Monday, June 4, 2012

Nepali economy in the last four years of Constitution Assembly

It was published in Republica, June 3, 2012, p.8.

Four wasteful years

After the highly charged parleys leading up to May 27 and the disappointing outcome at mid-night, it is now almost unanimously acknowledged now that our political leaders failed to fulfill their responsibilities. Economically, they wasted four precious years on our drive to prosperity and aggravated health of economic institutions.Despite lofty promises of rapid growth, which was impossible due to lack of necessary prerequisites, the hope was that the leaders would help build foundations for long term growth and promote economic institutions accordingly. Unfortunately, except some cosmetic institutional changes, the political leaders miserably failed on this front. Economic imperatives were overshadowed by selfish political agenda and cronyism, leading to squandering of around Rs 10 billion by Constitution Assembly (CA) alone and several billions under various pretexts by the parties.

The first government under the CA was led by UCPN(M). While the then Prime Minister Puspa Kamal Dahal was bragging about turning Nepal into Switzerland, his Finance Minister (FM) Dr. Baburam Bhattarai presented the first fiscal budget of the republic on September 19, 2008. It opened up a saga of lofty promises that were not in sync with our economic realities. With an expenditure plan of Rs 236 billion for 2008/09, he targeted GDP growth and inflation at 7 percent and 7.5 percent respectively, and outlined a plan to generate 10,000MW hydroelectricity in a decade.He jacked up basic salary of civil servants, provided debt-relief to heavily indebted farmers, prioritized infrastructure investment, including hydropower, and committed to enacting Special Economic Zones (SEZ) bill. Importantly, he vigorously promoted cooperatives, neglected private sector and tried to revive bankrupt state-owned enterprises by infusing substantial amount of taxpayer’s money. By the time Dr. Bhattarai left Ministry of Finance (MoF), he managed to reform revenue administration, leading to substantial rise in revenue growth. However, he failed to achieve the targets—GDP growth was just 4.53 percent and inflation 12.6 percent— and promote private sector, which was severely distressed by increasing load-shedding, labor strikes, extortion and political uncertainty. Meanwhile, the well-intentioned Youth Self-Employment Fund (YSEF) turned out to be a legitimate conduit to channel state’s resources to party cadres, and his grand plan of promoting ‘national capitalism’ tapered off quickly.

On July 15, 2009, the then FM Surendra Pandey presented Rs 285.93 billion expenditure plan for 2009/10. The size of budget was increased by around Rs 50 billion to pay for retired PLA combatants and to distribute money to party cadres under various pretexts and pet projects. While setting growth target of 5.5 percent and inflation of 7.5 percent, he managed to increase budget for education, youth employment and expansion of social welfare programs, including pecuniary incentives for inter-caste marriage of Dalits.Though he promised to generate 25,000MW hydroelectricity in two decades,he failed to allocate adequate funding and the government sidelined enacting of important regulations on this regard.

Compared to Dr. Bhattarai’s budget, Pandey’s budget was less ambitious and geared to put the house in order, especially on the eve of global economic turmoil, declining growth of remittances and highly worried banking sector due to excessive real estate loan portfolio. At the end of the fiscal year, GDP growth rate was 4.82 percent and inflation 9.6 percent. The industrial sector weakened due to persistent labor strikes, long power outages and shortage of petroleum fuel.

Following a nasty power struggle between the political parties to lead government, budget for 2010/11 was delayed by four months, which affected rural development projects in particular and macroeconomy in general. On November 20, 2010 FM Pandey presented an expenditure plan of Rs 337.9 billion, a whopping 30.4 percent increase from previous year.The big size of budget-- withgrowth and inflation targetsat4.5 percent and 7 percent respectively—was not warrantedby the weak absorption capacity of bureaucracy and local administrations, and fluid political condition. Though Pandey was pressured by the UCPN (M) to continue funding their pet projects and handouts to party cadres under various pretexts, he managed to bring a progressive, private sector-friendly, and infrastructure, employment and exports focused budget. He promised blacktopped roads up to premises of manufacturing firms employing more than 100 Nepali workers; sub-health clinic and a police post to any firm employing over 500 Nepali workers; cash incentives for exports based on value addition; and 50 percent tax rebate on earnings from exports of goods produced using local raw materials. However, before Pandey could implement this plans, Bharat Mohan Adhikari came to MoF with a thunder to introduce a supplementary budget. He was guided by UCPN (M), which helped topple Madhav Kumar Nepal’s government. The main motive was to distribute taxpayer’s money to YCL cadres and party associates under the guise of various cooperative programs and local level development projects. Adhikari’s push for supplementary budget during normal time and his deliberate attempt to overlook booking of tax evaders led to former secretary Rameshore Prasad Khanal’s resignation and widespread upbraiding of the government.At a time when the economy was facing severe distress due to decline in growth of remittances and banking woes, he created a fuss for nothing and dampened investor’s confidence. By the end of the fiscal year, growth rate was just 3.88 percent and inflation 9.6 percent.

With much reluctance FM Adhikari abandoned the plan for supplementary budget and presented a full budget, which was leaked beforehand, for this fiscal year (2011/12)on July 16, 2011. Without a solid foundation for realizing capital expenditure and revenue mobilization, he increased expenditure by 14 percent to Rs 385 billion with targets for growth and inflation at 5 percent and 7 percent respectively. Following the controversial white paper he presented few months earlier, Adhikari riddled the fiscal budget handouts and programs in favor of cooperatives.Worse, rather than giving continuity to Pandey’s programs and addressing the evolving macroeconomic challenges (low growth rate, high inflation, balance of payments deficit, ballooning trade deficit, eroding competitiveness of economy and productive capacities, slump in manufacturing sector, and liquidity crisis), he followed Maoists’ diktat by rolling out a distributive and macroeconomy damaging expenditure plan. The illogical, untimely, unfocused, visionless, and cooperative-biased budget discouraged and distracted private sector. By the end of this fiscal year, GDP growth is expected to be 4.63 percent and inflation near double-digit. Adhikari was replaced by UCPN (M)’s Barsha Man Pun, who has so far tried to implement previous projects and allay apprehension of private sector and investors. Under pressure to put finances in order, FM Pun spent most of his time cleaning the mess accumulated since 2006.

During the four years of CA there was continued supremacy of political priorities over economic imperatives. Between 2008/09 and 2010/11, fiscal budget has increased by an alarming 63 percent without having an impact on productive capacity of the economy. Despite initial optimism GDP growth remain below 5 percent;development and capital expenditures are very low;inflation is near double-digit; trade deficit is widening unsustainably; manufacturing sector growth was negative for two consecutive years and is still very low; balance of payments was negative for two years and then recovered on the back of high remittance inflows; severe petroleum and LPG shortages have frustrated consumers;long load-shedding hours are persistent; FDI is as low as US$39 million;real estate sector has tanked and banking sector is still feeling the pressure;food insecurity has intensified in the Far West;labor problems continue to blight industrial sector, and bandas continue to cripple livelihood, among others. Overall, though there were some improvements in social indicators and notable reforms with regard to attracting investment, the economy is in a much perilous state than before. Worse, it has retained the extractive institutions with distorted economic incentives. During the tumultuous and unfruitful four years, we missed an opportunity to build foundations for the economy to take off on a high growth path.