CESIF

August 2023 Analysis: Economy and Development

by CESIF Nepal
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The government expects that the lifting of the ban on land fragmentation will boost the real estate market and increase revenue. India's onion export tax has disrupted Nepal's onion market and caused prices to soar, with smuggling a risk. As per the amended Integrated Directive of the Nepal Rastra Bank (NRB) infrastructure development banks now can create a subsidiary company to development infrastructure projects.

Timeline of Major Events

 
Date Events
15th August Nepal Government removed the restriction on land fragmentation.
18th August NRB amend the Integrated Directive for infrastructure development banks
19th August India decided to impose a 40 percent customs duty on exports of onion.
 

Land Fragmentation opens


The government decided to remove the restriction and make available for land allocation and fragmentations. Earlier, the Ministry of Land Management, Cooperatives, and Poverty Alleviation had imposed a ban on land allocation. Unable to withstand the intense pressure of the businessmen, the government decided to open land fragmentation for selling.

The government expects that the revenue will also increase when the land fragmentation is opened. The government, which has been collecting revenue of nearly 60 billion rupees annually from the real estate business, had a shock in its revenue when the real estate business was stopped.

Real estate transactions were at a standstill due to the stoppage of allotments. Banks were not able to invest and when real estate transactions were stopped, people's disposable income was also put on hold. Now, with the opening of allotments, real estate is business and transaction are expected to soar with more money coming into the market.

Following the release of the Land Use Regulation 2022, Nepal experienced a significant downturn in its real estate market. This decline was exacerbated by the existing liquidity crunch, resulting in a notable decrease of approximately 56 percent in property transactions during the fiscal year 2022/23. The restrictions on land allocations shrinked the investment areas of the banking sector resulting in accumulation of liquidity and soaring CD ratio at 83-84 percent. In addition, the Central Bank through the monetary policy of the current fiscal year 2023-24 made it easier to take loans in real estate sector, indicating the sore rise in transaction of real estate.
 

A surge in price of Onions


The decision of India’s Finance Ministry to implement a 40 percent tax till 31st December on onion exports has disrupted the Nepal’s onion market. As the world’s leading exporter of onions, India’s this particular move aims to stabilize soaring onion prices at domestic market. However, this decision’s ripple effect is seen in Nepal’s supply chain with onion prices have gone up by 29 percent. As the Nepal is heavily dependent on India for its onion imports, it is eminent that this rise in onion prices will sky rocket further with festive season being on the horizon. In the last fiscal year, Nepal imported 6.75 billion rupees worth onion from its southern neighbour.

Despite India's imposition of a 40 percent export tax, the unique geographical situation with an open border raises concerns about smuggling. The risk of onion smuggling has surged due to the border between India and Nepal.
Adding to the complexity, onion prices within India have surged by a significant 20 percent in the past month alone and the new season crop is expected to get hit by the erratic weather too. This price hike within India, coupled with the export tax, highlights a challenging picture for Nepal's onion market which is highly dependent on it.
 

New decision on Infra banks


The infrastructure development bank has got the facility to open a subsidiary company to develop projects by themselves including identification, analysis, cost estimation of infrastructure related projects. Earlier, there was no provision for the Infrastructure Development Bank to open such a company. Nepal Rastra Bank has given this facility to the Infrastructure Development Banks through the amendment of the Integrated Directive. The directive dictates investment in infrastructure-related Special Purpose Vehicle (SPV) companies.

According to international practice, the Infrastructure Development Bank has been not only providing loans and investments in projects, but also assisting in project development. Currently, infrastructure development banks and other banks and financial institutions also invest only in already identified projects. But after the implementation of the unified directive, the subsidiary company set up by the Infrastructure Development Bank will identify new areas and conduct all the activities from feasibility to execution of identified projects.

Single customer credit limit (एकल ग्राहक कर्जा सीमा) will also be applied to Infrastructure Development Bank. In order to maintain the quality of the loan, to restructure and reschedule the loan, and in cases where the borrower's ability to repay the loan is perceived to have decreased, the central Bank has issued separate instructions for the Infrastructure Development Bank in the new directive.
 
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CESIF Nepal

CESIF Nepal