The Ministry of Finance has presented a budget of Rs. 618 billion for the fiscal year 2071/72. While the Finance Minister has promised to kick-start second generation of economic reforms by reforming economic policies, bringing down anti-competitive practices like syndicate and cartels, encouraging the private sector and offering various fiscal incentives like tax exemptions and rebates, the budget has, in the mean time, also been a subject of debate in terms of issues like Constituency Development Fund, being pro-rich and many more.
Samriddhi, The Prosperity Foundation hosted its latest round of Econ-ity on “Analysis of Budget 2071/72 Presented by GoN” on the 17th of July, 2014 at Hotel Everest, New Baneshwor, Kathmandu.
This edition of econ-ity featured Dr. Chiranjibi Nepal (Chief Economic Advisor to the Prime Minister) and Prof. Dr. Bishwanbher Pyakuryal (Senior Economist) as speakers. The event was moderated by Mr. Rameshore Khanal (Former Secretary, Ministry of Finance) who started by acknowledging that this budget has been presented in the right time for Nepal. He shared that the current government is capable of staying in power throughout its tenure and has potential to deliver results in terms of constitution drafting, delivering economic growth, enhancing production, generating employment, etc. In the meantime, he also acknowledged the fact that this budget has been critically analysed in the parliament itself and opposition parties have raised concerns over its not being regionally balanced.
Here is a snippet of what the speakers said during the forum and what their analysis was regarding the new fiscal budget.
Prof. Dr. Bishwanbher Pyakuryal
Prof. Dr. Pyakurayal commenced his deliberation by acknowledging the good aspects of this budget. He mentioned that the allocations justify the government mission of employment generation, economic growth, social physical infrastructure, long term growth and poverty reduction.
He then went on to warn that this budget will not it yield any result unless the plans and policies and reform measures are implemented. The underlying assumptions that are made during the preparation of the budget do not seem to hold up in reality in Nepalese context. He talked about how theoretical economic policies and ground realities of Nepal do not match.
Nepal has seen wages go up or down, without really affecting labor productivity; despite the much talked about effect of India’s economy, Nepal’s inflation was still double digit when only last year it was contained at zero in India; the monetary policies have failed to deliver desired results in inflation. There does not seem to exist a robust relationship between Nepal’s monetary policy and inflation. He further expressed that we need to understand which among the factors like policies, capital adequacy/inadequacy, governance structure, and institutional set-ups are responsible for these issues.
He highlighted that one of the major problems in Nepal is the inability to make capital expenditures. Despite Local Self Governance Act and guidelines set by the fiscal commission, we have failed to spend on time. This raises concerns over our resource allocations. He said that we have already missed the train if we are to make it to Developing Nation status by 2022. We need to make 13-18 billion dollars worth of capital expenditure to graduate to Developing Nation status, but our current growth rates will not lead us there.
He raised serious concerns over how we never study India’s budget allocations’ impact in Nepalese economy despite its being released few months in prior. With their levels of planning, their currency is going to strengthen against USD. This will lead to lower production costs in India. On the contrary, our production costs are higher than market prices in India. Only 13% of the agricultural produces reach the markets in Nepal. In this case, the priority of the budget should have been making markets available to these entrepreneurs, farmers, businessmen. This has not been addressed by this budget.
While on one hand, the budget talks about reforming policies and Acts, in reality we have been relying on very old policies. We are still guided by Foreign Exchange Regulation Act, 1962, while India has made 3 amendments to the same Act of theirs till date. There are as many as three dozens of proposed policies and Acts lying around in the cabinet; some are stuck in the parliament. These processes need to be expedited.
He also expressed that we need to make structural changes in our tourism sector. 55-65% contribution to tourism sector comes from domestic tourism, but we have failed to recognize the domestic tourists. We need to explore further on possibilities of pilgrimage tourism, adventure tourism, trekking, sights-seeing, and formulate relevant programs for the domestic tourists. He also mentioned that we should look into popular international tourism practices like keeping Tourism Competitive Indices.
He concluded his deliberation by commenting over lack of capital/financial management in Neal and economic viability of possible federal states. There is domestic saving worth Rs. 2 trillion in Nepal itself but we have failed to channel these funds into productive sectors. He further drew attention to the issue of economic viability of federal states. While have been talking about federalism in Nepal, we have been overlooking facts like 60 % of Nepalese districts only somehow manage to collect revenues worth 10% of their total expenditure. Under such a situation, it is obvious that it makes no economic sense to go into federalism.
Dr. Chiranjibi Nepal
Dr. Nepal commenced his deliberation by expressing that we cannot have very high expectations from the budget. His focused majorly on our inability to make time-bound reforms to our existing policies and regulations. He acknowledged that for the first time in history, this budget has addressed Second Generation of Economic Reforms. However, lot needs to be done for the promises sowed by the budget to materialize.
He stressed on the need for industrial policies to adapt and respond to the changing trends and rapidly developing technological innovations coming in the market. Comparing it with India and China, he lamented that Nepal has been very slow in economic reforms and mentioned capital and financial market as an example of how the economy has been hit by lack of timely policies. China has continued to grow since its economic reforms of 1978, achieving as much as double digit annual economic growth and falling to single digit only recently. Industrial policy of China changes every 3 years to allow the industries to adapt to the technological advancements in the world. Similarly, India, that opened up its economy in 1994 has been continually reforming its economic policies and is all set to be one of the biggest economies in the world by 2020. In the meantime, Nepal has failed to internalize the positive changes occurring in the neighboring countries.
Dr. Nepal also shared that the Constituency Development Fund (CDF) will do away with the long bureaucratic procedures delaying the funds from reaching the local level, and expressed his consensus with the policy.
The pre-budget discussion, addressing Public Procurement Act, Financial Accountability, Land Acquisition and quality control are some major highlights of this budget, as expressed by Dr. Nepal.
Interaction with the audience
The participative and interactive audience then further talked about education, ability of the government to spend, youth self employment, foreign employment, sectors of comparative advantage, and other issues pertinent to the topic. Some highlights of the interaction session are as follows:
• Currently in Nepal, inflations has been rising and output is falling. There is therefore a situation of stagflation. Similarly, there does not seem to be a sound link between growth and employment. We have seen unemployment levels remain the same despite economic growth. In order to address situations like these, we need to form coordinated policies.
• Agricultural Development Bank has gone on loss due to its subsidy program. Now, instead of going for technological up-gradation and commercial agriculture, we are giving continuity to the same subsidy program. It appears that necessary homework has not been done in this regard.