Econ-ity » October 26, 2014

Daily Archives: October 26, 2014

Of Trade: Your Money (in) My Country

fdi cartoonTrade is a wonderful aspect of modern economy; it enables us to consume products that we have no means of producing. There are many versions of trade: goods for goods, service for service, goods for service, and goods for money are a few examples. Like any rational process, trade also seeks the easiest way in. In order to promote trade it is essential to provide an environment that is supportive to the trading parties. A particular kind of trade that I would like to discuss today is “money for markets,” i.e. trading one party’s money for another party’s resources.

For a budding economy like Nepal, it is important to foster trade and to create an environment that is supportive of trade. Our consumers have acquired many new tastes, like cars, motorcycles, exotic foods, smart-phones and a host of other things. Amazingly, we consume all of these things without producing them. However, it is more than likely that we can also produce goods or services that other countries or economies may not be able to produce. Nepal has a diverse environment but due to our economy’s infantile stage, our production is mostly limited to products that cater to basic needs and necessities. With a stronger industrial base we can easily add value to our products, thereby, increasing the revenue of producers and providing satisfaction to consumers.

Our society is unique and there are distinctive values and ideals that, we, Nepalese pursue. However, globalization has molded our values with images that we have imported. We have also welcomed foreign influences in other, more direct, ways. Foreign investors have set up shop in Nepal to cater to the Nepali market’s needs and in the process have employed many Nepali workers as well. These workers are then introduced to new entrepreneurial skills and management techniques which in turn foster such qualities in our laborers as well. Foreign investments also require technology and skills that may not be available in the host country. In such cases, the investors can bring the required technology and manpower with them which help familiarize us with novel ideas.

Foreign investments are important to Nepal because we do not have enough funds with us to invest in large ventures. Our domestic saving is very low; this may be due to low income, high consumption, or a combination of both. Consumers can consume, save, or invest their disposable incomes, which is whatever part of their income that is remaining after paying taxes. A high rate of consumption without sufficient investment can lead to inflation. Similarly, low rates of saving may lead to high interest rates that could cause pressure on those who wish to invest.

For Nepal, foreign investment is one of the easiest ways to accumulate capital. This new capital will not only employ Nepalese laborers, it will also create avenues for Nepalese households to utilize their money. A wide selection of publicly traded companies might provide incentives for households to consume less and save or invest more. New resource-intensive industries will also help utilize our resources efficiently and provide opportunities for our country’s manpower which could help curb the current “brain drain.”

Protectionist means have been employed by many countries in the past but it was through the removal of such policies that these countries experienced growth. For example, India and China both saw massive growth once they liberally opened up for trade. Similarly, evidence shows that more open countries experience better growth than their closed counterparts. While there are many variables and constants taken into consideration while formulating these conclusions, it cannot be doubted that in order to remain an attractive site for foreign investment, Nepal needs to structure policies that make it as attractive as, if not, more than other countries.

Anurag Pant

About Anurag Pant

Anurag holds a Bachelors of Science in Economics and works as a Research Assistant at Samriddhi, the Prosperity Foundation. He also lectures on Economics at Xavier International College.

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NOC – a White Elephant of the Government of Nepal (GoN)

blogHistorically, the term white elephant derives from the story that the kings of Siam (modern day Thailand) customarily presented white elephants to their courtiers who suffered from high maintenance cost of the animals. In modern norm, the term is seen as a business venture, scheme or facility which is of no value or use. In other words, a white elephant is a term for a possession that can neither be disposed-off nor preserved through maintenance as the cost of its maintenance exceeds the utility that the owner derives from it. This phrase fits the description of one of the many state-owned enterprises in Nepal- Nepal Oil Corporation (NOC).

Nepal Oil Corporation is the only distributor of petroleum products in Nepal. Its function consists of smoothly supplying petroleum products to the people. However, it has suffered financial losses of millions of rupees for nearly a decade. To run its operations, it has been taking loans from the GoN, Citizens Investment Trust, Employees Provident Fund and various commercial banks. Now, it is neither disposable as it is the only importer of fuel in the country, nor does it supply fuel efficiently or make profits doing that.

As petroleum products are essential consumer goods that everybody uses, the mismanagement of NOC directly affects people. This can be perceived when there are fuel shortages and people have to wait in long queues at the gas stations to fuel their vehicle and when you or your family member buys an extra cylinder of Liquefied Petroleum Gas (LPG) to prepare for the impending fuel shortage that you hear in the news. Therefore, it is imperative that we look at the problems of NOC.

The primary problems of NOC are corruption, mismanagement, and most importantly, ineffective cross-subsidization policy. Under this policy, the government procures petroleum products from India at a certain rate and then cross- subsidizes LPG by manipulating prices of other petro- products. The rationale behind the policy is that the economically weak sections of the populace receive LPG at an affordable rate. This price control therefore has been the main cause of its loss. NOC carried out this policy till mid-2071.
To counter the losses being suffered by NOC and to facilitate the smooth supply of petroleum products, GoN implemented an automatic pricing system at the end of Ashwin 2071. It has adopted an automatic pricing system for petrol, diesel and kerosene. However, the system has not yet been implemented for aviation fuel and LPG. In the automatic pricing system, domestic prices will be aligned with international fuel prices.

Even though GoN implemented an automatic pricing system to tackle the losses, it has not yet been implemented on LPGs. This doesn’t seem like a rational move. It introduced an automatic pricing system to tackle the loss created by subsidizing LPG. But the LPGs don’t fall under ‘automatic pricing’ mechanism. However, GoN plans to fix two prices of LPGs- for household and commercial uses, it plans to continue subsidizing LPGs for households while start selling LPGs for commercial uses at market rate. Why does it still want to subsidize LPG for households when cross-subsidization didn’t achieve its goal is something that will go beyond a layman’s comprehension. It still endures a loss of Rs 511.28 per cylinder due to subsidization. How can they ensure this will work? The better option would be to discontinue subsidizing LPGs at all and fully adopt an automatic pricing system for LPG.

Although this is a move in the right direction for long-term development, the GoN should enact the proposed Petroleum Act which will provide legal means regarding issues like leakages, oil theft and adulteration, and facilitate proper management and monitoring. It should transition from a state-owned monopoly and deregulate the sector so that the private sector can step in. Deregulation will facilitate competition in the market between public and private firms and the consumers will benefit from this in the form of appropriate prices for the products.

Arman Pandey

About Arman Pandey

Arman Raj Pandey, a student of Economics works with Research Department at Samriddhi, The Prosperity Foundation.

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