Experts call for realistic and transformative budget

By Laxman Kafle,Kathmandu, May 21: The country is now reeling from a financial crisis. The economy affected by the COVID-19 pandemic has not returned to the right track. Government expenditure and revenue collection both are below the target. The situation is such that the revenue is not enough even to meet the recurrent expenses while capital expenditure has been poor. 

Although there have been a few positive signs in some macroeconomic indicators, the recovery rate is not as expected. Inflow of remittance has gone up but it has not been invested in the productive sector. Inflation is high. The trade deficit is still wide even though import has fallen.

The gradual drop in the share of the industrial sector in the gross domestic product and the inability to arrange the required amount of development infrastructure seem to be major challenges at present. The government has still been unable to convince foreign and domestic investors while it has failed to control the exodus of the skilled human resources in lack of employment opportunities at home.

Amidst these problems and challenges, the government is now busy preparing the budget for the next fiscal year 2023/24. Budget formulation has reached its final stage. As per the constitutional provision, the budget will be tabled on May 29 this year.

The budget ceiling for the fiscal year 2023/24 is Rs. 1,688 billion. People are eagerly waiting what sectors will get priorities in the upcoming budget, and what the size of the budget will be. As the policies and programmes unveiled by the government on Friday gave priority to the revival of the economy by boosting the confidence of private sector and supporting local production, one with a little knowledge of economics can guess the priorities of the budget, because the budget bases on the policy document.  

Realistic budget expected 

In the meantime, experts shave suggested bringing a realistic budget to instill hope of revival of the sluggish economy.

Economist Keshab Acharya said that the budget for the next fiscal year should be realistic and address the present economic problems instead of being ambitious and distributary.

He said that the government should introduce a budget by analysing the present needs to boost the private sector's confidence and provide relief to the people who are affected by price hikes.

“Building a self-reliant economy and generating employment opportunities should be the priorities of the budget. There is no alternative to allocating the required budget for production and productivity to reduce growing imports and control price hikes by improving supply of domestic products to bring the national economy on track,” said economist and former member of National Planning Commission Dr. Chandra Mani Adhikari.

Through the budget, the government should focus on boosting the private sector's confidence in investment and giving relief to the general people who are suffering from low income and high inflation.

Meanwhile, the private sector umbrella organisations—Federation of Nepalese Chambers of Commerce and Industry, Confederation of Nepalese Industries and Nepal Chamber of Commerce (NCC) -- have appealed to the government to make the upcoming budget production-oriented instead of distribution-oriented one.

Focus on capital formation

Economist Dr. Dilli Raj Khanal stressed the need for restructuring the budget so that expenditure in the targeted areas increases and capital will be formed.

He said, “The first thing is to reduce the budget of the unproductive sector and shift it to the capital sector. Even within the capital sector, priority should be given to areas that give higher returns."

Stating that the fixed capital formation of the country has been declining over the last few years, economist Acharya said that the new budget should focus on fixed capital formation which is the foundation of development.

According to the latest statistics of the National Statistics Office, the fixed capital formation from both the government and private sector has been projected to fall to 25 per cent of the GDP by the current fiscal year while it was around 33 per cent a year ago.

Under the fixed capital formation, the government invests in the social-physical infrastructure, including construction of roads and bridges. Similarly, the private sector invests in house construction and vehicle purchase.

 “The significant decline in the fixed capital formation in the last five years is a serious matter. So, the government should focus on this matter because there is no other way to achieve the economic growth without increasing fixed capital formation,” Acharya said. 

In the current fiscal year, the growth is projected to be below 2 per cent while the government had set a target to achieve 8 per cent growth.  At the same time, GDP of the construction, industrial, production and trading sector will be negative in the current fiscal year.

He said that development committees and boards and other positions which are duplicated in their works, do not work according to the purpose, and are irrelevant, and should be merged with each other or abolished.

Economist Adhikari said that various positions created by the government should be scrapped and expenditure on foreign visits should be reduced to cut recurrent expenditure.

Paradigm shift in capital expenditure

Government capital expenditure is crucial for developing economies like Nepal, where inadequate infrastructure poses a major obstacle to both the public and private sectors. Unfortunately, the underutilisation of capital expenditure has become a recurring problem in Nepal, with an average of only 70 of the allocated funds being spent over the past 10 fiscal years. 

"Low rate of capital expenditure is a challenge for the country and the government too. This is because the government and the concerned authorities have failed to carry out works making a calendar," said Adhikari. He said that there is no way to make a prosperous country without improving the expenditure of capital budget as capital budget is the backbone for development.

“The administrative performance of the civil service is weak. But the recurrent expenditure is increasing. In this context, it is a must to formulate development administration to increase capital expenditure,” said Adhikari.

Stating that foreign investment could not be attracted due to administrative hurdles in development works, he said that the government should pay attention to resolve the problems seen in the development works which could result in the mobilization of resources.

Positive intervention through budgetary policy Speaking in different forums, Finance Minister Dr. Prakash Sharan Mahat has been claiming that there was no space in fiscal and budgetary policy for the revival of the ailing economy. At the same time, the Prime Minister said that the government would address the present economic crisis through the budget.

"There were no prospective approaches and thoughts to address the problems by internalising them. There are no concrete policies and programmes reflected in the recently tabled principles and priorities of the government. It showed that the budget will give continuity to the past," economist Khanal said.

The views and speeches of the Prime Minister and Finance Minister show that they won’t introduce concrete policies to save the economy from going into recession, said Khanal.

The statistics of NRB showed that the country is moving towards a recession as import and export are decreasing continuously, morale of the private sector is declining and consumers are panicking from inflation and there is no investment from the BFIs.

"In this context, the problems of the economy will not be addressed by a routine budget. There is a need for positive intervention through the budgetary policy to save the country's economy from recession by gradually mitigating the present challenges," he said.

"It is a must to move ahead with a comprehensive plan with the help of fiscal policy, monetary policy, trade policy, industrial policy, employment policy and price policy to build a robust economy by tackling the present crisis," he said.

It is the government's priority to facilitate development projects by bringing laws related to development projects.

Size of the budget

The revenue collection is low and the foreign aid and loan could not be mobilised as per the target. Considering the present scenario of resources, including revenue collection, the budget for the next fiscal should be around at Rs. 1,500 billion to Rs. 1,600 billion, said Acharya.

“There is no shortfall of resources. But, the government and political leaders look reluctant to explore them,” he said.

Stating that the government has identified about two dozen national pride projects despite limited resources, economist Acharya said that only six or seven selected projects (Budhigandaki, postal highway, mid-hill highway) which can be potential game changer for the national economy, should be forwarded with the allocation of the required budget and a target to complete within 2-3 years.

The government should abandon the unnecessary projects which were put on the list in the past but now have lost relevance and other pipeline projects in order to overcome the shortfall of budget. Adhikari said the government should pay attention to efficiency of budget instead of size as there is no meaning of the size of budget, if it could not be implemented. The policies and programmes unveiled on Friday may lead to an increase in the demand for budget, he said.

"But we have limited resources and implementing capacities. The size of the budget should be less than Rs. 1,700 billion,” said economist Adhikari.

He stressed the need for carrying out projects with assurance of budget which support production, jobs creation and economic development of the country. He also suggested to scarp the provision of the constituency development fund for the lawmakers of the federal parliament and the Provincial Assembly members.

"The constituency development fund should not be included in the budget when there is a shortage of the resources. Even if the government allocates a budget for the constituency development fund, it will not be implemented due to lack of resources. In the meantime, the image of political parties and the government will be tarnished further by giving continuity to such unproductive programmes in the budget," he said.

Expand scope of tax

Adhikari further said that the government should desist from tax exemption, he said. "I suggest introducing a two-level VAT rate. The upper level of VAT rate should be expanded to 17 per cent from the existing 13 per cent and another lower rate should be fixed on the basis of a new study and analysis," he said.