Tuesday, February 19, 2013

Mid-year review of FY2013 budget scales back GDP growth to 4.1%

The Ministry of Finance has released a mid-year review of budget for FY2013. At the outset note that this year Nepal is not having a full budget so far due to lack of political consensus as the opposition parties contend that the caretaker government prior to election is not authorized to launch full budget with new programs and policies. Consequently, Nepal had a one-third budget in July 2012 and followed by two-third budget in November 2012.

It means the economy still doesn’t have a full budget. Now, readers might be wondering what is the big deal if things are going fine. Well, a full budget comes with around six associated bills, including those on revenue policies and internal borrowing. Revenue policies are guided by Finance Act 2012 and internal borrowing is not allowed right now. Furthermore, the present budget is pretty much the same size as of last year’s actual expenditure. Considering inflation of above 10%, we are actually seeing a real contraction of spending allocation, let alone the capacity to spend given the political difficulties.

Anyway, here are some of the relevant stuff from the mid-year review:

  • GDP growth rate for FY2013 revised to 4.1% from 5.1% considering the impact of unfavorable monsoon and low capital expenditure.
      • Projected agriculture sector growth: 0.7%
      • Projected non-agriculture sector growth: 5.4%
  • Total expenditure stood at 29.59% of total allocation. Capital expenditure was around 15% (Rs 7.66 billion) of the allocated amount for FY2013 (Rs 51.3 billion). All expenditures (recurrent and capital) are lower than what was achieved in the first half of FY2012 (overall down by 6.3%). Recurrent expenditure is down by 3.05% and capital expenditure by 19.90%.
  • Revenue mobilization was Rs 134.56 billion, 2.04% higher than the target.
  • Average inflation was 10.7%.
  • Exports increased by 9.3% and imports by 25.2%. Balance of payments surplus dropped to Rs 6.7 billion.
  • A number of important projects—especially those tagged as national pride projects— have seen some progress.
  • Private sector added 30 MW electricity to the national grid. More power imports from India and 38 MW electricity generation from thermal and diesel plants helped contain power cuts to around 12 hours a day.
  • Deposits of BFIs increased by 4.8%, but loans increased by 5.3%. Liquidity declined by 15.1% (down by Rs 30.30 billion) as the government could not spend enough and banks could not attract deposits with relatively low interest rates.

The revised GDP growth figure still looks quite optimistic given the continued slowdown in construction sector and slowing down of growth of remittance inflows, which will then hit services sector growth. Earlier, the IMF, ADB, and the WB estimated GDP growth at 3.8%. The IMF recently indicated that it expects growth to fall below 3.8% estimate.

Also, though the capital spending is low, we might see pick up in spending in the last three months of FY2013 as in the previous years. But, overall spending level might fall short of the already low level reached in FY2012 (dropped to 3.3% of GDP from 7.9% of GDP in FY2011).

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