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VOL. 27, NO. 46, August 01 , 2008 (Shrawan 17 2065 B.S.)
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ECONOMIC REPORT
Rising Budget Deficit
The spiraling rise in government expenditure cause budget deficit to rise
By SANJAYA DHAKAL
The latest report by the central bank has shown that apart from the pressures from the rising cost of food and fuel, the transitional economy is also likely to bear the heat of budget deficit.
The government budget deficit amounted to Rs 9.30 billion in the first eleven months of 2007/08, according to the report by Nepal Rastra Bank. The deficit was Rs 6.93 billion in the corresponding period of the previous year. "The higher growth of government expenditure relative to resource mobilization accounted for such a budget deficit in the review period," the report adds.
But the huge budget deficit is not caused by any substantial investment on productive sector. Economist and board member of NRB Dr. Bishwambher Pyakuryal said that this is caused by the high government expenditure.
In the first eleven months of 2007/08, revenue mobilization of the government soared by 25.5 percent amounting to Rs 90.17 billion compared to an increase of 20.8 percent in the corresponding period of the previous year. "Such an impressive growth of revenue was on account of substantial increase in the import of merchandise goods and the resulting increase in customs duties, VAT revenue and excise duties, increase in income tax and increase in non tax revenue."
But Dr. Pyakuryal said that the handsome revenue growth has been eclipsed by soaring expenditure. "In this period, the government generated revenue of Rs 90 billion but it spent Rs 117 billion. This is serious," he said.
Another reason for the soaring deficit is the yawning trade gap with India. Nepal conducts two-third of its entire foreign trade with India. And during this period, Nepal's trade deficit increased by 40 percent compared with corresponding period of previous year to reach staggering Rs 76 billion.
The government officials, however, say that the situation is not so disturbing. Rameshwore Khanal, Secretary at the Ministry of Finance, said that the macro economic indicators are satisfactory. "The budget deficit calculated by the NRB doesn't include the resources we generated from domestic loan as well as foreign grants/loans. When they are taken into consideration, we actually have cash surplus of over Rs 6 billion," he said.
Dr. Pyakuryal, on the other hand, is worried that due to the budget deficit, the government will not be able to invest in social sectors like health, education, sanitation, drinking water and so on.
The NRB report states that in mid-June 2008, the gross foreign exchange reserves stood at Rs. 206.47 billion, a growth of 25.0 percent from the level of Rs 165.13 billion in mid-July 2007. Such reserves had fallen by 1.6 percent in the corresponding period of the preceding year. In US dollar terms, gross foreign exchange reserves went up by 18.5 percent to US$ 3.02 billion in mid-June, 2008. Such reserves had risen by 11.5 percent in the same period of the previous year. Based on the import figures for the first eleven months of 2007/08, the current level of reserves is adequate for financing merchandise imports of 11.1 months and merchandise and service imports of 9.0 months.
"The y-o-y consumer inflation rose to 11.0 percent in mid-June 2008 from 4.5 percent a year ago. The inflation was driven by the significant rise in the price of food and beverage group (13.0 percent) as well as non-food and service group (9.0 percent) in the review period. The price rise of food and beverages and non-food and service group was 5.8 percent and 3.1 percent respectively a year ago."
