What needs to be done to bring the economy back from the brink?
- On January 31, the Ministry of Finance decided to cut the funds allocated under various headings under the recurrent expenditure. The ministry has also frozen the remaining funds allocated for the current fiscal year under 14 budgetary headings.
- On February 3, the Ministry of Federal Affairs and General Administration urged both provincial and local governments to slash their planned spending by 20 percent in a number of areas while discouraging the implementation of development projects that are yet to be awarded to contractors.
- Presenting the mid-term review of the current fiscal year budget, Finance Minister Bishnu Poudel on February 12 announced that the ministry has reduced the size of the budget by 14 percent.
the HRM
While the top political brass of the country is more focused on the presidential election, Finance Minister Bishnu Poudel and the people under him at the finance ministry are firefighting to avert a looming economic crisis that many warn is likely if the growing resource gap of the government is not narrowed over the next few months.
From increasing capital expenditure, axing recurrent expenditure, and tightening revenue leakage to improving revenue collection, Poudel, in his third stint as Finance Minister, has shouldered a big responsibility to resurrect the recession-mired economy.
While the external sector imbalance, which affected the economy in the last fiscal year, has gradually eased after stringent policy interventions by the central bank and the government, the growing imbalance in expenditure management and overall public finance management is looking precarious at the moment.
The fact that the finance ministry decided to slash recurrent expenditure by 20 percent clearly shows a serious mismatch between the earnings and expenditure of the federal government. The most serious is a large slump in the revenue collection in this fiscal year.
Struggling to manage resources, Paudel and his team have decided to reduce the size of the current budget by 14 percent in the mid-term review. High officials at the ministry accept that due to the decrease in revenue sources and foreign grants, there is no condition to meet the expenses according to the budget size. It is normal to trim the size of the budget up to 5-6 percent. However, the decision of the Finance Ministry to downsize the size by 14 percent clearly illustrates that there is a serious problem with the government resources and spending system.
The then finance minister Janardan Sharma had presented a federal budget of Rs 1,793 billion for the FY 2022/23 targeting economic growth of 8 percent which economists have termed unrealistic and unachievable given the economic headwinds. Now, the finance ministry said the budget size has to be reduced as it has increasingly become difficult to meet the budget expenses due to poor revenue collection and a decline in foreign grants.
Unveiling the mid-term review of the current fiscal year budget, Finance Minister Poudel reduced the size of the budget by Rs 244 billion.
The budget size has been readjusted to Rs 1549.99 billion from earlier 1793.83 billion. The recurrent expenditure has been trimmed by Rs 161.31 billion and the capital expenditure by Rs 66.53 billion.
Along with the total budget size, the revenue collection target has also been revised. According to Finance Minister Poudel, the new revenue target has been set at Rs 1244.75 billion.
With foreign grants declining, the ministry has revised the target of grants from Rs 55.45 billion to Rs 38.45 billion. Similarly, the target for foreign loans has been readjusted to Rs 170.53 billion from earlier Rs 242.26 billion.
Even the target for internal loans has been reduced as the government now plans to raise internal borrowing of Rs 240 billion from earlier Rs 256 billion.
Poudel has acknowledged that while there has been some improvement in the tourism sector, the economic growth will not be as per the target as the manufacturing sector has failed to operate to its full capacity. “Resource management has become difficult. A policy of cutting non-essential expenses has been taken,” said Poudel.
“The government is struggling to manage expenses for public expenditure and paying the principal and interest of the loans,” he further said.
For the current fiscal year, the government has targeted to collect Rs 1,403 billion in revenue. However, the revenue collection has been disappointing in the first seven months of the current fiscal year. Data published by the Financial Comptroller General Office (FCGO) show only Rs 511.79 billion of revenue has been collected till February 11, which is only 36.49 percent of the total target.
Though revenue administration officials blame higher revenue targets and import restrictions as major reasons behind decreased revenue collection, economists point out economic mismanagements under the former Finance Minister Janardan Sharma as one of the key reasons behind sluggish revenue collection.
According to a former finance secretary, during his tenure, Sharma filled the key position of the finance ministry with inexperienced and inept administrators which resulted in a leakage of revenue. “The revenue target itself was not scientific given that the import restrictions were already in place when the federal budget was announced,” he said.
Amid fear that the country would move in the direction of Sri Lanka due to depleting foreign exchange reserves, the government and the central bank introduced a series of restrictive measures to discourage imports ranging from import restrictions to cash margin provisions on opening letters of credit (LCs). The central bank made it mandatory for the importers to deposit a cash margin of up to 100 percent to open LC for importing nearly 50 types of goods; this policy arrangement, which was introduced a year ago was abolished on January 19. The policy was first introduced for 10 types of goods in December 2021 and was expanded to more goods in February 2022.
In April 2022, the government imposed import restrictions on 10 types of goods including automobiles, alcohol, and expensive mobile phones among others.
Though the government lifted the import restrictions in mid-December 2022, the impact of the policy is still visible in the government’s revenue collection.
On the one hand, import restrictions caused a sharp reduction in revenue collection, on the other hand, the shortage of loanable funds in the banking system contributed to a slowdown in the country’s economy. As a result of import control and reduced economic activities, both customs and inland revenues have slumped in this fiscal.
Deputy Prime Minister and Finance Minister Bishnu Prasad Paudel accepts that the country’s economy is under extreme pressure at the moment as a rarely seen negative growth is being experienced in revenue collection. The revenue collection, according to the finance ministry, is the worst for the last 55 years.
The mid-term review of the budget for the current fiscal year has revealed that import restrictions imposed to arrest the depletion of forex reserves had led to low revenue collection. The provision to maintain a 100 percent margin amount to open a letter of credit also led to a decrease in the collection of import duty.
All the major contributors to the government revenue collection have declined in the first half of FY 2022/23. Tax collection from imports of vehicles powered by petrol dropped by 92.36 percent, while vehicles powered by diesel by 18.08 percent. Similarly, restrictions on alcohol imports caused a revenue loss of 71.61 percent.
For the government, maintaining stability in the revenue policy and improving revenue mobilization by making revenue administration agile and professional has become of paramount importance.
As a result, the government revenue collection has been barely sufficient even to meet recurrent expenditure with the government’s revenue collection. The government’s recurrent expenditure stood at Rs 455 billion against the total revenue collection of Rs 458.98 billion, according to FCGO.
The government has come to a difficult situation as the funds are insufficient even for projects for which resources were assured. For instance, Rs 16 billion has been assured by the finance ministry for the purchase of chemical fertilizers this year, but the amount is insufficient. Similarly, the budget allocated for excise duty stickers is also not sufficient as additional funds are required. An additional Rs 880 million has to be managed for the printing of passports.
The government has to manage additional funds for social security allowances as the current allocation is insufficient. As the previous government increased the salary of civil servants, the finance ministry is also finding it difficult to manage additional funds.
Economists caution that risks persist in the country’s external sector and the improvements can be short-lived. “The government has lifted the ban and we have to wait for 2-3 months for the results. And looking at the current scenario, the external sector of the economy is still in a ‘danger zone’ as the latest data suggests import is again growing very fast,” said Keshav Acharya.
Govt seeks additional budget to repay internal debts
The government has been forced to manage an extra budget than the allocated amount for repaying the internal debt in the current fiscal year with the liabilities to the domestic creditors increasing along with the rise in interest rate amid a liquidity crunch in the market.
The government increased the budget for internal loans payment by nearly 60 percent for FY 2022/23 but that will not be enough for domestic debt liability for the current fiscal year.
“We have estimated more than Rs 20 billion in the additional budget for the current fiscal year to repay the internal loans, both principal and interest,” said a senior official of the Public Debt Management Office (PDMO).
The government has allocated Rs 134.32 billion allocated for internal debt servicing, of which Rs 43.73 billion has been allocated for paying the interest on the internal loans for this fiscal year.
The allocated budget for domestic debt servicing is higher by 58.17 percent compared to the total repayment the government made to the domestic creditors in FY 2021/22. The government had spent Rs 84.9 billion in domestic debt servicing in the last fiscal year, according to the PDMO.
Austerity measures
On January 31, the Ministry of Finance (MoF) decided to cut and freeze the funds allocated under various headings under the recurrent expenditure. The ministry has frozen the remaining funds for the current fiscal year under 14 budgetary headings.
The revenue administration has been struggling to meet the revenue target from the first months of the current fiscal year.
Given the mismatch between revenue collection and expenditure, the Finance Ministry says it has become necessary to re-prioritize spending and manage resources for national pride and transformative projects and projects and programs that contribute significantly to job creation and economic growth.
The ministry has decided to slash 20 percent of budget spending incurred in various headings of the approved budget of all ministries/agencies of the federal government, including fuel, maintenance, stationery and office assistance, newspapers, printing and publication of information, service, and consultancy.
The federal government has also asked both provincial and local governments to cut their planned spending by 20 percent in a number of areas while discouraging the implementation of development projects that are yet to be awarded to contractors.
The ministry has asked them to cut spending on these headings by 20 percent and adjust accordingly in the Line Ministry Budget Information System (LMBIS), an integrated financial management information system, through which budgets and programs are submitted to the federal government and get approval.
According to the letter, if the procurement has already been ordered, the deduction in spending will not be applied. The local governments have been told to suspend new procurements even for the programs that have been included in the budget and programs of the local governments. If the procurement process has not begun to implement any project, the federal government has told the local government to take the approval of the federal government’s finance ministry.
The local governments have been told not to create new job vacancies, or new liabilities to make payments within this fiscal year and not to provide any financial assistance except in exceptional cases. Provincial governments have also been asked to adopt austerity measures.
“Besides reduced revenue, the previous government’s decision to increase compulsory liabilities by increasing the salary of public officials and lowering the eligibility age to get an elderly allowance to 68 years from 70 years also contributed to the resource crunch,” said a finance ministry official. The federal government’s treasury is currently negative by Rs 90 billion.
Citing these factors, the federal government called for a reduction of expenses by local and provincial governments too. A both provincial and local governments are heavily reliant on fiscal transfer and revenue sharing from the central government, they are bound to reduce these costs.
For the current fiscal year, the central government had promised a fiscal transfer of Rs 129.46 billion for seven provincial governments and Rs 300.37 billion for 554 local governments.
Sub-national governments receive fiscal transfers in four headings—equalization grants, conditional grants, complementary grants, and special grants. The provinces and local governments are supposed to get an additional Rs 163 billion through a revenue-sharing mechanism as well.
According to economists, though times are challenging for the country, there is also an opportunity to give the economy the right direction for the long term. “I think the time is right to restructure the economy and bring long-term policies for import substitution,” said Acharya. He also suggests that to reduce the recurrent and other burdensome expenses, the government must reduce the sizes of provincial ministries. Former National Planning Commission member Dr. Chandra Mani Adhikari agrees with Acharya. “For now, the government needs to tighten the spending,” said Adhikari, adding, “It has to limit the number of ministries, should stop investing in unnecessary projects and focus on increasing capital expenditure.”
He sees a necessity that the government needs to take the country’s private sector into confidence to face the challenge. “There is a misconception that the private sector is just about big business houses. This is not true. In fact, small and medium scale businesses are the backbone of the economy,” he opined. According to him, agriculture should be another key area of focus for the government. “Producers of farm products need to be motivated as it will help the country to become self-sufficient in agricultural goods,” he mentioned.
The govt needs to take the country’s private sector into confidence
— Dr. Chandra Mani Adhikari
The improvement seen in the external sector is likely for a short period of time. We need to see how things will turn out in the next few months. The high remittance inflow is one of the major reasons behind the improvements in the external sector. But the question is for how long this will go on.
At present, the major threat to the economy is the fall in the government’s revenue. The government has now been forced to raise domestic loans for the salaries of employees. But the irony is the government is not serious about improving the capital expenditure which will help to kickstart the economic engine of the country.
Lately, foreign currency reserves have increased. But this is not helping to end the economic sluggishness. The money flow in the market has been severely disrupted and people are unable to start and sustain their businesses.
For now, the government needs to tighten the spending. It has to limit the number of ministries, should stop investing in unnecessary projects and focus on increasing capital expenditure.
The government needs to take the country’s private sector into confidence. There is a misconception that the private sector is just about big business houses. This is not true. In fact, small and medium scale businesses are the backbone of the economy. Agriculture should be another key area of focus for the government.
roducers of farm products need to be motivated as it will help the country to become self-sufficient in agricultural goods.
High time to move ahead to restructure the country’s economy
— Keshav Acharya
The external sector of the economy has improved as the government had restricted the imports of luxury goods for several months. But the government has lifted the ban and we have to wait for 2-3 months for the results. And looking at the current scenario, the external sector of the economy is still in a ‘danger zone’ as the latest data suggests import is again growing very fast.
In the past few years, the consumer price index (CPI) of Nepal used to be less compared to the CPI of India. But lately, Nepal’s CPI has been higher than that of India. This shows that Nepal’s industries are falling behind.
The government lifted the import restrictions as it was reeling under huge pressure to meet the revenue target. I think the time is right to restructure the economy and bring long-term policies for import substitution. To reduce the recurrent and other burdensome expenses, the government must reduce the sizes of provincial ministries.
Nepal has faced many economically challenging moments in the past. But the situation is different and more challenging as there is a widening resource gap and revenue collection is not enough to even meet the recurrent expenses.
It can clearly be seen how the macroeconomic headwinds are affecting us. The credit flow to the private sector credit flow has declined dramatically. This is high time for the government to work to reduce expenses and improve domestic production.
