Tuesday, July 17, 2012

A review of Finance Minister Pun’s partial budget

It was published in Nepali Times online on July 16, 2012.

Budget discord

After much disagreement over the size and nature of budget for fiscal year 2012/13, Finance Minister (FM) Barsha Man Pun finally unveiled, through ordinance, “The Bill for Authorizing Withdrawal and Expenditure from Consolidated Fund for the Services and Works, 2012” (simply a partial budget) on July 15. The expected expenditure is approximately Rs 161.24 billion, of which Rs 51.29 billion is earmarked for debt servicing and expense of constitutional bodies. The remaining expenditure of Rs 109.72 billion is equal to one-third of the revised expenditure estimate of fiscal year 2011/12.


It will be just enough to meet administrative expenses and to finance ongoing development works, which should be of the same expenditure sub-heads as of the last fiscal year. The tax structure and revenue collection will be guided by the Finance Act 2010/11, which means they won’t change until the full budget is unveiled. Moreover, the government is not allowed to use domestic and foreign loans to finance expenditure during this period. It will have to issue overdrafts as per Nepal Rastra Bank Act 2001 in case revenue collection cannot cover expenditure.

The partial budget does not include new programs except for Rs 3 billion for CA election, Rs 3.69 billion for payment to PLA combatants who chose voluntary retirement, and Rs 3 billion for the establishment of proposed Directorate of Nepal Army. Understandably, the opposition has objected to such ad hoc allocations. Visibly unhappy with the way he was compelled to unveil a partial budget, FM Pun defended his track record and outlined, in his budget speech, what he would have done if a full budget were allowed. He mentioned populist programs like 100 days of employment guarantee to unemployed, free education up to 10+2 level for dalits, allowances to elderly and handicapped people, cultural centers, allowance to girls to attend school and universal insurance, among others.

FM Pun boasted that the economy—particularly growth rate, balance of payments (BoP) and foreign exchange reserves—had performed better during his tenure than previous years. According to government’s projection, the economy grew at 4.6 percent in 2011/12, up from 3.9 percent in 2010/11 and 4.3 percent in 2009/10. Let us be clear that this happened not due to any special effort by the government, but due to favorable monsoon and availability of agriculture inputs, which increased paddy production and pushed agriculture growth rate to 4.9 percent, the highest in the last four years. While the growth rate in service sector remained unchanged at 3.6 percent, industry sector grew at just 1.6 percent, which is lower than 2.9 percent in 2010/11.

It points to the fact that the major constraints to robust industrial activities were not addressed. In fact, the industrial sector is still crippled by power cuts, lack of affordable raw materials and qualified human capital, persistent labor problems coupled with expensive workforce (Nepal has the highest wage overheads in South Asia), strikes, lack of R&D and innovation, and policy implementation paralysis. No wonder gross fixed capita formation as a share of GDP was 19.6 percent, the lowest in the past decade. There is no improvement in cost competitiveness and efficiency of the industrial sector. Unsurprisingly, due to lack of adequate inventory and production hassles in export-oriented sectors, Nepal could not take advantage of weakening of Nepali rupee against major currencies.

Meanwhile, during the first eleven months of 2011/12, BoP surplus and forex reserves reached a record Rs 113 billion and Rs 427 billion respectively. It has resulted not from any novel government policy and structural change in the way the economy is functioning, but because of high remittance inflows and net transfers. There are still worrying signs in the economy: inflation is still high (government’s projection of 8 percent for 2011/12 is gross underestimation), trade deficit is widening, industrial woes are persistent, recurrent expenditure is rising, fiscal deficit is increasing, financial sector troubles are not sorted out, and some inefficient state-owned enterprises continue to drain taxpayer’s hard-earned money.

Given that this is just a special arrangement for revenue and expenditure, there is no relief program for the public, who are hammered by rising cost of living. Similarly, the troubled industrial sector—the most important sector for generating high and sustainable growth and employment opportunities—is also not getting immediate relief. The grand plan for Nepal Investment Year 2012/13 is now out of gear and completion of development works will be delayed.

Against this backdrop, the best the caretaker government could do is to create good industrial relations, maintain investor’s confidence and earnestly implement the ongoing projects by plugging leakages. Importantly, the primary focus should be on sustaining growth rate given the impending impact of late monsoon and fertilizer scarcity during planting season.