The most important ingredient of the Common Minimum Programme (CMP) is that it makes the commitment to pursue economic policies based on social justice, economic growth and justifiable distribution. As a corollary, it pledges to carry out comprehensive reforms in areas such as industry, banking and finance, commerce, transport and communication. National industrialisation with priority to small and cottage industries and enabling investment environment are part and parcel of the CMP. Labour rights and security together with productivity enhancement of industry and commerce are also equally important aspects of the CMP.

Though implicitly, it thus gives broad directions under which macroeconomic policy reforms are to be carried out. The upcoming budget will be a real test in this regard. It is often claimed the fiscal front is one of the successes of post-liberalisation period. Low budgetary deficits and macroeconomic stability are cited for this. But this is simply due to massive containment in development or capital expenditure. In the last 10 years, development expenditure as a share of GDP has been cut by half, jeopardising development potentials or eroding productive capacity of the economy.

Security-related factors contributed to massive escalation of recurring expenses. There is no standard enforceable criteria that can enhance efficiency in public expenditure management. Each ministry simply demands additional resources without proper justification as a part of a deliberate cost escalation tendency. The National Planning Commission lacks a clear-cut role, authority and quality manpower. In view of rising recurrent expenses, management inefficiency and absence of judicious resource allocations, there is little scope for fiscal policy being a catalyst to socio-economic development.

At the same time, fiscal balance or macroeconomic stability alone cannot guarantee price stability. Had macroeconomic stability alone been the vehicle of development, even Sub-Saharan countries could have grown at respectable rates during the 1990s. My own calculations reveal that budget deficit up to 3% of GDP need not necessarily jeopardise macroeconomic stability provided expenses are linked to specific projects or programmes.

On the revenue front, despite many reforms like introduction of VAT, a regressive tax by its virtue, dependence on trade-based revenue has increased in the post-liberalisation period. In 1985, share of trade-based revenue was around 43%, it rose to 48% in 2005. Interestingly, excise and VAT are also imposed at custom points like tariffs. Revenue base is shaky, which is worrisome from the standpoint of increasing domestic resource remobilisation. By the same token, it is distortion-prone. At the same time, compulsion to further rationalisation of tariffs and phasing out of certain fees under WTO obligations would mean revenue losses. Equally important, the existing tariff structure discourages high value added and labour intensive domestic resource based industries. This hinders agro-and forestry based industries.

Trade reform as part of macroeconomic policy reform is considered to contribute to both trade diversion and creation. Worryingly, we are entering a phase when exportable commodities are gradually evaporating. Deregulation and open policies completely ignored the reasons for vanishing small and cottage industries which were the key to enhancing our exports and also a major vehicle for pushing agricultural and non-agricultural development. Trade competitiveness has eroded with rising transaction cost. One of the issues related to trade is exchange rate. On the other hand, policy space in trade related areas is limited due to our obligations under WTO and commitments to SAFTA. Bilateral trade relations are equally antagonistic.

After initiation of reforms in financial sector, there has been a proliferation of banks and other financial institutions. Now total financial assets of financial institutions have surpassed total Gross Domestic Product. Still, access to financial services or credit in rural areas has not increased. More than 80% rural populace is outside the reach of institutional credit. At the same time, affordability has become a major problem owing to highest interest rates charged by newly created or expanded micro-finance institutions in the rural areas.

On the other hand, most of the resources are being used in unproductive sectors. Still the spread between lending and deposit rate is very large due to a high level of non-performing assets of state owned banks. Macroeconomic reforms without structural and institutional breakthrough are self defeating. It is impossible to achieve equity based two-digit growth unless strong bases are created by the coming budget by introducing comprehensive but coherent macroeconomic policy reforms within a progressive framework, which will be a huge challenge.

Khanal is an economist