Page 1

Contents Editorial


Part I : General Overview


Political Overview


International Economy


Macroeconomic Overview

Nepal Economic Forum P.O.Box 7025, Krishna Galli, Lalitpur - 3, Nepal T: 554-8400 E: W: October 2011, Issue 6 Editorial team: Pranab Man Singh and Akira Dhakwa Contributors: Aalok Pandey, Ami Shrestha, Trishagni Shakya, Tejesh Pradhan, Shristi Singh, Raju Tuladhar and Rojesh Shrestha Layout and Design: Aavishkaar Marketing Communication Bakhundole - 3, Lalitpur, Nepal T: 5010679 The document is solely the work of the Nepal Economic Forum and the information documented in and the views expressed by this economic periodical is of Nepal Economic Forum.





Foreign Aid






Manufacturing & Trade


Real Estate




Telecommunication & Media




Macroeconomic Outlook


Part II: Review Education


Capital Market





37 Docking Nepal’s Economic Analysis


2 Docking Nepal’s Economic Analysis

Editorial With our sixth issue of the nefport, we are happy to bring to you an overview of Nepal’s economy over the past three months. First off, we would like to thank all our readers for their invaluable feedback. Your input helps us develop this publication and better cater to your needs. With your support, we hope that this publication will prove to be essential to business executives and development practitioners in Nepal. This issue builds upon the general structure established in previous issues and is divided into two sections. The first section provides a general overview of the overall macroeconomic state of Nepal’s economy. It goes into some depth within each sector and provides an overview of key stories that have developed over the last quarter. It also provides an outlook for the next quarter. Like with previous issues, the second part of nefport is more analytical. In this issue, we have decided to look into three specific areas – the education sector, capital markets and banking. We provide a detailed overview and assessment on each of these topics. We hope that this will be beneficial for those who make critical decisions in these sectors, as well as those interested in the general economic well being of the country. While the US dollar has appreciated in value considerably over the past few weeks, we have used a USD conversion rate of NPR 71.69 to a dollar, the one year average. Nepal Economic Forum is a not for profit organization and a wing of beed management. We would like to thank beed invest and beed management for their support in making this issue possible. We also thank all our readers who continue to encourage us. We are eager to receive your valuable feedback on how to make future issues of nefport more useful and user friendly. Please email us your suggestions at

Sujeev Shakya Chairman Nepal Economic Forum

Docking Nepal’s Economic Analysis


4 Docking Nepal’s Economic Analysis



Docking Nepal’s Economic Analysis



Political Overview The government missed the constitution drafting deadline of August 31, 2011 but was able to extend the term of the Constituent Assembly by another three months without any major problems. Prime Minister Jhalanath Khanal’s struggled to appoint a full cabinet and failed to move the peace process forward. This eventually led to his resignation and the election of the Baburam Bhattarai as Nepal’s newest Prime Minister. The primary challenge of the new government is to successfully complete the integration and rehabilitation of Maoist combatants and draft the new constitution.

Highlights Another PM: After a few weeks of Prime Minister Khanal’s resignation and the failure of efforts to form a national unity coalition, Baburam Bhattarai was elected as the new Prime Minister on August 28, 2011. The Vice Chairman of the Maoist party, Bhattarai won by a majority of 340 votes against Ram Chandra Poudel of the Nepali Congress and is now Nepal’s fourth PM in four years. Third time extension of the CA: Having missed several deadlines to draft the constitution, including the August

6 Docking Nepal’s Economic Analysis

31, 2011 deadline, the government has managed to extend the term for a third time for another three months. Budget 2011-2012: The finance minister, Bharat Mohan Adhikari, presented the budget for 2011/12 on July 15, 2011. There was a delay of one day caused by the United Democratic Madhesi Front (UMDF) as they cited the government failed to address the issue in the Terai region. The total proposed expenditure stands at NPR 384.9 billion (USD 5.5 billion), representing a 14% increase from the 2010/11 budget. New Indian Ambassador: Jayant Prasad was appointed the new ambassador to Nepal and took office on August 26, 2011. He replaces Rakesh Sood who had left after completing his three-year tenure in Kathmandu.



conomic performance will be strongly influenced by political developments in the country. The prime minister is likely to face major challenges over the modality of integration and rehabilitation of former Maoist rebels. This remains a crucial issue and is a necessary step before the drafting of a new constitution.

International Economy Global economic growth appears more sustainable as the developed economies continue to recover and emerging markets maintain their rapid pace of growth. The IMF acknowledged that global economic activity is set to accelerate again and has maintained global growth forecasts for 2011 and 2012 at 4.2% and 4.4% respectively. Major areas of uncertainty for the global economy have revolved around the crisis in the Euro zone and the future path of monetary and fiscal policy in the United States.

Figure 1 Contributions to Global GDP Growth

fiscal concerns pose big challenges for policymakers. As solvency concerns have not been fully addressed, the sovereign debt crisis in Europe intensified. There is a risk of it becoming systemic as it spreads beyond Greece, Portugal and Ireland to Spain, Italy and Belgium. More recently, the last hour deal reached in Congress to end the U.S. debt crisis and to prevent a national default, has significantly dented investor confidence. The deal raised the debt ceiling in two steps from USD 2.1 trillion to USD 2.4 trillion and cuts an initial USD 1 trillion in spending over ten years. Global equities markets: Global equities have been volatile with large swings of over 4% in either direction.1 Recent weeks have begun on a distinctly down note after S&P’s downgraded U.S. debt to AA+ from AAA. As a results, even Japanese and Chinese stock markets saw massive declines. Investors were unsure what this would mean to them and fled to safe havens including U.S. treasuries, the Swiss franc, and the Japanese yen.2

The U.S. and Euro zone: The slowdown in activity in the United States should be temporary as oil prices stop climbing and international supply chains are restored after the Japanese earthquake. The recovery is still weak and is prone to relapses. The recent economic turmoil could be a precursor to a double-dip recession in the US and has dented consumer and producers sentiments. On a brighter note, some of the growth worries about the American economy were alleviated when weekly jobless claims fell below the 400,000 mark coupled with a favorable retail sales report. Both in Europe and the US,

Emerging markets: Emerging economies continue to show risks of overheating, although as a whole, growth has slowed down due to commodity price increases and the earthquake in Japan. However, inflation in emerging economies remains a concern.3 Overall, developing nations have made a significant contribution to the global economic growth.



ith predications of an American recession in the remaining months of 2011, the global economy still looks shaky. Though slow, the impact will be felt even in the smallest of economies like Nepal via reduced exports and remittances. However, the lasting double-digit growth nearby in India and China provides some cushion.

Docking Nepal’s Economic Analysis


Macroeconomic Overview At the turn of the century, Nepal’s GDP for the 2000/01 fiscal year stood at NPR 413 billion (USD 5.62 billion). Since then, Nepal’s economy, as estimated for the 2009/ 10 fiscal year, has painstakingly grown to NPR 619 billion (USD 8.42 billion) at 2000/01 prices. The decade saw momentous change in Nepal’s political spectrum through the removal of the monarchy and the end of the civil war. However, economic progress has at best trudged forward with socio-political issues consistently trumping the economy. According to the Central Bureau of Statistics (CBS), Nepal’s per capita Gross National Income (GNI) during this time period doubled from NPR 19,144 (USD 260) in 2000/01 to NPR 42,291 (USD 575) in 2009/10. However, this still keeps Nepal close to the bottom of global income tables.

Agriculture Agriculture is the primary source of food, income, and employment for a majority of Nepalis, particularly the poorest. Marred by low labor productivity, 66% of the labor force is employed in the agricultural sector but is able to contribute only 33% to national GDP.4 Agriculture has been the highest priority sector since the formulation of the Fifth Five-Year Plan (1975-80). Economic growth is dependent on increasing agricultural productivity and diversifying the agricultural base. Accordingly, the budget for this fiscal year emphasizes the agriculture sector as a priority sector and highlights plans to commercialize it. The Asian Development Bank expects the agriculture sector in Nepal to grow by 4.0% in 2011 (up from 1.3% in 2010), primarily due to weather-induced recovery in the output of key summer crops.5 Transform and commercialize the agricultural sector: In this year’s budget speech, Finance Minister Bharat Mohan Adhikari put a strong emphasis on the need to transform the traditional feudal system of subsistence based agriculture and commercialize it to establish a selfreliant economy. Adhikari highlighted the need to partner with cooperatives and the private sector to set up agriculture farms. The government will provide subsidies

8 Docking Nepal’s Economic Analysis

to mechanize agricultural production and has allocated NPR 3 billion (USD 41.85 million) as subsidies for farmers to access chemical and organic fertilizers. In addition, the government has given continuity to the “One Village, One Product” program, and intends to develop pocket areas in order to encourage specialization and facilitate production.6 Boost in production this season: By July, 80% of total paddy fields had been planted because of an early monsoon and continued downpours throughout the season.7 This figure increased to 94% as the first week of August ended. According to the Ministry of Agriculture and Cooperatives (MoAC), less than 86% of total paddy fields were used in the same period last year. Nepal has regained the status of a food surplus country after two years and increased hopes of a bumper harvest this year. The MoAC plans to almost double the supply of subsidized chemical fertilizers in the current fiscal year based on the assumption that this input is the most important variable towards boosting output. The Agriculture Perspective Plan (APP) 1992-2015 estimates that chemical fertilizers contribute to a growth of 64-75% in the agriculture sector and recommended that the supply of fertilizers be increased by 8.5% per annum.8 Foreign aid for agriculture and food security: The Global Agriculture and Food Security Program (GAFSP) has decided to award Nepal a grant of USD 46.5 million (NPR 3.33 billion) for the enhancement of household food security in the poorest and most food-insecure regions.9 Similarly, the World Bank (WB) is providing a grant of USD 75 million (NPR 5.38 billion) to the Poverty Alleviation Fund10 and USD 35,000 (NPR 2.48 million) to improve the commercial and technical capability of coffee farmers11 in Syangja, Kaski, Kavre, Lalitpur, Tanahun and Lamjung districts.12 The technique to feed more with less: The government has been accused of “paddy politics” in its collusion with the International Rice Research Institute (IRRI), which only promotes rice varieties and technologies established by the organization.13 Experts claim the System of Rice

Intensification (SRI) can double Nepal’s rice production. The National Agriculture Research Council (NARC), the sole authority to suggest policy measures to the government, is not backing SRI. Nevertheless, the Food and Agriculture Organization (FAO) is training farmers in the technique from transplantation to harvest in field schools. Though SRI is more labor intensive, this technique produces 150 quintals of rice per hectare for a land that yielded 20 to 30 quintals using the traditional method while using 35% less water, 10% of the seeds, and 50% less fertilizers.14 Nepali farm goods to face additional competition: In accordance to the agreements signed during bi-lateral trade talks held with India in March, the Ministry of Commerce and Supplies (MoCS) has proposed to the government to gradually reduce the 5% Agricultural Reforms Fee (ARF) imposed on Indian farms products. Nepali trade experts have been opposing the reduction in ARF, which they claim will weaken the competitive power of Nepali farm goods. Subsidies and other incentives from the Indian government already give Indian farm products a competitive advantage. In addition, the MoCS also seeks to increase the margin of preference on Indian goods between 5 to 7%. This is likely to make Indian products more competitive in the Nepali market. On the other hand, in a bid to promote exports, the MoCS has also proposed different incentives including the waiver of export duties, reduction of import duties on raw materials, and exemption of other taxes on around a dozen products like black cardamom, ginger, pulses, honey, tea, jute, handicraft, medicinal herbs, carpet, betel nuts and tanned leather.15 Unstable food prices: Rising food prices is the chief driver of the high inflation in the country. According to Nepal Rastra Bank (NRB), the consumer price index (CPI) eased to 9.5% in mid-May, down from the 10.6% a month ago. During this period, food and beverage prices increased by 16% due to soaring vegetable prices,16 however, by midAugust, vegetable prices of seasonal vegetables dropped due to high production. Due to a lack of proper storage facilities, the price of major vegetables like dry onion, local cauliflower, cowpea and pumpkin increased by as much

as NRS 10 (USD 0.14) over the period of a week.17 The Department of Commerce (DoC) has drafted a Price Control Policy that allows the government to fix the price of essential commodities taking into consideration factors like cost of production, buying price and profit margin for the sellers.18 Ostrich farming in Nepal: Ostrich products are all set to hit the Nepali market, thanks to the commercial farming of the world’s biggest flightless birds that began in the country two years ago. Ostrich Nepal, a private company which started the farming in Rupandehi with an investment of NPR 300 million (USD 4,184,684), is all set to supply ostrich products including meat, leather and feathers to the market in 2011. The company started farming to market the products in the international market where the price of one kilogram of ostrich meat costs up to USD90 (NPR 6452).19

Energy A string of positive reforms have been witnessed in the energy sector after the appointment of Gokarna Bista to the Ministry of Energy. The Nepal Electricity Authority (NEA) has also undergone core changes.20 However, the state run Nepal Oil Corporation (NOC) is still running losses despite hiking prices to an all time high.21 NEA to control power thefts: In an attempt to control power thefts and leakages, NEA has launched a campaign under the new Energy Minister, Gokarna Bista. Officials have seized equipments used to steal electricity in addition to taking legal action. To further discourage theft, defaulters will be subject to load shedding and also be removed from the priority list for maintenance. The aim of the NEA is to bring down leakages to a total of 9% from a whopping 29% which was the case when Bista took office in February.22 Reforms in the Energy Sector: The Ministry of Energy recently appointed Dipendra Nath Sharma as the new managing director (MD) of NEA through open competition. Docking Nepal’s Economic Analysis


Until now, the selection was made through a cabinet decision.23 Breaking the 26 year old tradition, the minister stepped down as chairperson of the NEA board, allowing for the Energy Secretary to take up the position.24 These structural changes are expected to free the state owned authority from political interference. Dues being collected by NEA: Only once the total tally of electricity bills owed by various ministries reached an alarming NPR 400 million (USD 5.6 million), has the NEA initiated serious actions against defaulters. Starting August 10, 2011, it cut electricity supplies to ministries who haven’t cleared their dues in areas such as Nawalparasi, Kawasoti, Dhangadi, Pokhara and even Kathmandu. Such measures have led to the collection of arrears amounting to approximately NPR 200 million (USD 2.8 million) in three days. The next step as outlined by the Managing Director of the NEA is to act against private establishments and individual defaulters. It has already published a list of such defaulters owing more than NPR 100, 000 (USD 1,395) to the NEA.25 Petroleum products: Petroleum products are the country’s largest import, accounting for 21% of the national budget. In the last five years, Nepal has seen an increase of approximately 52% in the import of oil.26 The NOC estimates oil imports to touch a value of NPR 100 billion (USD 1.4 billion) in the current fiscal year. Diesel accounts for 60% of the total fuel imports, mainly due to persistent power cuts/load shedding. NOC Director Digambar Jha claims that Liquid Petroleum Gas (LPG) and diesel import could be reduced by 75% and 50% respectively if the country could produce self-sufficient electricity.

Year wise total import of Figure 2 petroleum products

New bill finalized: The government has finalized the Petroleum Product’s and LPG Bill, which will put an end to the three decade long state monopoly in the sector. The new bill welcomes private sector investment into the business but specifies the requirement of a heavy paid up capital from interested private players. The paid up capital requirement to import crude oil, refined products and LPG are NPR 20 billion (USD 279 million), NPR 10 billion (USD 139.5 million), and NPR 3 billion (USD 42 million) respectively.27 If the bill is endorsed by the parliament, the government will have to raise the paid up capital of the Nepal Oil Corporation (NOC) to NPR 10 billion (USD 139.5 million). The significant capital provision was included to ensure only competent players enter the sector. The bill also seeks to establish a seven member Nepal Petroleum Authority (NPA), for which the government will appoint the members. The NPA will put an end to the regulatory function currently being carried out by NOC. Increase in Fuel Prices: NOC increased petrol prices to NPR 102 (USD 1.42) from NPR 97 (USD 1.35) on June 13 2011.28 Diesel and kerosene prices rose to NPR 73.5 (USD 1.02) on July 10, 2011.29 NOC has introduced a flat commission rate to petroleum dealers instead of the

10 Docking Nepal’s Economic Analysis

prevailing 3% commission rate. The new price list released by the Indian Oil Corporation shows a drop in LPG prices, although the prices of petrol and diesel have increased. The overall effect is positive and coupled with the increase in selling prices, NOC’s losses will be reduced from NPR 793 million (USD 11 million) in July to an estimated NPR 714 million (USD 10 million).30 The Commission for the Investigation of the Abuse of Authority (CIAA) has prohibited NEA from distributing bonuses on account of it being unethical with the existence of huge losses.31 The NOC’s profit/loss owing to per liter of sale of the various petroleum products for August is provided below.

Table 1 Per Liter Profit/Loss on Sale of Petroleum Products in August, 2011 Item

Profit/(Loss) per

Profit/(Loss) per

liter in NPR

liter in NPR

Petrol (MS) ○

Estimated Total Loss

Figure 3 Foreign Aid to Nepal

(0.01) ○

(3.63) ○




21.04 (Bonded) ○

Budget 2010/11 and the foreign aid: Looking at the past few years, the government has become increasingly dependent on aid to meet expenses. In fiscal year 2007/ 08, grants contributed to 13.8% of the total budget. However in the current fiscal year 2010/11, the Government of Nepal expects foreign aid to cover 24.65% of its expenses. The total expected aid for the current year is NPR 70.13 billion (USD 978 million).33


20.97 (Duty Paid) ○

Aviation Turbine Fuel (JET A-1) ○


Aviation Turbine Fuel (JET A-1) ○


LP Gas ○


Kerosene (SKO) ○

Foreign aid is the one of the principle drivers of the Nepali economy. A major portion of the finance for development projects is made possible through foreign aid.



Diesel (HSD)

Foreign Aid


Source: center&opt2=news

DoMG to tap natural gas beneath Kathmandu Valley: The Department of Mines and Geology (DoMG) is expected to conduct a feasibility report on the possibility of tapping into natural gas from under the Kathmandu valley.32 The DoMG will initiate processes whereby they might extract some of the gas for a trial by the end of the fiscal year 2011/12. Findings from previous studies reveal the existence of lithium gas which cannot be liquefied, but can be supplied to households through pipelines. The study states that the source can produce enough energy to meet the demand of 20,000 households for 50 years.

Source: Budget Speech 2011/2012, Ministry of Finance

EU’s support for peace in Nepal: The European Union has given a NPR 2.2 billion (USD 30.69 million) grant to the Government of Nepal for peace related activities.34 These activities are to be implemented under the Nepal Peace Trust Fund under the Ministry of Peace and Reconstruction. The European community wants the government to use this fund for the implementation of the 2006 Comprehensive Peace Accord.

Docking Nepal’s Economic Analysis


World Bank’s efforts to reduce poverty: The World Bank has provided additional finances of USD 75 million (NPR 5.38 billion) to the Poverty Alleviation Fund.35 The grant is set to directly benefit 2.65 million people, almost a tenth of the total population. The Poverty Alleviation Fund (PAF) has successfully increased incomes of its target groups by 80% in the areas it supports.

towns.39 Through this grant, 75,000 Nepali youth are expected to gain access to short-term skills training and technical education. The project is aimed at youth from poor and marginalized backgrounds. On the other hand, Urban Governance and Development Program: Emerging Towns Project is going to finance the construction and rehabilitation of infrastructure in six municipalities.

World Bank to NRB’s rescue: The World Bank has agreed to provide Nepal with technical assistance in order to prevent the exacerbation of its financial problem.36 Nepal faced a liquidity crisis, which was aggravated when large depositors withdrew their deposits. The World Bank will assist Nepal Rastriya Bank (NRB) to study the causes of the liquidity crisis and assess the steps taken by the authorities.

Nepal receives from the Forest Carbon Trust Fund: Under the first ever Forest Carbon Trust Fund (FCTF), Nepal received USD 95,000 (NPR 6.81 million) in Ludikhola, Kayarkhola and Dolakha where the FCTF was piloted.8 The main focus of the FCTF project is the sequestering of carbon through community-based forest management. The project covers 10,000 hectares of community-managed forests and 16,000 households. According to ICIMOD (International Centre for Integrated Mountain Development), the organization involved in implementing FCTF, this is one of the first communitybased carbon offset project.

Nepal may lose Asian Development Bank (ADB) grant: Lawmakers expressed concerns regarding the government’s inability to implement the ADB’s Information and Communication Technology (ICT) project. This could result in the withdrawal of the USD 6 million (NPR 430.14 million) grant.37 The ADB provided the grant for introducing Voice over Broadband services in 38 districts. The project has not been implemented because of a lack of coordination between ministries. DFID to help create jobs, infrastructure: The UK Aid Agency, Department for International Development (DFID) has unveiled an assistance plan of NPR 38.72 billion (USD 540 million) for Nepal.38 This is a four-year operational plan (2011-2015) which will focus on government, security, inclusive wealth creation, human development, climate change and disaster risk reduction. Through this plan, DFID aims to create 23,000 jobs, build 532 kilometers of road and maintain 3,700 kilometers of road. In addition, DFID will continue its support of the peace process through the Nepal Peace Trust Fund. World Bank to fund two projects: The World Bank has pledged USD 75 million (NPR 5.38 billion) to promote vocational education and improve governance in emerging

12 Docking Nepal’s Economic Analysis

Health Health care still does not reach many areas of Nepal. The current budget allocates NPR 24.51 billion (USD 350 million) towards health care services, the expansion of free basic health care and the promotion of infant and maternal health. Integrated Health Plan: The Integrated Health Program is to be implemented in Jajarkot, Mugu, Bajura, Rukum, Taplejung, Kapilvastu, Rautahat and Siraha districts which lag behind in Human Development Index.41 The Ministry of Health and Population (MoHP) plans to spend around NPR 2.5 million (USD 35,715) for carrying out various health programs in each of these districts. Progress in National Health Survey: New Era, a nongovernment, non-profit research organization, under the guidance of the MoHP, is conducting the fourth Nepal Demographic and Health Survey. The survey is being

conducted in 11,095 households among men and women between the ages of 15 to 49. According to recent claims, the organization has finished 58% of its fieldwork.42 The data obtained from the survey will facilitate the calculation of various demographic details on the general health of the population. Epidemic outbreak measures: Banke, Dang, and Gorkha districts have reported over 1200 cases of diarrhea in the past year.43 The main reasons were polluted water sources, contamination due to the recent floods and a lack of awareness. Similarly, with reports of dengue and encephalitis in many parts of the country, campaigns are being undertaken to fight the diseases. In Chitwan, the District Public Health Office (DPHO) launched an operation to search and destroy the pupa and larva of dengue mosquitoes. It also started a campaign to distribute vaccines for encephalitis. Further aid for Child Malnutrition: To reduce high levels of child malnutrition, the Japan Fund for Poverty is contributing USD 2 million (NPR 143.38 million) for social protection programs.44 According to the World Health Organization (WHO), 38.8% of children (below age 5) suffer from malnutrition in Nepal.45 The project will run for three years and is expected to be completed by early 2014. Trade and tariff barriers discourage the export of Nepali Drugs: Domestic drug manufacturers are seeking to grow and enter international markets. The intended export countries are India, Sri Lanka, Cambodia, Myanmar, Vietnam, and some African countries. However, various non-tariff barriers, registration charges of up to NPR 3.58 million (USD 50,000), renewal fees and delays in sample testing procedures have been discouraging drug manufacturers from attempting to export their products.

Government of Nepal has consistently invested in infrastructure development. Nepal’s geography, the resources required for construction, and endemic structural corruption has meant that many infrastructure projects are delayed or compromised upon quality. Hydropower: To enhance investment in the energy sector, the Government of Nepal registered a Hydropower Development and Investment Company with a paid up capital of NPR 8 billion (USD 111.6 million).46 Compared to the last fiscal year, the budgetary allocation for hydropower projects has also increased by 13.61% to NPR 16.69 billion (USD 232.81 million). As per the budget, tax incentives will be provided to both domestic and foreign investors to attract investment in hydropower and infrastructure development. Any hydropower project that starts construction within 24 August, 2014 and begins commercial production by mid-April 2018 will be fully exempted from paying income taxes for the first ten years. Thereafter, a 50% income tax exemption will be provided for the next five years.47

Table 2 Budget allocation for some of hydropower projects & electricity grid extensions

Project Name

Allocation (NRP) Allocation (USD) Middle Marsyangdi Hydro Electricity Project (70 MW) ○

Micro Hydro and Alternative Energy Program

1.49 billion

19.53 million ○

29.29 million ○

1.39 million ○

36.27 million ○

10.88 million ○

79.09 million ○

14.09 million ○

21.89 million

1.57 billion ○

2.09 million

1.01 billion

Community and other rural electrification ○

5.67 billion

Hydro power Strengthening Project ○

780 million

132 KV and other Transmission Line Extension ○

2.6 billion

Kabeli ‘A’ Hydropower Project ○

100 million

Upper Trishuli 3A Hydropower Project (60 MW) ○

2.1 billion

Upper Tama Koshi Hydropower Project (309 MW) ○

1.4 billion

Rahughat Hydropower Project (27 MW) ○

150 million

Chameliyagaad Hydropower Project (30 MW) ○

7.04 million

505 million ○

Kulekhani Third Hydropower Project (14 MW)




20.78 million

Source : ‘Red Book 2011/12’, Ministry of Finance,

Economic development is largely dependent upon the access to and quality of its infrastructural facilities. The

Docking Nepal’s Economic Analysis


Road Projects: The 2011/12 budget has allocated funds amounting to NPR 178.61 billion (USD 2.49 billion) for road projects. The fund allocated for the roads increased by 46.89% to NPR 27.16 billion (USD 378.85 million) from the last fiscal year with ongoing projects like the Mid-hill highway, Kathmandu –Terai Fast Track, Terai – Hulaki Road and the North – South Highways given a priority.

Table 3 Budgetary allocation for some of major road projects Project Name



Allocation (NRP) Allocation (USD) Pushpa Lal Highway (Ilam – Baitadi) ○

North South Highway (Syaphrubesi – Rasuwagadhi) ○

24.41 million

1.75 billion ○

3.55 million

254.7 million ○

North south Highway (koshi, Kaligandaki and Karnali river corridors) ○


71.02 million

9.91 million

710.46 million

Sagarmatha Highway ( Gaighat-Diktel Section) ○

8.78 million

629.5 million ○

Kathmandu – Terai Fast Track

Biheswor Prasad Koirala Highway Benapa, Sindhuli, Bardibas ○

2.62 million ○

1.59 million ○

28.73 million

2.06 billion ○


113.85 million

Road Upgrade Project ○

187.79 million

Saljhandi -Sandhikharla-Dhortpatan Road ○

34.6 million

Mahakali Highway (Darchula-Tinchar section) ○

16.60 million

1.19 billion ○

Karnali Highway (Kalikot-Jumla section)

Sahid Marg (Tila-Gharti Gaon-ThawangRukumkot) ○

1.52 million

109.15 million ○

48.82 million

3.5 billion

Kathmandu-Bhaktapur Road expansion ○

1.5 million

107.5 million ○

Road Sector Development Project

Kathmandu valley Road construction and development ○

4.88 million

350 million ○

Kathmandu valley Road Extension Project ○

Road Connectivity Project

4.94 million

354.6 million 805.6 million

11.24 million

Source : ‘Red Book 2011/12’, Ministry of Finance,

Irrigation: The budget speech stated that the construction of the 15 kilometer long major canal section of the Sikta Project will be completed with a capacity to irrigate 35,000 Hectares of land in the fiscal year 2011/12. NPR 996.45 million (USD 13.90 million) has been allocated to the project. Further NPR 780 million (USD 10.88 million) has been allocated for Ranijamara-Kulariya irrigation projects

14 Docking Nepal’s Economic Analysis

in Kailai District. A detailed feasibility study will also be conducted to irrigate the Dang Valley. Ten new cities: A feasibility study carried out by RIBS Engineering Consultant has identified 10 potential locations to set up modern cities. These cities will have a capacity to accommodate a population of 30,000 - 50,000. The government has given this project a high priority and has allocated NPR 50 million (USD 697,447) to start integrated physical and social infrastructure development planning.48 West Seti Hydropower Limited (WSHL) license revoked: The cabinet on July 27, 2011, revoked WSHL’s license, a company promoted by Australia’s Snowy Mountain Engineering Corps.49 The license was acquired by the company in June 27, 1997. As per the cabinet’s decision, the Energy Ministry will explore the possibility of constructing the 750 MW reservoir based project through government investment. The estimated cost of the project in 2007 stood at USD 1.2 billion (NPR 86.03 billion).50 Preliminary works for the projects such as Environmental Impact Assessment and Detailed Engineering Report have already been prepared. The project lost its investment support amidst allegations of poor governance, lack of public support and a hostile foreign investment climate. On May 2011, the China Three Gorges Corporation (CTGC) expressed interest in investing in the West Seti Hydro project. The Ministry of Energy recently revised the estimated current cost to USD 1.6 billion (NPR 114.7 billion). World Bank assistance for electricity project: The World Bank approved of assistance for the Nepal India Electricity Transmission and Trade Project (NIETTP). The assistance package comprises credit worth USD 84 million (NPR 6.02 billion) and a grant of USD 15 million (NPR 1.08 billion). The credit carries a 0.75% service charge, 10 year grace period and a maturity of 40 years.51 The project is expected to provide at least 100 MW of additional electricity which will help minimize power outages. The project will also see the establishment of cross border transmission capacity of about 1000 MW and develop key

segments of the high voltage system to help expand access to electricity across Nepal.52 Dry port to be constructed in Larcha: In order to systematize the ever increasing trade between Nepal and China, a dry port in Larcha, Sindupalchok will be constructed and will include a customs office in Rasuwa. A team has been deployed to prepare a report with the cooperation of United Nations Development Programme (UNDP). Currently, a makeshift dry port is being constructed53 with an investment of NPR 10 million (USD 139,489) from the Government of China.54

Manufacturing and Trade Power shortage and political interference have been identified as the main reasons for the slow growth of the Industrial Sector. Growth was limited to just 1.5% in the fiscal year 2010/11. Government assistance to Small and Medium Enterprises (SME), which employ more than 70% of the work force, is limited. The government needs to prioritize SMEs if long term sustainable growth is to be achieved. It needs to consult SMEs when making rules and regulations and then communicate these changes. The budget for the current fiscal year was largely unable to increase investor confidence in the private sector. Instead, the budget gave a higher priority to distributing money through cooperatives rather than investing in projects that could lead to sustainable growth in the future. Employment Guarantee Act: The government has drafted the Employment Guarantee Act, promising to provide a job for at least 100 days per year to a member of each household living below the poverty line. The government will rely on records held by village development committees (VDCs) and district development committees (DDCs) for implementation. Local bodies will monitor and regulate the program and hold public hearings every four months to identify grievances. New Labor Policies and its effect: The implementation of labor policies in the workplace has resulted in damaging

consequences. Surya Nepal’s garment factory in Biratnagar implemented the policy on ‘no work no pay’ after strikes by its employees. The strike lasted for eight days as employees demanded a hike in wages. The company’s refusal to pay for the eight days led to workers taking 37 employees as hostages. Police intervention was called for the rescue of the hostages. At present, the factory has been shut down. Similarly, a nation-wide industrial shutdown called by ten fringe trade unions was called off with the implementation of the governments new pay package. This fixed the minimum monthly salary of workers at NPR 6200 (USD 86.50) and daily wages at NPR 231 (USD 3.23). Ratification of the ILO Convention 87: Trade Unions have demanded that the International Labor Organization (ILO) convention 87 be ratified by the government. The convention provides laborers the right to be affiliated to any organization and guarantees core labor standards to all workers. This would help laborers unite, and guarantee the right to work independently and ensure social security to them. However, this convention does not cover people in the army and police. New system of additional checks: From August 1, 2011 India imposed a new system of additional checks on third country containers in transit to Nepal. This allows Indian custom officials to unlock any sealed containers in transit at Kolkata. Reported incidents of illegal trade in India before arriving in Nepal lead to India imposing this new system. With this in place, Nepali traders face longer transportation periods and higher transportation costs. The Government of Nepal has requested India to withdraw the newly imposed system as Nepali officials argue that it is against the bilateral transit treaty between the two countries.55 Trade Policy Review to be finalized by February 2012: Nepal will be finalizing the Trade Policy Review (TPR) by February 2012 to reduce the gap between Nepal’s commitment to the World Trade Organization (WTO) and its actual fulfillment. The TPR will also give importance to the service sector, which dominates global trade. This emphasis is to enhance the service sector in Nepal and Docking Nepal’s Economic Analysis


get it up to speed with the global standards. Currently, the Ministry of Commerce and Supplies (MOCS) has sent the report to different ministries for their suggestions and comments.56 Trade of gold and silver drops: The price of gold in the domestic market reached an all time high of NPR 50,500 (USD 704.43) per tola (11.664 grams). An increase in the prices has resulted in a drop in the transaction of gold by more than 75%. Along with reaching an all time high, yellow gold has surpassed the price of platinum for the first time since 2008. Silver prices have also reached as high as NPR 1350 (USD 18.84) per tola (11.664 grams) due to a weakening dollar, high crude prices and increasing use of silver in the industrial sector. Nepal has been facing a decline in the export of silver.57 Silver products, a major export commodity, saw a decline of 61.6% from NPR 168.52 million (USD 3.5 million) in the first 11 months of 2009/10 to NPR 64.74 million (USD 902,497) in the same period for 2010/11. Nepali silver is completely hand-made due to which massive orders cannot be taken and also does not have a cadmium free certificate.

Bangladesh, Nepal is currently speeding up the process to sign a trade treaty with Bhutan. Growing trade between the two countries encouraged such a pact. However, discussions on providing entry points for trading are yet to take place with Indian officials. During trade talks held in June, Bhutanese officials were positive towards Nepal’s proposal for zero tariffs for its products.58 Trade indicators show a significant growth of exports to Bhutan with major export products being iron, steel, transformers, soaps, standard wire and noodles. From 2005 to 2010, exports have increased from NPR 238.27 million (USD 3.32 million) to NPR 1.55 billion (USD 21.62 million). In FY 2010/2011, Nepal exported a total sum of NPR 421.4 billion (USD 5.87 billion) to Bhutan, out of which NPR 240.45 billion (USD 3.35 billion) consisted of iron and steel products. During the fiscal year 2009/2010, imports from Bhutan stood at NPR 133.1 million (USD 1.85 million).59

Figure 5 Total Exports to Bhutan

Figure 4 Export of Silver

Source: Trade and Export Promotion Centre

Source: Nepal Rashtriya Bank

Imposition of excise duty on metal products: Going against the provision of excise duty on metal products, India has recently imposed a 5% excise duty on metal products. This hike is discouraging for Nepali metal exporters and makes it difficult for them to compete in the Indian market. Bhutan and Nepal to sign trade pact: After signing the trade pact on the Most Favored Nation basis with

16 Docking Nepal’s Economic Analysis

Inland Revenue Offices (IRO) cracks VAT racket: Inland Revenue Offices (IRO) has been entrusted with investigating 518 firms that use fake VAT receipts to evade taxes. So far they have completed investigations into 216 firms, slapping taxes and fines totaling NPR 2.78 billion (USD 38.8 million). Losses to the government through these fake transactions are assessed to be NPR 1.09 billion (USD 15.2 million) in income tax and NPR 5.82 million (USD 81,183) in excise revenue. So far a sum in the form of a collateral amount of NRP 400 million (USD 5.58 million) has been was deposited by 21 out of the 24 firms while appealing for administrative review. The existing law gives these firms 60 days to settle their liability, after which stringent action is allowed to recoup the revenue.

Separate Intellectual Property body: A separate wing to address the issues related to intellectual property rights is to be set up by the Ministry of Industry (MoI). Currently, it is being taken care of by the Industrial Property Division (IPD) under the Department of Industry (DoI). The new body will have a wider scope to exercise its authority by having claims registered from other fields including academics and arts, while at the same time helping Nepal execute its commitment to the World Intellectual Property Organization (WIPO) and the World Trade Organization (WTO).

identity card system. The mandatory provision of filling customs declaration forms while importing goods worth more than NPR 100 through land and NPR 5000 through air has had a positive impact. In the first 29 days of the current fiscal year, the DoC collected customs revenue summing up to NPR 6.53 million (USD 91,087) and has a target of NPR 100 billion (USD 1.4 billion) for the current year 2011/12.61

Export Incentives: Exporters have not received the benefits of cash incentives on exports. NPR 600 million (USD 8.37 million) has been set aside for cash incentives but due to the delay of the Department of Industry (DoI) in following the standard for incentive distribution, this is yet to materialize. The scheme promises incentives of 2%, 3%, and 4% on export of goods generating 30-50%, 5080%, and more than 80% in value addition. The current budget has increased the allocation towards incentives by NPR 60 million (USD 836,937), but failed to elate exporters earning in Indian Currency. The Ministry of Finance overlooked the proposal of the MoCS that exporters earning in India should receive incentives as well.60

The housing market is an indication of the state of the economy as a whole. People buy new homes only when they are confident that they’ll have enough income to pay for it, so economic downturns can depress the housing market considerably.

Customs Review and Evaluation: The Department of Customs (DoC) conducted its periodical review on the reference prices of 305 imports. This was conducted on the basis of rules for custom valuation set by the World Trade Organization (WTO). The review revealed that out of 305 imports, 181 items were third-country imports while the rest come from India. The review was also conducted to discourage undervaluation and the smuggling of goods to Nepal. In order to systematize the whole import process and collect higher volume of import customs revenue, the Finance Ministry is preparing to introduce an importer

Real Estate

Real estate market still shaky: The realty and housing sector of Nepal during the last one and a half year has gone into near recession after the central bank, fearing the creation of realty bubble, capped the credit floated to the sector in 2009. During the same period a directive issued by the Nepal Rastra Bank (NRB) required individuals to disclose income sources while purchasing land worth more than NPR 3 million (USD 41,846) and houses worth more than NPR 5 million (USD 69,744). The imposition of a capital gain tax further impacted the realty market. Adding to the woes of the realty sector, the liquidity crunch tightened the credit flow to the housing and real estate sector. As a result, the government was able to collect NPR 3.2 billion (USD 44.6 million) for the fiscal year 2010/2011 as against the target of NPR 6.3 billion (USD 87.88 million) from the realty sector. Revenue from land transaction, alone decreased by 46.5% against the NPR 6 billion (USD 83.69 million) collected in the fiscal year 2009/2010.62

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as to comply with the cap set by the NRB for realty lending. However if the personal home loans are more than NPR 8 million (USD 111,591) then such loans are to be included as real estate loans.

Table 5 Revenue Collection in Kathmandu Valley in millions FY 2010/11 FY 2010/11

FY 2009/2010

FY 2009/2010









Chabahil ○

Kalanki ○




7.87 ○


3.55 ○


171.35 ○


254.8 ○

5.39 ○

217.41 ○

7.36 ○



386.74 ○



Bhaktapur ○


Lalitpur ○





Home loan rates hiked: Amidst the relaxation provided by the budget, commercial banks have hiked home loan rates by as much as 1.5%. This has increased the industry average rate of home loans to over 16%. The hike in rates can also be attributed to the central banks’ directive to close the interest rate gap between different saving schemes to 2% or less.

Source: Department of Land Reforms and Management

Changes in provisions: The 2011/2012 fiscal year budget introduced much awaited changes in the provisions governing the real estate sector. Some of the provisions introduced are as follows: z The capital gain tax has been reduced by 50% from 10% to 5%. z The budget has relaxed the income disclosure provision on the purchase of land and houses raising the limit to NPR 5 million (USD 69,744) and NPR 10 million (USD 139,489) respectively. z Provision for settling real estate transaction only through registered broker companies holding Personal Account Number (PAN) cards issued by Inland Revenue Offices. z Provision for allowing Non Resident Nepalis (NRN) including foreign nationals or companies to purchase houses or apartments amounting to USD 200,000 (NPR 14.34 million) or more. However such buyers will be prohibited from selling their houses or apartments for five years from the date of purchase. Likewise, as per the NRB circular dated 14 July 2011, real estate loans taken from banks and financial institutions can be renewed only after the due interest is paid by 16 July 2011. Further, the NRB in the same circular has raised the personal home loan limit from NPR 6 million (USD 83,693) to NPR 8 million (USD 111,591). Such personal loans are to be separated from real estate loans and need not be included in the calculation of real estate loans so

18 Docking Nepal’s Economic Analysis

Remittance Remittances accounted for 22% of Nepal’s GDP in 2010.63 Remittance inflows have successfully reduced absolute poverty by 13% and the Gini coefficient rate from 0.41 to 0.35.64 Unsurprisingly, the practice of migration for foreign employment has seen an increasing trend. The benefits of a high remittance in the household level are poverty reduction, decline in inequality, more income and consumption. This however, comes with the cost of family separation, exploitation by recruitment agencies, and expensive remittance services. At the macro level, the benefits are an increase in foreign exchange and BOP stability, increase in disposable income, and higher aggregate consumption. However, they have a direct impact on inflation, labor supply, wage increases, higher real estate prices, and a heavy dependence on remittance based growth.

Figure 6 Remittances in USD Millions for 2011

Source: Nepal Rastra Bank,

The Dutch Disease: According to the World Bank, Nepal may be suffering from the Dutch Disease. Dutch Disease is a conundrum that generates from a country getting increasing amounts of revenues either from natural resources or increasing inflows in remittances. This high demand in currency leads to currency appreciation, which has been witnessed in Nepal until late July of this year.65 According to the theory, increase in the price of exports due to currency appreciation results in a loss of competitiveness in the world market.66

Figure 7 Remittances and Export Trends

Nepali workers hold expired visas. This issuance has placed the risk of deportation on many Nepalis who travel without documentation.68 Visa restrictions to Hong Kong: According to the Hong Kong immigration department and the Nepali consulate, there has been a drastic increase from 17,555 Nepali people in February 2009 to 29,433 in May 2010. The number of Nepalis residing in Hong Kong with an Identity Card stood at 30,756 as of February 2011.69 However, the implementation of a ban on visa issuance for Nepali laborers has put restrictions on pursuing one of the most lucrative destinations for Nepali migrants. Human rights organizations have been urging the Hong Kong Government to restart visa issuance under International Labor Organisation (ILO) convention 189 passed by the 100th International Labor conference held in Geneva, Switzerland. ILO 189 is a comparatively new law that grants legal recognition to domestic workers.70

Telecommunication and Media Source : World Bank, Remittances Benefits and Costs, Shishido, 2011, Nepal Rastra Bank,

NLSS III: utilization of remittances: The third National Living Standard Survey (NLSS) published by the Central Bureau of Statistics states that only 2.4% of remittances go towards capital formation. It also adds that 78.9% of the remittances are used on daily consumption by households struggling below poverty line. 7.1% is used to repay loans, 4.5% is used for household properties, 3.5 % on education and 2.4% on capital formation.67 Kuwaits takes action on Illegal Migrants: Kuwait issued a warning to arrest and deport illegal migrant workers in the country. The Kuwait government issued a four-month amnesty period (ended on June 30, 2011) within which these illegal immigrants were to return to Nepal and complete legal procedures for re-entry into Kuwait. According to Kuwait’s administrative records, over 40,000 Nepalis are living and working in Kuwait out of which 3,500

Telecom services are expanding their reach to all parts of Nepal. This is evident from the penetration rate of 44.89% as of July 2011.71 This has given rise to fierce competition between Telecom operators Ncell and Nepal Telecom (NT) which has led to additional services at affordable rates.

Figure 8 Penetration Rate as of July, 2011

Source: Nepal Telecommunications Authority

Docking Nepal’s Economic Analysis


NTA proposal for Unified Licensing Policy: The Nepal Telecommunication Authority (NTA) has proposed a single operator’s license for all telecom services to the government.72 NTA believes this will help rural operators expand. NTA formulating policy to regulate .np domain: With private internet service provider Mercantile Communications providing the .np domain for over a decade, the NTA has finally realized the need to formulate a policy that regulates the National Internet Registry.73 The lack of a proper regulatory framework increases the risk of the domain being misused. A study on the .np domain management was conducted in 2010. However its findings were not implemented, but with the use of .np domain on the rise, NTA has understood the gravity of the situation and will formulate a policy within the fiscal year. Nepal Telecom to improve quality of service: NT has already started the process of providing landlines through Optical Network Units (ONU) and will introduce the Multi Service Access Node (MSAN) technology after it installs the Next Generation Network (NGN). The contract for the NGN was given to Chinese Company ZTE Corporation in April, 2011.74 After, the Public Accounts Committee (PAC) scrapped NT’s attempt to procure GSM and CDMA lines without a bidding process,75 NT put forth its largest tender till date for its mobile network expansion project which will add 10 million lines in the country at a cost of NPR 15 billion (USD 209 million) to NPR 20 billion (USD 279 million).76 The connections will be based on Global System for Mobile Communication (GSM) and Universal Mobile Telecommunications System (UMTS) and are to come into operation in 15 to 20 months. It aims to improve service quality. The tender will help NT deal with the scarcity of sim-cards in the markets. NT to be compensated for faulty equipments: ZTE is said to have exported faulty equipments to NT in the year 2004. As a result, the quality of service was compromised. ZTE is providing NT with a compensation package after six years which includes equipments worth NPR 36 million (USD 508,332).77

20 Docking Nepal’s Economic Analysis

Government request to waive UTL liabilities: Acting Prime Minister Jhalanath Khanal had called a meeting with the Ministry of Information and Communications (MoIC) to discuss the possibility of waiving outstanding royalties due to paid by UTL. The Nepal Telecommunication Authority (NTA) has stated that the outstanding liability amounts to NPR 896 million (USD 12.5 million).78 UTL on the other hand claims that they have suffered a loss of NPR 4.44 billion (USD 62 million) at the hands of the NTA as it did not fulfill the terms of the license for which it should be compensated. Journalists attacked: CPN-UML affiliated Youth Force activists, Rohit Koirala and Manoj Rai, attacked the Biratnagar correspondent of Nagarik Daily, Khilnath Dhakal.79 Parshuram Basnet has been charged with masterminding the attempt to murder Dhakal. While Koirala was arrested on the night of the assault, Rai was arrested 9 days later.80 Youth Association Nepal (YAN) Chairman Mahesh Basnet, in a gathering held in Biratnagar, threatened the police and the government to drop charges against Parshuram Basnet.81Another journalist Kishor Budhathoki was assaulted by Bikash Rai and Rupak Rai in Sankhwasabha for publishing news about domestic violence concerning Bikash, one of the attackers.82 None of the assailants have been caught yet. Bikash has also been making threats to the police.83 Journalists prohibited from entering Singha Durbar: The government has posed a ban on journalists entering the premises of Singha Durbar to prevent them from covering the protests being conducted by civil servants. The reason for protests was dissatisfaction with their salary structures announced in the budget.

Tourism The Nepal Tourism Year 2011 has successfully attracted a higher number of tourists as compared to previous years. The tourism sector has seen an average growth of 25% in the first half of the Tourism Year and has witnessed a significant growth in the number of tourists arriving via air.

The total number of tourist arrivals via air covering the period April- July is 34.5% higher as compared to the same time the previous year. However, despite the increase in tourist arrivals, revenue generation has been on the decline due to the reduction in high end clients.

Figure 9 Number of Tourist Arrival

Source: Nepal Tourism Board.

The Government proposes a Tourism Master Plan: A Tourism Master Plan is being prepared and includes the development of physical infrastructure and tourism services to make Nepal one of the best tourist destinations within the next 15 years. The concept seeks to develop 17 tourist destinations around the country and has allocated the necessary budget to establish and operate an Integrated Tourism Service Centers for employment generation within the tourism sector. Quality improvement works will be carried out at the Tribuvan International Airport and infrastructural improvements will be made in other regional airports.84 Visitors estimated to triple in Lumbini Region: According to the Lumbini Development Trust (LDT), Lumbini, the birthplace of Gautam Buddha, has 133 sites, including monuments and archaeological remains. These sites have attracted as many as 50,000 foreigners,

excluding Indian tourists coming via land, in the first four months of Nepal Tourism Year 2011. Rajendra Thapa, the Secretary of LDT has said that the region is yet to witness the main tourist season. LDT’s estimates the number of visitors in 2011 will be three times more as compared to the 102,059 and 82,443 visitors in 2010, and 2009 respectively. Most of the tourists visiting the region are Sri Lankans followed by Koreans, Japanese, Chinese and Vietnamese. LDT also claims that in order to enhance security, a team of 90 Armed Police Force personnel has been deployed in the region.85 Promotional Programs implemented for Nepal Tourism Year 2011: The Nepal Tourism Year 2011 Implementation Committee claims that promotional campaigns were carried out in 25 international fairs. From the NTY 2011 Promotion Budget of NPR 230 million (USD 3.21 million), NPR 130 million (USD 1.81 million) has been put aside for international promotion alone. NPR 60 million (USD 836,936), NPR 30 million (USD 418,468), and NPR 40 million (USD 557,958) has been allocated for tourism promotion in India, China and other destinations respectively. The government is expecting 400,000 visitors from India and China alone.86 High-End Clients Decline: Although there has been a significant growth in the number of tourist’s arrivals within the first half of the NTY 2011, the growth did not reflect in tourist activities like trekking, and adventure sports which are taken up by high-end clients. Tourists who come for trekking stay longer and spend significantly more than those who come for sightseeing.87 Political Instability hits the Tourism sector in Chitwan: During the month of May, Chitwan witnessed a banda every second day due to which many tourists cancelled their trip. 90% of hotel bookings in the Sauraha area were cancelled due to political disturbances. Although the political parties declared Chitwan a non-strike zone three years ago, the unrest within the government resulted in strikes and a significant decline in visitor number.88

Docking Nepal’s Economic Analysis


Macroeconomic Outlook There is some good news for the agricultural sector due to the boost in the production of summer crops owing to a favorable monsoon. However, there is little else to be happy about. The budget does not adequately addresses the food security and price shock issues. While there is an increase in the foreign aid into the agricultural sector, this needs to be closely monitored to ensure its effectiveness in improving food security. The commercialization of agriculture is essential for the development of the sector and the government needs to address the constraints to agricultural commercialization like the lack of infrastructure, fragmented land holding, and the lack of proper market links. It is necessary to promote community based farming in which agricultural land is consolidated to take advantage of economies of scale, allowing for the mechanization of production while maintaining individual ownership. New techniques such as System of Rice Intensification (SRI) that have been tested and proven in Nepal and abroad must also be experimented with. Within the energy sector, the control of leakages will lead to a significant increase in revenue generation for NEA and NOC. According to the MD of NEA, a reduction of leakages by a mere 6% will help generate revenues equivalent to NPR 2.5 billion (USD 34.9 million).89 Further, if the arrears are collected in total, the NEA will recuperate losses equivalent to NPR 660 million (USD 9.2 million).90 With regards to the oil crisis, if the new bill is passed by the parliament, private investors will enter the market, which might provide a competitive environment thereby reducing prices in the future. Additionally, projects which involve locating new sources of energy should be encouraged if the import of petroleum products is to be curbed. Although the Ministry of Health and Population aims to improve the access and quality of health services in Nepal, there is much to be done to ensure equitable access and quality services in both rural and urban areas. These services also have to become self-sustaining, require community participation and efficient management. A key constraint remains the availability of skilled doctors. Nepal faces significant challenges in terms of its best doctors leaving the country for more lucrative jobs abroad. This trend is set to continue. The pace at which Nepal has been constructing power plants, highways and ports have for years lagged behind the demand of the nation. This has had a negative impact on economic growth and helped keep inflation uncomfortably high. The budget is a positive sign for infrastructure development but the funds allocated are not sufficient to meet the infrastructural needs of the country. The infrastructure sector is a capital intensive industry and the Government of Nepal alone is not in a position to fund all projects. Instead, it must create a suitable business environment for attracting foreign direct investment and private equity into the sector. Complete tax exemption benefits for the hydropower industry may lure more investments in the power sector. Strategic efforts like focusing on “on-going projects” rather than setting aside funds for new projects is likely to make a big impact. The government must take necessary measures to support the growth of the economy through the private sector and SMEs. Training and development of SME’s are necessary as they contribute to over 70% of total employment. Disruptions in operations through trade union activities will likely to be addressed with the implementation and adoption on the new pay structure. Initiatives to ratify ILO convention 87 will prevent deprivation and ensure higher standard of living for workers in various sectors. The incentives approved by the cabinet towards export need urgent implementation. The Trade Policy Review will allow the service sector to grow and work along the lines of the global service sector. Creation of an effective independent body dealing with IP rights will give IP a greater scope in the country while at the same time help to execute commitments effectively. The government could increase its revenue if strict actions are taken against businesses found creating fake VAT bills and if measures are undertaken to avoid future rackets. The current increase in export to Bhutan is positive and due to low transportation costs, Nepal could find a bigger market there for its products. However, the fall in the export of silver and the imposition of excise duty on other metal products by India will lead to a reduction in foreign currency earnings. Real estate is a capital intensive industry and is facing a liquidity crunch emanating largely from the cautious approach of banks towards financing real estate companies. The tightened monetary policy of the NRB to control the bourgeoning real estate asset bubble has considerably slowed the realty sector. More stringent regulations could lead to a disastrous correction in the land and house prices increasing the vulnerability of BFI’s loans and threaten the macroeconomic stability of Nepal. During the earlier boom period, a seller’s market existed. But now the market has perceptibly shifted towards the buyer, hence products must be designed to respond to market requirements. Currently the demand in affordable housing is encouraging and developers need to meet this demand.

22 Docking Nepal’s Economic Analysis

With Nepal showing signs of Dutch Disease syndrome due to high dependence on remittance, sensible fiscal management is necessary to reduce an over dependence on remittance. However, Nepal’s remittance market is likely to remain unchanged and reducing this dependence will be a challenge. Constructive utilization of remittance into productive sectors is necessary. The government’s failure in attracting remittance through bonds for productive investments makes it necessary to explore other means of attracting remittance. Redirecting of remittance flow from informal channels into formal channels also needs to be addressed. Once the government opened the telecom sector to private sector investment, intense competition has led NT to add more value added services and improve its connectivity. Ncell’s aggressive marketing strategies, launch of new services and infrastructure expansion led to a rapid increase in its subscriber base. On the contrary, NT’s growth slowed down due to inefficient management and government instability. Moreover, scarcity in simcards during times of high demand prevented NT from capitalizing upon demand. However, in order to recapture its lost market share, NT is finally making amends and improving its operations. The NT-Ncell rivalry has benefitted customers as tariffs have fallen and the quality of service is improving. The recent attack on media persons for reporting objectionable news is a blatant violation of the right to freedom of speech and independent journalism. If the guilty are not penalized, journalists will be cautious in their reporting and will be subject to self-censorship. At such a critical stage of transition, the government must ensure the freedom of the press and take strong action against those who commit crimes against journalists. Although the tourist numbers are up, there has been a decline in the revenue earned by trekking operators. Out of the budget allocated towards the promotion of tourism, trekking activity should be a major focus as it generates a major portion of the foreign currency revenue. Political stability continues to be an important factor in maintaining the consistency of tourist arrivals. Overall, Nepal’s macroeconomic future is shadowed by the inability of the political class to move the peace process forward and write the new constitution. The political instability affects all sectors of the Nepali economy and is a genuine cost of operations in Nepal. Until there is an assurance of relative political stability, Nepal’s economy will not see major improvements on its growth figures.

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24 Docking Nepal’s Economic Analysis



Docking Nepal’s Economic Analysis


Review : Education With an emphasis on delivering quality education, developing the necessary infrastructure, and providing internet access to most schools, the government allocated NPR 63.91 billion (USD 891.45 million) amounting to 16.61% of the national budget towards education this year.91 However, Nepal’s state run educational institutions remain weak and struggle to provide quality education. To some extent, the private sector has stepped in to bridge the gap, but the general perception remains that the quality of education in Nepal is of a poorer quality and standard than that of abroad. Thus, it is unsurprising that the trend of seeking education abroad continues to occur.

The Education Statistic-Pyramid of Figure 10 Nepal for 2011

Although the government is implementing the School Sector Reform program in the hopes of improving the education quality, it allocated less than 20% of its budget on education, a drop of 1.3% points from that of last year’s budget.92 The international benchmark for education spending is 20% of the budget.

School Leaving Certificate (SLC) The first major examination for Nepali Students is the School Leaving Certificate (SLC). It holds great importance because its results define the future of many Nepali students. Taken by grade ten students, the SLC is a prerequisite to higher education. The figure below presents the number of students enrolled in these programs in Nepal.

26 Docking Nepal’s Economic Analysis

Source: Ministry of Education, Nepal Education Figures 2011 at a Glance, June 2011

The results of the last three years show a decline in the number of successful students passing the SLC. In 2011, 397,759 students sat for this examination, out of which only 220,766 (55.5%) passed. Out of the 176,993 students that failed, 144,000 are allowed to take the supplementary exam this year of which only 122,505 have registered for this exam.93 It remains inconclusive what those who did not register and the 32,993 who were ineligible do afterwards.

Figure 11 SLC Pass Percentage

Source: Ministry of Education, Education in Figures 2011 AtA-Glance

A point of concern is the disparity between the results of public schools and private schools. Only 46.02% of the exam takers from public schools managed to pass the exam whereas 85.82% of the students from private schools passed.94 With over than 75% of the total students who took the SLC coming from public schools, the quality of skilled manpower that Nepal produces will not be satisfactory, unless the quality of public education is immediately improved.

Higher Secondary Education After SLC, Nepali students have an array of programs to choose from. These include the Higher Secondary Education Board (HSEB) 10+2 program, A-Levels, International Baccalaureate (IB), Indian Certificate of Secondary Education (ICSE) and Intermediate degrees. Internationally recognized programs like the A levels and IB, though relatively expensive, have gained in popularity as they offer international standards and increase the chance of taking up education abroad. The 10+2 Program: In order to make the Nepali education more competitive in the world market, HSEB 10+2 program was created in 1992.5 This program has been the most popular among post-SLC students. The four streams available to the students in this program are science, commerce, humanities, and education. In the HSEB, once a student chooses a subject stream, it is difficult to explore other options. In the academic year

2010/11, there were 322,735 students enrolled in the eleventh grade, of which 193,083 students were registered in public schools. In addition, there were 300,631 students enrolled in the twelfth grade, of which 177,140 went to public schools. The numbers seem implausible if we compare the numbers with students who passed the SLC last year (247,689). However, this high enrollment in grade eleven could be because of students returning to academia after a respite. Tuition fees at most 10+2 programs are around NPR 3,500 (USD 48.82) per month.96 The Intermediate Degrees: Prior to 1992, the only available option for students who completed their SLC was the Intermediate System. Intermediate in Science (ISc.), Intermediate in Commerce (ICom.), and Intermediate in Arts (IA) were the most popular degrees. Today Tribhuvan University and Kathmandu University are the only universities in Nepal that run the Intermediate Programs. Although planned for phasing out since the introduction of the 10+2 program, it is still running normally. According to the education statistics of the Ministry of Education, there are 37,223 students enrolled in this program. A levels and The International Baccalaureate: The Cambridge International Examinations (CIE) Advanced Level degree and newly introduced The International Baccalaureate (IB) are gaining popularity. The A-Level allows students to explore a wide range of subjects. ALevel is also perceived to be more practical than the HSEB, providing students with the ability to answer the questions based on one’s understanding and less through the technique of rote memorization. The IB system is the newest addition to the existing programs in Nepal. Although ULLENS is the only school in Nepal to run this program, it is considered to be one of the most competitive high school programs in the world. The major constraint of A-Levels and IB is cost. An ALevel student typically takes four to five subjects and the cost of taking the exam for these subjects is usually around NPR 30,000 (USD 429)97 in addition tuition fees of around NPR 11,500 (USD 161)98 per month. The two year A-Levels costs around NPR 306,000 (USD 4,268) in total. The IB Docking Nepal’s Economic Analysis


is an equally expensive program. The monthly fee at ULLENS is NPR 40,000 (USD 558)99 and students have to pay a separate exam fee at the end of two years. The majority of the Nepalis are unable to afford these options making it the government’s responsibility to reform the HSEB program to make it more competitive, applicable and flexible.

Figure 12 Private Tuition Costs in Nepal

Higher Education Education Abroad Undergraduate and graduate program in Nepal are being offered in several government and private colleges. The most popular degree is the Bachelors in Business Administration (BBA) and Masters in Business Administration (MBA). Business and management schools are being run by Tribhuvan University, Kathmandu University, Pokhara University and Purbanchal University along with their affiliates. The Bachelor of Medicine, Bachelor of Surgery (MBBS) in Nepal has been attracting many students within the country and abroad since the inception of the course by the Institute of Medicine in 1978.100 Due to high costs and limited scholarships, very few students are enrolled in this course. Very few enroll in the Doctor of Philosophy (PhD) program. There are only 393 students enrolled in this program. Such a low figure can probably be attributed to the lack of good educational institutes or due to the lack of general interest and perceived need to pursue this degree. According to Kathmandu University, a two and a half year PHD course costs NPR 320,000 (USD 4,463).

Table 6 Enrollment figures in Higher Education Course

Enrollment 2011

BA ○

46,453 ○


3 ○



88,470 ○

3,078,333 ○

2 ○


4 ○



18,312 ○







BE ○

Duration (years) Average Costs (NPR)



28 Docking Nepal’s Economic Analysis


Based on the ‘No objection letter’ issued by the Ministry of Education (MoE) in the Fiscal Year 2067/68, there were 11,392 students who went to pursue education abroad. Some of the countries popular among Nepalis for higher education are India, United States of America (USA), United Kingdom (UK), Australia and Japan. While many students remain in Nepal for further education, an increasing number of students are going abroad for higher education. Studying abroad is an attractive option for students who can afford it mainly because of the unsatisfactory quality of the education system in Nepal. Other reasons why students chose to go abroad are political instability, better job prospects and the appeal of an independent life. However, contrary to the trend, the number of students going abroad dramatically decreased from 11,392 students this year in contrast to 26,222 the previous year.101 This huge decrease in the number of students going abroad is possibly due to stricter visa regulations employed by the British High Commission in Delhi and anti-immigration policies of the UK. Even with a significant decrease in numbers leaving for the UK, it is still a popular destination followed by Australia, Japan, USA and India. As recorded by the ministry of education, 482 students went to India to study for higher education.102 However, this figure seems incredibly low, possibly because of the lack of documentation required to go to India since Nepal shares an open border with India and No Objection Letters are not required to exchange currency.

Figure 13 Issue of No Objection Letters

Number of Students going abroad Figure 14 for the academic year 2010/11

Source: Ministry of Education, Nepal Education Figures 2011 At-a-Glance, June 2011

Source: Ministry of Education, Nepal Education Figures 2011 At-a-glance, June 2011.

According to the data provided by the Educational Consultancy Association of Nepal (ECAN), more than 250 of its 300 member agencies operate in Kathmandu Valley. These agencies not only provide coaching classes for international standardized tests but also assist students in document and visa preparations. The average price of counseling comes to around USD 139.49 (NPR 10,000) where as coaching classes range from USD 142.279 to USD 153.43 (NPR 10,500 to NPR 11,000) depending on the standardized test.103 Orbit Educational Consultancy alone claims that on average, 25 students come to seek counseling every day.104 Counselors at consulting agencies list four major reasons why students chose to go abroad: 1. Students are frustrated over the limited scope of education in Nepal 2. The educational system here is outdated and as a result an international degree is more recognized and saleable 3. The prospect of better jobs 4. The lure of independent living105



o meet the expectation of students, the government must consider reforming the entire education system to add a wider variety of subjects and improve the quality of learning. Such changes cannot happen overnight and require a significant amount of resources. Nepal does not have enough qualified teachers. Improvements in the quality of education in Nepal will not occur until better teachers are available. Thus in the short-term, the school system will not see any significant changes. Given that a smaller group of students seek higher education, the government can address and improve the quality of higher education with the resources it has at its disposal. While people are aware of the benefits of private education, the majority of Nepali students are unable to afford this option. The overall state of the Nepali economy and the quality of education available here means that many students will continue to seek better opportunities abroad. But few students can afford to go abroad for higher education. For those who study in Nepal, it is imperative that higher education is made accessible and attainable.

Docking Nepal’s Economic Analysis


Review : Capital Markets The Nepal Stock Exchange Index (NEPSE) continued with its downward spiral as it plunged by 24.12% to close the fiscal year 2010/11 at 362.52 points. During this period, the market also witnessed the lowest index level since September 1, 2005 at 292.32 points. At the end of fiscal year 2010/11, 209 securities were listed at the NEPSE with a total market capitalization of NPR 323.48 billion (USD 4.51 billion) having fallen from NPR 376.87 billion (USD 5.25 billion) on July 2010.

Table 8 Listed Companies at the NEPSE 1


46.53% ○

-22.24% ○

-36.23% ○





4 ○








Manufacturing and Processing





Source: NEPSE

70.13% ○


34.81% ○




FY 2009/10 FY 2010/11


FY 2008/09 ○


FY 2007/08 ○


FY 2006/07 ○


FY 2005/06 ○

% change


FY 2004/05


222.04 ○



Finance Companies ○


FY 2003/04

Development Banks

Table 7 NEPSE index performance NEPSE Index

3 ○

Number of listed companies

Commercial Banks


Fiscal Year



Source: NEPSE

Led by the dominant financial sector, all major sub-indices shed value during the year. The commercial banking sector (-28.06%) plunged by 128.22 points to close at 328.71 points. The development banking sector (-38.53%) slumped by 38.53 points to close at 294.15 points. Finance companies also (-23.93%) fell by 95.11 points to end at 302.29 points. Likewise, the Insurance sector (25.79%) slid by 141.51 points to end at 407.01 points and the Hydropower Sector (-25.04%) plummeted by 220.62 points to close at 660.38 points.

The number of listed companies on NEPSE has reached 209. However, almost 85% of these listed companies represent the financial sector which only contributes to around 4.5% to the national GDP. The dominance of financial companies is because of mandatory regulatory requirement set by the NRB. However, till date, the capital market has failed to attract other types of business enterprises. Except for a few companies, general investors have limited confidence in other companies listed on NEPSE, largely due to their lack of accountability, credibility, transparency, and poor governance.

Table 9 Details of Public issue approvals by SEBON Details

FY 09-10



Total Number of IPO’s ○

10 ○

FY 10-11 209

37 ○

17 ○

Total Amount of IPO’s issue approved (in NPR millions) ○

NEPSE’s Performance in the Fiscal Figure 14 Year 2010/11

FY 08-09

Total Number of Listed Companies

2,383.57 ○

Total Right Shares approved ○

3,144.70 ○

51 ○


35 ○

31 ○

Total Amount of Rights issue approved (in NPR millions)

11,486.42 10,962.74 5,049.33

Source: SEBON

Along with low market capitalization, the secondary market has also been experiencing an increase in the supply of securities in the form of right shares and new issues. During the fiscal year 2010/11, SEBON granted

30 Docking Nepal’s Economic Analysis

permission to 17 different companies to float primary shares worth NPR 1,778.44 million (USD 24.80 million). It also granted permission to 31 different companies to issue rights shares worth NPR 5,049.33 million (USD 70.43 million).

Developments During the fiscal year 2010/11, the regulatory bodies, Securities Board of Nepal (SEBON), Nepal Rastra Bank (NRB) and NEPSE initiated various strategic activities and regulatory changes to facilitate and strengthen the Nepali capital market. The Central Depositary System (CDS) is in its final stage of implementation and will replace the current manual practice with a computer based book keeping system. The operations will be carried out by CDS and Clearing Limited, a wholly owned subsidiary of NEPSE which was established on March 31st, 2011. However, in a recent development, the company failed to obtain an operating license from SEBON as the company failed to provide the necessary documents from its board members. During the year, SEBON introduced the Mutual Funds Regulation 2067 which came into effect from September 27, 2010. The entry of mutual funds is expected provide small and retail investors a chance to derive the benefits of a well-diversified portfolio. Moreover, NRB paved the way to allow BFIs to act as sponsors for mutual funds by issuing a specific circular. As of now, Siddhartha Bank, NMB Bank, Nabil Bank and Laxmi Bank have applied to SEBON for obtaining licenses to operate mutual fund in Nepal. The new stock broker’s addition process is in its final stage, SEBON has already granted operating license to 16 new stock brokers and they are expected to begin operations from first week of September, 2011. After the additions, the total number of stock brokers will reach 41.

Nine other aspirant stock brokers are yet to receive operating licenses from SEBON. The addition of stock brokers is expected to end the current monopoly of the existing brokers and provide a much needed wider network which will effect trading volume. SEBON also implemented the Portfolio Management Guidelines 2067 during the fiscal year. The guidelines allow portfolio managers to provide three kinds of services: discretionary, non-discretionary services and investment advisory. Moreover, it also allows NRNs to invest in capital market through Portfolio Managers. SEBON also issued the Credit Rating Regulation 2068. Investors are expected to benefit from the credit rating as it will be mandatory to do credit ratings for the issuance of any debenture and other debt instruments, Initial Public Offer (IPO), right issues, preference shares, issues of shares with premium, and Further Public Offer (FPO). It is required to disclose the outcome of the rating carried out in the offer document or the prospectus and other public disclosures before the issuance of such securities. SEBON has granted a letter of intent to ICRA Limited, India for the establishment of a credit rating agency in Nepal. ICRA Limited will hold 55% ownership of Credit Rating Agency while the other key promoters will be the Credit Information Bureau (CIB), Banks and Financial Institutions, Himalayan Infrastructure Fund Limited and other business professionals.106

Five-Year Capital Market Development Master Plan With the assistance of the World Bank, SEBON has prepared a five year master plan for the capital market. A steering committee comprised of senior officers from all the main agencies has been formed and given the mandate of implementing the master plan. The government announced the five year plan will begin in a phase wise manner from the next fiscal year.

Docking Nepal’s Economic Analysis


The key themes of the strategy for developing the Nepalese capital markets as outlined in the master plan are: 1. To rebalance the supply of and demand for securities, particularly by phasing out distorting factors, removing current barriers to listing and investing, and consider tax incentives 2. To increase the capacity of SEBON to enforce the regulations 3. To address gaps in regulation by completing the regulatory regime 4. To develop an effective enforcement regime that addresses the concerns about the manipulation of the market and the poor disclosure performance of listed companies 5. To strengthen the trading and settlement infrastructure 6. To provide education for investors and intermediaries so as to increase the level of understanding of the market107

of such ceilings, the capital market can expect to benefit, as investors will have an additional cushion even when the share prices plummet. The budget has also directed SEBON to prepare the necessary guidelines to allow NRNs to invest in the Nepali capital market by mid-October 2011. For this purpose, a committee consisting of representatives from SEBON, NRB, Company Registrar Office (CRO) and Insurance Board was formed.111 The budget for the fiscal year 2010/ 11 allows NRNs to invest in the Nepali capital market through portfolio managers. The budget also provides concessions to investments coming from institutional investors such as mutual funds, but the degree of such concession has not been specified. To support the fiscal policy, the monetary policy for the fiscal year 2011/12 has declared that NRB will co-ordinate with SEBON to motivate banks to carry out mutual funds.

Fiscal and Monetary Policy The current liquidity crisis seen in the financial system is likely to get some respite, as the budget introduced provisions for voluntary declarations that the money being deposited is not earned through illegal means.108 The capital market is expected to benefit from such arrangements. To encourage investors, the government has reduced the capital gain tax from 15% to 10% for institutions and 10% to 5% for individuals.109 The borrowing limit against the collateral of securities (Margin Loans) has been removed .With the change, Bank and Financial Institutions (BFIs) are free to decide the margin loan amount. Earlier BFIs could only lend up to 60% of the average market value of shares put up as collateral.110 The market was witnessing unnecessary selling pressure as both investors and the lending banks were required to sell the pledged securities to stay in line with the margin requirement. Now, with the discontinuation

32 Docking Nepal’s Economic Analysis

Himal Power Company to issue USD denominated bonds For the first time, the Nepali capital market may witness the issuance of USD dominated bonds. This is expected to provide substantial support for the development of the bond market. However, the approval from SEBON and NRB is expected to take some time as both regulators are preparing the required directives. Himal Power Company will issue the USD 60 million (NPR 4.30 billion) bonds and Ace Capital Limited, the merchant banking subsidiary of Ace Development, will be the issue manager. The debenture will yield 6% as coupon rate per annum and will mature in five years with a roll over option that will be declared in 2013. The bond will be offered to commercial banks and development banks via private placement.112



he continuing downward momentum seen in the secondary market can be primarily attributed to various macroeconomic factors like sluggish economic growth, regulatory inadequacy and a liquidity crunch coupled with the political deadlock. Investor’s confidence remains low as an influx of new shares in the form of bonus and right shares to meet regulatory capital requirements flooded the market, diluting their earnings. To ease the ongoing liquidity crisis and marginalize the high exposure of BFIs in the real estate sector, NRB has made some significant changes. It increased the home loan ceiling, excluding home loans up to NPR 8 million. Likewise, NRB has allowed BFIs to reschedule their realty lending for one more year, if the borrower pays all outstanding interests for the current fiscal year. Moreover, the budget has also made key changes to ease the real estate sector crisis; it has reduced the capital gain tax on land and housing transactions by 5%. It has relaxed the income disclosure provisions on land and housing purchases, raising the limit to NPR 10 million for land and NPR 3 million for a house. The above changes can have a domino effect in the secondary market as both the earnings and liquidity position of BFIs can be expected to be favorable and as the NEPSE index is dominated by BFIs stocks. However, capital market cannot be expected to revive in the immediate future. Due to the above mentioned changes, albeit weekly, a short term uptrend is possible, as investors may be lured by the financial results of BFIs offering higher than expected yields at bargain prices. Furthermore, with the ongoing reforms to support and strengthen the capital market along with the Five Year Capital Market Development Master Plan in the pipeline, the capital market can experience a sustainable bull run in the near future, if accompanied by economic stability and a positive political environment.

Docking Nepal’s Economic Analysis


Review : Banking Despite significant economic challenges, the Nepali Banking industry got to close the last fiscal year (FY) 2010/11 on a positive note due to a stronger banking system and vigilant regulatory supervision. The number of institutions in the banking industry has almost doubled in the past six years largely. At the end of FY 2010/11, 31 commercial banks, 87 development banks, 79 finance companies and 21 micro credit development banks were operating in Nepal. The competition has enhanced the efficiency of the banking industry and has contributed to financial development and economic growth. However, due to the larger number of players in a small economy, there is the emerging challenge of financial stability. Currently, NRB has halted the process of granting license to new aspirants until further notice. The monetary policy for the FY 2011/12 only grants Class “D” Micro Credit Development Banks operating licenses for establishing banking facilities in remote areas.

Table 10 Budgetary allocation for some of major road projects Category





Commercial Banks (Class ‘A’) ○

Development Banks (Class ‘B’) ○

Finance Companies (Class ‘C’) ○

7 ○


Micro Credit Development Banks (Class ‘D’)

31 ○

26 ○





Source: NRB

Figure 15 Growth of BFIs in Nepal

87 ○

79 ○


Deposit Mobilization and Liquidity Management During the past fiscal year, mobilizing deposits in a high inflation and tight liquidity environment remained a challenge for BFIs. This aggravated the imbalance between deposit mobilization and lending in the banking industry. During the first ten months of FY 2010/11, deposit mobilization of Class ‘A’, ‘B’ and ‘C’ financial institutions increased by 8.2% or NPR 59.62 billion (USD 831.63 million) to reach NPR 788.72 billion (USD 11 billion) whereas it increased by 9.7% or NPR 60.77 billion (USD 847.67 million) in the same period of the FY 2009/10. Likewise, during the eleven months of FY 2010/11, deposit mobilization of commercial banks increased by NPR 29.68 billion (USD 414 million) as compared to an increase of NPR 40.97 billion (USD 571.48 billion) during the same period in FY 2009/10. On the other hand, the loans and advances of commercial banks increased by NPR 69.24 billion (USD 965.82 million), which had increased by NPR 71.20 billion (USD 993.16 million) during the same period in FY 2009/10. On a positive note, despite the sluggish deposit growth rate, credit to the private sector increased by NPR 51.10 billion (USD 712.79 million). The role played by NRB to manage the liquidity crisis through its open market operations and timely refinancing and liquidity facility was highly effective. During the eleven months of the FY 2010/11, NRB injected a net liquidity of NPR 61.40 billion (USD 856.46 million) through secondary market operations and NPR 82.40 billion (USD 1.14 billion) was injected through repo auctions. NRB injected a net liquidity of NPR 160.64 billion (USD 2.24 billion) through the purchase of USD 2.22 billion (NPR 159.15 billion) from the exchange market. During the same time period, interbank lending surged to NPR 344.58 billion (USD 4.80 billion) from NPR 245.82 billion (USD 3.42 billion). During this time, the weighted average 91-day Treasury bill rate stood at 7.1%, up from 6.5%. Likewise, the weighted average inter-bank rate stood at 8.13%, up from 7.74%. The monetary policy for FY 2011/12 made some critical changes to tackle the ongoing liquidity problem. It announced the Statutory Liquidity Ratio (SLR) to be fixed

34 Docking Nepal’s Economic Analysis

at 15% of total deposits in which cash in vaults, the balance in NRB, and the deposits remaining in ATM machines can also be counted. To increase lending to productive sectors, the Cash Reserve Ratio (CRR) has been decreased to 5% from 5.5%. This is expected to increase liquid cash in the market by NPR 4 billion (USD 55.79 million). The current liquidity crisis is primarily due to a slow deposit growth rate and is likely to improve as the budget introduced a provision allowing for the voluntary declaration for deposits exceeding NPR 1 million (USD 13.94 thousand) stating that the money is not earned from illegal sources. Mergers Since the government announced special concessions for BFI’s opting for merger, especially through the fiscal policy for FY 2010/11, many BFI’s have sought to merge with other suitable BFI’s. Narayani Finance and National Finance were the first BFIs to merge in Nepal. Recently, Himchuli Development Bank has merged with Birgunj Finance to become H&B Development Bank. Similarly, Nepal Sri Lanka Merchant and Finance merged with Nepal Bangladesh Bank. Currently over a dozen plus BFIs are in the process of merging, amongst them are Bhajuratna Finance and Vibor Bikas Bank, NMB Bank and Clean Energy Development Bank, Infrastructure Development Bank and Swastik Merchant and Finance, Nepal Bangladesh Bank and Nepal Credit and Commerce Bank, Shikhar Finance Limited and Kasthamandap Development Bank. In a period where the existence of a large number of participants in the financial system of Nepal is being criticized and questioned, the enthusiasm shown by BFI’s to merge with other BFI’s could be a positive signal for the stability and growth of the Nepali financial system. To encourage BFI’s, the fiscal policy for the FY 2011/12 waives the registration fees of merged entities. The government is also exploring the feasibility of merging government owned banks.

Banking Crisis The Nepali Banking system is presently experiencing a challenging period, some BFI’s are in a weak financial position. A banking crisis is possible in the near future. Till date Nepal Development Bank and Samjhana Finance are being liquidated. During the last fiscal year, a number of BFI’s witnessed severe problems starting from Gorkha Development Bank, Nepal Share Markets and Finance (NSM), Vibor Bikas Bank, CMB Finance, and Peoples Finance. The problem faced by these BFI’s was largely due to poor liquidity management, weak corporate governance, over concentration in a single sector and banking fraud. NRB recently announced that a single person can’t be the chairperson of the board as well as the chief executive of the bank. Most of the banks facing problems were led by the executive chairman. The NRB has also discouraged the tendency of chief executives who run financial institutions from the capital but have head offices in another district.

Deposit Insurance In a bid to boost public confidence in the banking system, the government made deposit insurance mandatory for Class ‘B’ and ‘C’ licensed financial institutions. The fiscal policy 2011/12 now requires Class ‘A’ commercial banks to also come under the insurance policy. The government intends to gradually increase the deposit amount to NPR 500,000 (USD 6,970) from NPR 200,000 (USD 2,780).

Performance Analysis: The overall performance of commercial banks in 2010/11 fiscal year was satisfactory. Out of 31 commercial banks 16 commercial banks saw double digit growth. Four new commercial banks – Mega Bank Nepal, Civil Bank,

Docking Nepal’s Economic Analysis


Commerz and Trust Bank and Century Commercial Bank – entered the market. Net profits increased by a marginal 2.22% with Rastriya Banijya Bank possting the highest net profit of NPR 175.9 crores (USD 24.53 million). Nabil Bank led the way with NPR 129.4 crores (USD 18.04 million) among private banks. In terms of capital, except for the public sector banks, most commercial banks are in a comfortable position to meet the regulatory capital requirement. Commercial banks deposit grew by 8.2% during the last fiscal year. Excluding the new banks, NMB Bank was able to increase its deposit base by impressive 27.25% followed by Lumbini Bank with a 17.42% increase. Similarly, borrowing increased by 12.6% with NMB Bank increased its borrowing by 43.02%, followed by Nepal SBI Bank with 22.23%.

costs that ends up costing good borrowers more to compensate for bad ones.

Outlook The government through fiscal and monetary policies for the current fiscal year has made some significant changes to address key issues. This includes: z The relaxation on income disclosure for deposits and real estate purchases z Mandatory deposit insurance for commercial banks Grants NRB the right to supervise and monitor savings and credit co-operatives with the annual transactions exceeding NPR 50 million (USD 697,000) along with the department of Co-operatives z Relaxation of the Cash Reserve Ratio (CRR) z

z Continuation of acute liquidity and re-financing facility z Encourage mergers

During the nine months of the last fiscal year, BFI’s Non Performing Loans (NPL) increased to reach 3.4%, up from 2.5%. However, the average NPL had decreased to 2.44% at the end of the fiscal year (unaudited). The NPL ratio, reflective of financial stability, indicates the seriousness of the problem of the Nepalese banking industry. The high level of NPL is also an indication of higher intermediation

36 Docking Nepal’s Economic Analysis

z Special focus on risk management and stress tests

These positive changes made by the regulators should be appreciated and is expected to bring some respite to the banking industry. Despite the above changes, the days ahead for the banking industry may still be challenging as macroeconomic factors including the political environment have not shown any form of adequate progress.

Endnotes 1

Global Economic Outlook 2011: Q 3, Delloitte Research, July 2011


Global Economic Outlook 2011: Q 3, Delloitte Research, July 2011


IMF World Economic Outlook Database, 2011

Madhab Karkee, Nepal Economic Growth Assessment Âgriculture, USAID, 2008. 4


Asian Development Outlook 2011: Nepal

Deputy Prime Minister and Finance Minister Bharat Mohan Adhikari, Budget Speech of Fiscal Year 2011-2012, July 15 2011, Accessed on August 1, 2011. 2010_1/index.php#

Draft of Price Control Policy ready, Republica, June 27, 2011, accessed on August 18, 2011, index.php?action= news_details&news_id=32852 18

19 Madhav Dhungana, Ostrich products to hit Nepali market, June 04, 2011, accessed on August 16, 2011. 20 “Departure from the past: Bista steps down as NEA Chairman”, The Kathmandu Post, August 4, 2011


Plantation Recorded in 80 pc of paddy fields, Republica, July 27, 2011, accessed August 1, 2011. index.php?action= news_details&news_id=33986 7

Paddy plantation reaches 94pc due to timely rains, Republica, August 10, 2011, accessed August 16, 2011. portal/index.php?action= news_details&news_id=33986

21 Siromani Dhungana, “NOC hikes petrol price to Rs 102 per liter, The Himalayan Times, June 13, 2011 22 Prem Dhakal, “NEA punishes over 15,000 customers for power theft, Republica, June 23, 2011 23 “NEA GETS MD through free competition”, The Kathmandu Post, July 29, 2011


Nepal gets $46.5m from GAFSP, Republica, June 10, 2011, accessed on August 17, 2011. action= news_details&news_id=32212 9

US$ 75Million WB grant for PAF, July 13, 2011, accessed on August 18, 2011. news_detail&id=384 10

Kriti Bhuju, Nepali coffee attracts WB assistance, June 19, 2011, accessed on August 17, 2011. index.php?action= news_details&news_id=32527

24 “Minister Bista relinquishes NEA chairmanship”, Republica, August 4, 2011 25 “Ministries owe NEA Crores in power dues, The Himalayan Times, August 13, 2011 26 Sangam Prasain, “Oil Imports jump 35pc to Rs 70b”, The Kathmandu Post, July 21, 2011 27 Milan Mani Sharma, “New Bill to end NOC monopoly, Republica, July 6, 2011


Counterpart Fund for Sericulture,June 4, 2011. accessed on August 18, 2011. news_detail&id=379 12

Himalayan News Service, Govt. Ignores high rice production method, July 13, 2011, accessed on August 15, 2011. http:// t h e h i m a l a y a n t i m e s . c o m / fullTodays.phpheadline=Govt+ignores+high+rice+production +method+&NewsID=295318

28 Siromani Dhungana, “NOC hikes petrol price to Rs 102 per liter, The Himalayan Times, June 13, 2011 29

" Kerosene and Diesel price hike”, Nepali Times, July 10, 2011

Laxman Kafle, “NOC loss going down”, Rising Nepal, August 2, 2011 30


Rubeena Mahato, Nepal’s Hunger Solution- New Method of Rice Cultivation Doubles Harvest with Less Water and Less Seeds, June 24, 2011, accessed on August 10, 2011, issue/2011/06/24/Nation/18312

31 Suprabha, “No bonus for NOC staff: CIAA, Breaking News Nepal, July 20, 2011 32 Ashok Thapa, “With Rs 10m in hand, DoGM aims to tap natural gas, Republica, July 27, 2011


33 Ministry of Finance, Public Statement on Income and Expenditure of the Fiscal Year 2011-12, Annex of Budget Speech, July 2011.

Press Release, July 10, 2011. 2011/10july11.pdf July 10, 2011 34

Prabhakar Ghimire, MoCS proposes to lower ARF on Indian farm imports, July 12, 2011, accessed on August 17, 2011. http:// w w w . m y r e p u b l i c a . c o m / p o r t a l / index.php?action=news_details&news_id=33373 15

Inflation eases to single digit, Republica, June 21, 2011. accessed on August 17, 2011. index.php?action= news_details&news_id=32636

35 “Poverty Alleviation Fund Receives US$ 75 Million in Additional Financing”, World Bank, July 13, 2011. Accessed 18 July 2011, http:/ /


Vegetable Prices Fluctuating, August 17, 2011, accessed on August 18, 2011, news_details&news_id=34859 17

36 Milan Mani Sharma, “WB steps in to help manage financial woes”, Republica, June 16, 2011 37

“Nepal May Lose $6m ADB grant”, Republica, June 10, 2011

Docking Nepal’s Economic Analysis


“Operational Plan 2011-2015” and “Summary of DFID’s work in Nepal 2011-2015", DFID Nepal, April 2011,


“WB pledges $75m for two projects”, Republica, June 30, 2011


“ICIMOD pilots first Forest Carbon Trust Fund in Nepal – Helps communities benefit from forest conservation and sustainable use”,15 Jun 2011,




Prabhakar Ghimire, “Iron, steel lead country’s exports to Bhutan”, Republica, 27th July 2011

Prabhakar Ghimire, “ Red Tape Delays Export Incentive Distribution”, 3rd August 2011


KritiBhuju, “DoC Revises Reference Prices of 305 import items”, Republica, 15th August 2011

41 Om AsthaRai, “Govt. Approves Integrated Health Plan”, My Republica, June 5, 2011


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1 Ropani equivalent to 5476 Sq.ft.

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38 Docking Nepal’s Economic Analysis


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Docking Nepal’s Economic Analysis



NEF port 6 final