Nepal is likely to miss the capital expenditure target this fiscal year as well, as only 13.06 per cent of the total allocated fund of Rs 208.88 billion has been spent in the first eight months of the current fiscal year. Low capital expenditure has been a bane for Nepal, which is facing a huge infrastructure gap. This has prevented the country from achieving high economic growth rates and eroded the country’s competence. Low fund absorptive capacity has also made Nepal’s development partners wary about channelling funds to Nepal. Rupak D Sharma of The Himalayan Times recently caught up with Thomas J Richardson, Senior Resident Representative for Nepal, India and Bhutan at the International Monetary Fund, in New Delhi and discussed IMF’s support to Nepal and ways to enhance the country’s fund absorptive capacity.

The International Monetary Fund (IMF) recently provided SDR 35.65 million (approximately $50 million) to Nepal under the Rapid Credit Facility (RCF). The IMF was also holding discussions with the government on extension of Extended Credit Facility (ECF). How far have the talks reached?

The IMF provided RCF, a post-emergency lending facility, last summer to Nepal Rastra Bank (NRB) for on-lending to the government. The IMF extended the credit facility to participate in the international relief and reconstruction effort (in the aftermath of the earthquakes of April and May). At the time when we provided RCF, we also discussed the possibility of extending ECF, under which medium-term support is extended to low-income countries that need sustained engagement with the IMF. But subsequent political changes consumed lots of attention, which has put the ECF issue on the backburner. However, we expect to have a team in Nepal in early April and hope to hold interaction with authorities on this issue as well. So, the IMF is ready to extend ECF. But NRB as well as the government should show the desire to make use of this facility.

RCF and ECF are extended to countries facing balance of payments (BoP) problem. Since Nepal was not facing this problem at the time when the IMF decided to extend RCF, funds were disbursed as direct budget support. Can the same condition be applied if Nepal intends to make use of ECF as the BoP is still in surplus?

Yes, that’s the intention. As you know, NRB has a healthy foreign exchange reserve. Nevertheless, the reconstruction effort, coupled with Nepal’s long-term development challenges, will have an impact on the BoP, which needs to be addressed. We recognise that BoP problem comes from the fiscal side and not from the monetary side. So, we will find a way to make resources available to the government through NRB. The IMF lends to the central bank, which then makes the funds available to the government. We have previously done this in other countries, so it won’t be a problem. We generally lend to countries to help them cushion the impact of adjustments they make and make the adjustments smoother and easier to manage. That’s our real objective. Also, engagement with the IMF will provide some comfort to bilateral donors that are extending resources to Nepal. This is because many donors find it helpful if IMF-supported macroeconomic policy framework is in place in the country where they work.

But ECF comes with conditions as well. Is it true that Nepal is a bit wary about these conditions?

I don’t think our conditions are onerous. People think IMF prescribes policies that are painful to implement. But we have changed over the years. We just held a conference titled ‘Advancing Asia: Investing for the Future’ (in the Indian capital of New Delhi). One of the objectives of the conference was to make people aware about how the IMF has evolved over the years and how it has started to think about the world in a modern 21st-century way. We abolished structural conditionality that accompanied our programmes over a decade ago. There is no legal structural conditionality in IMF programmes now. We do make recommendations on structural policies that governments should undertake, but it’s entirely within their discretion to follow our advice or choose a right time to implement those suggestions. The only formal conditionality in our programmes now are related to the level of fiscal deficit, monetary policy, which should be consistent with the objective of keeping inflation rate at a low level, and the level of international reserves. Nepal, for instance, is not facing the problem of fiscal deficit. In fact, it has not been able to absorb funds for a long time. So, in Nepal’s case, it would be inappropriate to put a ceiling on fiscal deficit because the country needs to spend more, especially the capital budget.

What do you think needs to be done to address problem of low fund absorptive capacity of the government, which is hitting the country’s capital spending?

Nepal is not the only country which is facing this problem, although it is quite severe in Nepal. The solution is to improve public financial management system and strengthen the capacity of institutions at all levels. We are happy that the Ministry of Finance has decided to introduce the Fiscal Responsibility and Budget Management Act, which aims at medium-term budgeting. This Act will enable the government to develop a medium-term fiscal plan, which will pave the way for capital spending initiated in a year to be continued for several years. The government also introduced treasury single account system a couple of years ago with technical support from the IMF. The data generated by that system can also be used to make public spending more efficient. But there is also capacity constraint at line ministries and sub-national government level. And Nepal is likely to face more challenges on this front once the constitution is fully implemented and local elections are held. So, Nepal can be key beneficiary of the integrated capacity development centre called the South Asia Regional Training and Technical Assistance Centre (SARTTAC) that the IMF has decided to open in New Delhi. I believe the SARTTAC will do lots of work in Nepal and will cover areas such as budget management and raising efficiency of capital spending.

The SARTTAC will provide technical assistance to Nepal and help build capacity of government officials. But what about problems such as delay in decision making, which are not technical in nature, but affect capital spending. How can this problem be addressed?

My perception is that people in the bureaucracy are sometimes afraid to take decisions despite being fully aware about significance of the projects that they are planning to implement. This is because of fear of being accused of doing something wrong. India also faces the same challenge. And lots of delays in infrastructure spending in India are related to this problem. Of course, if someone does something corrupt then they have to be prosecuted. But when people are doing their jobs within the framework of the mandate given to them, then they have to be protected to some extent from accusations of malfeasance. We all know that the best disinfectant against corruption is sunlight. If officials can make best decisions on behalf of the government in the sunlight, then they should not be afraid of losing their pension after they have retired. Civil servants have a tough job to do and we have to support them too.

And what about problem of delay in framing policies and laws? Take the case of the Fiscal Responsibility and Budget Management Act which you mentioned earlier. The Ministry of Finance (MoF) started drafting the Act more than two years ago, but it has not been able to finalise it till date.

Drafting that Act is a tough thing to do and MoF officials have been working on it for a couple of years. From what I understand, the MoF has already prepared the draft of the law and is preparing to circulate it among stakeholders. So, they are doing the work, and by international standard they are doing the work pretty fast. Also, you have to acknowledge the fact that they did this work under challenging conditions, such as the earthquakes and supply disruptions. So, give them some credit.

But to catch up with the world, Nepal needs to work even faster, isn’t it?

True. And we are ready to support Nepal in this regard. We have done a lot of work in framing fiscal rules. We have made those documents available to the Ministry of Finance. We are ready to support the ministry if there is further need. But I am sensitive to the fact that the same civil servants are doing their regular work and thinking about long-term future as well. So, there is a lot on their plate.

Lastly, IMF has always said Nepali rupee’s peg to Indian currency has served as a transparent anchor. You say this because of lack of capacity at NRB to manage flexible exchange rate or because the peg really helps Nepal’s economy?

The Nepali central bank has the capacity it needs to run its own monetary policy. So, that’s not the issue. The issue really is about who Nepal trades with and what kind of trading of goods and services occurs in the country. Our feeling is that pegged exchange rate has served Nepal well by providing a clear nominal anchor to the stance of the monetary policy. However, Nepal is a sovereign country and it can decide to make the exchange rate flexible. But we feel revisiting the peg system at this point is not necessary. Besides, Nepal has been facing lots of problems lately and you probably do not need one more complex thing to work on. So, at this point, Nepal should fully focus on reconstruction, fix the budget management system, build some more hydropower plants and work towards enhancing competitiveness.

Are you trying to say that unless Nepal enhances its capacity to earn foreign currency, except through workers’ remittance, it should keep the currency pegged with Indian rupee?

Well there are lots of works that need to be done to enhance competitiveness. And lots of levers are at the disposal of the government, rather than the central bank, to do this. For example, if Nepal builds better roads into India and China, it can work as a bridge for trade between the two countries. This can generate growth. If Nepal develops hydropower plants, manufacturing sector can grow in the country. If Nepal invests in schools, it will have an educated and well-trained workforce. This can curb outward migration and provide Nepal a stable supply of workers for various firms. You can do all this without worrying about the exchange rate. In India, the government’s mantra is ‘Make in India’. You should also encourage people to make products in Nepal and export those products to India, China and rest of the world. But to encourage people to make products in Nepal, country needs to have the right infrastructure.