Ailing economy Unsustainable expansionary fiscal policy

Bishwambher Pyakuryal:

It will be difficult to imagine that Nepal is facing a unique but difficult conflict economy by looking at the way the government is making policy decisions. The excuses to increase the price of POL products and the VAT rate to 13 per cent to finance increased expenditure do not have justifiable grounds cannot be justified. The government has totally failed to establish a linkage between the tax rate and level and trend of total revenue. We have not been able to properly assess the demand and supply of goods and services.

Soaring trend of non-budgetary expenses and lack of studies to assess the impact of tax adjustment in the price of essential commodities have limited our knowledge in estimating the real inflation rate. The non-budgetary expenditure had already exceeded Rs. 1583.4 million in July 2004 as against Rs 1370.9 million during the same period in 2003. There are evidences that the government has spent billions more as off-budget military expenses in recent months. The increase in VAT rate will raise an additional Rs. 2.10 billion during the remaining six months of the current fiscal year 2004-05.

Therefore, an increase in the total expenditure to over Rs.115 billion from an earlier estimation of Rs. 111.69 billion indicates that the government wants to opt for expansionary fiscal policy. Normally when a country gets involved in war, it helps economy to recover from slowdown. But the government expenditure and revenue pattern clearly shows that the economy has lost its productive capacity to respond to the sustained growth. Furthermore, the economy lacks excess capacity and the state machinery is not capable of increasing investments through additional spending. Budget deficit is going beyond accepted norms and public sector investment does not match private sector investment in terms of quality and productivity. Therefore, expansionary policy including the current additional defence spending of Rs.1.20 billion as proposed in the Ordinance is not the right answer.

The Nepal Rastra Bank’s latest Main Economic Indicators (February/March/April 2004) reveal that as of mid-April 2004, the National Urban Consumer Price Index (CPI) rose by 1.7 per cent compared to an increase of 8.1 per cent a year ago. Similarly, on point-to-point basis, the index for food and beverages group increased by 2.4 per cent compared to an increase of 7.9 per cent during the same period last year. Is this the real life situation of the majority of the people that the decline in CPI and Wholesale Price Index (WPI) has slightly increased their purchasing power? This issue needs to be debated.

The per cent rise in the price of kerosene in the open market is highest which is almost 28.57. Theoretically, there should not be divided opinion to fix up domestic prices at par with the international prices. The Nepal Oil Corporation (NOC) is incurring a considerable loss since it is selling diesel and kerosene at the price below its cost price. Historically, NOC on the basis of product exchange arrangement with the Indian Oil Corporation (IOC) delivered diesel and kerosene procured from the international market at the time and place directed by IOC, and delivered the required POL products at the prices fixed up by IOC. The service charge to NOC was often revised without prior notification and approval of NOC making it a non-economic buying with the IOC.

These were the reasons why the loss was already skyrocketing. The loss increased from Rs. 550 million in 1990-91 to Rs. 670 million in 1991-92. Mismanagement at NOC, increasing liability to national treasury due to subsidy through the NOC, faulty purchase agreement with IOC and unacceptably delayed decision-making behaviour of the government were the fundamental reasons for initiating privatisation of NOC. It is surprising that after 12 years of liberalisation initiative, the authorities have just informed the public that the government is planning to deregulate petroleum supply and the Act on this matter has already been prepared.

In VAT, the compliance rate is low. Although the number of registered tax payers has increased from 4,959 in the initial period to 36,520 during the current fiscal year, 18 per cent tax payers have not provided any details and therefore are abstaining. There is room to increase the contribution from VAT provided that the threshold of two million rupees is reduced and coverage is increased. At a time when the private sector has lost confidence in making investments and the consumers are deprived of basic services from the state, this was not the right time to increase the rate in the middle of the fiscal year without even giving any hint to the Revenue Consultative Committee. Available alternatives to compensate the revenue loss are not being explored either. The non-tax revenue contributes to approximately 20 per cent in the total revenue generation. Its rate of growth is higher compared to the total revenue growth indicating the possibility of increased contribution from this sector in the future. The revenue collection is done on an ad hoc basis.

Maintaining minimum growth, creating tran-sparency in non-budgetary expenses, tracking inflation and maintaining effective price level of essential commodities and restoring confidence of the investors should be the immediate priorities of Nepal’s ailing governance.

Prof Pyakuryal is president, Nepal Economic Association