Budget Speech 2008/09 : Government is the problem not solution

The Budget for 2008/09 presented by the Minister of Finance, Dr. Babu Ram Bhattarai, has surprised everyone, perhaps the Finance Minister and his advisors too, that a unique consensus has emerged among the economists. It has proved even Nobel laureate Friedman wrong who used to say that “Let three economists gather and there are bound to be at least four opinions...”. The main question is: what is such a unique quality of the current year’s budget that led to such consensus. The answer is: it is highly inflated, populist, and it will undo the development activities what the previous governments have done. Dr. Babu Ram Bhattarai, however, argues that “All these figures are within the accepted international standard and are projected on the basis of possibilities”. Is the current controversy over the budget then politically motivated? I have tried to examine the problem objectively to clear up the issue.

True, the revenue and expenditure of the government are highly inflated, and they are bound to create price rise in the short run as inflation is always and everywhere a financial phenomenon caused by too big expenditure chasing too few goods. The revenue in the current year is projected to rise by 32.8 percent compared with a rise of 25.0 percent last year to reach Rs.141.7 billion. The expenditure is expected to rise by 45 percent, a record after 1952 when Mr. Subarna Shumshere presented the first budget in Nepal, to reach Rs. 236 billion. This will result in a budget deficit of Rs. 94 billion, equivalent to 103 percent of the development budget. Yes, 103 percent. It is not a misprint.

Not to be outdone, the regular expenditure will rise further by 40 per cent to reach Rs.129 billion. As a result, the government revenue will not be sufficient even

to meet regular expenditure plus the

principal repayment by about Rs. 3 billion. The government has to borrow from

the market to meet its day to day expenditure. I am not sure what international standard he has followed to produce such budget which on the price front may lead to replication of the experiences of Russia between December 1921 to January 1924. This indicates that the government itself is the problem rather than solution.

Fortunately, the open border with India and the fixed exchange rate maintained by Nepal with Indian currency provides an opportunity to maintain an inflation rate equivalent to Indian rate in the medium term, that is, within a quarter or two. The excess cash, however, will lead to the rise in import, deterioration of balance of payments situation and depletion of

foreign reserve which will reduce the liquidity in the economy in the not too distant future and a rise in the interest rate. In particular, the expectation of inflation itself which the current budget has generated in the country may itself lead to a cycle of inflationary situation.

The basic question that remains to be examined is, will the proposed budget, given such inflated estimates, be implemented in the form in which it was presented? The government has identified two customary sources to finance the expenditure, namely, foreign aid and internal loan which together are expected to generate Rs.94.6 billion. In particular, the foreign grants are expected to rise by 107 percent to finance fifty percent of the budget deficit, defined as the difference between government revenue and expenditure. The mobilisation of foreign grants in such a large amount without any programme is easily said than done while the internal loan will put further pressure on domestic interest rate. This will affect domestic investment and the growth rate of the economy.

The budget, however, has estimated the growth rate of the economy in the current year to reach 7.0 percent in accordance with the Economic Model presented by the Minister of Finance in the White Paper. The model assumes economy to grow by 7.0 percent from 2008/09 to 2009/2010 and by double digit thereafter for five years. It is assumed to increase even by higher rates thereafter. How the model works has not been explained nor the policy and programme guidelines have been discussed. It is a sort of religious claim that we have to accept in faith or reject. Similarly, it assumes the inflation rate to remain at 7 percent, much lower than the inflation rate experienced by the main trading partner.

It is now an open secret that the Nepal Communist Party (Maoist) has no economic plan to create New Nepal, and the publication of the White Paper itself is more than sufficient to make it clear. The Minister of Finance appears interested to achieve “double digit growth”. Unfortunately, there is a wide gap between the goal and the reality. He has neither the plan nor the programmes to achieve the target. In the current year, the growth in the

economy in relative terms will be lower compared to last year due to the uncertainty created by the budget.

Dr Pant is executive director, Institute for Development Studies