| Economic and Commercial Report– July, 2006 |
| |
DOMESTIC |
| 1. |
The Nepali fiscal year 2006-07 began on July 16 against the backdrop of
a reinstated Parliament, a government of seven political parties, ceasefire
by the government and Maoists and an incipient peace process. Nevertheless,
uncertainty about the direction of the peace process and economic policies
of an interim government to be formed with Maoists, and continued targeting
of the business sector by Maoist labour union and cadres, despite assurances
to the contrary by Maoist leadership, has kept business confidence low. On
the other hand, the government hopes to use the truce to reclaim the
development space in rural areas. |
| |
Economic Performance |
| 2. |
The preliminary estimate of GDP growth at factor cost in 2005-06 is 2.3
percent, and 1.9% at producers' price. Except for a negative growth rate in
2001-02, the growth rate in 2005-06 is the lowest in the last 10 years.
Nepal's GDP at factor cost was approximately USD 7.8 billion in current
prices and USD 4.5 billion at 1994-95 prices. |
| 3. |
Negative growth in production of food crops, due to poor rainfall, kept
agriculture growth at 1.7%, the lowest in the last eight years. The
non-agriculture sector grew by 2.8%. The main growth drivers were
construction, utilities, and trade sectors. Manufacturing sector continued
on a sluggish growth path with a 2.2% increase over last year.
Point-to-point inflation rate, which was around 3.5% in December 2005,
increased to about 9% by June 2006, due mainly to increase in petroleum
price and sharp rise in food grain prices. |
| 4. |
Inward remittance from workers abroad, which equals about 15% of the
GDP, grew 47% and helps fuel consumption demand, generate liquidity in the
economy and keep the balance of payment comfortable, despite a trade deficit
of around 17% of the GDP. |
| |
Budget for 2006-07 |
| 5. |
The budget was presented in the Parliament on July 12 after four years.
Budget projections for the next fiscal is predicated on the assumption of
3.5% growth in the agriculture sector; 6% growth in the non-agriculture
sector; and, 5% overall economic growth. Inflation in the next year is
projected to come down to 6%. |
| |
(NRs. Billion) |
| Resources |
Budget |
Revised Estimate |
Budget |
| Revenue |
82.0 |
73.5 |
85.0 |
| Foreign grant/loan |
33.2 |
23.2 |
41.0 |
| Domestic borrowing |
11.8 |
15.4 |
18.0 |
| Total |
127.0 |
112.1 |
144.0 |
| Expenditure |
|
|
|
| Recurrent expenditure |
76.0 |
69.1 |
84.0 |
| Principal repayment |
14.0 |
14.2 |
15.0 |
| Capital expenditure |
37.0 |
28.8 |
45.0 |
| Total |
127.0 |
112.1 |
144.0 |
|
| 6. |
The budget envisages an increase of nearly 29% in total expenditure over
the revised estimates for 2005-06, based on an increase of 55% in capital
expenditure and 21.5% increase in current expenditure. Government hopes to
meet the expenditure through an increase of 16% in revenue, a 75% increase
in foreign assistance and 51% increase in domestic borrowings over revised
estimates for 2005-06. The emphasis is on social sector and rural
infrastructure, as the government seeks to resume development activities,
reclaim its rural reach and restore economic momentum. |
| 7. |
The government has sharply slashed outlay for the Royal Palace from the
estimated expenditure of NRs. 749 million in 2005-06 to NRs. 220 million in
fiscal 2006-07. Similarly, the outlay for Police and Ministry of Defence for
the next fiscal year is 10% lower than the estimated expenditure in 2005-06.
On the other hand, there are steep increases in allocation for roads,
electrification, health, education and local development. |
| 8. |
Budget belied the expectations of the business sector that the
government would launch new initiatives for reviving the industrial,
services and tourism sectors. Customs duties have been raised on 40 items;
excise net has been expanded; and, income tax relief on exports has been
withdrawn. A modest Industrial Revival Fund, with an initial allocation of
NRs 500 million, has been set up. The government has further reduced the
concession in customs duties on imports from India. |
| 9. |
In terms of foreign aid, aid from India would amount to nearly 11% of
total budgeted assistance, which will place India at the top among bilateral
donors and third behind ADB and World Bank. |
| 10. |
The budget is ambitious and even unrealistic. It assumes a political
climate in which either the present government would continue to be in
office or a new interim government would pursue the same policies; strong
economic revival; huge inflow of foreign aid, which might not happen to due
to weak institutional structure, low absorptive capacity and political
uncertainty; and, efficient delivery structure in rural areas, which would
be constrained by poor infrastructure and competition between Maoists and
the SPA. |
| 11. |
The industry has been predictably lukewarm to the budget. Analysts say
the direction is right, but worry about the huge increase in borrowing
target and poor capacity for implementation. Maoists dismissed the budget as
not being reform-oriented or addressing the needs of the poor people. |
| Monetary Policy |
| 12. |
Nepal Rashtra Bank (NRB) announced its annual monetary policy for
2006-07 on July 23. The policy aims to contain inflation rate to 6%, while
supporting the projected GDP growth of 5% for fiscal 2006-07. NRB's clear
challenge in the coming year would be to contain inflation rate. Given the
low economic growth rate, cost-push nature of inflation and excess liquidity
in the economy created by inward remittances, NRB will leave key interest
rates untouched and rely on market operations through sale and purchase of
treasury bills to manage the liquidity. |
| 13. |
An area of considerable comfort for NRB and the government is the high convertible reserves of USD 2.1 billion, which are sufficient to finance 11 months of merchandise imports. This has resulted from large and growing inward remittances from workers abroad and stagnant merchandise imports from countries other than India. |
| 14. |
On the other hand, NRB faced continual shortages of rupee reserves,
which account for about 5% of total reserves. This arose from a huge trade
deficit with India, which was over 10% of the GDP in 2005-06. The NRB met
the shortages through sale of USD 600 million to purchase Indian rupees and
by increasing the number of goods eligible for imports from India on rupee
payment to 91, which accounted for estimated 15% of total imports from
India. |
| 15. |
Throughout the fiscal 2005-06, there was repeated speculation about
devaluation of Nepali rupee against Indian rupee, largely because NRB had to
repeatedly support the peg with Indian rupee purchases, but concerns about
impact on inflation, since two-thirds of Nepal's imports are from India, and
business confidence kept the NRB from taking that step. |
| Maoists' engagement with the business sector |
| 16. |
Sensing imminent Maoist entry into the government, business chambers and
trade associations have begun engagement with the Maoist leaders to
understand their economic policies, but also to seek an end to extortion,
intimidation and interference in business activities by Maoist labour union
ANTUF and cadres. |
| 17. |
ANTUF continues to target industries through difficult labour-related
demands, both for raising funds and expanding its support base in the
working class, despite assurances to the contrary from the Maoist
leadership. Trade unions associated with mainstream political parties are
also becoming belligerent to protect their bases. As a result, industrial
relations in Nepal are becoming increasingly militant, which will impede
industrial revival and further encourage capital flight to India. |
| 18. |
Maoists have not so far clearly defined their economic policies. There
have been statements of broad principles to adapt communism to the realities
of 21st century: a mixed economy, expansion of industrial base and national
capital, promotion of self-reliance and encouragement to local labour force,
technology and resources; within this framework, private capital and open
competitive economy would be encouraged; there would be a role for foreign
investment and assistance, which would, however, be permitted in a
controlled and a regulated manner, in areas where domestic capital was not
forthcoming and in a manner that it did not displace domestic investment or
market. |
| 19. |
During a meeting between Confederation of Nepalese Industry (CNI) and
top leadership of the Maoists on July 17 in Kathmandu, the Maoists agreed to
create a peaceful industrial climate, appeal to tourists to visit Nepal and
work with the industry to create an environment of mutual trust and prepare
a long-term economic roadmap. The Maoists announced that they would
organise a national conference of entrepreneurs. However, extortion and
interference by Maoist cadres and labour union have not abated. |
| INDIA-NEPAL |
| |
Bilateral trade |
| 20. |
NRB has released the trade data for the first ten months of the fiscal
2005-06 (ending July 15). Total trade with India saw a year-on-year growth
of 18.4%, whereas Nepal's trade with the rest of the world saw a
year-on-year growth of 5.7%. Nepal's exports grew at 8.7%, a sharp decline
from growth of 24% last year. On the other hand, Nepal's imports from India
saw a year-on-year growth of 34%, whereas imports from rest of the world
grew by 15%. |
| 21. |
During the ten-month period, bilateral trade reached USD 1.7 billion,
with imports from India accounting for USD 1.21 billion. India's share in
Nepal's foreign trade increased from 60.8% in May 2005 to 63.5% in May 2006.
India absorbed 68.1% of Nepal's exports and provided about 62% of total
imports. |
| Economic Assistance Package for Nepal |
| 22. |
The two governments continued their discussions for implementation of
the economic assistance package announced by India for Nepal during the
visit of PM Koirala to India in June 2006. The grant of INR 100 crores for
budgetary support will be released in the early part of Nepalese fiscal
2006-07. Government of Nepal is identifying projects for utilisation of the
concessional line of credit of USD 100 million. Supply of 25000 MT of
fertilizer, at the same subsidised price at which it is sold to farmers in
India, will commence in the first week of July 2006. |
| 4% additional duty of customs |
| 23. |
Following Nepal's request for exemption of its exports to India from 4% additional duty of customs, primary products exported from Nepal to India were exempted from 4% ADC in June 2006. Further, during the visit of PM Koirala to India in June 2006, Government of India agreed to extend the exemption to goods manufactured in Nepal and exported to India. |
| 24. |
Following Nepal's request for exemption of its exports to India from 4%
additional duty of customs, primary products exported from Nepal to India
were exempted from 4% ADC in June 2006. Further, during the visit of PM
Koirala to India in June 2006, Government of India agreed to extend the
exemption to goods manufactured in Nepal and exported to India.In July 2006, Government of Nepal forwarded a list of 71 goods
manufactured and exported to India, together with data on domestic
production, consumption and exports to India. Government of India is
examining the data. |
| POL sales |
| 25. |
According to estimates provided by NOC, total outstanding dues of NOC to
IOC on account of petroleum purchases reached NRs. 6.0 billion, which is
roughly equal to 2.5 months of POL imports by Nepal. With the government
continuing to show no sign of increasing POL prices, NOC's losses, and its
dues to IOC, will continue to mount. During the visit of Nepal's Prime
Minister to India in June 2006, it had been agreed that IOC and NOC would
work out arrangements for rescheduling outstanding payments. A consequence
of Nepal Government's unwillingness to rationalise POL prices is the
difference in prices between India and Nepal, which has resulted in
significant levels of smuggling of POL products across the border. |
| Review meeting of Rail Services Agreement |
| 26. |
The two governments held their second review meeting on the India-Nepal
Rail Services Agreement, signed in May 2004, which led to the commencement
of direct rail services for third country and bilateral cargo traffic to ICD
Birgunj in Nepal. During the meeting, the two sides finalised the customs
procedures for bilateral traffic and discussed the possibility of increasing
the types of rolling stock permitted on the Raxaul-Birgunj rail section, in
order to increase the cargo handled by ICD Birgunj. |
| THIRD COUNTRY |
| Nepal-China |
| 27. |
During the visit of Chinese Vice Minister of Foreign Affairs, Wu Tawei
to Kathmandu from July 24-27, China conveyed its intention to step up
economic engagement in Nepal in a significant way. |
| |
| » |
China has offered concessional loan of USD 200 million to be
utilised over the next three years. The terms and conditions of the loan
are yet to be worked out. Nepal wants China to match the terms offered by
the World Bank. GoN intends to use the loan to fund, among other things, a
hydropower project. |
| » |
The two governments singed an agreement for Chinese budgetary
grant assistance of 100 million RMB. The assistance represents an increase
of 20% over annual Chinese grant of 80 million RMB. |
|
| 28. |
With regard to Nepal's long-standing demand for duty free access to
China, the Chinese delegation reiterated its offer to provide duty free
access to 278 items (at 4- digit and 6-digit levels) and subject to minimum
value addition of 40% in Nepal. Government of Nepal continues to reject the
offer, since it is well short of Nepal's request for duty free access for
1500 items (at 6 digit); the Chinese list has a number of items of no
interest to Nepal; and, Government of Nepal wants China to match India's
value addition requirement of 30%. Since Chinese offer to duty free access
to Nepal was made in the context of a similar offer to a group of LDCs,
China is reluctant to change its position. However, given its focus on
increasing economic engagement in Nepal, China may eventually accommodate
Nepalese request. |
| 29. |
In addition, a Chinese trade fair is being organized in Kathmandu in
September, similar to the one organised last year. There is a proposal to
make this an annual feature. |
| 30. |
China is the fourth largest export destination for Nepal and the second
largest source of imports. China's share in Nepal's trade is about 6%;
India's share is about 65%. Chinese investments in businesses in Nepal are
low. Chinese firms have notched significant successes in two areas - project
contracts and in telecom equipment for Nepal Telecom. In addition, China
enjoys high visibility in its economic assistance projects. |
| Nepal-USA |
| 31. |
Export of readymade garments to the US, the largest market, has grown by
28 percent in June. Local media reported that Nepali garment export in the
month went up to US$5.56 million against US$4.35 million exported during the
same period last year. The rise was due to recent increment of new orders
from major US importers based in India. This is the first time the Nepali
readymade garment industry saw a rise in growth for two consecutive months
in 2006. The industry has been in trouble since 2005, when the quota regime
in international textile trading ended. |
| Nepal-EU |
| 32. |
European parliamentarians, who visited Nepal in the third week of July,
said that Europe would extend financial support to boost Nepal's trade and
tourism. |
