Deficit diplomacy

Finance Minister Dr Ram Sharan Mahat is facing the uphill task of presenting the coming fiscal year’s budget in two weeks. With empty coffers left by the royal regime, the finance minister has been clamouring for donor money for budgetary support at almost every platform. However, there is still a huge gap between the government’s needs and foreign pledges of support. The government’s financial needs are likely to grow despite the ceasefire for usual reasons, and new ones like arms management and the consequent financial obligations and preparations for constituent assembly elections. Ahead of the national budget presentation for 2006-07, a three-member IMF mission has completed a 10-day visit to the country and is reported to have taken a very grim view of the issue of macro-economic stability of the Nepali economy, particularly of its fiscal imbalance. Currently the government coffers contain only Rs.3.4 billion, an amount barely enough to meet the salaries of civil servants for one month.

This poses a problem for IMF: whether to continue its Poverty Reduction Growth Facility (PRGF), which is expiring in November this year. Nepal needs to maintain its fiscal discipline for an extension of the facility, under which Nepal has been entitled to a loan of some seven billion rupees at less than one per cent interest as per a three-year agreement. The IMF is also concerned over heavy government borrowings, which amount to Rs.11.85 billion during the current year and stand at two per cent of the country’s gross domestic product (GDP). In IMF’s view, this percentage represents a danger signal on global standards and is bound to hit the economy’s external sector, particularly the balance of payments. Currently, Nepal has received the pledge of budgetary support only from India. The World Bank has hinted that it will be difficult for it to provide budgetary support on short notice.

The excess of liabilities over assets has put the government in a fix. Moreover, with last week’s 8-point agreement between the seven-party alliance government and the Maoists, the life of this administration should be one month or so, then giving way to an interim government composed of the SPA and the Maoists under an interim constitution. Therefore, any budget presentation without consultation with the rebels might create problems. While the treasury is virtually empty, the development budget as proposed and approved for this year remains mainly on paper, not in fact. Now the immediate economic challenge facing the government is how to meet the daily expenses, let alone the development expenditure. Caught between the fluid political situation and the cash crunch, the government seems to be at a loss. This will heighten a sense of uncertainty and frustration among the people, if concrete solutions are not found within days.