Sunday, 24 October, 2021

Nepal’s Economy May Take Years To Recover

Hari Prasad Shrestha


Finance Minister Dr Yuba Raj Khatiwada presented federal budget in the parliament on 28 May 2020, with full of promises to support the devastated economy and to save human life endangered by the COVID-19 pandemic.
This budget has dual responsibilities – first, emergency funding for programmes and activities to stop the pandemic and second, offer stimulus packages to heal the ailing economy through financial relief, recovery plan and programmes.
This is the second post-disaster budget, after the great earthquake of 2015, unveiled amidst the COVID-19 pandemic and during the lockdown in the nation and shutdown of the economy.
The pandemic is expected to have the greatest impact on poverty and economic growth. Poverty may increase at the rate of one per cent for every three per cent loss in economic growth. National GDP is expected to grow between 1.5-2.8 per cent this fiscal year while the growth would be roughly three per cent in the next fiscal year, the World Bank said. However, the budget has projected a 7 per cent economic growth for the next fiscal year.
The tourism sector, which contributes around three per cent in GDP, is in a state of complete closure. It would take years for airlines, hotels, and other sectors of the tourism industry to recover from this shock.
The agriculture sector contributes 27 per cent in GDP. Its share in the economy is expected to decline. The highest contributors in GDP business other than agriculture such as, real estate, construction, forest, communication, and services have also been seriously affected.
Remittance in Nepal is expected to drop by a whopping 14 per cent and the private sector, which has around 65 per cent share in the economy, is facing severe losses by this pandemic.
Around one million people have lost their jobs inside the country. And another one million workers are expected to return from different labour destinations abroad and half a million from neighbouring India. It would be a great challenge for the government to manage employment for them.
The size of budget Rs 1.74 trillion is not large. However, in this critical situation, it would not be easy to secure revenue from both domestic and external resources. Nonetheless, if government secures this amount, it would be certainly a miracle.
Out of the total budget, Rs 948 billion has been allocated for recurrent expenditures, Rs 352 billion for capital expenditures and Rs 172 billion for debt services.
The target for revenue collection is Rs 889 billion, which indicates that the government must take loan for recurrent expenditures and loan repayment and interest payments. Deficit budget will be fulfilled by external grants of Rs 60 billion, external debt Rs 299 billion and domestic debt Rs 225 billion.
The relief and recovery packages and programmes announced in the budget seem to be supportive for many sectors of the economy. Top priorities have been given to health, agriculture, tourism, and employment. The budget has addressed the demand of most affected sectors of the economy by announcing economic stimulus package of Rs 150 billion.
Cottage, small and tourism-related industries have been facilitated by term loans on concession at 5% rates, to pay salary of workers and to restart business. Rs 50 billion is allocated and it will be operated by Nepal Rastra Bank.
The large and medium industries will get refinancing bailout support under the emergency lending programmes on 5% interest rate. Rs 100 billion has been allocated for it, however, the companies must assure the government not to misuse the bailout amount making it a license to steal. Moreover, 2% interest rate will be charged for loan to start-up businesses.
Health budget has been increased to 90 billion with priority in health infrastructures and fight against COVID-19 pandemic. The priorities of health budget are constructions of quarantine centers, laboratories, communicable disease hospitals in all states, primary hospitals in all local levels and trauma centers on highways.
Exemptions in income tax, VAT, excise and customs duty to most affected businesses and industries seem to be supportive. Provision of anti-dumping duty and countervailing duty to protect domestic productions, supply management fund and reduction in raw material import rates are also positive aspects.
This pandemic has opened eyes that we must be self-sufficient in producing food stuffs. Grant amount has been increased to Rs 11 billion in fertilizers, development of 200 wholesale agriculture markets, food warehouses with capacity of 310 thousand metric tons in all provinces, which would also buy farmers’ productions at minimum support price, food bank would certainly support agriculture sector.
Substantial budget has been allocated to local governments to invest in local infrastructures to generate additional employment to returnees. The programme of skill training to returnees would substitute cheap Indian labourers to some extent.
Moreover, the budget has reduced allocations in national pride projects and increased amount in game changer projects, like Melamchi Drinking Water, Upper Tamakoshi Hydropower, Fast Track Road and four International Airports.
The budget has announced exemption on electricity demand charge to industries during the lockdown period and 50 per cent exemption during low electricity consumption period.
The provision of sending money directly to farmers through credit cards is praiseworthy. This will help build the economy from the bottom.
The budget has drastically curtailed the expenditure on office operation, fuel, maintenance, foreign visit, seminar, training, consultancy, grants, furniture, vehicles, and all types of allowances except for specified health and security personnel working on frontline of COVID-19 pandemic.
Based on the recommendation of Public Expenditure Review Commission, some of the offices will be shut down, merged and handed over to the state governments. And vacant posts will not be fulfilled.
However, there are challenges for the government to achieve the goals of the budget and to collect domestic revenue and secure foreign assistance.
Another challenge is to shift our petroleum-based economy to renewable energy by using electricity in transport, industries, and household consumption. But this is not easy.
There other sectors where the budget could have done more to make it balanced.
For example, the government would have revisited the obstacles which are negatively affecting capital expenditures.
At present, many people are unable to feed their families. As we have noticed relief and food materials did not reach the needy poorest people during emergencies, which has not been directly addressed. The continuation of constituency development fund is not good.
It was the right time to implement multi rates in Value Added Tax to support domestic production of primary and intermediate consumable items and discourage illegal import trades, which is missing.
Information technology based on cloud computing, automation and artificial intelligence have not been affected by the pandemic and we must also move rapidly towards this direction by shifting from cash to digital payments in massive scale as urgent step. These are also lacking.
Finally, the government and the private sector must work together for an immediate coordinated health response to contain the transmission of the virus and end the pandemic. We should not forget that the rate of infections may surge if we fail to comply with the government health protocols and that would be undermining our effort to revitalise the economy in the foreseeable future.

(The author is a former Under Secretary, Ministry of Finance, and a specialist in UNDP Africa)