February 2006
BIZ NEWS

Cost of Conflict: ADB Study
Nepal will Lose 8.3 Percent in GDP Growth in Five Years

While arbitrary figures are being circulated as the cost of the ongoing conflict to the Nepali economy, the country's largest donor Asian Development Bank has conducted a scientific study.

The study published in July 2005 but was made available only recently. According to this study, if the conflict continues at the present rate, the country will lose 8.3 percent in GDP growth and have a 7.8 per cent lower GDP per capita over a five-year period between 2005 and 2009 as compared to a no-conflict situation. If this happens as forecast, the population below the poverty line will be 4.8 per cent higher than in a peaceful situation.

According to the Second Nepal Living Standard Survey, the population below the poverty line in 2004 was found to be 31.1 per cent. Statistics also show that the population below the poverty line reduces by 0.6 per cent for every percentage increase in the GDP in Nepal.

The study has taken the change in the government's development expenditure as the basis of distinguishing the level of conflict. If there is no conflict, the development expenditure of the government should rise by 10.4 per cent in five years ending 2009, but it will reduce by 4.2 per cent during the same period if the conflict continues at the present rate. If the development expenditure reduces by 8.4 per cent in the same period, this is considered intensification of the conflict. An increase of 10.4 per cent in the development expenditure was achieved in the five year period till 2001 while a 4.2 per cent decrease was recorded in it in the period between 2002 and 2004.

A percentage increase in the development expenditure by the government in Nepal leads to 1.57 per cent rise in the fixed capital investment by the private sector and 0.65 percentage increase in the fixed investment from the public sector as well as 0.18 percent increase in the public sector consumption, according to the Nepal Macroeconomic Model (NMM) developed by ADB to forecast Nepal's economic future.

According to the study made on these bases, if the conflict continues at the present level, the GDP growth rate in Nepal in the period 2005-2009 will be 8.3 percent lower (1.7 percent loss per year) than in no-conflict situation. But this loss in GDP growth rate will be 10.3 percent (i.e. 2.1 percent loss per annum) if the conflict intensifies, the study has concluded.

The study has found that the loss in GDP growth rate due to the conflict during the period 2001-2004 was 3 per cent.

The study also says that the loss in the GDP growth will be higher in the later years than in earlier years due to the cumulative effect of the reduction in the development expenditure in the earlier years.

The study has not estimated the effect of destruction in economic infrastructure, displacement of the people and disruption of economic activities on GDP growth. Similarly, it has not fully considered the impact caused by lower private investment in the conflict.

The NMM is said to be a medium sized Keynesian model with 20 behavioural equations and 17 identities. Of the 59 variables in the system, 37 are endogenous and 22 exogenous.

Hulas Remittance - Western Union Tie-up

Golchha Organization has expanded its business portfolio with its recent entry into remittance business through establishment of Hulas Remittance unit. The unit has tied up with Western Union money Transfer Service in Nepal.

Western Union has its network of money transfer in more than 200 countries and territories and its agent locations in Nepal has now reached 681. This tie-up with a business house in Nepal is, however, not the first such for Western Union. It’s alliance with CG Finco, a Chaudhary Group subsidiary, has been there for quite some time already.

A World Bank report has listed Nepal as one of 20 top remittance recipient countries of the world. According to this report Nepal’s remittance last year was 755 million US dollar, which constituted 18% of the nation’s GDP.

Inflation Rate Crosses 8 Per cent

Nepal Rasta Bank has revealed that the rate of inflation measured as year-on-year change in the national urban consumer price index reached 8.5 per cent on mid-November 2005 compared to only 2.7 per cent in the same point of time the previous year. This rate was 8.2 per cent on mid-September and had eased a bit to 7.8 per cent on mid-October.

The average rate of increase in the consumer price level for the 12 months ended on mid-November 2005 was 6.3 per cent compared to 5.5 per cent the previous year.

The change in the national wholesale price index was 11.3 per cent on mid-November 2005 as compared to 4.6 per cent in the previous year.

Meanwhile, the central bank has started making public the figure for "core inflation" by following the exclusion principle under which the prices of rice and rice products, vegetable and fruits, fuel, light and water and transport are excluded from the price index. The core inflation figure thus arrived at is 4.4 per cent on mid-November 2005 as compared to 3 per cent in the previous year.

Average
P=Provisional

American Management in Fulbari Resort
Fractional Ownership to be Introduced

Pokhara's Fulbari Resort has been handed over to Kosmas Group International, an American company, for its management.

One major point of the five-year management agreement with the group is to pay a certain percentage of the sales revenue of the resort to the Nepal Bank Ltd., the leader of the consortium that has to recover about Rs. 3 billion, all categorised as bad loan, from the resort. As the realisation of this loan will reduce the bad debt of Nepal Bank by about 12 per cent, this management agreement is regarded as a very important development in the bad debt collection effort of the international management team in Nepal Bank Ltd.

One major condition for the loan granted by the consortium was to have an internationally respectable brand for the resort and this condition was never fulfilled. This is regarded as the major reason for the poor operation of the resort. In a press meet held in Kathmandu to announce the management transfer, Raghu Shah, Director of Blue Flag Nepal, a company set up by Kosmas to manage Fulbari Resort, expressed hope to repay all the loans of the bank within the next five years.

On the occasion it was announced that the new management will create an "active five-star" environment in the resort and introduce a "factional ownership" concept. In an active five-star environment, the staff and management of the resort are supposed to interact more with the guests, by participating with the guests in all activities such as trekking, golf, spa and local excursions.

Fractional ownership will be introduced in the 12 suites of the resort. These suites will be sold under the fractional ownership concept to holiday makers. The factional ownership is said to be a $ 10 billion industry worldwide and the new management hopes if it can bring a small portion of it to Fulbari it will make tremendous positive impact in the financial health of the resort.

Banks Facing Hurdle to Issue Debentures

As the authorities have failed to provide a way out from the provisions of the Company Ordinance, commercial banks are now facing a problem in issuing debentures to raise their core capital to the level required by the central bank.

Nepal Investment Bank and the Himalayan Bank Ltd. are prepared to raise Rs. 250 million each and the Nepal Industrial and Commercial Bank Rs. 200 million by issuing debentures. But their application is pending with the Securities Board due to a provision added in the Company Ordinance issued late September 2005. The provision requires all debentures to be issued only through a Debenture Trustee. But the authorities are yet to come up with definite rules to set up such trustees even though the central bank, the Securities Board, the office of the Company Registrar and the Finance Ministry have already held several rounds of meeting for this purpose.

According to the information received, the authorities have been able so far to make a rudimentary draft of a directive for this purpose. According to this draft, banks, finance companies or merchant banks will be allowed to be a Debenture Trustee if their Articles include a provision that allows them to be such Trustee and they have the appropriate manpower and valuation capabilities. As most banks and finance companies have recently concluded their general meetings, they are not in a position to hold a new meeting so soon just to change their Articles.

Failure to issue debentures will curtail the lending capacity of the banks. As the core capital requirement is related with the value of the risk weighted assets of the banks, they have to restructure their portfolio reducing their exposure on high risk-weighted assets and increasing it on low risk-weighted assets. Loans to the private sector carry 100 per cent risk weightage while the investment on government securities has a zero risk weightage. This is 20 per cent on interbank transactions and 50 per cent on L/C.

Though the banks also have the alternate route to sell shares on premium to increase their capital, as provided for in the Company Ordinance, they are hesitating to do so due to the technical complications in deciding the premium rate.

Fresh Initiatives to Attract Indian Pilgrims

The NTB is set to launch in mid February a new logo and slogan of the tourism industry, which will be unveiled in Delhi in the last week of February and in Berlin, Germany during the International Tourism Fair in March. The NTB had asked a Delhi-based company to prepare the logo about six months ago.

Looking at the encouraging trend of Indian tourist arrival in Nepal lately, Nepal Tourism Board (NTB) has now been more concerned about the Indian tourists. In this connection, a team of Nepal Tourism Board along with six tour operator companies toured South India recently. And the Board is preparing to bring out special packages for the Indian tourists.

Unlike tourists from third countries, the Indian tourists are quite undeterred by the political instability in Nepal, as shown by the arrival of air-bound Indian tourists which increased 8% in 2005 compared to 2004. Likewise, the month of January saw 32% increase in Indian tourist arrival compared to the same month last year.

The team took part in the tourism fairs held in Bangalore and Madras. “The ten day tour of South India was specially focused to attract the pilgrims as the south Indian populace is very religious,” says Ujjawala Dali, Tourism Marketing and Promotions Manager of NTB. The Indians are attracted to the religious sites in Nepal like the Pashupatinath and Muktinath. They being devout followers of religion are not daunted by the unstable situation in Nepal and the board has laid special attention to facilitate their visit, says Dali. It is learnt that the board is bringing out special arrangements for the upcoming Shivaratri festival and the holiday season of the Indians.

During the visit the Nepali tour operators interacted with the tour operators of some cities in south India. It is said that one major problem for Indian tourists coming to Nepal is the transportation. They have requested the NTB to have more flight operations connecting the region with Nepal.

Kist Merchant Banking to Enter Housing Biz

Looking at the growing difficulty to find viable new creditors, Kist Merchant Banking and Finance Ltd. is planning to foray into remittance handling and housing business.

Talking to Aajako Abhiyan weekly, Executive Director of the company Kamal Prasad Gyawali said that the present situation of the country has pushed every business sector into instability making it increasingly difficult to find viable borrowers, which prompted his company to make such a decision.

Established some three years ago, the company has invested in several sectors, especially into real estate. It has invested more than 100 million rupees in the purchase of real estate. Likewise, the company has lent for hire purchases of vehicles, machinery and home appliances. It also has granted credits in agriculture, health, education and industrial sector.

Gyawali has envisioned including in its management a group of experts comprising of tax experts, lawyers, engineers and the like. This group of experts would guide the company whenever the company ventures into any business. “Our idea is to become self dependant in matters relating to advices,” says Gyawali.

Prohibition on Opening Cooperatives to be Lifted

The government is now preparing to allow opening of cooperatives which it had prohibited for some years. The registrar of the Cooperatives Division, Markendeya Upadhyaya, informed that the government is making necessary changes in the law for this.

The cooperatives had increasingly cheated people, and as a measure to curb this the government effected a ban on opening of new ones three years ago. But now it has already allowed the local communities to open cooperatives in the rural areas and as Upadhyaya said, this would soon be allowed in cities also. The likelihood of cooperatives cheating people is less in the villages as the cooperatives there are formed by the local people themselves.

The Cooperatives Division has already submitted a paper to the government suggesting necessary changes in the law. The division has recommended for fixing limits to their work, pointing out the extent of deposit collection and capping deposit collection to a multiple of share capital.