Nepal | July 05, 2020

FY 2020/21 budget needs reform

Rewat Bahadur Karki
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The finance minister recently presented the budget for FY 2020/21 in the Parliament at a time when COVID-19 is creating panic and uncertainty in Nepal. The economy has been almost paralysed with an estimated Gross Domestic Products (GDP) loss of more than Rs 600 billion due to the long lockdown.

The budget has tried to focus on controlling the COVID infection and its impact on the economy and livelihood of the people. However, the budget’s policies are primarily based on the government’s traditional policies and programmes, ruling party’s election manifesto and the current 15th Plan policies and strategies. Thus, this budget needs serious reforms to deal with the critical humanitarian and economic crisis caused by the corona infection, and its control.

The current crisis was indeed in need of a corona special budget as in the United Kingdom or at least a crisis management budget. Since the so-called relief package announced by the government soon after the lockdown and the Prime Minister’s pre-declaration of a relief and stimulus (R&S) package to be announced through the next year’s budget, the general people had great expectation either of a corona special budget or a special package of about Rs 200 billion, or about 4-5 per cent of GDP.

But against the need and expectation, the budget mentioned an indirect R&S programme of Rs 60 billion – around 1.5 per cent of GDP – whereas in the developed countries, Germany had announced a special R&S package of about 22 per cent of GDP. India, among the developing countries, has declared a special R&S package of about 10 per cent of GDP.

The epidemic started in March this year, but the budget with the R&S programme will become effective only from the next fiscal year starting mid-July 2020 instead of becoming immediately effective with the budget announcement. The budget does not seem serious about the corona effect on the people and the economy.

The indirect R&S package is both impractical and inadequate in controlling the increasing number of COVID-19 cases and address their effect. The budget does not address the woes of the daily-wage earners and marginalised people, and on the other hand, the 75 per cent tax rebate provision to small and medium entrepreneurs does not benefit them, as their closed businesses, as a result of the long lockdown, can’t start without relief assistance, which is lacking. In addition, the private sector, which contributes two-thirds to the economy, cannot revive this sector on their own.

In order to address the critical employment situation, the budget’s policy to increase employment opportunities through training is a welcome step, but the focus of this programme is on the already controversial non-productive PM’s employment scheme, whose allocation has more than doubled. With regard to increasing employment, instead of creating jobs directly by the government, the policy should have been on introducing income-oriented employment programmes that increase both economic activities/income and employment, and reduce poverty.

Regarding the proposed tax rebates, the focus of the R&S programme announced in the budget is basically on the banking system’s 5 per cent interest subsidised loans to different sectors and a refinance fund of Rs 100 billion to be regulated by the central bank. However, the success of this programme is doubtful given the past experience, and it is basically seen as a political programme by the implementing banks/ financial institutions and borrowers. Also, this banking sector programme cannot cover the entire informal sector, which plays a dominant role in our economy.

In order to control the spread of the coronavirus and improve the health system, its budget amount has been increased by 31 per cent for the next year, but this is not enough. It would need to double in the context of the increasing number of cases and to improve the weak health system through the country.

To make Nepal independent in agricultural production and address the current severe employment problem, agriculture and its interrelated irrigation sector have seen only 18 per cent increase in the budget. The amount is meager to make agriculture competitive and less dependent on the monsoon.

As against the tradition of increasing the budget every year, the government has dared to present a budget that is lower by Rs 1,475 billion than last year’s, which is a welcome step. Nevertheless, this budget is 38 per cent, 35 per cent and 48 per cent greater respectively than the revised total expenditure, current expenditure and capital expenditure, which comprises only one fourth of the total budget. In the context of the uncertain corona infection and its inevitable effect next year and low capital expenditure absorptive capacity with just 22 per cent progress in the normal situation of the first eight months of this fiscal year, the proposed capital expenditure is especially highly ambitious.

The 22 per cent increase in total revenue estimate, based on an unreliable high GDP growth projection for next year, also seems quite unrealistic. Also, foreign aid mobilisation – both grants and loans – is also doubtful as the corona is taking a heavy toll of both lives and the economy of the developed countries.

The policy of mobilising internal loans of a maximum of 5 per cent (Rs 225 billion) of GDP is appropriate in a developing country like Nepal, but this is based on an unreliable growth rate of 7 per cent for next year. So the Rs 225 billion can’t be mobilised, rather, in real terms, it will be less than Rs 200 billion. In the recent three years, growth of internal debt has been increasing at around 40 per cent, recording more than 13 per cent of GDP, which is alarming for Nepal.

The 7 per cent growth rate for next year, which is high even in normal times, has been estimated ignoring the corona impact that is expected to continue well into the next fiscal year and beyond. The ADB and World Bank have projected a GDP growth rate of just 2-3 per cent. Likewise, maintaining the projected 7 per cent inflation next fiscal year is also quite a challenge primarily because of higher budgetary deficit, low production level, black-marketing, increased import duty on POL-products and disturbed supply chain due-to the lockdown.

Despite the relatively few major changes made in view of the revenue constraint, some upper changes made in import and excise duties on cigarettes, primary agro-products and furniture seem reasonable, followed by downward revision on import duty for machinery and raw materials for domestic cottage industries and Ayurvedic industries in order to protect and encourage the domestic industries.

However, increase in import duty on electric vehicles, including buses and induction cookers, and reduction in import duty on semi-luxurious items like chocolates and chewing gums are major weaknesses of the budget and policy inconsistency. This needs immediate correction. The budget could not pay proper attention to increasing revenue by levying a corona tax on liquor and increasing different duties on luxurious and semi-luxurious consumption, for which this was the best time.

Despite easing some regulations in the banking/financial sector, it has not received proper attention to benefit from the R&S package. Similarly, the R&S package cannot benefit the microfinance industry, which is also contributing to reduce abject poverty in the country. Although the land bank concept is reasonable, its implementation is questionable as this is an old concept dating back almost 15 years. The budget has also not introduced a new policy for the capital market, an important capital mobiliser for economic development and indicator of the economy, to make the secondary market competitive.

It was a great opportunity for the government to curtail 35 per cent of the unnecessary government expenditure amounting to Rs 450 billion as proposed by the Government Expenditure Review Commission. However, instead of curtailing the remuneration and allowances of high-level political figures and commissions and disbanding the Parliamentarian Development Fund, it has slashed the government employees’ allowance, which is an insignificant amount.

In order to address the uncertain COVID infection and neutralise its effect on the people and economy, some policy and budgetary reform is a must. More than Rs 200 billion will be available if 50 per cent of the recommendations of the above commission are implemented and the Parliamentary Development Fund is discontinued either through this budget session or after the session through ordinance. Secondly, the special R&S package should be put into effect immediately in order to provide relief to the marginalised and poor people and help operate closed micro, small and medium enterprises, and conduct simple and effective income-oriented employment programmes to address the severe unemployment problems.

Karki is an economist

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