Foreign aid commitment hits record high

Nepal received almost double to around Rs 100 billion foreign aid commitment in the last fiscal year compared with 2008-09.

At a time when the government's absorption capacity is under doubt, the country received Rs 92,288.48 million foreign aid commitment -- including loan and grants from bilateral and multilateral agencies -- in the fiscal year 2009-10, whereas it was Rs 47,975.23 million a fiscal year ago, according to the Foreign Aid Department at the Finance Ministry (MoF).

"Though, it can not be compared, the foreign aid commitment is huge," said Lal Shanker Ghimire, chief of Foreign Aid Department at the Finance Ministry.

However, the experts are seriously concerned over Nepal's capacity to utilise the aid. "Nepal has been unable to utilise foreign aid in the past few years," said former member of the National Planning Commission (NPC) Dr Posh Raj Pandey.

Out of the total commitment, Rs 25,823.24 is loan from multilateral agencies -- World Bank (Rs 13,492.33 million) and ADB (Rs 12,330.91 million), whereas the remaining Rs 66,465.24 million is grant. "Nepal needs to develop absorbing capacity for the maximum utilisation of the aid," he added.

"For the maximum utilisation, foreign aid has to be utilised on the projects Nepal owns," he said adding that this commitment could help government plan resources for the new fiscal year.

However, the foreign aid commitment in the fiscal year 2008-09 has registered a dismal growth of 2.5 per cent compared with 32.9 per cent in its immediate preceding year.

In monetary term, committed foreign aid was limited to Rs 47,975.3 million in 2008-09 from Rs 49,186.2 million in 2007-08. "Of the total foreign aid commitment for 2008-09, bilateral assistance constituted Rs 27,196.5 million, whereas the multilateral assistance totaled to Rs 20,778.8 million," according to the MoF.

Similarly, bilateral assistance constitutes Rs 36,001.41 million, whereas multilateral assistance constitutes Rs 56,287.07 million in the fiscal year 2009-10.

While classifying the foreign aid into grant and loan components for the year, grants amounted to Rs 43,095.7 million and loans to Rs 4,879.5 million in 2008-09. Foreign grants have increased by 4.9 per cent whereas loans have decreased by 39.9 per cent compared with a fiscal year ago.

Foreign loan has been playing vital role in the Nepali economy. The net outstanding foreign loan totaled Rs 249,965.4 million in the fiscal year 2007-08, which further increased by 10.8 per cent reaching Rs 277,040.4 million in 2008-09.

The budget for the fiscal year 2009-10 has targetted Rs 78.51 billion in foreign assistance -- including grant and loan. It was 27.45 per cent of the total budget of Rs 285.93 billion.

Last budget's target

Total budget -- Rs 285.93 billion

Foreign assistance -- Rs 78.51 billion

Foreign grant -- Rs 56.95 billion

Foreign loan -- Rs 21.56 billion

Will the Monetary Policy be effective?

The central bank is preparing to bring the Monetary Policy -- for the first time before the fiscal policy popularly known as budget -- to plug in the loop holes of the economy.

However, the experts doubt the effectiveness of the Monetary Policy as it could not support the full-fledged budget that might come in two months. "Given the size of the 'Special Budget' that is Rs 110.21 billion, the actual budget size could be expansionay to be at around Rs 335 billion," said Prof Dr Bishworbher Pyakurel.

"It calls for expansionary Monetary Policy to support growth and credit flow," he said adding that 'Otherwise, it could not absorbe the macro-economic shock.

But the bankers think that the expansionary policy could create more trouble. "We need tight Monetray Policy that could support banks and financial instuitution," said Radhesh Pant, former president of Nepal Bankers' Association (NBA).

Though, expansionary Monetary Policy could pull the interest down and increase money supply, it would be ineffective currently in an absence of good investment-climate that could only be ensured by the budget and its policies.

This is the first time the central bank is bringing the Monetary Policy before budget despite its bad experience of last Policy's failure.

The ex ante stance of monetary policy of 2008-09 was made tight in the face of arising trend of prices. "It was made tight considering rising pressures on prices of goods and services, liquidity overhang of a year ago, rising asset prices and likely adverse impacts of volatility in asset prices-the prices of real estate and shares in economic activities and banking sector stability in the long run," the central bank had said then.

But it could neither contain the price hike nor eased pressure on liquidity rather the banks and financail institutions have faced liquidity crunch. "The liquidity of the commercial banks has gone down by 5.1 per cent in the first 11 months," a central bank authority said.

As last fiscal year's Monetary Policy failed to create microeconomic stability and crack whip on price hike that has posted a double digit growth despite the Policy's target to contain within seven per cent, the central bank has to analyse the tools it has used.

One of the major objectives of Nepal Rastra Bank (NRB) is to maintain stability by adopting suitable monetary policy. However, it failed in not only raising public confidence on banking and financial system, but also to provide excellent services by promoting monetary and financial system stability and ensuring a financial sector for achieving sustainable economic growth.

Another key objective of the Monetary Policy is also to facilitate economic growth through price and external sector stability. The Balance of Payment -- that registered a deficit in last 25 years -- is another challenge for the Policy.

Daily transaction amount drops to half

Nepal Stock Exchange Ltd (Nepse) registered a fall in daily transaction amount by almost half in the fiscal year (FY) 2009-10 from a fiscal year ago.

"Nepse saw Rs 42.4 million worth transaction daily in 2009-10, whereas a fiscal year ago, it used to transact Rs 92.6 million daily," according to the data.

Similarly, Nepse posted Rs 11.75 billion worth transaction during 2009-10 that is 45.80 per cent of the total transaction amount in 2008-09," the secondary market said adding that it had registered Rs 21.68 billion worth transaction during 2008-09.

The Nepse attributed its poor performance to various economic and non economic factors. "However, the over supply of shares, gloomy economic situation of the country and political uncertainty also pulled the Nepse down in 2009-10," it added.

The market capitalisation that was at Rs 5.12 trillion at the end of 2008-09 also plummeted to Rs 3.76 trillion at the end of 2009-10. "But the current market capitalisation is almost 28.59 per cent equal to the gross domestic product (GDP).

The Nepse data reveals that in 2009-10, Nepse listed 18 more companies for the secondary market transaction. "Among 18 companies, Nepse listed 11 development banks, two finance companies, two commercial banks, one hydropower and two insurance companies for the transaction in 2009-10," it said adding that the total listed companies now reach 176 companies that was only 159 a fiscal year ago.

"Two listed companies Narayani Finance and National Finance merged to form a company," according to the Nepse that has also listed Rs 19.92 billion worth ordinary shares including primary, rights, and bonus shares, Rs 227.7 million worth corporate debentures and Rs 9.80 billion worth government bonds.

However, the increasing number of securities -- in the secondary market -- coupled by low investors' confidence pulled the Nepse down to 477.73 points from a fiscal year ago's 749.10 points.

Though the secondary market has signed an agreement with CDSL India to establish the CDS, it failed to establish it within the targtted time frame. The budget for the fisca lyear 2009-10 has aimed to establish the CDS -- the scripless securities trading system -- within October.

"Nepse signed an agreement on January 15 with CDSL India for the establishment of the CDS system," according to the Nepse. Managing director of Nepse Shanker Man Singh and acting director of CDSL India P S Reddy signed the agreement on behalf of their respective organisations on January 15.

The Kathmandu-centric secondary market expanded to Biratnagar, Birgunj, Narayangath and Butwal in 2009-10, though the transaction outside the valley is not yet very encouraging. The Nepse still has many challenges like boosting the investors' confidence, making the OTC market functional, starting the bond trade, listing of more manufacturing industries to reduce the dominance of financial sector and increasing the number of brokers.

Pandey presents Special Budget

Once again the political agenda has pushed the development and economic agenda to the back burner. Instead of the full fledged budget, finance minister of the caretaker government Surendra Pandey today presented Rs 110.21 billion 'special budget' meant only for the government expenditure.
"Due to the present political deadlock, the caretaker government could not present the regular budget for the fiscal year 2010-11," he said adding that "due to the emergence of special situation, the Special Budget Bill -- that empowers government to withdraw money from Consolidated Fund to carry out regular services and activities in the coming fiscal year under the Article 96 (a) of the Interim Constitution -- has been presented.
According to him, the revised total expenditure of this fiscal year 2009-10 is estimated to remainat Rs 265.63 billion -- 20.93 per cent higher compared with a fiscal year ago. The 'special budget' will help the government to spend 'not exceeding one-third of the last year's budget'. "The government is forced to bring the 'special budget' as a temporary arrangement to allow itself to carry on with routine expenses and revenue collections in the new financial year, starting from July 17," he said.
Economic policies of the last budget gets continuity until a full-fledged budget is brought by the new government.
It is the second time after the Constituent Assembly (CA) election that the government has failed to present a full-fledged budget on time and made temporary arrangements. Under the Interim Constitution, Pandey has not announced any new tax policies as a caretaker government cannot bring changes to the present tax structure or introduce new taxes. Earlier, former finance minister Dr Ram Sharan Mahat had brought such 'special budget' in July 2008. But the entrepreneurs think that such 'temporary arrangements' will hurt the development activities and investors' sentiments. "We are on 'wait and watch' mood," said president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Kush Kumar Joshi. "There will be no new investment as the investors will wait for the new government's programme and policy," he said adding that such arrangements will also not address the business fraternities' problems. Binod Chaudhary, CA member and the president of Confederation of Nepalese Industries (CNI) agreed, "Once again the political agenda has pushed the economic agenda to the back burner." "At a time when all the economic indicators are nosediving, expenditures are going up in an uncontrolled manner hurting the economy," he said adding that many Acts that could boost the investors' confidence are gathering dust in the Parliament. Another CA member and industrialist Rajendra Khetan thinks that neither had the full-fledged budget nor this arrangement could propel development activities. "However, had the budget come on time, it could have addressed rising trade deficit and negative Balance of Payment (BoP) position," he said adding that the arrangement is only for the government expenses. Instead of outlining new development programmes and plans, the 'advance budget' aims to enable the government function till the full-fledged budget is brought by the new government to be formed.

The next finance minister will have a daunting task to tame inflation; check intimidation and threat against business community, create investor-friendly environment, provide security for the investment, and push the plummeting exports up to bridge the widening trade gap and BoP position.

Government fails to crack the whip on rising prices

The government has failed to crack the whip on price rise. "The inflation is expected to remain at around 10.7 per cent instead of the budget's projection at seven per cent," according to the Economic Survey that Finance Minister of the caretaker government Surendra Pandey today tabled in Parliament.
"Similarly, the gross domestic product (GDP) growth has been revised to 3.5 per cent from an estimated 5.5 per cent due to low agriculture yield that was at four per cent in 2008-09," said the survey that has estimated the agriculture sector's growth to remain at 1.2 per cent. The agriculture sector contributes 33.03 per cent to the GDP, according to the pre-budget economic survey.
The survey said construction, commercial services like real estate, leasing and other services, manufacturing, and hotels and restaurants sectors could grow at higher pace than in the last financial year.
The survey has accepted government intervention as the key to address obstacles in accelerating economic growth.
"Government finance situation is satisfactory," said the survey that has estimated revenue mobilisation to grow by 24.6 per cent. Encouraged by the revenue mobilisation, the government has also revised the revenue target upwards to Rs 190 billion from the budgetary estimate of Rs 176.73 billion.
Pandey had presented an accommodative budget of Rs 285.93 billion for 2009-10, with Rs 46.34 billion deficit.
Normally, the Economic Survey is tabled in Parliament a day before the General Budget but due to political deadlock, the Finance Minister will present a Special Budget tomorrow.
He will present an estimation of expenditures and revenue projections, with no changes in tax rates or new policy measures for four months.
The Special Budget will help the government to spend 'not exceeding one-third of the last year's budget'. The government is forced to bring the Special Budget as a temporary arrangement to allow itself to carry on with routine expenses and revenue collections in the new financial year, starting from July 17. Economic policies of the last budget gets continuity until a full-fledged budget is brought by the new government.
It will be the second time after the Constituent Assembly (CA) election that the government has failed to present a full-fledged budget.
Earlier, former finance minister Dr Ram Sharan Mahat had brought such Special Budget in July 2008.
The next finance minister will have a daunting task to tame inflation; check intimidation and threat against business community, create investor-friendly environment, provide security for the investment, and push the plummeting exports up to bridge the widening trade gap.

Sector wise contribution to GDP (2009-10)
Agriculture and Forestry – 33.03 per cent
Wholesale and Retail Trade – 13.97 per cent
Transport, Storage and Communication – 9.76 per cent
Real Estate, renting and business activities -- 8.26 per cent
Education – 6.67 per cent
Construction – 6.64 per cent
Manufacturing – 6.25 per cent
Financial Intermediaries – 4.07 per cent
Hotels and Restaurants – 1.67 per cent
Public Administration and Defence – 1.99 per cent
Electricity, Gas and Water – 1.49 per cent
Health and Social Work – 1.46 per cent

Govt expenditure on PE employees goes up

Despite the poor performnace of the Public Entreprises (PEs) compared to private sector, the government's average expenditure on PEs employees has gone up almost to the level of private sector employees.
"The average expenditure per employee per month has increased to Rs 27,110 compared with Rs 21,672 a fiscal year ago," said the annual performance review of the PEs published by the Finance Ministry today.
Among the 36 PEs half of the PEs reported profit and the remaining half were in loss in the fiscal year 2008-09, whereas 17 were in profit and 19 in loss during the fiscal year 2007-08, said it.
"PEs under industrial sectors, service sector and social sector are in loss whereas the PEs under the trading sector, public utility sector and financial sector are in profit," according to the performance appraisal.
According to the Financial Comptroller General Office, the government has invested Rs 86.13 billion in these 36 PEs and has received Rs 3.47 billion in dividends in 2008-09. However, the return stands at only 4.03 per cent in comparison to the total government's share investment.
The government has received Rs 3.47 billion in dividends from Nepal Industrial District Management, Nepal Telecom, Nepal Stock Exchange and Rastriya Beema .
The review reveals that overall net profit of the PEs has also more than doubled to Rs 10.55 billion in the fiscal year 2008-09 from Rs 4.94 billion in the fiscal year 2007-08.
The performance appraisal gives a gloomy picture of the auditing of the PEs. "Out of 36 PEs, only 14 have completed audit up to fiscal year 2007-08, 15 PEs have completed audit upto 2006-07, two PEs have completed up to fiscal year 2004-05," according to it.
The government accepts that the task of limiting of number of Board of Directors to five could not be complied because of lack of Act and Regulations as some of the PEs that have specified the number of Board of Directors fixed above five that remained to be amended. Similarly, the government has also failed to hire professional management team to run the PEs.
The unfunded liability has increased by a whopping 92.59 per cent to Rs 9.54 billion in the fiscal year 2008-09, whereas contingent liability has touched Rs 17.10 billion. Similarly, the outstanding balance of the PEs remained Rs 74.6 billion at the end of the fiscal year 2008-09.
The annual performance review of the PEs incorporated per formance of 74 entreprises comprising 36 PEs with full government holding, 26 witgh minority share, 11 development committees involved in commercial activities and Employees Provident Fund that is incorporated under special Act.

Monetary Policy to give breather to margin lending, real estate

The central bank is planning to bring a balanced Monetary Policy with some changes -- especially to relax margin lending and real estate sectors -- before the full-fledged budget this time.

"The government''s policy and programmes will largely based on the Three Year Interim Plan (2011-2013) that is the already-approved," Nepal Rastra Bank (NRB) governor Dr Yubraj Khatiwada said adding that the approved-TYIP and the central bank''s financial indicators will help chalk out the plan for the Monetary Policy.

"The central bank might not need to wait for the full-fledged budget," he added. "Though, the Monetary Policy has to come after the budget – that has been delayed this year too due to political uncertainty this year – there might be exception this time."
Though, the tradition has it that the Monetary Policy is brought to support the government's policy document that is budget.

Meanwhile, painting rosy picture of the economy, the governor said that the deposit -- that was registering negative growth during February, March and April -- has been increasing by 11 per cent recently, credit to deposit (CD) ration has come down to around 85 per cent from 95 per cent and foreign exchange reserve – mainly Indian Currency (IC) and dollar – along with the Balance of Payment (BoP) is improving. "Within six months BoP will come out of the current deficit position,” he estimated.

However, he accepted that the BoP situation is not improving due to increase in exports – that has plummeted by over six times than the imports – but due to some restrictions in imports.

"Restriction on imports of some goods and services helped the BoP deficit to ease,” the governor said. The BoP deficit has eased to Rs 17.36 billion in the first ten months from Rs 22.1 billion in nine months.

The Monetary Policy will also spell out specific upgradation policy for the banks and financial institutions. "The upgradation has been stopped for a while," Khatiwada said adding that quality has to be taken seriously while upgrading banks and financial institutions.

Currently couple of banks and financial institutions like Sanima Bikas Bank and Nepal Share Markets and Finance Company have applied to the central bank for upgradation to the Class-A commercial banks. But the central bank has halted their process till the new Monetary Policy.

Meanwhile, the Monetary Policy will have a serious challenge to address the rise in cost of fund due to hike in lending rates. "The rise in interest rates in recent months have been successful in increasing the deposit, but it has also put pressure on lending rates hurting the investors," the governor accepted.

Khatiwada also appealed the people not to hord cash at home and have faith on banking insititutions as there is enough liquidity in the banking system unlike last Dashain.

Financial Sector Reform

KATHMANDU: The review of new UK government’s grant assistance policy has hit Nepal’s Financial Sector Reform Programme. After the assurance of assistance, we will start the process of hiring the CEOs for the troubled Nepal Bank Ltd (NBL) and Rastriya Banijya Bank (RBB). The World Bank and DfID – the British agency – had been supporting the programme to restructure the NBL and RBB along with the central bank. “We are ready to start fresh process of hiring the CEOs for these two financial institutions,” Khatiwada said adding that the Nepal Rastra Bank (NRB) had invited applications for the post of CEO of NBL repeated but could not succeed. The central bank backed team is operating the NBL for last two-and-a-half year after the then foreign management left abruptly, though the RBB has seen not many changes.