Short-term priorities for the economy

It was published in The Kathmandu Post, 09 August 2021.

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Short-term priorities for the economy

The focus now should be on executing the budget and curtailing wasteful spending.

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.

Brief highlights from IPCC's Sixth Assessment Report

AR6 Climate Change 2021: The Physical Science Basis, the IPCC’s Sixth Assessment Report submitted by Working Group I is out now. The report includes the most updated physical understanding of the climate system and climate change, and includes regional climate simulations as well. It provides evidence on how and why climate has changed and the effects attributable to human actions. 

Excerpts from the report:

The evidence regarding human influence on warming of atmosphere, ocean and land is unequivocal. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred.  Observed increases in well-mixed greenhouse gas (GHG) concentrations since around 1750 are unequivocally caused by human activities. Each of the last four decades has been successively warmer than any decade that preceded it since 1850. Global surface temperature in the first two decades of the 21st century (2001-2020) was 0.99 [0.84-1.10] °C higher than 1850-1900. Global surface temperature was 1.09 [0.95 to 1.20] °C higher in 2011–2020 than 1850–1900. 

The likely range of total human-caused global surface temperature increase from 1850–1900 to 2010–2019 is 0.8°C to 1.3°C, with a best estimate of 1.07°C.

Globally averaged precipitation over land has likely increased since 1950, with a faster rate of increase since the 1980s (medium confidence). It is likely that human influence contributed to the pattern of observed precipitation changes since the mid-20th century, and extremely likely that human influence contributed to the pattern of observed changes in near-surface ocean salinity.

Human influence is very likely the main driver of the global retreat of glaciers since the 1990s and the decrease in Arctic sea ice area between 1979–1988 and 2010–2019 (about 40% in September and about 10% in March).

It is virtually certain that the global upper ocean (0–700 m) has warmed since the 1970s and extremely likely that human influence is the main driver. It is virtually certain that human-caused CO2 emissions are the main driver of current global acidification of the surface open ocean.

Global mean sea level increased by 0.20 [0.15 to 0.25] m between 1901 and 2018. It increased by .7 [3.2 to 4.2] mm yr–1 between 2006 and 2018 (high confidence). Human influence was very likely the main driver of these increases since at least 1971.

Global surface temperature has increased faster since 1970 than in any other 50-year period over at least the last 2000 years (high confidence). Temperatures during the most recent decade (2011–2020) exceed those of the most recent multi-century warm period, around 6500 years ago13 [0.2°C to 1°C relative to 1850–1900] (medium confidence).

Human-induced climate change is already affecting many weather and climate extremes in every region across the globe. Evidence of observed changes in extremes such as heatwaves, heavy precipitation, droughts, and tropical cyclones, and, in particular, their attribution to human influence, has strengthened since AR5. It is virtually certain that hot extremes (including heatwaves) have become more frequent and more intense across most land regions since the 1950s, while cold extremes (including cold waves) have become less frequent and less severe, with high confidence that human-induced climate change is the main driver of these changes.

The frequency and intensity of heavy precipitation events have increased since the 1950s over most land area for which observational data are sufficient for trend analysis (high confidence), and human-induced climate change is likely the main driver. Human-induced climate change has contributed to increases in agricultural and ecological droughts15 in some regions due to increased land evapotranspiration (medium confidence).

Decreases in global land monsoon precipitation from the 1950s to the 1980s are partly attributed to human-caused Northern Hemisphere aerosol emissions, but increases since then have resulted from rising GHG concentrations and decadal to multi-decadal internal variability (medium confidence). Over South Asia, East Asia and West Africa increases in monsoon precipitation due to warming from GHG emissions were counteracted by decreases in monsoon precipitation due to cooling from human-caused aerosol emissions over the 20th century (high confidence).

Heating of the climate system has caused global mean sea level rise through ice loss on land and thermal expansion from ocean warming. Thermal expansion explained 50% of sea level rise during 1971–2018, while ice loss from glaciers contributed 22%, ice sheets 20% and changes in land water storage 8%. The rate of ice sheet loss increased by a factor of four between 1992–1999 and 2010–2019. Together, ice sheet and glacier mass loss were the dominant contributors to global mean sea level rise during 2006-2018.

Global surface temperature will continue to increase until at least the mid-century under all emissions scenarios considered. Global warming of 1.5°C and 2°C will be exceeded during the 21st century unless deep reductions in CO2 and other greenhouse gas emissions occur in the coming decades. Global warming of 1.5°C relative to 1850-1900 would be exceeded during the 21st century under the intermediate, high and very high scenarios considered in this report (SSP2-4.5, SSP3-7.0 and SSP5-8.5, respectively).

Many changes in the climate system become larger in direct relation to increasing global warming. They include increases in the frequency and intensity of hot extremes, marine heatwaves, and heavy precipitation, agricultural and ecological droughts in some regions, and proportion of intense tropical cyclones, as well as reductions in Arctic sea ice, snow cover and permafrost. Every additional 0.5°C of global warming causes clearly discernible increases in the intensity and frequency of hot extremes, including heatwaves (very likely), and heavy precipitation (high confidence), as well as agricultural and ecological droughts in some regions (high confidence).

Monsoon precipitation is projected to increase in the mid- to long term at global scale, particularly over South and Southeast Asia, East Asia and West Africa apart from the far west Sahel (high confidence). A warmer climate will intensify very wet and very dry weather and climate events and seasons, with implications for flooding or drought (high confidence). It is very likely that rainfall variability related to the El Niño–Southern Oscillation is projected to be amplified by the second half of the 21st century.

From a physical science perspective, limiting human-induced global warming to a specific level requires limiting cumulative CO2 emissions, reaching at least net zero CO2 emissions, along with strong reductions in other greenhouse gas emissions. Strong, rapid and sustained reductions in CH4 emissions would also limit the warming effect resulting from declining aerosol pollution and would improve air quality.

The likelihood of an outcome is expressed in the following way: virtually certain 99–100% probability, very likely 90–100%, likely 66–100%, about as likely as not 33–66%, unlikely 0–33%, very unlikely 0–10%, exceptionally unlikely 0–1%. Additional terms such as extremely likely 95–100%, more likely than not >50–100%, and extremely unlikely 0–5% are also used. A level of confidence is expressed using five qualifiers: very low, low, medium, high and very high.

South Asia

• Heatwaves and humid heat stress will be more intense and frequent during the 21st century (medium confidence)
• Both annual and summer monsoon precipitation will increase during the 21st
• century, with enhanced interannual variability (medium confidence).
• Over most of the Hindu Kush Himalayan region, snow cover has reduced since the early 21st century, and glaciers have retreated and lost mass since the 1970s.
• The Karakoram glaciers have remained either in a balanced state or slightly gained mass. During the 21st century, snowcovered areas and snow volumes will decrease in most of the Hindu Kush Himalayan, and snowline elevations will rise and glacier volumes will decline (high confidence).
• A general wetting across the whole Tibetan Plateau and the Himalaya is projected, with increases in heavy precipitation in the 21st century.
• Extreme precipitation is projected to increase in major mountainous regions (medium to high confidence, depending on location), with potential cascading consequences of floods, landslides and lake outbursts in all scenarios (medium confidence).
• With few exceptions, mountain glaciers have retreated since the second half of the 19th century (very high confidence). This retreat has occurred at increased rates since the 1990s, with human influence very likely being the main driver. This behaviour is unprecedented in at least the last 2,000 years (medium confidence). Furthermore, glaciers will continue to lose mass at least for several decades even if global temperature is stabilized (very high confidence).
• Mountain glaciers will continue to shrink and permafrost to thaw in all regions where they are present (high confidence). Mountain glaciers are projected to lose more mass in higher greenhouse gas emissions scenario over the 21st century (medium confidence).
• It is virtually certain that snow cover will decline over most land regions during the 21st century, in terms of water equivalent, extent and annual duration.