Decoding Budget FY 2024/25

Moderate efforts to address grave challenges of the economy

the HRM
The government has unveiled the fiscal budget 2024/25 focusing on economic reforms to build confidence and a new sense of hope among citizens, productive capacity enhancement, infrastructure development and employment generation.

The Rs 1.86 trillion budget has set an objective to boost production and productivity, generate employment opportunities; enhance confidence of the private sector to mobilise fresh investments and accelerate economic activities; develop human capital; alleviate poverty, minimise income inequality through balanced and equitable mobilisation of resources, and bring effectiveness in public service delivery.

To achieve the aforesaid objectives, the fiscal budget presented by Finance Minister Barsha Man Pun in the parliament has prioritised economic reforms. It aims to encourage the private sector and develop agriculture, energy, ICT, tourism, industries and infrastructure. The budget has also focused on education, health and social sector development; inclusion and social protection, and promoting good governance and improving public service delivery.

Announcement of reforms
The fiscal budget 2024/25 has announced a few major reforms including structural reforms. Low productivity, alarming trade deficit, lack of employment opportunities and high inflation have posed crippling challenges to the economy. To come out from the low-level equilibrium trap, the country’s economy requires an overhaul. The fiscal budget has laid emphasis on developing integrated economic corridors, expanding digital economy and creating a foundation for a green economy by identifying the major accelerators of economic growth. The budget has announced to form a high-level commission to study structural reforms.
Secondly, the budget has announced to improve the overall business climate by initiating amendments in industry and investment related laws. It also talks about guarantee of investment security, country rating, bilateral investment and double taxation avoidance agreements, and increment in service fees against technology transfer. The budget has also focused on provision of reinvestment (to a certain threshold) in foreign countries from the income generated through transfer of technology and promoting the private sector to establish an investment company to invest in enterprises and infrastructure by collecting small funds from across the country.

The third area of reform as announced by the budget is reforms in public finance system which comprises of reforms in taxation and providing policy stability, harmonisation in fiscal and monetary policy, debt sustainability and capital mobilisation, austerity measures and result-oriented public expenses and ensuring objective led fiscal transfer.

The fourth area of focus is on financial reforms, including developing and implementing a new financial sector development strategy, promoting digital payments, creating a Central Bank Digital Currency, and expanding the formal economy through taxation and green finance instruments.

Another area targets administrative reform, aiming to improve structures, operations, and behaviour within the government, with a focus on optimising technology use in public services. This reform also includes plans for strengthening public accountability and managing conflicts of interest.

Besides, the government has tabled a separate Customs Tariff Bill for review to fix the customs tariff along with the budget. Moreover, the fiscal budget 2024/25 has spelled out that companies with a certain capital threshold must be listed in the stock market.

Though the government has announced reform initiatives to create an investment friendly environment, enhance public service delivery and spur economic growth, analysts have said that executing the reform agenda requires the commitment of the high political leadership along with political stability.

Increasing burden of debt
As revenue mobilisation slumps, the government has resorted to debt for budget financing. Revenue targets have remained constant as compared to the previous fiscal. The government has set a target to mobilise revenue worth Rs 1,260.30 billion as compared to Rs 1,248.62 billion of the previous fiscal year 2023/24. Nepal’s import-based revenue mobilisation slumped along with a plunge in imports. Import growth and revenue mobilisation have a very strong and positive correlation. The customs are still a source of the country’s largest revenue collection, which accounts for 44% of the total revenue and 50% of the total tax revenue, according to the Department of Customs.

Remittance-fuelled consumption and consumption driven imports have contributed revenue growth for a long time, which slumped along with the spread of the Covid-19 pandemic and subsequent global economic slowdown.

The government has decided to mobilise debt amounting to 29.4% of the total budget, which is worth Rs 1,860.3 billion. A large chunk of debt, Rs 330 billion, will be raised from the domestic market or the country’s financial sector. As the government is going to raise a large chunk of debt from the internal market, this will have a crowding out effect on the private sector, according to Dr Prakash Sharan Mahat, Former Finance Minister.

“When the government raises a huge debt from the internal market, the country’s private sector might be deprived from availing credit from the financial institutions,” he said, adding, “This will hit the growth target set by the budget.” The fiscal budget has set a target to achieve 6% growth in the coming fiscal year 2024/25 and tame inflation at 5.5%. The government has also pushed Nepal Rastra Bank to a tight spot by saying that the central bank will formulate a monetary policy that complements the target set by the fiscal policy.

Due to shrinking resources such as revenue, foreign loan and grants, the fiscal budget has increased the portion of domestic debt exponentially by 37.5% as compared to the previous fiscal year 2023/24.

Nepal’s total debt to GDP ratio is increasing each passing year to around 43% in fiscal 2022/23. The fiscal space is narrow as government debt is high. The government’s liability of debt repayment has been constantly increasing.

Soaring recurrent expenses
In the last 10 years, the size of the budget has increased by more than two-fold, however, growth of capital (development) expenses is slow. In fiscal 2015/16, the total budget size was Rs 819 billion, which increased by 127% in FY 2024/25, whereas capital expenses that are spent on infrastructure development increased by a mere 25.8% over the period of one decade from Rs 280 billion in FY 2015/16 to Rs 352.35 billion in FY 2024/25. The growth in the size of the budget is mainly due to increased recurrent expenses.

Government’s increased liabilities under recurrent expenses and narrow fiscal space affects the government’s spending on infrastructure development, which is critical for the productive capacity enhancement of the economy, according to Dr Dilli Raj Khanal, a senior economist. Khanal led the Public Expenditure Review Commission, which has recommended various austerity measures to cut down the government’s recurrent expenses. Though there have been announcements through the budget on multiple occasions to execute the recommendations made by the Khanal-led commission, they have not been implemented so far.
The amount spent for principal and interest of foreign and domestic debt surpassed development expenses in fiscal 2023/24. As per the revised estimates, Rs 247.55 billion is expected to be spent under the financing heading, whereas development expenses will remain at Rs 215.30 billion.

Budget: hype vs reality
The success of the budget depends on its implementation. However, due to weak implementation capacity of development projects, mainly due to lack of project readiness, there are serios questions on the effective implementation of the budget. Chandra Prasad Dhakal, President of Federation of Nepalese Chambers of Commerce and Industry, has said that the government agencies should enhance implementation capacity to deliver results as envisioned by the government.
In fiscal 2023/24, the government had unveiled a budget of Rs 1,751.31 billion, however, as per the revised estimates presented by the fiscal budget 2024/25 only 87.4% of the budget of Rs 1,530.35 billion will be spent. As per the revised estimates the government will be able to spend 93.5% or Rs 1,067.49 billion under recurrent expenses heading; around 71.3% or Rs 215.30 billion under capital (development) expenses heading and 80.5% or Rs 247.55 billion is expected to be spent by the end of fiscal mid-July 2024 under financing (repayment of debt and investment in State-owned enterprises). On the other hand, rampant transfer of funds at the end of the fiscal year calendar has raised eyebrows.

While comparing with the revised expenditure estimates, the size of fiscal budget 2024/25 is 21.5% larger than the previous fiscal.

“The budget should have allocation efficiency, implementation capacity and accountability of the implementing authorities/agencies,” said Suresh Pradhan, Former Financial Comptroller General.

Experts have opined that one of the major reasons of the ongoing economic crisis is basically due to the lack of intervention from fiscal policy and its operators. An assertive fiscal policy was required to address the impacts of Covid-19 pandemic and subsequent economic slowdown, according to Rameshore Prasad Khanal, Former Finance Secretary. “Ideally, the fiscal policy should have provided the necessary stimulus, rather than relying solely on monetary policy. Though economic slowdown is looming, the fiscal budget 2024/25 has just provided some assurance rather than tangible interventions,” he stated.

Dr Swarnim Wagle, economist and member of the parliament, has said that the budget is not inflated, though the reality of the budget will be reflected in the mid-term review. There has been a trend of revising expenditure and resource mobilisation targets through the mid-term review.

Unleashing growth potential
The fiscal budget has initiated a few new programmes to align production with employment and promote exports along with import substitution. In this respect, the concept of economic corridors and provincial economic hubs/growth poles have been announced. In collaboration with the private sector each province will be able to develop their own identity based on production and services. The competitive and comparative strength of provinces will thus be unleashed.

Koshi province will be developed as industrial province, Madhesh as agricultural province, Bagmati as ICT province, Gandaki as tourism province, Lumbini as small and medium-sized industries (SMEs) province, Karnali as medicinal herbs production pocket and Sudurpashchim province as province of religious tourism.
Earlier, while initiating the concept of decentralised development, then Vice Chairperson of the National Planning Commission, Dr Harka Gurung, had selected the capitals of the development regions as the growth poles or economic hubs. It was believed that growth diffused from the capitals across the regions and beyond. The budget has taken a similar concept of growth poles/economic hubs from production areas, or the pockets of economic activities so that growth diffuses across the provinces and beyond, and it is through this that the growth potential is expected to be unleashed. Further, the budget has carried forward Gandaki Triangle Project keeping Bharatpur (Mugling)-Pokhara-Bharatpur (Mugling) on three sides. Further, human capital and climate responsive development have been given due priority.

Fiscal transfer to subnational governments
As recommended by the National Natural Resource and Fiscal Commission (NNRFC), the fiscal budget has allocated Rs 60 billion and Rs 88 billion as equilisation grant for provinces and local levels, respectively. Likewise, Rs 25.84 billion and Rs 208.88 billion have been allocated as conditional grants for provinces and local levels. Moreover, complementary grants worth Rs 6.20 billion and Rs 7 billion have been allocated to provinces and local levels, respectively and special grants worth Rs 4.40 billion and Rs 8.50 billion will be transferred to provinces and local levels, respectively. Under revenue sharing, Rs 159 billion is projected to be transferred to provinces and local levels.

Major changes under tax headings
The fiscal budget 2024/25 has made several changes in tax headings, which has landed it into controversy. Policy inconsistencies have been witnessed in incentivising the enablers of the green economy. Another inconsistent move is that the government has raised the customs tariff and levied excise on electric vehicles. Further, there are controversies over increase of customs tariff on raw materials of MS-billet. The government earlier had lowered customs duty on sponge iron and scrap citing that these industries have high value addition in production of rods, and they are also energy intensive. However, the fiscal budget has levied 2.5% customs tariff on the import of sponge iron and scrap to produce rods from the earlier 1%. For those producing rods from MS-billet, who had to pay 5% customs duty, the fiscal budget 2024/25 has withdrawn excise duty, which was Rs 2,500 per metric tonne on MS-billet.

Apart from that, the fiscal budget 2024/25 has waived Value Added Tax (VAT) on the import of potatoes, onions and apples. On electric vehicles (EVs), the fiscal budget has increased customs tariff by 5 percentage points to 15% and 5% for excise duty. While buying an EV of up to 50-kilowatt battery capacity, a consumer has to pay 15% customs tariff and 5% excise, earlier, only 10% customs was levied. For EVs of above 50-kilowatt battery capacity, additional 5%/5% customs tariff and excise duties will be levied.

Besides, the fiscal budget 2024/25 has levied excise on assembled EVs that is 50% less than non-assembled ones. This provision has adversely affected the assembling plants producing EVs in Nepal. Moreover, the budget has slapped Rs 1,500 on Indian trucks, bullets and lorries ferrying goods to Nepal. Earlier, Indian trucks, lorries and bullets had 72 hours access inside Nepal without any charges/tariffs. This move of the government could increase the cost of goods in the domestic market.

Private sector hails budget, expresses concerns on tax rate revision
The private sector has hailed the government’s budget 2024/25 and provided positive feedback on it stating that the private sector is always eager to collaborate with the government to implement the budget.

The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) – the country’s largest private sector umbrella body – has hailed the announcement of forming a commission for structural reforms in the economy. FNCCI has welcomed the government’s decision to support the private sector to develop hill stations near the Indian border points to promote tourism as well as allocation of significant amount to promote the startup culture in the country. FNCCI has underlined the need of project financing (based on project collateral) through the monetary policy to promote startups in the country.

FNCCI has appreciated the announcement of motivating the private sector to establish an investment company for investing in the productive/real sector of the economy. However, FNCCI has expressed concerns on the revision of the tax rates and its possible impact on the economy and decided to submit a report to the government following an interaction and feedback collection from the district and municipal chambers.

The Confederation of Nepalese Industries (CNI) has hailed the announcement of a new phase of economic reforms and promoting the country’s production/manufacturing sector. CNI, however, has expressed doubt on the implementation aspect of the budget. It has urged the government to act for the operation of the newly built Pokhara and Gautam Buddha International Airports. The fiscal budget has announced to conclude the investment modality of the Nijgadh International Airport and complete all ground works to carry the project forward, however, it has remained silent about operating the already built and inaugurated two international airports – Pokhara and Gautam Buddha International Airports.

CNI has further said that the fiscal budget has failed to announce a stimulus package to uplift the economy that is reeling under a slowdown. “Based on our experience of the previous years, the implementation aspect of the budget is not encouraging,” said CNI President Rajesh Kumar Agrawal, adding, “We urge the government to pay attention on implementing the budget to achieve the desired growth target of 6%. To achieve the target, the monetary policy should be expansionary instead of contractionary like in the previous years.”

Meanwhile, Nepal Chamber of Commerce (NCC) has said the budget is realistic, however, implementation is challenging. NCC has hailed the announcement of economic reforms, however, it is a herculean task to accelerate economic activities coming out from a crisis and achieve the revenue growth target of Rs 1,260.30 billion in the upcoming fiscal year. NCC has further said that the resource mobilisation target through domestic debt is significantly high, which will create a situation of liquidity crisis in banks and financial institutions.

‘Budget envisions a greater transformation in the economy’

Madhu Kumar Marasini, Finance Secretary

The fiscal budget 2024/25 has tried to boost the confidence of the private sector and give a new sense of hope to the society. The next fiscal year will be a year of reforms on various fronts including business environment, public expenditure system, financial sector and administration. As announced by the budget, the government will form a commission to recommend policy actions to initiate structural reforms.

The government has realised that structural transformation is required to accelerate economic growth and for stability of the overall economy. Along with boosting the confidence of the private sector, the fiscal budget has underlined the need to boost the confidence of public servants. We have said that we will initiate reforms as per the aspirations of the new generation. Simultaneously, the budget has announced an approach of equitable and inclusive development across the nation to address massive migration from mountains and hills to terai, semi-urban and urban areas. Though infrastructure and assets have been developed in the mountains and hills, they are not being utilised optimally as people have started migrating as though these infrastructures were built for evacuating people.

Mid-hill highway, postal highway, and north-south corridors have eased the mobility of people and created economic opportunities. The fiscal budget has allocated sufficient funds for the upgradation and expansion of critical and strategic road networks.

The fiscal budget 2024/25 has not added any distributive programmes. Those that are already in place have also not been withdrawn nor suspended because none of the political leadership dares to withdraw it.

The fiscal budget 2024/25 has proposed some enablers to kick start the economy. An equal level playing field has been provided to the private sector. Policies and laws will be amended in consultation with the private sector to create a conducive investment climate. The fiscal budget has also talked about allowing innovative financing solutions such as venture funds and crowd funding. As the startups guideline is already in place, FY 2024/25 budget has allocated Rs 1 billion for startups.
Upgradation and maintenance of the East-West Highway, which is the spine of connectivity, is in the government’s priority and a significant amount of Rs 30 billion has been allocated for the purpose. The budget has prioritised early completion of ongoing projects rather than big announcements.

Further, considering more than 60% of the country’s population is engaged in the agriculture sector, the budget has envisaged to modernise and transform the agriculture sector. To make this happen, a substantial budget has been allocated for Research and Development (R&D). Nepal Agriculture Research Council (NARC) will have Rs 3 billion in R&D in fiscal 2024/25. In addition, the ICT sector has been addressed accordingly, where the government has ensured all basic amenities – uninterrupted electricity supply, internet facilities and workstations in a peaceful environment and it will also promote exports of ICT products. The fiscal budget 2024/25 has laid best efforts to enhance the competitiveness of the economy. In this respect, interest rate of the Development Finance Institutions/International Financial Institutions (DFIs/IFIs) has been slashed by 50% and the income tax levied on the repayment of loans obtained from international banks has been waived.
We expect all the stakeholders to play a significant role and join hands with the government in implementing the budget.

‘State should act in a mission mode to deliver results’

Swarnim Wagle, Economist and Member of Parliament

The fiscal budget 2024/25 is below 30% of the GDP in terms of size, which is relatively low as compared to fiscal 2023/24. However, real expenditure will remain low at around Rs 1,350 billion in FY 2023/24 as it was downsized by Rs 1,530 billion in the mid-term review from the initially announced Rs 1,751 billion.
After the earthquake, we went on a different trajectory and started bringing inflated budget and downsized the budget during the mid-term review. Such ill practices have set a question mark on the reliability of the government’s budget. Along with this, other areas of concern are the implementation capacity of state, relativity of the budget size and indispensability of economic reforms.

Over the last 30 years, the comment has always been: ‘the budget is high sounding; however, the question is its implementation.’

Around 52 years back, in December 1972, Prof Aaron Wildavsky of California University had published a journal article themed ‘Why planning fails in Nepal?’ and he mentioned five key things which are still relevant during the course of implementing the fifth periodic plan to 16th periodic plan. The five key points he had mentioned then are, weak capacity of the development administration; lack of evidence-based policy making; lack of project readiness; high dependency on foreign assistance and lack of coordination with the Ministry of Finance.

We may explain these with different nuances, but these are the deep-rooted challenges. Economist Karthik Muralidharan suggests that South Asia’s successes in managing emergencies, like vaccinations, elections, and bank account openings, demonstrate a strong state capacity for achieving results in ‘mission mode’. This implies that governments should be more proactive in tackling challenges by adopting a focused and time-bound approach.

The fiscal budget 2024/25 has announced some clear missions and envisioned to work in mission mode in the sectors of digitalisation, energy, high-end tourism, agriculture and irrigation, and green reindustrialisation. Further, the reforms agendas should be carried out in a big way or in a mission mode.

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