Econ-ity » April 3, 2014

Daily Archives: April 3, 2014

Why should we develop local currency bond?

Local Currency Bond

Local Currency Bond

Around 67 percent of the annual national budget is spent for meeting regular expenditure that includes mainly salary as well as allowance of government employee and 15 percent is used for paying loans of national and international financial institutions. And as a consequence, the remaining portion is invested in development of projects as capital expenditure; this amount is very minimal. It causes insufficiency of capital in various development programs that leads to delay in construction of infrastructure. Sikta Irrigation Project which is under construction with domestic investment can be cited here as an example. After the restoration of democracy in 1990, budget should have been allocated fairly to all constituencies in order to meet the growing economic aspiration of people. But the uneven allocation of the budget hampered the smooth development of mega projects because such projects required sufficient funds for several consecutive years and this did not happen. Therefore, Nepal needs to depend on foreign loans and foreign direct investments to run its development activities in the needed scale.

After the successful completion of second round of Constituent Assembly Elections, domestic as well as foreign investors are very much optimistic as it brings much needed political stability with policy level consistency. Such optimism was clearly observed in the recently concluded Nepal Economic Summit (NES) and Nepal Business Conclave (NBC). Over hundreds of possible investors participated in those events from all around the globe to invest in niche markets that would allow them reasonable return and further open new avenues for investment. Additionally, local currency bonds could be developed by triple ‘A’ rated international financial institutions which is used for investing in mega infrastructure projects such as hydropower, airports, cold storage and so on. The investment in these growth sectors would create the new job opportunity for all kinds of human resources ranging from unskilled to highly skilled. This could possibly stop the mass movement of Nepalese people to gulf nations and other countries like Malaysia, Macao and South Korea for employment opportunities. Furthermore, the creation of bond in local currency saves national economy from the risk of currency mismatch as it has better absorption capacity from external shocks. It gives commercial banks an opportunity to manage their liquidity and thus, making the capital market more vibrant. Realizing these importances, Ministry of Finance (MoF) has already prepared guidelines regarding issuing bond in Nepalese currency and international financial institutions such as International Finance Corporation (IFC) and Asian Development Bank (ADB) have shown keen interest in this. IFC has gone one step further by giving application in concerned ministry to seek permission. According to news published in various national dailies, it has planned to issue bond of around US$ 500 million within the time period of five years which would be used for long term financing.

Till now, Nepal Rastra Bank, the central monetary authority of Nepal has issued bond for Nepalese financial institutions mainly for maintaining liquidity in the money market. It has once issued bond targeting remittance receivers, but it could get good response because the coupon rate was not so attractive and Nepalese people were not familiar with this kind of new practice. However, with the involvement of globally renowned financial institutions such as IFC and ADB, the scenario would be much different as this would be starting point to developing the broader and longer tenure fixed income market.

In case of an emerging economy like Nepal, better economic policy with low level of inflation is required for successful operation of bond market in local currency. It also needs better legal framework with strong implementing institutions for attracting more investors. And formation of a new government with fairly comfortable majority and successful demilitarization of Maoist combatants give hope that all these prerequisites will be met even during the period of political transition.

Pramod Rijal

About Pramod Rijal

Pramod Rijal is a Research Associate at Samriddhi, The Prosperity Foundation. He is also a lecturer of Economics at Mega National and Unique College of Management and has contributed a number of articles in various national dailies.

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Shopper’s Dilemma

prisoners_dilemma_23“Tapaiko pani haina, mero pani haina, 1000 rupees ma dinus na!” This must sound familiar to a lot of shopaholics out there who are more than familiar with the nuances of bargaining. Be it in the busy markets of Asan Bazaar or the retail hubs of New-Road, negotiating and striking a deal is common phenomena. Being an avid shopper with a passion for good bargains, I believe that these daily market negotiations are true representations of a free market, allocating prices of commodities. Although not all, some of the fixed- price counterparts, might conversely be victims of the prisoner’s dilemma.

For the readers who aren’t familiar with the famous game theory concept developed by RAND Corporation scientists, Merrill Flood and Melvin Dresher and formalized by Princeton mathematician, Albert W. Tucker; Prisoner’s Dilemma is a strategy which attempts to explain the behavioral balance between co-operation and defection in human beings. This classic game model sets out two prisoners who cannot communicate at all with each other. Both of them are given an option either to confess or to remain silent. If both the prisoner’s remain silent, then they both will serve 1 year in prison. However, if Prisoner A confesses, and Prisoner B remains silent; then Prisoner A is set free, while Prisoner B will spend 3 years in prison instead and vice versa. Lastly, if both of them confess, then both will be spending 2 years in prison each. Here, remaining silent and co-operating is clearly the most mutually beneficial strategy. However, betraying makes the most rational sense for each individual prisoner, and hence confessing becomes the dominant strategy. Both prisoners then resort to confessing which makes the prison sentences worse for both of them.

Fixed price stores, have set non-negotiable prices of commodities which might distort free market allocation of pricing. Looking at this from a game theory perspective, conforming to a given set price might be looked upon as refusing to co-operate (defecting) to get to a certain price. On the other hand, bargaining and agreeing on a price can be seen as co-operation. Hypothetically speaking in any given month, without bargaining, a seller earns total profit of NRS. 50,000 and a customer can buy 50 things on average with NRS. 50,000. Conversely if both parties bargain, then the shopkeeper can earn total profit of NRS. 70,000 and the customer can buy 70 things with NRS. 50,000. However, if the shopkeeper refuses to bargain and quotes a high price for his products, and a customer walks in and buys the product, then the shopkeeper earns a profit of NRS. 90,000 while the customer can only buy 30 things with NRS. 50,000. Lastly, if the customer refuses to pay more than a certain amount for a product and the shop keeper agrees to their price, then the seller earns only NRS. 35,000 in profits and the customer can buy 90 things with NRS. 50,000. Simplistically looking at this model, both parties benefit by having a fair bargain. However, both sellers and buyers resort to a fixed price shopping system so that they can each individually gain more by not bargaining, thus losing out on greater profits which bargaining offers.

This simplistic model shows that both parties benefit from bargaining. Does this mean that all stores will benefit from being bargain joints? Most definitely not! Real world markets are not isolated and solely confined to one particular factor like the prison sentence in the prisoner’s dilemma example.  Consumer choices are based on a variety of preferential factors like ease of shopping, shoe-leather costs, and prestige in buying rare expensive luxury items. These are the reasons why one-stop-shopping centers like Bhat-Bhateini Supermarket and branded stores in Durbar Marg are profitable. However, fixed price retails still exist between pools of shops open for bargaining. Without specialized commodities that set them apart, and a niche market to cater to, the sellers are definitely foregoing the sales and the potential profits by refusing to negotiate prices. Customers that prefer to shop in those stores are also losing out on better price deals they could get on the same item elsewhere. Additionally, shopping giant Bhat-Bhateini might also do well with a few separate bargain counters for the more thrifty spenders. While maintaining their existing clientele, this strategy of having majority normal checkout lanes with the exception of a couple bargain counters will definitely attract more local customers. The ease of one-stop-shopping experience with the option for a good bargain might be taking traditional departmental store shopping to a whole new level; and might be a potential venture Bhat-Bhateini might want to try out. Lastly, to the shopkeepers and shoppers: If the one and only reason you opt for fixed pricing option is because you don’t want to negotiate, you might be losing out big time. Keep shopping smart, people!

Sneha Pradhan

About Sneha Pradhan

Sneha Pradhan is a Researcher at Samriddhi Foundation with an interest in good governance. She is a graduate student at Heinz College, Carnegie Mellon University in Pittsburgh, Pennsylvania, pursuing a Master of Science degree in Public Policy and Management. She also has a Bachelor of Arts Degree in Economics and Statistics with a minor in Complex Organizations from Mount Holyoke College, South Hadley, Massachusetts.

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