is yet practiced (Adhikari, 2014). Watch this reporting from Kantipur Television Network that addresses the recent production loss in various regions of Nepal caused by ongoing prolonged drought understood to be the resonance of El Nino and Climate change.

https://www.facebook.com/eKantipur/videos/10154562014676754/

Given that, increased agricultural import in midst of decreased domestic agricultural production in food scarce region doesn’t guarantee complete food accessibility in those very areas due to supply channel constraint (Nanda, 2012). And this issue of accessibility is strongly applicable in Northern regions of Nepal where supply infrastructure is in purgatory. In other words, though food imports powered by food aiding agents as Nepal Food Corporation (NFC) (i.e., the National Public Distribution System) may fulfill the “availability”, “affordability”, and “acceptability” aspects of food security criteria, the criterion of “accessibility” long remains in in jeopardy (p.28).

As the knowledge of this phenomenon is not aloof from the government, the Budget speech of FY 2015/2016 had also strongly regarded advancement of irrigational facilities and rural electrification as a major priority to departure from primitive rain-fed agricultural practice in order to enhance agricultural sector and preserve food security. In fact, the proposed provision for development of agricultural sector in terms of advancement in irrigational practice and rural electrification were as follows (Ministry of Finance, 2015):

1. Installation of Irrigation facility in additional 28 thousand 3 hundred hectors of agriculture land.

2. Apportionment of Rs.3.4 billion in Expansion of Medium size irrigation facilities in all districts to increase agriculture production.

3. Installation of seven thousand one hundred units of shallow tube-wells in pocket areas of vegetable farming to commercialize agriculture products.

4. Initiation of feasibility study of inter-basin water transfer projects such as Sunkoshi-Marin Kaligandaki-Tinahu and Thuligadh Kailali as well as reservoir base Kankai and Rapti projects.

5. Apportionment of Rs.2 billion for extension of rural electricity network to all village development committee within coming three years.

Having said, the performance of the concerned body to conduct the mentioned proposal is already judgmental as we reach the end of the FY 2015/2016.

While the surplus obtained from Agricultural economy through trade is recognized as the impetus to initiate the industrial economy, Nepal is not even in the state of fulfilling its own Agricultural demand while remaining as an agrarian economy. In fact, Nepal is yet vulnerable to food crisis in remote regions where plummet in agricultural production cannot be perfectly substituted by increased food imports or food aid. Nepal’s primitive rain-fed agricultural practice is now strongly challenged by climate change and thus the threat of food scarcity is more relevant. All in all, immediate need for advancement in agriculture supportive infrastructure and policy is urgent in order to maintain food security in the present and fuel industrial growth in the future.

References:

Adhikari, J. (2014). Agricultural Adoption Practice in South Asia: Case of Nepal. SAWTEE Working Papers, (01(iii)/14), 1-39. Retrieved April/May, 2016.

Dowling, M., & Valenzuela, R., Ma. (2004). Economic Development in Asia. Singapore: Cengage Learning.

IPCC (2007). The fourth assessment report: Climate change 2007. Synthesis Report. Cambridge: Cambridge University Press

Ministry of Finance (2015). Budget Speech of FY 2015/2016. 1-132. Retrieved April/May, 2016, from http://www.mof.gov.np/

Nanda, N. (2012). Agriculture Trade in South Asia: Barriers and Prospect. SAWTEE Working Papers, (03/12), 1-32. Retrieved April/May, 2016.

Recommended Reads:

Pant, K. P., Dr. (2012). LDC Issues for the operationalisation of the SAARC Food bank. SAWTEE Working Papers, (01/12). Retrieved April/May, 2016.

 

Nepal: The economic side of the Capital Restoration progress after the Earthquake

It is a widespread intuition among general Nepalese Public that the government’s effort towards reconstruction and restoration since the aftermath of April-May earthquake has been scarce and disappointing. Now that it has already been a yearlong since the disaster took hold, government has yet only delivered strategic plans for executing the reconstruction effort leaving the execution effort in limbo. On the flip side, its ramifications in along with sustained alarmingly degraded living standard of the affected people have also been their accumulation of backlash towards the government. And recently, Bibeksheel Nepali’s (a newly organized political party) 15 day public campaign to ironically question the government about its reconstruction effort had been one of the influential medium to amplify their frustration towards the government in a mass manner.

Check their Facebook event section https://www.facebook.com/bibeksheelnepali/events to know more in detail

In the meanwhile, Mr. Chandan Sapkota, a prominent economist of Nepal, acknowledges the inability of the elected Nepal Reconstruction Authority (NRA) to mobilize the allocated $740 Million for reconstruction purpose within a year as one of the major impediment for momentum in restoration progress (Sapkota, 2016). Sapkota highlights multitude of political and bureaucratic muddling for NRAs snail pace efforts that has instead prolonged the disaster related pain among the affected. But most importantly in respect this article, Sapkota also acknowledges the past revision of the FY2016 GDP growth on positive side had the cash disbursement process and execution of reconstruction projects gained momentum. So, while knowing the stake of budget mobilization for reconstruction purpose towards the positive growth of the nation’s GDP, it is worthwhile to explore the relationship between the mobilization/expenditure of the apportioned budget and economic growth of Nepal to gain more intuition about it.

At first and foremost, given the main motive of the budget apportionment to restore the lost physical capital and infrastructure during the earthquake, it is definite that the intention of the budget mobilization is also to restore the estimated slashed economic potentiality (i.e., 1.5% of the expected GDP for 2015) by bringing back the productive stock of capital to at least pre-earthquake level (Sapkota, 2016). While the contribution of productive stock of capital towards economic growth is casually comprehensible in terms of capital returns, this causation relationship is also emphasized by a prominent economic model called Harrod-Domar model (Valenzuela & Dowling, 2004). This model recognizes the relationship between national income/output and stock of capital to be

ΘY (t+1) = (1-δ) K (t) + I (t)

Whereby,

A Nation’s economic growth (Y) in the year following (t+1) is the function of depreciation adjusted gross capital stock ((1-δ) K) in the current year (t) summed up with capital investment (I) made in the current year given a certain capital-output ratio (Θ)

So, by acknowledging prominent economic model that also measures the intensity of positive relationship between economic growth and capital growth in along with presence of influencing variables, the contribution of budget mobilization for capital restoration towards economic progress is well relatable. However, this model though assumes a year long period of time frame (i.e., t+1), its observable impact in our unique condition should at least take more than couple of years. After all, there is a fair degree of timeframe of multiple years for each capital development project to deliver and contribute to the economic growth even if the process of budget mobilization and project development meets competitive time limits. Important to note, for this expressed relationship (i.e., between growth and capital) to take effect, it at least requires each project for capital restoration to be completely delivered before it can contribute to the national economic growth. Therefore, the given causation of restored stock of capital contributing towards regaining of national economic growth appears to be a long-run phenomenon that continues until the productive life of the capital stock.

On the other hand, the kind of positive impact on GDP that happens as soon in next year (i.e., FY2016) through speedy budget mobilization and project initiation should definitely be the short-run kind that occurs as the projects for capital restoration is initiated. The impact is a form of revenue that adds to the national GDP as domestic Government expenditure (i.e., NRA’s reconstruction expenditure) occurs in order to carry out the capital restoration projects. The domestic Government expenditure (i.e., the portion of reconstruction budget that is expended within the nation) made in order to mobilize the local factors of production to build residential and productive stock of capital generates revenues for the very factors of production which ultimately gets added up to the national GDP. The generated revenue (i.e., the exact reflection of the Government’s direct or indirect* domestic expenditure) is always in form of wages and remuneration to Human Resources involved in capital restoration, increased sales to local producers of required Raw-Materials, and other expenditure headings essential to restore every unique capital or physical infrastructure that can be met by local factors. Not to mention, this observed equation of domestic expenditure equalling the domestic revenue is an important property of GDP calculation (Mankiw, 2010).

(Note: the indirect* expenditure includes the domestic transfer payments as $2,000 grant allocated to shelter affected people who are expected to spend it to rebuild their residential shelter.)

In other ways, If NRA’s reconstruction expenditure has to be represented in the expenditure based GDP composition model, then it contributes towards the national GDP by expanding the “G^d” component of the total “C^d + I^d + G^d + X” that makes up the total GDP figure of an economy.

Whereby,

G^d denotes Domestic Government Expenditure

I^d denotes Domestic Investment Expenditure and,

C^d denotes Domestic Consumption

X denotes Export Volume

In acknowledging the long-run and short-run positive contribution towards National GDP in mobilizing the $740 million reconstruction budget, the economic stake in pacing up the reconstruction effort is definitely considerable. In fact, the observed long-run and short-run impact towards National GDP can also be figuratively depicted as a combined approach for a single capital restoration project.

It is important to realize that this discussion only considered the economic side of this overall issue by solely focusing on National income growth from capital restoration perspective. Importantly, GDP of an economy doesn’t alone determine the well-being of the citizen at large (Valenzuela & Dowling 2004). The social-economic cost in terms of poverty rate, living standard, inflation rate and unemployment rate on the affected individuals in event of this destructive earthquake have also been large. It is believed that 2.5%-3.5% of the estimated population size of the nation in 2015 has been pushed down below the poverty line since the great earthquake (Sapkota, 2016). And, given the stake and motive of this government restoration program to heal such socio-economic and environmental cost brought up by the disaster, the vitality and immediate necessity to execute this program is more pronounced

 

References:

Dowling, M., & Valenzuela, R., Ma. (2004). Economic Development in Asia. Singapore: Cengage Learning.

Mankiw, N. (2010). Macroeconomics (7th ed.). New York, NY: Worth.

Sapkota, C. (april 8, 2016). One year since the Great Gorkha Earthquake. Chandan Sapkota’s Blog. Retrieved April 17, 2016, from http://sapkotac.blogspot.com.au/2016/04/one-year-since-great-gorkha-earthquake.html

Further sources:

Watch https://www.youtube.com/watch?v=Nd7AjgO6vAU to know more about what CEO of Nepal Reconstruction Authority (NRA) has to say about the reconstruction progress in a News 24 talk show

Follow stories at 101 East (Al Jazeera) from https://www.facebook.com/101East/?fref=photo (Nepal: After the Earthquake) and watch their documentary at https://www.youtube.com/watch?v=En65cR5gw4g  to learn more about progress after the earthquake.