This article was first published in The Kathmandu Post on July 25, 2011.
Sunday, September 18, 2011
Saturday, July 16, 2011
Hydropower Development Bank
This article was first published in the Kathmandu Post on June 13, 2011.
Tuesday, June 7, 2011
Wednesday, May 18, 2011
Monday, April 18, 2011
US on razor edge
The US almost came to a standstill on April 8, 2011. The Republicans, who control the House of Representatives, and the Democrats, who control the Senate, locked horns over differences on US President Barack Obama’s proposed budget. The dispute threatened to lead the US into a government shutdown which would have resulted in the closure of all government related activities from museums to metros to municipal parks. Disenchanted with the Democrats’ profligacy, the Republicans have been demanding huge spending cuts especially on social security benefits and environmental protection, causes which are strongly espoused by the Democrats, to rein in the budget deficit which has spiralled out of proportion especially during the last few years.
During these last few years, the Democrats had some form of monopoly over public policy decisions. President Obama is a Democrat, and his party had control over both the Senate and the House in 2009 and 2010. As such, the Republicans blame the Democrats and their spending habits for causing the US deficit to rise to historic proportions. Using the core Republican values of limited government and less tax and criticising the Democrats’ spending policies, the Republicans made significant gains during the midterm election of 2010, and wrested the House from Democratic control. Given the public’s mandate through the ballot and the control over the House, the Republicans have recently been more vociferous regarding US deficit levels and the need to control spending.
While the Democrats and the Republicans were able to reach a deal in the last hour of April 8 and stop a government shutdown besides avoiding an embarrassing situation, the current level of the US deficit and the state of the US economy pose unique and hitherto untackled challenges. According to the International Monetary Fund’s (IMF) recent publication entitled “Fiscal Monitor”, the US is expected to have the largest budget deficit (as a percentage of the GDP) among the major developed countries in 2011. The figure of 10.8 percent quoted by the IMF is higher than that of other deficit-prone developed economies such as the UK and Japan.
In economics literature, a budget deficit of over 5 percent for a prolonged period of time can have adverse consequences as higher government borrowing pushes up the economy’s interest rate and, as a result, “crowds out” investment hurting the economy. The US has been facing a severe budget deficit for the last couple of years.
Despite the high budget deficit, US interest rates have not reached unmanageable levels. Some economists such as Paul Krugman, a devout Democrat, have been using the low yields on US Treasury bonds to argue that the current deficit doesn’t pose a long-term economic challenge. The low yield on US Treasury bonds, however, has been largely attributed to the financial crisis of 2008. After the financial crisis, investors sought the safety of US Treasuries over other riskier assets which have helped to keep the yields on these bonds low and also helped the US government finance its borrowing at a lower cost.
In the past, the US has been able to ride out high-deficit situations with a subsequent economic turnaround. During his first presidential term, Bill Clinton had similar woes of high deficit. But the US economy turned around quickly and robustly, and the deficit was replaced by a massive surplus by the end of his term in 2000.
This time, it’s a bit different. Although the US economy has been technically out of the recession of 2008, high unemployment and meagre economic growth have dampened tax receipts of the US government. Moreover, entitlement spending for the unemployed and other spending programmes to stimulate the economy have pushed up government spending. As a result, the deficit has grown year after year and debt has been piling up.
According to the latest figures, the total US debt now stands at approximately US$ 14.2 trillion (around 95 percent of the total GDP) and it is soon expected to surpass 100 percent. (This can help contextualise the current level of US debt: Among the PIGS group of countries, only Greece has a debt to GDP ratio in excess of 100 percent)
As a result, many people are spooked by the current US debt level and where it is heading. Bill Gross, legendary bond investor and chairman of the world’s biggest fixed income management company at Pacific Investment Management Company (PIMCO), thinks that the unrecorded US debt level is close to US$ 75 trillion (if one accounts for future obligations such as Medicare, Medicaid and other social security benefits).
Gross believes that this will definitely lead to higher inflation, a higher interest rate and a lower US dollar. As a result, PIMCO has been moving out of US Treasuries. Not only that, PIMCO has now started to sell short US Treasuries. Others are following suit, and many are now shorting the US Treasuries linked Exchange Traded Funds (ETFs).
Him and others, who have a pessimistic view of US debt, have the rationale that when the US Federal Reserve quantitative easing ends in June, US Treasuries will sink as the excess liquidity moves out of the system. Warren Buffet once advised, “Never short the United States.” In the past, the US has always come out of adversities stronger — from the Cuban missile crisis to the Cold War to Japan’s economic ascent. We have to wait and see how it plays out this time.
This was first published in the Kathmandu Post on April 18 2011. Permanent Link:
http://www.ekantipur.com/the-kathmandu-post/2011/04/17/money/us-on-razors-edge/220722.html
During these last few years, the Democrats had some form of monopoly over public policy decisions. President Obama is a Democrat, and his party had control over both the Senate and the House in 2009 and 2010. As such, the Republicans blame the Democrats and their spending habits for causing the US deficit to rise to historic proportions. Using the core Republican values of limited government and less tax and criticising the Democrats’ spending policies, the Republicans made significant gains during the midterm election of 2010, and wrested the House from Democratic control. Given the public’s mandate through the ballot and the control over the House, the Republicans have recently been more vociferous regarding US deficit levels and the need to control spending.
While the Democrats and the Republicans were able to reach a deal in the last hour of April 8 and stop a government shutdown besides avoiding an embarrassing situation, the current level of the US deficit and the state of the US economy pose unique and hitherto untackled challenges. According to the International Monetary Fund’s (IMF) recent publication entitled “Fiscal Monitor”, the US is expected to have the largest budget deficit (as a percentage of the GDP) among the major developed countries in 2011. The figure of 10.8 percent quoted by the IMF is higher than that of other deficit-prone developed economies such as the UK and Japan.
In economics literature, a budget deficit of over 5 percent for a prolonged period of time can have adverse consequences as higher government borrowing pushes up the economy’s interest rate and, as a result, “crowds out” investment hurting the economy. The US has been facing a severe budget deficit for the last couple of years.
Despite the high budget deficit, US interest rates have not reached unmanageable levels. Some economists such as Paul Krugman, a devout Democrat, have been using the low yields on US Treasury bonds to argue that the current deficit doesn’t pose a long-term economic challenge. The low yield on US Treasury bonds, however, has been largely attributed to the financial crisis of 2008. After the financial crisis, investors sought the safety of US Treasuries over other riskier assets which have helped to keep the yields on these bonds low and also helped the US government finance its borrowing at a lower cost.
In the past, the US has been able to ride out high-deficit situations with a subsequent economic turnaround. During his first presidential term, Bill Clinton had similar woes of high deficit. But the US economy turned around quickly and robustly, and the deficit was replaced by a massive surplus by the end of his term in 2000.
This time, it’s a bit different. Although the US economy has been technically out of the recession of 2008, high unemployment and meagre economic growth have dampened tax receipts of the US government. Moreover, entitlement spending for the unemployed and other spending programmes to stimulate the economy have pushed up government spending. As a result, the deficit has grown year after year and debt has been piling up.
According to the latest figures, the total US debt now stands at approximately US$ 14.2 trillion (around 95 percent of the total GDP) and it is soon expected to surpass 100 percent. (This can help contextualise the current level of US debt: Among the PIGS group of countries, only Greece has a debt to GDP ratio in excess of 100 percent)
As a result, many people are spooked by the current US debt level and where it is heading. Bill Gross, legendary bond investor and chairman of the world’s biggest fixed income management company at Pacific Investment Management Company (PIMCO), thinks that the unrecorded US debt level is close to US$ 75 trillion (if one accounts for future obligations such as Medicare, Medicaid and other social security benefits).
Gross believes that this will definitely lead to higher inflation, a higher interest rate and a lower US dollar. As a result, PIMCO has been moving out of US Treasuries. Not only that, PIMCO has now started to sell short US Treasuries. Others are following suit, and many are now shorting the US Treasuries linked Exchange Traded Funds (ETFs).
Him and others, who have a pessimistic view of US debt, have the rationale that when the US Federal Reserve quantitative easing ends in June, US Treasuries will sink as the excess liquidity moves out of the system. Warren Buffet once advised, “Never short the United States.” In the past, the US has always come out of adversities stronger — from the Cuban missile crisis to the Cold War to Japan’s economic ascent. We have to wait and see how it plays out this time.
This was first published in the Kathmandu Post on April 18 2011. Permanent Link:
http://www.ekantipur.com/the-kathmandu-post/2011/04/17/money/us-on-razors-edge/220722.html
Thursday, April 7, 2011
Sunday, March 20, 2011
Too much, too soon
At the end of two trading days following the earthquake and tsunami in Japan on Friday, March 11, the stock market in Japan—as measured by the Nikkei index—plunged more than 17 percent wiping out all the gains made during 2011. Although the Japanese market has recovered somewhat since then, the fear of a radioactive meltdown in the nuclear reactors damaged by the tsunami has been holding back foreign institutional investors from entering Japan’s stock market. This unprecedented event, not modelled into sophisticated trading strategies, has once again highlighted the importance of tail risk in the financial market. The 17 percent dive in the Nikkei index during two consecutive trading days was the largest since Black Monday of 1987.
While many of the global equity markets grappled with that tail risk from the aftershocks of the earthquake and tsunami in Japan last week, back home our domestic equity market, already under a severe bearish trend for more than a year, came under extreme selling pressure due to proposed amendments in the Banks and Financial Institutions Act (BAFIA). As a result, the NEPSE index has reached a five-year low. While most of the proposed amendments to BAFIA are counter-intuitive and against the spirit of a liberal economy, the proposal to limit the investment of businessmen (the definition of businessmen is one who is involved in a business with an annual turnover of over Rs 10 million) in banks and financial institutions to 5 percent has spooked investors the most.
The argument as to whether businessmen should be allowed to own banks or financial institutions has been raised for a long time not only in Nepal but all over the world; and it can be argued over and over again without reaching a proper conclusion. There are pros and cons to having businessmen own a bank. The pros and cons depend on the size and state of an economy. To some extent, even in the developed world, there has been a certain leeway recently in the notion of businessmen or businesses owning banks. For example, in Germany, Siemens recently received approval from the German authorities to engage in banking activities. GE, a global business conglomerate, has been involved in financial transactions through GE Capital, and so have General Motors and countless other businesses. Even our neighbouring country India is in the process of liberalizing its licensing policy regarding financial institutions.
In the context of Nepal, given the current state of our equity market, the proposal to limit the stake of businessmen in banks and financial institutions to 5 percent can be suicidal as it will inundate the market with an excess supply of shares. Already, demand for investment in the equity market has not been able to keep pace with supply, which is one of the reasons for the current bearish trend at NEPSE. Following the recent promulgation of mutual fund regulations and the progress made in introducing the Central Depository System (CDS) in the Nepali equity market, there had been a modicum of hope among investors that demand would pick up due to both the participation of institutional investors and increased retain penetration. However, the recent developments regarding proposed amendments to BAFIA have put a major dent in investor confidence.
As mentioned above, the question as to whether businessmen or businesses can own banks can be debated on its merits. One valid argument against having businessmen or businesses own banks is that they can deprive credit to competitors and, in the process, harm the overall economy. However, checks and balances can be put to minimize these transgressions. In the Nepali context, banks and financial institutions are probably the most transparent corporate institutions. So there is room to believe that they will abide by the rule of law. Yes, there has to be some limit to the stake a single business or businessman can hold in a particular bank or financial institution—that limit can be more than 5 percent or even less than that. However, given the state of the equity market in Nepal, it’s not the right time to make a decision to limit the stake to 5 percent. Let the equity
market develop and reach a certain stage, then maybe we can make a decision.
Investors are not only concerned about the proposal to limit the investment of businessmen in banks and financial institutions but also the overall direction that they perceive our economy is heading towards. At a time when India and China are reaping benefits by shedding socialistic
and mixed economic policies towards in favour of market oriented ones, the Nepali policymakers’ vision of a “mixed” economic model is not only perplexing but also sadistic to the aspirations of the Nepali people.
This article was first published in The Kathmandu Post on March 21, 2011
Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2011/03/20/money/too-much-too-soon/219667.html
While many of the global equity markets grappled with that tail risk from the aftershocks of the earthquake and tsunami in Japan last week, back home our domestic equity market, already under a severe bearish trend for more than a year, came under extreme selling pressure due to proposed amendments in the Banks and Financial Institutions Act (BAFIA). As a result, the NEPSE index has reached a five-year low. While most of the proposed amendments to BAFIA are counter-intuitive and against the spirit of a liberal economy, the proposal to limit the investment of businessmen (the definition of businessmen is one who is involved in a business with an annual turnover of over Rs 10 million) in banks and financial institutions to 5 percent has spooked investors the most.
The argument as to whether businessmen should be allowed to own banks or financial institutions has been raised for a long time not only in Nepal but all over the world; and it can be argued over and over again without reaching a proper conclusion. There are pros and cons to having businessmen own a bank. The pros and cons depend on the size and state of an economy. To some extent, even in the developed world, there has been a certain leeway recently in the notion of businessmen or businesses owning banks. For example, in Germany, Siemens recently received approval from the German authorities to engage in banking activities. GE, a global business conglomerate, has been involved in financial transactions through GE Capital, and so have General Motors and countless other businesses. Even our neighbouring country India is in the process of liberalizing its licensing policy regarding financial institutions.
In the context of Nepal, given the current state of our equity market, the proposal to limit the stake of businessmen in banks and financial institutions to 5 percent can be suicidal as it will inundate the market with an excess supply of shares. Already, demand for investment in the equity market has not been able to keep pace with supply, which is one of the reasons for the current bearish trend at NEPSE. Following the recent promulgation of mutual fund regulations and the progress made in introducing the Central Depository System (CDS) in the Nepali equity market, there had been a modicum of hope among investors that demand would pick up due to both the participation of institutional investors and increased retain penetration. However, the recent developments regarding proposed amendments to BAFIA have put a major dent in investor confidence.
As mentioned above, the question as to whether businessmen or businesses can own banks can be debated on its merits. One valid argument against having businessmen or businesses own banks is that they can deprive credit to competitors and, in the process, harm the overall economy. However, checks and balances can be put to minimize these transgressions. In the Nepali context, banks and financial institutions are probably the most transparent corporate institutions. So there is room to believe that they will abide by the rule of law. Yes, there has to be some limit to the stake a single business or businessman can hold in a particular bank or financial institution—that limit can be more than 5 percent or even less than that. However, given the state of the equity market in Nepal, it’s not the right time to make a decision to limit the stake to 5 percent. Let the equity
market develop and reach a certain stage, then maybe we can make a decision.
Investors are not only concerned about the proposal to limit the investment of businessmen in banks and financial institutions but also the overall direction that they perceive our economy is heading towards. At a time when India and China are reaping benefits by shedding socialistic
and mixed economic policies towards in favour of market oriented ones, the Nepali policymakers’ vision of a “mixed” economic model is not only perplexing but also sadistic to the aspirations of the Nepali people.
This article was first published in The Kathmandu Post on March 21, 2011
Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2011/03/20/money/too-much-too-soon/219667.html
Sunday, February 20, 2011
Monday, February 7, 2011
The Easy Way Out
The barber shop at New Baneshwor that I visit every fortnight looked quite different when I went there for a haircut recently. There were no signs of familiar faces, and the current crew of barbers, except the owner, looked completely new to me. As I waited for my turn to come, I asked the owner nonchalantly about the whereabouts of those faces familiar to me. He replied, with a hint of frustration, that they had moved to “Qatar”. As I sat down for my haircut, he told me that he had had to replace two departing barbers with new members from his hometown near Janakpur.
I then remembered a conversation that I had with one of the barbers a few months ago. At that time, he, along with one of his colleagues, was mulling setting up a barber shop of his own in Ghattekulo. He was also processing his visa for Qatar as a backup option if things did not work out as planned with his new venture. I then presumed that things must not have worked out for him; and, as a result, he along with his colleague must have decided to move to Qatar for better opportunities. I did not know much about that barber, but from the fair bit of conversation that I had with him over the last one year, I found him to be quite entrepreneurial. He had everything planned out about the barber shop; he had found a place for a rental of Rs 8,000 per month, he had a colleague as a partner, and he was willing to risk his existing job and give his new venture a go.
I don’t know what materialized that made him scrap his venture and move to Qatar. But I do know that Nepal has lost out on an entrepreneur, irrespective of the size of his business. As I moved out of the barber shop that day, it made me think about the pervasiveness of the foreign employment culture in Nepal and its effect on the Nepali economy.
Nepal is a remittance dependent economy. Everyone who follows our economy knows this fact. According to the World Bank’s data, Nepal now ranks as the fifth highest remittance receiving country in the world (this ranking is based on the share of remittance in the country’s Gross Domestic Product). Remittance has had a lot of positive influence. According to academic research, it has helped reduce the headcount poverty rate in the country. It has been providing much needed foreign currency reserves and, given Nepal’s perennial trade deficit, has helped to maintain our external sector stability. It has also helped the money transfer business to flourish;
many people have made billions out of the remittance business. Not only that, it has also provided much needed liquidity to the financial system.
Having said that, incidents such as the one I mentioned above makes one introspect about the long-term impact of migration on the Nepali economy. Initially, mass migration to the Gulf countries and Malaysia, where a majority of Nepali migrant workers reside, I believe, transpired because of the Maoist conflict. At the height of the conflict, Nepali youth started to migrate overseas fearing for their lives. The conflict also resulted in closure of industries and stifled employment opportunities within the country, which exacerbated migration as Nepali youth had to earn a livelihood and support their families.
However, this has persisted for a long period of time. Going to Dubai or Malaysia is now so entrenched in the Nepali youth’s psyche that they don’t even think about giving it a go here. Yes, there are still a lot of problems in Nepal. Employment generation is not adequate, and there is a wide mismatch between demand and supply of workers. Having said that, it’s not as bad as it was during the height of the conflict.
However, because this migration culture is so pervasive that most Nepali youth have an established mindset of going abroad as they perceive that there are no opportunities here. They want to take the “easy” route and fly out of the country. I am not saying that working in Dubai or Malaysia is easy. Nepali workers toil hard for minimum wages. However, once someone has that idea of going abroad in mind, it’s easier for them not to give their best at what they are doing here.
Going forward, the danger then is that Nepali youth, while growing up, will inculcate this “growing up to go to Dubai” approach to their lives. Having seen their uncles or cousins or brothers make that journey, they might as well take that “easy” plunge. The loss to our nation will be their entrepreneurial skill and strong work ethics.
This article was first published on 7th Feb, 2011 in The Kathmandu Post
Permanent Link: http://www.ekantipur.com/2011/02/07/business/the-easy-way-out/329241.html
The missing market
In Nepal, we have commercial banks that provide funds to big enterprises, and we have microfinance institutions that provide funds to small entrepreneurs. In between, there are other financial institutions, segregated by the class structure of Nepal Rasta Bank (NRB), who are catering to the financing needs of entrepreneurs who lie between the above mentioned extremes. Some of the commercial banks have also set up a separate department to cater to the financing needs of small and medium-scale enterprises, so called SME lending; however, their lending via such schemes is miniscule if one compares it to their total lending portfolio.
A bulk of the lending via these financial institutions is on the basis of collateral. Without collateral, there isn’t a good chance of getting loans even if you have a great business plan. If a young enterprising person has a great business idea and needs seed capital to start the business, then there is a slim chance that this person will be able to start the business without providing adequate collateral or initial equity to meet the required debt-to-equity ratio.
And this is where, I believe, there is a huge missing market in terms of our financial system. We don’t have a developed system that provides seed capital to enterprising people. As a result, many innovative business ideas and sound business plans don’t get translated into actual businesses.
One of the ways to bridge this is through venture capital (VC) firms or private equity (PE) funds or other investment funds that invest in new and innovative businesses without seeking any collateral or initial equity from the entrepreneurs. There are two areas where a VC firm or a PE fund can help, either to start a new enterprise by providing seed capital or to expand an existing enterprise by providing necessary funds for expansion.
VC firms or PE funds are necessary as they recognize the concept of sweat equity—value attributed to the creator of an enterprising idea—and fosters innovation and entrepreneurship. If I have a good business plan and if I am able to convince the fund manager of a PE fund that my business plan does indeed make adequate returns, then the PE fund will provide the necessary seed capital to start the business. And they will do that even if I don’t provide any initial equity or put up collateral for a share of a certain percentage in the company. In the process, I get value for my “sweat equity” through the equity sharing structure with the fund.
As of now, we don’t have a proper system in place that recognizes the value of “sweat equity”. Many readers of this column might argue that the Nepali economy hasn’t reached a stage to support the establishment of VC firms of PE funds and these types of investment firms will emerge as the Nepali economy starts to pick up a higher growth rate. Even some of my friends with whom I discuss these ideas feel the same way. However, I beg to disagree with such a viewpoint. There are a couple of reasons for my disagreement.
First, when someone talks about a VC firm or a PE fund, he or she often associates it with either providing seed funding to technological companies (to some extent this is understandable as the growth of major tech firms in Silicon Valley is largely due to VC firms) or the leveraged buyout that engulfed the global financial market during the late 1980s. However, VC firms and PE funds work in areas above and beyond just technology and finance—from agriculture to energy to medicine. It’s just that technology and finance happen to be glorified ones.
Second, again when someone talks about a VC firm or a PE fund, he or she associates its promoters with individuals with a high net worth. Yes, founders of VC firms or PE funds have predominantly been high net worth individuals. However, there is a growing trend of the association of banks (ICICI Venture in India) and development partners (though funds such as Small Enterprise Assistance Fund) to cater to the private financing requirement in developing and emerging economies.
Third, I believe that there is a huge need for VC firms and PE funds in a developing economy like Nepal as they foster innovation and provide employment opportunities. They foster innovation because entrepreneurs are able to translate their business plans into tangible businesses. And when these businesses grow and expand in size, they provide employment. Even though a majority of businesses funded by VC firms or PE funds fail, those who succeed deliver long-term value to the economy.
First published on 24th January in The Kathmandu Post.
Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2011/01/23/money/the-missing-market/217601.html
A bulk of the lending via these financial institutions is on the basis of collateral. Without collateral, there isn’t a good chance of getting loans even if you have a great business plan. If a young enterprising person has a great business idea and needs seed capital to start the business, then there is a slim chance that this person will be able to start the business without providing adequate collateral or initial equity to meet the required debt-to-equity ratio.
And this is where, I believe, there is a huge missing market in terms of our financial system. We don’t have a developed system that provides seed capital to enterprising people. As a result, many innovative business ideas and sound business plans don’t get translated into actual businesses.
One of the ways to bridge this is through venture capital (VC) firms or private equity (PE) funds or other investment funds that invest in new and innovative businesses without seeking any collateral or initial equity from the entrepreneurs. There are two areas where a VC firm or a PE fund can help, either to start a new enterprise by providing seed capital or to expand an existing enterprise by providing necessary funds for expansion.
VC firms or PE funds are necessary as they recognize the concept of sweat equity—value attributed to the creator of an enterprising idea—and fosters innovation and entrepreneurship. If I have a good business plan and if I am able to convince the fund manager of a PE fund that my business plan does indeed make adequate returns, then the PE fund will provide the necessary seed capital to start the business. And they will do that even if I don’t provide any initial equity or put up collateral for a share of a certain percentage in the company. In the process, I get value for my “sweat equity” through the equity sharing structure with the fund.
As of now, we don’t have a proper system in place that recognizes the value of “sweat equity”. Many readers of this column might argue that the Nepali economy hasn’t reached a stage to support the establishment of VC firms of PE funds and these types of investment firms will emerge as the Nepali economy starts to pick up a higher growth rate. Even some of my friends with whom I discuss these ideas feel the same way. However, I beg to disagree with such a viewpoint. There are a couple of reasons for my disagreement.
First, when someone talks about a VC firm or a PE fund, he or she often associates it with either providing seed funding to technological companies (to some extent this is understandable as the growth of major tech firms in Silicon Valley is largely due to VC firms) or the leveraged buyout that engulfed the global financial market during the late 1980s. However, VC firms and PE funds work in areas above and beyond just technology and finance—from agriculture to energy to medicine. It’s just that technology and finance happen to be glorified ones.
Second, again when someone talks about a VC firm or a PE fund, he or she associates its promoters with individuals with a high net worth. Yes, founders of VC firms or PE funds have predominantly been high net worth individuals. However, there is a growing trend of the association of banks (ICICI Venture in India) and development partners (though funds such as Small Enterprise Assistance Fund) to cater to the private financing requirement in developing and emerging economies.
Third, I believe that there is a huge need for VC firms and PE funds in a developing economy like Nepal as they foster innovation and provide employment opportunities. They foster innovation because entrepreneurs are able to translate their business plans into tangible businesses. And when these businesses grow and expand in size, they provide employment. Even though a majority of businesses funded by VC firms or PE funds fail, those who succeed deliver long-term value to the economy.
First published on 24th January in The Kathmandu Post.
Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2011/01/23/money/the-missing-market/217601.html
Friday, January 21, 2011
Corporate Debacles
Veer Sanghvi, a suave and swanky newspaper editor, whose weekly column “Counterpoint” in The Hindustan Times was one of the most read. Barkha Dutt, a poster child of the new breed of Indian journalism, whose television reporting during the Kargil War earned her many plaudits. As the Indian economy moved into a higher growth path post-1991 economic reforms, so did the clout of these journalists.
With easy access to both political leaders and corporate honchos, their news reporting made headlines and often changed the political and business landscapes.
The reputation of Sanghvi and Dutt, however, came under heavy scrutiny last month due to their active involvement with Nira Radia, a public relations (PR) face of multinational companies such as Tata and Reliance. Radia was actively lobbying, with the help of these two journalists, to make A. Raja telecom minister in the United Progressive Alliance (UPA) government. Radia wanted to ensure that with Raja at the helm of the Telecom Ministry, her clients would get favours during the licensing of the second generation (2G) mobile spectrum in India.
And she was successful in her mission. A. Raja, after becoming telecom minister, gave out 2G licenses without adopting proper auction procedures to maximize Indian government revenue. Radia’s client Tata Telecom was one of the key beneficiaries of that decision. As a result, according to Indian media reports, the Indian public may have lost as much as US$ 40 billion during the issue of 2G licenses.
Radia-gate has tarnished the image of not only Sanghvi and Dutt, but to some extent also that of Ratan Tata. Once a venerated figure not only in the Indian corporate world but all over the globe, Radia-gate has put a huge dent in his legacy. It’s not that business tycoons have not used (or misused) political connections for business dealings or special interests. It’s done all over the world; and in the Western world, they have a fancy name for it called “lobbying”. Before the 1991 economic reforms in India, the late Dhirubhai Ambani made his early fortunes during the License Raj era largely due to his close connections with political leaders.
However, in this particular episode, popularly known as Radia-gate, the extent of the corporatization of political decision making is alarming. It shows how, overriding the larger national interest, companies such as Tata were, and maybe still are, able to influence cabinet choices and consequently policy decisions.
Back home, recently, the Commission for Investigation for Abuse of Authority (CIAA), raided the factory of Dabur Nepal and found that this multinational company was involved in tampering with the manufacturing date of one of its popular products to dupe its customers and increase its bottom line. Prior to this incident, this company was in the news because of the inferior quality of that same product. However, at that time, the company, aided by influential decision makers, dismissed those allegations as fabrication on the part of some media houses. In fact, the company went on a new marketing campaign to dispel these rumours. This time, the truth is there for everyone to see.
Pursuing profit and stockholders’ wealth maximization, companies such as Tata and Dabur have ignored the societal aspect of their business. In the short run, they were able to increase their profits. However, in the long run, the fallout from this kind of activities will be far reaching. In case of both Tata and Dabur Nepal, the true losers from their malpractices have been the general public, those who are clients as well as prospective clients of these companies.
There are a few important take-aways from these corporate debacles. First, corporations should not just blindly follow profit and stockholders’ wealth maximization and ignore other stakeholders in their business. Although any well known textbook in corporate finance teaches everyone that a firm’s objective should be profit or stockholder maximization, instances like these underscore that maybe it’s time for firms to pursue stakeholder — anyone from employees to customers—maximization. Manage-ment thinkers have also started arguing that the premise of stockholders’ wealth maximization is a flawed one.
In one of the recent issues of the Harvard Business Review (HBR), Roger Martin, dean of the University of Toronto’s Rotman School of Management, argued that firms should focus on maximizing customer satisfaction instead of shareholders’ value.
Second, which is closely related to the first, corporations should not indulge in anything that will alienate the general public. As a former regular consumer of Real Juice, I feel cheated and I have friends and families who feel the same. Dabur will need to do a lot of convincing to regain mine, and others’, trust.
First published in the Kathmandu Post on Jan 10, 2011
Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2011/01/09/money/corporate-debacles/217063/
With easy access to both political leaders and corporate honchos, their news reporting made headlines and often changed the political and business landscapes.
The reputation of Sanghvi and Dutt, however, came under heavy scrutiny last month due to their active involvement with Nira Radia, a public relations (PR) face of multinational companies such as Tata and Reliance. Radia was actively lobbying, with the help of these two journalists, to make A. Raja telecom minister in the United Progressive Alliance (UPA) government. Radia wanted to ensure that with Raja at the helm of the Telecom Ministry, her clients would get favours during the licensing of the second generation (2G) mobile spectrum in India.
And she was successful in her mission. A. Raja, after becoming telecom minister, gave out 2G licenses without adopting proper auction procedures to maximize Indian government revenue. Radia’s client Tata Telecom was one of the key beneficiaries of that decision. As a result, according to Indian media reports, the Indian public may have lost as much as US$ 40 billion during the issue of 2G licenses.
Radia-gate has tarnished the image of not only Sanghvi and Dutt, but to some extent also that of Ratan Tata. Once a venerated figure not only in the Indian corporate world but all over the globe, Radia-gate has put a huge dent in his legacy. It’s not that business tycoons have not used (or misused) political connections for business dealings or special interests. It’s done all over the world; and in the Western world, they have a fancy name for it called “lobbying”. Before the 1991 economic reforms in India, the late Dhirubhai Ambani made his early fortunes during the License Raj era largely due to his close connections with political leaders.
However, in this particular episode, popularly known as Radia-gate, the extent of the corporatization of political decision making is alarming. It shows how, overriding the larger national interest, companies such as Tata were, and maybe still are, able to influence cabinet choices and consequently policy decisions.
Back home, recently, the Commission for Investigation for Abuse of Authority (CIAA), raided the factory of Dabur Nepal and found that this multinational company was involved in tampering with the manufacturing date of one of its popular products to dupe its customers and increase its bottom line. Prior to this incident, this company was in the news because of the inferior quality of that same product. However, at that time, the company, aided by influential decision makers, dismissed those allegations as fabrication on the part of some media houses. In fact, the company went on a new marketing campaign to dispel these rumours. This time, the truth is there for everyone to see.
Pursuing profit and stockholders’ wealth maximization, companies such as Tata and Dabur have ignored the societal aspect of their business. In the short run, they were able to increase their profits. However, in the long run, the fallout from this kind of activities will be far reaching. In case of both Tata and Dabur Nepal, the true losers from their malpractices have been the general public, those who are clients as well as prospective clients of these companies.
There are a few important take-aways from these corporate debacles. First, corporations should not just blindly follow profit and stockholders’ wealth maximization and ignore other stakeholders in their business. Although any well known textbook in corporate finance teaches everyone that a firm’s objective should be profit or stockholder maximization, instances like these underscore that maybe it’s time for firms to pursue stakeholder — anyone from employees to customers—maximization. Manage-ment thinkers have also started arguing that the premise of stockholders’ wealth maximization is a flawed one.
In one of the recent issues of the Harvard Business Review (HBR), Roger Martin, dean of the University of Toronto’s Rotman School of Management, argued that firms should focus on maximizing customer satisfaction instead of shareholders’ value.
Second, which is closely related to the first, corporations should not indulge in anything that will alienate the general public. As a former regular consumer of Real Juice, I feel cheated and I have friends and families who feel the same. Dabur will need to do a lot of convincing to regain mine, and others’, trust.
First published in the Kathmandu Post on Jan 10, 2011
Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2011/01/09/money/corporate-debacles/217063/
Wednesday, January 5, 2011
usual uncertainities
If 2009 was the year of "New Normal", then 2010 has to be the year of "unusually uncertain"—a phrase aptly used to describe the state of global economic recovery by Ben Bernanke, chairman of the US Federal Reserve, during the Jackson Hole symposium in August. After teetering on the edge of collapse in late 2008, the global economy managed to survive and even grow, albeit at a slower pace, in 2009. That recovery, from the brink of collapse, was largely due to massive fiscal stimulus and coordinated quantitative easing in US and other developed economies. Although these policy measures helped to resuscitate the global economy in 2009, structural problems existed in both the US (such as high unemployment) and European countries (high government deficit).
These structural problems came back to haunt in 2010, especially in Europe, causing major ripples throughout the global financial market. The sovereign debt crisis amongst Portugal, Ireland, Greece and Spain (so called "PIGS") has created major havoc in Europe and questioned the long run viability of the Euro. There are rumours that Germany, dissatisfied with the level of profligacy of some of its fellow Euro members, might abandon the Euro and revert back to the Deutsche Mark. In the US, disenchanted with Barack Obama's economic policies and his government's inability to tackle high unemployment, the American voters voted against the Democratic Party in the recently-held midterm elections.
While the global economy has grown at a higher rate in 2010, compared to 2009, and will grow at even higher rates in 2011, this global economic growth is increasingly supported by higher economic growth in China and India. Finally, it appears that the much-talked about "decoupling theory of emerging markets" is actually happening. Going forward in 2011 and later, much of global growth will be derived from China, India
and other emerging markets. As such, the global economic landscape will witness slow but inevitable paradigm shift where the likes of China and India will have major economic, and consequently, geopolitical clout.
While our neighbouring economies prosper, the Nepali economy continues to be stymied by political impasse. In a country where the most important annual economic policy declaration can get delayed for four months, one can imagine the fate of other policy announcements and the subsequent policy vacuum. Consequently, like the last few years, the Nepali economy managed to meander along in 2010 although there were few significant hiccups in between.
The external sector stability was threatened when the balance of payment (BOP) deficit reached approximately Rs. 24 billion during mid-March. Although the deficit figure came down substantially during the middle of the year, there are enough structural problems in the economy which could again threaten our external sector stability. These structural problems make Nepali exports uncompetitive in the international market, increase our reliance on imported goods and subsequently widen our trade deficit. Although the BOP crisis was, to a certain extent, due to huge gold imports to take advantage from arbitrage opportunity created by tariff differential between Nepal and India, it has been an eye opener for policymakers to address Nepal's ever-widening trade deficit.
For a long time, remittance inflow was able to even out trade deficit and maintain some
semblance of external sector stability. However, depending on remittance inflow to compensate for trade deficit is not a viable solution in the long run. According to recently-released World Bank statistics, Nepal already ranks as the fifth-highest remittance receiving country in the world (this ranking is based on remittance share in the country's total GDP). And, going by the continuous exodus of Nepali youth overseas, remittance inflow will continue to grow for a long time. But, remittance inflow, according to empirical works in economics, doesn't lead to long run economic prosperity, as remittance predominantly gets channelled into consumption-related purposes. Given Nepal's shrinking manufacturing base, it's no surprise then the surge in remittance has coincided with a surge in imports. Higher remittance has increased the consumption level of remittance beneficiaries and, given the lack of domestic production, has increased imports.
Moving forward, policymakers need to recognise this disconnect and figure out ways to effectively channel remittance into productive sectors. The concept of "Foreign Employment Bond", which is widely known in development literature as "Diaspora Bond", was a welcome step. But given the narrow list of target countries, as well as other factors, the initial bond issuance only generated a few buyers. In the recent budget, the government has decided to continue issuing such bonds, and hopefully, with lessons from the initial issuance, policymakers will widen the list of target countries and carry out effective marketing campaigns to generate wider interests. In 2011 and beyond, the onus lies with the government to reorient our remittance dependent economy.
To address the trade deficit problem, in the short run, the government needs to introduce import substitution programmes. However, in the long run, the focus should be on export promotion to tap into potential demand from burgeoning economies in the neighbourhood. There are areas where Nepali goods have a comparative advantage; however, to kick start that export-led growth, basic infrastructure (such as decent road connectivity and uninterrupted power supply) needs to be in place. Nepal has a fixed exchange rate system with India which, to some extent, helps participants in foreign trade as they don't have to bear extra costs associated with adverse exchange rate movements. However, in the case of Nepal, the current peg of the Nepali Rupee with the Indian Rupee is making our exports less competitive in the international markets. Moving forward, policymakers need to revaluate the level of peg.
In the international press, there are comparisons between the economy of China and India almost every day. China started its economic reforms in the late 1970s, while India started during the early 1990s. As a result, both are reaping tremendous economic benefits out of it. It's not that there have not been any efforts to push economic reforms forward in Nepal; post the restoration of democracy in the early 1990s, there were signifi-
cant economic reforms. However, while India and China were, and still are, able to supplement those economic reforms with political stability and coherent policies, we have failed to provide either. The recent political wrangling over the budget's announcement is one of many such examples. In 2011 and beyond, the onus lies with both the government to bridge that policy vacuum and uncertainty. While others complain about "unusual uncertainty", in 2011 and beyond, we have to end our "usual uncertainties".
First published in the Kathmandu Post on 1st Jan 2011
Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2010/12/31/features/usual-uncertainties/216708/
These structural problems came back to haunt in 2010, especially in Europe, causing major ripples throughout the global financial market. The sovereign debt crisis amongst Portugal, Ireland, Greece and Spain (so called "PIGS") has created major havoc in Europe and questioned the long run viability of the Euro. There are rumours that Germany, dissatisfied with the level of profligacy of some of its fellow Euro members, might abandon the Euro and revert back to the Deutsche Mark. In the US, disenchanted with Barack Obama's economic policies and his government's inability to tackle high unemployment, the American voters voted against the Democratic Party in the recently-held midterm elections.
While the global economy has grown at a higher rate in 2010, compared to 2009, and will grow at even higher rates in 2011, this global economic growth is increasingly supported by higher economic growth in China and India. Finally, it appears that the much-talked about "decoupling theory of emerging markets" is actually happening. Going forward in 2011 and later, much of global growth will be derived from China, India
and other emerging markets. As such, the global economic landscape will witness slow but inevitable paradigm shift where the likes of China and India will have major economic, and consequently, geopolitical clout.
While our neighbouring economies prosper, the Nepali economy continues to be stymied by political impasse. In a country where the most important annual economic policy declaration can get delayed for four months, one can imagine the fate of other policy announcements and the subsequent policy vacuum. Consequently, like the last few years, the Nepali economy managed to meander along in 2010 although there were few significant hiccups in between.
The external sector stability was threatened when the balance of payment (BOP) deficit reached approximately Rs. 24 billion during mid-March. Although the deficit figure came down substantially during the middle of the year, there are enough structural problems in the economy which could again threaten our external sector stability. These structural problems make Nepali exports uncompetitive in the international market, increase our reliance on imported goods and subsequently widen our trade deficit. Although the BOP crisis was, to a certain extent, due to huge gold imports to take advantage from arbitrage opportunity created by tariff differential between Nepal and India, it has been an eye opener for policymakers to address Nepal's ever-widening trade deficit.
For a long time, remittance inflow was able to even out trade deficit and maintain some
semblance of external sector stability. However, depending on remittance inflow to compensate for trade deficit is not a viable solution in the long run. According to recently-released World Bank statistics, Nepal already ranks as the fifth-highest remittance receiving country in the world (this ranking is based on remittance share in the country's total GDP). And, going by the continuous exodus of Nepali youth overseas, remittance inflow will continue to grow for a long time. But, remittance inflow, according to empirical works in economics, doesn't lead to long run economic prosperity, as remittance predominantly gets channelled into consumption-related purposes. Given Nepal's shrinking manufacturing base, it's no surprise then the surge in remittance has coincided with a surge in imports. Higher remittance has increased the consumption level of remittance beneficiaries and, given the lack of domestic production, has increased imports.
Moving forward, policymakers need to recognise this disconnect and figure out ways to effectively channel remittance into productive sectors. The concept of "Foreign Employment Bond", which is widely known in development literature as "Diaspora Bond", was a welcome step. But given the narrow list of target countries, as well as other factors, the initial bond issuance only generated a few buyers. In the recent budget, the government has decided to continue issuing such bonds, and hopefully, with lessons from the initial issuance, policymakers will widen the list of target countries and carry out effective marketing campaigns to generate wider interests. In 2011 and beyond, the onus lies with the government to reorient our remittance dependent economy.
To address the trade deficit problem, in the short run, the government needs to introduce import substitution programmes. However, in the long run, the focus should be on export promotion to tap into potential demand from burgeoning economies in the neighbourhood. There are areas where Nepali goods have a comparative advantage; however, to kick start that export-led growth, basic infrastructure (such as decent road connectivity and uninterrupted power supply) needs to be in place. Nepal has a fixed exchange rate system with India which, to some extent, helps participants in foreign trade as they don't have to bear extra costs associated with adverse exchange rate movements. However, in the case of Nepal, the current peg of the Nepali Rupee with the Indian Rupee is making our exports less competitive in the international markets. Moving forward, policymakers need to revaluate the level of peg.
In the international press, there are comparisons between the economy of China and India almost every day. China started its economic reforms in the late 1970s, while India started during the early 1990s. As a result, both are reaping tremendous economic benefits out of it. It's not that there have not been any efforts to push economic reforms forward in Nepal; post the restoration of democracy in the early 1990s, there were signifi-
cant economic reforms. However, while India and China were, and still are, able to supplement those economic reforms with political stability and coherent policies, we have failed to provide either. The recent political wrangling over the budget's announcement is one of many such examples. In 2011 and beyond, the onus lies with both the government to bridge that policy vacuum and uncertainty. While others complain about "unusual uncertainty", in 2011 and beyond, we have to end our "usual uncertainties".
First published in the Kathmandu Post on 1st Jan 2011
Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2010/12/31/features/usual-uncertainties/216708/
Sunday, December 26, 2010
Blinkered Policy
In la-la land, there are two banks “Mean and Lean (M&L)” and “Fat and Profligate (F&P)” who had similar balance sheets and profitability figures five years ago. Over the last five years, the two banks have focused on completely different strategies. While F&P has been more aggressive and often reckless in seeking growth, M&L has focused on prudent banking practices.
Over the last five years, the total asset of M&L has grown at a cumulative average growth rate (CAGR) of 15 percent. The top management, including the chief executive officer (CEO) of M&L has focused on quality over quantity while pursuing growth. M&L has maintained excellent lending standards, with rigorous credit analysis, while providing loans to its clients. Their credit analysis not only involves determining the client’s “ability” to pay but also their “willingness” to pay. Often, M&L has rejected loan requests because of either dodgy business proposals or because of the client’s past track record. Moreover, M&L has worked
on maintaining a diversified
lending portfolio.
In line with its prudent strategy, M&L has focused on growing its deposit mix judiciously focusing on both current and savings accounts (CASA) to lower its cost of funds and time deposits to address a potential asset-liability mismatch.
To maintain its rigorous banking standards, M&L has concentrated on retaining and hiring experienced staff; however, it has not indulged in a hiring spree to push its loan products. M&L’s perks and benefits for its staff are on a par with the average industry standards, and its Human Resource (HR) department has devised new and innovative, yet cost effective, ways of retaining quality manpower. Moreover, because of a large number of experienced and long serving staff, the top management of M&L has been able to seamlessly convey its strategic vision to middle and lower level management, which has resulted in operational synergies.
Over the last couple of years, lots of new banks and financial institutions have emerged in la-la land, and, as a result, staff attrition in the banking sector has increased rapidly. However, because of M&L’s focus on quality over quantity, flexible working hours and a not so strenuous job schedule, it has been able to minimize the employee turnover level. Experienced staff coupled with a motivating work environment has increased M&L’s staff productivity, helping to increase its bottom line.
M&L’s focus on quality over quantity in their loan portfolio has helped it to keep its non-performing loans (NPL) to a bare minimum level. Its judicious deposit mobilization has helped it to maintain its interest spread. As a result, the net profit of M&L has increased at a CAGR of 25 percent over the last five years. Shareholders of the
bank have been satisfied with the management’s ability to grow profit and deliver above average returns on equity.
Compared to M&L, F&P’s total asset has grown at a CAGR of 30 percent over the last five years. In order to purse this high growth, F&P has pursued a different strategy to that of M&L. The lending practice of F&P has been lax at best; and often, loan requests have been approved without proper due diligence. While seeking high growth, the top management of F&P has ignored maintaining a diversified loan portfolio. As a result, its portfolio is highly concentrated among a few vulnerable sectors (such as real estate).
In order to pursue rapid growth, F&P has poached a lot of staff from other banks by offering them a higher salary, which has resulted in higher than average salary expenses. However, the top management of F&P has not been able to properly convey its strategic vision to middle and lower level management resulting in lack of organizational coherence. Moreover, long working hours and a demanding schedule have taken their toll among F&P’s staff, reducing their productivity.
Recently, because of a sudden slowdown in the real estate sector, a few major loans of F&P have come under scrutiny. This, coupled with higher staff compensation, has severely undermined F&P’s bottom line. As a result, the net profit of F&P, after growing at a CAGR of 30 percent for the first three years, has decreased at a CAGR of 17 percent over the last two years.
Ignoring other financial information, for comparative purposes, the total asset of F&P is approximately 2.5 times that of M&L currently, while the total staff expense of F&P is two times that of M&L. However, the total profit of F&P is only half that of M&L.
Now, why on earth does Nepal Rastra Bank (NRB), given the above mentioned hypothetical yet plausible scenario, want to have the CEO of F&P earn a higher salary than that of M&L? To put it more bluntly, why does NRB want to have more F&P-like banks and less M&L-like banks in the future? Because by linking the CEO’s compensation to the total asset and average salary expense, NRB has paved the way for formation of bloated financial institutions with the management’s mandate to seek total asset growth irrespective of other factors.
This article was first published on 20th December 2010. Permanent Link:
http://www.ekantipur.com/2010/12/20/business/blinkered-policy/326772/
Monday, December 6, 2010
Fighting Inflation
Inflation averaged 13.2 percent in the fiscal year 2008-09, 10.5 percent in 2009-10 and, according to the Monetary Policy for fiscal 2010-11, is expected to be 7 percent in fiscal 2010-11. Given the persistently high inflation in Nepal for the last couple of years, the Nepali people, I feel, have started to take higher prices as given and adjust with them accordingly. However, having said that, one needs to think about the adverse impact of an inflationary environment and its wide ranging impact on export competitiveness to national savings to the exchange rate.
But before I get into the details of the adverse impacts of inflation, it’s interesting to compare and analyze the government’s inflation projection—set by Nepal Rastra Bank at the start of the fiscal year in its annual Monetary Policy announcement—and actual inflation for that particular year.
For fiscal 2008-09, NRB had projected an annual inflation rate of 7.5 percent; but the actual inflation for that fiscal year was, as mentioned above, 13.2 percent. Similarly, for fiscal 2009-10, NRB had projected an annual inflation rate of 7 percent while the actual inflation for the last fiscal year was 10.5 percent. For this fiscal year, NRB has again projected an inflation rate of 7 percent. What the average annual inflation for the current fiscal year will be remains to be seen. However, given the central bank’s track record, your guess is as good as mine.
Given the above mentioned context of a huge gap between the projected and actual inflation
rates during the last couple of years, it’s easy to realize that
NRB has lost its credibility especially in terms of fighting inflation. Keeping the supply side constraints aside, which is the inevitable excuse that NRB uses when the actual inflation is higher than the projected inflation, if NRB has projected inflation to reach a certain level, why then doesn’t it fight to keep it at that level?
If at the start of the year, I believe that inflation will be 7 percent (guided by NRB), I will plan accordingly; i.e., if I am a wage earner, I will demand a minimum 7 percent wage hike to at least maintain the purchasing power of my income. Similarly, if I am the owner of a manufacturing company, I will increase my product’s price by a minimum 7 percent so that my firm’s profit will at least remain the same in real terms.
However, if at the end of the year, I realize that inflation actually increased to 13.2 percent, then I will be worse off irrespective of whether I am a wage earner or the owner of a manufacturing
company. Hence, at the beginning of the next fiscal year, I start to mark up NRB’s inflation projection by a certain percentage so that I won’t be worse off again. If every decision maker, i.e., individuals and businesses in the country, starts doing the same, then the inflation level will shoot up and become unmanageable.
High inflation then has a multiplier effect throughout the economy. High inflation decreases after-tax real return and reduces the people’s incentive to save and invest. For example, if the tax rate is 25 percent, the interest rate on a one-year taxable bond is 10 percent and the inflation rate is 5 percent, then the before-tax real return will be 4.76 percent, and the after-tax real return will be 3.57 percent (this is what an investor actually cares about).
Now, if the inflation rate rises by 5 percent to 10 percent and the interest rate on a one-year bond also rises by 5 percent to 15 percent, then the before-tax real return will be 4.55 percent, and the after-tax real return will be 3.41 percent.In the latter case, even if the nominal return has increased to 15 percent, the after-tax real return is lower than in the former case because of high inflation, discouraging people from saving and investing.
High inflation also makes a country’s products less competitive in the international market and reduces exports. Because of its adverse effects on exports and imports, in the long run, it also puts downward pressure on the country’s currency.
This article was first published in the Kathmandu Post on Dec 6th 2010
Permanent Link: http://www.ekantipur.com/2010/12/06/business/fighting-inflation/326079/
Saturday, November 20, 2010
Dissecting the budget
After much hue and cry and a delay of almost four months, Minister of Finance Surendra Pandey finally tabled the budget of Rs 337.9 billion for the Fiscal Year 2010/11 on Saturday.
Amidst the cacophony of political wrangling, it’s relieving to finally have a budget, which lays out key fiscal policies, irrespective of its form or issuance mechanism. Having said that, lets then discuss what this year’s budget has to offer and, after much ado, are there things to be cheerful about?
Segregating the composition of budget, Rs 190.32 billion has been allocated for recurrent expenditure, Rs 129.54 billion has been allocated for capital expenditure and Rs 18.42 billion has been allocated for principal repayment of foreign loans. In terms of sources, the government expects to raise Rs 216.64 billion from revenue collection, mobilise Rs 87.57 billion from foreign rants and loan, and borrow Rs 33.68 billion internally. To up the ante on revenue collection, the budget has focused on expanding revenue net and has proposed 2011 as ‘Tax Implementation Campaign Year’.
During the last fiscal year, Nepali economy reeled under Balance of Payment (BOP) crisis and had to seek help from the International Monetary Fund (IMF) under its rapid credit facility program to maintain external sector stability. While huge growth in imports of gold were largely to blame for the BoP crisis, which at one time was in deficit of almost Rs 24 billion. There were other glaring trends; for example, Nepal imported livestock worth Rs. 15 billion during the FY 2009/10.
Given the current mismatch between the import and export growth (in the FY 2009/10, Nepal’s merchandise export declined by 9.7% to Rs 61.13 billion while imports increased by 33.2% to 378.8 billion), Nepal will have to perennially face BoP crisis if the government doesn’t act to either revive Nepal’s export or curb import. Hence, this year’s budget should have focused on import substitution and export expansion programmes. However, few, if any, such specific programs can be found in the budget.
During the last few years, education sector has received substantial budgetary allocation and it has paid off handsomely as Nepal has made rapid headway in literacy rate. This year also, 17.1%, which is the highest sector allocation of the total budget, has been allocated for the education sector.
One of the factors for the underperformance of Nepali economy over last couple of years is lack of proper roads and transportation related infrastructure. Given the growth constraints due to lack of transportation related infrastructure, budget has proposed construction of Railway and Metro to kick start the development of mass transit system in Nepal. The focus on development of four- and six-lane highways in and around Kathmandu and border towns near India will however help to ease supply bottlenecks. Moreover, to tackle
the energy crisis, this budget has allocated funds for completion of Trishuli-3, Chameliya and Kulekhani-3, among others.
Recently, the government has shown adequate concern to revive the flagging capital market. Slew of new regulations (Mutual Fund and Central Depository System) have been issued during last couple of months to streamline and institutionalise security market. This budget has also introduced several new programs such as allowing Non Resident Nepalis (NRNs) to invest in capital market, regulating the commodity and derivative market and introducing regulation pertaining to credit rating mechanism. These will certainly help to move the capital market in the right direction; however, going forward, government should also allow overseas investors to invest in domestic capital market, as the mutual fund regulation already allows 25% of total Asset under Management (AUM) of a mutual fund to be invested in overseas market.
The budget has also proposed tax incentives to encourage merger and acquisitions (M&A) among financial institutions and insurance companies. One of the bones of contention while pursuing M&A in Nepal have been the issue of fixed asset revaluation and consequent capital gain tax on such revaluation. Hence, I believe, finance minister’s proposed tax incentive is likely to address this issue, among others.
Keeping in the mind the Nepal Tourism Year-2011 (NTY-2011), this budget has proposed various programs for a successful NTY-2011. However, with less than one and half month’s time before the start of the NTY-2011, it’s debatable whether there is sufficient time for implementation of these programmes. And, this brings home the point which has plagued fiscal policy making in Nepal for quite some time-lack of proper implementation of proposed program due to less time period after the budget announcement and before the end of the FY.
Recently a high level commission called ‘Commission to review Government Budget Management and Expenditure System’, submitting a report to Finance Minister Pandey, recommended the government to bring budget before May; i.e., at least one and half months before the end of the FY. As many programs announced in the budget goes either un-implemented or are implemented hastily towards the end of fiscal year to toe the line of budget’s speech, the aforementioned commission’s report rightly urged the government to table budget early so that it leads to better implementation.
Traditionally, in Nepal and unlike international practices, budget for the upcoming fiscal year is brought only towards mid July; i.e., towards the end of the fiscal year. And if there is change in government or any other political wrangling, budget, like this year, gets delayed jeopardising the whole economy. Hence hopefully, going forward, the upcoming government (when and if it gets formed) will heed the Commission’s advice and brings next fiscal year’s budget early.
First published in the Kathmandu Post on November 21, 2010
Link: http://www.ekantipur.com/the-kathmandu-post/2010/11/20/money/dissecting-the-budget/215085/
Amidst the cacophony of political wrangling, it’s relieving to finally have a budget, which lays out key fiscal policies, irrespective of its form or issuance mechanism. Having said that, lets then discuss what this year’s budget has to offer and, after much ado, are there things to be cheerful about?
Segregating the composition of budget, Rs 190.32 billion has been allocated for recurrent expenditure, Rs 129.54 billion has been allocated for capital expenditure and Rs 18.42 billion has been allocated for principal repayment of foreign loans. In terms of sources, the government expects to raise Rs 216.64 billion from revenue collection, mobilise Rs 87.57 billion from foreign rants and loan, and borrow Rs 33.68 billion internally. To up the ante on revenue collection, the budget has focused on expanding revenue net and has proposed 2011 as ‘Tax Implementation Campaign Year’.
During the last fiscal year, Nepali economy reeled under Balance of Payment (BOP) crisis and had to seek help from the International Monetary Fund (IMF) under its rapid credit facility program to maintain external sector stability. While huge growth in imports of gold were largely to blame for the BoP crisis, which at one time was in deficit of almost Rs 24 billion. There were other glaring trends; for example, Nepal imported livestock worth Rs. 15 billion during the FY 2009/10.
Given the current mismatch between the import and export growth (in the FY 2009/10, Nepal’s merchandise export declined by 9.7% to Rs 61.13 billion while imports increased by 33.2% to 378.8 billion), Nepal will have to perennially face BoP crisis if the government doesn’t act to either revive Nepal’s export or curb import. Hence, this year’s budget should have focused on import substitution and export expansion programmes. However, few, if any, such specific programs can be found in the budget.
During the last few years, education sector has received substantial budgetary allocation and it has paid off handsomely as Nepal has made rapid headway in literacy rate. This year also, 17.1%, which is the highest sector allocation of the total budget, has been allocated for the education sector.
One of the factors for the underperformance of Nepali economy over last couple of years is lack of proper roads and transportation related infrastructure. Given the growth constraints due to lack of transportation related infrastructure, budget has proposed construction of Railway and Metro to kick start the development of mass transit system in Nepal. The focus on development of four- and six-lane highways in and around Kathmandu and border towns near India will however help to ease supply bottlenecks. Moreover, to tackle
the energy crisis, this budget has allocated funds for completion of Trishuli-3, Chameliya and Kulekhani-3, among others.
Recently, the government has shown adequate concern to revive the flagging capital market. Slew of new regulations (Mutual Fund and Central Depository System) have been issued during last couple of months to streamline and institutionalise security market. This budget has also introduced several new programs such as allowing Non Resident Nepalis (NRNs) to invest in capital market, regulating the commodity and derivative market and introducing regulation pertaining to credit rating mechanism. These will certainly help to move the capital market in the right direction; however, going forward, government should also allow overseas investors to invest in domestic capital market, as the mutual fund regulation already allows 25% of total Asset under Management (AUM) of a mutual fund to be invested in overseas market.
The budget has also proposed tax incentives to encourage merger and acquisitions (M&A) among financial institutions and insurance companies. One of the bones of contention while pursuing M&A in Nepal have been the issue of fixed asset revaluation and consequent capital gain tax on such revaluation. Hence, I believe, finance minister’s proposed tax incentive is likely to address this issue, among others.
Keeping in the mind the Nepal Tourism Year-2011 (NTY-2011), this budget has proposed various programs for a successful NTY-2011. However, with less than one and half month’s time before the start of the NTY-2011, it’s debatable whether there is sufficient time for implementation of these programmes. And, this brings home the point which has plagued fiscal policy making in Nepal for quite some time-lack of proper implementation of proposed program due to less time period after the budget announcement and before the end of the FY.
Recently a high level commission called ‘Commission to review Government Budget Management and Expenditure System’, submitting a report to Finance Minister Pandey, recommended the government to bring budget before May; i.e., at least one and half months before the end of the FY. As many programs announced in the budget goes either un-implemented or are implemented hastily towards the end of fiscal year to toe the line of budget’s speech, the aforementioned commission’s report rightly urged the government to table budget early so that it leads to better implementation.
Traditionally, in Nepal and unlike international practices, budget for the upcoming fiscal year is brought only towards mid July; i.e., towards the end of the fiscal year. And if there is change in government or any other political wrangling, budget, like this year, gets delayed jeopardising the whole economy. Hence hopefully, going forward, the upcoming government (when and if it gets formed) will heed the Commission’s advice and brings next fiscal year’s budget early.
First published in the Kathmandu Post on November 21, 2010
Link: http://www.ekantipur.com/the-kathmandu-post/2010/11/20/money/dissecting-the-budget/215085/
Subscribe to:
Posts (Atom)