Realistic budget demands earnest execution

By Modnath Dhakal/Laxman Kafle,Kathmandu, Jun,1 : Prime Minister and Chairman of CPN (UML) KP Sharma Oli is a leader who propagates 'ambitious planning' and 'sets up high targets' in development outline, including in the annual budgets of the government. 

However, his staunch supporter Deputy Prime Minister and Finance Minister and Vice-Chair of CPN (UML), Bishnu Prasad Paudel, announced 'less ambitious' – in his words, a 'realistic' budget for the next Fiscal Year 2025/26.

Given the significant financial constraints, this moderation was anticipated as the Finance Ministry had made its intentions clear during the budget formulation.  DPM Paudel appeared to be contended while facing a large group of journalists a day after he presented the budget of Rs. 1,964.11 billion for the upcoming fiscal year. Although the media briefing on Friday was a ritual, it is the time when the Finance Minister is grilled by journalists as the latter dig the motive behind the allocations to certain sectors or no allocation to others.

Amidst the growing development aspirations and financing needs for three-tier federal government structure, the Finance Minister has been facing a challenge to maintain a balance between the sources of income and expenditures. Expanding social security expenditure is another issue of worry. 

Ministry of Physical Infrastructure and Transport (MoPIT), Ministry of Urban Development (MoUD), Ministry of Energy, Water Resources and Irrigation (MoEWRI) and Ministry of Water Supply (MoWS) are the major development ministries while Ministry of Education, Ministry of Health, Ministry of Tourism and Ministry of Industry also mobilise significant portions of development budget. 

National Development Research Institute, in its analysis of budgets of FY 2011/12 to 2023/24, has concluded that a significant portion of the budget is allocated to public services. 

According to it, a substantial 36 per cent of the budget of fiscal year 2023/24 has been designated solely for general administration expenses, whereas less than half, a mere 17 per cent, has been allocated for development and construction expenses. The same report observed that there was inefficient utilisation of the allocated 17 per cent. The country has long been facing the challenges of meagre resource allocation to development and its poor utilisation (see table). Budget performance of the MoPIT that mobilises the largest share of the capital allocation hovered at around 71 per cent for the last decade. 

In the last 10 years since the new constitution came into force, more than 80 per cent of the budget has been spent only in three years. In the last 13 years, an average of 84.76 per cent has been spent under recurrent headings, an average of 67.80 per cent under capital headings, and an average of 81.52 per cent under financial management. 

 It emerges that only 80.58 per cent has been spent on average.

Defence, peace and security, and entertainment, culture, and religion have seen more spending as per the allocation, but less than 80 per cent has been spent in the capital construction sector.

There are problems in formulation, lack of efficiency in allocation, excessive demand compared to resources, and a tendency to demand budget for projects that have not met the prerequisites for implementation and have not been studied, a former high official of the Finance Ministry said.

Trend to set high targets and adjust in mid-year  

According to economists and development experts, what is more worrisome for the economy is the tendency to announce a large budget by including populist programmes and bring down the annual estimates during the mid-term review in February every year. It has become a common characteristic of the fiscal policy for the past several years. 

For example, the government adjusted the budget of this FY 2024/25 to Rs. 1,692 billion from Rs. 1,860 billion – 90.99 per cent of the total estimates – on the pretext of poor capital expenditure, inadequate revenue collection and realisation of foreign loans and grants. 

The budget was slashed by 12.62 per cent last year 2023/24 as well to bring the budget size to Rs. 1,530 billion from Rs. 1,751 billion. The meagre capital budget of just Rs. 352.35 billion was reduced to Rs. 299.50 billion. In the first six months, the government had spent only 16 per cent of the total development budget. While only one-and-a-half months remain of this fiscal, the utilisation of development budget has reached only 37 per cent. 

Since the budget of this fiscal year was designed and announced by Barsha Man Pun, Finance Minister of the coalition government led by CPN (Maoist Centre), DPM Paudel could term it 'overly ambitious' and 'problematic' for implementation. But he will be in no luxury to downsize the budget of the next year during mid-term review. 

DPM Paudel said that the budget of the next year addresses various development holdups such as scattering the funds. He cut the budget of the 4,654 projects in order to secure funds for more important projects. 

The government has put forward various policy reforms with the aim of promoting economic growth by balancing public expenditure and development activities for the upcoming fiscal year, according to him.  

Reforms in project management 

Through the budget, the government has made an attempt to diversify resource mobilisation by adopting a policy of utilising alternative development finance. It is believed that this will help in financial access for long-term infrastructure development.

Project management and procurement processes are being improved in line with the goal of increasing capital expenditure. 

In particular, arrangements have been made to start the procurement process after May 30 (a day after announcement of the budget), and monitoring of projects larger than Rs. 250 million through a national dashboard is expected to improve transparency and performance.

A threshold of Rs. 30 million has been implemented for federal projects strictly in the budget, and limiting grants to a maximum of 50 per cent of the cost will contribute to cost control and planning effectiveness, he said.

Likewise, the projects that have completed preparatory steps such as land acquisition and forest clearance will be moved to the procurement phase. To accelerate project execution, contract agreements will include provisions for three-shift work arrangements.

DPM Paudel also announced that the Public Procurement Act will be amended and electronic procurement system will be implemented to ensure timely, cost-effective and quality completion of infrastructure projects. Development assistance would be mobilised to large infrastructure projects like Dudhkoshi and Upper Arun through co-cofinancing from multiple donor agencies. 

Other development management provisions include holding the responsible official accountable if project costs increased or abnormal liabilities are created due to delayed and flawed decisions and specification. 

In addition, efforts have been made to balance current expenditure through a policy of controlling contingency and consultant costs and adopting frugality.

Making balanced budgets mandatory at the provincial and local levels and simplifying land use in forest areas will contribute to inclusive development. 

Similarly, the proposal for policy reforms to promote foreign investment will create an environment for injecting foreign capital into the economy. All these initiatives are aimed at ensuring good governance, transparency, and sustainable development overall, said DPM Paudel.

The Finance Ministry is also set to ensure a match between the project bank and the Line Ministry Budget Information System (LMBIS). All mismatch would be removed before taking any project into implementation, Shree Krishna Nepal, Chief of Budget Division at the MoF, said the other day. 

With these development policy reforms and extended list of private sector facilitation – including concessional loan, reduction in customs duty and charges for space at the Special Economic Zones – DPM Paudel said he is in a position to assure the country that the budget of the next fiscal would make impacts on the economy. 

Challenge to mobilise capital budget

Prof Dr. Ram Prasad Ganwaly, Head of the Central Department of Economics, Tribhuvan University, said the budget for the upcoming fiscal year sticks to fiscal discipline. 

He termed the policy to increase the age limit for receiving senior citizen allowance to 70 years a 'bold move' which will positively contribute to the economy.

The government has included many suggestions provided by the High-Level Economic Sector Reform Advisory Commission in the budget, said Ganwaly who was also a member of the Commission.     

Through the budget, the government has tried to reduce the rerecurrent expenditure and increase the capital expenditure which is essential for higher growth. 

Of the total allocation of Rs. 1964.11 billion, Rs. 1,180.98 billion (60.1 per cent) is allocated for recurrent expenditure, Rs. 407.89 billion (20.8 per cent) for capital expenditure, and Rs. 375.24 billion (19.1 per cent) for financing arrangements. 

Of the total budget of Rs. 1860.40 billion of the current fiscal year, around 61.31 per cent has been allocated for recurrent expenditure, 18.94 per cent for capital expenditure and 19.74 per cent for financing.

In terms of revenue collection, the projection of Rs. 1,315 billion for the upcoming fiscal year is also practical based on the estimation of the current fiscal year, said Ganwaly.

 Former Finance Minister Janardan Sharma, while agreeing with DPM Paudel termed the budget 'realistic' but questioned the bases that would boost expenditure next year. Speaking at the post-budget discussion programme organised by the Nepal Association of Financial Journalists (NAFIJ) in Kathmandu on Saturday, he said, "The government should be serious about achieving the targets set by the budget. It also has a challenge to change the situation of 10 times higher imports than exports."

Pro-private sector budget 

Through the budget, the government has addressed almost all the demands raised by the private sector.

The budget has proposed various discounts and concessions for industries ranging from export-oriented industries to information technology-based industries, hotels and resorts.

The government has announced to give tariff exemptions to information technology-based industries, hotels and resorts.

Similarly, an arrangement for a 75 per cent tax exemption on income derived from the export of information technology services. A provision has been made to exempt income taxes for startup businesses with an annual turnover of up to Rs. 100 million for five years.

The government has abolished other taxes and duties by imposing only 1 per cent customs duty on the import of mill machinery required for wood seasoning industry, removed customs duties and abolished other taxes and duties on the import of equipment required for the production of organic and natural fertilisers.

A 1 per cent customs duty has been imposed on the import of equipment, tools and sports materials required for the construction of infrastructure for football, cricket and multi-purpose stadiums, abolishing all other taxes.

The government has made arrangements to exempt all types of taxes and duties on machinery and equipment imported for green hydrogen production industry for five years.

Provision of only 1 per cent customs duty has been introduced on the import of batteries and other equipment required to store electricity from solar and wind energy.

DPM Paudel also said that the budget has been introduced with the aim of encouraging the private sector to invest.

"In addition, such things have been introduced in the budget for the upcoming fiscal year with the aim of motivating the private sector to invest and facilitating investment in projects."

In the meantime, the private sector leaders appreciated the budget citing that it would encourage private sector investment. 

"If private sector investment cannot increase even after providing so many tax exemptions for industries and businesses, how can the government expect the private sector to accelerate the country's economy further?" economist Dr. Ganwaly said.

He expressed hope that private sector investment would increase and help achieve the targeted economic growth of around 6 per cent in the coming fiscal year.