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Remittance: Where is the money going?

It is hardly news for us that Nepal is one of the largest recipients of remittance (relative to the Gross Domestic Product); inbound remittance is equivalent to 30% of Nepal’s GDP, and continues to grow by the year. Yet, not much of this money is being channeled to productive activities, and that, many argue is a worrisome event for Nepal. But why could that be happening? According to one of the recent updates published in national daily, much of this money is spent on loan repayment, daily consumption, education and health, and some bit is being saved. A closer look at these headings clearly reflects Nepal’s ground realities, and offers cues to why not much is going into productive sector.

25% on loan repayment
The primary reason behind so many young people migrating to foreign lands is a search for economic opportunities—opportunities that are not available for most of them in Nepal. This migration, however, does not come free of cost. Since most of these economic migrants come from poor families that also do not have much savings in the first place, they acquire loans in hundreds of thousands to get themselves into these foreign lands. Obviously then, the first priority for them is to repay their loans so that they can secure greater disposable transfers for their families as soon as they can.

24% on daily consumption
Around 25 percent of Nepalese are living below the poverty line. For most of these people, it is daily battle—meeting their basic needs. Therefore, when the level of income increases, a large portion of the disposable income is spent on daily consumption. People cannot be expected to make huge proportions of saving and invest it while they do not even have a decent arrangement regarding their basic needs of food, clothing and shelter. And that is what we see so many poor Nepalese people doing with growing remittances. When disposable income increases, it’s a basic human behavior to uplift living standard for better and healthy life.

10% on education and health
While a large portion of Nepal’s budget is spent on health and education sector, access of people to quality health and education services are not satisfactory to say the least. The number of free public schools is high but large numbers of students are now slowly moving to privately-run schools for quality education. This is a manifestation of the fact that parents believe that quality education is a pre-condition for their children’s secure future, and that they perceive private schools as better educators.
Similarly, public health services are not accessible to all. That is not to mean that private health services are, however, the same services that the government has committed to offer to the people for free are non-existent in a lot of places, and people have to spend a substantial chunk of their income on accessing these facilities.
Combined, these expenses reflect the inefficiency of state institutions, and poor quality of whatever little services are available to the people.

28% on savings
The above-three major headings and some others (including trade, cultural and religious activities, etc.) account for 72% of remittances, leaving behind only 28% for savings. This is the amount that could actually go to productive sectors in the form of investments. And that is where the catch is, for Nepal. If nothing else changes, most of this money will go into purchasing land and gold as these assets guarantee a certain amount of return (which substantially greater than investing in other economic sectors in Nepal). However, if the goal is to have this money channeled to productive sectors, then Nepal will have to rethink its policies such that there are respectable returns to be earned from the productive sectors as well. And this will come through building a conducive environment for doing business, meaning stable and market-friendly policies that allow people to start their businesses with ease, protect their private properties, guarantee contract enforcement, allow for easy exit from the market, and ensure rule of law.

Sujan Regmi

About Sujan Regmi

Sujan is working as Research Intern at Samriddhi Foundation.

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Automatic Route – A Prerequisite for FDI Inflows

Nepal Investment Summit, 2017 raised the aspirations of many investors and business opportunists as it unlocked various possible alternatives to promote investment-friendly policies and practices. Among the many commitments, political stability to attract foreign investors, huge FDIs from various nations including China and USA, and the assurance of Minister of Industry to promote friendly regulatory framework for doing business in Nepal were the major outcomes of the Summit. Parallelly, the MoI had also been working on reforming the Foreign Investment Act, and the provision of granting permission to some investors via “automatic route” seemed to be a good complementary move; there were also some genuine arguments about why it was limited to only some, and why not all.

However, a recent move by the MoI to remove the provision of automatic route from the draft of Foreign Investment and Technology Transfer Bill (FITTB) countervails these commitments. The removal of this policy requires foreign investors to enter Nepal through a long and cumbersome process—submit multiple documents to the regulator (Department of Industries, Investment Promotion Board, or the Nepal Investment Board, depending on the scale of investment), and additional documents to Nepal Rastra Bank (NRB). This approval system for Foreign Direct Investment has been one of the biggest tailbacks for investors to make actual investments in Nepal.

Nepal does not need such a complex approval process. What Nepal actually needs is simple Acts and regulations to attract as many investors as possible in order to meet saving-investment gap, technology and skill gap and generate ample employment opportunities. The many goals of the GoN – completion of national pride projects, building of satellite cities, infrastructure development projects, energy development projects and an aim of achieving double digit industrial growth rate – cannot be fulfilled with limited domestic investments. Foreign direct investment is an irrefutable factor for the economic development of Nepal and thus, we cannot afford to offset our potential investors.

Nepal already ranks in the 109th position in the World Bank’s Index of ease of Starting a Business. Moreover, Nepal is the only country in South Asia to have a two-layer approval system and extensive paper-works to bring in foreign investments – a major comparative disadvantage which makes Nepal less attractive to the foreign investors. Foreign investors are likely to explore more favorable alternative investment destinations within the markets of South Asia rather than investing in Nepal. Nepal already lags behind in numerous ways than other neighboring countries. In such scenario, a policy change that enables easy entry of FDI in Nepal could be a competitive factor among its South Asian counterparts.

Automatic route could indeed be a defining factor for economic transformation of Nepal through which foreign investors could bring in investments without government approval, reducing the lengthy and cumbersome processes. Nepal, in this matter should comprehend India’s reform. After the adaptation of automatic route for FDI, India was able to attract $44.20 billion in 2015, a rise by 28%. The FDI contribution in GDP of India during that period was 14-15%.

It is apparent that Foreign Direct Investment is crucial for the economic growth of Nepal. Automatic route could be seen as the most rational step for the government to take in order to attract these FDIs for executing all its committed plans. However, the removal of this principal provision by the MoI is unconceivable.

Ayushma Maharjan

About Ayushma Maharjan

Ayushma is working as an intern in the research department of Samriddhi Foundation.

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Four Reasons Why the NEA Should Not Procure LED Bulbs

The Government of Nepal’s decision to purchase 200 million units of energy efficient LED bulbs has created a big controversy. While the decision in itself has been projected as being in the national interest, the NEA has been facing suspicions of corruption for having bypassed the public procurement law, and having resorted to the special power of the cabinet for buying light bulbs.

Granted that the NEA is acting in the national interest and there is no corruption involved, there are still other reasons to why the procurement of LED bulbs by the NEA is wrong.

1. Going beyond the NEA’s mandate
Nepal Electricity Act, 2041 states that the primary objective of NEA is to supply the power by generating, transmitting and distributing electricity efficiently and reliably, making it accessible to everyone. That is to say that NEA is tasked with only generation, and management of supply of electricity to make it affordable and accessible to all Nepalese. Therefore, procurement of LED bulbs falls beyond the mandate of the NEA as it is clearly not indispensable for either the generation, or the transmission and distribution of electricity.

2. The flaw in the proposed financing model
To finance the procurement, the Government of Nepal is granting a loan of Rs. 2.08 billion which the NEA seeks to repay by selling the bulbs through its distribution centers. In a country where 25.2% of the population lives below the poverty line, it is not pragmatic to expect people to spend money in purchasing energy efficient bulbs in the name of contributing to national interest. In this scenario, the government is likely to provide subsidies to make it affordable to the poor, reducing the retail price (which may even be below the cost price). As soon as that happens, the NEA will face similar fate as the NOC where the dysfunctional subsidy policy rendered it unable to even attain break-even, making it impossible to pay the loans.

3. Crowding out private investment
The NEA, as it is a public enterprise, enjoys few privileges that private enterprises do not. It neither has to depend on investors for capital, not on consumers for profit. With the unlimited government backing, it can afford to procure goods at economic cost and sell them in the market at social costs, even if it makes loss after loss. This disrupts the playing field for private enterprises for they cannot compete with state-backed competitors. This will eventually crowd out private investments.

4. Policy insecurity; lack of predictability
The most important factor affecting investment decisions of private investors is predictability, which is a function of policy stability. The fact that the state-owned enterprises can, at any moment, use the special powers of the government to curb the law of the land makes it further challenging for private investors. In this case, Honorable Minister of Energy, Mr. Janardan Sharma has cited the provision in the public procurement law that allows direct procurement with an international inter-government organization but he has conveniently left out the condition of the provision being applied only in the case of pre- existing supplier of the said goods or services. These kind of malpractices also set negative precedents that can be borrowed by other sectors of the economy as well, which has the potential of making it impossible for private investors to operate in any sector in Nepal.

The Alternative Solution
The rationale given for the purchase of the bulbs by Honorable Minister of Energy, Mr. Janardan Sharma and the MD of NEA, Mr. Kulman Ghising, is its potential to reduce the national electricity consumption by up to 200 MW. Nepal has adopted a liberal economic policy and there are private enterprises that are offering the same service as the NEA is attempting to. If the goal is to lessen the peak demand, then the government could very well relax some of the taxes that apply to these products, making these energy-efficient bulbs affordable to most, if not all, consumers of the grid electricity.

About Ranju Bista

Ranju is working as a Research Intern at Samriddhi Foundation.

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Maximum Tuition Fee Limit Regulation That Backfires

In advocating for equal access to quality education in Kathmandu valley, Ministry of Education (MoE) has recently devised the regulation to set maximum limit on the tuition fees of private and boarding schools based on official categorization of the schools and the grade standards they conduct. While the maximum tuition fees limit per student studying at 9th and 10th standard for grade-A school is set at NRs 3,600, the tuition fee limit is set varying for other schools belonging to different category for the grade standards they conduct.

Given that the appeal for this price/tuition fee control is justifiable in order to make sure that quality education as a fundamental need of the society is affordable to all income holders, the side-effect of such restrain regulation that distort the balancing mechanism of the market is unfathomable and historically observed. Simply take the cliché case of maximum rent price regulation practiced in different cities of the world that brought the entire tenancy housing market into dire straits. New York City stays as a classic example whereby setting maximum rent price below the usual market price at tenancy housing market not only disturbed the incentive to supply enough apartment to meet the growing demand for it, but it also resulted to degradation of housing quality as house-owners could not afford to upgrade and maintain the housing standard while depending on below feasibility rent revenue. Alas, it led the city to only offer the fiasco of inadequate-barely livable residential housing thanks to rent price control legislation.

Importantly, it is necessary to recognize that the disastrous unintended consequence of rent price control has less if any to do with the unique characteristics of the housing industry of a particular city, but more if not all to do with distortion of the governing market fundamental (i.e., price) that allows the supplier of a particular commodity to supply it in a particular quantity and in quality as demanded by the market.  Similarly, in implicating the distortion of same market fundamental or price in the private education market in Kathmandu, the exact same horrendous consequences are likely to be observed.

At first and foremost, when private schools are forced to depend on limited tuition fees set by the maximum limit regulation, they are also forced to invest limitedly on infrastructure maintenance, upgrade, and in adopting innovative education practice in order to break-even. And, if the legislation prescribed tuition fees or the revenue is below what the market would offer, investment on increasing the education related infrastructure and the quality of the education will also be below the pace of what price liberalized private school market would have offered. And henceforth, the quality of the private education system is more likely to be compromised.

Likewise, the ability to charge below-feasibility maximum tuition fees as per the regulation shall also discourage new investment in private schools enough to meet the demand growth of private education possibly triggered by the guardians who are encouraged to transfer their children from public schools. A research from Samriddhi Foundation clearly states that cost structure and initial investment outlay for opening schools with infrastructure required for meeting Grade-C category cannot be feasibly fulfilled by the maximum tuition fee limit set for them. Therefore, a rational investor willing to make profit will not have incentive to establish schools of such category in order to meet the growing demand of private school education. Given the widening gap in supply and demand of private school education as the consequence of this regulation, the motive of this very regulation to make private school education affordable to normal people can instead backfire. With virtually no growth in number of private schools in compared to demand for it, the supply-shortage will rather create an underground economy whereby people with better connections and willing to pay more money off the table are more likely to get their children admitted at private schools while the marginal ones are left out.

This directive on setting maximum limit of tuition fees can be a costly constraint on growth of private educational institutes of Nepal. The directive meant for ensuring quality education to all at affordable prices, in itself can be a major factor hindering the growth of educational sectors. There are numerous reforms required in Nepal regarding its quality of education. In current scenario, the government must instead focus on improving the quality of public schools and not on decreasing competitiveness among private schools affecting its quality and lowering the possibility of low income household children to get a quality education.

 

Ayushma Maharjan

About Ayushma Maharjan

Ayushma is working as an intern in the research department of Samriddhi Foundation.

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Honking Prohibition: The ineffectiveness behind a popular policy

In addressing the grievance of city dwellers about excessive noise pollution from the traffic in the busy roads, the Department of Transportation Management (DoTM) in association with the Kathmandu Metropolitan City Office is enforcing the regulation to prohibit honking except in the emergency situations. This regulation is scheduled to be enacted in the start of Baisakh, the Nepali New Year. According to the department of transport management, any motorist acting against the regulation will be subject to penalty of NRs. 5000. Meanwhile, ambulance, fire brigade, security vans, government vehicles and tourist vehicles are exempted from this regulation.

This good intention behind the enforcement of this regulation to reduce vehicular sound pollution is quite obvious. However, the enactment of this regulation completely ignores the genuine compulsion or the root cause behind honking for motorists, while jumping into the measure of controlling the consequence (i.e., honking) regardless. Therefore, the effectiveness of this proposed regulation can be doubted as it is also bound to victimize innocent motorists and provoke unintended consequences as discussed below.

First and foremost, the regulation is clearly unconcise and obscure. While it only tolerates honking in situation of high risk of accident and emergency, it does not define the characteristics of high risk and emergency explicitly. It is not clear whether the situation of high risk only refers to the times when the motorists are sure to collide with the passer by, or it also refers to the situations when some motorists are being cautious by signaling stationary pedestrians to not cross streets while they are in considerable speed. While making such criticisms might sound picky and paranoid, a motorist traveling in the busy streets of Kathmandu clearly acknowledges coming across multiple situations that require blowing horns even if it is debatable if the situations fit as being “an emergency situation” after all.

Secondly, it is outright clear that most motorists do not honk simply to disturb the residence or contribute to the noise pollution. While exceptions exist, it is often the haphazard traffic situation in the city that compels motorists to blow horns. We all know that the grave conditions of the roads require pedestrians and vehicles to share the same pathway frequently. Thus, honking is the only method to communicate with the pedestrians to ask them to make way for motorists who are at least traveling 5 times speedier than the walkers. Likewise, lack of traffic management at cross-roads and junction require motorists to honk while passing across as a caution even during light traffics. Besides, there is hardly any other decent way to signal public buses often stopping in the middle of the road at their own ease while mischievously blocking the entire traffic. In saying so, it does not seem quite justifiable to prohibit honking when it currently is the important part of usual driving function.

Government, when identifies a potential problem, often goes for the simplest solution, i.e. to pass policies and laws targeting the end consequences that results more bad than good. The policies restrict the rights of the citizens even on conducting general activities that is not opted to cause harm to anybody. Recently, the government formulated the policy to restrict the sale of cigarettes and liquors on certain times and now it plans to ban honking. Further, it is also preparing to ban Nepalese from visiting the gulf countries. In saying so, this spree of legal bans is unintentionally encroaching on our civil liberties from all direction while it is trying to reduce certain consequences.

In conclusion, haphazard policies and regulations as such that attempts to counter the explicit end-consequences without respecting the root causes and incentives of it can often result in punishing the innocent than the culprit.  Given that it is at least 40% of the time that motorists are honking for genuine purpose in the disorganized streets of Kathmandu despite it not fitting under the general understanding of being emergent, it still means that the regulation carelessly charged 40% of the innocent. Therefore, the better government strategy would be to act upon particular compelling factor for honking that would ultimately relieve motorists from honking in the first place. Enforcing Public buses to only stop at designated spaces, assuring separate commute pathways for pedestrian and traffic, and enforcing effective traffic management at junctions and cross-roads could actually be the decent efforts to organically reduce honking.

Ayushma Maharjan

About Ayushma Maharjan

Ayushma is working as an intern in the research department of Samriddhi Foundation.

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Nepal remains as the most expensive place in Asia to Incorporate business as per Doing Business Report 2016

Provided above is the composite picture of the pieces of info-graphs retrieved from Starting a Business section of Doing Business Report 2016 published by the World Bank Group. The picture attempts to convey that Nepal remains as the only country all over Asia that urges entrepreneurs to employ third party legal agent (i.e., the most expensive procedure to start a business) to get their business incorporated.

Technically as per the Companies Act 2006, incorporating a business doesn’t require an entrepreneur to gain authorization by attorney or notarization. The procedure simply expects one to submit the Article of Incorporation and Memorandum of Association along with personal identification documents while paying minimal registration fees.  However, the opacity of the law and inefficiencies in the judicial system has made the registration process far too complex for entrepreneurs to navigate through it without securing professional assistance. Hence, World Bank finds it better for entrepreneurs to use professional services by hiring expensive laws as it happened to be the only way for entrepreneurs to save time and be ensured that the process goes smoothly.

Nevertheless, the need to involve third-party professionals only imposes a cost that can be prohibitive to entrepreneurship. Even though such cost of employing third party legal service is not enlisted as a legal charge for incorporating a company, the bureaucratic hurdle present in the system that requires entrepreneurs to take legal assistance implies such cost to be relevant.

Business registration process should be designed in such a way that deems the use of legal services to be unnecessary. Entrepreneurs, especially those starting a small business, should be able to complete the registration process without having to pay exorbitant lawyers’ fees.  After all, having to deal with cumber regulation procedure always creates room for bureaucratic corruption and larger informal economy with more unregistered businesses.

 

Prience Shrestha

About Prience Shrestha

Prience works in the research department at Samriddhi Foundation. And, he attempts to specialize in the field of Development Economics

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