Reasons Behind Low Capital Spending

Development expenditure is of great importance to accelerate the economy. A qualitative and adequate spending of development expenditure boosts socio-economic development through enhancement in the area of infrastructure, government revenue and individual incomes. But low development expenditure has become a headache for the successive governments in Nepal. For last two decades, the ratio of the capital budget is narrowing down on one hand, and the government has been unable to achieve overall economic progress due to low capital spending on the other. So, increasing of development budget and capital expenditure has become a national challenge.

In fiscal year (FY) 2003-04, out of total budget of Rs.102 billion, only Rs.42 billion was allocated for development expenditure and out of that Rs.29 billion was for capital expenditure. For the year the ratios of spending of development and capital budgets were 74 and 79 per cent respectively. In the FY 2004-05, Rs. 32 billion or 28 per cent of total budget was allocated for capital expenditure, and out of this 84 per cent was used. In the following years, the contribution of capital expenditure to the total expenditure seems to be around 20 per cent. This trend has not been changed even in the last two decades too. In the FY 2021-22 and 2022-23, the ratios of capital expenditure out of allocation congested to 57 per cent and 61 per cent respectively, while the allocations for the years were 21 per cent and 17 per cent respectively, of total allocations. 

Low capital spending 

Even after seven years of the implementation of federalism, the capital budget spending capacity of local and province levels could not exceed 60 per cent, compared to the target. Even in current FY 2023-24, up to mid-October 2023, use of capital budget is below 9 per cent.  In FY 2020-21, aggregate capital budget of three levels was Rs.496 billion, equal to 11 per cent of the gross domestic product of country, and the aggregate budget was equivalent to 53 per cent of the GDP. Thus both the share of capital budget and its quality of spending are not as desired. In addition, the trend of capital spending is always the same - whether at the time of internal conflict or transitional period or normal period. 

Until FY 2002-03, the budget was classified into general and development expenditures. Presently, according to the standard of the International Monetary Fund, public expenditure is categorised into current, capital and financial management while allocation, expenditure, recordings and reporting are also made accordingly. The loan amount is included in the financial management head and the interest and service fee of internal and external loans are included in current expenses. Generally speaking, the terms ‘development budget’ and the ‘capital budget’ are used interchangeably but there is some differences between them. 

Current expenditure is connected with daily services. By nature, it is simple and as goods ready-to-eat. It does not leave much impact for tomorrow, meaning that it does not create wealth. Capital expenditure creates wealth, physical infrastructures and jobs, builds capital, and helps to motivate private investment. In long run, it lays the foundation for development and productive activities by making the economy more dynamic. It encourages the private sector to invest in industry and infrastructure sectors. The development budget includes both current and capital expenditures and the programmes drawn by those relates to development of human capital and socio-economic and physical infrastructures, e.g. investment in education and health sectors indirectly prepares the basis for future development. 

Before the implementation of the new constitution, the authorities said that reasons behind the low expenditure were the delay presentation and late approval of budget and the accumulation of most of the financial resources at the central level. Now this claim has turned out to be false. As per the constitution and laws, the federal government must submit the income and expenditure statement of the coming fiscal year to the Federal Parliament  on 15th of May of current fiscal year and the Province and Local level within the 1st and 10th of Ashadha respectively. But still, the scenario of spending is the same. 

Now new list of reasons such as policy mistakes, weaker laws, unscientific budget system, lack of budget and resources for programmes and projects, random transfer of employees, floods, adverse weather, festivals, pandemic and political instability have been cited for the low spending of development budget. Keeping these in mind, laws related to economic procedures and financial responsibility have been amended or new laws developed. According to these laws, establishment of project banks, preparation of medium-term expenditure structure annually and the use of budget information system are mandatory. Laws related to budget formulation and procurement related laws have been amended several times. 

While making budget, resource assurance is a must and for national pride project and multi-year contract, earmarking of the budget is essential. Legislatures, the National Development Problem Addressing Committee (chaired by the Prime Minister) and other concerned organisations have started to discuss on the issues. Various commissions, constitutional bodies and agencies have given reports with reasons and suggestions. Still the issue is as it is, new reasons are listed. Private sector investment, public works, revenue collection, employment generation, daily services, agriculture and industry have suffered. Therefore, measures of increasing both allocation and expenditure should be searched very minutely while addressing the hidden causes of problems. For that, the issues should be scrutinised and diagnosed in terms of each programme and projects to determine whether there are wrongs in policy, procedures and actions.

Shortcomings  

The shortcomings of responsible person and agency to complete the work in the specified time and cost should be identified through separate list for every project. The causes may be related to delay in preparing and issuing tender documents, calling for proposal, making erroneous design, approving and cancelling tender and making agreement and price variations. Design mismatching, malpractices of the project managers and negligence of the contractor, lack of budget assurance increase the project cost, and push to delay in work requires adjustment. 

While implementing projects, run with foreign aid, the duties and responsibilities of the government and development partners should be reviewed and revised. A comparative study between successful and failed projects is also necessary to overcome the weaknesses. To make  development expenditure more qualitative and achieving the goal of sustainable and high economic growth, all responsible parties should work together. The budget should be objective and realistic instead of popular in order to secure high and inclusive growth and eventual prosperity.

(The author is an economist.)