RSS

Tag Archives: Government of Nepal

NEPAL: BUDGET SPENDING SLACK, A CAUSE OF ECONOMIC STAGNATION

A broken bridge in Mugu District

A broken bridge in Mugu District

As I went through the Macroeconomic section of an internationally popular Economics volume, I came across multiple monetary and fiscal policies and intervention techniques that could help expand aggregate demand of an economy in order to avoid recessions. However, it was hard to find any direct monetary or fiscal intervention that would allow positive increase in Aggregate Supply side in the long run, or let’s say the production side. In fact, the side that developing nations like Nepal are mostly struggling over. Despite, the volume logically reiterated that aggregate demand plays a vital role in stimulating the production or the Aggregate supply side through various means that are not usually displayed in figurative explanations.

In regards to that logic made, we can also infer that accelerating the sluggish government spending on the infrastructural development of our country should obviously help us break free from the stubborn state of economic stagflation (i.e. the economic condition that causes both growth stagnancy and inflation at a same time) that we have been encountering since years and years. According to Index Mundi Factsheet (2013), the inflation rate in Nepal remains as high as 9.5 percent (2012 est.) whereas the GDP growth rate stays as low as 4.5 percent (2012 est.). Even though the idea of accelerating government spending directly refers to boosting Aggregate demand (i.e. the totality of Public Consumption, Investment, and Government spending and Net Exports) of the economy, it might ultimately stimulate the long-term Aggregate supply of the economy (i.e. the totality of the outcome retrieved from the mobilization of the factors of productions) as soon as the high demand pressure increases the price level of such factors of productions to a level that might cause the heavy chunk of immobilized factors of production like the unemployed labors (which stands about 46% for Nepal according to 2008 est. of Index Mundi) and unused natural resource and capital stocks to come to the production play.

Lately, it was publicized in the economic section of the Kathmandu Post that the government bodies like the Department of Road (DoR) and Civil Aviation Authority have been miserably unable to mobilize or spend the budget amount it was allocated for. According to the post (2013), “The Department of Roads (DoR) has so far just spent just 12.23 percent of the total fund allocated, while the physical progress stood at only 19.68 percent.”  Though a common man might be unaware of the multiple implications of such spending underperformance, the economic implications are definitely multiple. At first, such spending slacks decelerate economic progress in an already stagnant Nepalese economy in a sense that it creates weak Aggregate Demand that may not adequately value (or price) the factors of the productions that instead causes stagnancy in the production growth (GDP growth) as the huge chunk of factors of production remain immobilized due to under pricing. While on the later part, it depresses the potentiality of efficient mobilization of the factors of productions like the human capital, and private investments that could again potentially stimulate the momentum of already progressing economic growth if it would have been previously bolstered by heightened Aggregate demand. In other words, not spending properly on infrastructural resources like roads (For inst. Kathmandu-Terai Fast Track that has failed to see any progress lately), Air facility (For inst. The proposed Regional International Airport in Pokhara of which talks have stalled already) etc creates impediments and difficulty in mobilization of factor of productions, and makes it more costly to mobilize (Money, 2013).

Figurative explanation of the positive side of the government spending in the economy can make this logic more comprehensible:

Capture

As it is presented in the provided figures, once the Aggregate Demand (AD) shifts to the right after it is bolstered by accelerated Government spending of the allocated budgeet, the price level offered for the factors of productions like labor, private capitals and natural resources gradually increases from OP to OP’ thus stimulating the long-term aggregate supply curve to shift the right (from AS to AS’) (provided in the second figure) until the mobilization of further factors of production remains economically unfeasible due to gradual fall in price level. However, the improvement in national infrastructure portfolio after government spending and resource utilization increases the efficiency of further resource mobilization, thus making it economically feasible to deploy further resources even during a lower price-level. Ultimately, the Aggregate supply curve or production further shifts from AS’ to AS” (provided in the second figure).

In fact, a healthy economy often takes a progressive economic cycle whereby, there is a constant growth in price-level (i.e. inflation) and production volume (GDP). Even though, the acceleration of government spending may not fully enable the country to break free from the current state of stagflation, it is never economically logical for our government bodies to remain in such minuscule spending level.

Note:

The provided figurative explanation can also embed Short-term Aggregate supply curve on it. In fact, the elasticity of the Short-term supply curve would have rather determined the amount of shifting that long-term supply curve would have endured. However, the absence of short-term supply curve on the provided figure doesn’t compromise the validity of the logic. Short-term Aggregate supply curve is an upward sloping curve with varying elasticity in basis to the complex characteristic of a particular economy.

Reference:

Index Mundi (2013). Nepal Economic Profile 2013. Retrieved from: indexmundi.com/Nepal/economic_profile.html

Mankiw (2003). Multiple Chapters. Economics: Principles and Applications. Cengage learning

Money (2013). DoR spends just 12,23pc budget. The Kathmandu Post. Kantipur Publication.

Money (2013). High Priority Given to the Project: FinMin. The Kathmandu Post. Kantipur Publication.

Further reads:

Macro-economic theory of Aggregate Demand and Aggregate Supply

 
Leave a comment

Posted by on December 31, 2013 in Nation Specific

 

Tags: , , , , , , , , , , , , , , , , , , , , , ,

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.

 
Leave a comment

Posted by on January 8, 2012 in Nation Specific

 

Tags: , , , , , , , , , , , , , , , , , , , ,

National: Kathmandu city and its Traffic issue

Traffic in Tudikhel freeway


No wonder, you’d frequently quote, “I’d rather be in a hell for the time” whenever, you drive by the main roads of the city from 9-11 in the morning and 5-8 in the evening. Actually, it’s the acute time when you realize that the city has become a chronic victim of over-traffic and the Government should really do something about it as an emergency.

Reactively, Government of Nepal (GON) does have recently practiced a basic economic principle by increasing the custom-duty on vehicle imports in order to discourage vehicle purchasing rate in the country. Though, the vehicle purchasing rate has certainly decreased by the disclosed statistics, its left to be seen, how soon the final effect comes into action. Since, operational life time of vehicle utilities is extremely long in the country, (for inst. More than 25% of the vehicles in operation are more than 15 years of age), the effect can’t be seen any sooner, not before the end of a decade.

Besides, the Auto dealer association in Kathmandu has been convicting this bill of the government as nothing more than an austerity that has no link to the resolution of overly centralized traffic rather than over traffic all over the nation. It expresses that raising the tax rate that is already high, make no reasonable solution. Unfortunately, tariff barriers are only what the government could readily impose as a short term measure to this firing problem. However, non-tariff barriers could have been an effective solution, only if it wouldn’t be a violation of international trade law. Therefore, there remains limited solution that the government can impose. Whatsoever, I do believe that vehicle tax hikes may not be the perfect measure for the problem of overly centralized traffic but it doesn’t mean that it won’t have any effect at all. Enhancing Transport infrastructure and decentralizing development could be a fruitful option (Of course it is!!) but it is a way-way a long-term solution for anyone but a unstable government of now.

Certainly, it’s been a hard fact that, traffic pressure is high during the peak hours of 5-8 P.M and little less during the day hours. But just think about the late hours, Isn’t there anything but a pin drop silence in the Chabil Chowk, with speeding vehicle in only at randomly five minutes of interval from 11:00 P.M. to 4:00 A.M.? Well, I may be exaggerating in saying so, but I am sure that I make sense when I say that, the vehicle traffic activity is somewhat centralized during the few hours of the day, called the peak hours. Now, my question is how it would be for the government to try to displace the high traffic pressure of the day hours to such late hours?

Well, I agree that I may sound hypothetical in literal, because it is practically impossible for public transports and private vehicles to run on off-hours. But, certainly there remains a high possibility for the transport jobs that has the privilege of running in any hour. Well in that case I would be talking about the construction and material tipping trucks, pick-ups and mini-vans that can transport loads even during the off-hours like from 11P.M. to 5A.M. or something.

With so much mini-trucks and pick-ups hovering in the main roads, I believe such bills could at least chop off 20-25% of the traffic pressure in the Kathmandu City. And most of us do believe that it’s a considerable number. Unfortunately, this kind of bills cannot be implemented overnight as per weighing its high stakes. So, there shall certainly appear a lot of resistance by the influents and others (as security being a major concern). After all, it’s a kind of a change, and probably a radical one. But frankly, it depends upon how the government does it. Whether it bases the bill on the principle of carrot or stick or both? As it’s often taught in business schools that, an effective leadership can efficiently implement changes, it applies here as well. Politically speaking, through the current government of Dr. Babu Ram Bhatterai, with high civil support, things look quite hopeful for now.

All in all, it’s just a thought that rung into mind while it took me more than a half an hour to get from Chabil to Baudha, this evening due to the hectic routing traffic jam. And, it’s a just something that I wanted to put on a blank document before dinner. As they say, ideas and thoughts are the consequences by product of influencing incident.

 
Leave a comment

Posted by on October 14, 2011 in Nation Specific

 

Tags: , , , , ,

Political Economy: Foreign Grants expect Results.

One should really wonder what our country (Nepal) would be, if it starts falling in short of foreign grants and donations. I believe politicians and national economists well know that the current account balance of our country’s international trade is negative and Balance of Payment (BOP) is artifically positivisezed by foreign grants and donations. Could the government still make the public relax by saying that, the remittances are high enough for the country to not depend upon foreign grants? Can there be a statistical evidence for that?
Whatsoever, foreign grants has still become a major back-up to at least let the BOP of our nation remain positive. But, would the international community would be so generous enough to keep making donations in the country, with so much of unaccountability and irresponsibillity flourishing in the government (the actual receiver and technically the mobilizer of the grants). I believe it is time for the government to think GLOBAL rather than LOCAL. In other words, i think there are tons of other developing and under-developed nations that are seeking grants from these IGOs and developed nations. There practically has been created a some sort of a competition amongst the developing nations to retrieve financial (and technical) donations. And on the other hand, the developed ones has array of choice to choose to whom to grant for.

Well, whatsoever is the situation, the one thing that would impress the donators to make their donation is, how effectively will the country (the donatee) utilize and mobilize the fund they receive from them? or simply, which countries knows the value of the limited resource and the ultimate opportunity. Though, there are numerous concerns that would influence the decisions of the donating community, this particular concern is one of the most influencing and most easily understood one. Yet, the politicians of our nation are practically nullifying it. It wasn’t much ago, that the Thai government could not execute a scholarship plan because they simply could not see any positive results for doing so, the explanation the Thai-embassy gave was that, the Ministry of Education for Nepal. has not yet figured out, the potential competitiveness of the country amongst the other international community, on which the nation would want to develop its Human Resource for the development of that particular competitiveness, in order to reach the final goal, which is national development. Meaningfully, what the Thai-government wanted was called positive results of their financial generosity. Well, the major concern is, if the government keeps ignoring the significance of developing a positive perspective amongst the international community, it won’t be soon, that the nation will run out of donations, in having its BOP imbalanced and finally having the economy collapsed in a short-term vision.

It is one thing, for a nation to become independent to financial grants, but by looking at the current status of our nation, we should at least be able to exploit the present opportunity, i.e. the foreign grants

 
2 Comments

Posted by on January 20, 2011 in Nation Specific

 

Tags: , , , , ,

 
Follow

Get every new post delivered to your Inbox.