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Globalisation Strategies for Nepal
BY Prof. Dr. Bakul H. Dholakia
To approach globali sation, the first necessary step is to introspect and look at what our strength and weaknesses are. The last 3-4 years in Nepal have witnessed sharp decline in the growth of economy, while elsewhere in the world, the growth rate is accelerating.
There has also been a reversal in the process of structural change in the economy. The strength of the economy improves if the structural change in such that the importance of agriculture in the national economy reduces and the importance of industry and services goes up. With higher stages of development, even within the non-agricultural sector, the importance of services goes up. If we look at Nepal, while the national income grew at about 3.3% in 2004, agricultural sector grew at about 4% while the industry (secondary sector excluding services) grew at 1.7%. This means that there is reversal of process in the structural change.
For a country to be able to benefit from globalisation, its non-agricultural sector will have to play a significant role. And the slowing down or reduction in the growth rate of industry and the services imply that the domestic market, which is already small, is not growing rapidly. That increases the challenge all the more because when you want to globalise and operate in the international market, you want some domestic strength so that the fluctuations in the international market don’t hit you very hard. In this sense, reversal of structural change is an important phenomenon to worry about.
Now let’s look at what is happening to inflation. The policymakers take a lot of pride and say that the average rate of inflation in Nepal is still below 5%. Well, that’s true. But let’s look at the composition of this inflation. The reality is that this rate of inflation is working against the manufacturing sector from the point of view of competitiveness. The average rate of inflation in agricultural sector is about 3% whereas in industrial sector it is about 7%. And high rate of inflation in the non agricultural sector implies the erosion of the competitiveness.
This problem gets compounded because of the currency peg. Since the currency of Nepal is pegged to the currency of India and Indian currency is gaining strength year after year because of the huge capital inflow so that the supply of foreign currency far exceeds the demand for it and the dollar is declining in international market, correspondingly there is also an appreciation of the Nepali currency vis-à-vis the dollar. If your industrial prices are rising at 7% per annum and if the currency is appreciating vis-à-vis the dollar, then your competitiveness erodes on both counts because of the domestic inflation as well as for the fact that when you translate it into dollar prices, it will turn out to be relatively high. As if all this is not enough, the remittance which was a major source of surplus in the BOP has dropped in the last one year. What used to be 18 million rupees in 2003 has come down to 15 million rupees this year.
The government’s ability to respond to this is going to be largely influenced by the problem of insurgency that the country is facing. The first principle for formulating any strategy is to put your feet on the ground. The ground reality in Nepal today is the insurgency. The latest report of the United Nations (UN) says that 36 out of Nepal’s 75 districts are category 3, which means they are at high security risk. Anyone who is looking at Nepal as a business proposition or as a tourism destination from abroad is going to look at this kind of data. In India we had problems of this kind in Gujarat, Uttar Pradesh, Kashmir and various other places. We had to carry out a large scale campaign in order to diffuse this misinterpretation that was being spread around and the situation is far better today. Something of that order would be required to be done here.
The insurgency has caused a huge cost. As a result of the insurgency, the pattern of government expenditure has shifted from development to security.
One has to argue and wonder over whether this is the best strategy given the stage where Nepal is today and given the fact that the rate of growth is declining. Pump-priming the economy and raising the development expenditure and therefore the public expenditure has to assume greater priority rather than reduction in fiscal deficit per se because reduction in fiscal deficit helps the economy only if the increase in the total expenditure is maintained. If the reduction in fiscal deficit is equal to the reduction in total expenditure growth, then it proves to be dysfunctional, especially when you are looking at it from the point of view of globalisation.
The insurgents have had other costs for the economy. About 400,000 rural families have been displaced over the last 5-7 years. About 10,000 people have been killed. An estimate of the international agencies is that the cost of reconstructing the infrastructural facilities, which have been destroyed in the last 5-7 years, would be around 400 million dollars. This actually means that the external assistance now is not going to produce the same kind of impact which it would have produced if this reconstruction and rehabilitation was not required.
The unwarranted migration to the urban areas due to insurgency is causing lot of pressure on the basic amenities and facilities which are provided in the urban areas. In any country urban areas are the face of the economy or the country in the context of globalisation. Someone who lands here at Kathmandu and finds that everything is polluted; the roads are congested and it takes around 40 minutes to cover 2 km distance, this will not create a good image about the place in his mind. Therefore the challenges are going to be a lot more formidable.
In Nepal international financial institutions are involved for a long time. I think there is need for an internal debate to find out how much of what the international financial institution are trying to say makes sense and how much of it doesn’t. Based on the experience of a large number of developing countries, usually 70%-80% of what these institutions say makes a lot of sense. It is some 20%-30% that needs to be debated, which is where changes are required. But the tendency is to denounce the prescription of the international agencies on the whole. That is never a good idea, because there are a lot of useful things that they try to say. I think the policymakers and the intelligentsia of the country will have to focus on this.
Let us take certain situations as given and predict what is going to happen. For instance, will this country, by 2007-08, have no insurgent at all? The answer is no. That factor needs to be considered while formulating strategies. Insurgents don’t affect all economic activities equally. There is a fair amount of economic activities that you could still have in a disturbed environment. Look at your local strengths and weaknesses. Look at what your capabilities are. See what can be done within this. It requires a lot of effort.
Let us look at the features of the international markets and where the globalisation opportunities are available. Traditional strength of Nepal has been tourism. To take advantage from this strength, you have to ask: Is it possible to provide more security? What is it that you need to do? There are a whole lot of things that you can do yourselves, where insurgents or political instability is more of an excuse for not doing anything.
International markets today are driven by some obvious characteristics. The first is scale of operation that drives the cost and the competition. The next is quality. The third is the reliability of supplies and what are the processes and services you provide to ensure that the supply is continued. The fourth is basic knowledge about the international markets. And then of course you have your own access to these international markets in terms of your own distribution network and so on.
Less developed countries have vulnerabilities in all of these. They will never have advantage over scale. It’s not possible to think of a unit in Nepal which has a scale that is comparable to even less developed countries which are going global. Therefore some stability of the domestic market plays very important role. Quality is partly backed up by technology and partly by the attitude towards quality. I am amazed that in a country where imports are relatively free, there is no benchmarking about the quality of the goods imported. It is a question of our tolerance to bad quality. Quality is not something that is only involved in the design of the product. It is also involved in the way it is packaged, the manner in which it is delivered and distributed and the manner in which it is dealt with after the supply. And no one looks at these things. You cannot succeed in a local market unless you have quality consciousness right from the procurement of materials down to the after sales services. We can also talk about the quality of infrastructure: reliability of power, quality of power, nature of roads, the type of communication system you have. For instance, think about promoting tourism. What is the quality of consciousness in hospitality industry? You cannot blame anybody for that. This has nothing to do with the environment. This has nothing to do with insurgents. I myself have faced hostile responses from employees at the hotel here. When quality is in the mind it gets translated into actual delivery. Less developed countries have to develop strength in the service sector. There is no other hope.
This service sector business is not something that you should outsource. These are your strengths. I think you can very well capitalize on it and as I said it is all a matter of attitude that one is to develop. For that one needs to put in place the systems. Very often it is said that the less developed countries have tremendous advantages in the service sector because of law labour cost. But there is a lot of myth about this. If in the investor’s country the labour costs are 10 or 20 times what we pay here, it does not translate into competitive advantages if our productivity is 10 or 20 times less than in the investor’s country. For competitive advantage, the productivity differential should be less than the wage differential. No one expects that the productivity of the manpower in the less developed countries would be the same as that of the developed countries. But the differential can be reduced. Therefore, you should invest in those things which will enhance productivity. Many of those skills that improve productivity are sub-skills, not necessarily hard skills. It is just a question of style of function, system of functioning, sincerity and the honest effort.
Clearly, the strengths are not being capitalized. That is what results in this situation. When a Nepali gets a job abroad, he works very hard. He gives 100% productivity overseas, not here.
(Prof. Dholakia is Director of Indian Institute of Management, Ahmedabad and this article is based on his recent lecture at Apex College in Kathmandu)
Currency & Money
The US Dollar outlook:
The greenback traveled along an uneven path of peaks and valleys in first week of Feb, 2004 as markets frantically sought to garner meaningful insight from what could only be characterized by a week fraught with a myriad of “event risks”. Coming off the heels of a relatively quiet and smooth election in Iraq, the markets immediately turned their attention to Federal Reserve Chairman Greenspan’s announcement on US monetary policy (Feb 4 th , 2005). With carefully chosen words and well-crafted innuendos, Greenspan successfully left the markets with scarcely more than what had already been largely discounted heading into the pivotal meeting, i.e., a 25-bp rate hike to 2.50% and the Fed’s dispensation of its “measured” rhetoric. However, with key labor reports and another speech by Greenspan addressing the US current account deficit, all culminating on Feb 2004—not to overlook the much anticipated summit of the Group of Seven industrialized nations, which just concluded over the following weekend—markets were left with plenty to take in and process concerning the health of the world’s largest economy. Consequently, markets reacted sensitively to all news; moreover, speculation of news, resulting in yet another week of heightened volatility in the FX markets.
Heralding the deluge of fundamental economic indicators last week was a strong Chicago Purchasing Managers Institute (PMI) showing of 62.4 in January (61.9 in Dec), defying expectations of a 1-point drop. However, countering the ephemeral exuberance of the PMI release was an unexpected drop in the equally important Institute for Supply Management’s Manufacturing Index (56.4 in Jan vs. 57.3 in Dec). The delivery of the fully discounted rate hike drew support away from the dollar as it fueled further speculation that the Fed’s current tightening cycle aims merely to normalize US monetary policy, instead of containing an overheating economy. Momentum then built heading into Friday on the back of a 9K-drop in initial jobless claims to 316K. The sanguine outlook from Greenspan regarding the current account deficit, and an “undisturbingly weak” non-farm payrolls report of 146K in January (200K expected), helped propel the greenback to its meteoric, albeit brief ascent against the EUR, JPY, and GBP. Ultimately confirming the recent growth trend in labor statistics, the US headline unemployment rate dipped to 5.2%—the lowest level since September 2001.
The G-7 Meeting
In the final analysis, the highly anticipated meeting of the G7 ultimately proved nonchalant, vis-à-vis market expectations for a revaluation of the Chinese Yuan. The industrial nations pledged to take individual steps to maintain “robust” global growth, while repeating their call for Asian nations to adopt “more flexible” exchange rates. Consistent with market expectations heading into the meeting, the attending finance ministers and central bankers kept their wording on currencies unchanged from a year ago in a communiqué distributed after the meeting in London. Chinese officials, invited to some of the talks, gave no sign that they are poised to change the decade-old currency peg to the USD. With little in the way of economic indicators driving the markets this week, the dollar is likely to maintain its inertia for growth unless acted upon by unexpected global news or rhetoric to the contrary.
Eurozone:
As a corollary to the euro serving as beneficiary to any dollar weakness, the single currency remained on the defensive last month as it struggled to stave off the dollar’s building strength. The single currency’s weakness was the European Central Bank’s decision to hold rates unchanged at 2.00%, highlighting the E-12’s 0.5% yield disadvantage relative to the US.
The Fall of Samurais:
The dramatic show of “unmet expectations”, USD/JPY currency pair ricocheted multiple times, from a multi-week high to a multi-week low, all within the span of hours, on the back of various market-moving events. Initially underpinned by a growing sense that a Chinese Yuan revaluation would be the focal point of discussion at this past weekend’s G7 meeting, the yen enjoyed fleeting gains, which were all but lost subsequent to the stamping out of such expectation, coupled with a developing sense of optimism regarding the US and its currency. With nothing in the way of significant economic news out of Japan last week or this week, JPY levels will likely continue to be dictated by market factors influencing both the USD and the EUR.
Sterling down the Hill:
A mixed bag of economic data emanating from the UK was characteristic of the pound’s roller-coaster ride against the USD last week. The CBI survey of industrial trade rose from –9 to –3, while the British Consumer Confidence Index surged to +1 from –3 in January. However, the UK’s manufacturing PMI in January fell to its lowest level since July 2003 (51.8), with the employment index dropping to 48.3, from 48.8 a month earlier. The Bank of England’s Monetary Policy Committee will convene this week on 2/9 and 2/10, though no change in monetary policy is widely expected. The GBP maintained relative strength against the EUR and JPY all last week, but still remains pressured against the greenback—a trend that is likely to continue throughout this week, barring any unexpected surprises to the dollar’s downside.
Enduring Aussie (AUD):
Australian dollar has managed to trade in the range of 0.76 to 0.78 for the whole month of January. Opening just below 0.7700 on 7 th of Feb 2005, the AUD quickly moved to the days high around 0.7720 after the RBA delivered a hawkish monetary policy statement. In its quarterly statement the bank indicated that the need for tighter monetary policy had increased as strong economic demand raised the prospect of a build-up in wage and price pressures. The AUD however, was unable to sustain these levels overnight in the face of USD strength, eventually succumbing to some downward pressure as it traded as low as 0.7682 before settling around 0.7700. Continuous USD strength has battered all major currencies during the month of January 2005.
Nepali Rupee and US dollar (January 05):
The dollar strength against major currencies reflected similarly against the Nepali Rupee. The Rupee which started the month at NPR 70.95 lost around 85 paisa and closed at 71.80 against the US dollars. The US dollar strength is expected to continue against major currencies. Accordingly, if so happens, we may observe weaker rupee in the days to come.
Money Market-LCY.
With the absorption of rupee by Nepal Oil Corporation from the inter-bank market through auction and simultaneous suction of its deposits with commercial bank to the revenue account at Nepal Rastra Bank by Nepal Telecom, virtually dried up the already scanty Inter-bank call money market. Uneven policy of Nepal Rastra Bank of charging 2 percent premium over the 91 days Treasury Bill average trading rate, left the commercial banks with bifurcated dilemma of their inability to manage their rupee portfolio either short or long. If they go long their investment avenue is on 91 days and 364 days Treasury Bill trading in the range of 2 to 3 percent only. Whereas the Inter-bank Lending rate for over-night call money was hovering above 3.5 percent.
In order to salvage the liquidity crunch-stricken inter bank call money market, Nepal Rastra Bank pumped in some money through repo auction and outright sale. This was of much relief to the already panicking market due to the reduction of SLF limit to the 50 % of G-Secs holding from an earlier 90 % by Nepal Rastra Bank.
Contributed by Nabil Support of Remittance
By Anup Bhandari
The history of Nepali nationals going abroad for work dates back to 1814-1816 Anglo-Nepal war. Nepali soldiers were recruited in the army of Sikh ruler, Ranjit Singh of Lahore. This trend earned the nickname Lahure for all those employed in foreign armies. Soon after the war, also the British started recruiting former Nepali soldiers into their forces. However, in recent times Nepali migrants are engaged more in occupations other than armed forces. In a research carried out by Nepal Rastra Bank in 2001, it was found that 85% of Nepalis are working as laborers, 13% are in armed force and 2% in the organized government services in foreign lands. Today, due to increase in unemployment and accelerated Maoist insurgency, the phenomenon of migrating abroad for work continues to increase. According to Department of Labor, excluding India, 122,764 workers went abroad in the year 2003/04 alone. Data published by Department of Labor show that workers have migrated to 53 different countries in the period 1991/92-03/04. The inward remittance for the fiscal year 2003-2004 was over Rs. 100 billion which was about 20 % of GDP.
A survey conducted by the Department for International Development (DFID) in 1997 states, 3.2 percent of the total population of Nepal was working in various parts of the world. Nepal received about US$ 506 million (NRs. 35 billion) through remittances in 1997 and this figure almost doubled in 2002. Further increase was noted in 2003-04 when inward remittance stood at over Rs. 100 billion. The same year, the trade deficit registered Rs. 70 billion. Thus, despite a huge trade deficit, Nepal did not face any problem in its balance of payments (BOP), thanks to remittance.
Remittance is relatively a new topic for Nepali economy, though its contribution to Nepali economy had started when Nepalis joined Indian and British army. Since then substantial amount of money entered the country in various forms like cash, gold, clothes, electrical equipment etc. After the restoration of democracy in 1990 the government adopted liberal economy policy, which encouraged the establishment of several private sector banks in joint venture with foreign banks. These banks helped the country to receive the remittance through formal banking channel. Furthermore, the central bank was liberal in giving permission to operate money transfer companies. Currently, NRB provides 15 paisa per dollar as incentives to such companies for bringing in the money through formal channels. Nevertheless, according to NRB estimates, the money being remitted through banking channels constitutes only 40 percent of the total.
With the trend of huge flow of remittance, the commercial banks of the country have started to establish relationship with money transfer companies. This enables reliable and quick service for the inflow of foreign exchange to the country. Funds remitted from any part of the world through International Money Transfer Companies can be paid in just 15 minutes to the beneficiaries in Nepal. Banks are investing heavy amounts of money in technology and on expansion of branches to provide convenient, efficient and reliable services.
Economic activities have slackened in all the sectors including tourism, manufacturing, investments etc. However, receipts of inward remittance have contributed in stopping adverse effects on the BOP despite huge trade deficit. At the same time it helped increase foreign exchange reserves with the banking sector to 108.76 billion in 2003. It is estimated that every year 250,000 persons are added to the Nepali labor market. Foreign employment surrogates the incapability of Nepali labor market to absorb the excess laborers. Nonetheless, policy makers should have a vision about how best to include foreign labor migration and remittances into the development strategy of Nepal.
In order to achieve beneficial results the government should formulate supportive policies. Hence, it is necessary to sign labor agreement with those countries where large number of Nepalis are working. The agreements should be concerned on safeguarding the interests of migrant workers and encourage them to invest their money back in Nepal. Furthermore, lobbying activities have to be carried out to ensure that Nepali workers get the same salary or wage scale as their counterpart in the host country. It is prudent to provide short-term vocational training to the workers before sending them abroad so that their income abroad can be maximized.
Looking at the brutal killing of 12 Nepalis on 31 August 2004, the government should effectively monitor the manpower companies as the cases of fraud and charging high commissions are frequently being reported. Last but not the least, looking at the shocking figures which show that 60 % of remitted money enters through informal channels, the government should organize workshops on banking in coordination with manpower agencies so that their knowledge on banking can be enhanced. This will help funnel the remittance through formal channels contributing to country’s foreign exchange reserves. Moreover, in the recent years western countries have focused more on controlling the laundering of money around the globe. The risk of terroist groups using such channels to transfer money is high. We should help in the fight against terrorism.
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