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Economic Environment

Economic dimensions of an economy- economic,


socio-
economic, and industrial dimension
Basic social and economic indicators of Nepal
Analysis of these dimensions and their impact on
business
An overview of the latest economic development plan-
its objectives and strategies
Indicators for analyzing economic environment

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Economic Systems
Mechanism which deals with the production, distribution and
consumption of goods & services in a particular society and
comprising people, institutions and their relationships
Way or organization of society to decide on a) what products or
services should be produced or offered b) how should the products or
services be produced or offered c) for whom should the products or
services be produced
It provides framework within which as economy operates & various
economic units and agents mould themselves to fit into the system
Broadly classified as
A) Market allocation- capitalist form of economic system
B) Command or Central Plan allocation socialist economic system
C) Mixed allocation mixed economy
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Dimensions of Economy
1. Economic dimension: indicates purchasing power, consumption
patterns, balance of payment, exchange rate, while internal
performance includes results in terms of output, prices, employment,
savings, labour cost
2. Socio-economic dimension: managers require data on size &
structure of number of economies and socio-economic factors :
demographic compositions (must be sufficient number of people to
buy product/service)
3. Industrial & Agricultural dimensions: stronger the industrial and
agricultural base greater the potential supply of goods, services &
raw materials to markets, consumers
4. Economic development dimension: economic development plans
which indicate overall socio-economic development policies,
strategies & mechanisms of resource allocation in different sectors
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Basic Social Economic indicators and their
impact
Business depends upon the economic environment
for all needed inputs
It also depend upon the economic environment to
sell the finished goods
Business is one unit of total economy
Mainly economic dimensions are GDP, GNP, Per
Capita Income, Labor cost, Employment
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Gross Domestic Products & Gross National
Product
Gross National Product/Income (GNP/GNI) is
total sum of all goods and services produced in a
year including net property income from abroad
Gross Domestic Product (GDP) is the GNP less
net foreign factor incomes
These values tells size of economy of the country
Business people prefer to view GDP in relations
to population rather than GDP in isolation
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Gross Domestic Products & Gross National Product
00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/1010/11 11/12 12/13 13/14 14/15 15/16

GDP at current
price (in
Billion Rs.) 441.5 459.4 492.2 536.7 589.4 654.1 727.8 815.7 988.3 1,192.77 1,367.0 1,527.3 1,695.0 1,964.50 2,120.47 2,248.7

Source: Economic Survey 2015/16

01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16

GNP/
GNI 458838 491555 535065 73526 82361 100002 120280 137698 120189 137450 153964 229265 199729 215471 229265

(Rs. in million at current prices) Source: Economic Survey 2015/16

Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri


Lanka

GDP 21.1 173.1 1.7 1893.5 2.6 19.5 236.4 74.9

(in billion US dollar ) Source: ADB Key Indicators 2015

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Details of economic growth rate
Growth Rate (%)
Fiscal Year GDP Agriculture Industry Services
2001-02 0.2 3.1 0.7 -1.8
2002-03 3.8 3.3 3.1 3.7
2003-04 4.4 4.7 1.5 6.8
2004-05 3.2 3.5 2.9 3.3
2005-06 3.7 1.9 4.4 5.6
2006-07 2.8 1.0 4.0 4.4
2007-08 5.8 5.8 1.6 7.3
2008-09 3.9 3.0 -0.6 6.0
2009-10 4.3 2.0 4.0 5.8
2010-11 3.9 4.5 4.3 3.4
2011-12 4.6 4.6 3.0 5.0
2012-13 3.8 1.1 2.7 5.7
2013-14 5.7 4.5 7.1 6.2
2014-15 2.32 0.8 1.5 3.6
2015-16 0.77 1.3 -6.3 2.7

Source: Economic Survey 2015/16 (Ministry of Finance)


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Per Capita Income
Indicator of purchasing power of people
Per capita GDP is US $ 751.6
Business should be cautioned that only increase in per
capita income might be misleading distribution of it
also essential
Within a country also there is variation in per capita
income
Per capita income vary from region to region e.g. it is
highest in Kathmandu valley Rs. 98,084 & lowest in rural
hills-mid & far western is Rs. 23,893
Besides formal trade there is informal trade that goes on
between the countries for example Nepal India
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informal
Income Distribution
Income most important economic variable and also
valuable indicator of market potential
Also gives average standard of living of the people
Market analyst will love to have information on income
distribution in a country to estimate demand for a
commodity
Income source is mainly agriculture, wages and exports
Varies widely from sources, regions and areas
Business managers also keeps a watch over the extent of
income inequality and factors affecting it
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Poverty Situation
Income distribution marked by disparity in distribution of income
Gini index (lies between 0 and 100. A value of 0 represents absolute equality and

100 absolute inequality) as per UN Human Development Report 2013 is 32.8


As UNDP Human Development Report indicators 2013 : US $ 1.25 per day
24.8%
According to Living Standards Survey 2010-11
(The poverty line for Nepal in average 2010-11 prices has been estimated at Rs. 19,262; the
food poverty line is Rs. 11, 929 and non food poverty line Rs. 7,332. So an individual in Nepal
is considered poor of his/her per-capita total annual consumption is below Rs. 19,261.)
Poverty rate (for Nepal) is 25.16%
Urban Hill is the least poor region with a poverty of 9 %
Within urban areas, poverty ranges from 9 % in urban Hills to 22 % in urban
Terai
Within rural hills, poverty ranges from 16 % in Eastern region 37 % in Mid and
Far Western region
Within rural Terai, poverty ranges from 21 % in Eastern region to 31 % in Mid and
Far Western region.
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Within each of the development region except the Eastern, hills have higher
Government Budgetary Position
Gap between revenue generation and budgeting
expenses
Budget deficit and donor dependency
Higher budget deficit higher is more will be the
dependency on foreign aid
Dependence on Foreign Assistance for FY 2016/17
Amount in As % of total As % of capital As % of total
Heads million Rs. budget and financing revenue
Total grant 106,896.4 10.2% 24.8% 18.9%
Foreign loan 195,715.7 18.7% 45.3% 34.6%
Total 302,612.1 28.8% 70.1% 53.5%
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Personal Consumption
Disposable income of people is important indicator for market
assessment
Personal consumption information will be important for market
segmentation & product targeting
Marketer needs to know about disposable income
How consumers allocate their disposable income between the
purchases of essential or non essential goods
As per Nepal Rastra Bank Household Budget Survey 2014/15
The poorest 20% of household allocated 56.84% of their
consumption in foods and beverage & this number of 32.86%
for top 20%
Poorest 20% if household allocate 43.16% of their
consumption in non-food & it is 67.14% for top 20%
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Savings, Debt & Credit Availability
Savings, Debt and Credit availability are important variables that
affect market potential
Affect consumption and investment
Higher consumer savings would positively contribute to debt and
credit availability and banks will be in position to loan out money to
business firms
Capital formation and investment are dependent on the household
and national saving behavior
Consumption is increasing even amidst low economic growth rate
&
it causes contraction in domestic savings
Major portion of remittance is used for consumption
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Savings, Debt & Credit Availability
A recent survey reveled that
Lower income and major proportion of households under
poverty has lead to lower savings
Debt is mainly owed to informal sector in which interest
rate is as high as 37% this has lowered the capital
formation capacity and thus investment
According to Living Standards Survey 2010-11 out of
loan taken 51.1% are from relatives (informal sector)
Around two thirds of borrowings are done for
consumption purposes 15
Inflation
Has direct impact on cost of funds/ money borrowed
High inflation rate makes capital expenditure planning more difficult
Inflation rate for FY 2015/16 is 9.9%
Taxes
Direct impact on business and lower taxes will lessen the burden on the
business and then businesses can provide goods at cheaper rate
Trade Deficit
Trade deficit is increasing at alarming rate an in last 10 years trade deficit
increased on average by 23% and in FY 2014/15 trade deficit is 32% of
GDP
Amount of exports that country make is not sufficient even to import
petroleum products. In FY 2014/15 and FY 2015/16 exports were Rs.
85.39 billion and Rs. 70.11 billion while petroleum imports were Rs. 110.05
billion and Rs. 65.6 billion
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Monetary Policy
Monetary policy will determine the supply of money
(in details in next chapter)
Fiscal Policy
Deals with the collecting and spending of money by
governments
What kind of tax is levied at what rate?
On what and in what amounts does government spend
money?
determines and set standards for government spending

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Exchange Rate
Business involved in exports and imports dealing with foreign
currency have to face exchange gain or loss
Tariffs, customs or import duties
Customs, import duties and tariffs are placed by government in
many cases to protect their domestic industries

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Socio Economic Dimensions
Population
growing population indicator of growing market
As per census of 2011: 26,494,504 with growth rate of 1.35%
Terai constitutes about 50.27%, while hill and mountain
constitutes about 43% and 3.73% of population respectively
Population size provide estimation of market size in case of mass
consumed products like biscuits, soft drinks
Regional Distribution and Density
Marketer needs information on urban percentage population in big
cities, shift of population from rural to urban areas (trend is there
seeking more employment, education)
Population with high disposable income in Kathmandu and
distribution of population in Hill, Mountain and Terai
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Socio Economic Dimensions
Age and sex structure
market segmentation is carried out by age, sex in order to target
the products (target market)
age is determinant for estimation of market size
female population is also another determinant for market size
estimation
Labour force & Labour market
Labour force demographics must be considered by business firms
in formulating their human resources strategies
Quality and quantity of people available in different sectors will
have a considerable impact upon the country`s ability to produce
Labour market characterized by very small formal sector & larger
informal sector 20
Socio Economic Dimensions
Employment trends
People giving up their traditional family occupations

Shrinking employment in rural areas lead towards


migration in urban areas
Immigration trend has an important impact on the
composition of labour force
Rise in literacy & education level, educated women are
now seeking out employment opportunities

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Socio Economic Dimensions
Labour force & Labour market
Quantity depends upon population and quality on training,
experience and education
Out of total 11.8 million employed large portion about 64%
are engaged in subsistence agriculture
Lack of education and skills, the bulk of the economically
active population is engaged in manual and unskilled type of
work
Major issue of labour market is rigidity of labour law 2002

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Socio Economic Dimensions
Labour force & Labour market

Agriculture, Forestry and Fishery 6,355,735 64.0%


Industrial Sector 585,308 5.9%
Trade and Commerce 695,915 7.0%
Social Service 568,077 5.7%
Public administration 146,547 1.5%
Construction 335,827 3.4%
Transport, storage and communications 256,523 2.6%
Tourism 137,810 1.4%
Energy 25,068 0.3%
Financial intermediaries 70,347 0.7%
Real State 6,812 0.1%
Others 745,592 7.5%
Total 9,929,562 100.0%
Source: Population Census 2011; CBS 23
Foreign Employment and Remittances
Migration have impact on labour market, land use, changing
human resource base of economy
Nepal migration have been quite high and in FY 2015/16
418,713 left country and till FY 15/16 number of persons that
went abroad is about 43,78,656 million
Remittance is major source of income in economy and is
growing year by year in FY 15/16 Rs. 665.06 billion was
received and is 29.5% of GDP
Money transfer institution are encouraged so that money
transfer can be carried out easily

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Remittances

Source: Nepal Living Standards Survey 2010-11; CBS


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Human Development Index
HDI is indicator to measure the welfare of individuals in a country
Devised by UNDP to measure the economic achievements of a
nation by combining economic & social welfare provisions
HDI takes into account main factors: life expectancy at birth, level
of
educational attainment, GDP per capita
According to latest report on UN Human Development Report 2014
falls under low human development with HDI value of 0.540
Nepal ranks in 145 among 187 countries

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Industry & Agriculture Dimension:
Industrialization in Nepal began after country opened its border to
outside world in 1951
At first rudimentary (basic) industries were established
In 60s construction materials and production of import substitution
industries
In 70s & 80s export oriented like carpet, garments were developed
In 90s growth of industries like electronics and electrical
equipments, construction, food processing etc,
Service sector (hotel, tourism, banking and financial services) are
significant and growing sector and major contributor to GDP
Agriculture a largest sector and backbone of Nepalese economy
India is most important partner in agriculture trade accounting 80%
of Nepal`s exports 27
Industry & Agriculture Dimension:
Nepal suffers from deficit in agriculture trade (apart from formal
informal trade imports from India dominate trade)
In spite of huge investments in agriculture sector over the past
decades growth rate in agriculture productivity has been negligible
Processing costs of agriculture products is high in Nepal compared
to India
Production of fruits, vegetables, milk & milk products, poultry, tea,
fish & cash crops has gradually been increasing over the years
Nepal's agriculture sector has lost competitive edge owing to dearth
of fertilizers, seeds, irrigation and other facilities necessary for
raising productivity

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Economic Development Dimension:
National development plans are also the sources of information for
analyzing economic environment
Role of state on developing country has been conceived as planner
and government assumes responsibility of fulfilling basic needs of
people
Government set goals, targets (national level, regional level) to
achieve for development and plans are devised accordingly to
achieve these goals
Business are highly affected by national development plans of
government
Pattern of economic development in Nepal is very significantly
affected by system of national planning
All development plans gave emphasis in increasing standard of
;living of people by increasing per capita income 29
Development plans
Five year development plans were formulated and implements from 1956
onwards and till 2007 it was five year plans . After Tenth Plan (2002-2007)
Three Year Plans are formulated and is being implemented cause of
ongoing political instability
National Development Plans are sources of economic data
In developing country state play a role of planner and government
assumes the responsibility to fulfill basic need of people with upliftment of
living standards
Sets goals, targets and develops and adopts policies to mobilize resources
to meet these goals and strategies
Business firms are affected by national planning exercise as it provides
policy framework set for development of the sectors
Business firms can also exploit the opportunity available within the
economy created by national development plans
Pattern of economic development in Nepal is greatly affected by system of
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national planning
14th Three Year Plan 2016/17-2018/19
Long Term Vision
Independent, progressive and socialism oriented national economy and
prosperous Nepal
Target
Transform Nepal into middle income level country by developing it to
public welfare state with social justice
Objective
Social and economic transformation by rapid reduction in poverty rate
with high level of economic growth characterized by production
oriented employment and equitable distribution

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13th Three Year Plan 2013/14-2015/16
Target of
Particulars Thirteenth Plan
(FY 2013/14 Achievement of
-2015/16) 13th Plan
Average economic growth rate (%) 6.0 2.94
Agriculture Sector (%) 4.5 2.23
Non- Agriculture Sector (%) 6.7 3.37
Inflation (%) 7 8.7
Annual average growth in employment (%) 3.2 2.9
Population below poverty line (%) 18 21.6
Life expectancy (years) 71 69
Maternal mortality rate (in lakhs) 213 258
Population with drinking water access (%) 95 83.6
Population with access of sanitation (%) 90.5 81
Net enrollment rate in primary school (%) 100 96.6
Literacy rate (15-24 years) 95 88.6
District headquarters with raod connectivity (nos) 75 73
Tele density including mobile (per 100) 100 103.4
Power Generation (MW) 1426 851
Population with internet access (%) 46.4 65
Population with eletricity access (%) 87 74
Irrigation (in hectare lakhs) 14.87 13.92
Area covered with forest (%) 40 44.46
Total length of road (km) 32
27,965 29,031
14th Three Year Plan 2016/17-2018/19
Long Term Vision
Independent, progressive and socialism oriented national economy and
prosperous Nepal
Target
Transform Nepal into middle income level country by developing it to
public welfare state with social justice
Objective
Social and economic transformation by rapid reduction in poverty rate
with high level of economic growth characterized by production
oriented employment and equitable distribution

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Targets of 14th Three Year Plan 2016/17-2018/19

Target of 14th
Particulars Situation as plan (2016/17-
of FY 2015/16 2018/19)

Average economic growth rate (%) 0.77 7.2


Agriculture Sector (%) 1.33 4.7
Non- Agriculture Sector (%) 0.63 8.4
Per capita GDP income (Rs. 000s) 79.37 116.5
Population below poverty line (%) 21.6 17
Human Development Index 0.54 0.57
Gender empowerment Index 0.56 0.58
Life expectancy (years) 69 72
Population with drinking water access (%) 83.6 90
Net enrollment rate in high school (%) 37.7 45
Power Generation (MW) 851 2301
Population with eletricity access (%) 74 87
Irrigation (in hectare lakhs) 13.92 15.2
Population with internet access (%) 46.4 65
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14th Three Year Plan Strategies
Transformation of agriculture sector, increase in production through
expansion of tourism, industrial and small and medium enterprises
Construction of infrastructure for development of energy, road and
air transport, information and communications, rural and urban and
trilateral commitment
High and sustainable human development with emphasis on social
development, social security and social protection
Promotion of overall governance system with improvements made
in by social, economic and governance, efficient and accountable
public finance, transparent and people friendly public service and
protection of human rights
Maximum use of science and technology and institutional capacity
development for gender parity, inclusive and environment protection
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