Under Stress

As less than two months remain before the current fiscal year ends, the government is working hard to come up with “realistic” budget. However, given the extremely fluid political situation and deepening economic slowdown apart from the disturbingly growing inflation rate, the Finance Minister has his hands full. At a time when a number of donors have indicated that they could cut down aid in retaliation to what they say as the setback to democracy, the government - given the limited revenue mobilization and stagnant internal resource situation – will be hard pressed to unveil development activities so badly needed by the poor people of this conflict-torn nation

By SANJAYA DHAKAL

At a recent pre-budget discussion program, Finance Minister Madhukar SJB Rana said that the twin priority of the upcoming budget would be poverty alleviation through PRSP and ushering in private sector-led economic growth. Besides, Rana has always maintained that the 21-point policy program of the government would be his guiding document.

The 21-point program calls for the participation of private sector in industrialization; utilization of modern technologies in agriculture, among others. The program also mentions Special Karnali Development Program, efficient public service delivery and development of long-term infrastructures like east-west electric train service, tunnel ways, waterways and ropeways.

The finance minister hailing from an aristocratic background will soon be tested how he would be able to deliver.

Nobody says his job is easy. Especially at a time when the February 1 political changes have turned off a large section of donors.

Financial Situation

The macroeconomic situation of the country is still stable despite the raging internal conflict. “Our economic growth stands at around 3.5 percent. The agriculture sector growth has been above 3.5 percent for the past three to four years while the non-agriculture sector growth has dipped to around 3 percent. Inflation is below 5 percent. This year the export growth stands at 2.7 percent, the current account balance is positive and the foreign exchange reserve is robust. In fact, as per a recent study by the International Monetary Fund (IMF) on economies of conflict-affected countries, the display by Nepal has been above average,” said Dr. Sharma. A recent report on the Nepal Living Standard Survey conducted by the Central Bureau of Statistics (CBS) and the World Bank, too, has shown that the level of poverty has decreased from 42 percent to just over 31 percent.

In an assessment he made about the Basic Economic Indicators and Achievements, economist Dr. Pushkar Bajracharya stated that economic growth in the country after 2000 has stood at 2.4 percent on average. “The total investment is rising; domestic savings have declined but national savings have increased; exports have declined: the Balance of Payment is unfavorable but the Current Account Balance is favorable. Likewise, achievements in physical term are satisfactory in access to electricity (growing from 20% to 40%) reduction in infant and child mortality, life expectancy at birth, coverage by irrigation facilities, and development of road infrastructure. However, achievements are still far from satisfactory in the areas of literacy, telephone lines, agriculture, industry and more importantly in economic growth rate,” Dr. Bajracharya stated.

According to economists, actual budgetary expenses have not increased commensurate to budget growth. “The actual expenses reached Rs 89.4 billion in 2003/04 or about 17% of GDP compared to 19.4% in 2000/01. Nepal’s public spending is still well below the desired 25% of GDP as an international norm. Moreover, due to growing security expenditure, the regular expenses occupy two-third of actual total expenses meaning that the public sector is investing less and less on capital formation/development expenses,” he stated.

Minister Rana, analyzing the first 100 days of the government, said the country was able to maintain financial stability and even inject confidence as shown by continued boost in Stock Exchange indices. “Due to efforts of security agencies, many transport syndicates have been broken, which has brought down transportation costs,” he said.

However, the steadily creeping inflation is beginning to worry the economists. From the level of below 5 percent, the inflation is slated to rise up to 5.8 percent this year. Thanks to the increase in the prices of petroleum products and increase in Value Added Tax (VAT) rate, which had a cascading effect on prices of other consumer goods, the inflation is beginning to increase. In fact, immediately after he was appointed Finance Minister, Rana has stated that controlling inflation is going to be his primary challenge. If allowed to increase unchecked, the inflation could disrupt the macroeconomic stability.

Besides, another problem the government faces is the donors’ support. After the February 1 royal steps, there have been a lot of apprehensions regarding the future of development projects funded by foreign countries and multilateral donors with many of them deciding not to sign new assistance projects with the government. The World Bank even withdrew its budgetary support worth Rs 5.5 billion.

As a result, the level of foreign aid for this year’s budget has been revised to come down from previous estimation of over Rs 30 billion to Rs 19 billion. According to Dr. Sharma, this year, out of the total Rs 22 billion of capital expenditure, the government is able to chip in with only Rs 3 billion while the donors will provide Rs 19 billion – 85 percent of the total capital expenditure.

“In this situation, if the government’s revenue decreases or if the donors do not help, that will directly hit the Poverty Reduction Strategy Program (PRSP) and Millennium Development Goals (MDGs), which in turn, could increase food insecurity and fuel conflict,” said Dr. Sharma, adding, “Because we are not in a position to decrease regular expenditures, security expenditures and debt repayment.”

Finance Minister Rana, too, said that the government was holding a meeting of local donor partners on June 6 to discuss with them and determine the level of assistance that it can be sure to get. “We want to include only the committed level of assistance in the budget.” FM Rana added that the government will live by the commitments it had made to the donors and that it respects their Basic Operating Guidelines.

Private Sector Aspiration

The private sector has already made a number of suggestions to the government for the forthcoming budget. Hit by political instability, the private sector is hoping for prudent economic policies that could bail them out.

Rajendra Khetan, noted industrialist and vice president of Confederation of Nepalese Industries (CNI), has made a number of suggestions that include reforms in labor law; setting up of Special Economic Zones (SEZ); promotion of exports; rollback in VAT rake hike; industrial security; true one-window system; efforts to bring down cost of doing businesses; infrastructure development and private sector partnership in poverty alleviation.

“The banks are flushed with funds even at interest on deposits as low as 2-3 % p.a.. They should pass this benefit to the borrowers by reducing interest on lending which still crosses double digit in most of cases.

Logistics cost, Khetan said, in Nepal is one of the highest in south Asia. To decrease it, he suggests fixed and regular schedule of train movement between Kolkata and Birgunj ICD can save huge logistic cost and reduction in Nepali trailer rates, among others.

Expenditure Commission Report

The report submitted last week by the high-level Expenditure Commission submitted should also provide ample guidance to the government in formulating a prudent budget. The report has made a number of concrete suggestions to control the growing current expenditure and boost the capital expenditure by adopting appropriate public expenditure management system.

The commission led by Professor Dr. Bishwambher Pyakuryal has also recommended appropriate ratio between current and capital expenditure based on fixed index. In the last few years, the current expenditure is rocketing. The report states that the government expenditure has grown uncontrollably because of the absence of any public expenditure policy. The commission has also provided a roadmap for such policy. The report states that emergency expenditure is growing beyond control. It has also advised the government to reform the accounting system.

The report has expressed grave concern over the surging ‘pension’ liabilities of the government. It has stated that between fiscal year 2058/59 and 2061/62, the number of pensioners grew by 6 percent to reach 117,233. Likewise, the number of pensioners from military and police has also increased by 8 percent in the period. It has drawn the attention of the government towards proper policy to meet the pension expenditures.

The report has also expressed concern about the rising security and defense expenditure. It stated that between fiscal year 2054/55 to 2058/59, the security expenditure almost doubled and is still growing in subsequent years. “And compared to its growth, adequate management of resource is absent,” the report states.

Compared to fiscal year 2054/55, the gross foreign debt the government needed to pay back increased by 7 percent to reach Rs 233.43 billion in fiscal year 2059/60 – which was equal to 55 percent of that year’s GDP. “The government does not have concrete policy on getting loans and paying them back,” said Dr. Pyakuryal.

Challenges Ahead

As anthropologist Dr. Bihari Krishna Shrestha recently noted, “the challenge of Nepal might be greater if looked at from non-economic perspective.” Given the high population growth, by 2015, Dr. Shrestha fears, that the population of the country could reach between 33 to 37 million (from existing 24 million). “This huge population would be difficult to manage in view of limited agricultural land. Therefore, our budgets should be tailored to act as catalysts for management and development of society,” he said.

The budget naturally depends on the nature and magnitude of resources at disposal. The internal resource of revenue is not growing as desired. It is growing at just over 10 percent. “As revenue surplus is not possible and as domestic borrowing cannot exceed Rs 9 to 10 billion, we have very limited options before us. In the current budget, more than two-third of development projects were financed by foreign aid,” said former finance minister Dr. Badri Prasad Shrestha.

The former minister hoped that foreign partners would ‘appreciate’ Nepal’s difficult position even as they have some very legitimate concerns. “Because the cost of no cooperation (by foreign partners) will be much higher – there will be escalation of conflict, proliferation of terrorism and deepening of poverty,” he added.

As such, the forthcoming budget will have to grapple with a number of challenges including introducing programs targeted at ameliorating the conditions of conflict-hit people; reinvigorating development programs; controlling inflation; keeping macroeconomic indicators in check; boosting exports; speeding up with reforms and so on. Will Rana be able to do all these things? The 24 million Nepalese hope he will.