• TOPICS
KATHMANDU, MAY 05
There has been much debate around the ability of capital expenditure to boost long-term growth of the Nepali economy.
Capital expenditure is expected to achieve economic growth through a multiplier effect.
Lack of capital expenditure is often faulted for the inability to achieve long-term growth and employment targets.
The creation of capital assets helps generate future cash flows for the economy and adds to value creation. Capital expenditure helps expand ancillary industries and services, and create jobs. It also facilitates labour productivity.
However, during the period of the pandemic, the multiplier effect will not take place as people are holding idle cash out of fear of unforeseen expenses during possible future lockdowns.
Inflation-induced price rise of food and health also affect the multiplier effect as households will be spending much on consumption items.
Also, capital expenditure funded by the government through heavy domestic borrowing has the potential of crowding out capital expenditure by the private sector.
During the first wave of COV- ID-19, a nationwide lockdown, implemented during from March to July last year, impacted economic activities in the last four months of FY2020. As a result, output contracted by an estimated 1.9 percent in FY20.
Wholesale and retail trade, tourism, transport and associated services such as hotels and restaurants – which are all important drivers of growth – were particularly impacted.
In the first half of FY21 (Mid-July 2020- Mid-Jan 2021) growth has remained sluggish as tourism activity was stalled and private investment constrained by risk aversion and uncertainty.
The current emphasis must be on timely implementation of the National Pride Projects and other ongoing projects.
The maintenance, repair and operations expenditure, which is part of revenue expenditure, will have to be monitored during project implementation to see to it that it increases the ability of the capital assets to deliver the projected benefits during the assets' lifetime.
The government should also aim to cut down on inefficient revenue expenditure and focus on creating a balanced and stable virtuous cycle which can have positive effects in the long term.
This will help set the foundation for stimulating growth and future investment, while eventually leading the economy to overcome the recessionary pressure should the COVID second wave prolong.
No economic activities will restart unless the pandemic is brought fully under control. For this, everybody has to work together.
A version of this article appears in the print on May 6, 2021, of The Himalayan Times.
