Nepal | August 12, 2020

Procurement policies, land acquisition, environmental issues affect budget execution


Sujan Dhungana
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Stakeholders are sceptical about the achievability of the economic growth target of 8.5 per cent set by the government for this fiscal, especially due to lack of ample investment and proper policies in place. Similarly, failure to accelerate capital expenditure and dwindling remittance inflow in recent months have made it more challenging for the government to achieve its economic and development goals. Against this backdrop, Sujan Dhungana of The Himalayan Times caught up with Uttar Kumar Khatri, joint secretary at the Ministry of Finance, to know the details of the current situation of the economy, challenges and prospects. Khatri is also the chief of Planning, Monitoring and Evaluation Division at the MoF. Excerpts:

What is your evaluation of the country’s economy against the backdrop of tepid revenue collection and dwindling remittances in recent months?

Analysing the trend of the first four months of the ongoing fiscal, we have missed some of our targets, especially related to revenue collection. Particularly, the collection of customs revenue has not been satisfactory so far this year. The low customs revenue collection is the result of a fall in import of goods and services. One of the positive signals that Nepal’s economy has shown today is the surge in exports and fall in overall imports. While overall exports have increased by 14 per cent in the first quadrimester, import figures have come down by 10 per cent. Consequently, the country’s trade deficit came down by 12 per cent compared to the first four months of the previous fiscal. Similarly, the foreign exchange reserves of the banking sector today is sufficient to cover prospective merchandise imports of 8.5 months, while the reserve could cover imports of only eight months till mid- November last fiscal. However, inflation has quickened to over six per cent now from around five per cent in mid- November last year. But more importantly, financial access is increasing as only 12 out of 753 local units are yet to get banking services. The drop in remittance in recent months is, however, a cause for concern.

The government has adopted policies to discourage imports and raise revenue. Is the low revenue collection the result of a mismatch between these policies?

It is true that some sort of mismatch can be seen while trying to reduce imports and raise revenue simultaneously.

The government truly has tightened import policies, especially for luxury goods. But this was necessary to address the ballooning trade deficit of the country. The fact is, we have tried to promote inland revenue over import-based revenue. Hence, revenue collection from VAT and excise duty is impressive.

At the same time, customs-based revenue collection has been hit following a drop in imports.

The country today is self-sustained in cement and clinker production.

Similarly, with adequate electricity supply, we expect the import of fuel to come down in the future. We expect customs-based revenue collection to take a further hit when domestic products start substituting imports. In such a context, our priority should be on expanding tax administration and implementing tax policies strictly to generate more inland revenue.

How scientifically are our revenue collection targets set?

The Ministry of Finance has a mechanism to decide on tax issues, determine tax slabs and revenue targets. Moreover, we are preparing to establish a permanent Revenue Board to look after revenue issues and a proposal on this issue has been tabled at the Cabinet. The Cabinet is expected to endorse the proposal soon. Similarly, all revenue-related issues and policies are discussed in the revenue advisory committee before they are implemented.

The committee minutely discusses the tax and revenue issues for months before making any changes in the tax structure or revenue. Thus, it would be wrong to say the tax and revenue collection target is unscientific. But then again, a number of businesses and people are still beyond the tax net.

We can collect more taxes and meet high revenue targets if we are able to expand the tax network. It is crucial that we generate money from inland revenue over internal and foreign borrowing to achieve desirable growth and development. The Finance Ministry is identifying sectors that are beyond the government tax net. In a nutshell, revenue collection today is neither discouraging nor encouraging.

As Nepal is an import-based economy, be it of goods and services or remittance, what impact will the dwindling remittance inflow have on the economy?

As statistics show, remittance inflow has been gradually coming down in recent months and the government too is concerned about this. As our economy is remittance-driven, it might affect the economy, but we are not sure about the kind of impact it will have. So, a technical committee has been formed at the Ministry of Finance to identify the reasons behind the fall in remittance and its impact on the economy. Among others, the falling remittance will certainly leave an impact on foreign exchange reserve.

The study committee will come up with all issues related to recent trend of remittance inflow, its possible impact and measures that can be taken to minimise the blow.

Last fiscal, the government had cited the process of formulating new policies as the cause for low capital spending. However, the development budget expenditure scenario has remained the same this year as well with just five per cent capital budget spent so far. Why is this so?

It is true that budget spending has not been impressive so far. In a bid to ensure timely spending of budget, the Constitution itself has mandated to bring the annual budget early. Owing to slow budget spending, the government even introduced and implemented the budget implementation work plan.

But budget implementation continues to be sluggish due to the same traditional procurement policies, tender processes and documentation works. The Finance Ministry is in constant discussion with the related ministries on ways to boost capital spending and if they need any facilitation. I must say that some factors like the long tender processes are still impeding effective capital spending. Procurement policies, land acquisition and environmental issues have a crucial role in budget implementation.

With all these challenges in hand, how optimistic are you about the country achieving the ambitious economic growth target of 8.5 per cent this year?

As the growth target of 8.5 per cent has been set, we all need to strive towards achieving it. Nepal has secured economic growth of above six per cent in the last three consecutive years and this is encouraging. Necessary regulatory framework and the business environment are being created for the economy to grow at the targeted rate. Nepal Rastra Bank statistics show that Nepal received foreign investment commitment worth Rs 15.97 billion in the first three months of the current fiscal year against Rs 8.49 billion worth FDI commitment during the same period last year. Similarly, Nepal received almost Rs four billion in actual investment in the review period this year compared to Rs 1.54 billion in the corresponding period of last fiscal. This is certainly a positive sign. Similarly, the credit flow of banks and financial institutions in the market in the first three months has been impressive. All these will help contribute to different economic indicators. But it is undeniable that tepid expenditure and projected drop in paddy production are major obstacles to achieving the set economic growth target.

A version of this article appears in print on December 03, 2019 of The Himalayan Times.

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