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Kathmandu Monday January 21, 2002 Magh 08, 2058.
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The sick budget
By DR RAGHAB D PANT
The supplementary budget for the current fiscal
year was announced in the form of an ordinance recently. The main opposition party
Nepal Communist Party (UML) has demanded that it be presented in parliament as is the
customary practice in a democratic society. This is a legitimate demand, and the Minister
of Finance has not yet provided a clear reason for presenting the budget in the form of an
ordinance.
Many Nepalese, especially the
political-economists, easily predicted the main features of the budget almost to the last
letter: an increase in taxes and internal borrowing to finance the rising budget deficit
which since the last fiscal year has been covered, sometimes openly, sometimes not quite
so openly, by borrowing from Nepal Rastra Bank.
The Finance Minister will definitely blame
‘security’ for the rise in total expenditure but not the bogus accounting
procedure that he has followed since last fiscal year in preparing the estimates for
revenue, expenditure, marginal tax rate etc that need to be taken care of while preparing
the budget. As regards the size, the additional resource requirement will not be less than
Rs 15 to 17 billion, assuming repayment of last year’s illegal borrowing of Rs 7.05
billion from Nepal Rastra Bank. In addition, there is expected to be some transfer of
resources from the development to the regular budget, which was substantially
underestimated in the current fiscal year- regular expenditure was expected to increase by
13.5 percent compared to a growth of 25.8 percent last year. It will, however, be
difficult, if not impossible, to raise the government revenue estimated in the original
budget estimates. For all these reasons, the budget probably has to be read with a pinch
of salt, may be more than a pinch.
How will private entrepreneurs and the economy
as a whole cope with the recent fiscal and monetary policy and programmes? It depends on
how the policy is framed and used. Unless we match policy instruments with policy goals,
the disequilibrium in the economy will be further widened as happened in Argentina
recently and in East Asia in 1997. Has Nepal learned from the experience of these
countries? My answer will be in the negative.
The recent performance of the economy, as we all
are aware, is less than satisfactory with income in per capita terms - the official
estimate of increase in gross domestic product has been reduced recently from 6.0 to 2.5
percent- declining, prices deteriorating and the balance of payments position showing an
unfavourable position for the first time in seven years. The so-called voluntary
disclosure of wealth has created terror among businessmen, industrialists and even among
families with a house, a car or a telephone. This has led, according to press reports, to
outflow of domestic resources as indicated by the heavy withdrawal of deposits from
commercial banks. There is no guarantee, absolutely no guarantee, as of now that tourism
related businesses including hotels and restaurants can be revived soon: these, to
rephrase the remark of a prominent writer, may die proudly as it is no longer possible to
live proudly.
The supplementary budget can, if we have
political will supported by professional maturity in policy formulation and
implementation, revive the economy by creating confidence in the private sector and let
the country move again. Unfortunately, the expected increase in tax- and uncertainty
created by Voluntary Wealth Disclosure - will further weaken the economy. The limited
domestic private resources will be diverted to the public sector due to the expected
increase in the internal borrowings of the government - the crowding out problem in
economic terminology - with negative impact on private sector investment.
On the monetary front, Nepal Rastra Bank, with
the approval of the Minister of Finance, has reduced the cash reserve ratio which,
according to official estimates, will release Rs 1.95 billion in additional funds in the
market. At the same time, it has reduced the bank rate- the rate at which Nepal Rastra
Bank will lend to the commercial banks. The only purpose of this is to increase economic
activity and the national income in the country. Even in normal circumstances, these
policy measures will create serious problems in the economy due to mismatch of policy
instruments with policy goals. It is obvious now that Nepal is trying to copy the mistake
of Argentina and East Asia in using monetary policy for development purposes. Nepal
maintains a fixed rate exchange with Indian currency and the Nepali rupee floats parri
passu with that currency. This cannot be used to promote growth, especially by printing
money, as Nepal Rastra Bank is planning to do. This mismatch of policy instruments will
create fundamental disequilibrium in the economy in the not too distant future.
Fortunately, a few of the policy measures were
announced just for public relations purposes, and will never be implemented. The reduction
in bank rate, for example, has no use: the commercial banks, to the best of my memory
have, in the past three decades, never borrowed a penny from the Nepal Rastra Bank. The
concept of the bank rate is better to be abolished in Nepal.
Who is benefiting from the current situation: a
few commercial banks which have been authorized and have the capacity to hold foreign
exchange. These banks are benefiting from the continuous devaluation of Nepalese currency
with currencies other than Indian currency. According to Asiaweek, the return on equity of
the Himalayan Bank is the 13th highest in whole Asia, followed by Nepal Grindlays Bank and
Nabil Bank. That is the reasons why there is more competition to open new banks in
Kathmandu. As a result, Nepal Rastra Bank has issued recently letters of intent for the
establishment of three more commercial banks.
How can we remain cheerful when the institution
responsible for development is sick? Let us wait and see how critically sick the
supplementary budget is.
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