Friday, September 19, 2008

First budget of the Federal Democratic Republic of Nepal

Today Finance Minister of Nepal Baburam Bhattarai presented budget of around Rs 236 billion ($3.23 billion) to the parliament. As expected, this year’s budget is bigger than last year’s budget and is already being termed ‘populist’ and ‘inflated’. More here. Read the full budget speech here.

The nice thing about this budget is that it takes sectoral issues seriously this time. It has rightly prioritized hydropower, tourism, and agriculture sector as top industries and has emphasized on the industrialization of agricultural sector. This is exactly what I had argued for in last time’s Op-Ed. I had argued for prioritizing hydropower and tourism sector for now and then to work on creating a good investment climate along with establishment of SEZs so that the sluggish manufacturing industry could be a major player in GDP. The budget has also aimed increase investment in agriculture, which is a good news for a country where more than 70 percent of the population is dependent on agriculture. But bailing out the poor farmers through cash could be very difficult. This mimics the Indian policy of bailing out poor farmers in in last year’s budget.

Long story short, considering the constraints to the economy at present and basing policies on reality, I am partially happy with this budget, which has been more pragmatic and better than I had thought before.

Though agriculture, infrastructure, health and education will be major areas of public investment, the budget will rate hydropower and tourism high on its priority, he added.

Dr Bhattarai indicated that the new government might not continue the past ones' privatization policy. "We will activate public enterprises, then issue their shares to people and employees, and run them under the public-private partnership modality," he said.

He reaffirmed the past governments' actions to deal with loan defaulters stringently. But at the same time, he tagged banks as 'parasites'. "Banks have completely ignored the real sector and focused only on serving able groups. This situation must be corrected," he stated.

However, the aim of achieving a double digit growth within five years (specifically, after two years) is very ambitious and I would need very convincing progress and policies to believe that this will be a reality. Bhattarai wants to take two years to prepare the country to get ready to set off in a double digit growth trajectory. However, given the threats to private property (even the Maoist’s party land reform minister grabbed land by force), bottlenecks in supply side, and sluggish manufacturing sector, I would be very hesitant to aim for a double digit growth rate. In a realistic basis, I would first aim for sustaining present growth rate of 5% for the next two years, then scaling it up by 2% for the next two years, then based on the investment climate and the level of structural changes in the economy, I would aim for a double digit growth rate.

The other issue that is sidelined in this context is monetary policy. Right now, inflation rate (7.7%)is more than the GDP growth rate and is expected to remain higher next year (about 7-8%). The injection of more money in the economy (especially by increasing wages to the tune of Rs 12 billion and bailing out poor debt ridden farmers, increasing expenditure by almost 60%) would put pressure on price level. With shortages of different goods and the advent of big festivals, expenditure is expected to shoot up. Moreover, the full effect of global rise in commodity and fuel prices is yet to be seen in the economy. This central bank would not let inflation rate get out of control (imagine how the IMF would bark at the central bank if this happens!). This means rise in interest rate and dampening of banking credit to firms and individual borrowers. It is unclear how monetary policy would be harmonized with the expansionary fiscal policy.

I don’t think inflation would be a major issue unless it crosses 10% limit. The ‘double digit’ number (inflation, not growth rate) would discourage investors. So, as along as it is under this limit (like in India and China), a slightly inflationary GDP growth rate would be tolerable for two or three years. But, this should not be let built on increasing expectations, which would lead to flight of capital and cash from the country.

Sources of finance:

Out of the estimated sources of financing for the current year, Rs 129 billion 215 million would be borne from the current source of revenue. Out of the total foreign assistance of Rs 65 billion 793.8 million, Rs 47 billion 93.2 million would be borne by foreign grant, and Rs 18 billion 700.6 million by foreign loan. However, there would be a deficit of Rs 41 billion 11.6 million even by mobilising both the sources.

With the same institutions still reigning bureaucracy and the same problems plaguing the economy, I wonder how the current administration is aiming to implement the ambitious budget.

Update: there is an increase in budget for the hydropower and transportation sector (113% and 77.14% respectively). This is a good news on fiscal side (concerns, on monetary policy remains high, as mentioned above.

Rs. 13 billion 910 million proposed for the road transport sector, which is an increase of 77.14 per cent in comparison to the revised expenditure of the last fiscal year.

Rs. 12 billion 690 million proposed for the power sector, which is an increase of 113 per cent in comparison to the revised expenditure of the last fiscal year.

A high-level power sector development committee under the chairmanship of the Prime Minister to be established to materialise the objectives of producing and utilizing 10,000 MW hydro powers in the next 10 years.

I will go over the budget speech in detail after my monetary theory class this afternoon. I will write more about the quantity and quality of stuff on the budget tomorrow.

Economic crisis: Call Keynes!

Jayati Ghosh opines that the current economic slowdown, triggered by the crisis in the Wall Sts starting last year, would affect the poor people in the developing countries. So, what can we do to prop up demand? Well, get back to the Keynesian policies to stimulate aggregate demand, mainly through fiscal policy. Would the impact of current crisis in economies around the globe resurrect the Keynesian ideas, which were like hot potatoes after the Great Depression until when the crisis in the 1970s gave rise to Friedman’s camp?

…fiscal policy and public expenditure must be brought back to centre stage. Across the world, we need significantly increased public expenditure to revive demand in flagging economies, to manage the effects of climate change and bring in widespread use of green technologies, to fulfill the promise of achieving minimally acceptable standards of living for everyone in the developing world.

And, some words on reducing inequality:

Reducing inequalities is not going to be easy. It will require the north to reduce its consumption of scarce resources and carbon emissions, which means some reduction of average consumption generally. It will require the global elite, spread across both developed and developing worlds, to curb extravagant lifestyles. It will require wage shares of national income to rise from their current very low proportions, with corresponding declines in the shares of profits and interest. And it will require governments in the powerful developed countries to recognise that they can no longer call the shots in all important international decision

I don’t exactly understand how curbing “extravagant lifestyles” by global elites would reduce inequality. Is this voluntary or involuntary? I guess income redistribution through progressive taxes and employment opportunities for the poor would be more effective than hoping for the global elite to give up their lifestyles!

More on Doing Business 2009 report

I have already discussed about the Doing Business 2009 report in a previous blog post. More on the report here. Here, I will focus on Nepal and South Asia. All the South Asian economies saw their ranking slip by some positions in this year’s report. This does not mean that the countries backtracked on earlier reforms. Other economies reformed more and better than the South Asian economies and hence climbed up the ranking, thus pushing the South Asian economies’ ranking down.

Sadly, on the ten index considered on the report, Nepal did not enact reform on a single one of them. The report flatly states, “No major reforms were recorded” in Nepal. Among the 181 countries considered in the report, Nepal’s overall ranking in the ease of doing business is 121, which is ten positions down from last year’s ranking of 111.

More on Nepal and South Asia:

  • The report states that it takes 7 procedures, 31 days, and costs 60.20 percent of income per capita to start a business in Nepal.
  • In the construction business it takes 15 procedures and 424 days (highest in South Asia), and costs 248.40 percent of per capital to get a construction permit.
  • The rigidity of employment index is 42 (Maldives has the lowest rigidity of employment index), and firing cost is equal to 90 days of salary (Afghanistan has the lowest firing cost in South Asia).
  • It still takes 3 procedures and 5 days, and costs 6.30 percent of property values to register property (Bhutan has the lowest in South Asia).
  • According to the report, the strength of legal rights index, which takes into account how collateral and bankruptcy laws facilitate the rights of borrowers and lenders, is 5 in Nepal (Bangladesh and India have the highest value in South Asia). Meanwhile, the strength of investor protection index for Nepal is 5.30 (Bangladesh has the best protection system with an index score of 6.70).
  • In terms of enforcing contracts, it takes 39 procedures and 735 days, and costs 26.80 percent of claim to enforce contract in Nepal. This shows how rigid and inefficient out courts are to resolve commercial disputes. Bhutan has the lowest costs to enforce contracts. Additionally, for a typical firm, it takes 5 years and 9 percent of estate to go through the process of insolvency.
  • For a typical entrepreneur, it requires 34 payments and 408 hours per year, and costs 34.10 percent of profit to pay taxes.
  • Furthermore, it takes 9 documents and 41 days, and US $1764 per container for an entrepreneur to export a typical item from Nepal. In the import front, it takes 10 documents and 35 days, and US $1900 per container to import a typical item.