Govt treasury empty, only Rs 3.40 billion left

Kathmandu, June 21 :

A three-member mission of the International Monetary Fund (IMF), led by Sajnay Kalra from Washington DC, completed their 10 day long visit to Nepal today ahead of Nepal’s budget announcement for fiscal year 2006-07. It has taken a very serious view of the status of the country’s macro economic stability, especially of its fiscal imbalance in recent times.

Currently only Rs 3.40 billion is in government’s treasury which is just enough to

meet the salaries of civil servants for a month.

With this fiscal imbalance, IMF is confused whether to continue its Poverty Reduction Growth Facility (PRGF). If Nepal could maintain fiscal discipline, PRGF may be continued as per IMF, said a source at the central bank . The forthcoming budget needs to take stock of PRGF extension which is expiring as per earlier agreements with IMF in November this year.

Under the PRGF, Nepal has been getting loans from IMF to the tune of about seven

billion rupees at below one per cent interest rate for a three-year period. If that is not available, Nepal would be a loser at a time when Nepal is ‘cash-strapped’, said sources.

Another major concern shown by the IMF team while discussing with senior government officials related to its increased domestic borrowing, says a source.

During this fiscal year, the government has taken domestic borrowing amounting to Rs 11.85 billion which is two per cent of the total national domestic product (GDP) that stands at Rs 539 billion as of today.

As per South Asian standards, this amount of domestic borrowing is not big but according to global standards, it is ‘dangerous’. It will ultimately hit the external sector, specially the state of balance of payments (BoP), in IMF’s views.

As Maoists have already started peace talks with the government, their involvement in the budget would make it easier for the government to function in future.

Excessive domestic borrowing fuels inflation in developed economies but for a small economy like Nepal’s, it can create problems for the external sector as more money would be printed and borrowings from commercial banks would increase, putting further pressure on BoP.

Despite the formal conclusion of IMF visit, it is yet to be received by the Nepal government. IMF, however, has indirectly suggested the government to adjust the prices of petroleum products. If the prices of petroleum products are not adjusted in time, it would send ‘serious shocks’ to consumers, IMF viewed.

Due to hike in the prices of petroleum products in the international market, Nepal Oil Corporation (NOC) is incurring a loss of about Rs 650 million every month. IMF wants addressed in time. The IMF team has also suggested the government to expedite privatisation.

The Nepali government is currently seeking international financial support as budgetary support due to shortage of funds. It may be recalled that India has given a budgetary support of Rs 1.60 billion for five years.

Similarly, if the World Bank and the Asian Development could lend some money to this new government as a budgetary support, it can maintain fiscal discipline and survive. Otherwise, liquidity crunch will push Nepal towards real danger.