The tax authorities failed to meet the revenue collection target in the first nine months of the current fiscal year, raising the question of whether domestic economic activities have also fallen alongside deteriorating indicators of the external sector of the economy.
The external sector of the economy (international economic transactions) is facing a crisis due to declining remittances, rising imports, soaring balance of payments deficit and depletion of foreign exchange reserves, according to statistics from the Nepal Rastra Bank.
The internal economy is being affected by a shortage of loanable funds in the banking system, with businesses not getting loans to start or expand their businesses, according to officials and experts.
According to the Inland Revenue Department, it fell short of the revenue collection target of over Rs 32 billion in the third quarter of the current financial year which started in mid-July 2021.
“Our target was to raise around Rs 375 billion, but we could only raise around Rs 343 billion,” said Ritesh Shakya, chief executive of the department.
“The targets were not met in the areas of value added tax (VAT), income tax and interest tax on banks and financial institutions.”
The Inland Revenue Offices under the department collect taxes from individuals and companies engaged in economic activities within the country’s borders.
According to Shakya, two factors could be responsible for the drop in income. “One is the continued slow capital expenditure, which has affected VAT liability,” Shakya said. “And the shortage of liquidity in the banking sector has affected economic activities.”
VAT accounts for a good share of tax revenue, but the government’s inability to accelerate capital spending has affected construction activities in the country. As of April 29, the government’s capital expenditures amounted to 28% of the allocated capital budget, according to the Office of the Comptroller General of Finance.
All banks and financial institutions have reduced their lending amid the shortage of liquidity in the banking system.
According to Nepal Rastra Bank, the average credit-to-deposit ratio of banks and financial institutions is over 90% and they are expected to reduce it below 90% by the end of the current fiscal year, as per the directive. of the central bank. Thus, the banking sector has been reluctant to lend on a large scale in recent months.
“We have been very selective in granting loans due to the shortage of liquidity,” said Sunil KC, managing director of NMB Bank. “We have given priority to loans to small and medium enterprises with amounts in the range of Rs5-Rs20 million.”
He said the bank has been able to provide additional loans based on loan recovery. Last week, a senior Rastriya Banijya Bank official also told the Post that the state-owned bank had limited its lending to a few select sectors.
“We have stopped providing loans under all other headings except concessional loans and loans to the productive sector,” Kiran Kumar Shrestha, managing director of the public bank, told the Post. “Even in the productive sector category, we only provide loans for agriculture and tourism.
Industrialists say the inability to obtain loans from the banking sector has severely affected economic activities.
“Request [from traders] for non-essential items has declined sharply due to the inability of the banking sector to finance their purchases,” said Shekhar Golchha, President of the Federation of Nepalese Chambers of Commerce and Industry. “The government derives most of its revenue from non-essentials and it is natural that revenue has been affected due to the cash crisis.”
Its impact could be seen in the economic growth of this fiscal year. The government had set the growth target at 7% for the current fiscal year 2021-22. But, a new report from the International Monetary Fund released on Tuesday projected Nepal’s economic growth in the current fiscal year to be 4.1%.
“I expected economic growth of 6-7% in the current fiscal year before the liquidity crunch hit, but hitting the target now seems impossible,” Golchha said.
However, a senior central bank official disagreed with Golchha’s assessment that the liquidity crunch was responsible for the continued slump in economic activities. “There are only 1.7 million bank loan borrowers against a population of nearly 30 million. This means that borrowers cover a small fraction of total economic activities. So we cannot say that economic activities have collapsed sharply,” said Prakash Kumar Shrestha, head of the economic research division at the central bank.
However, he admitted that the liquidity crisis had had a partial impact on economic activities. Regardless of the impact of the cash crunch and weak investment spending, one sector, the hardest hit by the pandemic, tourism, is showing signs of a gradual recovery.
Nepalese hotels decided on Tuesday to scrap the uniform payment structure and pay their employees according to their salary levels, a sign that tourism is rebounding in the Himalayan republic.
To avoid layoffs, the hotels had implemented a policy of paying a minimum amount equal to all employees – from reception staff to general managers – in July 2020.
“Hotel occupancy has increased, domestic airlines are packed, Tribhuvan International Airport is operating 24 hours a day and all of this suggests that tourism is in recovery mode,” Shrestha said.