BUDGET SPEECH OF THE FISCAL YEAR 1999

Challenges of the Economy

12. As there still exist weaknesses and challenges in policy, structural and institutional aspects of our economy, the overall production and economic growth rate could not remain at high and become sustainable. After the restoration of democracy, numerous efforts relating to policy, structural and institutional reform were initiated in order to make the economy robust. Achievements from those efforts were encouraging. Our ability and achievements have been shattered as the economic reform, policy change, institutional ability and feeling of responsibility could not receive anticipated perpetuity and commitment. The wound of poverty, unemployment and social adversity is recurring. The existence of this situation, even after nine years of the restoration of democracy, is of grave concern and challenge for us. Therefore, I feel it as the main duty of the elected government to place without fear -- the economic, social and administrative weaknesses and challenges which are becoming more complex in the country -- in front of the nation and people, and to strive sincerely and honestly for their solution.

13. Traditional Agriculture and Law Productivity : The reliable basis of income generation and employment within the short period for Nepal as well as Nepalese people is agriculture. Yet, the agriculture sector which has such potentiality and capability is entangled with the vicious circle of low productivity. Due to lack of irrigation facility, subsistence oriented cultivation, use of old technology, lack of seeds, fertilizer and market etc., the production and growth rate of agriculture sector has remained very low. Income generation and employment opportunities could not increase particularly in rural areas. Likewise, there has not been expected improvement in per capita income due to the high growth rate of population. Thus, the main challenge of our economy is how to commercialize agriculture sector and how to increase production, income generation and employment opportunities in this sector.

14. Slackness in Industrial Commercial Investment: The economic reform program launched after the restoration of democracy by the government of Nepali Congress had been successful among national and foreign investors in generating considerable stimulation toward the competitive character and opportunities of our economy. Frequent changes in government as well as perplexities observed in the continuity of policies in recent years have, though, affected negatively in the country's environment of industrial and commercial investment. There has been, although, some improvements recently in the export sector, the majority of industries dependent on local raw materials could not become competitive. Due to the lack of development and expansion of physical infrastructure, investment in such sectors like tourism and hydropower which have comparative advantage could not be attracted as expected. Also, industries which are based on our competitive labor force have not received notable share of the market. The private sector has not been able to come forward in self-propelled manner for the industrial and commercial investment due to the assimilated reason of delay, administrative troubles and political instability observed in the process of our institutional, policy and legal reforms.

15. Regeneration of Poverty and Unemployment : Income generation and productive employment opportunities could not increase in the nation due to the low productivity of agricultural sector, sluggishness in industrial investment and rapid growth of population. Moreover, the situation of regenerating poverty and unemployment could arise due to the worsening of government's commitment and ability in catering basic services such as education, health, drinking water etc. in a coordinated manner down to the village level. Although the efforts of the active civil society in improving rural development and living standard of the poor people is praiseworthy, the danger is surfacing that the majority of poverty alleviation programs and efforts gradually become the ritual of commitment less word and practice.

16. Burdensome Public Corporations: The majority of public corporations which were established -- by investing scares resources to the tune of billions of rupees of our poor country, which is troubled by the lack of resources -- have now failed to deliver expected services and are suffering from the ailment of standard less production and low productivity. The return on billions of government's investment in corporation is negligible. The disease of government intervention in corporation's high level appointment, investment, procurement etc. has been persistent. Professional good governance could not be maintained in public corporations. The minimum cost of goods and services could not be recovered due to the pricing policy of corporations relating to goods and services provided to the people. In other words, corporations are becoming more and more burdensome and unable to shoulder their own burden. Thus, public corporations, on the one hand, seem unable to achieve their commercial purpose and, on the other, the process of privatization of public corporations is moving on slower pace. The burden of these incapable and inactive corporations has, at the end, been added on the shoulder of the poor Nepali people.

17. Sluggish Financial Sector: The entry and establishment of financial institutions after the c restoration of democracy in the country has been encouraging. However, commercial banks, finance companies, insurance companies, share market transactions as well as rural development banks etc. opened with the initiative of the private sector have not been able to play an effective role in the direction of desired investment promotion. In financial institutions, there is the indication that, on the one hand, monetary liquidity is increasing and, on the other hand, investment could not yet be channeled to productive sectors due to high rate of interest. The old and broadly based commercial banks of the country are confronting with the problems of ever increasing bad debts, weak debt recovery system and expanding capital base. Due to the lower rate of interest on savings, in comparison with inflation, the large chunk of capital that could be invested in productive sector is likely to flow to unproductive expenses. The Nepal Rastra Bank, which has the responsibility of monitoring and encouraging commercial transactions as well as ability of commercial banks and financial companies, is also facing the challenge of expanding its monitoring and supervision capacity.

18.Development Project and Foreign Aid: In a country like ours which is unable to fill the necessities of economic development only from internal resources, it is usual to have the necessity and importance of foreign aid. However, it would not be usual to go on losing our ability relating to the acceptance of foreign aid, and being selective and self decisive in the task of utilizing foreign aid. The danger of losing Nepal's ability in these aspects has increased. Due to the easy accessibility to foreign aid, the concern of the nation toward the difficult and tiresome way and efforts of mobilizing internal resources is becoming weak. Consequently, indication is being seen that foreign aid, instead of supporting our endeavor to mobilize internal resource and private investment, is substituting these aspects. It is becoming serious challenge for the country because of the tendency to search for foreign assistance even for the project that has to be started with the country's own initiative.

19. While evaluating generally the mobilization and utilization of foreign aid, the hard truth in front of us is that whatever the flow of foreign aid we have received to the sector having direct return, the large amount of the aid proceeds is used in ultra-modern equipment, vehicle, expensive consultant and advisor's services. Yet, domestically available manpower and institutional capacity has been ignored. While there is goodwill gesture of donor countries and agencies toward Nepal, there has been no solid work and achievement in the direction of enhancing our ability and absorptive capacity. Although, the number of projects implemented under foreign aid is surprisingly rising, there are, however, not many projects which can satisfy the government and donors on the basis of the ratio of return on investment. This stern fact points toward the inherent problems in the selection, composition, and form of foreign aided projects. I have realized that the absence of a clear and transparent policy on the mobilization of foreign aid in our country, where foreign aid is being mobilized since the last 40 years, is in the crux of this problem.

20. Resources and Skills of national and international non-governmental organizations (NGOs), which have been active in the various sectors of poverty alleviation and social services, have not been appropriately coordinated and utilized. There is the duplication in the works of NGOs. There is no consistency of NGOs with the programs and efforts of the government. Proceeds mobilized by NGOs have not been transparent as in the case of proceeds of the government budget, which clearly mentions where and how the amount was spent. The effort of the majority of NGOs is still concentrated in the urban and nearby rural areas. All the resources mobilized by NGOs have not been able to reach to the poor and targeted groups as desired by the nation. Therefore, as the level of foreign cooperation and assistance is important for Nepal, it is becoming equally important for Nepal to pay attention to the quality and composition of foreign aid.

21. Adhoc Selection of Project and Ineffective implementation: Another serious problem of our economy is the increasing number of projects to the unsustainable limit. Due to the overwhelming number of development projects, the limited means and resources of the Government are scattered in an unproductive manner. Due to which, incidents like the increase in the cost of development project, time lag and the lack of expected return are becoming normal instead of exceptions. Because of the reason that the government's resources are scattered haphazardly, the portion of the government's contribution becomes lower, which in turn leads to the ineffective implementation of foreign aid and the problems of time lag as well as cost increasing become prevalent. In the name of Adhoc projects, there has been the tendency of bearing administrative expenses of ministry, department, commission, committee etc. from the project. If the investment in development works is not made in accordance with the measuring device of the need, rationale and cost-benefit, it is likely that our development movement will become stagnant and the economy will be further pounded by the debt burden.

22.Diminishing Institutional Capability and Administrative Morale: The lack of coordination among government agencies and unnecessary increase in the numbers and expenses of ministries, departments and offices are becoming challenging to us. The tendency of carrying out works of regular nature and those determined by the government through commissions, committees and task forces is rising. Persons responsible for the government's policy making and implementation have been themselves in too much want of consulting services. This tendency has pushed away our administrative service from being responsible. The number of personnel And job positions are increasing, while the work incentive of staffs has not increased. Each year, the amount of salary and allowances to be borne by the government is increasing. However, there has been no increment in the net income of personnel. Due to the lack of facility, work incentive and politicization of administration, agencies providing government service to the people are frustrated and have low morale. The increasing attitude of looking at salary as the allowance of attendance and asking additional allowance to perform own regular work shows the existing weakness of our administrative machinery.

23.Corrupt Behavior and Economic Irregularity : Corrupt behavior and economic irregularity is expanding in every level and area as socio-economic perversion. For the poor and weak people, it has been increasingly difficult to receive services and facilities provided by the government. The shameless situation of paying extra price exists in government offices -- which are established with huge expenses - where the general public go to seek the service, facility, right and justice. There is a wide complaint of the people that, with the involvement of policy level also, there has been mis utilization of revenue in the collection of resources and irregularity as well as corruption in expenditure. Without ensuring that our public construction, government purchase, supply, revenue administration and offices providing government service are efficient, transparent, responsible, non-corrupt in delivering service, it is not possible to provide to the people the feeling and experience of good governance.

24.Budget Deficit and Increasing Imbalance between Revenue and Expenditure: our ability to mobilize revenue has not increased to the level in which the level and speed of our expenditure is increasing. The development expenditure is continuously rising due to our weakness in selecting development projects. While in the front of regular expenditure, there has been serious problem in expenditure management as a result of increasing burden of debt servicing and salary as well as allowances.

25.Our capacity of debt servicing has not increased as anticipated due to the lack of utilizing loan proceeds in a productive manner. Consequently, we are now mobilizing only about 11 percent of GDP as revenue. out of the total revenue, about one fourth is spent on debt servicing. Considerable amount is spent on salary, allowance, pension and government subsidy. Besides, due to the uncontrolled increase in the operating expenses of offices, the situation is that only a small. portion of revenue could be allocated for the development purposes. In order to eliminate the increasing imbalance between the revenue and expenditure, there is no alternative except to provide added emphasis on expenditure management and revenue mobilization. In the context of Nepal preparing to join the World Trade organization (WTO) and making common trade open and liberal among SAARC member countries, it is clear that our comparative dependency on custom revenue will be diminishing. Unless, there is a rapid increment in economic activities, it would not be possible in the short run to mobilize maximum revenue from the income tax. As only the Value Added Tax appear as our reliable source of revenue mobilization in the long run, the slackness appeared in its effective implementation has made our, internal resource mobilization challenging. objectives, Policies and Programs of the Budget.

Rt. Hon'ble Speaker,

26. A collective commitment is indispensable to formulate some policies and programs and execute,those policies and programs to transform our economy from current situation into a vibrant and dynamic one in the context of facing the aforementioned challenges. While formulating the budget for FY 1999/2OOO, I have put promises of the Nepali congress party made to the public as well as objectives and priorities of the Ninth Plan at its centerpiece. Through this budget, I would like to propose the following policies and programs and thereby confirm the beginning of a campaign with the Government commitment in providing continuity to these policies for the next five years to fully achieve the objectives of this budget. objectives:

(a) to alleviate poverty through the modernization of agriculture, rural development, community participation, empowerment of women, creation of employment opportunities, and development of social and economic infrastructure;

(b) to achieve high economic growth rate through better mobilization and prudent sensible use of economic resources;

(c) to build a strong economy by encouraging private sector participation while providing continuity to economic reform programs; and

(d) to ensure good governance by transforming development administration into a service and result oriented system.

|Previous| |Next|