NEPAL: Implication of Resource Curse ideology in potential Hydro-power based economy

In particular, my inspiration in forging analysis in this matter came along the strange but complex blend of optimistic and pessimistic psychology that hit my head at least for the moment that I could think enough for this paper. Probably, the major assumption for this paper makes a utopian (optimistic) remark as I talk about the situation whereby, our country is in verge to become a Hydro-power based economy, while in the other hand I talk about the implications of resource curse (pessimistic) that may follow such utopian situation. Likewise, I shall also talk about the measures that can be taken to neutralize the side-effects of resource curse (solution to pessimism).

Civil war over resource

In general, the ideology behind the concept of resource curse may contradict with the superficial understanding about economics. After all, resource curse talks about the socio-economic disadvantage in having too much natural resource in a nation. Simply put, it talks about the acute negative effects that generally influence the resource dependent nations (esp. Oil Exporting Countries). Since Nepal also retains a huge hydro-power potentiality, it should be worthwhile to discuss the relevancy of resource curse ideology for our nation in case it chooses to become a hydro-based economy. The relevancy of this ideology of resource curse can be bolstered by the evidence that this particular concept has gained enough attention in international agencies like World Bank, International Monetary Fund (IMF) and United Nations (UN). This just adds the important in discussing this matter, at least in this paper!

As a caveat, the ideologies behind resource curse is not specific or confined but wide and varying. In fact, any disadvantage that a country faces in being resource dependent is a part of this ideology. However, I shall mention some of the most popular facets of this ideology that are highly mentioned in international discussions,

1. Implication of the Dutch disease:

The Dutch disease is a part of ideology of resource curse that infers the side-effect of having other export potential as uncompetitive due to currency appreciation caused by unilaterally exporting too much resource based product. Technically, resource export increases currency value and it can falter the comparative advantage of other potential export due to its dwindling price competitiveness. (Collier, P., 2007) In fact, the problem of being locked in unilateral natural resource export is not felt until it is realized that natural resource retains comparatively more price volatility in compared to other processed exports. (Collier, P., 2007) This sort of price volatility or shocks can arouse high fluctuation in national revenue, thus, causing high amount of socio-economic crisis, public debt defaults and unhealthy fluctuation of economic activity. One can pretty imagine the situation of a nation whose national revenue is uncertain as the price of the oil in the international market.

Factually, this issue is also applicable in Hydro-power sector in the sense that international community (e.g. Canada) prefers to peg hydro-electricity price over oil prices. Sensibly, Nepal has to follow this particular pricing strategy in order to meet the international standard, as it becomes a prominent hydro-power exporter. (Shakya. S, 2007) Therefore, this kind of price shocks shall contain higher ripple effects in the socio-economy of our country, of which governance is left with low expertise in fiscal technique and manipulation,

However at the other side of the story, the state of currency pegging of NRs with IRs would at least enable our economy to delay the implementation of the export diversification interest. Since the foreign exchange of NRs with the third country is totally dependent on IRs or Reserve Bank of India (RBI), there is virtually no correlation between increased export and NRs appreciation. However, it doesn’t release the economy from its duty of export diversification because price volatility is here to stay.

1. Increased Motivation to Corrupt Resource revenue:

Resource revenue dependent government has major control over the national revenue in compared to the tax-dependent government. Since natural resources are under sovereign rights, the revenue obtained from such resource is often contributed to the national government. The ability to control major share of the GDP and national revenue would surely motivate the politicians to take a crooked way up to the power in order to pocket huge amount of government revenue. (Hoeffler, A. & Collier, P., 2007) Besides, the flexibility of hoarding public revenue and expenditure information due to less dependency on public tax would make corruption easier.

Unfortunately, this issue is truer for our nation in which, the government controls the overall hydro-electricity revenue and selling authority through the government monopoly via Nepal Electricity Authority (NEA). Besides, the full control of government over NEA shall miserably enable it to be nontransparent about its annual reports which, vitally accounts the major portion of the national revenue if our nation becomes a Hydro-power driven economy.

However, the effects of this issue is more applicable in oil exporting countries in North Africa and Middle-East that are solely dependent on oil revenue and government for public expenditure in infrastructural and socio-economic development. Instead, Nepal is not totally dependent on Hydro-power and there are already plenty of private involvement potentialities in other economic activities. However, efficient allocation of resource revenue in nation building would at least accelerate the national growth in unprecedented speed and prevent the crook leaders from pocketing huge amount of corrupted resource rents. And for that, privatization and deregulation of the hydro-electricity authority and revenue should be the most promising solution. (McPherson, C., 2003) The paper shall talk about it in brief in later paragraphs.

1. Internal greed and arms struggle:

Generation in huge amount of revenue through extraction or utilization of natural resource has high tendency to breed greed among local mafias to capture the jurisdiction containing such potentiality. This issue has been very true for plenty of oil exporting countries of North Africa (esp. in Nigeria in which the oil exploration field of Niger Delta region faced constant attacks from NDPVF army) and, it can be equally true for developing countries like Nepal with weak military ability and high unemployment rate. Internal arms struggle, civil wars and coups are often the result of revenue boom through resource exports in developing countries. According to Collier and Hoeffler (2002), 23 percent of states dependent on oil exports have experienced civil war in any 5-year period, a figure that dwarfs the 0.55 for countries without natural resources.

Besides, local interest over revenue gained through resource belonging in their regional jurisdiction can eventually disturb the relationship between the locals and the government along with private investors. At least, it is something that is already being sparsely seen in locales under hydro-power exploitation, whereby local demonstration has caused to even halt operation in few of the hydro-power plants. It takes a very participative and effective revenue sharing scheme in order to neutralize the later problem while a strong military concentration to duck the former one.

Fighting Resource cruse:

The most promising measure to tackle Dutch disease is to deploy export diversification as soon as possible. There remains a caveat that, resource rents or revenues are just the initiator that brings momentum in the economic growth of the country and if anything more. It is the responsible of the rent seekers to leverage such revenue for infrastructural and socio-economic development of the country in order to promote export diversification. Export diversification towards non-resource products is important because it promises revenue consistency and increasing return to scale which in fact is not possible otherwise. (Matsuyama, 1992) Specifically, Nepal can diversify its export base in Tourism & Hospitality, agriculture, Information Technology (IT) and lots of other service based industry by utilizing the revenue gained from Hydro-electricity exports. As far as it is acknowledged, Tourism, IT and agriculture are three of the most promising competitive advantage for Nepal as per its socio-economic and geographical consideration (Shakya, S., 2010). Certainly, it takes a considerable private involvement or privatization of the electricity distribution authority in order to effectively route such huge amount of resource rents in the concerned sector through private decisions. After all, market decision of resource utilization if often effective in compared to central planning (Mankiw, G., 2010).

In midst of this, financial institutions and capital markets have a greater role to play as a mediator in order to succeed in this quest of export diversification. Probably, both the sectors need enhancement in order to complement the size and complexity of capital movement that we are talking about.

Besides, privatization also plays an important in order to prevent corruption in resource rents and promote revenue and expenditure transparency in public. Though it might sound impractical for the current state of our government to sacrifice such authority, it is at least to be recognized that privatization in hydro-power is relatively more easier in compared to the Oil resource which is explained as “commanding heights” by Lenin and understood as commodity of strategic importance by realist world (Yergin and Stanislaw, 1998).

Privatization in hydro-power sector in the upstream process of production has been satisfyingly done till now. There are various hydro-power plants that are effectively owned and ran by private investor. Out of all, Bhotekoshi power plant must be the most exemplary one (Shakya, S., 2010).  However, the vital downstream phase of distribution is still totally under the monopoly control of government through the public enterprise called NEA. As far it is understood, NEA is one of the most inefficient public enterprises (possibly through lack of competition and responsibility towards shareholders) that have miserably hindered the development of the hydro-power sector of Nepal in large. Certainly, the privatization of NEA through private equity participation can effectively make this enterprise more transparent in its management. Besides, enhancement of private participation by enabling the establishment of private electricity distribution companies can make the overall revenue utilization program more effective.

Likewise, hedging could have been one of the foremost options to insulate from electricity price fluctuation in order prevent its spill-over effect in national revenue. However, hydro-electricity has not effectively identified itself in the international future market enough to practice it in the volume that we are currently talking about, i.e. 23,000MW (approx.). In fact, Oil resource has successfully participated in international future market and lots of OECs are practicing it in order minimize their fiscal volatility. Seems like Hydro-power is more vulnerable to resource curse in compared to Oil resource! Therefore, export diversification is a must and urgent.

Importantly, the most visible issue regarding local and regional interest in resource revenue needs to be duly satisfied through effective revenue assignment decisions. Enough remuneration to cover for regional cost (in terms of environment degradation, infrastructure deterioration and lifestyle adjustment) due to resource exploration should be provided to the local or regional body. (McClure, E. C., 2003) However, revenue assignment should also be enough to account for socio-economic development of the region like road and bridge improvement, school and hospital construction etc. Besides, local equity participation in the power plant as a part of remuneration has been successfully implemented in couple of hydro-power plants (e.g. Chileme Hydropower plant).  And for tackling the military interest of illegal armed force to seize the resource power, probably the deployment of national security (army) in any other issue wouldn’t be so much contributing to national economic benefit as in this. At least, it is proved by the positive results in deployment of peace-keeping soldiers in African territories containing oil resource.

Furthermore, Individuals and institutions (belonging to both private and government) should effectively welcome international support and consultation in order take assistance in implementing key elements of the program like Capital market development, Procedure for Privatization of electricity distribution authority, Policy development for revenue utilization & assignment and lot other fiscal measures and policy. For instance, Consultation from countries like Canada and Bolivia that have been successful in Hydro-power sector can be effectively received in order to generate smoothness in the overall process. Besides, Budget support aids and other financial aids are virtually ineffective, if not harmful for resource-rich countries. Instead, technical assistance and aids for capacity building should be more sensible. (Collier, P.)

Since Hydro-power is the most promising option/catalyst to initiate the momentum of national growth, it would be reasonable to be serious about generation of such revenue in a careful manner for the socio-economic development of the country. It is understood that Nepal retains 55,000+MW of hydro-power potentiality of which 43,000MW is economically feasible (Shrestha,M.R., 2008) . Probably, these numbers effectively weigh the value of this kind of discussions!

References:

• Collier, P. (2007). Bottom Billion: Why the Poorest country are failing at what can be done about it? Oxford University Press
• Davis, J.M. (2003). Fiscal policy formulation and implementation in Oil producing countries.
• Torodo. S (2007). Fiscal system for hydrocarbons: Designing Issues. Washington DC: World Bank Publications. DOI: 10.1596/978-0-8213-7266-1
• Oyefusi, A. (2007). Oil Dependence and Civil Conflict in Nigeria,
• Shakya. S. (2010). Unleashing Nepal. Patna: Penguin Publication.
• McPherson. C. National Oil Companies: Evolution, Issues, Outlook       
• McLure, C. E. the Assignment of Oil Tax Revenue

 

 

Stumble upon: Failing judiciary, Ailing democracy

In contemporary times, democracy is particularly understood as the motivator of socio-economic growth of any nation. The end of 20^th century followed the boom of democracy in various underdeveloped nations in Africa, South-America and Asia. However, democracy has not been as promising as expected, in term of its contribution to the national growth. Instead, the transition towards the pseudo-democratic government brought a plethora of corruption culture in the developing economies of the world.

Obviously, democracy in general, is not the sure ticket to the national socio-economic betterment of any country. In order to retrieve the most out of a democratic structure, a nation should incorporate the perfect balance of electoral competition and restraints in its ingredient of democracy in order to embark the system of check and balance. (Collier, 2007)

In compared to other democratic under-developed nations (politically referred as developing nations) of the world, Nepal has secured better democracy in terms of number of electoral competitions performed and the perceived amount of public restraints through free media. Although, there still lays a considerable disagreement regarding the degree of press freedom in Nepal, it is logical to assume that Nepal retains enough public restraints in basis to the degree of information freedom to theoretically prevent the kind of corruption and political patronage that is already existent in the country. Certainly, the qualitative judgment over the state of press freedom of Nepal would not comply with the country’s miserable score of mere 2.2 out of 10 in government transparency. (Transparency International, 2012, Corruption perception Index) However, it is until and unless we ignore the other important variable regarding the enforcement of judiciary and laws. Certainly, the country is visibly wounded in its faction of judiciary and law enforcement in the sense that, the country is still deprived of permanent constitution and proper laws enforcement against corruption. Furthermore, higher chances for corruption accused government personnel to escape the legitimate judiciary decision through bribery have always questioned the strength of law enforcement in Nepal. Ironically, Nepalese Media has often been successful in flashing out such unlawful acts while government is often unable to reconcile the publicized mistakes. Probably, the blend of stronger public media and weaker law enforcement has been the activator of dwindling trust in government by Nepalese citizen.

Likewise, it is convincing for newly democratic nations with abundant easy money natural resource like oil and diamond to fall into the prey of corruption. (Collier, 2007) The possibility to pocket big money through resource export revenues, in a short span of power tenure and the freedom from the obligation to be transparent in the government budget due to the lack of reliance on public tax, is politically understandable in resource abundant developing nations.  In fact, it was the most logical reason for newly democratic Nigerian government to fall into the state of massive corruption. (Aderoju Oyefusi, 2007) Unlike Nigeria and other resource abundant developing countries, Nepal is a tax dependent country and the geo-economy of Nepal doesn’t enable the potentiality for the corrupt government to pocket big money from the existent natural resource. Therefore, there exists a dilemma regarding the source of motivation for the current scale of corruption and political patronage even with relatively low potentiality of earning corrupt money and the high responsibility of the government to be transparent through restraints factors like Tax dependency and Media strength.

In regard to this, it is logical to argue that, the loose state of judiciary and law enforcement in the country has made it feasible for the government to practice corruption even for relatively small bucks in a relatively high restraint environment.

In acknowledgement to the illegal routing from national Inland Revenue, public enterprises and other sources, considerable motivation towards corruption incentive can be attributed to the historical mal-behavior of Nepalese citizen to bribe public administration and the easy-to-misuse foreign aids. (Sujeev Shakya, 2010)

Nepalese Public alike to everyone else in the world seems to be under the false conception that democracy is the sure ticket to ditch poverty and stagnancy. However, democracy in its purest form also needs to incorporate ample amount of checks and balance in order to route its advantage towards national progress. Unfortunately, the structure of Nepalese democracy seems to lack this particular component due to the prevalence of inefficient judiciary and law enforcement.

Note: Media Freedom is understood be the restraint factor with the heaviest weight. (Collier, P., 2007)

Research Recommendation:

• Identifying the numerical factor regarding Press freedom and its regression analysis against corruption incentive.

• Identifying the numerical factor regarding judicial strength and its regression analysis against corruption analysis.

• Identifying the numerical factor regarding dependency of the nation over precious resource and its regression analysis to boost corruption incentive.

References:

1. Collier, P. (2007), Bottom Billion: Why the Poorest Countries are failing and what can be done about it. Oxford university press

2. Shakya, S. (2010), Unleashing Nepal.

3. Aderoju Oyefusi (2007), Oil-dependence and Civil conflict in Nigeria

 

The Currency call: Implication of NRs devaluation from the historical currency pegging

It’s been a more than a half century that the Nepalese currency (NRs) has been pegged over Indian Currency (INR) in the ratio of 1:1.6. It is believed that the governments of the two countries have decided to implicate a fixed exchange ratio in order to insulate the trade activity from the possible exchange rate risk. Historically, Nepal has a voluminous amount of trade stakes with India and vice-versa. Therefore, initiation of such currency pegging was sought essential for sound and certain trading activity.

With the initiation of such currency strategy, much of the monetary measures of the country have been delegated to India. Therefore, the exchange rate of the NRs against other third countries is dependent upon the currency performance and the monetary measures of the Reserve Bank of India (RBI). Since economic factors like International trade, foreign and domestic Investments and consumptions are highly influenced by the currency strategy of the Central Bank, we have certainly put the higher stakes of our economic variables over RBI. However, it is not something to be taken from a completely negative outlook as a unique domination by India over Nepal. In fact, there are certain advantages of such program regarding the minimization of currency risk. No wonder, numerous countries are pegged to USD due to its relative currency strength.

In regards, this particular currency program has certainly brought an unpopular debate amongst the economic intellectuals in Nepal over if could be better for Nepal to have a completely independent monetary policy. Certainly, the bureaucrats do not retain enough stomach to completely free the NRs from its neighborhood guardian during the dire times as of now. However, there remains a stronger rumor that the Rastrya Bank is willing to revisit the uniform exchange rate of 1:1.6 ratios in a downward order, i.e. devaluation. And the considerable possibility of this so-called rumor really encouraged me to think through the implication of such sort of Nepalese rupee devaluation in nation’s macro-economy.

 In general, currency devaluation has its own pros and cons and its pronouncement depends upon the economic taxonomy of each country. Export-oriented countries like China and Japan depends on relatively weak currency in order sustain their cheap exports while the consumption driven countries like America depends on strong dollar to sustain the Purchasing power of its citizen. Since, these countries choose their currency strength by monetary measures through their respective central bank or as a decision of the market forces, it is a little different in compared to the speculated revisiting of fixed exchange ratio between India and Nepal. However, the consequences as mentioned above are virtually the same. Therefore, the job to be done is to analyze the implication of the pros and the cons of currency devaluation on basis to the taxonomy of our economy.

Unfortunately, Nepalese economy is a rare species with a consumption driven economy without enough production base to support it. In other words, Nepal is a net-importing country with the historically large trade deficit. The Nepalese export volume stands dwarfed against its Import volume (especially from India). Therefore, the cons side of currency devaluation applies more than the pros side in regards to such scenario. Since Nepal highly depends on India and third-party countries for basic requirements like food, utilities and energy, the NRs devaluation can actually send the country into hyperinflation. Actually, the principle that works here is that, higher does the import volume outweigh the export volume in the trade portfolio; the more there shall be the implication of cons rather than the pros of currency devaluation. And relatively, the highly import driven economy of our country will have to sustain excessive rise in the trade deficit enough to bankrupt the nation in the short period of time (at least with the rate of currency devaluation which is as high as 25%).

One can blindly argue that currency devaluation could in fact help Nepal to boost its exports by gaining more global comparative advantage in the industry of agriculture, tourism and alternative energy of hydro-electricity. Or s/he can also argue upon the cheaper labor that can attract more outsourcing business and even Foreign Investments. Sure, it is a truth that currency devaluation can boost exports as it is what has been proven by the economic miracle in China. But the problem is that, Nepal already retains comparative advantage in the above mentioned evidences. And, furthering currency devaluation cannot make this fact truer. In a sense, monetary measures of this kind create export advantage but, it is the job of the real economic growth to grab such advantages. In fact, the tarnished productivity rate and the stagnant real economic growth of the country due to bleaker political scenario and acute power shortage is not going to help the nation achieve the comparative advantages even with the currency devaluation.

Bankers argue that currency devaluation could always boost our remittances based economy that has been sustaining our consumption led economy, thus balancing our current account. But have they forgotten that they played the major part in the housing bubble? There are statistical evidence to prove that our nation had retained enough remittances inflow before in order to change the face of the country if, most of it was routed to the production rather than consumption. Therefore, same principle applies here as well, i.e. higher remittances shall not make things any better.

It is logical enough to argue that, revisiting the fixed change ratio in order to devaluate the NRs may not be the right decision to be taken in the current situation where our nation is still consumption led. Instead, our nation needs to fully exploit the present comparative advantage before it would take such monetary measures to invent more comparative advantage to boost the national export. And certainly, the only the way to do so is to boost the national productivity and economic growth through the introduction of sound socio-political scenario and liberal economic policies.

 

Shifting Gears: US tends to fill the gap for possible oil supply slack due to Iranian Embargo

Recently, i have been finding some sort of connection between this two series of news stories regarding global oil energy that i had been following since its inception. One updated about the ongoing US-Iran crisis thus, creating a severe influence in global crude oil supplies while another talked about the US as a potential state for crude oil supplies. Interestingly, I haven’t heard of any analysis through popular Medias like CNN and CNBC that linked this two developing stories.  Therefore I thought if I could just fill the vacuum by expressing my analysis that contemplates both of these issues through my relatively unpopular blog. As through my analysis, I think the world could be shifting a considerable portion of their crude-oil supply hub from Middle-east to North America even for a shorter duration of time.

As most of us should know, the ongoing US-Iran tension regarding Iranian nuclear trials has now forced the other developed nations to pull their hands off the Iranian Oil imports. European Union (EU) and Developed Asia, i.e. China and Japan has started to lean against Iran (the second largest oil supplies of Iran) for their petroleum Imports. Whereas at the other end, US has been surprisingly declared as a net oil exporter last month after 60 years of its time being. Analyst assumes that such situation occurred due to the slack in domestic oil consumption caused by the relatively weak economy in 2011. In either way, the surplus oil is heading offshore as net US oil exports. Metaphorically, the cupid mechanism of world economy could lead the demand hungry oil importing nations to affair with US oil exports after their break-up from the Iranian export. In addition, this relationship could last long, as analysts predict the US net-export status for as long as 10 years. All in all, a major portion of the total share of Middle-eastern oil exports (esp. of Iran) could actually be shifting to United States though may be for a shorter period of time.

Well, my train of thoughts wouldn’t let me limit my analysis till this aspect. With due consideration, there are various possible major consequences that can occur due to such transition in oil geo-politics. In case US establishes itself as a rising hub for petroleum source as being predicted by giant European Oil companies like Total, Repsol and BP which has recently started to be invest in US oil fields, we could actually see some discipline in this Oil export industry. Existence of such situation even for a couple of years may threaten the OPEC cartel regarding the uprising free competition in Oil exports and the declining state of their monopolistic power. This could vow the need for a co-operative attitude among the OPEC cartel thus creating the sense of certainty in global oil supplies. However, the theory of comparative advantage wouldn’t allow US to concentrate in Oil exporting business in a larger scale, Therefore, it is unlikely that US would stand as a major hub for oil supplies for a longer term. In fact, it is until that the domestic demand surges till the level that the domestic oil production is insufficient to satisfy the rising industrial production. Actually, becoming an oil exporting nation is never in the best interest of US as it signifies the weakening production and economy of the country.

All in all, a highly developed nation like United States wouldn’t want to stand-up as a major exporter of raw resources like crude-oil or semi-processed oil for a long run. Though North America and various other continents except for Middle-East do contribute in global oil export, Middle-East is hoped to be the major hub for global oil supplies in the longest run. After all, the theory of comparative advantage persists.

 

NEA woes: Inefficient Monopoly in National electricity distribution

This time, it’s better to start with a now mythical adage that states as, “Nepal has the Hydro-electric potential to lighten up most of the South-Asia even after it would fully satisfy the domestic demand’. This very saying used to be anything that would inspire the Nepali citizen to keep dreaming about the days of prosperity and wealth. But today, after decades of waiting and experiencing the hardship of uncertainty and hunger, Nepali citizen find it as a hollow truth that was mercilessly turned into a fabricated lie by the leading members, ( And it includes more than just government). Cutting out the literature, it can be well said that there are numerous factors that has been impeding the growth of this infrastructure. Even a dictionary sized book would still be not enough to include all of the causes for this ongoing Hydro-power deficiency syndrome of Nepal. Therefore, I would specifically want to discuss over a part of the hydro-electricity distribution process that should be amended in order to improve the growth trend of this vital industry.

The concern remains over the fact that Nepal Electricity Authority (NEA) remains as a monopoly power trader and distribution agency of hydro-electricity. This godly privilege of non-competition for this government-run enterprise has actually spoiled its work-ethic as would of a child who is highly pampered by his/her parents. Since it is not about a child’s life, but about the future of the national economy at large, Nepalese Governments were stupidly brave enough to experiment the well-predicted dreadful consequence of an economically flawed law of creating government monopoly. While Independent Power Producers groan over the unacceptable low electricity pricing during the Power Purchase Agreement (PPA), the final consumers instead rages over the unacceptable high electricity pricing by the NEA. With all this, one should really wonder the vast amount of inefficiency drilled inside the working process of this government monolith due to the prevailing corruption and personal greed.

I had recently interviewed the chairperson of Energy Engineering Pvt. Ltd, which owns a power plant at Rasuwa district and he laments upon the stringent attitude of NEA to pay minimum price of Rs 4 per watt purchased, coupled with its unwillingness to review the price agreement at least in every four years interval. Besides, the back-breaking procedure of obtaining power production license from the Department of Electricity (DOE), forces the producers to make the purchase contract with the NEA even at a minimum price but ASAP. Unfortunately, the scheduled time of 4-5 years for a power plant to come into full-fledged production effectively obsoletes the pre-fixed price (but not re-negotiable) locked during the PPA due to the containing double digit inflation rate. All in all, the ever growing inflation coupled with the never growing power price mercilessly sends anything like ROI of the independent producer’s into dust. No wonder, people don’t think twice before they ignore to make direct investments in Hydro-power. Adding to the sorrow, banks know it and they wouldn’t want to risk their funds in hydro-power if they aren’t making anything as high as 16-20% of interest rates in their loans to this infrastructure. Relatively, the underlying unfriendly loaning policy of the commercial banks in charging such interest rates forced the Independent Power Producers Association to propose a fund that loans hydro-power based projects with subsidized interest rates of around 10% or less. This decision in turn drags this hydro-power industry towards the inefficiencies of subsidization that vividly violates the concept of free market. In general, the susceptible political will of the DOE and the unfair exploitation of monopolistic power by NEA are the major reason of this ongoing inefficiency in the supply-chain system of electricity production and distribution process

Well, I wouldn’t specifically blame NEA or the government. In fact, it’s the mechanism that stands as culprit. There is this well encrypted law of economics which states that, central planning replaces market with politics which wastes resources and retards economic progress.(Common sense Economics; James Gwartney, Richard L. Stroup and Dwight R. Lee) In other words, the intervention by the government to stifle the freely competing market through the creation of state monopoly creates inefficiency in the overall process. Free market is such a wonderful mechanism whereby the uncompetitive competitors are vanished by the competitive one, thus creating the vibe of efficiency in the overall industry. Sadly, free competition doesn’t exist in the state electricity distribution process and therefore, there remains no room for highly inefficient enterprises like NEA to be replaced by other private competitive power trading enterprises. Instead, expanding loss has become another reason for the NEA to request more budget for which the government has no other option than to comply. Well, it’s the general economic sense that applies here about which everyone should know, except for the government that pretends to be unknown.

Though it’s been two decades that Nepal officially launched Constitutional democracy, the control by the government over the total national energy through two mammoth but inefficient government enterprises, i.e. Nepal Oil Corporation (NOC) and Nepal Electricity Authority (NEA) should effectively mean that Nepali citizen is fully under the blessing of the so-called democratic government. The scarcity of fuel combined with the unavailability of electricity has sent the industrial development of the county into ashes. Surely, government should know the golden advantages of breaking the state of monopoly over such kind of strategic resources. But their preference of self-serving political will against the national economic will shall rather place such ideologies down six feet under.

 

The lost opportunity: Foreign Remittance

Indian currency and Middle-eastern currencies, being the most popular incoming foreign currencies in Nepal

Like it or not, foreign remittances can now be considered as one of the fundamental carrier of economic development for Nepal. Though the prevalence of this culture existed from the times of Rana regime when the Gurkha Armies were first sent to India to aid East-India Company, foreign employment actually surged in the later days when Middle-eastern countries invited foreigners for labor works after their rapid expansion of crude-oil exploration program. Besides, the ongoing political crisis in the country coupled with the developing anti-government sentiments amongst the people bolstered their decision to go abroad to Middle-eastern countries for employment activities. Initially, India was the major hub for foreign employment for Low-income group Nepali, due to the ease of finding a labor-class job that actually paid more earning than working in the farms, back home. In fact, this employment culture was strong enough to penetrate the socio-economic lifestyle of classical Nepal. However, the unexpected surge in foreign employment to Middle-eastern countries during the times of Maoist insurgency boosted by the decision of the government to decentralize the passport distribution process influenced this situation of foreign employment as a national issue. Subsequently, when foreign remittances grabbed 20% of the total share of national GDP in 2008, thus declaring Nepal as the 14^th nation with largest dependency of foreign remittances in national GDP, it was to be understood that foreign remittance is now, officially the back-bone of national economic development thus replacing other potential economic activities like agriculture and tourism.

Though the blue-collar based labor export and the minimum per person foreign earning would never uplift the national economy in a direct sense, it could always be the catalyst for development in case, the remitted money were effectively channeled to investment in productive sectors. Unfortunately, due to lack of broader mentality of the general people coupled with the inability of the government to create such incentives, the money that arrived as foreign remittances hardly landed in productive purposes. Instead, the remitted money was fed into the real-estate bubble and lavish foreign product consumption that had little if any contribution to national economic development.  In fact, foreign remittance is understood as the major culprit behind the ongoing real-estate bubble, due to its contribution in creating a sudden hike in real-estate demand thus shooting its price artificially, at its highest level. Moreover, any foreign earned money that entered the bank deposit was again re-invested in property and apartments & housings that would further add to the fire of real-estate bubble. This overall scenario concluded the economic sense, which instilled such hike in foreign remittance money as a destructor rather than constructor of already stagnant national economy. Today, the government has to face the extra-pain of managing the real-estate bubble that could actually default many financial institutions and ultimately push the country into recession in case the bubble finally busts.

Instead in most effective cases, such remittance had to be routed to infrastructural development and sustainable economic activities like tourism & hospitality, hydro-electricity production and commercial agriculture, thus acting as an agent of positive economic movement. In fact, it was only through this principle that it was found reasonable to support such occurrence of cheap labor export from economic perspective. In otherwise, such sort of economic activity was never a sustainable comparative advantage for the nation at large. Although admiringly, the investment of foreign remittance in real-estate did brew some growth in construction industry that actually supported employment growth and production till some extent, it was more taken as a rare found positive by-product of the already flawed economic mechanism. Let’s say, the negative consequences were effectively suppressing the positive ones.

Even today at the dawn of 2012, foreign remittances still sees an upward trend. The long queue at the Ministry of Foreign Affairs for passport application still persists. Any time cannot be the perfect time to rectify this situation, when the government has recently appointed the newborn institution, Nepal Investment Board (NIB) as a means to bolster effective investment results in this year that carries the flagship of Investment Year 2012. Anyone with a moderate economic sense can admit foreign remittances as the biggest source of infrastructural investment and development. Therefore, out of the many tasks that this board is liable for, suggesting effective policies and regulations to channelize the hard-earned foreign income into productive investments in never to be ignored.

 

The necessity of practicing credit rating system for establishing Foreign investment

Nepal technically adopted the free market policy when it broke through the Panchayat system and entered the era of multi-party democracy after the success of Jana anolon I in 1990. Though it has been more than two decades that Nepal became democratic and free from central ruling, Nepalese couldn’t see the brighter side of socio-economic development that should have followed the dawn of democracy. The frequent politicization of the facets of economic development by the government and the frequent lobbying of the already established privates to harass free competition led to the system that was completely infected by corruption. In fact, it was the biggest reason for Nepal in failing to attract foreign Investment and domestic entrepreneurship, which are highly pronounced as the catalyst of development after vividly visualizing the development history of Newly Industrialized nations (NIC) like South-Korea, China and Brazil.

However today, Nepal walks through the never ending highway of constitution building with constant interruption from the zombies of socio-economic and political crisis, which can also be dated back to the founding history of the country during the times of Rana regime. Though free market couldn’t foster in our nation even after the inception of democracy, the free-flow of international donation constantly grew in the respected time being for about  3000% in a matter of 40 years from 1960 to 2002. (Unleashing Nepal, Sujeev Shakya) Nepal remained unfit for free foreign investment in the past due to its central planned government while today, it couldn’t secure foreign investment due to its unplanned government. Alas, Nepal was only suitable for foreign grants because risk aversion was rarely in the underlying criteria of such donations. However, the tenure of more than 60 years has proven that the flow of international-aid was actually not the savior of Nepalese socio-economic development, instead it is the flow of international trade that would promote the socio-economic development of the country which, Nepal failed to tap into despite the prevailing opportunity.

Since now that Nepal is re-carving its constitution all from the start, there are lots of policy reforms that this country should undergo in order to succeed in its conquest of fetching global market and foreign investment.

Basically, development of the policies that compliments the mechanism and style adopted by the international community is very essential for Nepal to enter the global community. Out of many necessary reforms that complies with being in international practice, establishing the system of credit rating over various big enterprises and even the nation itself by internationally recognized agencies like Standard and Poor (S&P) seems like an formidable necessity. While the act of credit rating is recognized as threatening in current world economic scenario (the constant threat of mass downgrade in euro-zone), I identified it as a necessity for Nepal’s journey to enter international market. In general, initiating such credit rating makes the country more transparent to the world at large so that the international investors can access the necessary information to order to make valid investment analysis and decisions accordingly. Interestingly, it applies to domestic investors as well. After all, wouldn’t you prefer enough information regarding risk structure in order to make proper investment analysis? In fact, interventions by such credit rating agencies in investable enterprises can be the better way to create such investment friendly situation. It is often understood that lack of required credit information has been the main hindrance behind unwillingness of foreign players as well as domestic players to invest in bigger infrastructural projects like hydro-electricity power plant construction. Moreover, if the private commercial banks of Nepal start getting rated by international agencies then probably it could retrieve a lot of foreign interest thus strengthening their ability to fund bigger projects that could bolster the national economy. All in all, the establishment of credit rating system under the affiliation of renowned agencies can actually help Nepal bolster its infrastructural development process.

The credit rating principle works in the system that higher the credit worthiness of a certain enterprise, higher is its credit rating. For instance, S&P rates AAA and AA+ for institutions which it perceives as having stronger credit profile whereas for the ones it perceives as having weaker credit profile it provides lower ratings like CCC and CC. No doubt, market becomes more able to acutely valuate the bonds and stocks of the institutions that expose its risk structure through mechanism like credit ratings.

In general, credit ratings have a strong say in the bond market. The bond prices and interest rate decisions of the bonds issued by various government and enterprises in international community are especially decided by their respective credit ratings. The mechanism work in the principle that lower the credit rating of an institution, higher is its risk of default and more should the investors expect of return from investing in such institution while vice-versa also applies. For instance, if the market expects 7.5% of the interest rate in the bond issued by a public utility company with AA- ratings then, the bond issued by comparatively lower rated institution should provide more than 7.5% of interest rate. Factually, Nepalese bond market is at its infancy and such internationally recognized market principles don’t work here, mainly due to the lack of such rating information. However, proper development of bond and equity market is very essential for infrastructural development of Nepal, because of its financial reliance on such investment. One should realize that Nepal is in its stage of infrastructure reconstruction after the huge loss of such assets caused during the decade long Maoist insurgency. Therefore, this should be the perfect time for the nation to accept such credit rating system in order to boost the infrastructural growth.

Nepal needs to undergo a whole lot of policy reforms in order to coincide with the international interests building. Encapsulation of such credit-rating system is a tiny fraction of reforms and practices that this nation should follow in order to commingle its economy with the global community for the sustainable development in the future. There is a reason to believe that, this particular reform should be a vital agenda in this year of 2012 that carries the flagship of Investment Year.

 

The Geo-political issues regarding Global Oil reserve

Statistics to represent the major concentration of oil reserves in Middle-East

It is of course threatening to know that most of the global crude oil sources that the world depends upon locate in the countries infected by political turmoil. It is a common knowledge that crude oil is the most consumed energy resource in aldmost every part of the world. More than 80% of industries and house-hold depend upon oil to fulfill their critical requirements. It’s hard to imagine the sustainability of life without the supply of such petroleum products. Since, alternative energies like Solar and Hydro are still in their infancy, crude oil yet remain the widest source of energy in the world.

Geographically, Middle-East & North African countries, i.e. Iran, Iraq, Libya, Egypt, Nigeria, Kuwait, Qatar, Saudi-Arabia etc. remains the largest hub for crude oil resource. With this regard, the governments of oil supplying countries of Middle-East and North Africa had formed a coalition of Organization of Petrol Exporting Countries (OPEC) in 1961 in order to create a monopolistic environment in global oil supplies. This organization enabled the OPEC members to control the global oil prices as per their interest through supply volume manipulation. In fact, the formation of OPEC group has always been disadvantageous for Oil importing countries like America and Europe. However, it did not prove to be as hazardous for the international community as analyst had speculated back then. But unfortunately, the frequent uprising of Geo-political issue of Oil Exporting countries has always created instability in the global Crude Oil supplies. Any layperson with a good grasp of contemporary international political issue is aware to the fact that most of the political heats often generate from countries in Middle-East and North Africa. The recent activities regarding mass civil demonstration in Egypt & Syria, the bombing in Nigeria and the ongoing threat of Iran to sanction Strait of Hormuz, a critical waterway for transporting almost 20% of global oil supply, has been consuming most of the International broadcast and in turn retains a direct effect in oil supplies and its price (obviously pushing it to the north). The decade long political turmoil in Oil Exporting Countries of Middle East and North Africa dated as back as 1980s (during Iran-Iraq war), has always been creating uncertainty in global Oil supply since then. Though, Oil remains as the most important resource in the world due to its critical influence in global sustainability, it must be the most vulnerable resource that trades in global economy. Therefore, the fate of the world had always been threatening from the very beginning but we haven’t kept much concern to it in a local basis

Effect of Middle-east Geo-political issue in Oil price behavior:

Since most of the crude oil is consumed by super economic nations like America (consuming 18Million bbl/day approx.), China (consuming 8 million bbl/day approx.) , Japan (consuming 4 million bbl/day approx.) and Europe depend on crude oil, the scope of tension of fluctuating oil prices infects the global economy at large. Besides, the uncertainty in fuel prices has spillover effect in global production costs, because fuel always retains the major portion of raw-material cost for global production community. Therefore, the fluctuating oil prices due to geo-political issues have every right to create uncertainty in production cost at the global scale. However, the ever growing international intellectuality has generated an artificial economic system that could minimize this problem. In short, the inclusion of Oil resource in future market has potentiality in creating certainty in fuel cost for global production community. Probably, the creation of this investment vehicle must be a golden achievement in international economics.

It is necessary to understand the mechanism of Oil futures or future market at large in order to know about its positive effects in global production. In general, Oil futures allow production houses to make a future contract to purchase certain amount of fuel at an estimated price at some time in future. This ability to purchase fuel at a pre-locked price (disregard to its actual price in future) in future enables the production community to accurately estimate the overall production costs (certris paribus) and therefore assures the demand quantity and the final price of the finished products that they produce.

Effect of Middle-East Geo-political issue in Global Sustainability:

Though inclusion of fuel commodity in future markets does cushion the spillover effect of petroleum price fluctuation, the supply section uncertainty still remains vulnerable. Common warfare at Middle-east often drops the supply volume of fuel to the global community thus infecting its availability. Since, global consumption community is hardly privileged with alternative energies for critical necessities like heating and defense, the

uncertainty in fuel supplies due to geo-political crisis in petrol exporting countries has still remained an alarming global threat. Reactively, international intelligence has had deep concern for this issue and had frequently sought for the development of Alternative source of energy like Hydro, solar and Nuclear to replace the need of crude oil. Besides, various petroleum exploration projects has been undertaken in North American geography in order to create cushions during extreme supply cut down from Eastern suppliers. Recently, there is an ongoing debate in US government to allow the construction of Keystone Oil pipeline that transmits sand Oil from Canada to America.

However, the natural geography still makes Middle-east and North-Africa (producing 30 billion bbl/day approx.) as the major hub of global oil reserves, thus it always has a critical influence over the Global sustainability.

 

Cash flow: The life-blood of venture management

The adequate availability of cash remains vital to run every fundamental operation of the business. Specifically, the cash-tight situation of the growing venture makes cash-flow management a crucial task for them. In fact, improper cash-flow management can even force a business to the state of bankruptcy. Basically, every business experiences some sort of cash-flow cycle that complements the business process of purchasing raw material to selling the finished product. And the cash that the business receives from collecting the receivable of the sold goods is deployed in running the day to day business activity and funding the business growth. In order to understand the linkage of the state of cash-flow cycle to the overall business operation and manage it accordingly, making due consideration of cash flow trend of the business has been identified as a vital activity for managers.

At first, timely due consideration in the cash-flow trend helps the managers to make strategic financial decision. It helps the manager to determine if the business can fund its sustainability and growth through its internally generated cash or it may need external finances. Having a proper grasp of the cash-flow knowledge of the business enables the managers to make acute cash-flow projections and financing decisions accordingly. In fact, improper financial decisions has led many business to undertake costly external finances when funding could have been adequate from internally generated cash. Moreover, a management team with a proper knowledge of cash-flow trends is more liable of succeeding external finances. Financial institutions often want to learn about the amount of control that the prospective business have over its cash-flow trends. After all, it determines the accuracy of the management team in making strategic growth decisions and sustainability at large. Actually, a management with a good grasp of cash-flow knowledge can make effective decisions regarding growth plans, financing plans, credit policies, operation control & austerities and lot more of it which are essential for the proper health of the business. Importantly, a management with proper cash-flow management ability has the greatest skill of keeping the business liquid and floating.

Alike to it, cash-flow knowledge also helps managers to maintain smooth day-to-day operations of the business. Payments for raw-material supplies and fundamental expenses regarding stationeries, vehicle & rent expenses, wages and lot more relies on proper cash balance and which in turn in dependent on proper cash-flow cycle. All in all, it can only be achieved by the business that properly tracks the cash-flow trends and makes timely interventions. Besides, smooth running of day-to-day business operation has a major share in determining the overall effectiveness of the business. Metaphorically, it’s a tissue that determines the health of the overall organ.

Specifically, a healthy relationship with the suppliers is very crucial in order to retain in the competitive edge of the business. As we all should know, proper relationship with the supply-chain units is crucial for a business to perform over par. In fact, it enables the business to enrich the benefit of the activate synergy in the supply-chain system. Relatively, timely payment to the suppliers for their supplies is very essential to maintain friendlier relationship with the suppliers. Moreover, suppliers preferably rate their customers in basis to their compliance with their credit policy. Therefore, having enough cash to pay the suppliers before the credit duration is a key to proper supplier relation. And again, proper cash-flow control plays as an enabler here. More to mention, having proper relations enable the business to make exclusive deals with the suppliers, that could found as an added competitive edge for it. After all, accumulating competitive advantages is the ticket to success for businesses in the contemporary times.

Certainly, cash flow is more like the flow of blood that activates the vital organs in order to run the overall system. Therefore, it is very crucial to a business to have a thorough consideration of their cash-flow status and make timely intervention. Basically, the due consideration of cash-flow starts with the cash cycle that represents the process from payment to suppliers to receiving from the customers. In fact, a management that can master this cash-flow cycle has already half-done the overall cash-flow management process.

 

 

 

 

 

Watch-out for the Stealth!!

They are stealth because you don’t find them in any public domain, and they are competitors because they can eat your market share!! Well, their stealth identity makes it harder for you to anticipate their move and their foundation strategy before time. Certainly, it’s not a matter of life and death as we are not talking about the threats of stealth war machines of some international terrorist. Instead, we are discussing about the negative impact in small businesses that can be brought up by the uncertain move of these stealth competitors.

Stealth competitors as by their name are not identified in the public domains like the internet and cable TVs; In fact, they are rarely a part of community common knowledge. Therefore, it is harder for venturing entrepreneur if not possible, to identify their existence and market moves through public sources. Definitively, stealth competitors are the potential competitors in the common locality with the identical target market but have not revealed oneself to the public at large. Undoubtedly, stealth competitors are not the bigger competitors who are already established in the market; instead they are the ones who have not come into operation or have practiced it amongst exclusive customers as a marketing test.

The concern over the existence of stealth competitors in not realized unless one sees the impact that it can create in one’s founding or established business. In this discussion we shall be elaborating in the unprecedented impact that can be brought up by stealth competitors in the entrepreneurial venture. Factually, stealth competitors can be more vulnerable to founding businesses than the already established ones. In other words, founding businesses rarely retain the privilege of financial cushions in case of unprecedented mishaps. Therefore, budding ventures are strictly required to achieve their projected statistics in order to remain sustainable. But unfortunately, the ignorance of stealth competitors during the period of analysis and forecasts directly infects the perceived uniqueness or distinctiveness of their business strategy, thus creating a deviation between the projection and the actual result. In general, competitors are the primary environmental factors that an entrepreneur would want to consider while proving the competitive advantage of their innovative products and subsequently making the statistical projections. In fact, the state of competitors’ environment has a major say in determining the validity of a business’s distinctiveness which turn determines other major indicators like market share, growth rate, sales and profit potentiality, capital structure & adequacy and lot more. Therefore the inability of the entrepreneurs to consider the existence of stealth competitors can preclude the business from achieving the projected indicators thus questioning its long-term sustainability. In general, entrepreneurs fail to consider such competitors due to their unfounded existence and information unavailability.

Due to the underlying importance of concerning the existence of stealth competitors, it remains vital for entrepreneurs to be aware of their existence. In fact, there are ways in which entrepreneurs can actually gain information of their stealth competitors in order develop their business strategy and forecasts that insulate it from the counter moves from the stealth competitors. Since, it is the information that matter the most, there are various other uncommon sources from where entrepreneurs can learn the existence of his/her stealth competitors. Basically, local supplier and distributors are the major source of information for the availability of such competitors. Though such sources may divulge such kind of critical information, it is until that it creates conflict of interest (William By grave and Andrew Zacharakis, Entrepreneurship 2^nd edition.) Besides, local financial institution and Business registration office could also be another effective source of information if it doesn’t breach the ethical standard. Logically, the information regarding the stealth competitors can actually be found from the external units with whom both the business and the stealth competitors have concern over.

All in all, knowing the importance of being aware of stealth competitors and learning about them helps the founding business to create more genuine business strategy and projections. After all, the delicate state of budding ventures would always ask for the increased authenticity of their projections and strategy in order to minimize the unprecedented and sure the sustainability.