Nepal | July 08, 2020

Is the govt penny-wise, pound-foolish?

Rupak D Sharma
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Since we cannot boost exports in the short term, the only remedy for falling foreign exchange reserves is increasing foreign investment

— Anand Bagaria, managing director of Nimbus Holdings

Kathmandu, December 5

One thing that the incumbent government takes pride in is the pace at which it is generating revenue. Government’s revenue collection soared 41.7 per cent to Rs 197.9 billion in the first quarter of this fiscal year. This was partly because of revision in income tax threshold and cutback in leakages at customs points. But one major factor for revenue surge is soaring imports, meaning a big portion of the government’s income, as in the past, is coming from taxes imposed on imported goods.

A big jump in imports implies upsurge in outflow of money to finance goods brought from abroad. Capital flight would not have posed a big problem had Nepal been able to offset its impact by increasing exports. But Nepal imported Rs 15.7 worth of goods for every rupee of goods it exported in the first quarter of this fiscal year, according to the central bank. This mismatch, coupled with a weak rupee, has put a strain on foreign exchange reserves, which fell to $9.6 billion in October from $10.1 billion in July when the fiscal year began. The central bank has now prevented every Nepali travelling abroad from fetching foreign exchange facility of over $1,500, as against $2,500 in the past, to stop further erosion in foreign exchange reserves.

“Since we cannot boost exports in the short term, the only remedy for falling foreign exchange reserves is increasing foreign investment,” said Anand Bagaria, managing director of Nimbus Holdings, a leading business house. Higher foreign investment is also crucial for Nepal because banks here have very little money to lend to entrepreneurs and government’s capital spending, as in the past, has not taken off.

Finance Minister Yubaraj Khatiwada had said Nepal would be established as a foreign investment destination while presenting the annual budget. But foreign investment inflow dipped 74.6 per cent to Rs 1.5 billion in the first quarter of this fiscal year.

“Nepal can attract foreign investment only if it makes targeted interventions,” said Biswo Poudel, a University of California, Berkeley-educated economist, who teaches at Kathmandu University. One such intervention, according to Poudel, is reduction in corporate income tax, which stands at 25 to 30 per cent.

“Even a slight reduction in corporate tax would send the message that the government is ready to do business and is keen on creating an investor-friendly environment,” said Poudel. “If gains are generated through this intervention, the government can garner support for more reforms over time.”

The government, however, balks at the idea of reducing taxes, fearing it would diminish resources to finance ballooning recurrent costs, such as salaries and benefits of its employees. “But recurrent cost could be reduced if Armed Police Force (APF), established during Maoist insurgency, is abolished and the number of army personnel, which also surged during Maoist insurgency, is reduced by half,” Poudel said, adding, “We do not need APF and an overstaffed Nepal Army because Maoist insurgency ended more than a decade ago and resources allocated to them should be channelled toward more productive areas.”

The government is planning to spend over Rs 15 billion on Armed Police Force and around Rs 43 billion on Nepal Army this fiscal year. “This spending will come down if we abolish APF and reduce the size of Nepal Army, providing real peace dividend to the public,” Poudel said. “But the strong government, which enjoys support of two-thirds of lawmakers, has decided to maintain the status quo rather than take bold decisions.”

Poudel was trying to drive home the point that the size of the government is getting bigger and this should stop as it is consuming resources that could be used for development works.

“The savings we make from operating a lean government could be used to provide incentives to sectors where growth returns are highest. This can help the private sector to increase production and exports,” Poudel said.

It is not that the government has not been providing incentives to the private sector. But the process of getting those incentives is cumbersome. And at times, the government defaults on its promise to provide incentives. Take for instance the 2014-15 proposal to provided Rs five million upon generation of every megawatt of electricity within 2024-25. The incentive has not been provided till date, despite knowing hydropower could emerge as a major foreign currency earner for the country. All the while, the country has been importing up to 500 MW of electricity from India, making a dent in foreign exchange reserves.

“The government likes to talk about big things like structural reforms and blame the private sector for everything that has gone wrong. But it fails to deliver on small promises that can be effective to prop up investor confidence,” said Kumar Pandey, vice president of the Independent Power Producers’ Association, Nepal. “This shows the government is not focusing on the big picture. That’s penny-wise and pound-foolish.”

A version of this article appears in print on December 06, 2018 of The Himalayan Times.

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