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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 Nepalese inflation scenario. On the other hand, this paper redirects the overall enquiry towards acknowledgement of contribution of supply-side constraint (shock or disturbances) towards contemporary inflation scenario in Nepal.

The quest or the enquiry of identifying the role of the dynamics of supply-side variables in determining the contemporary period of running inflation can always start with the study of mechanism of Indian inflation transmission towards Nepalese inflation scenario. Though the law of one price of the theory of Purchasing Power Parity (PPP) in the event of fixed peg regime (∆s = 0) would warrant virtually complete price taking behaviour 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 Nepalese inflation scenario against 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 non-food price difference.

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In explaining the observed departure from the constraint of law of one price given the fact that Nepal fulfils 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 the Scandinavian approach already questions 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 fulfilment of required conditions (Ginting, 2007). In fact, the interplay of one or both of these undermined variables could be the reason behind observed deviation in 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 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 cool down 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.

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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 running inflation scenario in Nepal cannot be negated at all. After all, the significant drop in Brent Crude Oil price Index by more than 50pc during the mid of 2015 until start of 2016 didn’t exert much cooling impression in Nepal’s running inflation scenario that was already wrestling with different forms of supply-shocks (v) (Trading economics, 2016).

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As the implication of Supply-side shock (v) on Nepal’s running 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.

While consulting to Sapkota (2010) in regards to it, 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) in level of 90pc 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 running inflation scenario in Nepal since 2007/08. However, given the fear of Sapkota (2016) of government policy being able to supress the inflation rate to 7.5pc in eventuation of jumbo NRs1 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 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.

On his own account, Sapkota (2009) also regard the contemporary running headline inflation of Nepal to be completely outside the boundary of traditional monetary instrument 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 Political, legal, regulatory and diplomatic measures to counter this issue.  Statistically, Sapkota (2010) observes random regression between M2 growth (proxy of monetary policy) and Inflation behaviour in Nepal since past decades in Fig 4.

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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).

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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 6th quarter after which the effect totally fades out by 10th 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 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) (see Fig), the purpose to research on political, regulatory and economic polices & 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

 

 

inflation

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 6th quarter while completely decaying by 10th 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.

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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.

 

 

 

KalikaUpadhyayNepal

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).

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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.
  1. Apportionment of Rs.3.4 billion in Expansion of Medium size irrigation facilities in all districts to increase agriculture production.
  1. Installation of seven thousand one hundred units of shallow tube-wells in pocket areas of vegetable farming to commercialize agriculture products.
  1. 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.
  1. 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.

 

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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 “Gd” component of the total “Cd + Id + Gd + X” that makes up the total GDP figure of an economy.

Whereby,

Gd denotes Domestic Government Expenditure

Id denotes Domestic Investment Expenditure and,

Cd 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.

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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.

SIMPLIFIED OUTLOOK FOR 2014

thCA7AH4H5So, it’s New Year 2014. With this public fuzz of #NewYear, I just remembered a very unpopular proverb that says,” It takes a second to change your mind to change your life, or even a decade might not help, If your life sucked on 31st December of the year, it’s probably not going to get abruptly better on 1st January of another year”. Post Script: I just created this proverb!!!

Anyway, so what’s up in this New Year this time? Well, it depends on the stuff that makes you up when it’s up. And for general investors who would want to profit out of stocks, bonds, commodities and currencies, may be I’ve some comments to make. Well, how about putting it as 7 point changes that are going to happen in this year that adds to 7 (2+0+1+4 = 7)? Right on, right?

In here, I’ve gathered these predictions out of comments that were made by various analyst and strategist, and also on basis to my personal analysis. And, the good part is that I am presenting the predictions in a simplified manner.  So here it goes:

1. As the Federal Reserve has started its bond purchase tapering program as announced to be started this January, the interest rate on treasury notes has started to rise gradually, (10 years Treasury note has already risen to 3% approx from 0% approx) and will definitely keep rising. Therefore, even though the bond prices may gradually slow down, the appealing interest rates on the treasury notes shall definitely pull some money out of the equity market (especially from stocks of whose return are to get beaten by the rising rate of treasury notes) towards the treasury notes, thus creating a new normal in Bond and Stock market without the presence of the Fed. In other words, we might eventually see lower averages in American Stock market.

2.  The interest rates rise shall be well felt on mortgage rates as well. And hence, the home prices are going to get cooled off a bit. However, Fed is definitely wary of avoiding another housing recession.

3. Since the Dollar currency shall gradually increase after Fed decelerates on money printing, Dollar shall again regain its status as an attractive currency, thus pulling investments out of emerging economies in Asia and South America. The capital outflows in America shall logically drop the exchange rate of currencies of emerging economies. Indian Rupee, Indonesian Rupiyah, Korean Won, Brazilian Real are some of the currencies that might be observing a harder hit from this mechanism.

4. Since Gold is another alternative to Dollar in along with Emerging economy’s currencies, we might be observing lower long-term average in Gold ETFs as well.

5. Dollar-Yen dynamics is going to observe its record high spread in the nearer future. As the Federal Reserve of America has started its tapering program, the Japanese economy under the theory of Abenomics has instead demanded Bank of Japan (BOJ) to start its monetary stimulus program. Meanwhile, some analyst predict Dollar-Yen spread to break the level of 125 (i.e. 1 Dollar = 125 Yen). Currently, the spread is hovering around 105. Relatively, the decade long stagnating Japanese Export based Economy is expected to observe higher economic growth following heavy stimulus program coupled with accelerated Government spending.

6.  Japanese stock markets (esp. NIKKEI and TOPSI) are expected to see rising trend as profits of Japanese companies (highly dependent on export market) are going to observe rising profit out of rising sales. In fact, the glimpse of it has already been observed. However, under the long-term economic principle, I personally think the rising profits of Japanese Companies might start cooling off a bit, as soon as, imported inputs (esp. Fuel) start becoming more expensive for Corporate economy.

7. It’s hard to say how the upcoming banking union in European Union (EU) is going to fare the European Economy. I find it as a new economic experiment. However, since most of the struggling economies of Euro Zone have started seeing better economic outlook with increasing consumption confidence, better outlook is reserved for Europe in 2014.  Previously troubling big economies, i.e. Spain and Italy have started seeing better outlook, whereas French Economy has surprisingly started to observe a falling trend. Besides, German Economy has always been good as ever.

This Simplified prediction is compiled and developed by Prience Shrestha by acknowledging the views of analysts and strategies of Reuters, CNNMoney, CNBC, and The Financial Times. The author takes no responsibility of losses that are being incurred by the investment decisions pronounced under the prediction provided.

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

BLACK BERRY RESURRECTION: CASH FLOW MASTERING

blackberry-logo1As a strategy behind Blackberry resurrection, after it had cancelled its grand plan to sell itself to a potential buyer, the losing company has made a winning unconventional deal with the giant electronic subcontractor Foxconn to delay the payment for inventories unless the devices are sold to the downstream customers (Reuters, 2013). In addition, Foxconn agrees with Blackberry to assume the risk of write-downs of the unsold devices while gobbling in (as remuneration to risk taken) the share of profit made in each device sold (Reuters, 2013). However, it is definite that the remuneration doesn’t replace the usual payment due for the manufacturing works.

Through general analysis, it can be acknowledged that this particular Foxconn deal will put Blackberry in advantage in regards to write-down risk handling and cash cycle gap financing cost. Currently, the despair state of Blackberry is forcing it to absorb high amount of write-downs of its unsold devices, and therefore, this write-down risk transfer deal would definitely heal the company where it could hurt the most. Besides, the postponing the payment of the device production cost unless the device is sold to the downstream customers has definitely narrowed down Blackberry’s operational cash-cycle in order to allow it to reduce the financing cost of the payment gap (the time gap between the time it pays out for its production cost and the time it receives payment for it, including profit). Moreover, the deduction in necessity to maintain high level of liquidity reserve in order to finance the current level of payment gap would also strengthen the ability of the company to service its short-term costs and investments in order to improve its operational efficiency. Comprehensibly, Blackberry currently might be taking high level of cash-flow stress due to considerable write-downs of the devices and cash freezing inventory glut that disables the company to even cover its production and operational cost of each device. And therefore, the decrease in short-term financing stress after the Foxconn deal to narrow down the cash-flow cycle and redeem the company from device write-down cost is big enough to enable the company to turnaround its cash flow position. Furthermore, the profit-sharing scheme in Blackberry-Foxconn deal will hedge the phone company from remunerating the electronic subcontractor for risk taken during the times of operational loss.

All in all, it’s a savior deal for Blackberry. Thanks to John Chen, the new CEO of the phone company for succeeding the deal.

REFERENCE:

Reuters (2013). Blackberry Steps Back on Handset Busienss, Shares Jump. Thomson Reuters

FIGURES:

Blackberry’s current operating cycle:
Capture

 

 

 

 

 

 

Blackberry’s potential operating cycle after Foxconn deal:

Capture1

 

 

 

 

The following operating cycle may not completely reflect the actual operating cycle of the company due to lack of complete information on Blackberry’s operation strategy. This figure only tries to reflect potential decrement in cash-cycle as the payment for inventory defers for Blackberry.