Cover Story (Spotlight Weekly)

BUDGET 2004
Populism And Performance

The finance minister belonging to a communist party unveils a budget of balance. In a please-all budget, Bharat Mohan Adhikari has tried to walk a tightrope of populism and performance. Touted as a ‘budget for peace’, Adhikari hinges the success of his budget on the prospects of peace. The pulls and pressures of the ideologically polarized coalition government shows clear on Adhikari’s budget that speaks about liberalization on the one hand and subsidies on the other. Even as he fails to shrug off his ideological burden by doling out public money for populist measures, Adhikari promises to carry forward the economic reforms programs. How far Adhikari will be able to keep the promises he has made remains the ultimate question

By SANJAYA DHAKAL

Finance Minister Bharat Mohan Adhikari had earned the name of Mr. Populist when he presented his maiden budget in 1995 during the minority government led by the Communist Party of Nepal (Unified Marxist Leninist).

This year, although at difference places Adhikari attempts to show his true color, he manages to cobble together a budget of balance – striking a chord between populism and hard economics. In an attempt to reclaim his legacy on the Build Our Village Ourselves program of 1995 in which each VDCs were granted Rs 500,000 to carry out development efforts, Adhikari dangles additional performance-based resource of Rs 200,000 to them. However, he forgets to mention how the local bodies that remain without elected representatives can be expected to judiciously spend the resources.

Consumers : Prevailing indifference

A full time critic of earlier budgets and finance ministers, Adhikari, however, fails to discern himself from the pack. As usual, his budget is touted as pro-poor.

The compulsion of governance reflects heavily on Adhikari, who till a week before the budget was unveiled was claiming he would slash the spiraling security expenditures.

He, however, manages to address the conflicting and contrasting concerns of the multi-colored coalition partners. The fact that he only had about a week to prepare the budget must also be factored in while giving him due credit or criticism.

Budget In Numbers

Finance Minister Adhikari unveiled Rs 111.68 billion budget ordinances for the fiscal year 2061/62. The budget does not seem to make a radical departure from the policies and priorities of the earlier governments. It has given continuity to the reforms programs.

Of the total, Rs 31.57 billion is set aside for capital expenditure (for development purposes). The budget aims to raise Rs 66.26 billion as revenue; Rs 15.35 billion as foreign grants; Rs 16.95 billion as foreign loans; and Rs 13.11 billion will be the deficit.

Farmers : Not much to cheer about

Adhikari has re-introduced subsidy on shallow-tube wells and in the transportation of fertilizers. “At a time when farmers of neighboring India are enjoying subsidies, we cannot let our farmers suffer,” he said.

The budget allocates Rs 2.68 billion for agriculture; Rs 2.62 billion for irrigation, Rs 5.54 billion for road development repair, Rs 6.36 billion for electricity development, Rs 2.26 billion for Information Technology and Communication; and Rs 60 million for special program to develop five districts of Karnali zone.

“Special efforts will be made to conform our legal provisions with that of WTO. We have also cut down some custom tariffs this year, in accordance with our WTO commitments,” he said. Adhikari has allocated Rs 1.5 billion for holding general elections.

In the security front, Adhikari claims he has not increased the budget of the Defense Ministry. “The adjusted estimates of the budget of the previous fiscal year (2060/61 – 2003/04) shows that Rs 8.38 billion were provided to the Defense purposes. In this year (2061/62 – 2004/05), I have allocated Rs 8 billion to the same,” he said.

The budget has made sectoral allocations to the four main pillar objectives of the Tenth Plan. Rs 17.81 billion has been allocated for achieving the strategic target of broad based economic growth. Likewise, Rs 21.2 billion will be utilized to achieve the target of social sector and rural infrastructure development; Rs 2.75 billion for the social inclusion and participation; and Rs 5.41 billion for good governance programs. The regular administration and debt servicing will use up Rs 64.48 billion.

Social Spending

Adhikari has considerably increased the budget for education sector. He has set aside Rs 17.93 billion – an increment of 24.8 percent compared to the previous year – for the education sector. The Education for All (EFA), which targets to provide education to all by 2015, has been brought into force.

He has introduced new programs like providing total scholarship to the students belonging to Dalit families at primary level. For this he has set aside Rs 140 million. “This will benefit 5,59,000 children of Dalit families. Likewise, fifty percent of girl students will receive similar scholarships for which additional Rs 158 million has been allocated,” he said.

A separate Gird Education Fund with the seed money of Rs 20 million has been set up to expand the girl education in order to meet the Millennium Development Goal in this regard.

Over Rs 1.1 billion has been allocated for the physical infrastructure construction of schools. The budget plans to construct 2048 new classrooms, 1361 toilets, drinking water facility in 1175 schools and 90 top grade schools from this resource in the fiscal year 2004/05.

The budget for health sector, too, has been considerably increased by 50 percent to reach Rs 6.7 billion. “Programs have been introduced to provide universal access to basic health services. Resources have been allocated to facilitate the access of poorer section of people to health services,” Adhikari said.

The health centers at district headquarters of Dolpa, Mugu, Kalikot and Rolpa would be upgraded to district hospital. Primary health centers would be expanded so that there is at least one of them in each and every constituency.

The budget has allocated money to provide free anti-retro viral treatment to 450 HIV/AIDS patients. A Manmohan Memorial Cardio-vascular center will be set up within the Tribhuwan University Teaching Hospital. A special campaign is on the cards to provide vaccine to children between the age of 9 month and 15 years to prevent diseases such as measles, Japanese Encephalitis and other communicable diseases.

Likewise, Rs 3.58 billion has been set aside for the drinking water development purposes. Sixty-seven drinking water projects will be completed within this fiscal year and 40 of them would be handed over to community for management. Rs 1.1 billion will be allocated for this year to carry out the high-priority Melamchi Drinking Water Project.

“The increase in social sector spending is an encouraging sign. But it is still unclear through what mechanism does the minister plan to spend the resources,” said Dr. Minendra Rijal, an economist close to ruling Nepali Congress (Democratic).

Peace As Priority

Adhikari has touted the budget as being peace-oriented. He has set up a peace fund of Rs 20 million. “I plan to lure more resources in this fund through foreign assistance. These resources will be used for the sole purpose of peace-building,” said Adhikari. The budget also announces the formation of peace secretariat.

As the number one priority, the finance minister has set aside resources for the restoration of peace, settlement of social conflict and progression. Rs 50 million have been allocated for helping the victims of conflict. Rs 600 million have been allocated for the reconstruction of destroyed infrastructures. 40 districts have been identified as the most needy ones and the government plans to spend Rs 10 million in each of these districts for community participatory development activities. “I plan to hand out this resource to fund the projects chosen by the local community and to be carried out in their active participation,” he said.

Economists and experts, however, believe that merely allocating resources do not make the budget peace-oriented. “Peace is a political process not an economic one. By allocating peanuts for providing relief to the victims of conflict, the Finance Minister is falsely claiming that his budget is peace-oriented,” criticized Dr. Ram Sharan Mahat, former finance minister and a senior leader of Nepali Congress (NC).

Mixed Response

Shrestha : Mixed response

The budget, again as usual, has drawn mixed reaction. While many have welcomed it for focusing on social development, some have raised doubts over the government’s ability to deliver. Representatives of the private sector, too, have given varying responses.

Binod Bahadur Shrestha, president of the Federation of Nepalese Chamber of Commerce and Industry (FNCCI), has both bricks and bouquets for Adhikari. “Based on our initial study of the budget allocations, we welcome the increased spending on education and health. However, we are equally concerned about the lack of program to help the sick industries,” he said.

“The budget is, unfortunately, silent on matters like investment, commercialization of agriculture, tourism development, export diversification and identification of our competitive and comparative advantages,” said Shrestha, adding, “The economy is facing uncertain times as the markets continue to shrink; there are obstacles in the delivery of goods and lack of investment.’

Likewise, Binod Chaudhary, president of the Confederation of Nepalese Industries (CNI), said that the major challenge was to expand the economy. “Our capability to manufacture is eroding, our imports are getting India-centric. We cannot imagine that foreign remittances alone will continue to sustain our economy,” said Chaudhary, adding, “The private sector is currently facing multidimensional problems – that of law and order, extortion, pressure from the banks and pressures to compete in multilateral free trade regimes. The budget should have addressed some of these concerns as well.”

Padma Jyoti, former president of FNCCI, believes that nobody should expect ordinary budget in such extra-ordinary times. “We should not engage in useless academic exercise in such a crucial juncture,” he said.

Economists, however, have found some inherent weaknesses in the budget. “Agriculture deserves much more attention. Specially at a time when there is a global consensus that development of agriculture is imperative to uplift poor countries like Nepal, Adhikari missed a great opportunity in announcing big programs aimed at helping our farmers,” said Dr. Minendra Rijal. “Likewise, the budget should have announced employment-generating programs.”

It is not easy being a finance minister of a government that has four political parties with four different priorities and programs. In an attempt to please all the parties, Adhikari has had to exhibit a different balancing act. But that was an easier part. What is more difficult is how he implements his policies and programs to benefit the country and its people. As they say the taste of pudding lies in its eating, it would be premature to hail or discount the new budget.

Ordinance Controversy

Adhikari

When Finance Minister Bharat Mohan Adhikari announced budget for the fiscal year 2004/05 through ordinance last week, one of the persons who took most delight was the former finance minister Dr. Prakash Chandra Lohani. Having been pilloried for presenting budget through ordinance last year, it was now the turn of Adhikari to be at the receiving end. “Adhikari used to make tall claims that budget should not be presented through ordinance. He castigated me for doing so last year. Now he has done the same. Is it not immoral of him to eat his own words?” asked Dr. Lohani. In the absence of the House of Representatives, budgets for the last three years have been presented through ordinances, which need to be re-issued every six months. “I have a problem with the budget being announced through ordinance,” said Dr. Ram Sharan Mahat, former finance minister and senior leader of Nepali Congress (NC) who refuses even to acknowledge what Adhikari announced as ‘budget’. “It is not a budget but a report of incomes and expenditures.” Amid this debate on budget ordinance, one must not forget that it was Finance Minister Mahesh Acharya of NC party who had started this tradition in 1994. And every time there was absence of the House of Representatives, finance minister of every political shade has gleefully announced their budget through ordinance. Interestingly, they have never shied away from castigating the minister of the day for announcing budget through ordinance. The debate continues till date.

Alternative Model

Dr. Pyakuryal

At a time when the government has been unable to deliver the essential services to the people, a leading economist has opined that the time is ripe to go for an alternative model. “It is crystal clear that until and unless the Maoists are taken into confidence, the development expenditure targeted at rural areas cannot be spent. It, therefore, warrants that the government make some sort of arrangement through which the resources can be spent,” said Dr. Bishwambher Pyakuryal, president of Nepal Economic Association (NEA). “Nobody can guarantee that the conflict will end soon. In case of sustained conflict situation, we must maintain a minimum level of economic growth, which can be achieved only by increasing development expenditure. As such, I favor channeling development funds, where applicable, through a committee including representatives of the Maoists and NGOs. This will help in the continuity of development efforts,” said Dr. Pyakuryal. Not only Dr. Pyakuryal, even the Finance Minister Adhikari himself has said on record that he will utilize development funds come what may. “If the formal channels do not work, the government will make use of alternative models,” said Adhikari without elaborating what exactly he has in mind when he talks about alternative model.

Economic Survey Report

The economic survey of the fiscal year 2003/04, which was released by the Finance Ministry a day before the announcement of the new budget, has estimated that the economic growth rate for that year will touch 3.6 percent – slightly less than was the earlier prediction of around 4 percent but still considerable given the terrible security situation and persisting instability in the country. The GDP growth was recorded at 2.7 percent the previous fiscal year. The growth rate in 2001/02 was negative by 0.6 percent. The satisfactory growth in the economy in the fiscal year 2003/04 has been attributed to significant agricultural growth of 3.3 percent, an increase of 1.2 percent compared to the previous fiscal year. The Economic Survey estimates that out of Rs 41.81 billion set aside for development, around Rs 30 billion would be spent. In development sector, only 24 km more road could be constructed; 3000 skilled health manpower were added; and distribution of telephone increased substantially by another 57,528 lines. The survey accepts that the meager growth was not sufficient to have any impact on poverty alleviation. The per capita income of Nepalese, which was US$ 250 in the previous year, has increased to US$ 269 – the increase is said to be mainly due to depreciation of dollar value. The total foreign loan has crossed Rs 245 billion – Rs 9911 on the head of every Nepalese. The inflation stands at 4.4 percent. According to the survey, in the past ten months of the fiscal year, exports have increased by 4.5 percent. Imports were up by 9.5 percent compared to 16.7 percent in the fiscal year 2002/03. The balance of payments has shown a surplus of Rs 11.62 billion in the past eight months. The foreign exchange reserves have increased by 15.9 percent totaling Rs 125.39 billion.

Monetary Policy For Fiscal Year 2004-05

Governor Dr. Tilak Rawal unveiled the monetary policy on July 19. The policy has the main objective to maintain monetary stability. The salient points of the policy are as follows:

Monetary Policy instruments

1. Cash Reserve ratio CRR has been reduced from 6 to 5 per cent . This will release approximately Rs 2 Billion.

2. Arrangements has been made for issuing HMG bonds under price auctions system, wherein market force will be permitted to fix the interest rates.

3. The liquidity for these bonds will be provided through Nepal Stock exchange.

4. Rs 1 Billion will be continued to be provided for the rehabilitation of Sick industries.

Financial Sector Reforms:

1. Restructuring of Nepal Bank Ltd and Rastriya Banijya Bank to be continued –at a significantly reduced cost.

2. Appropriate policy to be framed for encouraging Bank's investment in the area of infrastructure like Hydro power, Education and health

3. Credit Information Center to be established as a company to streamline the function of credit information flows and also to help in Blacklisting the defaulters

4. Capital Adequacy Ratio( CAR), required to be maintained by Commercial Banks, continued to be fixed at 11 per cent for the current fiscal year 2060/61 also. CAR of 12 per cent target required to be met at the end of the current Fiscal Year

5. Second Tier Institutions to be established for the exclusive purpose of supervising co-operatives as well as other Financial Intermediaries

6. One supervision Office to be established in Chitwan from the start of the current Fiscal Year for the exclusive supervision of Financial institution operating in Narayani, Gandaki, Lumbini and Dhaulagiri zones.

7. Exchange of Soiled currency notes to be permitted to be handled through private parties also.

External Sector Reforms

1. The limit of $ 500, for the purpose of free exchange facility, has been enhanced to $ 1000.

2. Restriction of one Air Ticket purchase in one fiscal year for travel abroad has been lifted

3. Anybody now can purchase Business Class air ticket. Repatriation for such air tickets will now be automatically granted.

4. Commercial Banks has been authorized to issue bank Guarantee in foreign exchange by themselves in cases where the applicant is going to receive the proceed of its service in foreign currency itself.

5. NRB approval is going to no more required in the case where the applicants are HMG and its related units

6. The bank guarantee percent has been reduced from 10 to 5 per cent in the case of exporter exporting under cash against Document procedures.

7. Arrangement has been made wherein commercial banks now will be permitted to make payment for E-Commerce .

8. Commercial Banks has been permitted to do investment of its foreign exchange balance beyond one year maturity.

9. Banks has permitted to issue credit and debit card with payment up to $5000.

10. Importers can now import under FOB basis also. Foreign exchange facility to cover freight component will be separately provided by the banks here in Nepal itself, thus providing significant flexibility to the importers.

11. The list of goods eligible to be imported under $ payment from India will be increased beyond 39 numbers which are there presently.

12. Commercial Banks has now been permitted to undertake inter-bank borrowing as well as lending in Indian Rs.