Nepal’s fiscal budget 2010-2011

Here is the skeleton of Nepal’s fiscal budget 2010-2011 presented by Finance Minister Surendra Pandey today after yesterday’s Maoist party’s inexplicable drama.

Budget for FY 2010-1011
	Rs, billion	Percent of total budget	Percent increase from last FY
Total expenditure	337.9	100	30.4
Recurrent	190.32	56.3	25.8
Capital	129.54	38.3	44.8
Principal repayment	18.42	5.4
Development programs	178.61	52.9
General administration	159.29	47.1
Projected total revenue	281.99
Revenue	216.64
Foreign grants	65.34
Deficit	55.91
Deficit financing	55.91
Foreign loans	22.23
Domestic borrowing	33.68
FY 2010-11 full annex

Even though Mr. Pandey claims that this budget is in line with the Three Year Plan (2010-2013), which I think is not, politically, thanks to the Maoist party, he is restricted to bring a budget that will more or less be in line with the plan.  He is constrained by other parties’ reluctance to add new development programs. So, pretty much everything looks like a continuation of the ongoing programs.

Specifics:

• Infrastructure: construction and reconstruction of roads, bridges, highways, Tamakoshi Hydropower Project, irrigation projects in Karnali

• Transport: Rs 2.52 billion for regular and periodic repair and maintenance of roads (my take: the sum is too little to tackle the binding constraint to economic growth); construction of railway, metro, cable cars and water ways (my take: forget these and divert money to constructing roads and building hydropower; link up villages and markets first, where there is the highest marginal rate of return on public investment); upgrading and construction of bridges over roads and those linking highways; 4 six lane highways
• Hydropower: budget for completion of Trishuli III “A” (60 MW), Kulekhani III (14 MW), Chameliya (30 MW), and Rahughat (30 MW); at least one large and medium sized reservoir projects in each development region-- Budhi Gankadi (66 MW), Naushyalgad (400 MW), 300 Tamor (300 MW) and Aandhikhola (175 MW) projects to be brought into operation; micro hydropower production to be encouraged; national grid expansion and construction of inter-country transmission line of high capacity (my take: Good one. But, let us also ensure that they happen on time. It would have been better to put a time horizon for completion of these projects and institute a proper governance body to ensure that they are completed on time)
• Tourism: NTY 2011 promotion to bring in one million tourists; Rs 5 lakhs for any organizer bringing in more than 100 foreign passport holders via air; Lumbini, Pokhara, Janakpur to be promoted; airport infrastructure to be upgraded (my take: the cash incentive could divert some of the regional conferences to Kathmandu; good for the economy!)
• Private sector development: black topped roads reaching premises of manufacturing units employing more than 100 people; tax payment days reduced by 12 working days; sub health post staffed with health workers to any productive industry employing more than 500 Nepali workers; a police post of 5 police personnel near any manufacturing firm employing more than 500 Nepali workers; direct purchase of diesel from NOC at dealer’s price for manufacturing industries and hotels; along with 25% tax exemption, 2% of incentive in NRs to exporters on submission of bank document that they have received convertible currencies earned from exports; 3% and 4% tax tax incentive, along with 25% income tax exemption, if value addition in exported commodities exceeds 50% and 80% respectively; safeguard economic protection of industrial workers who have contributed to Social Security Fund; high priority to completion of road construction and electricity transmission lines to encourage cement industries in Udayapur, Makawanpur, Dhading, Rolpa, and Dang; grants for registration of collective trademarks for tea and coffee in the international market; price carteling and syndication to be illegal; Youth Self-employment Program (my take: Good incentives, but unsure how much of it will be picked up by the private sector, for whom any amount of incentive by this resource-strapped nation is insufficient; I like the idea of constructing roads up to premises of manufacturing units if they employ more than 100 people. It would better if this is used in as carrot-and-stick style, i.e. if firms employ more than 100 just to get roads to their premises, and fire 50 percent employees after getting the roads built for free, then they should be held liable for the costs incurred in constructing the roads. There should be hooks to this incentive. Also, let us start with breaking up the syndicate in transport sector. Consumer surplus is being deliberately squeezed by unfair pricing by syndicates and cartels. Also, export promotion measures are laudable. We’ll have to see how much risk abatement there will be with these tax incentives.)
• Financial and capital markets: capita restructuring of NBL and RBB; Infrastructure Development Bank; NRNs allowed to invest in capital market (my take: Why not totally reform and privatize NBL and RBB? What is the point in resuscitating them time and again? Let us make infrastructure development bank a reality. First, increase funding for it. Also, how about selling infrastructure bonds with relatively attractive high long-term interest rates?)

• Social security: social security allowances (distribution to be initiated through banking system), child protection grant for poor-Dalit families in Karnali, human development of backward and marginalized groups, one percent income tax as social security tax
• Women empowerment: 17.9% of total budget allocated for women empowerment, including campaign against gender based violence, legal expenses of small girls and teens rape cases to be covered by the state treasury
• Sports: incentives for medal winners at international events, development of sports infrastructure, construction of regional sports complexes, construction of cricket grounds of international standard at Mulpani, Kathmandu and Bhairawa, Rupendehi (my take: We badly need it. Let us boost our athletes’ morale)
• Targeted poverty alleviation: social mobilization, income generation, self-employment, small community infrastructure development, skill enhancement and creative programs through PAF; target groups are Dalit, Madhesi, ethnic groups and backward groups BPL; Karnali Employment Program
• Reconstruction, Rehabilitation … : monthly allowances and livelihoods for combatants (my take: if they are really in a combative mood and support their parent party in any moves, then why pay them with taxpayer’s money? I hate to think of giving hard earned tax rupees to idly sitting, potentially destructive and politically indoctrinated militants!)
• Agriculture: livestock development by concessional loans to be self sufficiency and to promote exports of meat (my take: its fine to aim for self sufficiency, which I doubt, but don’t aim for exports as of yet because we hardly meet international sanitation standards; it is a useless chatter to show that something is going to happen); Karnali Zone Special Agriculture Development Program, which is an extension to last year’s program, with provision of transportation of fertilizers, seeds, small scale irrigation, training… all aimed at reducing food scarcity; Rs 2.75 billion subsidy to farmers on chemical and organic fertilizer; 50% capital subsidy to cooperative of small farmers to purchase machinery and equipment for processing of cardamom, ginger, tea, coffee and honey; R&D; incentives for cooperative farming; 50% subsidy to insurers on the premium they pay for agriculture and livestock insurance (my take: I like these calibrated incentives, but think that they are not enough to bring about a substantial change; though it is tiny amount, it is better than nothing) 
• Irrigation: Rs 9.01 billion allocated for irrigation facility in additional 81,475 hectares of land in this fiscal year; construction of irrigation projects in Bara and Bardiya; continuation of People’s Embankment Program
• Land-use: Land to be classified into six categories -- agricultural, industrial, forestry, commercial, residential and public community
• Education: Rs 57.65 billion (17.1% of total budget) allocated,an increase of 24.5% over last year’s education budget; teacher-student ratio mapping; internet facilities in every community school; 5400 schools to be handed over to communities during this fiscal year; girls’ toilet mandatory in each community school; a total of Rs 1 billion for teaching grant for schools facing scarcity of teachers
• Health: Rs 24.51 billion allocated; expansion of free of cost maternity service; free basic health services; promotion of infant and maternal health
• High-Level Public Enterprises Management Board proposed to reform overall management of public enterprises (my take: why another bureaucratic board? We know the problem. We know the solution. Let us privatize some, offer public shares of some, and have PPP models for some. No point perennially pumping in money in the loss making public institutions.) 
• Rs 150 million for periodic review of both physical and financial performances of projects outlined by the budget; Finance Minister to chair the high level committee (my take: I really would like to read the final assessment report of not only the projects, but also how this committee spends the proposed sum)

Tax policy and incentives:

• Permanent Account Number for all employees
• Compulsory VAT registration for educational consultancy, discotheque, health club, catering, party palace business, mechanically operated dry cleaning service and restaurant with bar operating in municipality areas and other areas specified by IRD
• 40% tax exemption in income accruing from investment in construction and operation infrastructure development sectors like roads, bridges, airports and tunnels
• 25% rebate tax for people earning money out of exports of goods produced by using local raw materials
• 50 tax exemption for software development, data processing, cyber-café and digital mapping industries located within technology, biotech, and IT parks
• Tax incentives to facilitate merger of banks, finance and insurance companies
• 50% exemption on land registration tax for purchase of land by firms giving direct employment to 300 or more Nepali workers
• 30% exemption on land registration tax on land transferring ownership to women in rural areas
• An advance lump sum payment of land and house taxes for 5 years at existing rates

For this fiscal year, on July 12, 2010, Mr. Pandey was allowed to present a budget that was equivalent to one-third of last fiscal year’s actual expenditure. This barely sustained expenditures for the first four months of this fiscal year. During this period, revenue growth decelerated primarily due to low economic activities caused by budgetary uncertainty. Rural economy suffered. Government had to borrow from budget allocated for principal repayment as fiscal crunch got severe.

Nepal’s economic policy should focus on narrowing down trade deficit, achieving high economic growth, enhancing efficiency of public institutions, reducing poverty, lunching efficient public workfare programs for the rural poor, curbing corruption, reducing inflation, and maintaining fiscal stability. This year’s budget aims to lead the country to “industrialization by developing sustainable, self-sufficient and self-reliant economy through optimum mobilization of domestic resources”. Good luck!