Budget could exacerbate Nepal’s economic crisis

The government has presented a budget of Rs 1.79 trillion for the financial year 2022-23. Critics say the allowance is inflated, given the country’s precarious economic situation. The “populist” budget was bought with the one and only intention of pleasing potential voters, they argue. Is this really the case? ApEx spoke with Achyut Wagle, Professor of Economics at Kathmandu University School of Management.

What are the positives of this year’s budget?

The budget is not very ambitious and is largely a ritualistic continuum of the past. It increased by less than nine percent compared to last year. The idea of ​​devolving small infrastructure projects to the provincial and local levels is in keeping with the spirit of federalism. Its focus, at least in principle, on increasing productivity, especially in agriculture, is welcome. The plan to gradually replace kitchen gas cookers with electric induction cookers in a bid to increase the consumption of locally produced hydroelectric power is also a welcome proposal. The farmers’ pension scheme and the creation of a separate fund to increase farmers’ access to agricultural loans, if implemented, can help make farming more attractive. Incentives for tourism and export promotion were also desirable. “Make in Nepal” and “Made in Nepal” certainly create brand vibes and opportunities for Nepalese products.

When then are its biggest drawbacks?

The budget certainly missed the mark. In 10.5 months of the current fiscal year, only 33% of the capital allocation has been spent. Such a trend is also observed in provincial and local governments. This shows Nepal’s severe capacity constraint in resource absorption. This has multiple ramifications. The shortage of loanable funds in banks is a major concern. Infrastructure and development activities are naturally reduced accordingly. This, in turn, affects the overall economy. The budget lacks compelling programs to improve productivity and create enough jobs. On the agricultural productivity front, the lack of availability of cultivable land for commercial-scale farming has been a big concern that this budget seems to completely ignore. Incentives, subsidies and rewards will be significant if there is production. The budget also failed miserably to engage subnational governments in key programs related to boosting trade and productivity.

There is also a criticism that this budget is populist and election-centric.

In competitive multi-party politics, it is natural for the forces in place to do all they can to woo voters through populist elements in the budget. This five-party coalition government is no exception. Extensive social security schemes and the extensive pork barrel approach to allocation certainly indicate this.

But it will certainly put pressure on the Treasury because it is an unsustainable deficit budget. Financing the proposed deficit of more than 30% on an allocation of Rs 1.79 trillion is unsustainable, and financing unproductive populist regimes through borrowing is absolutely undesirable. The national debt has already crossed the 38% mark of the revised GDP of 4.85 trillion rupees.

Will this budget help overcome the current economic crisis?

This is the saddest part of this budget. The Nepalese economy is heading for a crisis mainly for three reasons. The first is the growing trade deficit which must be covered entirely in foreign currencies. Actual exports are low due to limited value added on input imports. The main source of foreign exchange is workers’ remittances, which are always volatile. Our large trade deficit is also an indication of import dependence, even for survival. The budget failed to address and resolve these tangled issues.

The second problem is the dismal state of capital spending. A thorough examination of the problems and the commitment to structural and legal reforms, for example to facilitate transparent and timely public procurement, including at the local government level, is lacking.

Finally, the country faces a crisis of fiscal governance at all levels of government. This has resulted in widespread corruption, irregularities and, most alarmingly, impunity for financial crimes.

This budget has deliberately omitted these essential aspects, which could lead to further inefficiency and exacerbate the crisis.

What are the budget implementation challenges?

The revenue target cannot be achieved without serious tax administration reforms. Since Nepal’s main source of revenue is customs duties, breaking the link between politicians, businesses and bureaucrats is key to controlling the under-invoicing of imported goods. But that will only happen with strong political will.

The search for international funds to the tune of around Rs 300 billion (in loans and grants) is definitely daunting. Development partners are unlikely to commit further support until the legislative elections are over.

The slogan “swadeshi” could well turn out to be a fiasco, as it lacks a mechanism for investment in the productive sector. Viable products for the program that have both reach and scale have not been identified; moreover, the possible upstream link with Nepalese products is not even duly considered.

Labeling products that don’t even have 20% added value as “swadeshi” is a mockery of the branding effort.

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