KATHMANDU, MAY 31
The Nepali economy has fallen into a policy trap due to inconsistent government practices in the past. There is a huge gap in revenue collection and capital expenditure, and the government has to allocate more funds for payment of loan interests than for capital expenditure as a result of multi-faceted issues in the country's economy, experts say.
In the post-budget discussion programme organised by the Society of Economic Journalists Nepal, former ministerfor finance Yuvraj Khatiwada and Shiv Raj Adhikari, head of the Central Department of Economics at Tribhuvan University, remarked that the Nepali economy has fallen into a policy trap and that its effects can also be seen in the budget announced for the upcoming year 2023-24.
According to Adhikari, with the rapid increase in the budget deficit as a result of increased current expenditure and reduced revenue, internal debt is likely to increase, eventually affecting the financial market.
"The budget deficit has al-ready reached Rs 271 billion.As the budget deficit plays a role in the rapid expansion of domestic debt, a higher deficit will lead to increased debt.This will expand public expenditure and budget deficit and increase the demand for loans," Adhikari said.
While there is a need for a huge policy leap to escape from low fiscal space and structural problems, the government is still unclear on the allocations announced through the budget.
"Contradicting policies have complicated the problems even further. However, there is no sign of improvement.There is a need for major policy reforms to resolve the issues," he said.
Despite introduction of programmes for policy reform and cost reduction in the budget, their correlation with budget allocation and other aspects is unclear. "Although the government has announced it would slash ex-penditure, capital expenditure has been cut further which raises questions on the efficiency of the allocation," he added. Adhikari further explained that internal debt will increase further if the targeted revenue collection is not met.
Similarly, Khatiwada remarked that the country's economy has fallen into policy trauma due to government practices after fiscal year 2006- 07, and its effects have increased further at present because of the competition in distribution-oriented programmes rather than production.
"We focused on distributive policy to resolve the problem caused by the conflict at that time. Some of the policies taken during the disaster period also caused problems. We competed for grants by taking loans for reconstruction after the earthquake and fell into the policy trap," he said.
According to Khatiwada, efficient implementation of the budget is crucial as the burden created by the current year's budget will fall on next year's budget.
He said that although it is good to target economic growth by six per cent, the investment required for this will be insufficient. Khatiwada also suggested not raising huge amounts of internal debt as the country's economic system is falling into a domestic debt trap, adding that there are doubts about effectiveness of policies such as not increasing incentives for civil servant, refraining from buying cars and constructing new buildings.
At the programme, Minister for Finance Prakash Sharan Mahat also admitted that the country had fallen into a policy trap.
"The problems we are facing now were not created just yesterday. If we cannot accept the problem, it will be difficult to solve it," he said, adding that adept allocations were not possible as obligations related to social security, loan principal and interest could not be overlooked.
Mahat shared that even if the capital budget is reduced, there is always a problem in its implementation and that plans are in place to ramp up development expenditure. He said that if pace of capital expenditure improves, foreign aid will also increase and that will replenish the country's resources.
He further said he was unable to bring any radical reforms in the allocation as the budget ceiling had already been capped when he took office.
"Still, mandatory obligations had to be added, due to which the total budget size for the upcoming year increased to Rs 1.751 trillion," he said.
He also clarified that there was no vested interest in changing the tax rates and that many exemptions had to be scrapped as taxes had started to get affected.
A version of this article appears in the print on June 1, 2023, of The Himalayan Times.
