Nepal | April 24, 2019

Low fund utilisation threatens development

Rupak D Sharma
Government's Absorption Capacity. Photo: MoF/ FCGO

Government’s Absorption Capacity.
Photo: MoF/ FCGO

KATHMANDU: The government was able to use only 41.11 per cent of the capital budget in the first 11 months of the current fiscal year, exposing the state’s low fund absorption capacity, which will further widen infrastructure gap in the country.

The government allocated Rs 116.75 billion for capital spending this fiscal year. But in the 11-month period to June 15, the government was able to use only Rs 47.99 billion of that budget, show the latest statistics of the Financial Comptroller General Office.

Although capital spending of the first 11 months of this fiscal is higher than that of the same period last year — when Rs 39.60 billion was used — the inability to utilise over 58 per cent of the capital budget points to weak public finance management, which has always created hurdles in the country’s development process.

If this trend continues in the next fiscal as well, the country will not be able to roll out projects and programmes related to reconstruction at an accelerated pace as planned.

Timely spending of capital budget is essential in a country like Nepal to unlock private investment, as public spending crowds in private sector investment. And to unlock private investment, public infrastructure is critical.

But because of the inability to spend capital budget on time, infrastructure deficit in sectors, such as energy and transport, is widening day by day, keeping investors at bay and preventing the economy from growing at a desired pace.

While greater capital spending lures private investment, it also creates jobs for a large number of people.

Last fiscal, for instance, 68 per cent of the capital spending went towards civil works, such as development of various physical infrastructure. These activities generated employment opportunities for thousands of people.

Nepal will desperately need such jobs in the coming days, as the devastating earthquake of April 25 and subsequent aftershocks have threatened to push 700,000 to 982,000 more people — 2.5 per cent to 3.5 per cent of the population — back into the trap of poverty.

To improve livelihoods of these vulnerable people, regain opportunities lost during the earthquake and restore physical infrastructure and assets, the government is mulling over ramping up spending in the next fiscal.

In order to mobilise financial resources for this purpose, the government is also holding the ‘International Conference on Nepal’s Reconstruction’, on June 25. And if everything goes well, the government may be able to raise adequate funds to rebuild the country.

But considering the poor track record of the government on spending, possibilities of a large chunk of fund remaining unutilised cannot be ruled out.

That’s probably the reason why Finance Minister Ram Sharan Mahat last week said: “The problem in the country is not lack of financial resources …. but the inability to spend the allocated funds on time.”

Nepal’s track record on spending — and subsequently project implementation — is poor mainly because of three major reasons.

First, is the lengthy process of conducting environment impact assessment, which takes around two years. A similar amount of time, or even more, is required to acquire land to build a project. And once these problems are sorted out, there is lengthy procurement process.

To deal with these problems, the government is mulling over forming a prime minister-led extra-ordinary mechanism to pursue reconstruction, which will be allowed to cut-short these processes to expedite project implementation.

Such a body may expedite spending. But what if it fails to do so? Who would be held accountable then?

To make officials accountable for underutilisation of budget, Ministry of Finance had previously started laying the groundwork to introduce the Budget Management and Fiscal Accountability Act.

But even after almost two years of beginning that process, nothing has happened till date.

If the government fails to introduce a law that penalises officials who fail to use the budget on time, capital budget utilisation will continue to remain low.

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