CA election : Can the economy sustain another deferral?

The Seven Party Alliance (SPA) has now decided to hold the election to the Constituent Assembly (CA) by mid-March, though the exact date is yet to be fixed. The Election Commission, according to press reports, has explained to the Prime Minister in clear terms that it needs at least three months’ prior notice — a reasonable demand given the past experiences — plus adequate and timely release of funds to meet the expenses. Interestingly, the people are not yet convinced that the election will be held on the date scheduled. They are perhaps right too. The basic question is: Can the economy sustain the postponement of next CA election? My answer is definitely in the negative, though I will be happy if I am totally wrong.

As I have explained in my recent articles , the economy has taken a sharp turn and for the worse. The data released by the Nepal Rastra Bank, and the analysis prepared by its Research Department, has further confirmed that the government budget deficit has continued to rise as the revenue of the government has shown a declining trend whereas its regular expenditure has continued to rise. Let me provide one simple but boring example: the government revenue in the first four months of the current year increased by Rs. 2.8 billion whereas it had increased by Rs.3.6 billion during the same period of the last

fiscal year! It appears as a puzzle that receipts from Value Added Tax have declined by as much as 41 percent in the first four months of the current fiscal year; the VAT revenue had increased by 178 percent in the corresponding period of the last fiscal year.

The foreign donors too have been adopting a cautious approach in releasing the money that they had promised. This ‘wait and see’ approach taken by the donors has led to a substantial decline in the receipts from foreign grants — 32 percent between July and November 2007 — with its expected negative impact on the development activities, especially in the rural areas. Unfortunately, the government is preoccupied with its own political problems and never-ending election of the CA. As a consequence, the current expenditure has far exceeded the government resources — by Rs. 7.4 billion to be precise — and is expected to go up further in the coming months.

To add insult to the injury, the rate of inflation, defined as continuous rise in price or fall in the value of money, has been rising due to both supply and demand factors. The data released by the Nepal Rastra Bank shows that overall price index between July and November increased at an annual rate of 20 percent with the price of fruits and vegetables (63 percent), rice ( 27 percent) and pulses (15 percent) — the main diet of the majority of people — showing the highest annual rate of growth.

My intention is not just only to provide the negative picture of the economy.

My aim, as a responsible citizen of the country, is to provide the decision makers with the objective analysis about the current economic situation of the country

and, more importantly, the economic catastrophe that the nation will have to face if the election to the CA is postponed again for one reason or another.

The main actor responsible for the current economic problem is none but the government. It is borrowing heavily from the Nepal Rastra Bank and other legitimate sources to meet its current expenditure and the repayment of loans; the total borowing from internal sources financed about 25 percent of regular expenditure in the four-month period. This was the prime cause of the rise in money supply far in excess of demand.

As a result, for the first time in the last five years, Nepal recorded a deficit in the balance of payments position of the country and the national foreign reserve position has shown a declining trend. It is estimated that if the current rate continues the total balance of payments with India alone will total Rs.100 billion in the current fiscal year. This is partly due to the maintenance of overvalued exchange rate with Indian Currency. This is, of course, the issue for another article. Suffice it to say that the fundamental disequilibrium — to borrow a term

popularised by the International Monetary Fund — has emerged in the economy. It needs overall changes in policy and programme to maintain high growth with relative stability in the price level in a democratic environment.

It is now clear that we are not handing the economy to the government formed after the election to the Constituent Assembly in good shape. But people do not always need results but they do need to see the efforts. Election to the CA will give them a heroic example. But if CA is postponed again — I hope it will not — the economy, and the

political leaders too, will be major casualty. This is the issue that heart can feel, given the above discussion; it is only for intellectuals that need further explanation.

Dr Pant is executive director of the Institute for Development Studies