Thursday, July 17, 2014

Overview of Nepal’s FY2015 budget

Here is brief snapshot of the FY2015 budget, which has rightly focused on two fundamental issues: (i) public infrastructure investments, and (ii) enacting new Acts and amending existing ones to accelerate public expenditure and to attract private sector investments. However, given the coalition government and its constraints, understandably the budget could not give much attention to rationalization of expenditures.

The total planned outlay is NRs618.1 billion, of which 64.5% is recurrent, 18.9% is capital and the rest 16.6% is financial provision. The total expected revenue is NRs497.3 billion, of which 85% is expected to come from revenue mobilization, 14.8% from foreign grants, and the rest 0.2% from principal repayment. This leaves with a gross budget deficit of Nrs120.8 billion. Now, this is to be financed by a combination of foreign loans, domestic borrowing and FY2014 savings in the ratio 41:43.7:15.3.

FY2015 budget overview
GDP growth target (%) 6  
Inflation target (%) 8  
Budget allocation for FY2015 FY2015BE
Rs billion %
Budget allocation 618.1 100
Recurrent  399.0 64.5
Capital 116.8 18.9
Financial provision 102.4 16.6
Projected total revenue 497.3 100
Revenue 422.9 85.0
Foreign grants 73.4 14.8
Principal repayment 1.0 0.2
Projected budget surplus (+)/deficit (-) -120.8
Projected deficit financing 120.8 100
Foreign loans 49.5 41.0
Domestic borrowing 52.8 43.7
FY2014 savings 18.5 15.3

On the composition of expenditure, revenue and deficit financing, two issues merit attention:

First, FY2014’s expenditure absorption rate was lower than FY2013’s despite the full budget. Okay, election related assignments slowed down expenditure related activities, but this doesn’t fully justify the lower absorption rate during better times. It indicates bureaucratic and government slackness and complacency— not good for a developing country with tremendous infrastructure investment needs.

About 89.6% of planned recurrent expenditure was spent in FY2014. Worse, about 75.1% of planned capital expenditure (lower than 82.6% in FY2013) was spent in FY2014. Hence, without much changes in the existing budget approval and execution setups, it is hard to believe that all of the planned capital expenditure will be spent in FY2015. And, the promised reform measures and amendment to Acts will take time (i) to complete the web of processes required to be before it reaches for debate in the CA, and (ii) after that implementation would also take time as policy and institutional arrangements are need for execution. So, it will set the stage for coming years, but potentially not impact this year’s expenditure figures.

Second, the most important thing that is missing in the FY2015 budget discussion is the accounting aspect. The government is using FY2014 fiscal savings equivalent to NRs18.5 billion to finance a part of the deficit, as mentioned in the budget speech. But then in the annex, this portion is included in the revenue heading (see the screenshot above). In FY2014’s budget, this was not the case even if there was a budget surplus in FY2013.

Now, as far as I understand, it is a bad practice to include last year’s fiscal savings as this year’s revenue. Ideally, this kind of savings should go to a trust fund to finance big infrastructure projects that face financing gap, and should be handled separately and independently. Or it could go to clear outstanding debt if debt burden is high, which for now is not the case as total public debt is just about 30% of GDP.

Treating such fiscal savings as revenue lowers deficit figures even when the government has to finance ballooning expenditure that are not met by usual trend of revenue growth. Note that lower deficit is a common yardstick for fiscal stability. Playing with numbers without much public clarity on the processes in order to show good fiscal standing may not be a standard practice.

Most of the expenditure items in FY2015 are recurrent in nature (even shoddy capital expenditure this year drains out a lot of money next year as more money has to be put in for asset maintenance—eventually becomes recurrent expenditure). If there are no fiscal savings this year then there will be pressures to bear more deficits in FY2016 (unless expenditure growth slows down along with higher growth rate of revenue mobilization—both unlikely as things stand right now).

Furthermore, the higher public expenditure threshold each year elevates inflationary expectation even if the actual expenditure is lower than planned expenditure at the end of the year. Higher inflationary expectations are already embedded in people’s consumption behavior, and household financial decision-making. Hence, the sticky prices at high levels for the last few years.

The baseline is that by treating last year’s savings as revenue this year, I think, a potentially bad fiscal accounting precedent is being set. Last year’s revenue mobilization were governed by last year’s finance bill, and this year’s revenue mobilization will be guided by this year’s finance bill, unless the latter explicitly specifies FY2014 savings as FY2015 revenue. Even this this is not a good practice. It creates issues with net fiscal deficit and net borrowing computations as well. These savings should not be used to finance uncontrollable recurrent expenditures. Correct me if I am wrong.

That said, there are a lot of good stuff in the budget. No point listing them all here in short blog post. Read them all here. For more specifics on expenditure headings, see this.