Low capex spending and widening trade deficit

Had the budget plan been executed successfully, most development work and post-quake reconstruction would have been expedited


The end of fiscal year 2016/17 yet again highlighted the government’s inability to execute the budget plan; and the problem of low government spending, burgeoning trade deficit and import growth corresponding to revenue collection resurfaced. Had the budget plan been executed successfully most development work and post-earthquake reconstruction would have been expedited.

Although the World Bank stated that Nepal’s economic growth rate reached 7.5 per cent in the last fiscal year, the government administered big scale projects at snail’s pace and the private sector strengthened their trade dependency through imported commodities and services.

Low capital expenditure

The government could not meet the budget expenditure target in the last fiscal year as the overall budget expenditure stood at Rs 823.21 billion which is 78.48 per cent of the total allocated amount of Rs 1,048.92 billion. The pace of development expenditure remained even more sluggish as the government only managed to spend Rs 204.30 billion or 65.5 per cent of Rs 311.94 billion allocated for capital expenditure. On recurrent budget, the government spent Rs 516.07 billion which is 83.62 per cent of the allocated recurrent budget of Rs 617.16 billion.

The government’s failure to deploy capital expenditure hampers economic growth of the country in many ways — the underdeveloped infrastructures and incomplete national projects do not propel but rather impede development works. The government’s inadequate spending last fiscal even led to major credit crunch in Banks and Financial Institutes (BFIs) wherein NRB had to intervene by altering its monetary policy. Anil Shah, President of Bankers Association of Nepal, says, “When the budget was announced for the last fiscal year, the banking sector increased their lending exponentially in the first six months which groomed the economy. But then the expected government spending didn’t occur which resulted in credit crunch. As a result, BFIs hardly lent any

money to the private sector.”

Big national projects

Capital spending remained stunted despite large sums of money allocated to big national projects. Projects such as Kathmandu–Tarai Fast Track with allocated budget of Rs 10 billion and Nijgadh International Airport with a budget of Rs 2 billion didn’t make any progress due to lack of project preparedness. Speaking with THT Perspectives, Mukunda Raj Panthee, Information Officer at Financial Comptroller General Office (FCGO), says, “Budgets for big projects are allocated without proper homework. Project preparation is necessary before the government decides to provide large chunks of resources to such projects.”

The National Reconstruction Authority (NRA) also fell short of its target. Until now, only around 45,000 houses have been rebuilt and 115,000 are in the construction phase. NRA has targeted mid-July, 2018 as its deadline to identify beneficiaries of the housing grant. This is likely to expedite post-earthquake reconstruction work and make proper use of the allocated budget.

Burgeoning trade deficit

According to the data unveiled by the Department of Customs, the country’s import surged by 27.02 per cent to Rs 984.07 billion in the last fiscal year. On the other hand, exports increased by only 6.35 per cent to Rs 74.71 billion. The ballooning trade deficit of Rs 909.35 billion reflects the country’s market economy which is dependent on imported goods and services. The negative balance of trade is a worrying factor for both the government and the private sector because it results in the outflow of foreign currency to other countries and mitigates economic growth destabilising local industries.

The share of import was 91.7 per cent of the total trade of Rs 844.97 billion in fiscal 2015/16 whereas in the fiscal year 2016/17 imports rose to 92.9 per cent of the total trade of Rs 1.06 trillion. Rabi Shankar Sainju, Spokesperson for Ministry of Commerce (MoC),  says, “Nepal is dependent upon the import of petroleum products and other forms of fuel which widens the trade deficit. Therefore, we must prioritise export and move towards balance of trade through strong production base. MoC is currently reviewing policies and also working closely with the private sector to encourage the export of Nepali products.”

Political instability, insufficient infrastructure, lack of resources often discourages large investments in Nepal. According to Former Finance Secretary, Rameshor Khanal, Nepali market is guided by short-term remunerations as the private sector is primarily focussed on investing in automobiles and housing which are less-productive sectors for the economy. In addition, the sky rocketing credit rates of BFIs have also discouraged the private sector to risk big investments.

Nepal only managed to export woollen carpets, juice, jute goods, readymade garments and cardamom in large quantities in the last fiscal year. Gyanendra Lal Pradhan, Treasurer of Federation of Nepalese Chamber of Commerce and Industry (FNCCI) says, “The country’s economy will completely breakdown in another ten years if the import ratio continues to increase. FDIs must be encouraged and railway network must be built to directly transport cargos from India to major cities of Nepal which will reduce the import of automobiles, petroleum products and also compensate high transportation cost.”

Revenue collection soars high

The exponential growth in imports allowed the government to exceed its revenue collection target of Rs 565.9 billion in the last fiscal by Rs 45.87 billion. Revenue collection saw a growth of 26.93 per cent growth in the last fiscal as compared to the previous fiscal. Even though the government could not meet the target of Value Added Tax (VAT), it exceeded the collection under all other headings.

The government collected Rs 151.36 billion through income tax against the target of Rs 127.52 billion and Rs 112.22 billion from the custom tariff against the target of Rs 104.74 billion. The government managed to collect Rs 84.53 billion against the target of Rs 80.94 billion through excise duty. Registration tax collection also increased to Rs 18.21 billion against the target of Rs 14.04 billion. Rs 8.81 billion was collected under vehicle tax against the target of Rs 7.54 billion.

Revenue collection is likely to soar higher in the current fiscal year but at the cost of the economy being trapped in a vicious cycle. Rapid inflow of remittance has increased people’s purchasing power which results in imports of goods and that finally amounts to increasing revenue collection. However, once the value of foreign workers plummets in international market, the country’s economy will collapse unless we seek long term solutions by reinforcing our market with domestic products.