Monetary Policy 2014/15 Highlights

Nepal Rastra Bank has been adopting monetary policy the objectives of maintaining price and external sector stability, financial stability and facilitating high and sustainable economic growth, increasing financial access, control inflation, maintain external and financial sector stability, utilize credit in the productive sector and expand financial access.

The monetary policy for 2014/15 has been formulated based on the analysis of domestic economic outlook as well as changes in international economic situation. Likewise, the selection of monetary policy stance and instruments has been made consistent with the objectives and priorities undertaken by the government budget for 2014/15.Certain major concern areas of NRB in current monetary policy are interest rate stability, rein inflation at targeted level, maintain external stability, encourage merger of BFIs, financial sector stability, promoting credit to productive sector, financial service expansion, financial literacy and increase financial inclusion, managing the excess liquidity created by remittances. Following are major provisions on monetary policy 2014/15.

NRB has announced contractionary monetary policy with the objective to control the credit flow to unproductive sector because of excess liquidity created by remittances in the financial market. As per policy provision, there will be provisions to sanction sufficient fund from banking sector to achieve targeted economic growth. Major highlights of monetary policy 2014/15 are:

Failed Economic Development of Nepal

Economic development is a process whereby an economy's real national income as well as per capita income increases over a long period of time. Following figure represents the percapita GDP of Nepal, which shows its not much increase during long period of time.

Economic development, as it is now generally understood, includes the development of agriculture, industry, trade, transport, Tourism, power resources, etc. It, thus, indicates a process of development. The sectoral improvement is the part of the process of development which refers to the economic development. In context of Nepal, sector wise growth during FY 2013/14 is as follow:

The structure of Nepalese economy has been changing gradually. Contribution of agriculture and industry sectors to GDP showed a declining trend while that of services sector showed the opposite.

Innovation in Financial System

Financial system of Nepal has characterized by the excess liquidity with systematic weakness. There is sharp remittance growth and slower deterioration of trade balance leading to a record balance of payment (BOP) surplus. Sharp and higher than anticipated remittance inflow has expected to drive service sector growth particularly wholesale, retail and social services. Industrial activity is likely to remain lackluster owning to structural constraints including irregular supply to energy, difficult labor relations and modest level of public capital spending. Every participants of financial sector are well aware about this type consumption and foreign employment led growth would not be sustainable as of investment led growth.

Financial system which represent all market participants including service provider, receiver, regulator need to think about the right alternative approach to manage excess liquidity to get rid out from this type of affirmative problem. Remittance is like anti-psychotic drug, in any day patient forgets to take drug then mental disorder with negative effects. Same as, in any day there is discontinue on remittance inflow in Nepalese economy the economic problems will multiply with social unrest.

The financial sector in particular banks must have to think alternative ways to manage anti-psychotic drug like financial resources that banks get from abroad to maintain order in economy. Observing current scenario innovation of financial product is extremely essential in banking and financial sector to manage remittances. For that purposes, especially banks must have to engage on identification of possible productive investment sector through research and development activities.

Creativity is the art of expanding possibility. Whereas, innovation is the ability to confine the creative ideas and make them turn into reality to achieve successful performance. Creative peoples and organizations must think “out of the box” while the rest of others barely realize that they are in the box. This is right time banks must reflect their creative approach that their function is not only accepting the deposits and advancing the loan by innovating new products. Besides regular tasks, banks must perform as well-built agent for change and development of the country. Banks can play major role for nation building especially developing nation like Nepal. In the developed economics, different types of financial products were developed to inject and multiply the funds but Nepalese banks are still reluctant to change from their regular tasks and  even unable to utilize the collected funds in proper way. It is not time to blame all the problems toward politics and get out from it. If safe landing behavior continues in financial system, Nepal will always lag behind and difficult to compete in future world market economics.

Innovation of new financial product is difficult job where most of the population is uneducated and depends on remittance income from abroad. Building a suitable channel of funds and its proper utilization at identified sector needs trust and support from all participants of financial system. For effectively and strategically manage excess liquidity central bank of Nepal (NRB) have to develop the new instruments with accomodative monetary stances. In the mean time, NRB should care about the volume of private sector credit growth and its quality. Once innovative financial product has developed and excess liquid money utilized then creation of new jobs in the economy which will ultimately reduces the problem of rising unemployment and foreign employment in unproblematic way.  Government should also need to set the policy to tackle these issues. Whereas corporate houses and banks must practice ethical, corporate governance practices with inclusive approach. By the effective performance of financial system only the strategic thinking of government “Graduating to developing country status by 2022 AD” will easily achieved. 

Social Progress Imperative

Social progress Imperative (SPI), an American Non profit organization published their report on April 2014 (Social progress Imperative Report 2014). They define social progress as "the capacity of a society to meet the basic human needs of its citizens, establish the building blocks that allow citizens and communities to enhance and sustain the quality of their lives, and create the conditions for all individuals to reach their full potential". They Measures the society’s progress on major three dimensions they are Basic Human Needs, Foundations of Well being and Opportunity with four components of each dimension. 

These indexes highlight the very different strengths and weaknesses of individual countries.
The top three countries in the world in terms of social progress are New Zealand, Switzerland, and Iceland and bottom three are Burundi, Central African Republic and Chad are bottom three whereas Nepal stands at 101th position (Nepal Scorecard) out of 132 countries. The Social Progress Index provides evidence that extreme poverty and poor social performance often go hand-in-hand.

Social progress Index yields insights such as economic development alone is not sufficient to explain social progress outcomes and some aspects of social progress are more highly correlated with GDP than others.

In context of Nepal, as the government’s investments remains comparatively low, the country have to struggle to sustain its economic growth and social progress. In a country of haves and have-nots progress will never be truly inclusive until the public and private sectors works together to tackle the issues head on. The agriculture dominated country having around 1/4^th of total GDP contribution by remittance sector exporting labor and economic growth is almost stagnant since decade expectation of better result is not worthy.

Over the last year, the Social Progress Index have been adopted as an official measure of national performance by the government of Paraguay and already is guiding public and private investment choices there. In Brazil, social entrepreneurs and businesses have adopted the index as a tool to understand community needs and inform interventions to advance social progress.

Measuring social progress will guide us in translating economic gains into social progress, and advancing social and environmental performance in ways that will unleash even greater economic success. So in Nepal also such indexes are essential to adopt by government while setting the policies for the sustainable growth with social progress immediately that are utmost necessary to address the imminent problem. 

Opportunity for Nepal as Landlocked Country

Landlocked countries have innumerable trade difficulties; Nepal as a“yam between two boulders” has also been facing lots of problems while trade with India. Nepal has lots of vulnerable economic characteristics like higher cost of business,poor competitiveness of the economy, weak export bases, weak infrastructure, imperfect markets and political instability etc. 

Since 1921 AD, lots of legally binding agreements were made between developed nations, transit countries and landlocked countries. Legal arrangements had made to secure the rights of the landlocked states over the marine resource which is common “heritage of mankind”. Despite these provisions lots of challenges landlocked country has to bear while trading with other nations. Nepal is one landlocked among forty eight in the world. But, now its time transform this challenge into opportunity being the "transit country" of big economics/emerging markets i.e India and China. It must have to be the area of concern to policymakers and political leaders to grab this opportunity. For that proper diplomatic balance and resolution of internal problems are essential. 

There are hordes of challenges to Nepal such as : Poor reliability and poor infrastructure, less FDI, Poor governance and accounting practice,weakness in domestic banking, lack of swap market for Nepali currency, logistical limitations, lack of investments in manufacturing sector, poor implementation of property rights, decreasing agricultural production, climate change risks, political uncertainty etc. Nepali policymakers and leaders have to focus on investment, development and maintenance of infrastructure, enhancement trade-productive capacities, value addition, diversification, global value chains, Enhance trade in services and human and institutional capacity building, regional integration, mitigate and build resilience to climate change, desertification, and economic shocks etc.

Another major concern must be maintenance of balanced and fruitful economic diplomacy to gain from emerging economic powers. Big markets are at doorsteps. To produce opportunities from this inescapable non-coastal reality, Nepal has to create conducive environment for transit facilitation between India and China. Some facilitation include freedom of transit (including security of vehicles), Fuller integration of economy into regional and multilateral trading, encouragement of business competition, modernization of roads and communications, upgrading of infrastructure, scientific custom handling procedures etc.

Participation in international trade by land-locked developing countries is crucial for their future development. One notion should not have to forget by all nations, policymakers, political leaders that “Developed are already developed (USA,UK), Opportunities lies in developing and emerging economics (India,China) and  least developed nations(Nepal) must have to create advantage from emerging markets”. Nepal as located between India and China can be vibrant bridge between them.

World Order in 2050

Measured by GDP in purchasing power parity (PPP) terms, which adjusts for price level differences across countries, the largest E7 emerging economies seem likely to be bigger than the current G7 economies by 2020, and China seems likely to have overtaken the US by that date. India could also overtake the US by 2050 on this PPP basis (http://www.pwc.tw/en_TW/tw/publications/events-and-trends/assets/e248.pdf).

The weight of global economic activity is already shifting substantially from the G7 countries toward emerging economies in Asia and Latin America. Over the next 40 years, this trend is expected to accelerate.GDP projections from present day through 2050 are made under the assumptions that markets stay open and macroeconomic policies remain sound; additionally, catastrophes—economic, natural, or geopolitical—are assumed not to occur.

Projections: The “Rise of the Rest”

As developing countries house an increasingly larger share of people, capital, and technology, their share of global GDP will increase, shifting the economic balance of power.

"As China, India, Russia, and Brazil join the global middle class, brains and money will increasingly flow away from the United States"

However, as these countries become the world’s largest economies, as well as the most populous, they will not rise among the world’s richest, breaking the decades-old correlation between economic size and per-capita income.

• China, India, and the United States will emerge as the world’s three largest economies in 2050, with a total real U.S. dollar GDP of 70 percent more than the GDP of all the other G20 countries combined.
• In China and India alone, GDP is predicted to increase by nearly $60 trillion, the current size of the world economy. However, the wide disparity in per-capita GDP will remain.
• However, despite these dramatic increases in total GDP, U.S per-capita GDP will be nearly three times that of China and over eight times that of India.
• The next forty years will be a critical period for the European Union (EU) and its 27 members. As economic interests shift away from Europe to favor Asia and Latin America, Europe will likely undergo a difficult and turbulent transition.
• Japan’s influence in Asia will recede further with China’s rise and Indonesia’s rapid expansion. Japan, Asia’s most powerful nation in the twentieth century, will be pressed to develop ever closer economic ties with China, an economy over seven times larger in U.S. dollar terms in 2050, as well as with India, which will be 2.5 times larger.
• Demographic drivers will significantly influence the economic transformation. UN predicts the global population will reach 9.2 billion in 2050, concurrently, the global labor force is expected to expand by nearly 1.3 billion.
• Spreading technology will bolster world economic growth. Developing countries will continue to absorb well established technologies, such as electricity and sanitation. 
• Poverty will no longer be a serious economic and humanitarian concern in 2050. Rapid growth in the emerging economies will pull hundreds of millions of people out of absolute poverty, leaving only a small fraction of the G20 population behind. Absolute poverty will, however, remain a significant, though much smaller, phenomenon in Africa. China and India will be responsible for lifting 600 million more people from the most extreme forms of poverty. 

Risks

Some risks could introduce major discontinuities and undermine these projections, slowing (though not stopping) world economic growth and the convergence process in developing countries.

• Geopolitical Breakdown : The projections suggest that the next forty years may witness one of history’s greatest shifts in economic and military power.Because globalization and economic growth do not occur in a vacuum, maintaining the cohesion of the international community is crucial to its continuation. Advanced countries will expect more from these emerging powers, from contributions to international institutions, to aid, control of carbon emissions, respect of intellectual property, and contributions to international security and economic sanctions against deviant regimes.The rise of several developing countries and the fact that, while they attain the status of giant economies, they remain much poorer than advanced nations, could make maintaining cohesion more difficult. In particular, the governance and functioning of the bedrock international institutions—the G20/G8, World Bank, IMF, WTO, Global Stability Board, and the UN—will have to be rethought.

• Financial Crisis and Depression : The political challenges of dealing with macroeconomic imbalances are formidable. The next set of vulnerabilities may be uncovered in emerging markets, which have become more attractive in the eyes of investors and may have to deal with a wall of inflowing capital in coming years.

• Protectionism : As emerging markets rise in importance but remain relatively low-wage economies—China is now both the world’s largest exporter and one of the most competitive low-wage economies they will become too big to ignore, and pressures to protect against them will increase.

• Climate Change : Climate change will hurt global growth through effects on health outcomes, agricultural yields, involuntary   migration, and the destruction of infrastructure.

• Global Tax Environment: Challenges for Multinationals : For multinationals need to operate in many locations makes tax management especially difficult and just complying with the tax law is far from easy. The main problem is large number of laws and regulations to consider and accelerating pace of change.

World Order in 2050

• China remains on a path to overtake the United States as the world’s largest economic power within a generation, and India will join both as a global leader by mid-century.
•  Traditional Western powers will remain the wealthiest nations in terms of per capita income, but will be overtaken as the predominant world economies by much poorer countries. Given the sheer magnitude of the challenge of lower-wage competition, protectionist pressures in advanced economies may escalate.
•  The global economic transformation will shift international relations in unpredictable ways. To retain their historic influence, European nations will be pressed to conduct foreign policy jointly, an objective implied by their recently ratified constitution, and will need to reach out to emerging powers. Japan and Russia will seek new frameworks of alliances. The largest emerging nations may come to see each other as rivals.
•  Absolute poverty will be confined to small pockets in sub-Saharan Africa and India, though relative poverty will persist, and may even become more acute. Carbon emissions are also on a path toward climate catastrophe, and by mid-century may constitute a serious risk to the global growth forecast.
• International organizations such as the IMF will be compelled to reform their governance structures to become more representative of the new economic landscape. Those that fail to do so will become marginalized.

 In conclusion, we can say that over the next forty years, low- and middle-income countries in Asia and Latin America will become an immensely powerful force in the world economy. The United States will remain a critical player, but will cede at least partial authority to China. To retain its leadership position, Europe must become more cohesive as its growth slows. International institutions, long governed by the traditional Western powers, will be forced to adjust to this new global economy. 

Creativity for Ideal Constitution

Nepal is near to constitution assembly election-II. Political candidates are vigorously involving to attract voters. Most of the candidates have made baseless and barefaced promises that “We will implement new constitution within one year”.History clearly reveals major parties undecided dramatic meetings to divide and elect prime-minister, president, speaker etc. We know they will lost one year to build the “Sahamati” (consensus) on these matter.We are lucky enough if they will enter to constitutional agendas that were left on last CA within one year.  
Constitution is taken as the law of land, a framework of fundamental rules, living organism, a grand norm, the rule of recognition of the country. The constitution of USA is model of brevity (7000 words) which was implemented more than 200 years ago.The rigid constitution, efficient matured democratic governance system, economic prosperity and provision to unite every citizen of the world with secured environment makes US a global hegemony and considered as dreamland of people around the world.The visionary and critical thinking skills of American leaders of that time were really admirable.

Most of the Nepali are annoyed from activities of political parties and wants to get rid from it. Because of political instability problems such as brain drain, export of labor, economic downturn, negative effect on working cultural etc has occurred. We sovereign Nepali has governed under the flexible interim constitution which was amended more than ten times. We all Nepali are hopeful from the upcoming constitutional assembly. So that some of the major leaders must have to play creative role to provide ideal constitution for our country.Questions are:

Have all possible political systems already invented? 
Can anyone imagine something truly new?
How about at least few major improvements to our system as is currently exist?
 How to end the transition period?

These are the questions that must be analysed by creative leaders.Especially, major political leader who will elect for CA-II. If upcoming major leader use some creative skills and really committed to work for country by creating the consensus environment the solution is possible.This will convey positive and good message to Nepali people with optimism and hope.

Creativity is art of finding unexpected space in problem that seems totally stuck to everyone else. It’s the ability to think “Out of Box” while rests of us barely realize that we are in a box. Even issues that seems totally stuck in CA-I such as governance system, federalism and its model, lengthy process to elect PM, ministers, president etc also have unsuspected possibility.

What is obvious isn't always true, there are other possibilities what is really practical and start looking for them is important.The first step toward creative transformation is to change our very idea of a “problem”. Today “problem” has negative overtones. But creative leader need to think of problems as occasions for ongoing thinking, and have to welcome problems as opportunities to change the world.

It’s sure that CA-II will not free from problems but major leader must have to solve these problems through creative way. If one really wants to be “leader of the Nation” he must think sincerely about the future of Nepal and Nepali.