Budget dashes hopes for faster industrial development

Kathmandu, May 29

The budget for fiscal year 2018-19 presented in the Parliament today was expected to be ground-breaking as it was framed by the strongest government formed since the restoration of democracy in 1990. But it failed to meet the expectation, as it did not incorporate policies and programmes to bring about radical economic changes.

The private sector was particularly hopeful that the budget would include revolutionary programmes to spur investment and domestic production. But Finance Minister Yubaraj Khatiwada failed to show appetite for risk despite having support of over two-third parliamentarians. This is a lost opportunity for the monetary economist, who could have written his name in the history books as the champion of second generation economic reforms in Nepal.

Nepal is still a least developed country, but its economic landscape changed quite rapidly over the years. It has, to a great extent, removed two key binding constraints for higher economic growth: Inadequate supply of electricity and rigid labour regulations. Another critical growth constraint, policy implementation uncertainty, is likely to be removed soon, as a powerful government has assumed the country’s driving seat.

Very soon, power cuts, which have plagued households and industries, will also be history, as 456 megawatts of electricity will be added to the national grid upon completion of Upper Tamakoshi Hydroelectric Project. A number of other hydroelectric projects are also being built rapidly. This progress made in the energy sector and reforms in labour market have provided an opportunity to bring about a revolution in the industrial sector, whose contribution to the economy has shrunk to 14 per cent from 23 per cent in 1998-99.

But the budget has sought to promote a handful of industries, such as sugar, pharmaceuticals, steel, wood, cement and other basic construction materials. This is not adequate to expedite industrial sector’s growth, which is critical to create jobs and end labour flight to the Gulf and Malaysia, where Nepalis are working in deplorable conditions, while creating a shortage of human capital in the country. This makes the budget for the next fiscal year, which begins in mid-July, not very different from those of previous fiscal years.

This, however, should not mean budget of the past was not constructive enough. Initiatives taken in the past to build infrastructure projects, such as Kathmandu-Tarai Expressway, Mid-hill Highway and Postal Highway, international airports in Bhairahawa, Pokhara and Nijgadh, Butwal-Gorakhpur and Galchhi-Rasuwagadi-Kyirong cross-border transmission lines, irrigation projects in mid-western region, and East-West electric railway, are critical to crowding in private investment. The finance minister has said adequate budget has been allocated for these projects, which is commendable.

The minister also deserves praise for bucking his party’s trend of introducing populist programmes named after various leaders. This time only two projects incorporated in the budget, a science and technology academy and an east-west highway, have been named after the ruling party’s late leader Madan Bhandari. The minister has, thus, saved a lot of taxpayers’ money by not yielding to the temptation to make everyone in the party happy. This, in turn, has helped him to introduce a compact budget of Rs 1,315.2 billion, up 2.8 per cent than in the current fiscal year.

The introduction of a lean budget has provided an opportunity to the finance minister’s party to rectify the past mistake of unnecessarily inflating the budget’s size. The practice of introducing bloated budget started when the current prime minister was leading the government in 2016. The same mistake was repeated by another government led by Pushpa Kamal Dahal. This made it difficult for the government to mobilise financial resources to fund programmes incorporated in the budget. This also prevented the government from meeting its expenditure target.

Although this problem has now been sorted out, chances of underutilisation of the budget — especially capital budget allocated for infrastructure projects — are high in the next fiscal as well, as some of new projects are unlikely to move ahead at a desired pace due to cumbersome procurement process. Some of the projects that are likely to see very little progress are a number of tunnel-ways, and Tamor, Kankai, Uttar Ganga, Naumure, Sunkoshi II and III, Kaligandaki and Nalgad multipurpose hydroelectric projects. This will once again hit capital spending, which has always remained low in Nepal.

Also, plan to provide loans of up to Rs 700,000 at five per cent interest against academic certificates to ‘entrepreneurial youths’ is difficult to be implemented, as banks and financial institutions do not take unnecessary risks by issuing credit without backing of fixed assets like land.

So, as in the previous years, the budget’s success will depend on the government’s will to implement the programmes. If all the programmes are implemented on time, it would not be hard to achieve eight per cent economic growth rate as envisaged by the budget. For this, projects must be monitored properly and staff, who fail to meet targets given to them, must be penalised.