Economic Reforms Underway Amid Challenges

The government has completed its first 100 days with some steps to initiate economic reforms and multiple measures to strengthen the private sector's confidence, while macroeconomic indicators registered a positive trend.

In its move to address the long-awaited need of the economy and fundamental instrument to attract foreign direct investment (FDI), the government initiated the sovereign rating of the country. Although the talks to conduct such ratings began more than five years ago, the process was expedited earlier this year, targeting the Investment Summit in April, but that couldn't witness any progress. Deputy Prime Minister and Finance Minister, Bishnu Prasad Paudel, launched a fresh initiative to complete the process, and a team from the Fitch Credit Rating agency has already started its work with initial discussions with the Nepal Rastra Bank, Ministry of Finance (MoF), National Planning Commission, and other concerned agencies as well as some private sector companies.

The sovereign credit rating will increase Nepal's creditworthiness and provide a tool for financial stability, especially after graduation from the Least Developed Country (LDC) status, as the country will lose a significant amount of foreign grants and has to increase its competence to obtain loans. With the credit rating results in hand, donors and investors can make better assessments of the financial risk in the country.

Another major step the government has taken after assuming power is the formation of the High-Level Economic Reform Commission, which is led by former Finance Secretary and economist Rameshwor Khanal. The commission is entrusted to find out the reasons that are holding the country back in terms of economic progress and business development. Private sector, especially the Federation of Nepalese Chambers of Commerce and Industry, which also has formulated an economic transformation strategy for the country. This commission is expected to find out the bottlenecks in private sector development, policy hurdles, and strategic obstacles in doing business and economic progress. It is likely to further improve the relationship and cooperation between the government and private sector.

To facilitate the private sector enterprises, the government has formulated rules for the issuance and transaction of the securities of the small and medium enterprises. The MoF has also implemented a new strategy to base the customs evaluation on real transaction price, formulated rules for customs duties to simplify the customs process, started the use of vehicle and luggage scanner machines at Tatopani Customs Office, and started a lab module at the customs offices in Birgunj, Bhairahawa, and Nepalgunj.

Probably, confidence building in the private sector is the immediate need of the country in order to make the local and national economies more robust, create jobs, and enhance exports. The banks and financial institutions are sitting on huge piles of money, with the total deposits surpassing Rs. 652 billion. As there is a weak demand of credit in the market, the Nepal Rastra Bank (NRB) has mopped up Rs. 100 billion last weeks, responding to the lowering interest rate that went below the 3 per cent mark. According to the private sector, they have paused their plan for the new business ventures as well as the expansion of the industries. DPM Paudel has expressed confidence that the new steps to facilitate the enterprises, including the promotion of export-oriented industries, can reverse the scenario to a positive one.

To make reforms in the public expenditure and revenue mobilisation, DPM Paudel had issued a 73-point guideline to make the budget implementation more effective and result-oriented. It has helped to make some improvements in the mobilisation of revenue and overall expenditure of the government. 

According to the MoF, capital expenditure this year has been up by 65 per cent compared to the same period of the previous year, while revenue collection has been increased by 13 per cent.

However, budget performance has not been encouraging in the first 95 days of the current fiscal year 2024/15, with total expenditure hovering around 17 per cent this year and last year, according to the statistics published by the Financial Comptroller General Office. Capital expenditure has been just 8.36 per cent of the total allocation of Rs. 352.35 billion this year, while it was 7.92 per cent of Rs. 302.07 billion last years. But revenue collection is up by 2 per cent on a year-on-year basis in the first three months.

It seems that Finance Minister Paudel needs to innovate some novel approaches to reform the revenue collection, which continues to be dismal even against the poor expenditure performance of the government. For example, in just three months of the current FY, total government receipts, including revenue, grants, and others, stand at Rs. 256.6 billion, while total expenditure from the Treasury is Rs. 329.8 billion. However, this has positive aspects as well; it will force the government to raise money from domestic borrowing, and the BFIs can mobilise their deposits.

Meanwhile, to control the revenue leakage, the MoF has mobilised a rapid mobile team at key locations, and a new Inland Revenue Mobilisation Strategy 2081 has been put into implementation. Likewise, transactions of more than 400 large taxpayers that deal with the business of more than Rs. 250 million have been connected with the Central Billing Monitoring System. Inspection and monitoring have been conducted in more than 100 industries producing energy drinks, liquors, juice, tobacco-related goods, cigarettes, and beer.

The formation of the government by the coalition led by the two largest parties in the Federal Parliament has increased the confidence of the private sector in a hope for political stability. Based on this confidence and possible increase in paddy production, the multilateral donor, the World Bank, has projected 5.1 per cent growth in the Gross Domestic Product (GDP). Although this is a bit less than the government estimates of 6 per cent economic growth announced by the budget, this is encouraging compared to the 3.9 per cent growth of the last FY 2023/24.

Similarly, DPM Paudel has initiated the work for the formulation of the second financial sector strategy and new policy for development cooperation, while new budgeting guidelines and domestic debt issuance and management procedures have been formulated and implemented, and the drafts of new insurance rules and policies related to debt and investment in public corporations are submitted to the Cabinet. The MoF has also dematerialised the citizen bond and foreign employment bond.

While the progress made in the past couple of years is at risk of being regressed by the recent disasters, the country has witnessed a surge in remittances and tourist arrivals, which has strengthened the foreign exchange reserves and improved the external sector. The future course of the economy will be guided by the government's strategy to harness the benefits from them.

(Dhakal is a journalist at The Rising Nepal.)