Economic Development
Monetary Policy Crucial For Growth

By Tanka Raj Niraula

MONETARY and Fiscal policy are the major economic policies of governments. For every economy moving towards the developmental goal, both these policies are of primary importance. Monetary policy has a concern with the regulation of the financial aspect basically- money or credit supply. Fiscal policy refers to that part of government’s economic policy, which deals with taxation, expenditure, borrowing and the management of public debt to regulate the aggregate level of economic activities. Basically, overall National Income or Gross Domestic Product (GDP) is dependent on two variables that are Taxation and Government Expenditure. Through the interaction of these variables, overall economic activities are changeable.

It is mentioned, as above that the basic tools of fiscal policy are taxation and government expenditure and both of them are cause and effect at the same time. The purpose of taxation is to meet the government expenditure and the aim of government expenditure is to supplement the government in terms of regular and development activities. If these two items are regulated very effectively, level of GDP can be increased. Since the goals of fiscal policy are attainment of greater economic stability through increase in GDP, full employment, and stability in the general price level, economic stability can be attained through high capital formation, which is the strategic factor for economic growth. Full employment, truly, is relevant to the developed economy. Our country is suffering from chronic open unemployment and underemployment and target of fiscal policy must be to reduce it. Similarly price stability is required for realizing a healthy economy. When prices are unstable, there are unhealthy practices, unfair distribution of income, unwanted effect on Balance of Payment. Continuous price hike is not acceptable even though it is desirable in the priori phase. For higher growth rate, 6.5 per cent as targeted by current (Ninth) Plan, price may go up. But hyperinflation as in Russia after 1990 (more than 100 per cent) or in Latin America is not acceptable. Also, prices should not fall down excessively, which decreases GDP in the future. Therefore, a rise in price may be instrumental in increasing the GDP. As Milton Friedman, a monetary economist states, there should be monetary growth rate because inflation is a monetary phenomenon. Therefore, money supply should be increased at the constant rate say 3 or 4 per cent for stabilization purpose. But Nepal’s annual monetary growth rate is 12 per cent (2000/2001), which is a gloomy scenario because it is instrumental for inflation. But money supply is outside the domain of fiscal policy. Price stability is achieved through fiscal policy by adopting appropriate tax and subsidy policy.

The crux of the problem is to achieve economic development without inflation and economic development without unemployment. These are the reasons for the deliberate adjustment in interplaying of taxation and expenditure is of utmost importance.

Prior to 1930, mostly in the capitalist countries, there was no decisive role of the governments as opposed to the communist and autocratic regime. Government expenditure and taxation were simply an obligation of the government. After 30’s, fiscal policy is viewed as significant equipment in the hand of the government for development. The function of an individual and state is different. In contrast to an individual, government is compelled to expend more, even if there is less revenue. State should not run away in spite of falling national income to support its people. Even by deficit budgeting it has to continue its duty.

Taxation is the major source of government finance and it plays a pivotal role in development, both for the direct contribution that can make, and for its indirect effect on control and incentive, and in narrowing the gap in available incomes. The argument for collecting more taxes is based on the assumption that private savings are not adequate and that domestic saving for national development can be increased by government through compulsorily reducing personal consumption of the people by taxes. If tax yield is very low, then government expenditure could be met by deficit financing. Major tool of deficit financing is money creation. Expenditure will have expansionary effect. Taxation is more contractional than borrowing and borrowing is more contractional than money creation.

Nepal’s expenditure-GDP ratio is 17.5 per cent while tax-GDP ratio is only 8.7 per cent. Therefore more cautious interplaying of the tools of fiscal policy by the government is necessary. GDP growth rate is also low to counter the expanding population. The need of the hour is to increase the size of the cake that is quantum of GDP. Since there is a great discrepancy between revenue and expenditure, then a situation like Crowding Out may arise. To fulfill the growing expenditure necessity of the government, if taxes are increased, private consumption and investment may decrease which may effect negatively to the economy. Now a days private sector participation is gaining momentum and government role is looked as a facilitator. Government alone cannot drag the economy and it has to work in tandem with the private sector to promote the economic development.

Liberal Policies
A Must For Economic Development

By Dr. Badri Pokhrel

IN comparison to the overwhelming expectations of the people the resources are not abundant to fulfil them. Sadly, potential resources have also not been tapped or properly utilized. Low resource base, natural handicaps, underdeveloped status of the country, lack of vision and corruption could be called the major reasons for the lack of development and opportunities.

With the inception of multiparty democracy, people’s wants and desires are getting grown. In the initial stage of the democratic restoration, political leaders gave the impression that the needs of the people could be met without calculating the resources and supply procedures.

But later they realised that resources are scarce and the distribution pattern could not be changed as required. On the other hand, authorities also are to blame for their mismanagement of the available resources due to the lack of vertical and horizental coordination between the pubic service delivery agencies. Such shortcomings among the officials in different government departments negatively affected the credit of the government.

After the advent of democracy, the government took a path of open economy and liberalization. New industrial policies were adopted according to this change. The incentives and concessions for the industries under the Industrial Enterprises Act provided one window system to make things easier for potential investors. Except in the areas of defense, public health and environment, the license system was withdrawn. Such a policy measure was established to expand and modernize the industries and bring rapid development in commerce in the country.

Since almost 5-6 years, Nepal has been wishing to establish an International Financial Services Centre in her domain. In order to materialize this scheme some studies also were conducted. An extensive research was carried out to qualify the pros and cons of an international financial services center here. In order to put into action the real need as well as the research findings, different measures were adopted. The establishing of such a center in Nepal is definitely going to benefit the industrial sector here. It is encouraging that the legal procedures have been completed for this project.

To establish a healthy environment for foreign investment in the country, the internal as well as external policies of the government plays a vital role. As the government has been carrying out various reforms to assure the foreign investors, it is unquestionable that this process of the government should be spread in foreign countries too through Nepal’s diplomatic channels. In this way the investment seekers will have information access and get the time to evaluate the investment environment, legal procedures, and people’s need and profit earning expectations in Nepal. To provide this service and to spread the spirit of the government’s open policy, the diplomatic machinery established in different countries in the world must be fully mobilised.

Considering the overwhelming expectations of the people and the low resource base of the nation, it is encouraging that some diplomatic efforts in resource generation have been started. The Nepalese embassies and Consulates abroad have already been told to remain alert to seek economic resources, financial as well as human resources. At present, Nepalese Embassies are encouraged to engage in promoting trade visits and periodic discussions with the local Chamber of Commerce and Industry for investment information and resource transfer.

It is true that such initiatives taken by the private sector and the interactions conducted by them are being more effective to tap the foreign resources, which actually are gradually mitigating the burden of bilateral as well as multilateral foreign assistance. To reiterate and successfully gear up this reality into effective action, the Ministry of Foreign Affairs has prepared an action plan on ‘how to make effective economic diplomacy’ in its annual programme. The Ministry of Finance has allocated some budget at the demand of the Ministry of Foreign Affairs to make this programme successful.

His Majesty’s Government has been pushing and encouraging the private sector to accelerate the economic development activities to fulfil the people’s real needs. For this, tax policies are being improved. For example, a new Income Tax Bill was presented in the parliament where all income tax provisions made in different other Acts have been amalgamated, synthesized and unified.

Similarly, tax policies are being improved to mobilize additional resources. Value added tax has been already introduced and fully enacted. Reformed administrative arrangement in implementing VAT and Income Tax jointly has been recently done. Some of the district level functional posts have been upgraded. In order to decrease the collection cost some of the offices have been merged and other such reform methods have been carried out. The number of tax rates in customs and income tax have been lowered.

All those corrective measures have been introduced in Nepal with three major bases: - A. Experience, B. Suggestions of the researches made within Nepal and abroad and C. Suggestion of the donors. Apart from these three corrective measures, some alterations have been made on the basis of cost plus formulae. These activities prove that Nepal is virtually trying to catch the pace of economic development through various endeavours in seeking all round development.

The policy of economic diplomacy adopted by the nation mainly aims to translate into real action the needs of the country through its diplomatic missions abroad. As before in the time of cold war, whatever the institutions installed were told to recoup with the view of political alignment, now the time has changed and most governments, including Nepal, only seek mutual cooperation for the development of their respective economies for their economic uplift.

Thus, Nepal is trying to adopt various methods to accelerate the pace of economic development. Such efforts have been initiated from both internal as well as external sources. In order to encourage and simplify the internal sources, a number of measures like open market policy, free competition, deregulation, private sector enhancement, liberal but astute rules and acts and the sale of public holding (privatization) have been introduced.

Similarly, in order to attract the foreign investments old commerce and industrial policies have been amended. For example according to the amended policy, foreign investment has been encouraged and permitted in all industries with fixed capital of above Rs. 20 million excluding products related with defense, cigarette, tobacco, alcohol industries. Foreign investors are allowed to remit their dividend and they are given commitment that their properties and industries will not be nationalised.

But in spite of the bold initiative taken by the government, the poverty of the nation has remained almost unchanged. A gloomy environment is being painted and such negative messages are being spread abroad. Many industries have been badly affected also because of the activities of the Maoist insurgents. The uncertain political scenario and constant confrontational protests of opposition parties have not been for the benefit of the nation and the people. Both the government and activists must understand that if they are doing something for the nation and people, they must continue their efforts peacefully on the political front only.

The present day world clearly spells out the reality for good relation and mutual understanding in the entire globe. Not a single country can remain isolated. This holds true for Nepal also.

Thus the efforts being made by His Majesty’s Government both internally as well as abroad, must be supported by all, specially the private sector investors, so that there is an economic boom in the country and poverty is eradicated.

Two Wives & A Pinch Of Salt

By PNK

Of course, it’s illegal but it makes its rounds mostly in the rural parts of Nepal and also to some extent in the urban centres. What is being hinted here is taking another husband or wife when one is already married. Though the reference has been made of polygamy as being against the law, the Civil Code is not silent on when a man can get married for the second time. Going through it makes it clear that a man can get married again—it’s always the necessity of kids and moreover for a male child, otherwise entering the next world will not be possible.

The tussle between the first and the second wife is as old as history has it. Often stories turn up with a man trying to "earn" more wives. Who knows whether the case of the more the merrier holds true? Many real life stories have not painted a happily married life for a person with more than one wife. Hassles are there. But the man who can make both wives happy or lead a life of compromise must be ‘praised’.

Just a few days back meeting a husband who had married for the second time with a girl less than half his age and a wife who is eight years older than her husband (he also married a second wife ten years younger than himself) and the comments or views they had to present was more than surprising.

The first case is of the man who is 52 years old but looks 35 with his black dyed hair and mustache. Slightly short and slim, he would look quite smart. With three sons and one daughter under his belt from his first wife, one would assume that he was a well contented person. But, life, as it is, never leaves anyone satisfied with everything all the time. So, as he narrated, he wanted a fling. The nature of his job involved recruiting people, both men and women (mostly young), as workers in various construction and painting jobs. He frankly admitted of several short affairs but one girl was too alluring and he couldn’t resist the temptation of marrying again.

And to top it off, he said that his first wife is only 6 days younger than he is so maybe he had gone for a second one. "Now no more flings, I swear," he said, as life was fine now with both the wives taking life with a pinch of salt. "Of course, greater affection goes towards the second wife who has a year old daughter now," he spoke without any regrets.

For the woman with a husband younger than herself, life hasn’t been smooth. She is 43 while her ‘sauta’ is just 25. There’s a degree of envy. "I’m not beautiful. I’m old. And men always look for a wife who is younger and easier to control. He was scared of me and did whatever I told him to do," she said. She also had to say something more. "One evening two years back he came along with a girl and said that she was to stay in the house. Just two months after the girl had come, a girl child was born. No one from her family came so I took care of her even though I didn’t want to. After all he was my husband as well and it was my husband’s child."

A year later he took his second wife and left for another house. Formally they haven’t separated and she doesn’t want to file a legal case. The first wife has her own shop to look after. So financially she’s independent enough to look after her two grown up children.

And when both representatives, one a man who has kept both of his wives in relatively good terms and the second whose husband got a second wife and separated, seemed reconciled to their fates. The man seemed to boast of his deeds while the woman didn’t repent. Yet, a woman’s fate is not as good as it might be for a man. A man walks away with polygamy but it’s tough for a woman to bear a husband who brings in a second wife.