It was published in The Kathmandu Post, 09 August 2021.
The current coalition government led by Prime Minister Sher Bahadur Deuba has inherited a challenging economic situation that continues to be affected by the Covid-19 pandemic and related lockdowns. Finance Minister Janardan Sharma faces an uphill task to revive economic activities, which remain subdued with little likelihood of a convincing rebound beyond the base effect after a contraction in fiscal 2019-20. Specifically, a short-term economic recovery strategy to reap 'low hanging fruits' has to be rolled out and implemented in such a way that it does not deviate much from the 2021-22 budget ordinance and 15th Five-Year Plan.
The major constraint here is the availability of resources amidst unprecedented expenditure pressure while the country stares at a third wave of the pandemic. The government cannot drastically increase expenditure, both actuals and allocations, due to its implementation capacity and funding constraints. The latest data shows that the government fell short of targets in pretty much all fiscal indicators. In 2020-21, while recurrent spending was about 90 percent of the target, capital spending was just 65 percent. Tax revenue mobilisation was about 95 percent of the target, but foreign grants just 34 percent. A relatively slower pace of spending compared to revenue mobilisation meant that the fiscal deficit decreased to 4.8 percent of the gross domestic product (GDP) from 5.5 percent in 2019-20. In the 2021-22 budget, a large increase in expenditure compared to receipts is set to provisionally widen the fiscal deficit to about 6 percent of GDP.
Low-hanging fruits
Against the backdrop of slow economic activities, tight fiscal space, inflationary pressures and deteriorating external sector, the new finance minister faces a challenging task of stimulating broad-based and inclusive economic activity. He perhaps wants to deliver visible results in a short period of time given financing and implementation constraints. Unfortunately, the options are limited.
First, ensuring availability of funds, as and when needed, to respond effectively to the healthcare crisis should be the utmost priority. The most visible outcome for the government right now is an orderly process of testing, tracing and treatment; availability of vital medicines used for the treatment of the coronavirus; and widespread vaccination in the shortest time possible.
Second, the pandemic-hit industry and services sectors need continuous support—be it in the form of tax concessions or utility discounts or direct wage subsidy or social security contribution—until the situation stabilises. A third wave of infections and related mobility restrictions will further affect cash flows. It may actually permanently cut off the struggling small and medium enterprise from production networks. This will have long-term economic consequences as gaps in supply chains cannot be filled immediately. So, the government could prop up aggregate demand not only by increasing public spending, but also by supporting the private sector wade through the crisis so that they can achieve at least pre-pandemic levels of capacity utilisation.
Third, given fiscal and time constraints, a supplementary budget or major amendment to the budget ordinance is not ideal. The focus now should be on executing the budget and, if possible, curtailing some of the wasteful spending and ad hoc projects and programmes included in the budget. With earnest efforts, Sharma could make a difference by prioritising operation and maintenance of dilapidated roads and bridges, water supply and drainage system, electricity distribution lines, school and hospital buildings and other public infrastructure. These initiatives yield quick, visible results, and help to enhance productive efficiency of public spending. Funding for additional operation and maintenance expenses could be arranged through reprioritising and repurposing of existing budget allocations.
The finance minister could also prioritise public investment management by instituting a mechanism whereby only well vetted and prioritised projects are included in the budget and medium-term plan. This means reworking on the existing National Project Bank, which has guidelines for identification, appraisal, selection and prioritisation of projects but are hardly adhered to during implementation. This will aid in allocative efficiency of public spending.
On domestic resource mobilisation, the bulk of the work needs to be in improving revenue administration so that leakages are plugged. Note that new policy measures related to revenue are expected to contribute only 7 percent of the total estimated revenue for this fiscal. The rest 93 percent is planned to be generated from existing measures, which means increasing the taxpayer base and improving compliance. Harmonisation of IT systems of various tax wings, active risk-based audit for taxpayer compliance, and a monetisation strategy for idle public sector assets will be helpful. Furthermore, assisting sub-national governments in revenue administration as well as public investment management will also be important. On deficit financing, since the cost of external borrowing is lower than that of internal borrowing, the former may be prioritised for the interim period. However, this will require sectoral policy and institutional reform commitments, or improved budget execution capacity.
Fourth, fiscal and monetary policies have to be synced with an objective to ensure demand and supply stabilisation, and an eventual economic recovery. Moderate inflationary pressures are okay during the interim period, but a medium-term plan to tame inflationary expectations, which are trending upward, should not be overlooked. There could also be cooperation in ensuring that the existing support measures related to refinancing schemes, subsidised credit and regulatory forbearance are not prematurely withdrawn. That said, the authorities will have to carefully rein in excessive credit growth that is not consistent with indicators such as GDP growth and deposit growth. An unjustifiably bullish stock market and rising real estate and housing prices are not good signs at the moment for the sound health of the financial system.
Minimal physical interface
Fifth, external sector needs to be monitored carefully, especially the direction of remittance inflows amidst a decline in the number of outgoing migrant workers as well as weak demand for them in the destination countries. This, along with widening trade and current account deficits, could put external sector stability at risk. Adjusting import tariffs and tightening bank financing to dissuade demand for expensive foreign vehicles and gold could be considered.
Finally, the finance minister can push for new measures that could have an immediate impact on struggling households and businesses, and aid the recovery process. For instance, a partial credit guarantee scheme with an umbrella framework to cover all guarantees, including credit subsidy to various sectors is helpful. Similarly, digitisation of public services so that there is minimal physical interface between the public and businesses and bureaucrats is another promising area for quick results. Addressing youth unemployment through reskilling, vocational training and temporary employment guarantee schemes is also going to be fruitful.
