‘Execution challenges should be addressed collectively’

The first federal budget for fiscal 2018-19 presented on May 29 drew widespread criticism, with even the ruling party members stating it failed to give an impression that the government is putting enough effort to translate the vision of economic prosperity. Critics have alleged that Finance Minister Yubaraj Khatiwada has ignored the promises made in the left alliance manifesto while preparing the budget. Private sector is unhappy as tax rates under several headings have been increased, against low incentives. However, the finance minister claims that the budget has focused on generating employment, developing entrepreneurship, boosting production and redistributing growth in an inclusive and gender-friendly manner. Finance Minister Khatiwada spoke to Pushpa Raj Acharya of The Himalayan Times on how the federal budget intends to bring transformation in the economy. Excerpts:

Even the ruling party members are expressing dissatisfaction with the budget 2018-19 saying it is moderate in terms of size, has not addressed aspirations of the people and missed the opportunity to leapfrog Nepal’s economy. What will you like to say on this?

People are comparing next year’s federal budget with the current year’s budget, which is based on unitary government structure. We now have 761 budget systems in federal government. The federal government is handing over resources to sub-national governments. Next year’s budget is 44 per cent of gross domestic product, which is historical. The size of our consolidated budget (761 governments plus federal government) would amount to at least Rs 1,550 billion and the consolidated capital expenditure is around Rs 650 billion. It is kind of a paradigm shift on the whole budgetary system. We are raising revenue at 35 per cent compared to current fiscal year. The budget is quite ambitious. I often mention Newton’s second law of motion that states that the rate of change of momentum of a body is directly proportional to the force applied (or big force is required to push the stagnant economy). As we are envisioning a big jump, we have given a large push to revenue generation. But, there is conceptual problem in understanding the budget even for economists and former finance ministers, which is why I said that an apple should be compared with an apple and an orange with an orange while addressing the Parliament.

So, the federal budget will address the structural constraints of the economy mentioned in your whitepaper?

This is the starting point to correct the fiscal system. I will cite a few examples. First, we have stopped unfinanced budgeting process. We have only accounted for the revenue, foreign aid and domestic borrowing, which can be collected and mobilised. We have not included any fictitious numbers. Second, we have tried to be as transparent as possible in allocating budget, as provincial and local governments would have separate budgets. Third, we have streamlined reforms by plugging all loopholes in the revenue system, including VAT refund. The government was being cheated in numerous ways, so we have corrected indirect tax system. In direct tax system, we have become more progressive in terms of structure of tax rates. We have not raised the tax burden too much. Also, we have opened doors for provincial and local governments to work with private sector and cooperatives in a more candid and clear manner. We will be working in a more consolidated budgetary framework, which should widen economic growth and address the fiscal challenges that I cited in the whitepaper.

You have been repeatedly asking private sector to engage in production sector, and saying imports should create optimum value addition in the economy rather than promoting excessive consumerism. But the private sector says they do not see any ground to be competitive in industrial production. In this context, how will the targets set through the budget be achieved?

An economy should be sustainable environmentally as well as fiscally. The remittances have been lubricating our economy, which has basically fuelled consumption. But it is not a lasting solution and we have to provide opportunities for the youth to work in the country by generating jobs. The trading community, which is thriving because of remittances, should shift their business towards setting up industries. Also, making money through trade deflection and arbitrage between prices does not work. While trading is less risky and a means to make a quick buck, our challenge is to show that industries can also be less-risky and entrepreneurship can be developed in industries and a degree of protection will be provided through a transparent tax system, customs, excise, in production and exports wherever applicable; financing could be made easier; cost of doing business will be reduced and that could encourage private sector to come into this area. There are 20 different areas/avenues in which we have sought support from the private sector. Now we want to sit with private sector and develop bylaws and regulations to encourage their participation. And I do hope this joint effort will propel the economy to new heights.

You have talked about protecting industries. But experts say it will raise inefficiency in the economy. What is your take on this?

Industries will get adequate protection, but it will not be an absolute or indefinite protection. Currently there are many cases of dumping and rampant import of low quality, cheap goods that are distorting the markets. Our protection will be in two folds — our products should be competitive in terms of both quality and price. We have binding rates in customs and limitations in VAT because there is no differential treatment in imported and domestic goods while levying VAT. The only window to protect domestic industries is excise. We have used excise as an intermediary approach to protect domestic industries, but it cannot be a long-term solution. There are complaints of price coalition among domestic industries, which we are looking into seriously. The whole approach is to seek paradigm shift from investment in trading business to industry by channelising all the productive resources towards the areas where we can generate output, income, and employment. Moreover, private players engaged in productive economic activities are happy already.

What is your response to the realty traders and stock market investors who are unhappy with your budget?

Housing and share market are also necessary to accommodate people and mobilise funds. But my suggestion to the business community is not to speculate on those things. Housing is necessary, but do not take it as speculative asset. Investors can invest in share market, but should be aware of the risks involved. Investing without assessing risks will only lead us to crisis.

The budget has envisaged self-reliant, resilient and interdependent economy. Could you please elaborate?

These are the basic premises. Take for example, food. We are not talking about being self-reliant in all kinds of food we consume. But we must have adequate production, smooth supply and minimum buffer stock of certain staples. The second is related to health security. We suffered a trade blockade some two years back. This is why we have encouraged private sector to chip in investment in pharmaceuticals industry, healthcare. Energy security is another. We are currently dependent on import to cater to our domestic demand, but that situation should change over the next five years at the most. This could significantly bring down our petroleum import over the next 10 years. The other aspect in which we want to be secured is jobs. Those working abroad are not secured. Job opportunity and its security — safety and stability in workplace — have been stressed. We have also underscored the need of robust infrastructure to prod industrial development. These are the areas that we have identified as critical.

The budget 2018-19 has focused on creating entrepreneurship and talked about providing access to finance through banks to returnee migrants, women, Dalits and youths. Do you believe that the banks and financial institutions will execute this policy?

All entities are a part of the broader system of the state. Banking sector has been operating in freedom, but no business can go beyond the policy of the state. Yes, the state should be careful in intervening the market forces and we have the wisdom not to overly interfere in the business practice of the private sector. If there are certain national priorities like promoting agriculture, tourism and SMEs, where all the stakeholders should take part, I don’t think only the banks can be given the liberty to do as they please. I do hope that some of the things that we have initiated through the budget will be addressed through monetary policy of central bank.

Due to huge financing requirements and low savings of the country, the central bank has allowed banks to borrow from foreign banks to invest in the country. Some Indian joint venture banks have proposed to borrow in Indian currency. What’s your view on this?

I think it is a valid proposal. I have personally encouraged banks to borrow from foreign banks to invest in Nepal. If that fits the business model, there should be no problem in borrowing. Currently our domestic savings is just 15 per cent of GDP, while our investment requirement is 45 per cent of GDP. We need to bring in money from external sources to meet the investment requirements. As government’s borrowing cannot jump overnight, we have limited sources to borrow. If banks can bring in money from third countries and India, we have to encourage them. Risks related to exchange rate are limited and for short-term loans, they themselves can hedge it. For longer term loans, there should be an institutional mechanism to manage long-term hedging.

The budget has talked about developing 750-megawatt West Seti Hydel project through internal resources. But the Investment Board is not willing to withdraw the project from Chinese firm. Why this contradiction between MoF and Investment Board Nepal though you represent IBN as its vice chair?

It’s a project that has been put on hold since several years. This is a key project of far west region, or Province 7. They say the project should be implemented and the government is also planning to have at least one storage project based on the viability. We picked the project on the condition that if the party with whom MoU is signed is not interested, we would take up this project with our own financing. We have communicated with the Chinese party numerous times. If they are interested, we can talk with them. But if they are not serious, we don’t want to keep this project lingering for long. If the Chinese party will not do it, we won’t award this project to another party. We will implement it through our own resources.

Lastly, are you hopeful that the budget will be executed properly because we have been facing challenges in budget execution since long?

This budget is a bit ambitious. We have targeted eight per cent growth through execution of budget and people are asking ‘where is the capital investment to achieve the high growth?’ Our accounting system has some errors, the money allocated under financing heading is also invested in capital formation. Like, the funds spent through our public corporations like Nepal Electricity Authority, Civil Aviation Authority of Nepal are also capital investment under financing heading. The grant amount transferred to sub-national governments is from recurrent expenditure heading. If we segregate the capital budget component, the consolidated amount of capital budget will easily reach Rs 650 billion and this is a landmark budget. If we achieve eight per cent growth, 400,000 people will get new job opportunities and additional 100,000 from employment schemes. While there are challenges in execution, we should be addressing them in a collective manner.