Who wants to be Kathmandu's Mayor?

Published on The Kathmandu Post on May 11, 2017:

Mayor of Mayhem

Outburst of interests have become public for the position of Kathmandu’s mayor with a promise to bring glory into this otherwise chaotic metropolis.  After a hiatus of almost two decades, Kathmandu aims to appoint a sheriff that is accountable to its electoral public. 

The herculean responsibility of resurrecting Kathmandu as a civilized city cannot be bestowed to the fainthearted.  This is not an experiment confined within a laboratory to observe whether it succeeds on a “trial and error” basis.  There is too much at stake here for the voters to blindly toe the political ideology at the voting booth.  Some poignant and difficult questions need to be put forth to seek the candidates’ position on how they intend to address issues that have long overwhelmed the city.

It isn’t enough for the candidates to project themselves as fitting for the role of mayor because they belong to a younger generation that offers “different and fresh” air.  A brief reflection on what the young political leaders have achieved vis-à-vis their senior contemporaries is enough to deduce that “new” generation does not imply “smarter” generation.  It is also inadequate for candidates to announce their candidacy buoyed by their political network, past experience or a relevant academic qualification. 

What Kathmandu needs is a leader that possesses the wherewithal to challenge the status-quo. The city gasps for a personality that not only has a high-level vision, but specific plans on transforming the vision into reality.  Someone that does not succumb to the political pressure and operates independently at an arm’s length from Singhadurbar.

None of the candidates have unveiled their specific plans on how they intend on making Kathmandu the next Colombo, forget Singapore.  Under this backdrop, casting a vote will be akin to walking into an exam without an iota of preparations, while leaving the results to the grace of the Pashupatinath.

Below transpires a list of questions, which, if answered by candidates, would prepare the voters execute an appropriate verdict at the voting booth.

·         After 20 years of unaccountability, how do you plan to catch up with peer cities in the region?

·    You have witnessed functioning traffic lights on your visits abroad.  How will you spearhead installation of such lights in Kathmandu?

·  Will you campaign for subsidized air masks for Dustmandu’s residents to combat lethal air pollution or do you have a more tangible intervention planned?

·      Do you believe that animal rights extend to stray dogs and cattle freely roaming the streets?  If not, what is your plan to eradicate such menace?

·    Will you continue the legacy of publicity stunts as a regulatory instrument against misdemeanors such as public disposal of trash, not wearing seatbelts, carrying passengers on the roof of public transport, honking horns, only to see them fizzle at the end?  Do you have a more effective measure against such misdemeanors?

·      Do you believe that shops setup on footpaths provide income opportunities to the shop owners and convenience to the consumers and therefore should be continued?  If not, how do you intend on returning footpaths to the pedestrians?

·   To demonstrate how poor Kathmandu’s roads are, a foreign diplomat once suggested advising pregnant women that they avoid the roads for the risk of miscarriage.  A mayoral aspirant cannot dismiss the road despair today solely on the Melamchi project.  The voting public deserves to understand whether Kathmandu’s roads will ever enhance mobility rather than continue to restrict it.

·   The snowballing number of vehicles compound traffic gridlock across the city.  Kathmandu witnesses traffic congestions throughout the day, whereas even 2-3 years ago, such congestions were limited to peak hours only.  It is no secret that the Government policy encourages vehicle import as the tax revenues provide a mainstay to Government finance.  The generosity of kickbacks from auto dealers also ensures that their business continues to thrive.  Cities such as Stockholm, Singapore and London have implemented congestion fees to discourage driving during peak hours.  What does the mayor suggest is the solution for Kathmandu?

·     Studies have been conducted on the feasibility of a mass transport such as metro, monorail and urban rail, as a meaningful substitute to private vehicles and an effective alternate to the dysfunctional public transport; however, such studies have remained only on paper.  The public transport system run by transport mafias, contravene all regulations by paying off the police.  How does the mayor plan to penetrate this nexus?

·    It is demoralizing to read about new construction springing up, dishonoring the building codes introduced after the 2015 earthquakes.  Such blatant violation to safety protocols, while the wounds from the disaster remain unforgotten, let alone healed.  What is the mayor’s plan to reprimand such violation?

·         Kathmandu has a sports stadium that is in a state of despair.  Similar to everything else that seems to have fallen apart, the stadium desperately pleads for a responsible caretaker.  It is regrettable that the city is unable to host international sporting events as the level of infrastructure provided by Dashrath stadium is inadequate.  Nepal has been a laughing stock in the international arena for exemplifying the worst, and sports is no different.  Does the mayor propose any remedy?

·      Finally, Kathmandu’s airport continues to grab headlines in international media for being ranked as one of the worst in the world. The main gateway airport is often seen as emblematic of a city in which it is located. At the moment, TIA as a gateway resembles a poor picture of the state of the city.  Its poor infrastructure is no longer able to cater to growth in air-traffic and deliver quality service.  News of monkeys spotted inside terminals and animals on runways are common sources of public ridicule.  How does the mayor unravel this disorder?

The convenient answer is that most issues fall outside of the city’s municipal jurisdiction and without support from other Government agencies, they cannot be solved.  The candidates need to rise above the situation and introspect whether they will opt for convenient excuses.  Subsequently, the perennial question resurfaces: who wants to be Kathmandu’s mayor?

Carving out a Country

The nuisance caused by strikes and closures are insignificant when one thinks of the big picture.  Such inconveniences are merely a byproduct of the greater cause; a cause that everyone feels will be heard only through strikes. In Nepal, such conclusion deserves some merit as past cases have shown.

A country is being reborn! The drama continues to unfold similar to how an onion gets peeled one layer at a time.  Anticipation of morning news through the national dailies, and their fastidious attempt to uncover (not cover), over a cup of tea ensures that my biological alarm clock goes off not too late after dawn.

Every group or body or affiliation wants a piece of the action, or the country, to be carved with their voices and aspirations taken into account.  I just hope that the economic viability of each piece of the pie will also have been considered when the dust finally settles.  Federalism with decentralization has to take center stage here to emerge out of centuries of concentrated and unbalanced favoritism and growth.

There is much chaos (think unorganized Kathmandu traffic style clandestine negotiations behind closed doors!), with no leadership from the political class to shed light to those that need it, as they themselves convolute in confusion.

Let the inevitable ensue.  Let common sense prevail!

SP

A few Diamonds in the Rough

Adept at reading the usual doom and gloom scenario in the national dailies, I was slightly taken aback by a few pieces of news - all incredibly positive in the context of Nepal's economy - published a few days ago.

The first one, published on "The Corporate Weekly", indicates that despite protracted political transition and an elusive peace settlement, Nepal received a record high commitment on foreign direct investments (FDI) for the upcoming fiscal year 2011/12.  The figure of Rs. 13.2 billion (USD 180 million) in FDI commitments is approximately 45% higher than what the country received in 2010/11, when it received Rs. 9.1 billion (USD 125 million).  However, it may be too early to express any meaningful exuberance as the bigger question is whether this growth can be sustained for a number of years to come.  It isn't the first time that the country saw an astounding growth in FDIs, with the last such growth occurring in 2007/08, when it received Rs. 9.8 billion (USD 136 million), compared to just Rs. 3.2 billion (USD 44 million) in 2006/07, an increase of a whopping 206%.

The FDIs for 2011/12 have been committed in services (software), energy (hydropower), construction (cement), and tourism (hotels).  And as usual, India continues to be the top foreign investor in Nepal.

The second piece of news that caught me off-guard was the results from the Nepal Living Standard Survey III (NLSS) conducted in 2010, which indicates that the absolute poverty declined to 13% of the total population, compared to 31.5% of the population in 2004 and 42% of the population in 1996.  This is a startling revelation because the visible indicators around the country would suggest otherwise.

The news, published on Republica (http://myrepublica.com/portal/index.php?action=news_details&news_id=34274) further suggests that the NLSS uses 2,200 calorie consumption per day per person and access to essential non-food items as the yardstick to measure absolute poverty in Nepal. Based on current market prices, a person needs an income of at least Rs 14,430 per year to manage food items equivalent to 2,200 calorie per day and other essential non-food items. Any individual earning less than Rs 14,430 per year is therefore considered to be below the poverty line.

The article further suggests that even those that conducted the survey found this result too good to be true, however, with the survey getting technical support from The World Bank, the data demands more credibility than otherwise.

The survey also reported a decline in income inequality (between the rich and the poor) measured in terms of the Gini-coefficient, which has come down to 0.35 from 0.41.  This is a slightly contradictory result to what has been happening in other growing economies such as India.  In India, the economic boom has enabled many middle class to higher standards but has failed to uplift the people at the bottom of the pyramid from poverty.

Nepal isn't an emerging market yet, and will not be for quite some time, but if it continues to achieve similar progress on a continuous basis, the opportunities are boundless.

-SP

Mergers - An outlet for Innovation

I recently got a piece published on The Kathmandu Post, which can be seen here:  http://www.ekantipur.com/2011/08/04/business/thinking-of-linking/338532.html

If Nepal can ever overcome the issue of self interest and ego overriding many logical decisions, the banking sector could witness a number of mergers and acquisitions, very much the need of the hour in a sector that has long been exposed to multiple adverse conditions.

-SP

Back to Bikram Sambat

I wrote a piece on Nepali times which can be found on the following link.

http://www.nepalitimes.com/issue/2011/01/3/Comment/17786

The article has been edited substantially by the editor and has come out differently than what I intended.  The unedited version follows:

-SP

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 “What time is it in Nepal?” was the question the passenger sitting in front of me asked the flight attendant as we were about an hour before touching down in Kathmandu.  The flight attendant, with her desire to disdain from the passenger evident, politely requested the passenger to check the flight entertainment portal in front of her seat.  The passenger apparently already having checked the portal only wanted to confirm that the portal had not gone haywire, for it was displaying time in Nepal that did not add or subtract evenly to the time from the origin.  I could empathize with her since it isn’t exactly easy to add or subtract Nepal’s odd time zone (GMT+5:45) from any other time zone in the world. 

Nepal’s integration with the global economy is as remote as the ability of an average tourist to calculate Nepal’s time in reference to any other country in the globe.  I started to contemplate whether my decision to return to a country detached in many ways from the rest of the world, after having lived in the US for 16 years, was a wise decision.  The “Reverse Brain Drain”, a pervasive phenomenon widely being experienced by other emerging economies, isn’t exactly Nepal’s forte, at least not yet, so what was my inspiration?  Sixteen years ago, I was a 17-year-old rebellious teenage student in search of opportunities and freedom away from the inhibiting confines of Nepal.  Sixteen years later, I was living the American dream with a good career, a house in the American suburbia, and the rest of the pieces slowly falling into place.  The only thing I knew was that I had to work hard and pay taxes and the promise of America was there for the taking.

Most Nepalese of my generation in the US are preoccupied by a conflict; a conflict that involves a tug of war between two cultures.  It’s a constant pull between the conveniences presented by the affluence of America, and a longing desire to come back home to contribute to our own country.  Then we find ourselves making a sacrifice with each step; each step towards assimilation into the American culture means losing a bit of our identity as a Nepali.  We are equally part of both the cultures, but truly belong into neither.  We compare every bit of convenience in the US: responsible public policies, transparent bureaucracy, home deliveries, well paved roads, good hospitals, courteous customer service, and clean public toilets,  to the innocent memories of home: the smell of morning fog, the gossiping over tea, the taste of momos, the cows on the streets, the gallis on which we sweated cricket matches.  It is always a dream that we will one day return.  But for most of us, this powerful longing to return home remains just simply that, as it is not easy to uproot ourselves because of careers, because of mortgages, because of kids who are American by birth, and for whom, Nepal is as alien as is Haiti. 

 But I decided to take the plunge.  Not only because I wanted to contribute to Nepal, but also because I wanted my children to admire Nepal’s heritage.  I wanted them to know what Dashain and Tihar mean, and I wanted them to build a perspective on third world hardships that are real rather than through discovery channel documentaries.  These values are an integral part of children’s upbringing, and cannot be purchased in the U.S. 

What follows below is a list of my experiences, gathered since our journey back home one year ago, such that they may be of use to others facing an eternal debate of whether to return.  The points may be relevant to those that have lived abroad for more than 10 years.

If you are a returnee, the first thing you need to do is to internalize the primitive Bikram Sambat (B.S.) calendar system in reference to the Gregorian calendar.  Use of this calendar, along with the time zone factor I mentioned earlier are two very evident deterrents for anyone abroad thinking of making a smooth transition into Nepal.  These are factors that are economically relevant, which regrettably is not on anyone’s priority in Nepal at the moment. 

Do not attempt to change the way things work immediately.  It is simply impossible and will only invite aggravation.  Hold on to your habits and set personal examples instead.  Understand that when a meeting is scheduled to start at 10am, it may start at 10:45am, or it may never start at all.  Also realize that mobile phone interruptions are very much part of the meetings, and it is perfectly OK for people to be holding side conversations on their mobile phones while the meetings continue.  Interestingly these customs do not apply if the meeting is being held with a foreign entity, as in these meetings, all of a sudden, there is value for time, and mobile phones are also set on silent.

Do not expect people to follow rules on the roads.  It is perfectly customary for people to honk the hell out of their horns even when stuck in miserable traffic jams as if the horns will miraculously clear the roads in an instant.  It is also OK for a public transport vehicle to stop any where it chooses with no regard for the inconveniences it causes to the trail of vehicles following it.  Be aware that the designated bus stops are merely symbolic.  One may wonder what the traffic cops are for, but so far I have seen them do a good job at only one thing: blowing whistles.

Get used to working without deadlines.  Even if deadlines are set, they are rarely met, and mostly extended.  The political leaders here are very good at doing so, and this craftsmanship has also extended to the private sector rather seamlessly.  There is very little negative repercussion for missing a deadline since the entire ecosystem seems to somehow move along without it.

Keep your reference of the US, or wherever you’ve returned from, to the minimum.  People will perceive you as an insensitive misfit.  Don’t compromise on your core values that you’ve built over the years, but understand and accept that things often work or are done differently than what you are used to.

Create your social network.  It is not about what you know.  It is not even about who you know.  It is more about who knows you that matters the most.  You may work hard and put in 14 hours a day in the office, but, in parallel, also work on building your social ecosystem.  People need to know you if you want them to get things done your way.

If you have to go somewhere new, let go of the luxury to be able to Google the driving directions or rely on the GPS in your vehicle to give you step-by-step directions.  Instead, get familiar with directions being given in reference to landmarks.  Five minutes from the electricity pole, and just left to the meat shop.  It will sharpen your geographical skills.

Admit that corruption, load-shedding, people throwing trash on the streets, people spitting in public, are part of everyday moment.  These things are bound to raise your blood pressure, but, if possible, use some of that energy to focus on why you are here instead.  Focus on the opportunities at work; if you have returned, more than likely you are at the front line of a new industry.

Take this as an opportunity to rediscover yourself.  Be optimistic that someday, things will be different.  Believe that someday you will have sitting in front of you in a plane a tourist who knows exactly what time it is in Nepal.  It's far from easy, but it is possible.

What Happens Next - McKinsey's Version

It is difficult to not appreciate McKinsey's research aptitude.  Setting aside my opinion of the firm during its recruitment drive while at my business school, I do nonetheless find its work to be shrewd.  In one of its latest publications, McKinsey discusses what it calls the "five crucibles of innovation that will shape the next decade".  The discussion is so data intensive that the numbers - thousands of them - literally pass through your head - as if a train whizzing past a station.  It is not too out of the ordinary to get carried away about the future as if the future is the greatest thing that the human kind has yet to see.  This piece from McKinsey also suffers from similar exuberance. Nonetheless, once the data is strung together, the argument does seem to make sense.

The core of their message: All of the action is happening only in emerging economies.  Developed economies are expected to lose their footholds in many standings in the next decade.  Adam Smith's "the natural progress of opulence" will be difficult to maintain in the rich nations, unless these countries produce more with fewer workers.  These rich nations can no longer expect growth in their labor forces to bump their GDPs.  They will instead need to focus on the productivity frontier.

The research (all 26 pages) can be read in its entirety in the following article: https://www.mckinseyquarterly.com/Strategy/Globalization/Global_forces_An_introduction_2625

- SP

Banking with Mobile Phones - A Case for "Beyond Branch" Banking

The ubiquity of mobile phones today in Nepal as well as in other developing countries lends itself as a formidable medium to bring formal financial services to all, right at their door steps.   With a push of a few buttons, users can not only deposit, withdraw and transfer cash from their mobile phones, but also use the stored cash value to make purchases at shops and stores.  The mobile banking system requires a good ecosystem of agents and merchants in order to effectively serve the customer base.  This method of banking is truly disruptive as it will bring down the barriers and cost of banking to everybody in Nepal.

Why is mobile banking relevant to Nepal?  The explosive proliferation of mobile technology across Nepal means that this technology can be leveraged not only as a medium of connectivity, but can also serve as a medium to conduct financial transactions, with the ability to spur various entrepreneurial activities that contribute directly to the socio-economic development of the nation.  In order to understand the transformative capability of mobile phones, it is instructive to look at the rapid spread of mobile phones all over Nepal.  The year over year growth of mobile subscribers is estimated at 36% for 2009 and beyond.  In 2007, of the 3,914 Village Development Committees (VDCs) across the country, 1,886 did not have access to a basic telephone service.  Today all of the VDCs have telephone service, thanks to mobile phone technology.  And most importantly, developing sustainable financial services in Nepal is fraught with complexities primarily due to the lack of needed infrastructure.  Currently, Nepal has approximately the following penetration level of various services: 

Penetration per 100,000 people:

1.       Bank Branches                                 4.12

2.       ATMs                                                 3.40

3.       Debit/Credit Cards                         2000

4.       Mobile Phones                                25000

While looking at the statistics above, it is important to remember that formal banking era in Nepal started about 75 years ago, while mobile phones have only been around for approximately eight years and while only less than 30% of Nepali population has access to formal financial services, the number of mobile phone users in Nepal is currently 75 lakhs and is projected to reach 1.5 crores by 2014.

 Based on the promise echoed by the data above, Kumari Bank, in partnership with Leapfrog Technology, a US based Software Company, in August 2010, launched “Kumari Mobile Cash”, a revolutionary service that uses mobile phones to provide access to financial.

Through this revolutionary service, the bank plans to deliver financial services in a new and innovative way to all Nepalese, including those that do not have access to banking services, in a fast, secure and low cost manner.  The bank stresses that one does not have to have a bank account at all to use this service.

The first of its kind in Nepal, this service pioneers the “mobile wallet” concept, which allows users to store cash balances in their mobile phones.  Users are then able to deposit and withdraw cash from their mobile phones, and use the stored cash value to remit to anyone, anytime, anywhere, with the push of a few buttons. At present, this service is available through all of Kumari Bank’s 28 branches and their growing number of authorized agent locations nationwide. 

Kumari Mobile Cash will save time, effort and money for everyone in Nepal.  For instance, this means, someone does not have to travel by bus for 8 hours to deliver money to family.  It means that an elderly woman no longer has to walk for five hours to a remittance agency to withdraw the funds that her son has just sent her. 

Kumari Bank intends to use the mobile banking platform to extend microcredit loans and payment facilities to its rural customers, saving them substantial amount of time and money in the process.

Kumari Bank says that its motivation to start this service became stronger after thoroughly studying some of the precedents to this idea, prevalent in other countries such as Kenya and the Philippines.  In Kenya, Safaricom (part of the Vodafone Group), launched M-PESA (Pesa is the Swahili word for money and M stands for mobile), in 2007.  Currently M-PESA has more than 7 Million customers out of a population of 38 Million of which 18 Million have mobile phones. Its positive social and economic impacts have been well documented.  For instance, M-PESA turnover amounts to 10 percent of the country’s GDP, and research indicates that those who use M-PESA on a regular basis have realized 5-30 percent increase in their income.  This rapid adoption is a clear sign that mobile bank is continuing to fill a gap in the market that was left out by the formal financial services. 

Delivering financial services through mobile phones is a game changer.  Traditional banking outlets will never adequately serve the remote areas of Nepal.  The economics is simply not there.  However, the challenges involved are enormous.  In order for this service to realize its potential, it has to be supported by an extensive awareness campaign.  In Nepal, Bottom of the Pyramid (BOP) represents 86% of the economically active population.  BOP population are those that live on less than USD 2 per day, have no access to financial resources, and are most vulnerable population because of their susceptibility to predatory lending, and are exposed to risks of carrying cash.  Making mobile banking successful in Nepal requires this class of people to be made comfortable with technology, to help them overcome illiteracy and their resistance to change.  In addition, the regulatory framework in the space is practically non-existent.  Overcoming these challenges is a feat that one bank alone cannot achieve.  The banks need to think beyond competing with each other and join hands in this quest for social transformation, which not only delivers tangible benefits to society, but also promises good profit potential, not with excessive fees, but with economies of scale.

This article is co-authored by Sanjay Poudyal, Head – Corporate Strategy & Development, Kumari Bank, and Himal Karmacharya, Co-CEO, Leapfrog Technology, Inc.

A Piece on Strategy

The military profession has taught the business community many tactics over the years when it comes to sizing up opponents.  It is known that many ex-military commanders quite often enter the business community and are able to make an instant difference with their leadership capabilities that they catapulted in the field of war.

While the tactics may help win the fight, it is strategy that helps win wars over the long run.  The field of strategy in business is relatively new, having originated only in the 20th century, primarily, derived from the strategies used in wars.  Since then, strategy in business has evolved over the years and has carved out its own niche of sorts.  My article attached discusses this and a bit more.

SP

Took a Break

It is rare that one gets to get away from it all, away from traffic, from office, from people.  Therefore, when one gets a chance to indeed get away, it would be foolish not to grab on to the chance.

That is precisely what I did for the last one week.  One whole week it was of walking into pristine nature, magnificent landscape, unforgettable scenery, and oh also, treacherous trekking averaging about 9 hours a day for three straight days around Mustang district of Nepal.  The price I had to pay (apart from the expenses along the way) was a body that was sore from head to toe.  But the pain was well compensated indeed.

Heading back now into the world of computers, internet, traffic, work, and people only to build a desire again to get away from it all again.  Such is the cycle of life!

-SP

Text me the Money!

Yes, exchanging money is now as easy as exchanging SMS, using your mobile phone.

In underdeveloped countries, the mobile phone penetration has far out-dueled those of traditional banking means such as bank branches and ATMs.  So then, leveraging this penetration makes an absolute sense to deliver financial services, doesn't it?

Think about a service that allows you to conveniently send and receive money from anywhere to anywhere, that too, in a point to point fashion which does not require either the sender or the recipient to travel in order to complete the transaction.  In underdeveloped countries, this means, someone does not have to travel by bus for 8 hours to deliver money to family.  It means that an elderly woman no longer has to walk for five hours to a remittance agency to withdraw the funds that her son has just sent her.  It also means parents can pay for their children's education fees directly from their mobile phones, regardless of whether the children study in a school next door, or next city.

Hey, you could even lend a quick buck or two to your buddies.  If SMS is now the language amongst the youth, then why not use it more!

No credit for credit cards - First of all, to have a credit card, one needs to have a bank account, which is a privilege for many in poor countries.  Who needs a bank account and a credit card, when one can pay for merchant expenses easily with a mobile phone?  Why carry cash and be vulnerable to insecurities?

Banking with mobile phones is a paradigm shift from the traditional ways of delivering financial services.  In underdeveloped countries, this type of service has the potential to revolutionize not just the banking sector, but the entire economy.  Let the underdeveloped countries have at least one competitive advantage over the developed ones - let this service provide it to them.

-SP

USD Turning into Japanese Yen!

The fundamentals that normally would boost the valuations of firms listed in the stock market appear to be in a dismal state. Majority of the firms have reported shrinking profits, or no profits at all. The uemployment rate is climbing towards 10 percent - forecasted to reach 12 percent. Property foreclosures are at an all time high, up 37 percent in July 2009, compared to July 2008. What possible scenario then would lead to an upsurge in valuations of publicly listed firms, leading the equity market to enjoy significant gains in the last six months? The Down Jones index (DJIA) is up close to 50 percent in September 2009, compared to March 2009.

Is this a glimpse of what is known as "Irrational Exuberance" as Greenspan once put it (and later became a title of the book written by Yale prof. Shiller)? Is Wall Street simply rushing to glory without any stable foundation to fall back on?

The underlying reason of the surge in the stock market, however, might be found by analyzing the recent foreign exchange performance of the USD. From March 2009 till September 17, 2009, the USD has weakened by more than 17 percent against the other formidable foreign reserve currency EURO. The logical reaction to this news is that this cannot be good. However, there is a silver lining in the weakening dollar. What the weakening dollar does is it boosts the balance sheets of thousands of American firms that claim revenues from sales overseas. Let us think about this for a second. For instance, an American firm makes EURO 10 million in revenues from its European operations. This revenue when translated to USD today, figures to be 17 percent more than it would have been back in March 2009. Aaah. After all, the balance sheets of the American firms are always recorded in USD terms. OK, but, is the forex behavior the only explanation for the upsurge in the stock market in the last six months? Well, it is difficult to see any other signs in the economy right now that would make anyone believe otherwise.

Now to the follow on question. Is the decline of the dollar a calculated move by the federal reserve or is it market driven? Is the fed trying to boost the sentiment of the US consumers by giving them capital gains sooner than they expected (i.e, not backed by fundamentals)? Consumer spending after all is the backbone of the US economy, and that the fed would strategize something like this to reignite consumer spending cannot be ruled out. Someone on CNBC this morning claimed that this is a calculated move by the fed, turning the dollar to what he termed the "Japanese Yen". Why did he say that? It could be because the Japanese Yen has been a weak currency for a long time as Japan has been in a perpetual recession that it never seems to be able to climb out of. The interest rates in Japan have been near historic lows for ever, discouraging Japanese and foreign investors from Yen driven investment schemes, and turning them to investments overseas, backed by other currencies. Japan's population is aging, meaning they are risk averse, and focused on wealth preservation.

But China is still investing in US treasury bonds which in turn should strengthen the dollar. There is news however that China is starting to cut back on its US bond investments because of the weakening of the dollar. The other plausible explanation for the dollar's decline could be our beloved metal - Gold. Gold has been doing very well in recent months and investors might have been lured into its appeal and in return are abandoning the dollar.

Whatever the case may be, the weakening USD appears to be doing wonders to the US stock market, and by the same measure, firms located in other countries that earn heavily in USD would see their balance sheets, in their local currencies, shrink. To verify this, we would need to research the equity market performances in various other countries, a task I hope someone is up for.

-SP

Does Recession Invite Inflation or Deflation?

Depends on measures taken to combat recession......

A common misconception related to inflation and deflation is that one is a result of an increase in price level while the other one is a result of a decrease in price level, respectively. These are however the symptoms of inflation and deflation, and not the underlying reasons.

The real reason why inflation occurs is because of increase of money supply in the economy; i.e, government prints more money, banks lend to the public at a greater propensity, credit cards and debit cards proliferate in the economy and so forth. As the amount of money circulating in the economy increases, prices of commodities across all sectors go up to match up with the increasing affordability. Similarly, deflation is a result of contraction of money supply in the economy; i.e, government stops printing money, banks lend at smaller scales (credit freeze), and consumers stop relying on credit cards as a mode of purchase, and start spending much less, exactly what is happening today in the recession affected countries.

Therefore, some amount of deflation is inevitable in countries affected the most by the current financial crisis.

Let us take US as an example.The recently published data indicates that the number of people unemployed will reach 10 percent of the working population. That is about 15 million more unemployed people compared to when the economy was doing well (unemployment rate was around 5 percent then). The purchasing power of these additional 15 million unemployed would be drastically reduced, resulting in a drastic reduction of the amount of money circulating in the economy, thus reducing the demand for consumer goods, and thus providing a downward pressure on price levels. In a recent McKinsey & Company survey, 90 percent of US respondents said that their households had reduced spending as a result of the recession—one third of them “significantly.” More than half said they expect to keep their expenditures down after the recession. As consumers return to more traditional spending patterns, companies will have little choice but to reduce prices in order to maintain competitiveness and retain market share. This is more so true for products that have positive elasticity with the income level of consumers.

In the great depression of the 1930s, the money supply in the US fell 25 percent from 1929 to 1933, and co-incidentally, so did the price levels by the exact same amount. This fact places primary blame for the depression on the US federal reserve for allowing the money supply to fall by such a large amount. Economists such as Milton Friedman have argued that contractions in the money supply have caused most economic downturns and that the great depression is a particularly vivid example.

The US federal reserve has been careful not to repeat the same mistake again and has been busy expanding the monetary base by injecting huge amounts of capital in the economy. However, these relief efforts have not led to desired results: consumer confidence has not increased and banks are still keeping credit frozen. This has created a surplus of Bank Reserves to fight the financial crisis.Banks have plenty of cash on hand at an affordable lending rate (Today, the Federal Funds Rate is at 0% - virtually free capital) but they are not putting it into circulation. Strangely, having a large cash balance sheet is typically a negative factor for banks. For their stock to perform, they need to turn those reserves into interest bering loans that yield them profit - expanding the credit and money supply. This has not transpired. We are also seeing deflation in the Consumer Price Index. The value correction in the US housing market by up to 30 percent in some markets has also contributed to deflationary pressures. In parlance, the cost of living has gone down. If the measures to combat the recession continue to include huge amount of capital injection in the economy by the fed, deflation today, combined with a mounting Federal Deficit will invariably lead to inflation tomorrow.

This argument--that the financial crisis will eventually lead to inflation--is based on the view that governments will be tempted to monetize the fiscal costs of bailing out the financial system, and that this sharp growth in the monetary base will eventually cause high inflation. The massive injection of liquidity in the financial system will be inflationary, as it accommodates the demand for liquidity that the current financial crisis and investors' panic have triggered. Once this excess demand for liquidity shrinks, the supply will remain in excess and thus giving rise to inflationary pressures. In other words, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized, as opposed to financed with a larger stock of public debt. However, as long as such deficits are financed with debt or higher taxes--rather than by the printing presses--such fiscal costs will not be inflationary, as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.

It can be beleived that central banks will be tempted to monetize these fiscal costs--rather than allow a mushrooming of public debt--and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers. What exactly happens remains to be seen.

SP

A Brief Reflection on Maoist Government's Eight-Month Rule in Nepal

Having left for the US in 1992, each trip to Nepal is anticipated with excitement. The gallis in which I ran, the chaurs on which I sweated cricket matches, the schools in which I studied, a longing desire to see these places once again somehow remedies the painfully long flight. As the saying goes, a land in which one is born is second to none, not even heaven. The touchdown point at Tribuvan international airport, then works at its best to dust off the excitement. The 'Je Pani Chalcha' modus operandi makes itself clearly evident right when I enter the immigration hall and carries throughout.

Once in Kathmandu, the excitement further erodes when I turn on the water faucet to see it supplying vacuum more than water. The erosion continues when I turn on the light switch only to be reminded of the power cuts at the expense of the resilient residents. The stench on the streets of decaying garbage, the abundance of dirt and debris – the list goes on. The so-called restoration of 'multi-party democracy' that was achieved in 1990 seems to have done no good. In the last eighteen years since the restoration, the country appears to have taken eighteen large steps backwards. For instance, throughout my childhood in Nepal, I do not recall experiencing load shedding similar in length to the one that is seen now. I do not recall lines in front of petrol stations, long enough to cause massive traffic gridlock for miles.

A corporation that epitomizes Nepal's downfall very well is the Nepal Airlines (Previously known as the Royal Nepal Airlines). The gross mismanagement of the corporation, which once had its network expanded to various cities in as far as Europe, has brought it to the brink of extinction. We might recall that when the airline sacrificed goats in hopes of survival, the news became a laughing stock material in the global arena. Nepal as a country has gone through similar downward spiral of sorts. The previous leaders of the country have done an excellent job in leading the backward march, making Nepal a laughing stock in the global arena. Travel anywhere in the world with a Nepali passport, and the point becomes clear.

Those of us that are aware of the new found middle-class prosperity in India and China must have heard of the term 'emerging economies'. Rather than put each of Nepal's feet on the back of China and India towards the race of prosperity, we seem to have completely missed the signal that the race in fact had even started. Our senior citizen politicians appeared oblivious to the leveled playing field that globalization bestowed upon us.

Although the present not so legitimate (rejected by janta) government claims that the Maoist government did not fulfill any of the promises that were made when in opposition, one must remember that revolution does not happen overnight. Blaming all the deficiencies on the Maoist government would be misdirected contention. One must remember that it takes years to accumulate the magnitude of deficiencies that Nepal is currently faced with, and the Maoist government was at the helm for hardly a year. Yes it is true that promises did outweigh the results during the Maoists' short stint in power, however, the efforts that they undertook suggested at least some level of business and commercial acumen in possession of those running the government, unlike in the past, and unfortunately the present.

In coming up with a plan to generate 10,000 MW of power in the next ten years, the Maoist government recognized uninterrupted GDP growth of the country as its top priority. It understood that the tremendous hydro power potential in Nepal can help boost the country’s GDP, but that the hydro power can only be extracted if the necessary capital from international investors can be entertained. The hydropower potential in Nepal makes entering the country a valuable proposition for foreign investors either in the form of FDI (foreign direct investment) or FII (foreign institutional investment), given the export potential of hydropower to neighboring countries such as India and China. Hydropower resources in the country are estimated to have a theoretical potential of 83,000 MW[1] out of which 43,000 MW is expected to be technically and economically feasible.[2] The required capital to extract this potential is beyond the nation’s capacity and therefore requires foreign investment. For instance, to generate each additional 1000 MW of electricity through hydropower requires approximately USD 1 billion worth of investment at a minimum. For Nepal, this level of investment is difficult to envision[3] without the help of foreign capital investment. The Maoist leadership recognized this and as a result aligned the objective of its foreign visits to encourage hydro power development in Nepal.

The Maoist government’s recent efforts and the subsequent success in collecting tax revenues have to be commended. In spite of the fact that additional revenues were not invested adequately, credit needs to given where it is due. What needs to be understood is that, because of inadequate tax revenue realization in the past, the government has been running on a budget deficit, and in order to meet the deficit, it either has been borrowing or printing more money.[4] The classical economic theory suggests that continuous printing of more money increases money supply in the economy and therefore increases inflationary pressures on prices. One of the reasons why inflation is out of control in Nepal therefore is precisely because of low tax revenue realization. As citizens, we want the government to build the country, but at the same time, also don’t want to pay taxes to help them build it. People in Nepal need to get over this wish and realize that payment of taxes are an integral part of the economy and cannot be avoided.

It was encouraging to hear the Maoist leader express concern over the increasing trend of brain drain in the country[5]. In doing so, the Maoist leadership recognized that no economic development is possible without the necessary intellectual capital, regardless of how much one accumulates the financial capital.

I do not recall the governments in the past speaking about economic development, much less doing something about it. At least the Maoist government spoke about it, and the points they have raised are validated by various economic theories. Transitions take time, and as such, it would be best that miracles are not expected overnight. Unfortunately, while Nepal's citizens have shown their uncanny ability to be patient while suffering hardship, the ones hungry for power have none of it, and jump at an iota of chance to grab it whenever possible, resulting in as frequent a change in government as some people change their underwear.

-SP

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[1] The total hydropower capacity need of Nepal for 100 percent electrification is currently about 1200 MW

[2] If the price of fossil fuels continue to rise, the economically feasible hydro power in Nepal will increase further

[3] Nepal’s GDP in year 2007 was approximately USD 10.2 billion

[4] The revenue raised by the printing of money is called seigniorage. The term comes from seigneur, the French word for “feudal lord”. In the middle ages, the lord had the exclusive right on his manor to coin money. Today this right belongs to the central government, and it is one source of revenue.

[5] Kantipur February 20, 2009