Thursday, July 15, 2010

Nepal's fiscal budget 2010/11 & Economic Survey 2009/10

There is hardly anything to say about the “special budget” worth Rs 110.21 billion rolled out by the caretaker government. It is meant to finance regular bureaucratic activities and is devoid of development and growth agendas. The inability of the political leaders to forge consensus on major economic issues is extremely frustrating because this budget is not going to do anything in addressing the major macroeconomic and development challenges faced by the nation. Unfortunately, misplaced political ambitions of the main political vision less leaders is holding hostage the aspiration of Nepalese people.
I usually assess and comment on the fiscal budget but this one is not even worth commenting because it lacks details about key economic expenditure and revenue issues. There is Rs 78.81 billion allocated for appropriate heads (parliament approval needed) and Rs 31.40 for chargeable items (parliament approval not needed). With such a half-hearted and incomplete budget, we should not be expecting much from the government in terms of spurring growth, development, and employment in the upcoming fiscal year. The messy macroeconomic situation will persist (or even worsen).
Meanwhile, the Ministry of Finance (MoF) released Economic Survey 2009/10 this week. It is one of the most anticipated reports coming out of the MoF. Here is an excellent summary and interpretation, based on the Economic Survey, of the state of the Nepalese economy. Here is my take based on the main message of the report: The economy is in a mess, growth is sluggish, and macroeconomic troubles are imminent. The government urgently needs to address the non-economic constraints such as bandas, destructive activities of militant youth wings and combative labor unions, donation campaign, supply-side constrains, and power shortages, among others, to kick-start the jammed growth engine of the Nepalese economy.
The economic growth rate (real GDP) in the current fiscal year 2009/10 is estimated to be 3.5 percent – lower than 4 percent achieved last year. Government argues that the decline in production of crops (blaming monsoon and adverse weather for growth stagnation!) and sluggish non-agricultural sectors contributed to the slowdown of Nepal’s growth engine. The non-agricultural sectors were (and are) plagued by frequent but fickle bandas, deteriorating industrial relations and labor strikers, power shortages, and supply-side constraints such as deficient supply of infrastructure. Meanwhile, real per capita GDP is nevertheless expected to increase by 2.3 percent, reaching US$562 per year – about 20 percent higher than last year’s figure.

As a percentage of GDP, gross investment is expected to increase to 38.2 percent as compared to 31.9 percent in the last fiscal year. Meanwhile, gross national savings is expected to decline to 9.4 percent from 9.7 percent of GDP in the same timeframe. The gap between gross domestic savings and gross investment, as a percentage of GDP, is expected to be negative 28.8 percent. It is widening by about six percentage points from last year’s figure. This essentially means that we are consuming more and have little money to fund projects and trigger capital accumulation.

The net export of goods and services is estimated to expand by almost 10 percentage points to a negative 28.4 percent of GDP. Exports are estimated to decrease to 9.2 percent of GDP from 12.4 percent last year. Meanwhile, imports are estimated to increase to 38.1 percent of GDP from 34.6 percent last year. Hence, trade deficit is expected to widen by 41 percent. The growth of remittances income is expected to slow down to 7 percent from 47 percent last fiscal year. The contribution of remittances to GDP is expected to stand at 19 percent, compared to 21.2 percent last fiscal year. This is leading to current account deficit of Rs 27.60 billion, which is an estimated negative 2.3 percent of GDP. Note that the current account balance was Rs 41.44 billion surplus last year. Overall, the Balance of Payments (BoP) deficit is projected to be Rs 19.57 billion.

State of the Nepalese economy (2001/02 to 2009/10):