FORUM (Spotlight Weekly)

Internal Memo Institute for Development Studies

Mr. Mahesh Acharya has been appointed as the Minister of Finance in the new government headed by Mr. Girija Prasad Koirala. It was not an unexpected event for the public familiar with Nepali politics. It might be recalled that Mr. Acharya, the architect of the current year budget, had resigned on January 28, 2000 from the Government headed by Mr. Krishna Prasad Bhattarai over the appointment of the current Governor of the Nepal Rastra Bank.

Mr. Acharya for reasons that are obvious to all was not involved in the implementation of the budget for a period of about two months - fifty three days to be precise. He is now back, according to press reports, with new energy. " I understand that the situation is very critical and it has demanded extra effort and honesty from us", Mr. Acharya explained to his staff at the Ministry of Finance after assuming office.

Subsequently, he, along with the Governor of the Nepal Rastra Bank, explained to the staff their concern and the plan for the future - a good beginning we must accept. Now, it is high time for both the Government and the members of the "civil society" to evaluate, first, the programs proposed by them and, then, monitor its implementation. We are perhaps first to begin this task, though, at a modest scale. This note was prepared for that purpose.

The Economic Situation

There are a number of agency in the country - National Planning Commission, for example - with the responsibility of monitoring the economic performances and emerging trends on regular basis. But they are seldom involved to perform the assigned task. We have to relay, therefore, on various sectoral studies and in the report prepared by a few international institutions.

These reports indicate that Nepal’s economic performances in recent years has been less than satisfactory with little success to improve the deep rooted poverty. Rather, it has worsened further in the rural areas due to sluggish performances of the agriculture sector. The gross domestic product at constant price in preceding two years increased, on average, by 3.0 percent per year, half the target of the Ninth Plan.

The gross domestic product may increase by 6.0 percent in the current fiscal year as claimed by the Government due to favorable weather. The rate of inflation has also declined due to external factors; the price in the first six months of the current fiscal year increased by 2 percent.

International reserve - the total reserve is now sufficient for nine months merchandise import- has continued to increase due to rising private transfer and official loans from both bilateral and multilateral sources. Export performances was relatively encouraging.

Despite these encouraging trends, the prospect for sustained growth to make meaningful progress for poverty alleviation is not encouraging. The implementation of the Agricultural Perspective Plan has lagged behind nor there is any major recovery yet in the industrial and business sector.

The fiscal position, in particular, is not in good shape. The growth in revenue has not kept pace with the growth in expenditure and the budget deficit has increased by 97 percent to Rs. 5.05 billion in the first seven months of the current fiscal year. It is expected to have increased further recently due to increased expenditure on internal security, among others. The Government is planning to take new initiatives but the prospect is not encouraging.

The banks and financial institutions have excess of resources - about Rs. 6 to 7 billion according to recent estimates -and it is rising. For the Government, however, it has been relatively easy to borrow from the market to finance the budget deficit as the commercial banks with excess liquidity grab the treasury bills even at a relatively low rate of interest. For others, the interest rate has remained high, notwithstanding the recent decline in inflation rate and the expected fall in interest rate in India.

This has enable a number of commercial banks to maintain their profit position which, in turn, has increased the share price of commercial banks and so-called NEPSE index. The interest rate on time deposit has continued to decline - the only instrument available in the country for the public to keep their monetary savings. This will effect adversely the national savings which is relatively low - 12.7 percent of national income in 1998/99.

It is customary to blame, specially by the donor agencies, the two state owned commercial banks for the problem in banking sector with privatization being the only measure available for reform. The performance of Nepal Bank Limited has shown that it is more serious than that. His Majesty’s Government has not yet been able to examine the problem in an integrated manner. The announcement from both fiscal and monetary sectors are made without detail study and full consideration of cross sectoral impact.

Current Signals

These are observations made by the responsible officials on current financial position and prospect:

1. The Nepal Development Forum (formerly Nepal Aid Group) meeting has been tentatively scheduled for April 17-20. "It is already late for us to prepare for the meting. We have to quickly decide whether we are prepared for the scheduled date" (Finance Secretary Ram Binod Bhattarai).

Comment: The policy approach that the Government will follow in the NDF meeting is not clear nor it has been discussed in Parliament or in any public forum. The Ninth Plan, which is now in the third year of its implementation, has neither been updated or revised. It might be useful to discuss the new policy initiatives in various forums such as the National Development Council.

2. The regular and non-budgetary expenditure (security related?) has increased at a rapid rate but the growth in revenue has declined due partly to problem at Calcutta port. If the expenditures are not controlled, it will create serious problem at the end of the year (Finance Secretary Ram Binod Bhattarai).

Comment: This is one of the serious issue faced by the country. In the lack of timely initiative, we might loose the even the macro economic stability experienced by the country.

3. The process of financial reform has slackened in the last two months. There is need to control unplanned expenditure and speed up the process of implementation of development projects (Finance Minister Mahesh Acharya).

Comment: The public expenditure management was initiated from as early as 1991. The problems have not yet been solved.

4. There is need to review rural banks as their performances are not encouraging. (Rastra Bank Governor Tilak Rawal)

Comment: Is there any relation between the poverty alleviation program of the Government (Poor with Bisheswar, for example) and the recent deterioration in the institutional capability of the rural banks?

5. "Since inflation is at a low level of two percent, there is scope for expansionary monetary policy" (Governor Rawal).

Comments: A difficult concept to follow without detail study of the purpose, process and the cross sectoral impact.

(Excerpt from Economic Overview, Vol. 2, No 5, April 1, 2000.)