‘Budget must contain provisions for good governance’

Dr. Bishwambher Pyakuryal is one of the outstanding and most active economists in the country. Professor at the Central Department of Economics of Tribhuvan University (TU), he did Ph. D. from TU (1989), and was involved in his post-doctoral research at University of Maryland, USA, in 1995. Chairman of the Nepal Industrial Development Corporation, and Nepal Academy of Economic Studies, Dr. Pyakuryal is president in a number of organisations of economic professional including Nepal Economic Association and BIS-Nepal Pvt. Ltd. Senior Fulbright scholar and consultant with several supra-national and international organisations, he is known for intellectual and analytical skills.

Arhan Sthapit of The Rising Nepal recently spoke with Dr. Pyakuryal on the forthcoming budget and other contemporary issues. Excerpts:

TRN: What reformative measures should be made in the budget to stabilize the price levels? What specific measures can be adopted to check the price hike of the necessaries?

BP: The review consumer price index in Nepal does not reveal excessive price hike in the food products. But a kind of uncertainty in the entire consumer society is alarming because of poor governance. So, the consumer price index and list that was made mandatory quite some time ago has not been complied with.

Similarly, because of the information gap in the rural sectors farmers are not getting the actual price of their products. On the other hand, while Nepal is reducing subsidy, India is continuing with it. This has made cost of production of agricultural products in Nepal higher than in India, a matter demanding serious consideration in the forthcoming budget. The government should link provisions of India’s budget with the new proposed provisions of Nepal’s new budget, there must be some sort of strong linkage. Now it is time to categorically identify those provisions having direct impact on Nepali food products to address the issue properly. These measures will help stabilize price. The situation is similar in the case of petroleum products and chemical fertilizer. The current budget should need to make provisions to address this problem.

TRN: The general trend in our past budgets is to set higher tariffs of taxes and other charges on luxurious items and tobacco, liquor and beer. It sounds good. But has it been faring in practice as good as expected?

BP: Discouraging the import of such items is a practice everywhere. But we do not have any State machinery to continuously follow up and review increase tariff rates in the past year. We have administrative leakage and problem. A mere increase in the rate in such items will not address the fiscal and budget deficit as the total amount generated in taxes imposed in such items is minimum.

Because of the open border with India, unrecorded trade also cuts down total collection. This also applies to luxuries. It also holds true to electricity tariff increase. Raising price of such items every year does not show the efficiency of the government. Increasing tariffs in these items is also needed but it is equally important and desirable to explore new areas, e.g., the coverage of taxes. There are many export and import items where government has not imposed taxes, they can be a source of income. Similarly, review of tax structure and procedural simplification in VAT, income tax, duty draw back, bank guarantee can also help expand the tax net. Sick industry revival through rehabilitation packages is also essential. Government should go into new areas of investment and consider tax and non-tax issues to increase collection. Overall, good governance is the most felt necessity.

TRN: Then, not only for effective collection but also for mobilisation of revenue, what provisions on the fiscal policy front would do you think necessary in the budget?

BP: Data reveal that against the current year target of 24.4%, the mid-term review shows hardly 18% revenue generation. It had the 30% growth target over the previous year budget. Revenue collection at present is not satisfactory.

The government is now grappling with three economic problems: the financial liability due to increased salary of civil servants, security administration and maturation of major projects funded through external resources by 2002. One fourth of our regular expenditure is already being used in debt servicing. Our revenue surplus has been able to finance hardly 15-17% of our development expenditure, with about 65% of the development expenditure being financed by external assistance. So, our commitment at international forums should match with allocation of resources in domestic projects. This applies to the high commitments we have made for the priority reforms programme at the meeting of the Nepal Development Forum (NDF), from where more than 80% of total external resources Nepal receives comes from.

Though the VAT registration has increased from 15,000 to 20,000, there is no increase in total income. Similarly, import has increased, but income from it has not. This demands simplification of procedures to increase revenue collection.

Last year’s budget had committed to establish an assets revaluation agency. It is relevant in view of the problem of non-performing assets and excess liquidity with the two big commercial banks of the country. These two banks’ liquidity stands at 12% of our national budget, and needs effective management. On the one hand there is liquidity crunch and on the other, we are not able to collect adequate revenue. It is high time to reassess fixed assets too. In absence of good governance, responsible authorities and bodies do not comply with rules and projections, adversely affecting the revenue collection.

TRN: The rise in regular expenditure is said to be increasingly alarming. The government also has the increased obligation of security administration. There are reports that an additional amount of 3 billion rupees on the regular expenditure is being transferred to the next year budget as a liability. How can the government strike a happy balance between means of the budget and regular expenditure?

BP: The increase of regular expenditure is of course alarming. There is no match between the regular expenditure and revenue surplus, resulting in a resource gap. Our fiscal deficit figures approximately at 18%, whereas there was a big hue and cry when it was just of a single digit in India. To address this problem the government had committed that they would not be having an overdraft of one billion rupees. But, the externalities developed in a past couple of months have forced the government to go beyond the limit. Even the government’s issuance of treasury bills and bonds, the last resort measure to mobilise public savings through the central bank is also not receiving much trust, it is reported.

Likewise, in addition to considering tax and non-tax issues, austerity measures in expenses of hospitality, furniture, foreign travel, and other overheads must be strictly taken, not only for the cabinet ministers but also for the senior officials of the government. This helps minimise the regular expenditure, and generate surplus fund. But due to weak administration, funds have not reached at the concerned DDC or VDC levels on time and hence remained unused.

The Ministry of Finance has been able to receive information of only 33% of development expenditure relating to the projects. Surprisingly, out of 818 development projects in the country, the government has information of only 14.4% of them. In such a situation how can it make projections about the resource allocation in these projects in the next budget? The mid-term review of the current budget has shown that the correct projections are lacking. There is less than 25% revenue generation against the projection of 30%.

So, the budget should address the challenge of information crunch relating to development and prioritised projects, so as to slash regular expenditure, make effective allocation of resources and increase revenue collection.

TRN: What is the general trend of annual budgets in the country in the last ten years?

BP: There has been a normal, though not highly encouraging, growth in the key economic indicators. There has been one million people below the poverty line, the incidence of poverty in rural sector is 2.5 times higher that in the urban sector. We have received almost 35 billion as foreign loan but the growth in the agricultural productivity is not commensurate with what we have received. The agriculture sector growth over the past two decades has been 2.6% p.a., against the population growth of 2.5%, which is alarming. Likewise, compared to other South Asian countries, the social sector spending in Nepal is low, approximately Rs. 400 per person per year on average. In the last 10 years, the government has been spending only 5.7 per cent of the budget in the social sector. There has been a gradual increase in this sector but still short of the South Asian Region standards.

The resource gap is also evident, as the increase in the total national expenditure in the last 5 years is 12.2% and that in revenue generation less than 11%.

So the whole story indicates that, on the one hand, we have not been able to spend the allotted resources and, on the other, we do not have good capability to mobilise the resources.

The success to strike a balance between deprivation and deformed instruments in the last years has also been dismal. To the awe of many studies have revealed that about 24% of small and medium landowners in the mountain region, 40% in the hill region and 18% in the Tarai are below the poverty line. It is high time that, to address the newly discovered realities, the government reconsider and redesign the traditional poverty alleviation programmes.

A major portion of the donors’ contribution should go to the rural infrastructure building.

The review of the past decade performance has also highlighted several other areas needing serious attention. In food, the subsidy to those living in the remote areas stands at less than 25%, and less than 10% credit has gone as subsidies to irrigation, cash crops, and livestock, making less impact on the rural poor. Targeted poverty programmes suffer from institutional weaknesses and lack of sustainability.

TRN: In a bid to reform the banking system in the country, the current budget has made a provision, among others, of establishing a credit rating agency. But, as not much has been done in this connection, can one expect that the banking system reforms go as expected?

BP: Following the preparation of the financial sector reforms paper by the National Planning Commission, Nepal Rastra Bank and the Ministry of Finance, opinion building process with major donors’ involvement is going on. The paper has the provision of a credit rating agency and credit information bureau. But, unless we strengthen credit information bureau that identifies the internationally accepted indicators including the institutions’ standing and creditworthiness, we cannot have bases to rate an institution in making credit decisions. Credit rating is new for Nepal and extremely important too. The L/C scams would not have resulted had Nepal got the strong credit information and rating agency. But, it is risky to jump into credit rating agency before strengthening the credit information bureau, which in our case is almost non-operational. International institutions like Dorman Bradt Street have also submitted proposals to help Nepal in strengthening the bureau and establishing the credit rating agency. The forthcoming budget should make adequate provisions for it.

TRN: You are also a popular lyricist and a creator, what kind of role artistes and creators should play in the protecting copyrights against infringements?

BP: We have witnessed new laws and private sector initiatives in the copyrights sector. This area should be given due priority as the art and entertainment sector is developing as a good industry. Copyright infringements are taking place due to weak implementation of laws, even though government, civil society and private sector organisations are positive about the recognition of copyrights. The major role of artistes and creators in this context is lobbying and creating forums to work on the issue. They should play an advocacy role. There is also a pressing need to disseminate information about the copyright issue.