MACROECONOMICS ASSIGNMENT

PART A-Can Nepal be a transit economy? Elaborate how; and examine the benefits to Nepal from it? Ans: Nepal being sandwiched between two Asian economic powerhouse India and China is seen as a lame duck geographically and economically. However the history has it that Nepal has been a gateway for indo- china Trans Himalayan trade since the period of Lichhivi Kings. Transit state entails a country whose functional transaction crosses the frontiers of two countries. The development of a transit state implies the conveyance of people or goods from one country to another, especially on a local public transportation system. Recently, the government of Nepal has constituted a committee to give concrete manifestation to make Nepal a transit country between India and China. Nepals nearest seaport is Kolkata in India which is 1,150 kilometers away. Administrative hassles and time consuming handling of customs often delay in the shipment of goods. Dependence on a single seaport has made Nepal vulnerable to regular interruption of transit and trade. Economic blockade imposed by India in March 1989 is still vivid in the memory of Nepalese business community and people as to how a lack of perennial transit could inflict problems on a small landlocked country. Economic growth, export expansion and the utilization of foreign direct investment (FDI) have generated the demand for transport and communication facilities. Mounting costs of transit and transport have increased the costs for import and export and posed additional barrier for Nepals development. Nepal can be developed as a transit economy if development disparity between Kathmandu and the periphery and the urban and rural areas are bridged by modern transportation and infrastructure developments. Nepal can serves as a transit country for the Indian and the Chinese trades through land routes. The Raxual-Kathmandu-Khasa road links the three countries. This link road is 390 kilometers. But the Barhabise-Kodari part of northern road is not well enlarged and well maintained. Therefore, it has created barriers in transport during rainy season. If Syaprubesi section of highway, which is 92 kilometer long and links to Rasuwa, is constructed distance will be shortened and there is every possibility that transit importance of Nepal will be significantly increased. The Raxual-Trishuli-Rasuwa (265 kilometers) will be the shortest road connecting Nepals southern with northern borders. The Chinese are helping to build a 22-kilometer road that links Syprubeshi with the Chinese border and is expected to augment growing cooperation between Nepal and China. To make Nepal transit country, it needs to develop good link roads, transportation and communication and storage facilities and develop good neighborly political understanding with both India and China. The completion of railway line in Lhasa by the Chinese government and its possible extension to Nepals border together with the wide transport connectivity in the south are going to create convenient northsouth transport links. This will also link Nepal to Chinas industrial cities Development of landlocked Nepal as a transit country between India and China holds tremendous potential for Nepals economic prosperity. Both the neighbors have shown keen interest in developing trade, investments and other cooperation through Nepal are territory. But, it requires Nepal to fulfill all the preconditions such as freedom of transit, fuller integration of its economy into the regional and multilateral trading system, encouragement of business competition, modernization of roads,

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communications, upgrading of warehouse facilities, expansion of dry ports, scientific custom handling procedures, security of vehicles, proper banking etc. Infrastructure developments have to be accompanied with political understanding and market integration in tune with regional and global integration processes envisioned in SAFTA, and WTO. Reducing the costs of transactions is a critical precondition to make trade an engine of economic growth and poverty alleviation. To be sure, turning Nepal into a transit state holds immense hope and feasible prospect for the modernization of Nepalese state, society and economy and the promotion of good neighborhood. Potential benefits to Nepal when playing the role of a transit point between India and China Fees of various types to the government Setting up of service centers, tea shops, motels along the road creating employment Nepali people will learn new businesses (Nepalese are good learners. Examples: carpets, pashmina, vegetable ghee etc.) Exporter-importers start to compare Nepal with other countries in terms of export-import ease Nepal will learn documentation, packaging etc. which are so crucial for international trade As the costs of production in India and China will increase while they develop, they will locate their production facilities in Nepal to export the products to each other and even overseas Proximity with India-China will grow and this will enhance Nepals goodwill with both the countries Tourism might benefit. Indians might be attracted to Hindu religious sites and Chinese people to Buddhist stupas. When we provide transit facility, Nepal will be a giver. This will help incre ase our bargaining power. This bargaining power can be utilized in other issues of national interest. Possibility of both Indian and Chinese investors being interested in setting up production facilities in Nepal to export to each other or even overseas. To benefit from this, however, Nepal needs to know what business they would be interested in and where.

Reference: www.google.com www.wikipedia.org www.moneybay.com

PART B: Should the newly established BOI also promote Nepalese FDI abroad to benefit fully from economic globalization? How might it promote Nepalese MNCs? What further policies, institutions and strategies may henceforth be required? Ans: The Investment Board was established in accordance with the Investment Board Act, 2068 enacted a couple of months ago. It has full authority to carry out economic development of the country by creating an investment-friendly climate through the mobilization and management of public-private partnerships, and domestic and foreign private investments. It wills also strategies to make industrialization orderly and rapid. And it will play a pivotal role in the development of infrastructure and other sectors to create jobs

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and alleviate poverty. Nepal Investment Board as a part of the government's effort to spur foreign investment. Nepal has a lot of opportunities for the enactment of the Investment Board Act, 2068. Nepal can prosper and take off if Nepalese people can only realize the potential that we have. And as for attracting investment, the government has to play a key role. So, it's a great challenge but at the same time it is a huge accomplishment if the board can contribute to increasing investment and enhancing Nepal's economy. The Board is chaired by the Prime Minister. Three ministers, finance, industry and forest, are also members. In addition, the Vice-Chairman of the Planning Commission, the Rastra Bank Governor, and the Chief Secretary are also permanent members of the board. Radhesh Pant as a Member-Secretary. The Board will select four members from the private sector who will be experts in industry, tourism, infrastructure development, commercial law and finance sectors as per the act. The vision of the BOI is to function in a professional and transparent manner which would eventually yield results, attract investment and successfully allow the completion of investment projects in Nepal. The board will primarily focus on creating an environment for investments in Nepal, be it domestic or international by providing 'one-window' services. This would mean streamlining various acts and policies, identifying and resolving investment deterrents for projects and selecting and promoting projects that will provide most value for the country. The Board will provide all relevant information to prospective investors, analyze and make proper incentives available for projects. Once a project takes off, board will be closely monitoring progress right up to its completion and operation. The role of investment board is to invest in hydropower, education, tourism, health, agiculture. This is the right moment to focus on high and sustainable growth which is not possible without massive investment in hydropower, infrastructure, agriculture, tourism, export industries and services and of course education and health. The opportunities are enormous if we get it right. Nepal is one of the richest countries in terms of natural resources. It has two of the largest markets surrounding it. Nepal must capitalize on this and this is where the Investment Board will play a pivotal role. It must create a conducive environment for investment, be professional and transparent and put the interest of Nepal first rather than any vested interest groups. BOI must protect investments, be it domestic or foreign and need to resolve labor issues, insecurity and be more competitive than other countries so that investors choose to come to Nepal. Foreign direct investment is essential next year and beyond to boost economy and create jobs in Nepal. Well functioning financial systems are central to generating foreign direct investment (FDI) which in turn accelerates economic growth. The success of any economy is judged by the free flow of capital and the extent of openness of the financial market. Globalization of the financial sector has led to the integration of emerging economies to international capital market. Nepal has not been able to attract significant FDI compared to other South Asian countries due to unstable political regimes, lower growth rate of macroeconomic indicators, unskilled and militant labor. It is losing its competitive advantage for foreign investments due to lack of clear policies and implementation factors. The recent volatility of capital flows in emerging Asian economies has had a

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negative impact on the exchange rate, overheating of the economy and asset price bubbles. Large capital flows can stress economies through exchange rate appreciation and sterilization. However, a continued focus on financial market development can mitigate the challenges of capital flows. The need for FDI in Nepal is enormous since resource mobilization capacity is limited, and in recent years the economy has faced a liquidity crisis which has led to lack of credit flows in the economy. Without total capital account convertibility, the prospect of capital inflows will be incomplete. A lack of domestic factors, such as strong macroeconomic fundamentals, a resilient financial sector, deep and liquid capital market compounded by political instability have been the main reasons for dismal FDI investments. According to a 2010 Central Bureau of Statistics survey, there were 1,897 firms operating with foreign investment from 139 countries. India had the largest investment in Nepal with 393 companies, followed by China with 179, Japan 132, South Korea 94, UK 94, Germany 61 and Switzerland 27. Manufacturing has most FDI investments, which stood at 565 companies followed by the hotel and resort sector with 370 firms. Textile and garments had 210 investors and energy, water and gas sector had 32 companies. The total capital outlay of these industries was nearly Rs 120 billion. BOI should focus on the following sector so that it can promote both Nepalese FDI and MNCs: BOI can establish a joint venture banks to improve the quality and efficiency of the financial systems by introducing best practices and standards, where consumers are the main beneficiaries. If higher integration to world capital markets is pursued with sound domestic systems in place, that will enhance the development of domestic financial markets by raising bank credit, total assets of the banking system, reducing net interest rate margins and increasing stock market capitalization. BOI should focus in tourism sector and infrastructure because most of the FDI is in these sectors and Nepal is highly tourism sector. FDIs exporting 100%, of any size, not be required to obtain licenses for project implementation except for those which may pollute the environment. However, they need to be registered in proposed BOI Office. Foreign investors should be allowed to open the foreign currency account, if they bring such currency from their own country. Foreign investment they made should be informed to NRB as and when such investments are brought into the country. All such information should be provided to foreign investors through one stop by the proposed OWS (one window service). For the purpose of remitting the profit/dividend, it should not be made mandatory to go to NRB every year, only once in the beginning year should have been sufficient. Establish an Industrial Dispute Tribunal to adjudicate commercial disputes between HMG-private sectors; this will not only reduce transaction costs significantly but also help remove obstacles set by antiquated, pre-globalization, pre-internet technology, pre-regionalization acts, rules and regulations. Also, the decisions by such a tribunal will serve as case law for the benefit of all such cases anywhere in future, if transparency is maintained.

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Develop a new strategy for hydro-power development to capture the multiplier benefits in Nepal by a demand-led, low-power tariff approach for multi-sector development in-19 country and for realizing the elusive regionally balanced national development. Avoid unnecessary delay under FI & TT Act to obtain permission of Foreign Investment and Technology Transfer Agreements (FITTA). Establish a high level institution for national consensus building by participation of private sectors.

References: http://www.nepalitimes.com http://www.mof.gov.np

PART D- The Chaudhary group is Nepals first business house to venture abroad. Which group/s you reckon can be the next ones, in what areas and where? Please think in the context of an industry rather than a firm. Ans- Chaudhary Group is based in Kathmandu, Nepal. Today Chaudhary Group has over 40 Companies under its umbrella and an investment outlay of over $1Billion. Being the first Nepalese organization to have a distribution network spanning the subcontinent, it has made substantial presence in South Asia's fiercely competitive Food and Beverages market. The Food & Beverages products have been a common household name in Nepal for decades. With ISO 9002 certification, providing the lead, our F&B products have crossed the borders to become a favorite in South Asian cities. The Group's progress over the last sixty-seven years has been a trial-blazer on the Nepalese horizon. In a land-locked, developing third world nation, this spells nothing short of very hard-earned success. Apart from also being a responsible citizen, Chaudhary Group forms an intrinsic part of every realm of life from Biotech, Cement, Education, Electronics & White goods, Energy and Infrastructure, Financial Services, FMCG, Hotels & Resorts, Realty to Retail. Since its inception, Chaudhary Group has contributed to the upliftment of the nation's economy, equalizing the infrastructure and entrepreneurial capability of Nepal with other developing nations. As Nepal's investment potential progressively draws the attention of leading multinationals, Chaudhary Group continues to lead, harnessing global partnerships in core sectors and offering cost-effective procurement affiliation to corporate worldwide. The company offers its products and services through dealers, distributors, retailers, and suppliers. Chaudhary Group has over the last 65 years forged nurtured and maintained global alliances and this growth has taken place through a deep understanding of local markets, people and customs. Toshiba Corporation LG Electronics Inc Thai Preserved Food Factory Co. Zinc Hospitality CrimsonLogic Pte. Ltd. AES Corporation Japan Sab Miller South Korea Western UnionThailand Financial Services Manipal K-12 Education Thailand Pvt. Ltd. Videocon Industries Singapore Ltd. Onida USA Kelvinator South Africa Cinnovation Group USA India India

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According to the current market situation, we can see that there are two prospect groups which may venture abroad. One being the Khetan Group & the Golcha group. Golcha Organisation is one of the leading Private Sector Enterprise having various Industries under its flag such as Steel Utencils, Steel Sheet, Tubes, Wires, Sugar, Rice,Paper, Jute etc. It is also a pioneer organisation representing various companies such as Daihatsu (japan), Samsung Televisons and home appliances, Nokia Mobiles, Bajaj (India), Ford Motors, Apple computers, etc etc. The Organisation has few trading companies which are engaged in Imports and Marketing such as Furnace oil, Food grains, oilseeds, Fertilisers, Cement, Sugar, etc. The Organisation has Service sectors also including an Eye hospital, School etc. The organization can spread its market abroad in places like India for products like Furnace oil, Food grains, oilseeds, Fertilisers, Cement, Sugar, etc. Another group is the Khetan group. With its evergrowing list of ventures and services all over Nepal, Khetan Group today, looks ahead confidently to consistent and stable growth. The Group has interests in the field of mining, fast moving consumer goods like beverages, food stuff and service industries like insurance, banking/financial services, telecommunications, IT, real estate, investments, energy etc. In 1989, Gorkha Brewery (P) Ltd. was established a joint collaboration between leading Nepali business houses and the Danish multinational company Carlsberg A/S, Gorkha Brewery (P) Ltd. was and continues to be one of the largest single foreign investments in Nepal, and in 2004, started Brewing & Marketing Sam Miguel beer, on the licence agreement with San Miguel Brewing International Ltd., Phillipines. Spread over nearly seven hectares, a picturesque state-of-the-art brewery was established on the banks of river Narayani near Narayan Ghat city. Tuborg, which was launched in May 1990, was the first-ever international brand introduced in Nepal. It was followed by Carlsberg in 1995. Gorkha Brewery changed the Nepali beer industry forever. Over the past 15 years, it has grown to become the market leader holding more than 80% share of Nepal's beer market. This extraordinary success is the result of excellence in every arena: brewing to truly international standards, stringent quality control, efficient and nationwide distribution, cutting edge marketing and sales strategies and prudent financial management. Adding that extra bit every time are the talented and dynamic people who work for Gorkha Brewery. Also, the group has a unit Bottlers Nepal Limited (BNL) which is the only bottler of Coca-Cola products in Nepal, and has two bottling plants; namely Kathmandu (Bottlers Nepal Limited BNL) and Bharatpur (Bottlers Nepal (Terai) Limited,) which is 160 km from Kathmandu, its capital. Himalayan Snax & Noodles Private Limited (HSNPL) was established in October 2000 in technical collaboration with Thai President Foods Plc of Thailand providing manufacturing technology expertise to HSNPL. The founding objective was to produce instant noodles under the "Mayos" brand. The plant is furnished with state-of-the-art Japanese machinery.

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HSNPL has been manufacturing various brands of instant noodles, i.e., Mayos, Mayos Shangri-la, Shaka Laka Boom, Ru-Chee, Lekali, J-mee, Hurray, Doharee, Jhilke and Humpty Dumpty. HSNPL understands the need of consumers and converts them into reality. In a short period of time, the company has been able to achieve a leading market share in Nepal. HSNPL plans for diversifying into production of other snack items in future. Manufacturing of Cheese Balls under the brand name of Mayos Munchy have already been introduced to the market and still some other plans are under progress. HSNPL can expand the products which are more popular in Nepal which give our company the opportunity to manufacture, distribute and to export our products to the international countries With years of expertise, hard working, and commitment, we offer our wide range of products and can customize to serve different tastes of customers. The company can grow and diversify expansions into leading regions such as UK, Australia, India, Bhutan, and Qatar. References: http://www.chaudharygroup.com/index.php/about-us/history.html http://www.chaudharygroup.com/index.php/global-partners.html http://golchhaorg.en.busytrade.com/about_us.html http://www.khetan.com.np/intro.htm http://www.khetan.com.np/gorkha.htm http://www.gorkhabrewery.com/Pages/index.php?para=Company&cat=Company http://www.khetan.com.np/himalayansnax.htm http://www.khetan.com.np/bottlers_nepal.htm http://www.khetan.com.np/others.htm

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