Nepal can achieve economic growth targets by working with both the Bretton Woods Institutions and the New BRICS and BRI-Related Institutions to enhance capital formation in a balanced way
Nepal government's budget speech for 2083/84 has sought to materialise the Election Manifesto 2082 of Rastriya Swatantra Party by setting the economic growth target as 7 percent and containing price inflation at 6 percent. It is claimed to suffice for equitable prosperity, particularly among the middle class. This paper, therefore, deals with the pathways in meeting the imperatives of economic growth and price stability.
In the government programme, a core target is to increase the average income to US$ 1,535 per capita, which is just one-tenth of the global average. The government aims for an average income of US$ 3,000 in the next 5-7 years. Such targets require widespread mobilisation in political, social, and economic aspects.
In programming for the economic growth target for 2083/84, the Finance Ministry could have specified the sources of growth by major sectors, namely, agriculture, industry, and services, because it helps in checking the underlying reality. Further, the System of National Accounts (SNA) also requires specifying the growth of gross domestic product across 21 sectors such as manufacturing, electricity, education, and so forth.
Thus the Finance Ministry could have helped to find the main growth centres, make it broad-based, inclusive, and fairly distributable. In this context, the budget speech (Annex 15) has sought to monitor changes across 34 sub-sectors; however, these outputs are barely consistent with the government's overall economic growth targets and, hence, require recalibrating the programme by sectors.
The agriculture sector, for example, outlines expected changes in some 14 products (e.g., paddy, milk, timber, etc.), which may lead to growth by 3.1 percent at best. Even so, it is below the norm for the 16th Plan. In the growth of the manufacturing sector, the government expected a leap from 2.8 to 7.6 percent because the government plans to restart seven public enterprises (such as the Gorakhakali Rubber-Tire, Hetauda Textiles) and improve governance and development management. Be it so, nevertheless, a more complete picture of industrial growth rate is warranted.
The growth rates in the services sector are only a resultant of dynamics in agriculture and industry. In other words, the National Statistical Office needs to work with the 18 Line Ministries to add value in the national income, which would require a clear monitoring and feedback scheme on a quarterly basis.
The national plans conventionally express economic output as a function of the incremental capital-output ratio. Unlike the 16th Plan norms, the World Development Indicators show that the capital requirement per unit of output has increased in recent years. So, it will require a gross fixed capital formation by as much as 41.9 percent of national output or Rs 1,079 billion. This amount has to be supplied by the government, domestic private sector, co-operative organisations, foreign direct investment, and the international financing institutions such as the international banks.
On its part, the government has announced an increase in the capital outlay from Rs 251 to 431 billion, which depends on the revenue-savings, loans from the domestic market, and repayments to the international agencies. In all, the net funds available for fresh capital injections are barely Rs 164 billion.
In the private sector is assumed to invest a whopping four-fifths of the total capital outlay. Ironically, a closer look at the data shows that private sector capital formation declined from 28.1 to 16.7 percent of GDP during 2019-2025. It seems that more is needed in fiscal policy, monetary policy, and business environment to make the private sector confident for capacity expansion in production, commerce, and trading activities.
To galvanise the speed of capital formation, the finance minister has often emphasised about the Alternative Development Finance Mobilisation Act 2083 BS and an Alternative Development Finance Fund (ADFF) to 'crowd in' investment in high-yielding mega schemes: energy and power networks, transport, and connectivity; industrial and logistic hubs; and urban, digital, and public infrastructure to boost up national income from the medium term onwards: we have to wait to see how this hypotheses may unfold.
The government strategy is to further use the balance of payments accounts for bridging the development financing gaps in collaboration with the World Bank, IMF, and Asian Development Bank. However, note that such agencies advise switching government financing from short-term borrowing to a medium-term loan strategy, on one hand, and prioritise lending for climate change resilience, governance, management, and livelihoods, on the other. Ironically, such strategies would not contribute much for the creation of potential outputs.
In view of the above, we emphasise that the government also needs to be proactive in working with the new financial architecture, namely, the Asian Infrastructure Investment Bank (AIIB), the New Development Bank (BRICS Bank), and other BRI-related windows such as the EXIM Banks of India and China. Such new institutions accord high priority to infrastructure development, connectivity, and industrial growth.
In conclusion, Nepal can achieve economic growth targets by working with both the Bretton Woods Institutions and the New BRICS and BRI-Related Institutions to enhance capital formation in a balanced way. The productivity of the existing capital stock also needs to be urgently improved. On the fiscal side, there is a need to develop investors' responses to the improved governance, liberalisation, taxation, and foreign economic relations.
On the monetary aspect, there is a need to go beyond interest rates and quantitative easing to consider other determinants of investment demand from bank finance for potential output, employment, price stability, debt sustainability, and prosperity.
Thapa is former member, National Planning Commission, and Aryal is formerly minister and member, National Assembly