Mahat Attempts to Maintain Fiscal Discipline
Even before Finance Minister DrPrakash Sharan Mahat presented the federal budget for the upcoming fiscal year 2023/24, it was clear that the new budget would be smaller in size than that of the last fiscal year. The only question was, smaller by how much?
Prior to the budget, the finance minister also talked about boosting the morale of the private sector which has borne the brunt of the economic downturn in the country.
As expected, Dr Mahat, in his first budget speech, did present a smaller budget, announced measures to ease doing business environment, made a strong push for digitization, and also signaled the government’s intention to move ahead with much-talked second-generation reforms. The budget has made an effort to address core economic issues while upholding fiscal discipline.
However, Mahat succumbed to the political pressure by reintroducing the controversial Local Infrastructure Development Partnership Program, known as the Constituency Development Fund. He also hesitated to break the tradition of scattering the resources in budget allocation.
The finance minister reduced the size of the budget by 2.37 percent to Rs 1,751.31 billion as well as announced measures to reduce recurrent expenditure, but economists have questioned the target set for revenue collection and foreign aid.
The FY 2023/24 budget has allocated Rs 1,141.78 billion for the current expenditure, Rs 302.07 billion for the capital expenditure, and Rs 307.45 billion for financing purposes. The recurrent expenditure of the government accounts for 65.20 percent of the total budget while the capital expenditure is 17.25 percent of the budget. Likewise, the budget allocated for financing purposes is 17.55 percent of the total budget. The government aims to achieve a six percent economic growth and plans to keep inflation at 6.5 percent in the next fiscal year.
The government has set a target to collect Rs 1,248.62 billion in revenue in the next fiscal year. Likewise, it aims to receive Rs 49.94 billion in foreign grants, raising Rs 212.65 billion from foreign loans and Rs 240 billion from internal debt. Given the poor revenue collection in the current fiscal year, economists say the revenue target set by the new budget looks ambitious since economic activities have still not picked up the pace.
Efforts to maintain fiscal prudence
In the budget, Dr Mahat has prioritized the reduction of public expenditure which has been debated in the public sphere for a long time. The budget has announced that recommendations of the Public Expenditure Review Commission will be implemented gradually. DrMahat has also announced various measures to cut the ever-increasing recurrent expenditure, from scrapping 20 government agencies, not procuring new vehicles in the next fiscal year. The budget has abolished all kinds of incentives and extra allowances. Similarly, cash-based transport allowance will be introduced to replace vehicle privilege.
The resource crunch has forced the government to cut the budget of 15 ministries for the next fiscal year, while six ministries saw an increment in their budget. The Education Ministry, Home Ministry, Physical Infrastructure and Transport Ministry, Energy Ministry, and Health Ministry are the top five ministries that are getting the highest resources in the next fiscal year.
DrMahat has kept the social security allowance unchanged for the next fiscal year. The government has allocated Rs 157.73 billion for the social security scheme which is Rs 23 billion more than the current fiscal year.
Signaling second-generation reforms
One of the high points of the FY 2023/24 budget is, it has signaled the beginning of the much-needed second-generation economic reforms in the country. Dr Mahat has tried to emulate his elder brother Dr Ram Sharan Mahat who was one of the architects behind the economic reform in the early 90s.
The budget has removed the minimum threshold limit on foreign investment in the information technology (IT) sector. In a bid to facilitate Nepali IT companies, the government has said that up to 10 percent of the foreign exchange earnings made by the IT industry will be provided to them to establish contact offices in third countries for the purpose of exporting IT services and to purchase software or programs and install equipment. The budget has also promised a separate law to promote and regulate the trade of Nepali goods and services through e-commerce. Similarly, Dr Mahat announced a 50 percent income tax concession for domestic firms exporting software programming, business process outsourcing, and cloud computing services.
The budget, in order to promote innovation and startups, has announced that one percent of the total budget will be allocated to foster innovation and support startup businesses. A separate unit has been proposed within Education Ministry for promoting innovation and startups along with the allocation of Rs 1.25 billion for startups.
Given the hassles investors have to face while registering and closing their companies, the budget has promised that the process of registration and cancellation of companies will be carried out online. The budget has also abolished the fee for the capital increment of companies. The government has announced that there will be no fee charged for new company registration and capital increment. Now, companies will be registered by declaring an authorized capital of only Rs 100. Similarly, the government has promised to amend the labor law to adopt a flexible labor policy for IT and innovation-based industries.
The other major policy initiative regarding FDI is the announcement of the arrangement of automatic approval for investment in the sectors, except for those requiring permission. The government has also said reinvestment of income earned from foreign investment will not require approval from now onwards.
Maintaining discipline in capital expenditure
In order to maintain discipline in capital expenditure, Dr Mahat said that a committee under the leadership of the National Planning Commission will be formed to monitor development projects worth more than Rs 1 billion. The Environmental Impact Assessment (EIA) report must be approved by the Ministry of Forests and Environment within 30 days of the application.
Given the low capital expenditure absorption rate, the budget has announced conducting country ratings of Nepal as well as organizing an investment summit in order to attract foreign investors. The announcement of country rating is, however not a new one, as the past budget had also talked about it.
In between, the finance minister did announce some controversial plans – mainly the revival of the constituency infrastructure development program, allocating Rs 50 million to each parliamentary constituency. The government has allocated Rs 8.25 billion for the program. Two years ago, the then finance minister Bishnu Paudel scrapped the program after it received criticisms from various quarters of the society.
“The budget drags government to policy trap”
Shiva Raj Adhikari, HOD, Central Department of Economics, Tribhuvan University
The government’s lack of awareness regarding the state of the economy is evident, considering the high size of the budget despite a significant decline in Nepal’s revenue by 31 percent, the lowest in 55 years. This decline is unprecedented, even during periods of negative growth.
To compensate for the reduced revenue, the government has resorted to increasing taxes, which has led to dissatisfaction among the private sector. Moreover, this tax hike is likely to trigger inflation. With inflation already at eight percent, it seems challenging for the government to manage and contain it within six percent in the next fiscal year. And the growth target will also not be fulfilled.
In an attempt to maintain resources, the government has to resort to domestic borrowing. However, this approach will further restrict the availability of funds for the private sector, resulting in increased interest rates. Thus, the government’s budget appears contradictory and falls into a policy trap. It is crucial for the government to reassess its budgetary decisions and consider alternative strategies to address the decline in revenue, control inflation, and ensure adequate funding for both the public and private sectors.
“The budget has several positive aspects”
Keshav Acharya, Former Executive Director, Nepal Rastra Bank
The budget has several positive aspects. First, the finance minister aims to expedite projects by ensuring that trees must be felled down after project approval is completed within 15 days. This would help streamline the implementation process and avoid unnecessary delays.
Secondly, the government has made it easier for both foreign and domestic investors to invest by introducing an automatic online route. This initiative is expected to attract more investment and facilitate economic growth. The budget emphasizes the utilization of domestic cement for road construction. This move not only reduces costs but also increases the lifespan of projects. It also contributes to a decrease in Nepal’s bitumen imports, promoting self-sufficiency and supporting the local industry.
The government plans to provide agriculture subsidies based on production. This approach ensures that the subsidies directly benefit the farmers and incentivize increased agricultural productivity. The decision to scrap some government enterprises is a positive step towards reducing public expenditure.
However, the revival of the constituency development fund goes against the principles of federalism. This decision could limit the authority and autonomy of local and provincial governments in their own development initiatives.
The imposition of taxes on acquisitions and mergers instead of income raises concerns. This approach may have unintended consequences and could discourage business growth and investment.