Resource Gap in Nepal: Fiscal discipline can bridge

The theme of taxation has come through a broad change of composition since last many years. First, taxes provide the long term financial platform for sustainable development. Taxes are the lifeblood of state services. Second, taxation matters for effective state-building. Bargaining between governments and taxpayers plays a central role in the emergence of democratic governance.

Improved tax relationships between state, businesses and society have provided a strong groundwork for broad-based growth and state accountability. Third, taxation combined with economic growth is

the antidote to long term reliance on aid.

A major problem facing the developing economies in recent times is how to promote sustainable growth and development.

Nepal with a per-capita income of $420 is one of the poorest, least developed and slowest economically moving countries in the world. In Nepal, revenue-expenditure gap is serious and broadening and at the same time resulting in larger fiscal and budgetary deficits. Tax potential in Nepal is extremely limited and tax effort ratio is 14.8 percent in FY2008/09 in the 3 year interim development plan, which is fairly below the average of SAARC countries and lowest in the world indicating one of the lowest taxable country. The most vulnerable situation is how to reduce the increasing critical resource gap facing the Nepalese economy. For the last many years Nepal is in the state of intense shortage of resource gap leading to incessant increase in budgetary deficit. The overall budgetary deficit is estimated to be is 2.7 percent of GDP and fiscal deficit is 4.1 percent of GDP. (Budget Speech, 2009/10).

As a result, dependence on external as well as internal borrowings has inordinately increased in the budgetary structure of Nepal. The economic growth of a country depends on the amount invested in developmental activities. If the budget of Nepal is analyzed, it is found that the share of development expenditure is decreasing while the share of regular expenditure is increasing. The situation has reached a point where Nepal has become almost unable to meet even the regular expenditure through internal sources of revenue.

Resource Gap is the difference between expenditure and revenue known as fiscal deficit. Second, it is the difference between expenditure and revenue plus foreign grant known as budget deficit and the third type is the difference between expenditure and revenue plus foreign aid (grant or loan) plus internal borrowings, known as overall deficit. Nepal has been experiencing massive resource gap in recent years. This is attributed to the lop-sided growth of government expenditure over revenue generation from domestic sources. The picture of growing resource gap in Nepalese finances i.e. the first resource gap has grown more than 2.5 times from FY (2001/02) to FY (2008/09) and the average growth rate is 17.2 percent (Economic Survey, 2008/09). This is a clear indication of the poor performance in resource mobilization in the domestic front. Resource Gap is becoming critical in recent years. In 2001/02, external borrowing and internal borrowing were almost at par i.e. 34 percent and 34.8 percent respectively. After 2001/02, external borrowing has been decreasing while internal borrowings is increasing. The proportion of internal borrowings increased from 34.8 percent

to 67.9 percent, while external borrowings decreased from 34 percent to 28.2 percent in 2008/09 (Economic Survey, 2008/09)

While domestic resource mobilization has improved since the early 1990s, receipts are still far too low. Here are some suggestions to minimize deficit by increasing the internal resources i.e. from direct and indirect taxes. For this it should increase the tax base and make tax administration efficient. On the other hand, Keynes suggested increasing public expenditure to sustain aggregate demand. This definitely will increase the budget deficit. To meet the budget deficit, (a) the government should give emphasis to conditional grants. The grant should not be accepted if it is not in accordance with the needs of the nation (b) if the government takes a loan, then the loan should be strictly utilized to meet the national priorities. The loan should never be used for regular expenditure (c) the government should not be extravagant and at the same time should curtail unnecessary expenditures (d) policy should be designed in such a way that foreign loans and grants can be used only in the productive sector. This helps to minimize the rate of inflation as well. So, a prudent fiscal policy is the foundation of a stable macro-economy as it guards against the risks of excessive debt, higher inflation and interest rates. An irresponsible fiscal policy would wreck the potentiality of tapping the investment, production, growth and employment enhancing initiatives in the private sector ultimately making the economy weaker and further impoverished. Hence, the art and practice of consuming at the cost of future generations should be avoided. The lesson

to heed is to stick to the discipline of fiscal prudence and responsibility.

Dr. Rana is a former Senior Economist of APROSC