Major highlights of Monetary Policy 2007-08

• The monetary policy for the fiscal year 2007-08 that Nepal Rastra Bank (NRB) made public on 23 July has no remarkable policy changes.
• It focuses mainly on managing high liquidity and maintaining fiscal stability, vowed to limit the inflation rate at 5.5 per cent and achieve surplus balance of payment of at least eight billion rupees.
• In order to bolster institutional investments to the disadvantageous sectors, the policy has raised single borrower limit for microfinance institutions to Rs 60,000 for individuals and Rs 150,000 for micro enterprises.
• Microfinance institutions that raise their paid-up capital by Rs 2.5 million, will be allowed to extend services to one adjoined district, the policy stated.
• Now onwards commercial banks are required to extend three per cent of their total loan investments for deprived sector. The policy has been extended to development banks and finance companies as well.
• There will be no need of 20 per cent additional loan loss provision on the loans extended to the deprived sector, according to the policy.
• To boost investment in major infrastructure projects, the policy has raised the existing single borrowing limit to 25 per cent of the primary capital while extending loans to sectors that require huge investments like hydropower.
• The policy has announced to slash export refinance on Nepali currency by one percentage point to 2.5 per cent but a cap on lending interest rate of five per cent has been set for commercial banks extending such loans.
• The central bank has also announced to extend concessionary refinance at 2.5 per cent to support the revival of cottage and small scale industries, but the retail interest rate of such loans should be less than 5.5 per cent.
• NRB continued the policy of extending loans to sick industries at a concessionary rate of 1.5 per cent. However, the policy has made it clear that commercial banks dealing with such loans are not allowed to charge an interest rate if more than 4.5 per cent.
• In order to check possible misuse of short-term loans being provided to development banks and finance companies by commercial banks, the NRB has raised penal interest on such loans.
• The monetary policy has also lowered the service charge that the commercial banks have to pay to the central bank while exchanging foreign currency to one per cent from two per cent.
• The rate of commission that banks charge to the customer while buying convertible currencies will come down by the same level.
• The policy estimates that the board money supply (M1) will remain at 15.6 per cent against the estimated 15 per cent recorded last year.
• Internal loan is expected to grow by 17.1 per cent and the total loan investment from banking sector to private sector is likely to increase by 18.5 per cent during the current fiscal year.
• Like in the past, the bank has taken more steps to liberalise the foreign exchange (forex) regime. The policy has added a new mechanism making imports possible using documents against payment in addition to the existing letter of credit (LoC) or draft/TT facilities.
• Traders can import raw materials and intermediate products from India against payment of US dollar.
• The ongoing financial reform programmes will continue.
• The policy has also warned the stock market that the current bullish trend defies the market fundamentals.

Nepse on corrective mood

The overheated stock market has started to show signs of slowdown from last week. Last week Nepal stock exchange (Nepse) index posted a marginal growth 0f less than one point. And this week too, it continued to cool down by registering more than two negative points on Sunday and 4.81 negative points on Monday and dropped to 680.55 points.
Credit default fears in the US home loan market sent jitters across global markets and it affected the Indian share market also.
But can it be implied to Nepal too, is a question at the moment. Can Nepal effect global stock market or be affected by it? Anyway Nepse is on the corrective mood at present. This little correction will do the Nepse well rather than harm.

Manufacturing sector needs more attention

One of the main causes behind the lack of industrialisation in Nepal is the private sector’s indifference towards industrialisation. Till late 1980s, large manufacturing plants like Bansbari Shoe factory were mostly owned and operated by the government.
In the post-1990 era, private sector has come up in an aggressive way to make its presence felt in the manufacturing sector. Once government dominated sector is now totally gone to the private hands. As a result the private sector has invested in major manufacturing industries — like jute, sugar, cigarettes, beer, matches, shoes, chemicals, cement, bricks and pharmaceuticals. Other manufacturing units like garment and carpet industries — targeted mostly to the foreign markets — are also dominate by the private sector.
Most of Nepal's manufacturing activity is based on the natural resources and agricultural products. However, agro-based industries in recent times have come under tremendous pressure as the government has imposed 13 per cent VAT on them, say industry players. “Once the VAT is imposed, industries could not compete and almost lost their identity, because in India — with whom we share wide open border —charge only four per cent VAT on agro-based products,” they complain.
The best thing Nepal can do is commercialisation of agriculture and promotion of industries like tea, coffee, jute, sugar, cigarette, dairy, leather-based, herbs. Being an agricultural economy most of the industries are based on these agricultural raw materials. Building competitiveness in these sectors can increase export and displace import. The other kinds of industries are also dependent on various imported raw materials like oilseed, sugarcane, jute, and tobacco are the major cash crops.
Diwakar Golchha, vice-president of the Golchha Organisation, one of the key manufacturing industries in Nepal, says, “VAT in agro products should be at par with India to build a competitive edge.”
He also suggests the government to establish pulses institute, sugar board and jute board — to boost the production of these major cash crops that can promote the Nepali manufacturing industries— immediately.
“Nepal used to produce 80,000 to 90,000 tonnes of jute earlier. But the production has been plummeting,” he says. “Apart from that farmers also have to change their traditional way of farming and learn modern technology. The production could be increased three-fold, if modern technology is adopted.”
Some of the other problems are unorganised marketing that has eroded the confidence of farmers.
As India and China positioned themselves as global technology and manufacturing hubs, Nepal has yet to realise its scope of being a manufacturing hub. The myth in the manufacturing industry could be broken, if government brings paradigm shift in policies to exploit the huge southern and northern markets.
To promote exports, the government has come up with the idea of Special Economic Zones (SEZs) and Export Promotion Zones (EPZs). But the industry insiders suggest these zones be linked to dry port.
In the past also, government has established industrial estates in different parts of the country like in Patan, Balaju, Hetauda, Pokhara, Dharan, Butawal, and Nepalganj to encourage manufacturing units. But most of the industries in these estates are either closed or non-operational due to recent disturbances.
The decade long Maoists insurgency has bled the industries blue. The business community had a little hope once the government and Maoists reached an agreement to stop violence. But again, confidence of the business community has eroded in recent days due to Maoists intimidation and donation–spree. “Though Maoists say that they support the national industries, they have not spared anyone,” industrialists complain.
Shekhar golchha, executive director of the Golchha Organisation, says that the low confidence is due to directionlessness of the politics. Not only the business community, consumer confidence is also low. There is a sense of nervousness in the market.
“Water is muddy now. And the investors and business community are waiting for the things to settle,” says Golchha. He, however, is hopeful that once the political parties have a long-term policy commitment, the double-digit growth is not a far cry.
Apart from political upheaval, no significant improvements were recorded in the overall productivity growth and spatial distribution of manufacturing which appear to be due mainly to the lack of basic infrastructure and the shortage of skilled manpower. Thus, appropriate investment policies are essential, if the potential benefits of liberalisation are to be fully achieved. “The nation must bring long and short-term strategies to develop its manufacturing sector to reap the benefits from SAFTA, WTO and BIMSTEC, suggests manufacturers.
With the expectation to supplement domestic private investment through foreign capital flows, transfer of technology, enhancement in management skills and productivity and to get into the global market, Nepal finally opened its door for foreign investment by adopting the most liberal economic policies in the 1990s.
After Nepal adopted the free-market economy and opened the manufacturing sector for foreign investment, there is a flow of foreign money in the sector. Indian manufacturing giants like Dabur and Hinduatan Lever entered the Nepali market with their consumer products. Few more companies have also entered into manufacturing tie-ups with Nepali companies like Shaw Wallace. Given the low import duty and tax regime in Nepal, several consumer goods companies can use Nepal as its manufacturing base.
The labour cost of Nepal is comparatively very low. Semiskilled and skilled labourers are plenty. The wage and salary of any of these groups is also lower than in any other developing countries, which is a boon for the foreign companies to shift their manufacturing bases here.
However, Joseph Pulikottil, general manager of Asian Paints, says that the government should take right steps to create an environment to change the import-led economy to manufacture-led economy. “Indian states are luring FDIs with longer tax holidays. Nepal can do the same, if it wants more foreign money to flow in,” he adds.
Almost every sector in Nepal is open for investment like manufacturing, energy, tourism, mining, agro-based industries except cottage, arm and ammunition industries; explosives and atomic energy; real estate; poultry and fisheries; and some other sensitive industries directly relating to public health, environment and defence are a few exceptions. Nepal is a member of Multilateral Investment Guarantee Agency (MIGA) that assures the foreign investors against non-commercial risks like currency transfer, breach of contract, war and civil disturbances in the country. The government has also granted several benefits for foreign investors — like charging no income tax on dividends, export earning and interest earned on foreign loan — to woo them.

(Published in The Himalayan Times of 2006, July 6)

Growth, but defying market fundamentals

Nepali share prices have been climbing a new high every day heading to 700 points mark with gains led by banks and financial institution in the recent months.
The financial companies, especially the commercial banks led the latest rally on hopes of bonus shares ands rights shares. The banks (commercial and development) and financial institutions (Bittiya Sanstha) have to increase their capital proportionately each year, according to the central bank's policy. Buoyed by this speculation, the investors are ignoring the market fundamentals, which can be fatal.
“The banks has no option than to issue bonus shares if they are making profit or right shares if they are not making profit,” says Niranjan Tibrewal, an investor.
However, being bullish on only the financial institutions can be justified if there is a strong credit demand in the market, which is not the case; or hike in public lending rates, which is even shrinking due to cut-throat competition.
“If we follow the history, 1929's global market crash led to the economic depression of 1930's,” says Prof Dr Manohar Krishna Shrestha. Bulls charged forth but the economy has not grown in a way that can sustain this 'exaggerated growth'. When the economy does well, it is obvious that banks and financial institutions do well. But the question is has our economy grown.
Some investors' pool has created an 'artificial boom' that is not a competitive drive. The upward movement that has been witnessed only in the last month of fiscal year proves that the investors are calculative, if not fool. They are taking calculative risks and pouring their money into the stock market.
The market, now, has to be regulated without damaging the investors' confidence as some people are playing on the investors' sentiments. The immediate gains that have lured some to play foul will lead to a bubble burst.
“The buying momentum is strong, there is more demand in the market than supply that is also leading to the price hike,” says Rabindra Pradhan. Stock market is, however, trying to cool investors enthusiasm for stocks -- by publishing notices regularly to be aware while buying -- after speculative frenzy set regulators on edge over a potential crash.
“Though the present trend may continue till this year, due to the crowding effect,” Prof Shrestha says adding that manipulation is evident.
Since last couple of months investors had ignored repeated warnings of the regulatory authority about the run-up in the share prices, but after yet another volatile week, investors' appetite for investing does not appear to be diminishing. But the market fundamentals do not support this buying frenzy, which could result in punters losing everything if the speculative bubble were to pop.
The share of the companies, which has negative net worth, is also increasing along with the companies that are making profits, which shows that lack of opportunities of investment and low interest rates have contributed to this bullish trend. But the market has to follow certain norms. The rise and fall in the prices of shares of any company must have some rationale. But current market trend does not follow any.

Books Vs Brokers
Economists and the regulators feel the current bullish trend as an irrational behaviour. Investors are attracted towards the stock market because the index of financial sector and service sector is rising but they are not aware of the real financial situation of the company, on which they are betting their hard-earned money.
According to the economists, the investors must know the financial condition of a company like how much deposit it has, how much is the bad loan, who are in the management, how much profit has it made in the last quarter, and what is the return on equity.
“The bonus shares they are after is only paper benefit, the investor must know the difference between the paper profit and real profit,” says Prof Dr Manohar Krishna Joshi. There is a risk when one invests on only one company. The intelligent way is to invest on many companies at one time to minimize the risk in such a volatile market.
“Diversification of portfolio is yet another smart way of investing currently,” suggests Rabindra Bhattarai, a stock analyst adding that the net worth of a company is more important factor to look into before investing on any company. “Are capital increase and profit proportionate,” it is yet another question one should ask before buying shares of any company.
“According to the market fundamentals, current growth is not justified,” Joshi adds. The growth should sustain in a long run otherwise the bubble will burst and a lots of petty investors find themselves on the road overnight.
However, the brokers think it is an accepted practice. “Only the perception is different,” says Navraj Pokharel, president of Brokers Association. He outrightly rejects the accusation of brokers being party to the manipulation in the stock market. “The economists want to draw the map but we follow the map,” he says.

The movers and shakers
Only profit and loss of a company can justify the rise and fall in the share prices of any company. The current rise in case of some companies is justified and in some cases it is not.
Stock exchange should disseminate information to the investors regularly and educate them to protect their rights. “It publishes a notice as a ritual and thinks that it has fulfilled its duty,” Surendra Bahadur Singh, director from the investors, Nepal Investment Bank (NIB), says adding that many investors even do not know the market reality and follow the whim only. “They follow the big investors.”
All investors are equal but some are more equal than others. Thus 'the big' investors have every reason to manipulate the market for their personal gain. “There is more dirt in the stock market than one can imagine and that justifies the raids at some of the brokers office last week,” says one investor without wanting to be quoted, adding that those people operate in a group.
However, Niranjan Tibrewal, director from the investors at the Standard Chartered Bank Nepal differs. “Operators manipulate globally,” he says adding that it might be the same case here also. “The change in monetary policy three times in one year last year gave them a fair share of benefit. It's the operators sheer luck also.” The decision to increase the paid capital by all the financial institutes is the major reason for the investors to invest in shares. “They know before hand that the banks will give them bonus shares or rights shares, in any case they will gain.”
Rise in the prices of only Commercial Banks group, Development Banks group and Financial Companies groups' indicates that the growth is not linked to national economic growth. “That is because if the economy grows banking sector gets the benefit first and if the economy is hurt, banking sector is the last one to be affected,” Tibrewal says.
Traditional Market is one of the reasons for the present situation. Thus, the Stock Market needs to be modernised. “It should apply Central Depository System (CDS) to grow as a vibrant sector. CDS can minimise the troubles for the buyers,” Singh says. According to him, the brokers' commission should also be lowered from what they are charging right now.
The secondary market is virtually on fire in recent months. “The stock market is currently heating because of the lack of investment opportunity. We need other investment opportunity where there is good return like mutual fund so that the petty investors can easily invest and get good return,” Singh further says.


Nepse feels the heat
The market is heating and it's obvious that Nepal Stock Exchange (Nepse) is feeling the heat more than anyone else. Why? “Because it's our duty to safeguard investors' interest,” clarifies Rewat Bahadur Karki, general manager and CEO at the Nepal Stock Exchange Ltd. “One bad fish spoils the whole pond. Thus, we cannot but remain silent when 'some investors manipulate the market and majority of the ignorant investors lose.”
“To regularise the market, we are introducing automation -- which will be one of the major tools for regulating the 'unjustified rise in share price' -- from 18 August,” he informs.
Siddhanta R Pandey, managing director and CEO Ace Finance Company Ltd (Bittiya Sanstha), agrees. “The first day of the stock market will be the day it starts automation,” he says adding “Vigilant stock market is another need of the hour to protect the interest of Nepali investors.”
The Stock market is also thinking of bringing 'Brokers code of conduct' to make it more self-disciplined.

The History
The history of securities market began with the floatation of shares by Biratnagar Jute Mills Ltd and Nepal Bank Ltd in 1937. Introduction of the Company Act in 1964, the first issuance of Government Bond in 1964 and the establishment of Securities Exchange Centre Ltd in 1976 were other significant development relating to capital markets.
Securities Exchange Centre was established with an objective of facilitating and promoting the growth of capital markets. Before conversion into stock exchange it was the only capital markets institution undertaking the job of brokering, underwriting, managing public issue, market making for government bonds and other financial services.
Nepal Government, under a programme initiated to reform capital markets converted Securities Exchange Centre into Nepal Stock Exchange in 1993.
Nepal Stock Exchange (Nepse) is a non-profit organisation, operating under Securities Exchange Act, 1983.
The basic objective of Nepse is to impart free marketability and liquidity to the government and corporate securities by facilitating transactions in its trading floor through member, market intermediaries, such as broker, market makers etc.
Nepse opened its trading floor on 13th January 1994.
Since then, it has witnessed its share of highs and lows. The market saw a swing in the beginning as it slowly gained the confidence. But from 2000 again it witnessed the downward trend till 2005. When the country returned to normalcy after the political settlement, the stock market revived. Now the market is on a cruise mode.

Nepal in figures

Per capita income
2004 — $ 278
2005 — $ 303
2006 — $ 311
2007 — $ 383
2008 — $500 (???)

GDP growth rate
2004 — 3.8 per cent
2005 — 2.7 per cent
2006 — 1.9 per cent
2007 — 2.5 per cent
2008 — 5 per cent (Estimated)

Inflation
2005 — 4.5 per
2006 — 8 per cent
2007 — 8 per cent
2008 — 5 per cent (Estimated)

Budget: Mahat is a dreamer

The government unveiled Rs 168.99 billion budget on Thursday. It is higher by 17.4 per cent as compared to the budget for fiscal year 2006-07 and 28.2 per cent higher than the revised estimate for the same period.
The budget, for the fiscal year 2007-08, presented by the finance minister Dr Ram Sharan Mahat at the interim legislature parliament on Thursday, has been scripted in the backdrop of November 22 Constituent Assembly poll, and its no wonder that its more a political document than an economical one.
The budget has kept tax rates stable on most of the items except cigarettes and liquors, which is the usual practise.
It is not surely a visionary budget, as it has a lots of constraints. It is shaped in line with the common minimum agenda (CMG) of eight-political parties. The budget devoted Rs 28.39 billion to the education sector, higher than last year’s Rs 17 billion but received less applause.
The budget seems to have focused on agricultural development also.
Some called it balanced and others feel let down, and yet others term it ‘over ambitious’ and big. However, the budget in a whole falls short of the larger picture within which the government should try and address the concern of the common people and ailing industries.
What’s good for Nepal in the long run, is good for the capital market also. Thus, the finance minister has tried to continue to appease the private sector especially to the capital market.
The government has also targeted to produce 5000MW of electricity within five years. It has planned to woo internal and external investment for hydro power generation.


Budget 2007-08
Total budget Rs 168.99 billion
Recurrent expenditure Rs 98.17 billion
Capital expenditure Rs 55.26 billion
Net budget deficit of Rs 20.5 Billion.

Target
GDP growth rate 5pc
Inflation at 5pc
Rs 99.60 billion revenue
Rs 27.46 billion foreign grant
Rs 17.36 billion foreign loan

Sectoral allocations
Rs 28.39 billion for education
Rs 12.18 billion for health
Rs 10.89 billion for defence
Rs 9.56 billion for police forces
Rs 13.8 billion for local development
Rs 5.82 billion for agriculture
Rs 7.65 billion for hydropower
Rs 3.5 billion for Constituent Assembly polls
Rs 9.34 billion for roads

International Airport to be constructed at Nijgarh, Bara
Infrastructure Development Bank to be set up
Two cement factories to be set up in Dang, Surkhet
New Tourism Policy-2007 to be formulated

Nepse scales historic high

The investors are having a great time and the stock market is on fire since the last couple of weeks. Nepal Stock Exchange (Nepse) index made history yesterday and went even higher today since it started trading 13 years ago by posting above 600 mark for the first time on Tuesday and 611.08 today.
Today the index gained +8.21 points and registered 611.08 points from yesterday's historic record of over 602 points. A continuous rise in the confidence of investors has led to this historic high but will this continue and can the market sustain this growth is yet to be answered. The Nepse index opened at 598.52 points on Tuesday morning and ended at over 602 points in the evening. Out of the 40 leading scrips the commercial banks group is the number one gainer.
The Nepse index has been soaring high for the last six weeks with investors making largely speculative buying amid rumors of persistent growth in share prices.
The bull run will continue for a week or more than again it will cool down, say experts.