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June 16 saw a bloodbath in Nepal Stock Exchange (Nepse), the country’s sole share market, as the signature index lost 52.41 points in a day, the biggest fall since the start of the latest ‘bull run’ at the start of 2021. By the day’s end, around Rs 1 billion had been wiped off the market-value.

The drop came a day after the Securities Board of Nepal (Sebon), the country’s share market regulator, released a list of 51 companies that it advised traders and investors to stay clear of. According to Sebon, these companies are in poor financial health. But the real reason for the list’s publication, many suspect, was to favor certain traders who had already gotten a whiff of the Sebon directive through insider trading. But this is only the latest in the list of Nepse-related controversies. 

Buoyed by lack of other investment opportunities and suspected insider trading, Nepse had set a new record of 3,025.80 points on June 14.

While the bull run (which is expected to continue despite the June 16 slump) has excited (short-term) traders and (long-term) investors, the exchange’s online trading system has let many down. As more and more Nepalis enter the market, Nepse’s online trading system has been overwhelmed. The number of traders and investors using the system has increased 17-fold in the past year, from 38,000 to over 660,000. As traffic on the system has shot up, traders are facing technical glitches and failing to place orders or sell stocks when they want to, often incurring big losses in the process.

The problem, however, is deeper rooted, observers say. The stock exchange has issued licenses to only a limited number of brokers and this has created one big bottleneck for market expansion. The number of brokers remains capped at 50 and no new license has been issued in a decade. Also, online the infrastructure they have was never designed to handle the large volumes of trade seen in the market these days.

This is why brokers, especially those handling a large number of clients, have faced problems. Traders say it is difficult for them to not only place orders, but also to get updated information about the market from the Nepse’s Trading Management System (TMS).   

Investors are often confused as the TMS software does not accurately update collateral and transaction details. With no proper information or guidance, rumors play a powerful role in guiding investor behavior.

Nepse officials say they are willing to issue more licenses for new brokers, especially subsidiaries of commercial banks. But the whole process has been entangled in red tape for a long time.

Back in 2019, Nepse had decided to issue stock broker licenses to subsidiaries of commercial banks. It even invited applications for such licenses on 2 August 2019.

The issue of licensing then caught the attention of Parliament’s Finance Committee, which on August 14 formed a sub-committee under lawmaker Ram Kumari Jhakri to prepare a report on the issue. Specifically, the sub-committee was tasked with studying the capital market and looking into the prospect of increasing the number of brokers.

They saw but they didn’t

When the sub-committee sought more time to weigh the prospect of adding brokers, the exchange had no option but to halt the new broker license issuance process, say investors, Nepse officials, and government representatives contacted for this news report.

Sub-committee chair Jhakri, however, denied that their study had anything to do with the issuance of broker licenses. Belying Jhakri’s words, the sub-committee members had in fact visited India, Bangladesh and Sri Lanka to study their stock exchange operations and regulatory bodies.

During the study visits, they learned that allowing banks to operate as stock brokers was a common practice in stock exchanges of Colombo, Mumbai and Dhaka, according to government officials involved in the study who spoke on condition of anonymity. But surprisingly, they remained silent on the matter on their return.

Most lawmakers on the sub-committee were unaware of the workings of the capital markets. Jhakri told ApEx that she started studying it only after she was appointed the sub-committee chair.

The Finance Committee has also in principle accepted that giving such licenses to banks is an international practice, according to the same sub-committee’s 86-page report endorsed after 11 months. Yet nothing of the sort has happened in Nepal.

Critics say that Nepse’s efforts to allow more platforms to trade physically or electronically were ‘intentionally’ thwarted as trade volume began to grow and profits soared—the daily average turnover has nearly doubled in the past 12 months.

At the start of the Covid-19 pandemic in March 2020, the share market was shut amid a lack of robust infrastructure for online trading for 50 days. Meanwhile, the Jhakri committee submitted its report on 7 July 2020.

The Finance Committee forwarded the report to Nepse and other stakeholders. But rather than clearing the way for the exchange to add new brokers, the report instead criticized Nepse for lack of preparation to induct new brokers.

An excerpt of the report reads, “Nepse has not undertaken enough preparations to permit banks to get stock broker license”. The sub-committee report also states that the market had not gone into full automation, which is not true. Nepse marked the first anniversary of full automation in November 2019, around eight months before the committee finalized its report.

After it got the report, Nepse wrote to the Securities Board of Nepal (Sebon), the stock market regulator, seeking its opinion. Nepse Information Officer Murahari Parajuli says this was done as Nepse could not, on its own, decide whether to add brokers.

“The report did not specifically talk about issuance of new stock broker licenses,” says Parajuli.

Shoddy systems

Meanwhile, investors are paying the price for the delay. Says Chhote Lal Rauniyar, chairman of Investors Forum, “Traders have faced major congestion due to poor online systems of the broker agencies. There are 700,000 online traders but only 50 stockbrokers.”

“Sebon is seemingly favoring existing brokers and is reluctant to spread the access of the capital market across the country,” adds Rauniyar. He says giving broker licenses to banks, with their network of around 4,000 branches across the country, will significantly increase market reach.

Sebon officials deny they are behind the delay in issuing new stock broker licenses and rather point the finger at Nepse.

Sebon spokesperson Niraj Giri says there is no confusion over giving licenses to brokers as Nepse can do so by following the parliamentary committee’s directive. (But then the Finance Committee never explicitly endorsed the idea of increasing the number of brokers.)

In fact, the sequence of events narrated above suggests a systematic attempt to prevent the issuance of new licenses. Government officials with direct knowledge on the matter say they won’t be surprised if new licenses are not issued for a “few more months” as the bullish run in the market continues.

Brokerage commission ranges from 0.27 percent to 0.40 percent of the transaction amount on both buying and selling. An average daily turnover of Rs 12 billion in the market makes for a combined Rs 32.4 million to Rs 48 million daily earnings for the 50 brokers. Each broker’s daily earning hovers around Rs 640,000 to Rs 960,000.

The stock brokers are suspected of using their money-power to lobby against new licenses. Chairman of the Stock Brokers’ Association of Nepal Santosh Mainali rebuts the charge. Rather than new licenses for banks, he argues, the priority right now should be on policies to upgrade brokers’ software and to expand the branches of existing stock brokers.

The majority of existing stock brokers also lack robust infrastructure including servers to handle the burgeoning number of transactions. They have not upgraded the servers that were installed when there were under 40,000 online traders in total. “This issue can be best addressed by increasing competition among brokers,” says Rauniyar of Investors’ Forum.

But Mainali of the stock brokers’ association refuses to be blamed for technical glitches customers face. “We have set the server capacity in line with the flow of online trade,” he claims. 

Nepse in turn says it has no technical problems whatsoever. “We have repeatedly reviewed our system. We have also found that brokers with a higher number of online traders mostly face such problems,” says Nepse Spokesperson Parajuli, adding that only 20 percent of the stock market’s installed online capacity has been utilized so far.

Brokers are also accused of delaying payments to clients. Parajuli says they have never received any complaint in this regard. “The law clearly says clients can claim compensations at Sebon over delayed payments,” he adds. The reason complaints are not filed, investors say, is because one, they have no knowledge of such a provision and two, there is little hope of redress against the brokers who have friends in high places.

As money keeps rolling in, the 50 brokers will do everything in their power to preserve their ill-gotten privilege.

The Covid-19 pandemic has hit the country’s economy hard yet its banks and financial institutions (BFIs) seem immune. Their third quarter reports show they are making profits even as other sectors suffer unprecedented losses. 

Another sector that has largely been unaffected and instead boomed during the Covid-19 scourge is the equities market. Investors in Nepal’s lone stock index NEPSE have been enjoying a bullish run for around a year. The index has now crossed 2,900 points compared to the high of 1,200 in June last year. The daily turnover, which was around Rs 200 million a year ago, has reached Rs 15 billion.

How was this possible? It was only a matter of time before Nepal Rastra Bank officials put two and two together. They suspected the banks had heavily invested in the bullish market to make quick money—deviating from their main business of accepting deposits and issuing loans. This may be why some banks and BFIs posted unusually high profits even amid excess liquidity created by low demand for loans. 

The central bank came up with a directive to address the issue. It said the BFIs could not invest in microfinance institutions, and they needed to hold the shares they bought for at least a year. This, the central bank believes, will discourage BFIs from speculative trading and further fueling an unsustainable bullish trend in the market.

The shares the BFIs traded were mostly of insurance, microfinance, and hydropower companies.  

Finance companies under scanner

While commercial and development banks may have made some profit by trading shares, finance companies have made the most out of lax regulations, greatly boosting their earning per share (EPS), a popular indicator investors use to decide to buy or sell a stock.

“Some finance companies have earned more from trading stocks than from their income interest and service fees,” says Basant Raj Lamsal, chairman of Nepal Microfinance Bankers Association. 

Although the NRB directive has set the microfinance sector on a bearish trend, the association welcomes the move to stop BFIs from investing in microfinance companies, adds Lamsal. 

The BFIs hereafter can only sell their stock investments equivalent to their primary capital in one fiscal year. (Primary capital includes paid-up capital, general reserve fund, and accumulated profit and loss.) 

But they can sell stocks bought before NRB’s directive by the end of this fiscal (mid-July). 

Investors have also welcomed the central bank’s decisions. Says Nepal Investment Forum’s chairman Chhote Lal Rauniyar, “BFIs were undoubtedly making money by trading stocks and it was a deviation from their primary role of providing banking service.” 

Likewise, the May 25 directive restricting BFIs from investing in the secondary market shares of microfinance institutions doesn't apply to BFIs’ loan investments in the deprived sector. By mid-January next year, BFIs need to get shares in microfinance companies off their books, according to the NRB directive. 

The BFIs were making money by trading in their own shares, as most of them also own promoter shares in microfinance companies.

Nabil Bank CEO Anil Keshary Shah welcomed the central bank’s directive saying that BFIs should not be involved in the speculative market. He however denied that his bank was into it. 

“We have sold some of our stakes in microfinance companies as required by NRB’s capping measures for BFIs. But those were long-term investments,” says Shah. 

Investors had feared the directive would hurt the share market, which has been breaking records every week. “But we haven’t seen any negative effect of the directive till date. The market’s bullish trend continues,” adds Rauniyar. 

Investors in bank scrips hope for good returns this year, despite the new restrictions. “We hope the BFIs’ fourth quarter financial statements will bring more good news as they have already booked profits in the equity market by selling shares of microfinance institutions and other high-value shares,” says Rauniyar. 

The central bank’s focus on long-term investments was also supported by the government, which introduced dual tax rates for profits made in the share market. As per the new budget, individual stock traders now need to pay a 7.5 percent capital gain tax for stocks they held for less than a year. The tax rates for those who sell their stock after holding on to it for a year has been fixed at 5 percent. 

Be that as it may, nothing, it seems, will stop the NEPSE bull-run in the near future.

The economy fared impressively for three consecutive years following the earthquake and Indian blockade in 2015-16, with around seven percent growth rates.

The spurt was the result of different factors, some of them natural, others related to long-needed reforms. Electricity supply had improved, and construction-related industries were flooded with demand as well as investment in post-earthquake reconstruction. Plus, a stable investment climate had been created after the communist coalition’s near two-thirds majority in the 2017 elections.

The newly elected local governments received a significant chunk of the budget from the federal government and the money they spent had an impact across the country. 

In the fiscal year 2018-19, a robust harvest was recorded owing to a favorable monsoon, and agriculture output grew by a record 5.16 percent. The construction sector grew by 7.8 percent. Improvements in service delivery at local level and more foreign investment sustained growth. 

Buoyed by the overall positive outlook, then Finance Minister Yubaraj Khatiwada set an 8 percent growth target for 2019-20. His target was also attributed to the likely completion of two mega projects—the Upper Tamakoshi hydropower project and the Melamchi Drinking Water Project—announced in that year’s budget.

President Bidhya Devi Bhandari inaugurating the distribution of Melamchi Drinking Water project at Bhrikutimandap | Sunita Dangol

In February 2020, the mid-term budget evaluation projected agriculture output growth of 2.23 percent—lower than the previous year’s. The two game-changer projects were also not ready by the year-end. Bilateral development partners such as the World Bank and IMF and ABD now projected Nepal’s growth to hover around five percent.

The projections came as the government's capital spending, which drives private sector investments, and foreign investment inflow, also slowed. But Minister Khatiwada was steadfast on his projection. 

The government needed a strong base for economic growth and important projects such as Melamchi and Upper Tamakoshi had to come online for this, says economist Chandramani Adhikari. “But none of the projects that could help sustain high growth were ready,” he says.  

Then came covid

This was the country’s economic scenario when Covid-19 hit in March 2020. The government’s overall spending, heavily concentrated between March and mid-July, was yet to gain speed. “The government’s slow spending till mid-July also contributed to the economy’s shrinkage,” adds Adhikari. 

A nationwide Covid-19 lockdown stopped the economy in its tracks. International borders were sealed and trade froze. Tens of thousands of migrant workers, who walked hundreds of kilometers from Indian cities to get home, were stopped at the border. With a ban on international flights, the mega-program of bringing two million tourists in 2020 was shelved. 

“The government neither worked on keeping feasible industries open nor did it do much to check the inflow of infections from migrant workers in India,” Adhikari says. 

The government diverted Rs 136 billion from its budget to fight Covid-19. Some industries opened with the lockdown’s relaxation in June, but limited testing hindered economic activities. Those with limited means such as daily wage earners were left to fend for themselves. The economy shrank by 2.01 percent.

In mid-May last year, then Finance Minister Yubaraj Khatiwada had tabled a Rs 1.47 trillion budget focusing on health facilities and Covid-19 response. A financial package worth Rs 150 billion (around 4 percent of GDP) was set aside to offset the negative impact of Covid-19 and subsequent lockdowns. 

Minister Khatiwada vowed that new jobs would be created as thousands of returning migrant workers were expected to take to agriculture. Also, “food-for-work programs in infrastructure projects will help create jobs,” he had said. 

The government, however, did not even assess the damage Covid-19 wreaked “on hundreds of new enterprises set up by the young generation”, says Pashupati Murarka, ex-president of Federation of Nepalese Chambers of Commerce and Industry. Nonetheless, a purse of Rs 83 billion for refinancing at 5 percent interest was available for enterprises that had borrowed from the banks.

But losses in tourism, recreation, aviation, transport, and service industries were huge and the government response was paltry, according to economists and members of the business community. 

“It didn’t even offer relief materials for the most vulnerable wage-earners and also ignored protests by youths demanding PCR tests and health services,” says economist Keshav Acharya. 

Remittance cushion

Despite the announcement of plans by all three tiers of the government to provide jobs to returnees and engage them in agriculture, migrant returnees, still jobless, started going back in hordes to India in October. 

The government could only rescue a few hundred migrant workers who had lost their jobs due to the Covid outbreak in the Middle East and Malaysia. Economists feared a reduction in remittance inflow; instead it has steadily grown since last June. Economies in Malaysia and the Middle East bounced back quicker than expected and the migrant workers this time chose to send money via formal channels, according to the World Bank. The government was cushioned by foreign currency received via remittances even when tourism collapsed.  

The health sector nearly collapsed. Wrote another economist Chandan Sapkota in an article for The Kathmandu Post, “This time, in addition to weak economic fundamentals and unrealized political and peace dividends, the inadequate infrastructure provision and a collapsed healthcare sector have laid bare economic and social vulnerabilities.” 

Poor implementation of the health budget crippled the health sector. But after five months of the fiscal, the government went on a nationwide foundation-stone laying spree for 5-15 bed hospitals at the local level. But real work on them was yet to begin at April-end, when the second lockdown began. A total of Rs 115.06 billion (7 percent of total budget) was allotted for the health sector, according to budget documents. 

But information provided by the Financial Comptroller General Office to ApEx shows that such allocation was only Rs 66.03 billion, including Rs 7 billion given to different ministries to fight the pandemic. Only Rs 26.98 billion (about 40 percent) of the budget was spent by mid-May.

Observers are worried the remaining 60 percent of the budget may remain unspent by the end of fiscal (mid-July) even as people struggle to access health services in remote areas. Death rates have spiked alarmingly in the second and third weeks of May due to shortage of oxygen cylinders and hospital beds. 

Farmers faced an acute shortage of chemical fertilizers during the paddy and wheat seasons, from June to November. Owing to the shortage, the projected 2.64 percent agriculture growth by the Central Bureau of Statistics will most likely be missed. So growth this year will be more or less the same as last year, economists reckon. 

Beware another wave

Now most of the country is under a second set of lockdowns and there is no indication of the economy’s reopening. No one knows when a significant proportion of the population will be vaccinated and allowed to return to work.

In his budget speech for the new fiscal, Finance Minister Bishnu Prasad Paudel acknowledged that achieving 4.01 percent project growth for this fiscal would be challenging in the middle of the pandemic.

Even in this bleak scenario, Nepal Stock Exchange has been on a bullish run, climbing to a new record of 2,800 points this June. Economists say the market’s trend does not mirror the reality of Covid economy and needs to be monitored properly. 

When covid cases declined in January, interested foreign mountaineers flew to Nepal and headed to the base camp to scale Mt Everest. The relaunch of mountaineering had rekindled the hope of a bounce-back in tourism, but the hope was short-lived. 

There is also fear of another wave. On May 25, Dr Sudhamshu KC of Bir Hospital tweeted, “We could not save lives because of mismanagement, we need to be better prepared for a possible third wave of Covid 19.” But the prime minister’s address to the nation and the finance minister’s subsequent budget speech were both silent on the third wave. 

Budget goodies

On May 29, Finance Minister Bishnu Prasad Paudel presented a budget of Rs 1.647 trillion for the next fiscal aiming for 6.5 percent growth. The budget focuses on health, with an allotment of Rs 122.77 billion for the Ministry of Health and various schemes to help the economy recover from the pandemic. The government expects the economy to bounce back soon after the majority of the people are vaccinated. Rs 26.75 billion have been allotted for vaccines in the next year’s budget while another Rs 37.5 billion will be spent on Covid tests and treatment. 

Finance Minister Bishnu Prasad Paudel walking towards the rostrum to deliver budget speech of fiscal year 2021/22

The budget waived 90 percent income tax of firms with annual transactions worth under Rs 2 million; and it waived 75 percent and 50 percent for firms with transactions ranging from Rs 2 to 5 million and Rs 5 to 10 million respectively. 

Likewise, income tax for hotel, travel, trekking, transportation, aviation, film industry and media has been lowered to 1 percent and these industries also can carry forward Covid-time losses for next ten years for taxation purposes. The private sector has welcomed these packages to revive the ailing economy.  

The budget also provides concessions for startups. They will get a loan of up to Rs 2.5 million as seed money at one percent interest and income tax waiver for five years. 

Lease fees for industries based in Special Economic Zones have been lowered while they, mainly established for exports, will also be allowed to sell 40 percent of their products in local markets for the next three years. The government will reimburse 75 percent of the cost of building access roads and transmission lines for new star hotels as well as cement and iron factories if the industries build them on their own. 

But the private sector is also concerned about the government’s slow progress in vaccine import. “Vaccinating people from the private sector is important to bring them back to work, helping achieve the growth target for the next fiscal year,” FNCCI said in a post-budget statement. 

Cost of jabs

Vaccination for eligible people should be the top priority to stem daily economic losses worth billions of rupees, say both doctors and economists. “If we want to bring the economy back on track, we first need to bring people out of their homes. This will only be possible when we vaccinate the eligible population,” says Dr KC. 

But the government plan of purchasing five million doses of the Covishield vaccine from Serum Institute India has failed and the whole episode was riddled with corruption. 

ApEx calculates the cost of importing the required 40 million jabs at around US $220 million (nearly Rs 25 billion), going by the $5.5 per dose price quoted by the Serum Institute. 

“People from developed countries may soon be interested in travelling to Nepal as tourists. But they won’t come if we have not vaccinated our people,” says Dr Sushil Koirala, chairman of the National Dental Hospital. Travel and tourism contributes 7.9 percent to the GDP and provides jobs to over a million people directly or indirectly. 

Economist Keshav Acharya agrees with Dr KC and says that the government should keep its citizens first. Acharya says, “Investing a few billions on vaccination would be wise, even if we have to pay a little more for it. This investment could eventually save tens of billions of rupees for the economy.”