FM Mahat presents Rs 99.79 billion budget
Civil service reform, security and industrial promotion top budget concern

By Ameet Dhakal

KATHMANDU, July 9 – Presenting the budget in the joint sitting of the Houses of Parliament for the third time, Chief of Treasury Dr Ram Sharan Mahat today focused on three things: civil service reform (including public expenditure), security and local industry and export.

Besides the three areas; poverty alleviation, decentralization and fiscal austerity featured prominently in Dr Mahat’s budget speech.

Addressing the Parliament, Dr Mahat presented an estimated expenditure of Rs 99.79 billion for the forthcoming fiscal year 2001/2002. Out of the estimated expenditure, Rs 50.47 billion has been earmarked for development expenditure and the rest 49.32 billion rupees for regular expenditure. This is for the first time in the post 1990 that the gap between the development and the regular expenditures come to the narrowest margin. Since the financial statement plans to cover Rs 60.25 billion from revenue and Rs 14.12 billion from foreign grant, it leaves over Rs 25 billion to be covered from internal and external loan.

There is a risk that the budget deficit would widen further exceeding the projected mark. Such risk is likely to come from revenue and foreign assistance mobilization front, both of which seem inflated artificially to balance the budget numerical. Dr Mahat has estimated the revenue to grow at a whopping rate of 25 per cent (assuming that the actual revenue collection this year would hover around Rs 48 billion) for next year. By his own assertions, this year’s revenue growth rate was only around 15 per cent. As Dr Mahat has failed to explore significant new areas to collect tax, at best the revenue-estimation-realization gap is likely to scale up to Rs 5 billion.

Mobilization of foreign aid at the below-expectation rate will be another factor that would trigger fiscal deficit – the more vulnerable area of the Nepalese fiscal management. In the absence of major development projects and outstanding term loans in the pipeline, estimated foreign resources component of over Rs 31 billion seems too bloated to be translated into real assistance.

However, Dr Mahat seems to be finding solace on the fiscal trick that almost all the Finance Ministers in Nepal play while presenting the budget. Alongside the revenue and foreign assistance, he has also presented an inflated development expenditure of Rs 50 billion – 25 per cent above the current fiscal year’s revised target. Neither the low absorptive capacity of the Nepalese economy nor the past’s real development expenditure growth rates justifies the estimations. Thus, the low development expenditure will suck in the pressure on the fiscal imbalance arising from low revenue and low foreign resource mobilization. All this may sound a dexterous work, but it is deceiving too and comes at the cost of development dreams of the poor.

Despite this trampling with the arithmetic of the development expenditure, Dr Mahat has initiated some bold and warranted steps to reform the bloated bureaucracy and public expenditure. Banking upon the merits of the Public Expenditure Review Commission (PERC)’s report, he has proposed to dissolve hundreds of regional and district offices, commissions, councils and other host of redundant bureaucratic structures. He has also slashed about 85 development projects to contain the trend of scattering "too little" resources on "too many" projects. Reform in pension system, hand-over of local projects to local authorities and direct channeling of resources to the local bodies are some of other recommendations of the PERC that have found place in the budget.

Dr Mahat today spent a good part of his budget speech discussing security. Adding to already bloating security expenses, he made a double digit increment (11.34 per cent) for the next fiscal year. With the new budgetary emphasis on security expenses, now the army and police will combinely exhaust about Rs 10.21 billion (10.2 per cent of the total budget).

Local industry and export promotions have also featured prominently in Dr Mahat’s schemes of things. He has proposed a Sick Industries Rehabilitation Committee to rescue the languishing industries. Major support to these industries will come in the form of concessional lending. Such industries will be entitled to get a concessional loan at 7.5 per cent interest rates. Furthermore, under the slogans of "Be Self-reliant: Use Local Products," the government offices and corporations will be encouraged to use local products to the possible extent.

Exporters can claim similar concessional credits. Exporters drawing credits in foreign currency have been offered interest concessions of up to 1.5 per cent, while those using local currency denominated loans have been offered a concessions of 1 per cent in their banking sector loans. Dr Mahat has also announced measures to promote fledging Information Technology (IT) industry. IT industry will be now treated as the priority sector industry. He has also proposed to establish a Venture Capital Fund to minimize investment risks in the IT sector.

Sector-wise, the social sector (education, health, drinking water and local development) has drawn the biggest share of the budget. All these sectors combined draw 37.2 per cent of the estimated expenditure. The budget has increased resources in education sector by 18.8 per cent, health sector 45.1, and drinking water 34.4 and local development 33.1 per cent compared to last fiscal years’ revised estimates.

Along with this social sector spending, the budget has also proposed to invest Rs 206 million in the Poverty Alleviation Fund – the umbrella Fund that will run all the poverty alleviation programs in integrated framework.

However, agriculture - the source of livelihood of over 90 per cent of the Nepali people - got the least attention in the budget. Experts had expected resumption of chemical fertilizer and irrigation (shallow tube wells) subsidy but nothing of the sort came in the budget. The only relief the budget can claim for the farmers comes in the form of interest rate cuts in the banking sector loans.

Experts, however, say they are not much worried about the inherent weaknesses of the budget. What worries them is the underlying political mess and uncertainty. The budget may be better than the past ones, but the political environment is also worse. That can upset the whole fiscal balance and development plans.

Pay tax, be a CIP

By Bhaskar Sharma

KATHMANDU, July 9 - The government has, for the first time, announced annual award for the top ten taxpayers of the country beginning from the upcoming fiscal year. The idea to award the top contributors to the government treasury is clearly an attempt to increase revenue mobilization by encouraging potential taxpayers to sincerely clear the taxes.

The announcement about the award came today from Finance Minister Dr Ram Sharan Mahat while presenting the budget for the fiscal year 2001/2002 at the joint session of the Parliament.

The awardees would be entitled to use the Commercially Important Person (CIP) lounge at the Tribhuban International Airport (TIA), using an identity card issued by the Internal Revenue Department (IRD), the finance minister said, reading out his revenue proposal.

The scheme is likely to complement the government efforts to boost revenue collection, which is projected at Rs 60.25 billion for the fiscal year, up from Rs 52.89 billion estimated for the current fiscal year that ends on Sunday.

The budgetary announcement to award the taxpayers comes along with reinforced pledges of the minister to increase the income tax base, along with bringing more effectiveness in the implementation of Value Added Tax (VAT), which the government created as the main base of resource mobilization since the previous budget.

The minister today reiterated the promises of his predecessor Mahesh Acharya who had announced last year in the budget for the current fiscal year that all economic activities would be brought under the tax net. Acharya had also pledged to carry out sweeping reforms in revenue administration.

Dr Mahat stressed that new Acts and Regulations would be introduced in the upcoming fiscal year to effectively check revenue leakage.

In what can be called as another innovative step, next to the awards, Dr Mahat announced to introduce a system of refunding a certain portion of VAT paid by customers back to them. However, such refunds would be made only after the customers claim it with the VAT receipts. Such a measure will certainly help in promoting the billing system at the retailers’ level, which so far has remained as the major challenge in successfully implementing the VAT system.

Dr Mahat, in his budget speech today, also announced a number of measures aimed at increasing the government revenue. In an attempt to bring potential taxpayers into the VAT net, the Finance Minister also announced a special drive to ensure that all firms dealing in vehicles and spare parts, computers and accessories, marble slabs and hardware are registered.

Furthermore, he threatened to take stringent steps against agents of any domestic or foreign development projects who do not show their sources of incomes to the Internal Revenue Department before mid-October. So much so, even the national and international non-governmental organizations are brought under the tax net.

In addition, taxpayers carrying out transactions of over Rs 1 million per year would compulsorily need to file tax returns at tax offices. For bringing more uniformity in tax administration, the finance minister announced to merge the district VAT offices and Income tax offices from July 16. The VAT and Income Tax departments at the center have already been merged, as per the provisions of the previous budget. Taxpayers would no more need to register separately with the Income Tax Office and the VAT Office for tax purposes.

On the customs front, Dr Mahat introduced some changes, which, however, would have a major bearing to the domestic industries. The reforms are aimed at promoting sick industries and at protecting the vital domestic industries. Among others, the minister waived 50 per cent duty in the import of raw yarn by textile industries, in addition to providing a bonded warehouse facility in the export of their finished goods.

He also granted large concession to the pashmina industry, as high as 80 per cent in the import of pashmina yarn. On the other hand, apart from banning the manufacture of polythene bags smaller than 20 microns in breadth, Dr Mahat increased the excise duties in cigarettes and liquor, among a few other items. He also imposed capital gains tax of ten per cent in the trading of securities, deductible at source if the trading is carried out at Nepal Stock Exchange.

Professionals such as doctors and engineers, whose income was brought under the VAT net last year, saw no relief either. The latest budget has made it mandatory for them to maintain accounts books, in addition to compulsory auditing if transactions over Rs 1 million are carried out.

Though various export-oriented industries like pashmina had all the reasons to celebrate, others were not that lucky. Against their demands for the scrapping of the 0.50 per cent income tax on exports, imposed last year, the Finance Minister raised it to 1 per cent, though it does not apply to those commodities on which duty is charged below 5 per cent.

Whatsoever, the latest budget has opened up an easy exit for those engaged in legal wrangling with the tax authorities by putting an end to the dispute by settling 75 per cent of the total liabilities. Even tax evaders were given a chance by allowing voluntary disclosure of income statements.

Most of the provisions of the new budget would be applicable from July 16, when the new fiscal year begins.

Sectoral focus of budget

By Prem Khanal

KATHMANDU, July 9 - Security – The budget has focused on improving the worsening law and order situation, for which security expenses have been increased . Out of the total regular expense of Rs 49.32 billion, security expenses absorbs Rs 10.21 billion, which is almost 21 per cent of the estimated regular expenditure, and over 10 per cent of the total budget.

Of the total security expense, Rs 5.79 billion has been allocated for Armed Police Force (APF) and general police while Army got Rs 4.52 billion. Besides, Rs 600 million has also been allocated for Integrated Security and Development Program (ISDP), which aims to use army, police and other security machinery to smoothen the development works being disturbed by the Maoist insurgency.

The budget has announced to merge all the development related programs, running under Integrated Basket System into ISDP. Similarly, it has for the first time slapped one percent special tax on import and taxable income to finance the soaring security expenses.

Industry –The budget has announced a number of measures to attract foreign as well as domestic investment into the domestic industries and other lucrative sectors. With an aim to encourage the participation of private investment in industry, hydropower and export-oriented industries, the budget has pledged to review existing polices.

Similarly, existing foreign investment procedures would also be simplified, under which the Director General of Department of Industry can grant final approval to a foreign investment project worth upto Rs 1 billion. Various steps and privileges have been announced to encourage Non Resident Nepalese (NRNs) to invest in Nepal.

In order to encourage private sector’s investment in small and medium hydropower projects, they are put into the priority sector and arrangement of investment upto Rs 100 million from commercial banks on each project. Similarly, the budget has also taken some steps to uplift some major troublesome export-oriented industries. In this regard, the interest rate on export loan on convertible currencies has been slashed by 1.5 per cent while similar type of loan on domestic currencies was cut by 1 percent.

The budget has also announced some measures to sort out problems related with Duty Draw Back (DDB). Similarly, operation of three dry ports and maximum utilization of Phulbari-Banglabandh route would be given priority in the upcoming fiscal year. The budget also announced to celebrate 2003 as "Export Year". A high level committee has been proposed to set to revive ailing industries.

Poverty - Poverty alleviation has been the prime agenda of the budget. In this regard, various scattered anti-poverty programs would be brought under Poverty Alleviation Fund (PAF) – the mega umbrella program to check worsening poverty. And necessary monitoring and evaluation of the programs would be carried out by the fund. A separate Act for the fund would be formulated and various anti-poverty programs under the PAF would be extended throughout the kingdom within five years.

In the same way, the budget will also focus on social empowerment, under which refinancing rate has been slashed by 2 per cent and Rs 1.50 billion would be invested thorough various institutions. Similarly, a separate unit in the National Planning Commission would be formed to collect and disseminate information related with poverty. The budget has also allocated Rs 100 million for capital investment in the Rural Development Banks, which are conducting various anti-poverty programs.

Information Technology - The budget has laid emphasis on developing IT sector as the major sector that can create both export and employment opportunities. 50,000 youths would be given various IT related training for which Ministry of Science and Technology will co-ordinate with Employment Promotion Council (EPC). The IT park, which is under construction in Banepa, would be completed within two years. The budget has included IT sector as the prioritized sector and necessary arrangements have been made for the smooth flow of loan to this sector. Besides the Kathmandu valley, the free installation of Internet would be extended to the schools of other major cities and books of school curriculae would be put on web site. The government would also extend loan of up to Rs 300,000 for IT education to the children civil servants.

Agriculture - The government has announced to introduce effective programs to ensure uninterrupted supply of agriculture inputs in the special pocket areas.

For this purpose, necessary government investment would be increased. In order to encourage commercial farming, the interest rate on the loan to such sector has been cut by 1 per cent.

Besides, the budget has also announced many measures to boost agricultural production, particularly in the food deficit areas. Increment of tea production is another area that the budget has focused on. Interest rate of the loan investment in this sector has been decreased by 2 per cent.

Likewise, sericulture would be extended to 10 more districts in coming three years. Various measures were also announced to boost the commercial farming in Karnali Zone for which arrangements have been made to extend loans at an interest rate of 10 per cent. Similarly, interest rates on agricultural loans in the areas where ISDP has been implemented and which are connected to the district headquarters by road would be slashed by 2 per cent for coming three years.

Budget in the eyes of experts

By Ram Sharan Sedhai

KATHMANDU, July 9 - Like in the past, the annual budget for fiscal year 2001/02 drew a slew of mixed reaction from experts, former finance ministers and businessmen, despite Finance Minister Dr Ram Sharan Mahat’s assertion that it is a reform-oriented budget, with a deviation from the previous trend.

While some of them have lauded the budget, others have criticized it for not incorporating programs that could really address the burning problems of sick industries, unemployment and poverty.

Bharat Mohan Adhikari, former finance minister and lawmaker from the main opposition CPN-UML, said the budget could not address the problems outlined in the Economic Survey released Sunday. "In general, the budget is disappointing. There are no notable programs on land reform, agriculture and tourism."

He admitted that the budget has brought programs to revive the sick industries but pointed out that it could not strike at the root of the problems although "we have been arguing that the ailing domestic industries should be revived and protected". Resource mobilization, as stated in the budget speech, is unlikely and the budget has no programs to solve the burning national issues, he said.

Similarly, Hridayash Tripathi of Nepal Sadbhavana Party flayed the budget saying that it hopeless. The budget was presented without doing necessary homework, as there are no concrete programs on agriculture sector. "Without solving the problem of the agriculture sector, poverty alleviation is impossible and this is the main shortcoming of the budget," he said. It is unlikely to achieve its targets, he added.

Likewise, Dr Prakash Chandra Lohani, former finance minister, said that though the budget could not be termed as over ambitious, there is doubt on its implementation as it has been the practice over the years. He also refuted that the budget was reform oriented.

In view of economist Dr Dilli Raj Khanal the budget has touched upon small things and missed important issues like subsidy in agriculture loans, chemical fertilizers and irrigation projects. "It is an attempt to fool the people," he remarked. The first half of the budget is akin to a general report of banking sector. The budget has not even mentioned anything about the 14-point agenda of the Prime Minister, and is nothing like the reform-oriented budget as claimed by the finance minister.

Although praising the budget as practical, Dr Mohan Man Sainju, former vice chairman of National Planning Commission said its implementation is doubtful. He also extolled the efforts to address the problem of the lower section of the society, to encourage the private sector and to revive the ailing industries and to promote export. Another important step of the budget is the allocation of fund for the social sector.

Another praise-cum-criticism for the budget came from industrialist Binod Chaudhary. He remarked that the finance minister has made an effort to bring realistic budget rather than making it ambitious. However, he said that the budget has failed to revive shrinking self-confidence of the tourism entrepreneurs, investors and taxpayers.

"To revive tourism industry, the concept of Destination 2002 should have been stressed but can the entrepreneurs wait for that?" he asked. The budget should have simplified tax procedures. The program to refund Duty Draw Back is a welcome step but if it were a plan to levy property tax, it would be disastrous for the country in the present context, warned Chaudhary.

Terming the budget ambitious vis-à-vis achieving the target of revenue collection and foreign grants, Dr Minendra Rijal, another economist, said the political factor could be most influential. "The target of foreign grants is ambitious, so it will not be met, which means that the government would not be able to spend targeted amount on development front."

Pradeep Kumar Shrestha, President of Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said the budget has incorporated most of the recommendations of the business community, which is positive. The budget has emphasized on creating investment-friendly environment. He also commended the move to refund Duty Draw Back.

Although admitting that the increment of tax on imported goods would raise revenue, he pointed out increasing tax on export at a time of slowdown would affect business. The proposal of issuing bills to small traders is positive but he too cast a doubt on the implementation of the budget despite its "nice spirit".

Doctors continue duty boycott

Post Report

KATHMANDU, July 9 - The strike called by the doctors five days back at the Tribhuvan University Teaching Hospital (TUTH) still continues.

According to the Director of TUTH, Mahendra Kumar Nepal, "We are trying our best to solve the problem so that the strike can be called of soon because we know it is the patients who are suffering".

The doctors at the TUTH have refrained from attending afternoon shift duty, since Thursday. The strike was called demanding a 50 per cent increase in allowances under the Hospital Service Facilities".