COVER STORY (Spotlight Weekly)

BUDGET ESTIMATES 2001-02

Promises To Keep

Finance Minister Dr. Mahat tries his best to restore business confidence and strike a balance between the development needs of the country and rising government expenditure in the next yearís budget. But deteriorating law and order and political instability pose threats upon its effective implementation

By BHAGIRATH YOGI

When a young hotelier in Kathmandu got his copy of the NEWSWEEK magazine early this month, he found himself in a great dilemma. The magazine had a cover feature on ten worst countries in the world. Was Nepal one of them? As he swapped pages of the magazine recalling Lord Pashupatinath, to his great satisfaction, Nepal was seen nowhere in the picture.

While presenting the budget estimates for the year 2001-02, Finance Minister Dr. Ram Sharan Mahat had the onerous task of restoring confidence of people like the young hotelier in the capital. Growing Maoist insurgency, extortion, attacks and arsoning of the industry and businesses, frequent `bandhsí and strikes, attacks upon a section of business community right in the heart of the capital late last year, to name a few, have done collective harm to the Nepalese economy. The royal palace massacre on June 1 may have been the last nail in the coffin. Most of the hotels and businesses in the country are yet to return to the normalcy.

Presenting an annual budget in such a situation would not have been a favorable exercise for any finance minister. Two-week long state mourning and targeting of high revenue paying establishments by the Maoist rebels at the end of the fiscal year made matters worse. "Recent disturbances may have caused the state exchequer a loss of up to Rs 1.5 billion," admitted Finance Minister Dr. Ram Sharan Mahat.

When he was appointed chief of the Bagh Durbar in February 2001-- after a gap of nearly one year, Mahat was reportedly unwilling to join the office. Well aware of the challenges that the country was facing and growing burden on the exchequer due to rising security expenses and substantial hike in the salaries of the government employeesí in the current fiscal yearís budget, he knew where his priorities lay. Declining business confidence, deteriorating law and order, slackness in economic activities and acute political instability would not help the job of a finance minister. "The country could fall into an unprecedented crisis if the widening gap between governmentís income and expenditure is not reduced," warned the minister. " A poor country like Nepal canít sustain spending a huge sum under security expenses for long."

In less than five months in office, Dr. Mahat had his job cut out to him. Despite tremendous political pressure, he has announced accommodation or slashing of nearly 12 percent of all the government offices in the next fiscal yearís budget. (Nepal fiscal year begins in mid-July). The government has also decided to implement a number of recommendations made by the Public Expenditure Review Commission (See: Box). While the budget has set ambitious targets for mobilization of revenue and foreign aid, officials say they had to use all their skills to keep the size of the budget under 100 billion rupee mark.

As expected, the budget doesnít make provision for any new projects. Instead, it has announced a concrete time frame to ensure timely release of the budget and implement the development programs. Early this year, the Finance Ministry brought out a new Budget Preparation Manual replacing the one issued in 1997 with emphasis on the performance of the projects.

Of the estimated Rs 99.79 billion budget estimates, Rs 49.32 billion has been allocated as regular expenditure and Rs 50.47 billion as development expenditure. The budget plans to finance the expenditure by raising Rs 60 billion from revenue and Rs 30 billion from foreign aid. There will be a budget deficit of an estimated Rs 10 billion. The minister proposes to finance nearly one-third of the total budget through foreign aid (including grants and loans).

According to Dr. Mahat, the budget proposal aims at improving the environment of investment, reform the financial sector, maintain public expenditure under sustainable limits and strengthen good governance. The budget has proposed a number of measures to rehabilitate sick industries, promote exports and information technology, pursue financial sector reforms, reform state-owned enterprises, alleviate poverty, expedite social sector development and employment promotion.

Industry/Exports

With a view to support dwindling domestic industries, the budget makes it mandatory to procure local products as much as possible under the theme "Be self-reliant, use local products." The budget has also made a provision of concessional loan at 7.5 percent interest rates to sick industrial units. The government has said it will simplify the existing procedures related to foreign direct investment (FDI). Director general at the Department of Industries has now been authorized to clear FDI of up to Rs one billion. With a view to sort out duty draw back problem, the budget has introduced "pass book" system for the exporters. Similarly, exporters drawing credits in foreign currency have been offered interest concessions of up to 1.5 percent, while those using local currency denominated loans have been offered a concession of 1 percent in their banking sector loans. The budget has identified the information technology sector as a priority industry and has also proposed setting up of a venture capital fund to minimize risks in the investments made in this sector.

Social Sector/Poverty Alleviation

The social sector has drawn the biggest share of the budget. The allocations to education, health, drinking water and local development have been increased by 18.8 percent, 45.1 percent, 34.4 percent and 33.1 percent respectively in the next yearís budget in comparison to the last fiscal yearís revised estimates. The budget has allocated Rs 206 million for the Poverty Alleviation Fund and has made provisions to avoid duplication of nearly 20 different programs targeted at poverty alleviation. It has also set aside Rs 1.5 billion to be mobilized for poverty alleviation programs through the Rural Micro finance Development Center (RMDC). Despite demands from the lawmakers, the Minister refused to raise the limit of money (Rs one million per head) provided as development fund for the Members of Parliament.

Agriculture

Critics say, agriculture-- the mainstay of the Nepalese economy has got least attention from the formulators of the budget. Instead of resuming subsidies on the imports of chemical fertilizers and shallow tube wells as demanded by some political parties, the budget has proposed concessional loans to the farmers to start commercial farming. The budget has also failed to devise any effective mechanism to effectively implement the long-term Agriculture Perspective Plan (APP)ósaid to be a key to poverty reduction in the country.

Security

Keeping in view of the growing Maoist insurgency, the budget has allocated Rs 10.28 billion for security expenses of which the lionís share will go to Nepal Police (nearly Rs six billion). Besides, Rs 600 million has been allocated for Integrated Security and Development Programs being implemented in seven districts severely affected by Maoist insurgency. The government is planning to expand the program in four more districts this year, reports said. For the first time since the launching of the Maoist ëpeopleís warí more than five years ago, the government has slapped one percent special tax on import and taxable income to finance the soaring security expenses. "The introduction of the tax in the name of security points toward the governmentís commitment to bring the law and order situation under control," said Dr. Minendra Rijal, a management expert. "But at the same time it will be under constant pressure to deliver the goods."

Revenue Collection

To realize the target of collecting Rs 60.25 billion as revenue in the next fiscal year, the Finance Minister has expressed commitment to broaden the income tax base, implement the Value Added Tax (VAT) more effectively and introduce new laws and regulations to check the revenue leakages effectively. The Minister said a special campaign will be launched in the next fiscal year to bring all firms dealing in vehicles and spare parts, computers and accessories, marble slabs and hardware into the tax net. Early this month, Kantipur daily reported that there has been a leakage of an estimated Rs 150 million per annum as revenue since a majority of the computer vendors in the capital did not pay the tax they collected from the consumers to the government. The annual sales of computer parts and accessories are estimated to be around Rs two billion in the capital alone.

With a view to recognize the contribution of taxpayers in the national economy, the government has announced the carrot and stick policy. Accordingly, the top ten taxpayers of the country would be entitled to use the Commercially Important Person (CIP)ís lounge at the Tribhuvan International Airport. At the same time, Dr. Mahat said the government would take stringent steps against agents of any domestic or foreign development projects who do not show their sources of income to the newly formed Department of Internal Revenue by October this year.

The Minister has proposed capital gains tax of 10 percent in the trading of securities; deductible at source if the trading is carried out at Nepal Stock Exchange Ltd. Similarly, the government has made it mandatory for professionals like doctors, engineers, lawyers etc. to maintain account books, in addition to compulsory auditing if transactions over Rs one million are carried out.

Can the budget be implemented?

Though most of the commentators have termed the budget as ërealistic,í opposition leaders have claimed that it is least likely to solve the major problems that the Nepalese economy is facing now. Former Finance Minister and a senior UML leader, Bharat Mohan Adhikari, said the budget has failed to address the critical situation of the country that the Economic Survey portrayed. "There is widespread pessimism and the document lacks a national vision." Added former Finance Minister and Vice Chairman of Rastriya Prajatantra Party, Dr. Prakash Chandra Lohani, "There is no basis to believe that the government would be able to implement whatever it has said."

The business community has taken the new budget with cautious optimism. Outgoing President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Pradip Kumar Shrestha welcomed the budget and said there was a need to give emphasis on its implementation aspects. Added Rajendra Khetan, a leading industrialist and former Vice President of the FNCCI, "The governmentís commitment to provide industrial security and revive business confidence is praiseworthy."

Given the tendency of lack of commitment on the entire government machinery to implement the budgetary provisions, questions have been raised once again regarding its implementation. For example, the "basket funding" mechanism to carry out development works in the Maoist insurgency affected districts had to be dropped as it failed to take off amid deteriorating law and order situation. Prmoises made in this yearís budget speech such as providing training to unemployed labor force, promotion of self employment, setting up of National Womenís Commission, setting up of the National Food Security Reserve, Credit Rating Agency and Asset Reconstruction Company etc. are yet to be fulfilled.

In this backdrop, all would like to see whether the proposed budget could be implemented in its true spirit. Says Dr. Mohan Man Saiju, former Vice Chairman of National Planning Commission; "The ruling party should take initiative in resolving burning problems of the country through dialogue with the opposition parties. If that can happen, there is every possibility that the Nepalese economy can take a big leap forward within the next two or three years."

As the sounds of bullets continue to echo in the remote hills and explosive devices make noises right in the capital, even the enlightened people would refuse to believe that Nepal still deserves a premising future. Unless there is peace and tranquility, no economic activity can sustain for long, not to talk of the foreign and domestic investment. For the majority of masses, personal safety and peaceful environment is what they would strive first, rather than packages of development. Will the peace be restored in Nepal once again? Letís keep our fingers crossed.

WHAT WILL COST MORE?

Prices of video parts, video camera, wristwatch, marble slab, granite, album, posters etc. are likely to go up as the government has raised import duty on these items. Similarly, the excise duties of cigarette, beer, wine and alcohol have been increased. The budget has also raised the import duty on milk and milk products, mustard oil, cement and cotton textile. The budget has balled production of polythene bags of less than 20 micron. On the other hand, the budget document has reduced customs duty on cotton yarn imported by textiles mills by 50 percent.

HIGHLIGHTS OF THE BUDGET 2001-02

Some of the important features of the budget estimates for the next fiscal year are as follows:

Top priority to poverty alleviation.

Department of Industry authorized to clear foreign investment projects of up to Rs one billion.

Rs 263 million allocated for Poverty Alleviation Fund.

Provisions made for the rehabilitation of the sick industries.

Emphasis on use of domestically manufactured products.

Security budget touches Rs ten billion mark (with an increase of Rs one billion this year).

The construction of the proposed Information Technology (IT) Park to be completed within the next two years. 50,000 youth to be trained in IT in the next three years.

Rs 1.42 billion allocated for Melamchi Drinking Water Project.

Encourages investment form the Non-Resident Nepalese.

Proposes formulation of strategic planning for the state-owned enterprises and converting them into companies providing them autonomy.

Year 2003 to be observed as Export Promotion year.

Year 2002 to be observed as Destination Nepal year.

Proposes one percent special tax on imports to provide for strengthening security measures.

‘The Budget Lacks Commitment’

— BHARAT MOHAN ADHIKARI

A senior UML leader and former Finance Minister, BHARAT MOHAN ADHIKARI, sees fundamental flaws in the economic policies adopted by the Nepali Congress governments since early 1990s. He is also critical of the latest budget of the Koirala government. Follows excerpts from his interview published in Budhabar weekly, Wednesday:

How do you see the latest budget presented by Dr. Mahat?

The Economic Survey presented by Dr. Mahat in the parliament portrays dismal picture of the economy. The GDP growth rate has declined to 5.8 percent this year from 6.1 percent and growth of agricultural production has declined to 4 percent from 5 percent last year. Similarly, the growth of non-agriculture sector has declined to 6.9 percent this year from 7.4 percent only last year. The industrial productivity has gone up only by 3 percent. Despite its target of raising revenue at the tune of Rs 54 billion, the government has been able to collect little more than Rs 41 billion by the end of mid-June this year. The exports of carpet and garments are on the downward trend and that of pashmina has almost collapsed. All this shows that the economy is on the verge of total collapse. But the budget has failed to forward any programs or commitment in such a situation.

How do you see the rise in the security expenditure?

The massive rise in the security expenses is another threatening aspect of this budget. In the districts where Integrated Security and Development Program is being implemented, even the development budget earmarked for the Members of Parliament is to be spent through the police administration. In such a situation, the District Development Committees will only remain as a showpiece.

Is this decentralization? It has tried to wipe out the role of the people's representatives at the local bodies. So, I don't think that this budget will expedite development programs and give relief to the people.

So, don't you see any positive aspect in this budget?

Though it is a traditional budget it has tried to correct its past mistakes. The proposal to rehabilitate the sick industries and provide customs facilities to industries including textiles, cement, iron rods etc. is a positive development. I would like to thank Dr. Mahat for this. But the budget has failed to introduce a massive program for protection (of domestic industries).

Will the implementation of Poverty Alleviation programs under the same umbrella improve things?

In the context of `Congressization' of programs like B. P. with the Poor, Ganeshman Peace Campaign, the proposal to integrated poverty related programs is a good initiative. Similarly, authorization of local bodies to carry out infrastructure development works at the local level is a positive development. But I must say that the fundamental trend of the budget remains same. Even after spending billions of rupees in agriculture there has been no achievement. How can you reduce poverty and unemployment without improving the agriculture? For agricultural development, the government should have put forward concrete programs to carry out revolutionary land reforms, reduce the ceiling of land, provide land to landless squatters and former kamaiyas (bonded laborers). The Agriculture Perspective Plan (APP) has targeted to double the per hectare use of fertilizer. But the subsidy on fertilizer has been completely removed. There is no proper facilities for irrigation. Even after the fourth year, the government has failed to implement a document like APP in which there was an all-party consensus. the budget has failed to increase investment in the rural areas. I am totally disappointed from this budget.