Nepal Budget FY 2009/10 Economy — creating or economy — diverting?

The country has a healthy fiscal surplus. In the first ten months of 2008/09, the government budget on cash basis remained at a surplus of Rs. 6.0 billion to a deficit of Rs. 6.0 billion in the corresponding period of the previous year. During the review period, Government of Nepal’s cash

surplus with Nepal Rastra Bank remained at Rs. 21.6 billion. Not only this, there was an ever-growing ratio of capital to total assets/liabilities since the share of total capital mobilized by the commercial banks to their total assets/liabilities stood at 5.79 per cent as of mid-May 2009. Also, the overall BOP surplus has more than doubled. The grants rose by 28.4 per cent, remittances soared by 55.5 per cent compared to a growth of 35.5 per cent in the corresponding period of the previous year. The current account surplus thus recorded a huge surplus of Rs. 37.0 billion against the surplus of just Rs. 7.1 billion last year.

The question is why

has investment not increased and the domestic market fails to accommodate more than 10 per cent of the total unemployed labor force,and the efforts of the private sector is fruitless in decreasing the cost of borrowing. And, therefore, no surprise if the firms deter from taking loans to finance new projects or feel insecure to make profits from

reinvestment. As 5 per cent interest rate in the Indian Currency deposits in India’s financial institution by Nepal’s central bank may be relatively more profitable than to deposit in other low-paying accounts, our investors will feel more secure in injecting capital in Mumbai’s stock rather than invest in Nepal. Therefore, the tragic result from the higher interest rate is that saving money becomes more interesting and the opportunity costs of using the money continue to increase.

With an aim to facilitate the promulgation of the new constitution as per the people’s expectations and bring the peace process

to an end, the Nepalese

Finance Minister Surendra Pandey presented the Rs. 285.93 billion budget for the fiscal year 2009-10 with

Rs. 160.63 billion (56.18 percent) as a recurrent expenditure and Rs.106.285

million (37.17 percent) as capital expenditure. The Principal Repayment is estimated to be Rs.19 billion 12.8 million (6.65 percent). The proposed expenditure is almost 34 per cent higher than the revised estimates of the previous fiscal year.

The break-down of the sources of finance are - Rs. 161 billion 73.6 million from current source, Rs. 78 billion 516.2 million from the total foreign assistance, of which Rs. 56 billion 955.6 million

is expected from grants

and Rs.21 billion 560.06 million from loans. The deficit stands at Rs. 46 billion 340.02 million.

Other things remaining the same, increased government spending bolsters economic growth and, hence, bigger government or larger annual budget would provide valuable “public goods” such as health, education and infrastructure. But Nepal’s case is different. The total government expenditure on cash flow basis has increased by 26 per cent to Rs. 127.6 billion compared to an increase of 28.2 per cent last year and capital

expenditure by just 11 per cent to Rs. 26.0 billion in contrast to an increase of 56 per cent. This means, from budgetary perspective, the government is too big.

The higher spending, therefore, will certainly undermine economic growth again by transferring additional resources from the productive sector to inefficient unproductive government sector. The conflict in Nepal is still not over. The government is

unstable. There is a greater degree of civil disobedience and poor governance. Also there is a continued misunderstanding between the largest political party and the others in the coalition. Based on past experience, the current policy will backfire the pro-growth policies if the public sector activities are expanded.

Empirical findings in most of the poor and politically vulnerable economies reveal that reducing the size of the government leads to higher incomes and competitiveness. Against this background, we need to seek the answer to justify how 286 billion rupees

budget in the context of 960 billion rupees GDP can achieve high growth path between 5-7 per cent growth rates. In the context of foreign assistance, there seems to be little excitement in the sense that it has

not been quite successful

in contributing to growth especially with regards

to its ability to supplement savings, foreign exchange and government revenue. Therefore, there was greater expectations from the domestic front. A categorical commitments and justification to guarantee additional jobs, strong regulatory measures to control food prices, uninterrupted and economically affordable supply of household utilities would have consoled the people expecting some executable rewards for their tolerance.

Unless the private sector is involved in partnership with the government through a clear-cut sector-specific Public-Private

Partnership model, based on the highly practiced rules on cost-sharing, there is

no sign that Nepal could achieve a high sustained economic growth. From this perspective the budget remains high-n-dry in terms of market expectations.