Monday, April 5, 2010

What is wrong with the Nepali economy?

The Under-Secretary at Ministry of Finance, Yoga Nath Poudel, in Nepal questions the increase in tax revenue, limited public services and low saving.

The underlying problem is the conflict between the large demands for investment and paucity of domestic savings. Lowering taxes, reducing public sector prices and improving infrastructure and education could lower public revenue in the short run; but it is the only avenue to save the country from being doomed to sink to the bottom of development failures. Rigorously stringent measures may not be politically feasible at this time, but the government can contain expenditure at a sustainable level so that the incoming government may not have to bear the unsound scale of expenditure. The times demand that we hammer out a plan of action that will not further burden the governments to come after the new constitution is written.

The questions is: if you lower taxes, where will the revenue come from to fund the existing meager public goods. Reducing public sector prices is not politically feasible. The tax revenue has been increasing with no increase in tax rates. How is it possible? Stemming corruption and loopholes in tax collection could be the two reasons. Another might be the incentives provided to tax collectors and tax payers to do fulfill their responsibilities as required. If revenue is higher than recurrent expenditures, then there is something wrong with the bloated public sector. Trimming its size is one evil option. Also, rather than nominal increase in revenue, we need to look at real increase in revenue.

The economy is in a bad shape-- expenditures are higher than revenues; huge balance of trade deficit; strain in exchange rate; balance of payments deficit in more than four decades; strains in fixed exchange rate between Indian rupee and Nepali rupee; decline in remittances; tightening of overall liquidity; real estate bubble; strained financing in the productive sectors; huge unemployment problem in the rural as well as urban areas; population growth rate that matches real GDP growth rate; low development expenditures; high recurrent expenditures; double-digit inflation rate; low productivity; demise of garment industry; slackness in total production in the agricultural sector; increasing migration from the rural areas to the urban areas; the inability of the economy to absorb new labor force entering the labor market, thus triggering massive exodus of talented citizens; inequality is increasing … the economic situation is as gloomy as it could get!

But, there are positive signs waiting to show up in the economy, if only there is improvement in law and order; political stability; restraint in YCL and similar organizations disruptive activities; restraint in militant trade unions; a selective industrial policy; (improvement in infrastructure) … Notice that almost all of these are largely related to political factors. The economic fundamental are still strong but the political fundamentals are constraining them and nipping their growth.


  1. Couple of comments
    * large demand for investment, meaning large amount of Rs needed for investment? does not sound right! the government has been under-spending the allocated budget on developmental activities and over-spending on foreign junkets for VIPs
    * revenue has been rising because of implementation esp of VAT the top revenue generator - the next two are custom duties and income taxes
    * remittances are not "declining" but "grow in remittances" is

  2. yup! It should be "declining growth rate of remittances" (absolute number is increasing though.