Saturday, July 16, 2011

Nepal’s budget for FY 2011-2012

After much drama Finance Minister Bharat Mohan Adhikari has finally presented the budget to the parliament. Here are some of the stuff as I read from the budget speech.

  • Expenditure: The size of the budget is Rs 384.9 billion, almost 14% higher than last year’s budget (and 25.67% higher than revised estimate). Recurrent expenditure is Rs 266.61 billion (69.27% of total budget). Capital expenditure is Rs 72.61 billion (18.86% of total budget). Financing, which is a new addition to the expenditure-revenue sheet, is Rs 25.38 billion (6.59% of total budget) and principal repayment is Rs 20.3 billion (5.27% of total budget).
  • Development expenditure is Rs 202.56 billion (52.63% of total budget) and general administration expenditure is Rs 182.34 billion (47.37% of total budget). The former is an increase by 13.41% and the latter 14.47% from last year.
  • Income: The total income of the government is expected to be Rs 317.83 billion, which is 12.71% higher than last year’s total revenue projection. Total revenue is expected to be Rs 241.77 billion (11% increase over last year), principal refund Rs 5.93 billion and foreign grants Rs 70.13 billion (17.43% of total budget).
  • Deficit financing: The difference between total expenditure and total income is budget deficit, which is Rs 67.07 billion. This is expected to be covered by Rs 29.65 billion foreign loan and Rs 37.41 billion domestic borrowing. Deficit financing is 17.43% of total budget and it has increased by 19.96% from last year.

Budget allocation for FY 2011-2012 
Rs, billion Percent of total budget Percent increase from last FY
Total expenditure 384.9 100 13.91
Recurrent  266.61 69.27 40.09
Capital 72.61 18.86 -43.95
Financing (loan & share investment) 25.38 6.59
Principal repayment 20.3 5.27 10.21
Development expenditure
202.56 52.63 13.41
General administration expenditure
182.34 47.37 14.47
Total Income 317.83 82.57 12.71
Revenue 241.77 62.81 11.60
Principal refund 5.93 1.54
Foreign grants 70.13 18.22 7.33
Deficit 67.07 17.43 19.96
Deficit financing 67.07 17.43 19.96
Foreign loans 29.65 7.70 33.38
Domestic borrowing 37.41 9.72 11.07
 FY 2011-12 full annex

  • The Finance Minister argues that his budget will be able to “accelerate economic growth and ensure equitable development by increasing investment in public, private and cooperative sectors and by bringing dynamism in the economy.”
  • Expected growth rate of 5%, with inflation 7% and BoP to remain positive.
  • Education (Rs 63.9 billion) is the top priority, followed by local development (Rs 44.5 billion) and physical planning and works (Rs 43.9 billion).

Few points from the budget:
  • Public service delivery: market monitoring to check artificial rise in prices; improving supply system and service delivery by establishing Fair Price Shops. Against cartels and obstruction of supply; address food insecurity in remote areas; upgrade of existing SAARC Food Security Storage and National Food Security Storage; implement recommendation of High Level Committee to reform supply of petroleum products
  • Development program in remote areas: capital subsidy for agriculture, herbs and fruits production, collection and processing through cooperatives in Kalikot, Jumla, Humla, Mugu, Dolpa, Jajarkot, Achham, Bajhang, Bajura and Darchula; economic, social infrastructure and services in Karnali and nearby districts; ‘One Family One Employment’ program in Karnali to be expanded gradually to other areas as employment guarantee-- focus in those areas with low human development index and infrastructure such as Jajarkot, Achham, Bajhang and Bajura;
  • Agriculture sector: increase in subsidy in fertilizer and seeds; land pooling to increase production and productivity; several specific products focused incentives and subsidies
  • Cooperatives: “Cooperatives in Villages, Employment at Every Household” program; to be established as strong pillar by building economic base and utilizing local resources, capital and labor; seed money to cooperatives run by women; concessional loans; assistances to tea cooperative; establish National Cooperative Federation by giving Rs 10 million; concessional loans to cooperatives investing in micro-hydro power projects of up to 1MW.
  • Infrastructure: money for many highways feasibility studies; expedite construction of postal highway; fast track highway; repair and reconstruction of bridges; expansion of railways
  • Energy crisis: Hydropower Development and Investment Company with paid up capita of Rs 8 billion already registered; master plan on hydropower development; study and implementation of reservoir projects; request NRNs to invest in hydropower project of 100 MW; extension of national grid and transmission line; too many slogan filled programs
  • Irrigation: construction of canals and irrigation facilities; mostly in Terai;
  • Employment: collateral free loan facility of up to Rs 200,000 per person under Youth Self Employment Program; skill based and professional training programs; youths to be incentivized to work in call centers, medical transcription, account, service business; trade union education program; training to remitters to enhance skill; remittance income to be mobilized according to investment proposal drawn out by a high level task force
  •  Tourism: airport upgrade; Nepal to be established as model tourism country of the world within 15 years; exploration of new tourist destinations; infrastructure and tourism service development in 17 destinations; modern conference hall to be built in Butwal;
  • Private sector development: PPP model to be promoted; security in industrial zones and declare them as zone of peace; international investment forum to be held to attract investment in industries having comparative and competitive advantage; separate electricity feeders to be installed in Biratnagar, Birgunj, Kathmandu and Butwal-Bhairawa to address load-shedding problems; Industrial Enterprise Act to be enacted; lump sum capital subsidy for the import of machinery and capital goods by group of more than 100 people returned from abroad after engaging in similar works; support for floriculture business; Rs 100 million for Women Entrepreneur Fund; custom duties exemption in import of machinery for alternative energy;
  • Financial sector and capital market: disclosure of income source while depositing a sum of over Rs 1 million; disclosure of income if on purchase of vehicle worth more than Rs 5 million and real estate more than Rs 10 million; capital gains tax decreased; NRNs can invest in housings and share market; foreigners can purchase flats and apartments of over US$ 200,000; supervision and monitoring of saving and credit co-operatives with annual transactions of more than Rs 50 million; action against willful defaulters; incentives for merger in the form of waving of registration fees;
  • Export promotion: special facility to exporters of tea, coffee, cardamom, herbs, unseasonal vegetable products; drying and packaging facility to be made available; upgrade certification laboratory; expedite construction of dry ports at border points; recommendation by concerned agencies for implementing NTIS to pursued; herbs processing plants; work toward implementing SEZs
  • Planning: NPC to prepare a 20 year long term plan for socio-economic transformation; results of Census 2011 to be quickly published; agriculture census next year; third party evaluation of foreign aid funded projects; FM to head a monitoring team for monitoring projects of over Rs 150 million;
  • Public enterprises: CEO and GM of PEs to be selected through open competition;
  • Public service: Salary increased between 30.39% and 42.86%.

  • Revenue policy: Tax incentives to domestic and foreign investors to attract investment in hydropower and infrastructure development; promoting production oriented, import substituting and export oriented industries; broadening revenue bases by expanding tax net; control revenue leakage;
    • Voluntary disclosure of fixed and movable properties to Inland Revenue Offices by paying certain percentage of tax; declare MRP of imported goods at customs point to avoid under-invoicing; increase in excise rates on alcohol, beer, cigarettes, and tobacco products; only persons with PAN number will be eligible for registration process of land and house transactions;
    • Tax exemption for tomato ketchup firms that are run through cooperatives; reduction of flat rate custom duty on LCD, Plasma and LED equipment brought by Nepalese passengers returning from foreign employment; VAT concession to Jute firms on the import of materials; reduction of capital gains tax by 50% on the income from sales of house and land; CGT in shares reduced (for entities 10% and for individuals 5%);
    • Exemption of income tax for first ten years for hydro-power projects commencing construction within August 24, 2014 and starting commercial production by mid-April 2018; extend deadline for merger among BFIs and waiving of land registration fee; 
    • Income tax exemption of 90 percent will be given to any of the special and information technology industry employing 300 or more Nepalis. Similar income-tax exemption of 80 percent will be given to any special industry employing 1,200 or more Nepalis directly. An exemption of 80 percent in the income tax will be given to any special industry which employs more than 100 Nepalis with at least 33 percent of them women, untouchable and differently-abled persons.

  • This is a directionless budget. Our macroeconomic challenges (low growth rate, high inflation, balance of payments deficit, ballooning trade deficit, eroding competitiveness of our economy and its productive capacities, slump in manufacturing sector and liquidity and banking crises) are hardly been addressed. In fact, an impression that one gets is that all these will be resolved by promoting cooperatives (this was already hinted in Program and Policies for 2011-2012). In fact, the budget is placing cooperatives above the private sector and it essentially is a cooperatives’ budget as was mentioned in the white paper. Neither in white paper nor the program and policies did FM Adhikari mention these macroeconomic challenges with emphasis. He has been very cosmetic in pointing them out loud and clear. And, his budget lacks vision in addressing these issues. 
  • Cooperatives are seen as a solution to the macroeconomic problems faced by the country. It is not a good idea. Even balance of trade deficit is being considered to be addressed by promoting cooperatives.
  • Note that due to increasing pressure from other political parties to fund their pet projects under various names and the decision to hike salary of civil servants, recurrent expenditure has shot up by almost 40.09% from last year’s allocation. Meanwhile, this was made up by reducing capital expenditure by at least 43.95% (or 24.36% if you choose to include capital and financing expenditures). It is bad for the economy and does not add much to productive capacities. In fact, it will very likely increase inflation even higher.
  • The way the size of the budget is increased will not add much productive capacities and will most probably put upward pressure on inflation. Also, since the revised total expenditure for FY 2010/11 is estimated to be Rs 306.27 billion against budget allocation of Rs 337.9 billion, this year’s allocation would also not be spent as envisioned.
  • This allocated amount of development expenditure is not going to be spent given present conditions. Neither was last year’s development expenditure spent (which partly contributed to the liquidity crisis).
  • Generating the revenue target is not going to be possible if the current trend is anything to go by. The MoF was unable to collect the projected revenue of Rs 216.64 billion of last year’s budget; it is estimated to collect only Rs 206 billion. I don’t understand why Finance Secretary Baskota is so ambitious. (He did accounting gimmick by including unspent budget as revenue. I think after so much of repudiation from experts and lawmakers, he has corrected the mistake.) It must be that since expenditures could not be brought down, they increased target for revenue mobilization (now total income).
  • The increase in domestic borrowing by 11.07% from last year’s budget will mop up liquidity from the market, essentially crowding out private sector investment and worsening liquidity crisis.
  • Foreign aid accounts for 25.9% of total budget (Rs 99.78 billion--just sum up foreign grants in total income heading and foreign loans from deficit financing heading). It is an increase by 13.9% from last year. Since the country was unable to even mobilize last year’s total aid, why so much of expectation this year? Absorptive capacity of foreign aid has also been decreasing.
  • No concrete steps to curb inflation except for monitoring markets. In fact, inflation will exacerbate due to FM Adhikari’s budget.
  • Insufficient and ineffective incentives for merger of BFIs. The relaxation on disclosure of sources of income will not aid much to alleviate the liquidity and banking crises.
  • No concrete plan to spur growth rate higher than the usual 3-4%. No explanation how the growth target of 5% and inflation target of 7% are to be reached. FM Adhikari is clueless on this one.
  • How on earth will balance of payments (BoP) will be positive from negative of around Rs 12 billion right now without decreasing trade deficit and increasing the growth rate of inflow of remittances. No clue about how to promote exports except for mentioning that it will be based on NTIS 2010 recommendation by the concerned ministry. In fact, of the seven pillars of state growth and development, mainstreaming for industry, trade and service sector is getting only Rs 7.24 billion (up from Rs 4.81 billion last year). Some income tax incentives to companies in SEZs is not going to work when we actually don’t have SEZs and an Act on this regard.
  • Overall, this is a lifeless budget with no tooth to make real impact on the productive capacity of the economy and to address the most pressing macroeconomic needs of the country. It is instead a cooperative promoting, ambitious but directionless, and distributive budget. It does not even adequately acknowledge the macroeconomic problems. A budget is not a political tool to hand out taxpayers’ hard earned money!