economic reports 2007 08 new

8/14/2019 Economic Reports 2007 08 NEW

1/164

NEPAL RASTRA BANK

ECONOMIC REPORT

2007/08


2/164

NEPAL RASTRA BANK

ECONOMIC REPORT

2007/08


3/164

Published By:

Nepal Rastra BankCentral Office

Research DepartmentStatistics Division

Baluwatar, Kathmandu

NEPAL

Telephone: 4419804, 4419805, Ext. 357Web Site: http://www.nrb.org.np

E-mail: [email protected]


4/164

Acronyms Used

ABBS Any Branch Banking SystemADB/N Agricultural Development Bank of NepalALCO Asset Liability CommitteeASYCUDA Automated System for Custom DataATS Automated Trading SystemBIMSTEC Bay of Bengal Initiative for Multi-Sectoral Technical and Economic

CooperationBOP Balance of PaymentsCBS Central Bureau of StatisticsCGISP Community Groundwater Irrigation Sector ProjectCIB Credit Information BureauCIT Citizen Investment Trust

CoE Committee of ExpertsCPI Consumer Price IndexCRR Cash Reserve RatioCRRDB Central Region Rural Development BankDAP Document Against PaymentDFID Department for International Development (UK)DICGC Deposit Insurance and Credit Guarantee CorporationEPF Employees Provident FundERRDB Eastern Region Rural Development BankEWS Early Warning SignalFISIM Financial Intermediation Services Indirectly MeasuredFNCCI Federation of Nepalese Chambers of Commerce and IndustryFWRRDB Far-western Region Rural Development Bank

GDP Gross Domestic ProductGHC Grievance Hearing CellGNDI Gross National Disposable IncomeGON Government of NepalGWH Giga Watt HoursHR Human ResourceIC Indian CurrencyIMF International Monetary FundIOC Indian Oil CorporationIPO Initial Public OfferingIRD Internal Revenue DepartmentIT Information TechnologyL/C Letter of Credit

Ll Broad Measure of LiquidityLMFF Liquidity Monitoring and Forecasting FrameworkLTO Large Tax Payers OfficeM1 Narrow Money SupplyM2 Broad Money Supply


5/164

2

MRA Masters Purchase AgreementMT Metric Tons

MTEF Medium Term Expenditure FrameworkMWRRDB Mid-Western Region Rural Development Bank NBBL Nepal Bangladesh Bank Limited NBFI Non-bank Financial Institution NBL Nepal Bank Limited NDA Net Domestic Assets NEFT National Electronic Funds Transfer NEPSE Nepal Stock Exchange NFA Net Foreign Assets NGOs Non-governmental Organizations NNML Net Non-monetary Liabilities NOC Nepal Oil Corporation NPL Non-performing Loans

NRB Nepal Rastra Bank NRN Non-resident Nepali NTB Non-tariff Barrier NWPI National Wholesale Price IndexOBIs Other Banking InstitutionsOPEC Organization of the Petroleum Exporting CountriesOTC Over the CounterPPA Power Purchase AgreementPRGF Poverty Reduction and Growth FacilityRBB Rastriya Banijya BankRDBs Rural Development BanksRepo. RepurchaseRMDC Rural Microfinance Development Centre

Rs. RupeesRSRF Rural Self Reliance FundSAARC South Asian Association for Regional CooperationSDRs Special Drawing RightsSEBON Securities Board of NepalSFCL Small Farmers' Cooperative LimitedSFDB Small Farmers' Development BankSITC Standard International Trade ClassificationSLF Standing Liquidity FacilityTBs Treasury BillsTLP Trade Liberalization ProgramUS$ US DollarVAT Value Added Tax

VRS Voluntary Retirement SchemeWAN Wide Area NetworkWRRDB Western Region Rural Development BankWTO World Trade Organizationy-o-y year-on-year


6/164

Contents

Pages

1. World Economic and Financial Development 1

2. An Overview of Macroeconomic Situation 4

3. Economic Growth 6

Sectoral Composition of Gross Domestic Product 7

Activities of Economic Sectors 9

Agriculture

Rainfall

Irrigation

Improved Seeds Chemical Fertilizers 9

Agricultural Production 9

Cereals and Other Crops 9

Vegetables, Horticultural and Nursery Products 10

Fruits, Nuts, Beverages and Spice Crops 11

Farming of Domestic Animals 11

Other Animals Farming and Production of Animal Products 11

Forestry, Logging and Related Services 12

Fisheries

Industry

Services 13

Aggregate Demand 14

Domestic Demand 14

Net Foreign Demand 14

Gross National Disposable Income 14

4. Inflation 16

Consumer Price Index 16

Seasonal Price Movement 17

Price Movement of Sub-groups of Commodities 17

National Wholesale Price Index 18

Wholesale Price Indices of Some Important Commodities 18 Foodgrains

Cash Crops 19

Pulses


7/164

Petroleum Products and Coal 19

Salary and Wage Rate 19

Wages 19

5. Fiscal Sector Development 21

Fiscal Performance (Revised estimates) 21

Fiscal Stance 21

Government Expenditures 22

Revenue Mobilization 24

Tax Revenue 24

Foreign Grants 26

Public Debt 26

Ownership Pattern of Government Domestic Debt 26

Budget 2007/08 27Major Fiscal Reform Measures 28

Tax Policy Provisions 29

Tax Rates 29

Status of the Public Enterprises 30

Privatization and Dissolution of Public Enterprises 30

6. External Sector Development 31

Assessment of Policy Developments 31

Merchandise Trade 34

Balance of Payments 37

Income and Expenditure of Convertible Foreign Exchange 38

Foreign Assets and Liabilities of the Banking Sector 39

Foreign Aid Agreements 40

Transactions with the IMF and IMF Liabilities 41

7. Monetary Sector Development 42

Monetary Policy of 2007/08 42

Objectives 42

Intermediate Target 43

Operating Target 43

Monetary Instruments 43

Bank rate and Refinance rate 43

Cash Reserve Ratio (CRR) 44Open Market Operations 44

Standing Liquidity Facility 45

Inter bank Transactions 45


8/164

Sick Industries Refinancing 46

Liquidity Injection through Foreign Exchange Interventions 46

Interest Rates

Monetary Aggregates 47

Sources of Monetary Growth 48

Structure of Domestic Credit 48

Reserve Money 4

Money Multiplier and Income Velocity 49

Banking Survey 50

8. Financial Market 51

Overall Development 51

Primary Market 51

Secondary Market 51Financial Institutions 53

Growth of Financial Institutions 53

Financial Structure 54

Development Banks 55

Finance Companies 56

Microfinance Institutions 56

Rural Self Refinance Fund 57

NRB Licensed Financial Cooperatives 58

NRB Licensed Non-government Organization 58

Money Transfer Companies 58

Money Changers 58

Insurance Companies 59

Employees' Provident Fund 59

Citizen Investment Trust 60

Postal Savings Bank 60

Deposit Insurance and Credit Guarantee Corporation 60

Credit Information Bureau 60

9. Commercial Banking 62

Number of Banks 62

Assets and Liabilities of Commercial Banks 63

Deposit Growth and Composition 63

Paid-up Capital and General Reserve 64


9/164

Loans and Advances 64

Non-performing Loans 65

Profitability 66

Sectorwise and Securitywise Credit Flows 66

Priority Sector and Deprived Sector Lending of Commercial Banks 67

10. Financial Sector Reform Program 69

Reengineering of Nepal Rastra Bank 69

Restructuring of Nepal Bank Ltd. and Rastriya Banijya Bank Ltd. 70

Capacity Enhancement of Overall Financial Sector 71

Regulatory Measures 71

Supervisory Actions 74

11. Microfinance 76

Rural Self-Help Fund 76Activities of Rural Development Banks and Their Share Divestment 77


10/164

World Economic and Financial Development 1

1World Economic and Financial Development

1.1 According to the World Economic Outlook (Updated) published by theInternational Monetary Fund (IMF) in January 2009, the world output growth is expectedto slow down from 5.2 percent in 2007 to 3.4 percent in 2008. The Fund projects suchgrowth to be 0.5 percent in 2009. The contraction of the world economy will remainsubdued primarily owing to the spill-over effect of the financial turmoil emanating fromthe sub-prime mortgage in the US to the other advanced economies through trade andfinancial system. This would be the first annual contraction during the postwar period,although the downturn is broadly comparable in the magnitude to those that occurred in1975 and 1982.

1.2 The continuing deterioration of financial crisis in the United States and Euro areawill remain a drag on demand and a source of uncertainty for financial markets. The U.S.economy will suffer, as households respond to depreciating real and financial assets andtightening financial conditions. Consequently, the US economy is projected to tip intorecession in 2009. Other advanced economies will also slow in the face of trade andfinancial spillovers, with housing markets a source of drag in some European countries.Growth in the Euro area will be hard hit by the tightening financial conditions and

declining confidence. In the case of Japan, the support to growth from net exports isexpected to decline. Moreover, the growth rates of Japan and Euro area are projected toremain low in 2009 compared to that of the preceding year.

1.3 In the fourth quarter of 2008, markets have entered into a vicious cycle of assetdeleveraging, price declines, and investor redemptions. Credits spread spiked todistressed levels and major equity indices dropped by about 25 percent in October. Weakglobal demand is depressing commodity prices. Oil prices have declined by over 50percent since their peak, retreating to levels not witnessed since early 2007 reflecting themajor global downturn, the strengthening of the U.S. dollar and the financial crisisdespite the decision by the Organization of Petroleum Exporting Countries (OPEC) toreduce production.

1.4 The economic growth of the emerging and developing economies is expected to

remain buoyant on account of lesser impact of the financial instability underpinned by themild recession in India and China.

1.5 Developing Asia is estimated to register a growth of 7.8 percent in 2008 and isprojected to decrease by 5.5 percent in 2009. Likewise, South Asia is estimated to post a


11/164

Economic Report2

growth of 7.6 percent in 2008 and is projected to contract by 6.4 percent in 2009. Theneighboring countries, India and China, are estimated to witness a growth of 7.3 percent

and 9.0 percent respectively in 2008. The economic growth of India is projected at 5.1percent and that of China at 6.7 percent in 2009.

1.6 The financial market strains and its adverse impact on the expansion of the globaleconomy, the higher price rise of the petroleum products and food-grains in mid-July of2008 together with the persistent global imbalances have created challenges for the worldeconomy.

1.7 World trade volume decelerated at the rate of 7.2 percent in 2007 as compared to agrowth of 9.3 percent in 2006 and is estimated to decelerate by 4.1 percent in 2008.Imports are estimated to register a growth of 1.5 percent in advanced economies and 10.4percent in other emerging markets and developing economies in 2008. Likewise, exportsare estimated to rise by 3.1 percent in advanced economies and 5.6 percent in otheremerging markets and developing economies in 2008. The imports are projected to

decrease by 3.1 percent in advanced economies and 2.2 percent in other emergingmarkets and developing economies in 2009; likewise, exports are projected to decline by3.7 percent and 0.8 percent in the respective economies in 2009.

1.8 Inflation rate stood at 2.1 percent in the advanced economies and 6.4 percent inother emerging markets and developing economies in 2007. The inflation in the advancedand developing economies is estimated to accelerate to 3.5 percent and 9.2 percentrespectively in 2008. Most of the economies are estimated to experience higher headlineinflation in 2008 owing to the higher price rise in the food and energy products onaccount of the strong demand growth in the emerging and developing economies.Inflation in South Asia is estimated to remain at 6.9 percent in 2007 and is estimated to be8.8 percent in 2008 and 8.8 percent in 2009.

1.9 The net private capital flows to emerging market and developing economies are

estimated to decline to US$ 528.6 billion in 2008 from US$ 632.8 billion in 2007.Similarly, such flows are projected to be at US$ 286.6 billion in 2009.

1.10 Unemployment rate in the advanced economies was estimated to remain at 5.7percent compared to that of 3.3 percent in the newly industrialized Asian economies in2008. The unemployment rate was estimated to be 5.6 percent in the United States, 7.6percent in the Euro area, 4.1 percent in Japan and 5.4 percent in the United Kingdom in2008. The unemployment rate in the advanced economies is projected to go up to 6.5percent while such rate is expected to remain at 3.3 percent in the newly industrializedAsian economies in 2009.

1.11 The fiscal imbalances as percent of gross domestic product (GDP) in the UnitedStates and Japan was estimated to remain at 4.1 percent and 3.4 percent respectively in2008. The net debt to GDP ratio was estimated at 101.3 percent in Italy followed by

Japan (94.3 percent), Germany (56.1 percent), France (55.5 percent), the United States(46.3 percent), the United Kingdom (37.6 percent) and Canada (21.5 percent) in 2008.


12/164

World Economic and Financial Development 3

Table 1.1

Overview of the World Economic Outlook Projections(Annual percent change unless otherwise stated)

Current ProjectionS.No. Particulars 2006# 2007

2008 2009

1. World Output 5.1 5.2 3.4 0.5

Advanced economies 3.0 2.7 1.0 -2.0

United States 2.8 2.0 1.1 -1.6

Euro Area 2.8 2.6 1.0 -2.0

Japan 2.4 2.4 -0.3 -2.6

Newly industrialized Asian economies 5.6 5.6 2.1 -3.9

Other emerging market and developing countries 7.9 8.3 6.3 3.3

Developing Asia 9.8 10.6 7.8 5.5

China 11.6 13.0 9.0 6.7

India 9.8 9.3 7.3 5.1

ASEAN5 (Indonesia, Malaysia, Philippines, Thailand &Vietnam)

5.7 6.3 5.4 4.2

South Asia @ 9.2 8.7 7.6 6.4

2. World Trade Volume (Goods and Services) 9.3 7.2 4.1 -2.8

Imports

Advanced economies 7.5 4.5 1.5 -3.1

Other emerging market and developing countries 14.9 14.4 10.4 -2.2

Exports

Advance economies 8.4 5.9 3.1 -3.7

Other emerging market and developing countries 11.2 9.6 5.6 -0.8

3. Commodity Prices (US dollar)

Oil* 20.5 10.7 36.4 -48..8

Non-fuel (average based on world commodity export weights) 23.2 14.1 7.4 -29.1

4. Consumer Prices

Advanced economies 2.4 2.1 3.5 0.3

Other emerging market and developing countries 5.4 6.4 9.2 7.1

South Asia @ 6.5 6.9 8.8 8.85. London Inter-bank Offered Rate (LIBOR, percent)**

On U.S. dollar deposits 5.3 5.3 3.0 1.3

On Euro deposits 3.4 4.3 4.6 2.2

On Japanese yen deposits 0.4 0.9 1.0 1.0

6. Private Capital Flows, Net (Emerging Market and DevelopingCountries, billions of US$) @

223.0 632.8 528.6 286.6

7. Unemployment (percent of labor force)

Advanced economies 5.7 5.4 5.7 6.5

United States 4.6 4.6 5.6 6.9

Euro Area 8.7 7.4 7.6 8.3

Japan 4.1 3.8 4.1 4.5

United Kingdom 5.4 5.4 5.4 6.0

Newly industrialized Asian economies 3.7 3.4 3.3 3.3

Notes: * Simple average of prices of UK Brent, Dubai, and West Texas Intermediate Crude Oil.** Six-month rate for the United States and Japan. Three-month rate for the Euro Area.

Sources: # IMF. 2008. World Economic Outlook (Updated). IMF. October, p. 3.@ IMF. 2008. World EconomicOutlook. IMF. October, pp. 52, 65, 273 and 283. IMF. 2009. World Economic Outlook(Updated). IMF. January, p. 6.


13/164

Economic Report4

2

An Overview of Macroeconomic Situation

2.1 In 2007/08, the Nepalese economy displayed a satisfactory performance in terms ofeconomic growth. The robust performance of agriculture sector together with thesatisfactory expansion of services sector placed the overall growth to a peak of four yearhigh. The industrial performance however remained lackluster. Strikes, roadblocks,

paucity of petroleum products, load shedding and turmoil in Terai region continued todrag down the pace of industrial growth in 2007/08. Overall, the real GDP at producers' prices grew by 4.7 percent in 2007/08 compared to a growth of 3.2 percent in theprevious year.

2.2 The average annual consumer inflation moderated to 7.7 percent in 2007/08 fromthe level of 6.4 percent in 2006/07. This was attributed primarily to the upsurge in theprice of food articles and petroleum products.

2.3 Despite the political turmoil and transition phase of the economy, fiscal situationremained broadly stable in 2007/08. Fiscal deficit stood at 2 percent of GDP as againstthe estimate of 2.7 percent in the budget of 2007/08. Such a prudent fiscal situation wasmade possible primarily due to the impressive revenue mobilization and foreign grants. Ahost of reforms in tax administration, growing imports and consumption induced by the

rise in remittances, the increasing imports of high tax yielding vehicles and spare partsand increase in non tax revenue were among the responsible factors for the encouraginggrowth of revenue mobilization.

2.4 In 2007/08, trade deficit continued to widen as in the previous years. However,there was a surplus in the current account primarily owing to large remittance inflows.The balance of payments also posted a surplus.

2.5 Ratio of exports to imports declined to 26.7 percent in 2007/08 from 30.5 percent inthe preceding year, demonstrating the declining import financing capacity of exports. Theshare of India in Nepal's total trade went up to 64.3 percent in the review year from 62.0percent in the previous year.

2.6 Total foreign exchange reserves of the banking system amounted to Rs. 212.62

billion as at mid-July 2008, an upsurge by 28.8 percent compared to the figure of theprevious year. This level of reserves was adequate for financing merchandize imports of11.3 months and merchandize and service imports of 9.1 months.


14/164

An Overview of Macro Economic Situation 5

2.7 Broad money rose by 25.2 percent and narrow money by 21.2 percent largely dueto the significant rise in the remittance inflows in the last two quarters of 2007/08

together with the increase in foreign assistance.2.8 For managing the Indian Currency reserves, the NRB purchased Indian Currency(IC) 70.6 billion by selling US$ 1.7 billion in the review year compared to a purchase ofIC 39.9 billion by selling US$ 920 million in the previous year. A widening currentaccount deficit with India and higher amount of payments made to Indian Oil Corporation(IOC) by Nepal Oil Corporation (NOC) contributed to such a rise in IC purchase in thereview year.

2.9 The stock market experienced impressive growth in 2007/08. The y-o-y NEPSEindex increased by 40.8 percent to 963.36 points in mid-July 2008. Similarly, marketcapitalization to GDP ratio reached 44.6 percent in mid-July 2008 from 25.8 percent ayear ago.

2.10 Overall, in terms of the macroeconomic performance, the Nepalese economydisplayed a mixed performance in 2007/08. While real GDP posted a higher growthcompared to the previous year, the annual average inflation remained high. Although thetrade deficit expanded, the current account and the balance of payments remained insurplus primarily due to the significant remittance inflows.


15/164

Economic Report6

3

Economic Growth

3.1 The performance of Nepalese economy in terms of economic growth remainedsatisfactory in 2007/08. The real GDP at producers' prices grew by a four-year high of 4.7

percent in 2007/08 compared to a growth of 3.2 percent in the previous year. In terms of

basic price, the real GDP grew by 5.6 percent in the review year (Figure 3.1). The robust performance of agriculture sector coupled with the satisfactory expansion of servicessector placed the overall growth to a peak of four year. The industrial performance

however remained lackluster. The strikes, lockouts and roadblocks, scarcity of petroleumproducts, load shedding and turmoil in Terai region continued to drag down the pace of

industrial growth in 2007/08.

3.2 The agriculture sector that contributes almost one-third share in GDP grew by 5.7

percent in the review year. Such growth in the previous year was a meager 1.0 percent.

The acceleration in the growth of agriculture can be attributed to the significant rise inpaddy production and a satisfactory performance of other agriculture crops.

Figure 3.1 : Economic Growth Rate

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

Fiscal Year

Percentage

Agriculture Non-agriculture GDP at basic prices


16/164

Economic Growth 7

3.3 The non-agriculture sector reported a growth of 5.6 percent in the review yearcompared to a growth of 4.1 percent in the previous year. Despite the sluggish

performance of industrial sector, the expansion of services sector contributed to improvethe overall performance of the non-agriculture sector. The industrial growth slowed to 1.8

percent that is nearly a half of previous years growth rate. This slowdown was mainly onaccount of the slackening in the growth of manufacturing sector.

3.4 The performance of services sector remained robust in the review year. It grew by6.9 percent in the review year compared to a 4.2 percent growth in the previous year. The

growth in financial intermediation; hotel and restaurant; transport, storage and

communication; wholesale and retail trade; and health and social work sectors played animportant role in the growth of this sector.

3.5 The review year is also the first year of the ongoing Three-Year Interim Plan. Theplan has targeted an annual growth of 5.5 percent with 3.6 percent growth in agriculture

and 6.5 percent in non-agriculture. The targeted growth seems to be attainable provided

that the law and order situation in the country remain conducive for additional investmentand also the monsoon remains favourable. In 2007/08, except in industrial sector, theoverall growth including agriculture and services exceeded the Plans targeted growth

(Table 3.1).

Table 3.1

Actual and Targeted Sectoral Growth Rates of GDP (at 2000/01 prices)*

Sectors 2006/07 2007/08 Plans Target

Agriculture 1.0 5.7 3.6

Non Agriculture 4.1 5.6 6.5

Industries 3.9 1.8 6.8

Services 4.2 6.9 6.4GDP at basic price 3.0 5.6 5.5

*Before deduction of financial intermediation services indirectly measured (FISIM)

Source: National Planning Commission and Central Bureau of Statistics.

Sectoral Composition of Gross Domestic Product

3.6 The sectoral GDP data of the last two decades revealed the ongoing structural

changes in the economy. The share of agriculture in GDP has registered a steady decline

while the services sector has taken a greater chunk in GDP. The industrial sectors share

has, however, stagnated. The share of agriculture, industry and services to the real GDPstood at 36.0 percent, 16.3 percent and 47.7 percent respectively in 2007/08. The

corresponding shares in 1987/88 were 48.7 percent, 16.3 percent and 35.0 percent (Figure3.2).

3.7 The contribution of agriculture in real GDP increased marginally to 36.0 in the

review year from 35.9 percent in the previous year. This sectors contribution to theoverall growth surged by more than three and half fold from 12.0 percent in the previous

year to 36.4 percent in the review year. A decline in the growth of industrial sector

dragged down this sectors contribution to growth from 22.0 percent in the previous year


17/164

Economic Report8

to 5.2 percent in the review year. Despite a robust growth of services sector, this sectorscontribution to overall growth dropped to 58.4 percent from 66.0 percent in the previous

year (Table 3.2).

Table 3.2

Sectoral Contribution to GDP and Overall Growth*

(at 2000/01 Prices)

In percent

Sectors Share in real GDP Growth Rate Contribution to

Growth Rate

2006/07 2007/08 2006/07 2007/08 2006/07 2007/08

Agriculture 35.9 36.0 1.0 5.7 12.0 36.4

Non-agriculture 64.1 64.0 4.1 5.6 88.0 63.6

Industry 16.9 16.3 3.9 1.8 22.0 5.2

Services 47.2 47.7 4.2 6.9 66.0 58.4

Total 100.0 100.0 3.0 5.6 100.0 100.0

* Basic price prior to deduction of FISIM.

Source: Central Bureau of Statistics and NRBs calculations.


18/164

Economic Growth 9

Activities of Economic Sectors

Agriculture

3.8 The agriculture sector grew by an encouraging rate of 5.7 percent in the reviewyear. This is the highest growth rate so far in the last fourteen years. The growth rate in

the previous year was meager 1.0 percent. A sharp rise in paddy production along with asatisfactory performance of other agriculture crops and livestock played an important

role.

Rainfall

3.9 The monsoon plays a crucial role in agricultural production in Nepal. The monsoon

remained quite favourable for paddy plantation in the review year. The country received98 percent of average rainfall in June, 125 percent in July, 101 percent in August and 159

percent in September. Except June, all other months received more than average rainfall.

This contributed positively in the production of paddy in the review year.

Irrigation

3.10 Irrigation facility increased by 7.0 thousand hectares to 1202 thousand hectares in

2007/08. The total irrigated land as a percentage of cultivated land reached 45.5 percentby the end of 2007/08.

Improved Seeds

3.11 The supply of improved seeds from National Seeds Company Ltd. increased by

20.4 percent to 3.8 thousand metric tones from 3.2 thousand metric tones in the previous

year. The supply of improved seeds of paddy and wheat grew encouragingly by 35.6percent and 17.6 percent respectively. However, the supply of improved seeds of maize

and other crops declined substantially by 89.7 percent and 44.6 percent respectively.

Chemical Fertilizers3.12 The supply of chemical fertilizer declined by 41.0 percent to 53.6 thousand metrictons from 90.9 thousand metric tones in the previous year. Since the deregulation of

fertilizer trade in 1997, the share of Agriculture Inputs Company Limited (AICL) hasregistered a steady decline.

Agricultural Production

Cereals and Other Crops

3.13 The production index of cereal and other crops that occupies nearly a fifty percent

share in the overall agricultural production increased by 7.3 percent in the review year.

This upsurge in the index was largely because of a significant rise in the production of

paddy by 16.8 percent. Paddy is an important crop that accounts for nearly a 21 percent

share in agricultural production and almost 42 percent share in the cereal and other cropsgroup. The cultivated area of cereal and other crops expanded by 2.8 percent to 4,152

thousand hectares in the review year from 4,040 thousand hectares in the previous year.

3.14 The production of paddy, after a continuous decline over last three years, reported a

significant growth of 16.8 percent to 4,299 thousand metric tones in 2007/08. It had


19/164

Economic Report10

dropped by 12.6 percent to 3,680.8 thousand metric tones in the previous year. Thecultivated area under paddy expanded by 7.6 percent to 1,549 thousand hectares in the

review year. This is 37.3 percent of total cultivated land under cereals and other cropsgroup. The production yield of paddy surged by 8.5 percent to 2.78 metric tons per

hectare in the review year from 2.56 metric tons per hectare in the previous year.

3.15 The production of maize grew moderately by 3.2 percent in 2007/08 compared to a

growth of 4.9 percent in the previous year. The cultivated area under maize stagnated at870 thousand hectares in the review year. The total production of maize increased to

1,879 thousand metric tons in the review year. The yield of maize increased slightly to

2.16 metric tons per hectare in the review year.

3.16 The production of wheat increased by 3.8 percent in the review year compared to a

growth of 8.7 percent in the previous year. With a marginal increase of 0.5 percent in thecultivated areas, the production of wheat increased to 1,572 thousand metric tons in the

review year from 1,515 thousand metric tons in the previous year. Consequently, the

yield of wheat surged to 2.23 metric ton per hectare in the review year from 2.16 metrictons per hectare in the previous year. The production of millet posted a growth of 2.2percent in the review year contrary to a decline of 2.1 percent in the previous year.

3.17 With an increase of 2.1 percent to 156.7 thousand hectares in the area coverage, the production of potato surged by 5.7 percent in the review year. Consequently, the

production yield of potato surged by 3.6 percent to 13.11 metric ton per hectare from

12.66 metric ton per hectare in the previous year. The production of sugarcane posted adecline of 4.4 percent in the review year compared to a growth of 5.6 percent in the

previous year. The area coverage of sugarcane also dropped marginally to 63 thousandhectares from 64 thousand hectares in the previous year. The production yield dropped

by 2.8 percent to 39.48 metric ton per hectare in the review year.

3.18 Despite a marginal drop in the area coverage, the production of jute posted a

marginal growth of 2.7 percent in the review year. The production had droppedsignificantly by 10.1 percent in the previous year. The production yield of jute improved

marginally to 1.62 metric tones per hectare in the review year. The production of tobaccocontinued to decline, falling by 1.3 percent in the review year.

3.19 Despite a marginal growth in the area cultivated, the production of pulses dropped

by 1.7 percent in the review year compared to a growth of 2.6 percent in the previousyear. The production yield of pulses dropped by 2.0 percent to 0.81 metric tones per

hectare in the review year. Similarly, the production of soybeans dropped marginally by1.7 percent compared to a significant growth of 7.3 percent in the previous year. The

production of other crops continued to decline in the review year. It declined by 2.5

percent compared to a decline of 2.7 percent in the previous year.

Vegetables, Horticultural and Nursery Products

3.20 The production index of vegetables, horticultural and nursery products registered a

growth of 9.6 percent in the review year compared to a growth of 6.3 percent in theprevious year.


20/164

Economic Growth 11

3.21 The production of vegetables that comprises a significant share in the groupincreased by 9.6 percent in the review year compared to a 6.3 percent growth in the

previous year. This growth can be attributed to the expansion of area cultivated undervegetables. The area cultivated under vegetables grew by 11.0 percent to 220.1 thousand

hectares in the review year. The production yield of vegetables however increasedmarginally by 1.0 percent to 8.65 metric ton per hectare in the review year. The

production of other crops in the group posted a decline of 1.9 percent in the review year.

Fruits, Nuts, Beverages and Spice Crops

3.22 The production index of fruits, nuts beverages and spice crops registered a growth

of 5.4 percent in the review year compared to a growth of 5.8 percent in the previous

year.

3.23 The production of fruits other than mango grew significantly in the review year.Mango, that has a significant share in the group, registered a decline of 2.4 percent in the

review year contrary to an increase of 5.4 percent in the previous year. The cultivatedarea under fruits increased marginally by 0.9 percent to 57.4 thousand hectares. The

production yield of fruits however dropped by 2.8 percent to 2.76 metric tone per hectare

in the review year.

3.24 The production of spice crops, tea and coffee registered the growths of 9.6 percent,

7.7 percent and 39.7 percent respectively in the review year. The corresponding growthsin the previous year were 3.9 percent, 8.2 percent and 19.3 percent. The cultivated area

under tea grew by 6.1 percent to 17.5 thousand hectare in the review year. The production

yield of tea also grew by 6.8 percent to 0.28 metric tonne per hectare in the review year.

The production of other crops in the group reported a growth of 2.0 percent in the reviewyear compared to a growth of 4.8 percent in the previous year.

Farming of Domestic Animals

3.25 The production index of domestic animals with nearly a quarter share inagricultural production grew by 2.6 percent in the review year compared to a growth of3.1 percent in the previous year. The production of buffalos meat and mutton surged by

3.2 percent and 2.6 percent respectively in the review year. The respective growths in the

previous year were 3.5 percent and 4.7 percent.

3.26 The production of milk with the highest share in the group surged by 2.7 percent inthe review year compared to a growth of 2.9 percent in the previous year. The production

of other crops in the group posted a growth of 1.3 percent compared to a growth of 1.9

percent in the previous year.

Other Animals Farming and Production of Animal Products

3.27 The production index of other animal farming and animal products grew by 3.1

percent in the review year compared to a growth of 7.8 percent in the previous year. Theproduction of pigs meat grew to a two-year high of 2.4 percent compared to a growth of

1.7 percent in the previous year. The production of poultry meat grew by 3.1 percent in

the review year compared to a growth of 3.3 percent in the previous year.


21/164

Economic Report12

3.28 The production of eggs surged by 2.7 percent in the review year compared to agrowth of 2.3 percent in the previous year. The production of hides and skins increased

by 5.2 percent in the review year compared to a growth of 44.3 percent in the previousyear.

Forestry, Logging and Related Services

3.29 The production index of forestry, logging and related services activities accelerated

marginally by 0.2 percent compared to a growth of 1.7 percent in the previous year. The

sluggish growth of the index was mainly because of a decline in the production offirewood that alone occupies more than 60 percent share in the group. The production of

firewood continued to decline in the review year. It declined further by 1.2 percent in thereview year compared to a decline of 0.2 percent in the previous year. The production of

timber grew by 2.2 percent in the review year compared to a growth of 2.7 percent in the

previous year.

3.30 The medicinal and herbal products and other commodities in the group posted adecline of 1.5 percent in the review year as against a growth of 1.8 percent in the previous

year. The growth of production of other products that has a quarter share in the group

slowed at 2.3 percent in the review year compared to a growth of 5.7 percent in the

previous year.

Fisheries

3.31 The fisheries sector grew by 7.1 percent in the review year compared to a growth of3.0 percent in the previous year.

Industry

3.32 The performance of the industrial sector did not remain satisfactory in the review

year due mainly to the poor performance of manufacturing sector. The sluggish

performance of manufacturing sector can be attributed to the unfavorable situation interai, industrial unrest, frequent lockout and strike, load shedding and lack of petroleum

products. The industrial sector grew by 1.8 percent in the review year compared to agrowth of 3.9 percent in the previous year.

3.33 The production of manufacturing sector measured in annual manufacturing

production index declined by 0.9 percent in the review year against a growth of 2.6

percent in the previous year. The production of dairy products; grain mill products andanimal feeds; other food products; beverage; tobacco products; textiles, pashmina; wood

sawn; paper and paper products; newspapers; other chemical products; and otherfabricated metal products grew in the review year while the production of vegetable oils

and fats; other textiles; garment; plastic products; non-metallic mineral products; and

domestic metal products recorded a negative growth. The production of vegetable ghee

and oil, garment and plastic products decelerated significantly by 14.1 percent, 15.0percent and 8.7 percent respectively in the review year.

3.34 Electricity, gas and water sector recorded a growth of 3.4 percent in the review year

compared to a high growth of 13.0 percent in the previous year. The performance of this


22/164

Economic Growth 13

sector did not remain satisfactory in the review year due to the non-commencement ofadditional hydro projects.

3.35 The hydropower generation grew by 1.7 percent to 2,768.3 GWH in the reviewyear compared to a growth of 8.3 percent in the previous year. Nepal imported 412.4

GWH electricity from India in the review year compared to 328.8 GWH in the previous

year. Nepal exported 31.5 GWH electricity to India compared to 76.9 GWH in the

previous year.

3.36 The construction sector grew by 3.1 percent in the review year compared to a

growth of 2.5 percent in the previous year. The sector recorded a slightly high growth in

the review year compared to the previous year owing mainly to the increase in thedomestic production of construction materials.

3.37 The growth of mining and quarrying sector remained normal in the review year. Itgrew by 2.8 percent compared to a growth of 1.5 percent in the previous year.

Services3.38 The services sector grew by 6.9 percent in the review year compared to a growth of

4.2 percent in the previous year. The high growth of the sector was attributed primarily to

the better performance of wholesale and retail trade; hotel and restaurant; transport,

storage and communication; financial intermediation; public administration and defense;

and other community, social and personal services sectors.

3.39 The wholesale and retail trade sector grew significantly at the rate of 6.4 percent in

the review year contrary to 4.5 percent decline in the previous year. This was largelyascribed to the rise in the production of tradable agriculture commodities and a surge in

import. The hotel and restaurant sector grew by 7.5 percent in the review year compared

to a growth of 3.5 percent in the previous year. The surge in the influx of tourists playedan important role in the growth of this sector during the review year.

3.40 The performance of tourism sector remained satisfactory in 2007/08. The number

of tourists visiting Nepal in the review year grew significantly by 37.2 percent to 526,705

compared to 383,926 in the previous year. The number of Indian tourists grew by 2.4

percent to 96,010 compared to a decline of 2.8 percent in the previous year. However, thenumber of tourist arrivals from third countries increased notably by 48.4 percent to

430,695 in the review year compared to a growth of 4.0 percent in the previous year. The

share of Indian and third country tourists in total tourist arrivals was 18.2 percent and81.8 percent respectively in the review year compared to 24.4 percent and 75.6 percent

respectively in the previous year.

3.41 In the review year, per capita tourist expenditure increased by 34.3 percent to Rs.

35,415 from Rs. 26,373 in the previous year. The average duration of stay of the tourists

in the review year increased by 17.3 percent to 12.0 days compared to 10.2 days in the

previous year.

3.42 Transport, storage and communication; financial intermediation; and real estate,

renting and business activities sectors grew by 6.6 percent, 13.8 percent and 4.4 percentrespectively in the review year. The growth rates of these sectors were 4.4 percent, 11.4

percent and 11.8 percent respectively in the previous year. Likewise, public


23/164

Economic Report14

administration and defense; education; health and social work; and other community,social and personal services sectors grew by 5.6 percent, 4.6 percent, 7.4 percent and 11.1

percent respectively in the review year. The growth rates of these sectors were 1.3percent, 6.2 percent, 6.7 percent and 11.8 percent respectively in the previous year.

Aggregate Demand

Domestic Demand

3.43 Gross domestic demand at current price witnessed a growth of 15.0 percent in2007/08 compared to a growth of 11.6 percent in the previous year. The growth of

investment played an important role in the rise of gross domestic demand. The total

consumption increased by 10.7 percent and stood at 88.5 percent of GDP in 2007/08

compared to 90.3 percent of GDP in the previous year. The private as well as public

consumption grew by 9.4 percent and 21.9 percent respectively in 2007/08 compared to agrowth of 9.3 percent and 17.7 percent in the previous year.

3.44 The gross capital formation (total investment) grew by 28.9 percent and remainedat 32.0 percent of GDP in the review year compared to 28.0 percent of GDP in the

previous year. The gross fixed capital formation grew by 16.4 percent to 21.0 percent ofGDP in the review year from 20.4 percent of GDP in the previous year.

Net Foreign Demand

3.45 The foreign demand (export) of the Nepalese goods and services registered a

growth of 4.1 percent in the review year compared to a growth of 8.0 percent in the previous year. Likewise, the domestic demand (import) of foreign goods and services

grew by 17.3 percent in the review year compared to a growth of 11.3 percent in the

previous year (Table 3.3). The net foreign demand (net export), which had remained

negative, could not improve in the review year.

Gross National Disposable Income3.46 Gross national disposable income at current prices witnessed a growth of 14.6

percent in 2007/08 compared to a growth of 10.0 percent in the previous year (Table 3.3).The GNDI accounted for 120.5 percent of GDP compared to 118.8 percent of GDP in the

previous year. The workers' remittances registered a growth of 42.5 percent in the review

year compared to a growth of 2.5 percent in the previous year. The workers' remittances

as a percent of GDP stood at 17.4 percent in the review year compared to 13.8 percent inthe previous year.


24/164

Economic Growth 15

Table 3.3

Gross National Disposable Income

(At current prices)Rs. in million Percentage Change

Particulars 2005/06 2006/07 2007/08 2006/07 2007/08

Total Consumption 595327 656276 726685 10.2 10.7

Gross Capital Formation 175603 203741 262582 16.0 28.9

Domestic Demand 770930 860017 989268 11.6 15.0

Import of Goods and Services 204828 227907 267290 11.3 17.3

Export of Goods and Services 87952 94979 98836 8.0 4.1

Net Export of Goods and Services -116876 -132928 -168454 13.7 26.7

Gross Domestic Product 654055 727089 820814 11.2 12.9

Net Factor Income 4956 7432 10187 50.0 37.1

Net Transfers 126146 128992 158381 2.3 22.8

Workers Remittances 97689 100145 142683 2.5 42.5

Gross National Disposable Income 785156 863513 989382 10.0 14.6

Sources: Government of Nepal, Central Bureau of Statistics and Nepal Rastra Bank.


25/164

Economic Report16

4

Inflation

Consumer Price Index

4.1 The average annual consumer inflation increased to 7.7 percent in 2007/08 from the

level of 6.4 percent in 2006/07 (Figure 4.1). The inflation, in the review period, wasmainly driven by the significant rise in price of food articles and petroleum products.

Figure 4.1 : Annual Inflation

4.8

4.04.5

8.0

6.4

7.7

0

1

2

3

4

5

6

7

8

9

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

Fiscal Year

Percent

4.2 The year-on-year (y-o-y) food and beverages index rose by 10.1 percent in the

review year compared to an increase of 7.2 percent in the previous year. Likewise, theindex of non-food and services group increased by 5.1 percent in 2007/08 compared to

5.5 percent in the previous year.

4.3 On point-to-point basis, inflation stood at 12.1 percent in mid-July 2008 compared

to 5.1 percent in the corresponding period of last year. During the review period, the

indices of food and beverages group and non-food and services group increased by 12.9percent and 11.3 percent respectively. These rates were 6.9 percent and 3.1 percent in the

corresponding period of last year.

4.4 Region-wise, the y-o-y price level in Kathmandu Valley, Terai and the Hills rose

by 7.2 percent, 8.1 percent and 7.5 percent respectively in the review year. The respective


26/164

Inflation 17

rates were 6.1 percent, 6.7 percent and 6.0 percent in the previous year. A relativelyhigher price level was observed in the Terai region mainly due to the effect of continuous

unrest in that region.

Seasonal Price Movement

4.5 The seasonal price fluctuations in the review year showed a higher variation incomparison to 2006/07. The highest price index of 212.7 point was observed in mid-July

and the lowest of 194.2 point in mid-January. The indices can be analyzed into three

distinct phases as depicted by the monthly price movement (Figure 4.2).

Figure 4.2 : Seasonal Price Movement

180

190

200

210

220

Aug

2007

Sept Oct Nov Dec Jan

2008

Feb Mar Apr May Jun Jul

Months

Index

Overall Food & Beverages Non-food & Services

4.6 As shown in the above figure the overall index rose gradually in the period mid-

August to mid-November, reached 198.7 points from 194.7 points with an increase of 2.1

percent. It decreased by 2.3 percent and reached to 194.3 points in mid-January.However, the index (from mid-January to mid-July) depicts an increase of 9.5 percent

from 194.2 points to 212.7 points.

4.7 Similarly, the above figure shows that the index of food and beverages group

increased in the first three months (mid-August to mid-October) from 191.9 points to199.2 points and decreased from mid-October (199.2 points) to mid-January (187.7

points). The index witnessed a gradual increase again from mid-January to mid-July

from 187.7 points to 208.6 points. On the other hand, the index of non-food and servicesgroup increased gradually every month from 197.9 points to 217.5 point. The above

scenario shows that the overall price index is affected by the movement in prices of both

the groups, that is, food and beverages as well as non-food and service groups.

Price Movement of Sub-groups of Commodities

4.8 On y-o-y basis, the price of sugar and related products showed a significant decline

of 10.1 percent in the review period. Likewise, the prices of grains and cereal productsaccelerated to 14.6 percent on account of the international price rise of rice and rice

products. Similarly, the prices of some commodities of this group such as oil and gheeshowed an acceleration of 20.9 percent, pulses 14.2 percent, meat, fish and eggs 7.7

percent and vegetables and fruits 6.4 percent in the review period.


27/164

Economic Report18

4.9 On y-o-y basis, the index of non-food and services group increased by 5.1 percentin 2007/08 compared to 5.5 percent in the previous year. This moderation was mainly on

account of the elapse of the base effect of previous year's hike in petroleum prices.

National Wholesale Price Index

4.10 The annual average National Wholesale Price Index (NWPI) increased by 9.1percent in 2007/08 compared to a rise of 9.0 percent in the previous year (Figure 4.3).

Such higher level of inflation was largely attributed to the increase in the prices of

agricultural commodities followed by domestic manufactured commodities and importedcommodities. The heavy price hike in the petroleum products in the fourth quarter of this

year was responsible for the increment of y-o-y wholesale price inflation.

Figure 4.3 : National WPI

3.84.1

7.3

8.9 9.0 9.1

0

1

2

3

4

5

6

7

8

9

10

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08Fiscal Year

Percent

4.11 Group-wise, the wholesale price of agricultural commodities rose by 9.5 percent inthe review year compared to an increase of 11.6 percent in the previous year. This risewas mainly attributed to the rise in the prices of pulses by 13.3 percent, foodgrains 12.9

percent and fruits and vegetables by 11.4 percent. The price of domestically

manufactured commodities also recorded a higher annual growth of 8.8 percent compared

to that of 8.5 percent in the previous year. This was mainly due to the significant rise inthe prices of construction material by 13.8 percent and the food-related products by 9.6

percent. The group of imported commodities also observed a significant acceleration inthe prices to 8.6 percent in the review year from 5.6 percent in the previous year. This

increase was on account of the price rise in the petroleum products and chemical fertilizer

and goods.

Wholesale Price Indices of Some Important Commodities

Foodgrains

4.12 In 2007/08, the index of foodgrains increased by 12.9 percent compared to the

increase of 10.9 percent in the previous year. In the review year, the price of rice


28/164

Inflation 19

increased due to the international price rise of food articles, use of foodgrains to producethe bio-fuel as well as irregularity in supply situation.

Cash Crops

4.13 In the review year, on an annual average basis, the index of cash crops increased

marginally 4.8 percent in comparison to an increase of 14.8 percent in the preceding year.This moderation was largely attributed to the decline in prices of potato by 28.1 percent

and vegetables by 28.8 percent despite an increase in the prices of oil seeds by 12.6

percent.

Pulses

4.14 In 2007/08, the index of pulses sub-group surged up by 13.3 percent. Such indexhad risen by 20.4 percent in the previous year. The responsible factor for the hike in price

of pulses was the unfavorable weather that affected its supply and production.

Petroleum Products and Coal4.15 In the review period, the lagged effect of the hike in the prices of petroleumproducts in January 2008 contributed to the upward pressure in this sub-group index that

was pushed up by 11.8 percent. Such index increased by 9.3 percent in the previous year.

Salary and Wage Rate

4.16 The annual average National Salary and Wage Rate Index increased by 9.7 percent

in 2007/08. It had risen by 9.8 percent in the previous year. Such an increase was on

account of increase in the salary of civil servants and a rise in the wages of laborers

because of the supply constraints arising from the migration of youths from the ruralareas along with the increasing trend of Nepalese youths seeking employment abroad. In

the review year, both salary and wage rate indices rose by 10.9 percent and 9.4 percent

respectively compared to the respective increases of 6.3 percent and 10.9 percent in the

preceding year. Within the wage rate index, the index of industrial labor increased by ahigher rate of 11.6 percent, followed by 10.2 percent of construction labor and 7.7 percent

of agriculture labor in the review year.

Wages

4.17 In the review year, the overall wage rate in the selected four market centres i.e.

Kathmandu, Biratnagar, Birgunj and Bhairahawa showed an increasing trend. On an

average, the highest growth rate of 18.6 percent was witnessed in the wages ofagricultural labourer for both male and female in Bhairahawa.

4.18 The average growth rate in the wages of construction skilled mason laborer inBirgunj and Bhairahawa had remained at par to that of the preceding year. In the other

centers, the average growth rate in the wages of construction skilled mason laborer

ranged from 1.7 percent (in Biratnagar) to 15.0 percent (in Kathmandu). The wage rate ofthe mason unskilled laborer also observed a similar trend ranging from 0 (in Bhairahawa)

to 27.7 percent (in Kathmandu).

4.19 The wage rate of both skilled and unskilled carpenters in Birgunj and Bhairahawa

remained the same as that of the previous year. Despite these rates, the wage rate of


29/164

Economic Report20

skilled carpenter ranged from 1.7 percent in Biratnagar to 11.4 percent in Kathmandu. Inthe review year, the unskilled laborer of such field recorded a growth of 1.61 percent in

Biratnagar and 24.5 percent in Kathmandu.4.20 As far as the growth rate of wages of laborer is concerned, the wages for both male

and female increased significantly in all the centres ranging between 0.7 percent in

Bhairahawa to 21.2 percent in Kathmandu for male and between 1.2 percent in

Bhairahawa to 20.8 percent in Kathmandu for female.


30/164

Fiscal Sector Developments 21

5

Fiscal Sector Development

5.1 Nepal experienced several historical political changes including Constituent

Assembly Election in 2007/08. Despite the political turmoil and transition phase of the

economy, fiscal situation remained broadly stable in 2007/08. The budget stance has been

cautious mainly on account of the sustainable fiscal deficit. Fiscal deficit stood at 2percent of GDP as against the estimate of 2.7 percent in the budget of 2007/08. Such a

prudent fiscal situation was possible mainly on the ground of impressive revenue

mobilization and foreign grants. Several reforms in tax administration, growing importsand consumption induced by the rise in remittances, the increasing imports of high tax

yielding vehicles and spare parts and increase in non tax revenue are mainly responsible

for the encouraging growth of revenue mobilization. Limited foreign borrowing andprudent debt management helped reduce public debt to 43.0 percent of GDP.

5.2 Also the year 2007/08 witnessed an increase in government expenditure. Recurrentexpenditure climbed up mainly due to a rise in the salary of government employees,

peace related expenditure, non-budgetary expenses on various items and expenditure on

Constitution Assembly (CA) elections. The increase in capital expenditure was

impressive in 2007/08. However, continued loan investment to the Nepal Oil Corporationposed a key threat to the government fiscal situation.

5.3 Net domestic financing of the budget deficit remained within the sustainable limit

of 1.5 percent (excluding the government cash balance with the NRB) which would not

threaten the macro economic stability of the country.

Fiscal Performance (Revised Estimates)

Fiscal Stance

5.4 The government budget remained prudent in 2007/08. The budget deficit (aftergrants) soared only by 24.8 percent to Rs. 16.6 billion compared to a growth of 26.9

percent in the previous year (Figure 5.1). The budget deficit was estimated to grow by

67.2 percent in budget 2007/08. The lower rate of growth of budget deficit was attributed

to the revenue mobilization and foreign grants. The ratio of budget deficit to GDPincreased to 2.0 percent in 2007/08 from 1.8 percent in the previous year.


31/164

Economic Report22

Figure 5.1: Government Budgetary Operation for 2007/08

(Budgeted and Revised Estimate)

152.1

129.8

22.3

144.2

127.6

16.6

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Expenditure and Investment Revenue and Grants Deficit

Rs.

inbillion

Budgeted Revised Estimate

5.5 Of the total budget of 2007/08, the government mobilized Rs. 12.0 billion throughnet internal borrowings and Rs. 3.5 billion through net external borrowings. Such figures

were Rs. 8.7 billion and Rs. 2.5 billion respectively in the previous year.

5.6 In 2007/08, the gross external loan grew by 12.7 percent to Rs.11.3 billion

compared to an increase of 22.4 percent in the previous year. Such loan was

Rs. 10.1 billion in 2006/07. Since both the receipt and repayment of external loan went up

by lower rates of 12.7 percent and 4.4 percent respectively, the inflows of net externalloan increased at a lower rate of 37.4 percent compared to an increase of 105 percent inthe previous year. The gross internal borrowings (excluding overdraft) augmented by 14.6

percent to Rs. 20.5 billion compared to a growth of 51.2 percent in the previous year. The

amount of gross internal borrowings was Rs. 17.9 billion in 2006/07. Since the principal

repayments on internal loan declined by 7.6 percent and also the gross internalborrowings increased by a lower rate of 14.6 percent, net internal borrowings increased

by a lower rate of 38.1 percent compared to an increase of 90.5 percent in 2006/07. The

ratio of gross internal and external borrowings to GDP stood at 2.5 percent and 1.4

percent respectively in 2007/08. Such ratios were the same in the previous year.

Government Expenditure

5.7 The total government spending including loans and investment recorded a growth

of 24.5 percent to Rs. 144.2 billion in 2007/08 compared to a growth of 21.8 percent in2006/07 (Figure 5.2). A slightly high growth of recurrent expenditure accounted for such

a high growth of total government expenditure in the review year. The revised estimate of

total government expenditure was lower by 5.2 percent than the budget estimate. The


32/164


ratio of total government expenditure to GDP remained higher at 17.6 percent comparedto that of 15.9 percent in the previous year.

5.8 Of the total government expenditure, recurrent expenditure registered a growth of18.5 percent in 2007/08 compared to a lower growth of 15.1 percent in the previous year.

A rise in the salary of civil servants, peace related expenditure, non-budgetary expenses

on various items, expenditure on CA election as well as payments of liabilities of public

enterprises accounted for such a growth of recurrent expenditure. The revised estimate ofrecurrent expenditure was 6.9 percent lower than the budget estimate of 2007/08. The

ratio of recurrent expenditure to GDP stood at 11.1 percent in 2007/08.


33/164

Economic Report24

5.9 Capital expenditure grew by 22.4 percent to Rs. 48.6 billion compared to a growthof 43.3 percent in the previous year. A pick-up in capital spending was on account of

investment in public enterprises and the disbursement of funds to local authorities forrural infrastructure development. The revised estimate of capital expenditure was 9.6

percent lower than the budget estimate. The ratio of capital expenditure to GDP stood at5.9 percent in 2007/08 compared to that of 5.5 percent in 2006/07.

5.10 The ratio of recurrent and capital expenditure in total expenditure stood at 65.3percent and 34.7 percent respectively in 2007/08. Such ratios were 66.0 percent and 34.0

percent respectively in the previous year (Figure 5.3).

Revenue Mobilization

5.11 Revenue mobilization (excluding the principal refund) registered a growth of 21.0

percent to Rs. 104.9 billion in 2007/08 compared to a growth of 22.5 percent in theprevious year (Figure 5.4). Reforms in tax administration, evolution of corporate culture

in banking and financial institution, increase in remittance inflows as well as increase innon-tax revenue in the form of sales of government properties and principal refund

contributed to such a revenue growth in the review year. The revised estimate of revenue

was higher by 2.5 percent than the budget estimate. The revenue to GDP ratio increased

to 12.8 percent from 11.9 percent in 2006/07. Of the total revenue, the share of taxrevenue and non-tax revenue stood at 81.1 percent and 18.9 percent respectively in

2007/08. Such ratios were 82.1 percent and 17.9 percent respectively in 2006/07

5.12 In Nepal the tax system is inelastic with greater than unitary buoyancy coefficients

(Box 5.1).

Box 5.1: Tax Elasticity and Buoyancy

A time series analysis (sample period from 1975-2007) of tax elasticity and buoyancy

demonstrates that the tax system in Nepal is inelastic (less than unity) with a more than unitary

buoyancy coefficients reflecting a significant revenue collection emanating from the discretionarychanges in the tax policy. Total tax revenue, which forms approximately 81 percent of the total

revenue mobilization in Nepal, has elasticity co-efficient of 0.50 which is half of the buoyancy co-efficient of 1.10. From these results, it can be easily concluded that there is very low automatic

growth of the tax revenue reflecting a very inelastic tax structure.

Tax Revenue

5.13 Tax revenue showed a growth of 19.5 percent in 2007/08 compared to a growth of23.9 percent in the previous year. The revised estimate of tax revenue was 5 percent

higher than the budget estimate. The ratio of tax revenue to GDP remained at 10.4 percent

in 2007/08 compared to that of 9.8 percent in the preceding year. Of the total tax revenue,

value added tax (VAT) occupied the highest share followed by income tax. In the review

year, the share of direct and indirect tax in total tax revenue stood at 27.1 percent and72.9 percent respectively. Such ratios were 26.7 percent and 73.3 percent respectively.

The major components of direct tax are corporate income tax, house and land registrationtax, investment and other tax and remuneration tax, whereas VAT, customs duties and

excise duties are the major components of indirect tax revenue.


34/164


5.14 Of the total tax revenue, VAT constituted the highest share (28.4 percent), followedby income tax (21.9 percent) and customs duties (20.1 percent) in the review year (Figure

5.5). In the previous year also, VAT had the highest share of 30.1 percent followed byincome tax (21.9 percent) and customs duties (19.3 percent). The revised estimate of

VAT revenue registered a growth of 14.0 percent in the review year compared to an

increase of 20.7 percent in the previous year and remained higher than the budget

estimate by 0.3 percent. Income tax grew by 21.2 percent compared to a growth of 35.9 percent in the preceding year. The revised estimate of income tax was higher by 8.0

percent than the budget estimate.


35/164

Economic Report26

5.15 In 2007/08, customs duties observed a growth of 25.9 percent compared to agrowth of 8.9 percent in the previous year. Reforms in customs administration and

increase in the imports of high tax yielding vehicles/spare parts boosted the customsrevenue in the review year. The revised estimate of customs revenue was more than 7.9

percent than the budget estimate.

5.16 Excise duties increased by 20.3 percent in the review year compared to a growth of

43.5 percent in the previous year. The revised estimate of excise revenue was higher by6.8 percent than the budget estimate.

5.17 The non- tax revenue witnessed a growth of 27.5 percent in 2007/08 compared to a

growth of 16.6 percent in 2006/07. Such an impressive growth of non-tax revenue wasascribed to the increase in dividend paid by some public enterprises including the NRB as

well as the amount received by the government in the form of principal repayment fromNepal Telecom, Nepal Electricity Authority and Civil Aviation Authority.

Foreign Grants

5.18 In 2007/08, foreign grants reported a growth of 43.9 percent to Rs. 22.7 billion

compared to a growth of 14.3 percent in the previous year. The revised estimate offoreign grants was lower by 17.2 percent than the budget estimate. The foreign grants to

GDP ratio stood at 2.8 percent in 2007/08 compared to that of 2.2 percent in 2006/07.

Public Debt

5.19 Total outstanding public debt (both internal and external) stood at Rs.353.3 billion

as at mid July 2008, with a growth rate of 11.8 percent. The share of total external and

internal debt in total outstanding debt remained at 68.5 percent and 31.5 percent

respectively in the review year. Such ratios were 68.6 percent and 31.4 percent

respectively in 2006/07. Of the total outstanding debt, internal debt increased by 12.0

percent to Rs. 111.2 billion compared to an increase of 10.4 percent in the previous year.

The ratio of internal debt, external debt and total outstanding debt to GDP remained at13.6 percent, 29.5 percent and 43.0 percent respectively in 2007/08. These ratios were13.7 percent, 29.8 percent and 43.5 percent respectively in the previous year.

Ownership Pattern of the Government Domestic Debt

5.20 In 2007/08, the government bonds (excluding TBs) in the holdings of the NRB

stood at 4.8 percent of the total bonds. Such ratio was 7.5 percent in the previous year.The government bonds held by commercial banks declined by 1.7 percentage point to

27.4 percent of the total bonds in the review year. The government bonds held byfinancial institutions increased to 25.6 percent of the total bonds in the review year from

18.7 percent in the previous year. Conversely, Provident Fund Corporation's holdings of

government bonds declined to 18.9 percent from 22.2 percent. In the review year

government business enterprises and private business enterprises did not hold the

government bonds. Holding by individual increased to 14.9 percent from 9.2 percent ofthe total holdings. But holdings of bonds by non-profit organization declined to 8.4

percent from 12.0 percent in the previous year.


36/164


5.21 In 2007/08, total outstanding treasury bills increased by 14.2 percent to Rs. 85.0billion compared to an increase of 18.2 percent in the preceding year. The share of TBs in

the NRB holdings in total rose to 20.7 percent in the review year from 18.5 percent in theprevious year. However, such share of commercial banks declined from 78.7 percent in

the review year from 76.4 percent in the previous year. Financial institutions did not holdthe TBs in the review and previous year where as others' share increased from 2.8 percent

to 2.9 percent.

Budget 2007/08

5.22 The budget estimate of government expenditure including net loans and investment

stood at Rs. 152.1 billion which was 31.3 percent higher compared to that of the previous

year. Of the total expenditure, recurrent expenditure was estimated at Rs. 98.2 billion

(64.6 percent) and capital expenditure was of Rs. 53.8 billion (35.4 percent) in the budget

of 2007/08. Both the recurrent and the capital expenditure were estimated to increase by27.3 percent and 35.5 percent respectively in 2007/08 compared to that of the previous

year. A rise in the allocation in social services expenditures especially in education,health, miscellaneous items, economic services and constitutional bodies were mainlyresponsible for such an increase in the estimate of recurrent expenditure.

5.23 Of the total recurrent expenditure, Rs. 39.8 billion (40.5 percent) was allocated tosocial services, Rs. 19.4 billion (19.8 percent) to defense and security, Rs. 21.8 billion

(22.2 percent) to miscellaneous expenditures, Rs. 10.2 billion (10.4 percent) to economicservices and Rs. 6.9 billion (7.0 percent) to general administration and constitutional

bodies (Figure 5.6).

5.24 Of the capital expenditure, Rs. 27.6 billion (51.2 percent) was allocated toeconomic services Rs. 23.7 billion (44.0 percent) to social services, Rs. 1.3 billion (1.3


37/164

Economic Report28

percent) to defense and security and the rest was allocated to economic administrationand planning and unclassified expenditure.

5.25 The budget of 2007/08 estimated to mobilize revenue of Rs. 102.3 billion of whichRs. 81.0 billion (79.1 percent) was estimated to be received from tax revenue and Rs.

21.3 billion (20.9 percent) from non-tax revenue. Of the total tax revenue, Rs. 29.7 billion

(29.0 percent) was estimated to be mobilized from VAT, Rs. 19.5 billion (19.0 percent)

from customs duties, Rs. 21.3 billion (20.8 percent) from income tax and Rs. 10.5 billion(10.3 percent) from excise duties.

5.26 Of the total non-tax revenue, miscellaneous (sales of government property, royalty,

donation and miscellaneous income) constituted a major portion of Rs. 7.7 billion

(35.9 percent). This was followed by dividend of Rs. 5.4 billion (25.2 percent). The restwas estimated to receive from interest, departmental receipts and forest sectors.

Major Fiscal Reform Measures

5.27 The major fiscal reform measures were launched in the form of strengthening ofbilling system, management of non filers (registered at VAT system), suspended returns

and outstanding, and expansion of Automated System for Customs Data (ASYCUDA).

The government is making rigorous efforts in the simplification in checking process,

developing transparency, making customs business friendly, increasing automation in the process, managing the valuation database, managing the intra customs information

system, collecting information regarding low invoicing, purchasing the goods with lowinvoicing, lowering the process of checking, developing e-customs, making the custom

administration of international standard and developing paperless trade transaction. On


38/164


the fiscal transparency front, also in this year, the government was effortful to implementthe recommendations made in the draft report on the fiscal transparency module (Report

on Standards and Codes-ROSC), prepared by the IMF staff.

Tax Policy Provisions

5.28 With regard to income tax, the exemption limit for personal income taxation of Rs.100,000 for individual and Rs. 125,000 for family in 2006/07 increased to Rs. 115,000

and 140,000 respectively in 2007/08.

5.29 Tax on interest income went down to 5 percent in 2007/08 from 6 percent in thepast.

5.30 On the excise front, excise duties on cigarette, liquor and cement increased. Exciseduties on vehicles import soared from 32 percent to 35 percent.

5.31 Custom duties on vehicle parts increased to 80 percent from 55 percent.

Tax Rates

5.32 Personal income tax and corporate income tax rates were not changed in the review

year. However, the existing provision of Rs. 75,000 above the tax exemption limit subjectto income taxation of 15 percent was expanded to Rs. 85,000 in 2007/08. Thereafter, the

rate is 25 percent, that is, the highest marginal rate of 25 percent plus 1.5 percent that was

applied in 2006/07, and has remained constant also in 2007/08.

5.33 In the excise front, excise rates of 4, 5, 15, 32, 35 and 53 are prevalent in 2007/08.Such rates were 2, 4, 5, 15, 32 and 53 in 2006/07. In 2007/08, customs rates on imports

remained at 5, 10, 15, 20, 25, 30, 40, 55 and 80, which were the same in 2006/07. In2007/08, customs rates on exports remained at 0.5, 1,4, 8, 70 and 200 which were only

0.5, 1, 8, 70 and 200 in the previous year (Table 5.1).

Table 5.1: Tax RatesDescription 2006/07 2007/08

1. Import Duties (Percent) 5,10,15,25,35,40,80 5,10,15,20,25,30,40,55,80

2. Export Duties (Percent) 0.5, 1, 8, 70, 200 0.5, 1, 4,8, 70, 200

3. Excise (Percent) 4, 5, 15, 32,53 4, 5, 15, 32,35,53

4. VAT (Percent) 13 13

5. Income Tax(a) Limit of Exemption

(i) Individual Rs. 100,000 Rs. 115,000

(ii) Family Rs. 125,000 Rs. 140,000(b) Rate of Tax (Percent)

(i) First Rs. 75,000 after Exemption 15 percent

(First Rs. 75,000)

15 percent

(First Rs. 85,000)

(ii) After Tax 25+1.5 percent 25+1.5 percent

Corporate Tax(a) Flat Rate at Corporate Net Income

(i) Bank and Financial Institutions 30 percent 30 percent

(ii) Others 25 percent 25 percent(b) Partnership Firm 25 percent 25 percent


39/164

Economic Report30

Status of the Public Enterprises

5.34 Of the 36 state owned (fully owned /partially owned) enterprises, 22 enterprises

had earned profit and 14 enterprises had incurred losses in 2006/07.

5.35 Public Enterprises earned net profit of Rs. 8.0 billion in 2006/07. They had earned

net profit of Rs. 2.5 billion in the previous year. Net profit of Rs. 6.0 billion earned byNepal Telecom and net profit of Rs. 1.1 billion earned by ADB/N contributed to such an

increase in overall net profit in 2006/07.Similarly, a decline in net loss of Nepal Oil

Corporation from Rs. 3.7 billion in 2005/06 to Rs. 1.9 billion in 2006/07 contributed tosuch an increase in net profit of the public enterprises. However inability to adjust the

local price of petroleum products with an increase in international price was expected to

increase the overall net profit of the enterprises to Rs. 7.2 billion. Likewise, net profit of

enterprises was expected to remain Rs. 3.5 billion in 2007/08.

5.36 Total shareholders' fund of all public enterprises remained Rs. 39 billion in

2006/07 which was the same in the previous year. In 2006/07, share investment of theGON was 75.8 billion. However, 49 percent of the capital has been eroded. The GON

earned a dividend of Rs. 1.5 billion which was 2.0 percent of total share investment in

2006/07. Similarly, total outstanding loan investment to the enterprises remained Rs. 65.1

billion in 2006/07. Of this, internal loan was of Rs. 6.3 billion and external loan was ofRs. 58.8 billion.

5.37 Even among the profit earning public enterprises, the economic condition, capacity

utilization and employee productivity of most of them did not remain satisfactory. A very

low rate of return, lack of regular and updated audit, inadequate professional human

resources, lack of funds for the provisions to meet employee-related facilities, politicalinterference, lack of autonomy to determine the price of their product as per the change in

market price, lack of clear policy and mechanism for the monitoring and inspection of the

enterprises are the main challenges of public enterprises in Nepal. As a result, most of the

public enterprises have negative net worth.

Privatization and Dissolution of Public Enterprises

5.38 With the objective of minimizing the administrative and budgetary burden of the

GON, strengthening productivity by increasing business skill of the industries andbusiness enterprises, minimizing the possibility of crowding out private investment by the

unproductive investment in government enterprises, increasing private sector

participation in economic development, the GON had started privatization process since1994. Up to mid-April, 2008, 30 public enterprises were privatized through liquidation,

assets and business sales, share and equity sales, management contract and equity sales

and lease. However, privatization is not free of problem. Problems in getting receivableseasily by the GON through privatization, problems in settlement of enterprises' obligation

and GON's compulsion to pay for such obligation, problems in sale of assets,

embezzlement of land given on rent in the process of privatization are the majorchallenges of privatization.


40/164

External Sector Development 31

6

External Sector Development

Assessment of Policy Developments

6.1 In 2007/08, a host of meetings and other activities took place pertaining to theexternal sector. In the regional context, various issues related to the implementation of

the South Asian Free Trade Area (SAFTA) Agreement were discussed at length in thelast Committee of Experts (CoE) meeting held in Delhi on March 1-2, 2008. The Nepalese delegation made its country position clear on various matters including theimplementation of the trade liberalization program (TLP), reviewing of the sensitive lists,discussion on the modalities of tariff reduction on the tariff lines which are removed fromthe sensitive list, consideration of matters relating to SAFTA Sub-group on Non-TariffMeasures, consideration of matters relating to elimination of quantitative restriction underArticle 7 (5) of SAFTA Agreement etc. Some excerpts of the issues discussed in themeeting and Nepals position are given in Box 6.1.

Box 6.1: Nepal's Position on SAFTA Discussed at CoE Meeting, March, 2008

Nepal has already reduced tariffs (in terms of percentage and items) higher than its tariff reductioncommitment/obligation under SAFTA TLP programme, and already notified SAARC Secretariat

about its tariff reductions. In SAARC region, on average, tariff rates are lowest in Nepal and it iscommitted to further reduce tariff rates. Therefore, Nepal requested other contracting states toreduce their tariff rates in an accelerated manner.

With regard to reviewing the sensitive list, Nepal had already started consultation withstakeholders to formulate a criterion to select sensitive products, with intention to reducing thenumber of items in the Sensitive List. Nepal also requested Non-LDCs to review their sensitive listfor LDCs prior to the scheduled timeline of four years.

Nepal has already revised its sensitive list based on HS 2007 and forwarded it to the SAARCSecretariat.

Nepal is imposing quantitative restrictions (QRs) on importations of puppy seed only, which wasfeared to be used as narcotics and can remove it if necessary. Nepal also requested othercontracting parties to eliminate all QRs applied on imports to their territories from SAARC region.

Nepal stressed the need of technical assistance for LDCs for capacity building (especially toestablish/operationalize) electronic database and notification system for issuance of certificate of

origin.Nepal has committed to favour all initiatives to be undertaken for elimination of non-tariff barriers(NTBs). However, the nature and coverage of NTBs is diverse which includes, among others,standards related, customs related, taxation and subsidies.


41/164

Economic Report32

6.2 The 16th Meeting of Bay of Bengal Initiative for Multi-sectoral Technical andEconomic Cooperation (BIMSTEC) Trade Negotiating Committee was held from March

17-21, 2008 in New Delhi. The Working Groups on Rules of Origin, CustomsCooperation, Services and Investment were held prior to the plenary session. It wasagreed that next meeting would deliberate on all outstanding matters on the Agreement onTrade in Good and continue discussions on Trade in Services and Investment. Eventhough the Trade Negotiations Committee (TNC) has held 16 meetings for the BIMSTECFTA in goods so far, the target date (that is July 1, 2006) set for the implementation of theagreement has been missed by more than two years owing to unresolved differencesamong the contracting parties with respect to the size of the negative lists, setting criteriafor rules of origin and a mechanism for dispute settlement.

6.3 With respect to transfer of remittances from India to Nepal, Nepalese citizensworking in India are eligible to remit funds to their families in Nepal with the use of the National Electronic Funds Transfer (NEFT) system (Box 6.2). The scheme envisagesconcessional charges as it is targeted at poor migrant workers of Nepalese origin in Indiawho desire to remit money to their kith and kin.

Box 6.2: New Arrangement for Remittance Transfer from India to Nepal

As the Nepalese workers residing in India are facing difficulties in remitting funds through formal channel, aninterim provision has been made with the joint initiative of Nepal Rastra Bank and Reserve Bank of India forremitting funds from India to Nepal through NEFT (National Electronic Fund Transfer) system. Remittancescan be sent through any of 40, 000 NEFT enabled bank branches in India which would then be disbursed to

beneficiary in Nepal through local commercial bank branches and money transfer agencies. Under thissystem, a Nepali worker can remit fund up to Indian Rupees (IRs.) 50,000 at a time and will be allowed amaximum of 12 remittances a year. For this purpose, Nepal SBI Bank and Prabhu Money Transfer in Nepaland State Bank of India in India have been designated. For transfer of fund from India there would be nocharges if an account is maintained with Nepal SBI Bank. If not, for remittances up to IRs. 5000, a fee of IRs.50 and for remittances above Indian Rs. 5000 and up to IRs. 50000, a fee of IRs. 75 is charged. The entireamount of charges collected from the remitter would be remitted to Nepal.

6.4 Non-Resident Nepali (NRN) Act has been formulated with a view to attractinvestment from non-resident Nepalese (Box 6.3). The Act has made provisions forNRNs such as approval of 10-year visa and permission for sale/purchase of property andoperation of industry or businesses like a Nepali citizen within Nepal. However, severallaws and by-laws related to the Act are yet to be formulated and implemented.

Box 6.3 : Non-Resident Nepalese (NRN) Act, 2007

According to the Act, 'Nepalese Living Abroad' is defined as any Nepalese residing and taking up any job, business or employment in a foreign country for a minimum of two years. The 'Non-ResidentNepali' denotes both 'Nepalese Living Abroad' as well as 'People of Nepali Origin'. The Act has made aprovision for preparing a record of non-resident Nepalis and providing them with identity cards as wellas permitting a 10-year visa for people of Nepali origin and their family. It allows NRNs to investconvertible foreign currency in sectors that are open for foreign investment, to open an account inconvertible foreign currency and to repatriate any earnings from such proceedings in convertible foreign

currency. Similarly, the Act entitles People of Nepali Origin to buy/sale property in Nepal. Besides,with a view to attract NRN investment, the Act has granted tax exemption to NRN on their investedcapital fund, fund remitted to close relative (up to Rs. 1.5 million per year) and donations made forsocial, religious, cultural and non-profit works. Overall, the Act has made provision for providing

business rights to NRNs similar to that provided to foreigners investing convertible currency andpermitting people of Nepali origin to operate industry/business in Nepal like a Nepali citizen.


42/164

External Sector Development 33

6.5 Along with the foregoing developments, some reform measures pertaining to theexternal sector in general and foreign exchange sector in particular that were adopted in

2007/08 included the following: A provision has been made whereby foreign exchange facility for living expenses to

students going abroad for study, which used to be granted by the NRB onrecommendation from the Ministry of Education and Sports, could be directly grantedby commercial banks on recommendation of the said Ministry from now onwards.

The number of items that could be imported from India on payment of convertiblecurrency has been raised from existing 91 to 124 and the policy of increasing thenumber of such items as per the necessity and demand has been continued.

A provision has been made allowing the import of silver under the same circular thatgovern gold import.

While the existing provision is such that it is possible to import from other countries

excluding India only through L/C and Draft/TT, an arrangement has been madewhereby it is now possible to import also through the mechanism of Documentsagainst Payments (DAP).

The exchange facility of US$ 5000 per individual as settlement expenses for Nepalese citizens migrating on immigrant visa to developed countries like USA,Canada, Australia, New Zealand and UK can be acquired directly from the banks andfinancial institutions.

A provision has been made whereby Nepalese companies working under GlobalTender and receiving payment in foreign currency are allowed to open foreigncurrency deposit account.

The existing provision of 2 percent service charge on sale of foreign currency in cash

by banks and financial institutions to the NRB has been reduced to one percent.

In order to manage the risk emanating from fluctuation in exchange rate ofconvertible currencies, a provision has been made whereby banks and financialinstitutions can themselves provide a facility of forward exchange transactionworking under the policy directive approved by its Board of Directors.

With a view of managing Indian Currency (IC) transactions and reducing IC cashtransactions, banks and financial institutions and money changers along the borderregions of Nepal have been allowed to open NOSTRO account in Indian banks.

As per the decision dated April 30, 2008 of Nepal Government, the necessarydirective for banning the export of paddy, rice and wheat from Nepal has been issued.

A provision has been made allowing agencies involved in remittance of income

earned by Nepalese people working in India in Indian rupees through bankingchannel to open account in Indian rupees on c