Most Businesses in Nepal are Financed by Own Funds

A economic census report of Central Bureau Statistics shows that there are total of 9,00,924 business entities in Nepal. It includes all registered and non-registered entities of all sectors, excluding entities non-registered agriculture sector and entities abroad. As we observe the source of financing, only 35.6 percent use borrowed money in their business. However, a larger number of business entities are using self finance means or other sources for their business. Out of these business entities, only 18.1 percent have used loans from Bank and Financial Institutions. Cooperatives are other source of financing for the business where 11.1 percent of business entities of Nepal borrow form cooperatives. .  There are 5.1 percent business entities who borrow from other people instead of borrowing from formal institutions.

Gold and Silver Monetization: A Productive Use of Households Idle Assets

1.      Background

Nepal is historically a consumer of gold and silver of the world gold market. The demand for gold and silvers are entirely met through import and it is not domestically produced. It is also a one of the commodities which played major role in rising trade deficit and to deteriorate the current accounts balance of the country. Nepal Rastra Bank (NRB) has imposed a quota on gold imports and demand for gold is rising year after year. As gold price has secular rising trend, Nepal is paying significant foreign exchange reserve for the import of Gold. Therefore gold and silver has become major component of import, expenses on it also affects liquidity condition of the banking system.

Globally, the demand for gold and silvers are increasing because it has multiple uses as a jewelry, finance and investment, medical use for dentistry, electronic devices and cell phone, aeroplanes and space vehicles, medals and rewards.  The central banks and governments also hold gold as reserve assets in the monetary system. In an uncertain economic condition, gold can be used as an investment asset to avoid financial risks. It is also a high esteemed precious metal and it is used for coins, crowns, awards and religious statues. Mainly, the demand for gold is high as it is accepted as safe assets for investment.

Nepalese people invest on gold and silver with significant amounts. However, these investments are not streamlined within the financial system and gold and silvers are like under the mattress savings. In Nepal, the gold and silver demand is driven by the socio-economic, cultural, religious, jewelry and ornaments factors. Nepal is not a producer of gold and silvers, thus its demand is met by imports. The gold and silvers purchased and kept as idle assets by the households can be brought under the financial system through gold monetization scheme. Thus, this article explains how the “gold deposit policy” can be implemented to utilize huge amount of gold and silver idley held by Nepalese households.

2.      Import and Stock of Gold and Silver

The gold and silver import is gradually increasing in Nepal year by year. The spending of foreign exchange reserves on gold and silver shares about 3 percent of total import of Nepal.  In 2003/04, the gold import was Rs. 0.1 billion which increased to Rs. 41 billion in 2009/10.   The figure increased to Rs. 32.2 billion in 2017/18. The total figure of gold and silver import is Rs. 325.5 billion during the period of 2003/04 to 2018/19.   In addition, there are the evidences of significant amount of illegal import of gold and silvers in Nepal. The illegal import of gold and silvers is hugely draining up remittances to pay the illegal import. Thus, the gold monetization scheme helps to discourage the illegal markets of gold and silver in Nepal.
3.      Current Use of Gold in Nepali Households

Gold is more than an investment to Nepalese people, it is a culturally significant metal which has found a place in every social and cultural ceremony in Nepal. Gold and silver is an integral part of religious ceremonies in Nepal. It is common for people to purchase gold at different religious occasions. Gold and silver jewelry and ornaments are passed on from generation to generation, it passes from one generation to another also helps people save money on gold, avoiding its rising prices. The gold has become symbol of power, people feel financially strong those who hold more gold. Gold has been considered the safest investment, owning gold and silver is considered an extremely smart choice. The fluctuation gold price everyday makes sense to invest in gold for a secure future.

Use of Gold in Nepal

Gold Import

Gold Buyer Or Households

Use as Collateral for Loan

Keep as an Idle Asset

Use for Ornament

Currently, in Nepal people have two options to hold gold and silver: they use it as collateral for credit or they keep it as idle assets and use it for ornaments or jewelry. The gold and silver used as collateral or credit is Rs. 38. 07 billion in end of the fiscal year 2017/18, it covers only 12 percent total imported gold since 2003/04. The gold and silver held by people either is kept at home without any security or they store it in bank lockers by paying a maintenance fee. Gold and silver holding with such a way is riskier or costlier. However, with the implementation gold monetization scheme, people have one more choices to keep gold in the form of gold and silver deposit at banks and simultaneously earn interest from it.

4.      Policy Framework for Gold and Silver Monetization Scheme

Monetization is a process of converting a commodity into domestic currency, in Nepalese rupee. Gold and silver monetization refers to unlocking the value of gold and silver in terms of Nepalese rupee. The Gold Monetization Scheme refers to a process wherein a depositor deposits gold and silver (say jewelry, bars, coin, etc.) in the bank. This can work as a normal banking operation like a savings bank account, but it is accepted in terms of gold or silver instead of in Nepalese rupee.

The principle of deposit can be accepted in gold or silver (which are valued Nepalese rupee) and interest can be denominated in Nepalese rupees. The central bank can provide a guideline for determining the value of gold or silver which can be accepted as deposit. The banks can determine the value or price of gold that can be used as deposit and be tied with reference to the fluctuation of gold price in the international market. The central bank can fix the minimum lock-in period of gold deposit and rule for penalty on early or pre mature withdrawal. Similarly, the certificate of deposit issued to the customer by banks should be made liquid and which can be used as collateral if loan is needed to the customer against such gold deposit certificate.

The scheme for gold deposit should be backed with four arrangements by the central bank to the banks: (i) withdraw loan from central bank equal amount of deposit (ii) allowed to receive a fixed period loan from other banks (iii) allowed to count in capital and credit to deposit ratio (CCD) ratio (iv) and allowed to count in statutory liquidity ratio (SLR) and cash reserve ratio (CRR).

5.     

Gold Traders

Gold Import

Gold Buyer or Households

Use as Collateral for Loan

Keep as an Idle Asset

Use for Ornament

Deposit in Banks and Earn Interest

Use as Collateral for Loan from the Central Bank

Use as Collateral for Loan from Other BFIs

Banks

Count in CD Ratio and Liquidity Ratio

Policy Support

Support and Benefits of the Scheme

The central bank should design a policy to support the banks to participate the gold deposit scheme. The banks can take approval to implement the scheme. The banks which were allowed to join the scheme can announce the customer to deposit minimum quantity of physical gold. The banks can build up an internal or outsourced mechanism to ascertain the quality and quantity of physical gold. The deposit should be interest bearing and fixed period maturity and can be allowed to short, medium and long term deposits. The minimum period for deposit should be three months and maximum period should be ten years within which the banks can be allowed to design their scheme.

Policy Support for Gold Monetization in Nepal

The gold deposit policy is monetization of gold through gold saving accounts. Currently, people have two options (i) they keep their gold without any security at home or (ii) they can store it in bank lockers by paying a maintenance fee. However, with the implementation of such scheme, people have one more choice to keep gold in the form of gold deposit facility and earn interest. The main benefit of the scheme is to attract in gold instead of gems and diamonds. Peoples holding coins and bars can earn interest generally an appreciation of value. The gold and silvers will be securely kept by the banks.  For a gold product that usually remains idle in homes and lockers, this will earn the households between 4 percent to 10 percent interest depending on the period of deposit and market condition. Short-term deposit rates can be allowed to decide by the banks while long-term deposit interest rates can be decided by the central bank.

Nepalese banks are in stress of liquidity and loanable funds. The opening of gold and silver deposit account can be followed with the same rules of cash deposit account. The provision should be made to similar to the other deposit accounts like know your customer (KYC), source decleration and other identification documents. The gold and silver deposit can be treated same principles as other deposits.

The idle gold holding at home is also threat of theft for the households. Thus, gold deposit scheme can facilitate the household with locker facility with handsome interest. The interest bearing on gold and silver deposit also motivates the people to hold gold instead of holding other gems and ornaments.

6.      International Experiences

Turkey and India are the countries which are the high gold and silver demanding countries in the world.  Turkey launched the scheme in 2011, which is called ‘the golden days’. It is in order to bring gold held by the households into the financial system as savings. The aim of the program is to support both elimination of savings deficit and the banks obtaining efficient resources.

Government of India and Reserve Bank of India (RBI) issued the detailed guidelines of Gold Monetization Scheme in September 2015.  The aim of the scheme is to mobilize the gold held by households and put it into productive use; to provide a fillip to the gems and jewellery sector in the country by making gold available as raw material on loan from the banks; to reduce reliance on import of gold over time to meet the domestic demand; to strengthening the reserve requirements of the Central Bank. There are three options in India for deposit the gold: short-term which is for 1-3 years (with a roll out in multiples of one year); medium-term which is for 5-7 years and long term which 12-15 years.

7.      Conclusion

The benefits gained from the arrangements of the gold and silver monetization scheme can be examined briefly in five parts. Firstly, the arrangement mobilizes the resources of the economy and support economic development. Secondly, the banks make their deposit reserve by physical gold and silvers, as a result, the risk and cost of households for holding gold and silvers decreases. Thirdly, the depositors earn definite interest in holding gold and silvers that they have not received before. The fourth benefit is the scheme can encourage people to buy gold in formal market, which in turn be helpful to collect more tax revenue. The fifth benefit of the scheme is as liquidity withdraws from banking through the import of gold is compensated by the scheme.

Thus, bringing under the mattress savings into the financial system has a great significance. These savings are not only supply of resource for economic growth but also they can have a role in solving the problem like informal markets and current account deficit of Nepal. The central bank and the government can mobilize the resources which has remained idle yet.

==***==

References:

Ercan Ozen (2015), “A New Model in Compensation of Saving Deficit in Turkey: The Golden Days in Banking and Early Results”, Procedia Economics and Finance 23 ( 2015 ) 38 – 46, (Link: https://core.ac.uk/download/pdf/82206149.pdf)

Nepal Rastra Bank (2019), Quarterly Economic Bulletine, 2019 Mid January. https://www.nrb.org.np/red/publica.php?tp=economic_bulletin&&vw=5

Reserve Bank of India (2015), Gold Monetization Scheme, 2015, https://rbi.org.in/scripts/FS_Notification.aspx?Id=11295&Mode=0&fn=2.

Poverty in Nepal

The term poverty is not only a material deprivation but also low achievements in education and health , vulnerabilities and exposure to risk, and lack of voice and empowerment. All these elements combine to restrict people's capability to escape poverty. Poverty is a complex multidimensional problem., it is not only a matter of statistics or number. It is a reflection of lack of dynamism in society and  human deprivation. Except hunger and malnutrition, several other aspects are used to explain poverty, such as deprivation in terms of clothing, shelter, basic social services including primary health care, sanitation, education etc., political powerlessness and socio-cultural marginalization.

In many developing countries, poverty persists due to three main reasons: slow economic growth, biased growth pattern concentrated on few sectors, and failure of government policies. A slow rate of growth has dual effect: low income or low employment opportunities and increases the rent-seeking behaviour of the politicians in favour of non-poor like businessmen, large farmers, bureaucrats, trade unions, and the security personnel. The incidence of poverty remains for long period if the pattern of growth is urban biased and there is no rural-urban economic linkage. In Nepal other additional factors are playing dominant role. 

Trends and Pattern of Poverty in Nepal: The CBS conducted comprehensive survey in the name of living standard survey in 1995/96, 2003/04 and 2009/10. This is sown in following table.

Year	Overall Nepal	Rural	Urban
1995/96	42	43	22
2003/04	31	35	10
2009/10	25	27	15

The table shows that the poverty declined from 42 to 25 percent. Poverty is higher in rural than in urban areas. While poverty exists in both rural and urban areas, it is well known that the problem in developing countries is predominantly of rural poverty. Agricultural laborers with irregular employment constitute the major part of the rural population.  

The Small Areas Estimates of Poverty 2011, published by CBS of Nepal, shows that there is wide range of differences in poverty distribution all over Nepal. Among others, we can observe following facts regarding poverty distribution in Nepal.

High economic activity is associated with low poverty. The lowest poverty districts in Nepal are Kaski and Ilam. Also poverty relatively low in Kathmandu, Bhaktapur, Chitwan, Jhapa, Shyanga, among others.

Rain fall, productivity and poverty are associated in Nepal. Rainfall in Nepal gradually decreases from eastern region to far western region. In an opposite trend, the poverty increases from eastern development region to western development region. There are some exceptional districts like Kaski, Kathmandu and Chitwan, these districts are tourist centres and high economic activity area. In the similar trend of rain fall, the land productivity also gradually decreases from eastern Nepal to far-western Nepal.

Geography is also a cause of poverty. The difficulty increases from Terai, Mountain and Hilly region. In the similar trend, the poverty increases from plain area to mountain area. The weak linkage with market and high cost of transportation increases cost of production. The high cost of production reduces the economic activities and increase poverty.

Harnessing Full Potential of Tourism in Nepal

Tourism has been an integral part of national development, including poverty reduction and increase employment. This sector can be one of the sustainable sources of foreign exchange. Nepal is one of the best tourist destinations of the world. However, Nepal is not able to capitalize the full potential of this sector. 

Government has given the top priority to the tourism sector and has prepared a long-term master plan to develop tourism infrastructure in the nation. The domestic political turmoil lagged this sector far behind because large number of infrastructure development activities were slow downed. Hence, to boost up the tourism sector and contribute to strengthen the national income, there is need of effective tourism policy in terms of the economic development.

Status of Tourism Industry

• It is a major source of foreign exchange earnings.
• Tourism accounts around 3 per cent of Nepalese GDP.
• The sector also provided the people of Nepal with increasing employment opportunity.
• Between 2001 and 2014, number of employees in tourism sector rose by 2.5 folds.
• Foreign exchange earnings increased by three fold from 2001/02 to 2013/14 (Rs. 37 billion).
• The growth of this sector is mainly dependent on tourists from the European as well as OECD countries.
• The arrival of tourists was 275 thousand in 2002 December which continuously increased to 803 thousand in 2013 December.

Prospects of Tourism in Nepal

• The natural beauty, diversity and unique features  
• Nepalese belief of 'Guests are God' has
• The community based tourism is well suited for the Nepalese economy. Local communities becoming more conscious in updating an inventory of cultural heritage.
• Growing awareness in the people for conservation and promotion of cultural heritages.
• Potential market of economically emerging and most populist neighboring countries India and China
• SAARC could be the useful platform to develop and promote this sector.
• Community based rural tourism is the high potential of the country.
• Possibility of further growth in the number of tourists with the opening up of new mountains and restricted areas.
• Recently political development is improving the country's image at global level. Peace agreement and election CA election-II.
• Immense possibility of developing adventure tourism in the mountains and rivers.
• Campaigns like Tourism Year and Visit Lumbini Year are motivation for entrepreneurs. 
  Sparkling mountains, unique natural beauties, wildlife experiences, historical and religious places have contributed to the commercial transformation of the industry.
  
• Attraction is not increased to rural tourism which can play the essential role to alleviate poverty and employment generation.

Problems of this Sector

• Tourism sector has been facing many difficulties due to lack of infrastructure, especially airlines and transportation services are bottlenecks.
  
  
• Political instability is other major problem in Nepal.
  
  
• Participation of the private sector in the infrastructure development is not encouraging.
  
  
• Domestic airlines are not internationally competitive to harness the benefits of this sector.
  
  
• Weak data base about cultural heritage.
  
  
• The major weakness is always disturbances and strikes in the main highways from the political and various other groups.
  
  
• Less use of computer technologies and software programs in information system are the drawback of this sector.
  
  
• Lack integrated and coordinated development efforts in the tourism sector.
  
  
• Apart from conventional tourism, development and growth of other innovative tourism, such as adventure tourism and eco-tourism, has not been encouraging.
  
  
• Construction of new airports are lacking due to inadequate resources.
  
  
• Recent black listing of Nepali aviation sector by European Authority.
  
  
• More importantly, threats from the competition on the global market, especially from close competitors like Malaysia, Thailand, Singapore, Sri Lanka, and Maldives. The resource constraints like low budget comparing to competitors, slow development of infrastructure also have negative role.
  
  
• Political condition still not quite good, strike in the tourism industries is the major problem, not good air connectivity with rest of the world, security problems and so on is the major domestic threats.
  
  

What Can be Done to Promote Tourism in Nepal?

• Infrastructure
• Government should invest or facilitate in tourism infrastructure, especially in tracks and road construction in mountainous region. 
• Private sector should be encouraged to facilitate in cable car, air transport, land transports, hotels activities.
• Regional airports and fast track roads should be developed in PPP approach.
• Capacity Building
• University and School education curriculum should be equipped with tourism education.
• Ongoing capacity building and training is needed until villagers are confident enough with their tourism activities.
• Increasing Length of Stay of Tourists
• Recreational activities should be diversified to different tourism places outside Kathmandu valley.
• Safety and Compensation for Tourism
• Insurance of tourists guides, trekking guides and workers who are in the tourism sectors this could be incentive for quality services and sustain these experienced in this sector.
• Insurance products should be developed for tourists about rescue in crisis, health problem and in accidents.
• Air safety measures should be applied and international images should be enhanced about it.
• Improving Quality of Services
• Quality standards should be maintained by regulating tourism hotels, services and businesses
• Tourists complain handling authority should be formed by the government with strong power to punish the wrong doers or those who do not provide the services they had contract. This can feel tourists safe and trust the government.
• Positioning Global Image on Tourism
• Nepal is nation that has passed through a decade long conflict. Thus image positioning program should be initiated.
• Promotional activities should be done to inform about tourism strength of Nepal. This should focus both tourists and investors.
• Tourism promotion program should be launched, targeting neighboring countries, India and China.
• Tourism information system should be established by empowering the local bodies.
•  Strengthening Local Community 
• Local communities and private agencies should be involved in the preservation, conservation and promotion of tangible and intangible cultural heritages.
• New Products Tourism
• New products of tourism should be given top priority for example
• Sports Tourism: a cricket game can attracts lots of people from all South Asian countries 
• Health Tourism: government has legalized surrogacy birth for foreigners; it can be allowed to Nepalese people it can be good earning source. International standard hospitals can be attracted because of good climate of Nepal.  
• Educational Tourism: Nepal can be educational hub of Asia.
• Investment in International Air Transport
• Private airline companies should be encouraged to contribute to tourism and economic development through the expansion of domestic and international air services.
• Diversifying the Sector
• The tourism sector should be developed as the foundation of the economy through product diversification and geographical diversification.
• Diversifying the tourism sector and should be expanded by developing educational tourism, health tourism, wildlife tourism, agro tourism, eco-tourism, mountaineering and trekking tourism, adventure and entertainment tourism, cultural tourism, and religious tourism in addition to mountain tourism.
• Promote Domestic Tourism
• Domestic tourism can be promoted to diversify the risk because concentration only on foreign tourists sometimes be risky.

Conclusions                                                                                                                                       

The tourism industry is growing very rapidly and Nepal has tremendous potential  in  this sector. Thus, market friendly tourism policy is essential to increase national productivity and income, increase foreign currency earnings, create employment opportunities, improve regional imbalances, among others through the development and diversification of the travel and tourism industries.

Government should decentralize the tourism planning process and encourage private sectors for the development of tourism. Similar, it is necessary to improve tourism infrastructures, improve safety mechanisms, develop tourism marketing information system and facilitate community based tourism. It is also necessary to develop new tourism products and places. Thus, tourism sector could be a means of reducing poverty, sources of foreign exchange and promote employment opportunity in the country.