Brief overview of the provincial budgets for FY2020

Finance ministers of the seven provinces presented FY2020 budget to their respective provincial assemblies on June 16. This is the second full budget of the provinces. 

The provinces have relied on federal transfers (in the form of fiscal equalization, conditional, matching and special grants), VAT and internal excise duty collections shared by the federal government, and cash savings from FY2019 (which basically is the unspent resources from last year) to finance a combined Rs259.6 billion budget of the seven provinces. 

The internal revenue mobilization target is too small compared to the expenditure needs as the provinces are still struggling with adequate human resources and a systematic mechanism to collect taxes that fall under their jurisdiction. Total budget envelop of federal and provincial governments for FY2020 is Rs1792.6 billion (about 44.8% of GDP), of which about 30% is for capital spending.

One the defining features of the budget is that the provincial finance ministers have imitated the distributive nature of federal budget, especially in trying to cover everything with limited resources and at times without ascertaining funding sources. This has spread the budget too thin across too many sectors and programs. In fact, the provinces still do not even have the institutional structure required to execute the budget fully. It would have been prudent if the provincial finance ministers had focused on following through on signature programs of the federal government that are implemented through them and local governments, and establishing an institutional mechanism across the provincial ministries to execute budget effectively. Furthermore, they could have focused on preparing feasibility studies of strategic provincial infrastructure projects (energy, roads, urban development, drinking water supply, ICT, public institutions, industrial corridors, etc), and drafting laws and regulations to promote private sector investment, especially provincial version of the federal level laws and regulations. That said, compared to the first provincial budget, this one is much more coherent in presentation and accounting methodology. This sort of coherency in budget preparation across the three tiers of government is essential for budget accounting as well as informed analysis. 

Province 1

Province 1 has earmarked Rs42.4 billion for FY2020—of which about 55.6% is capital expenditure—, which is more than double the amount it is planning to spending in FY2019. It is planning to meet 75% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 15.7% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue. 

It has allocated Rs25 million for each constituency (56) and Rs5 million for all assembly members (93). As a share of estimated provincial GDP, the size of province 1’s FY2020 budget is 7.2%, up from 4.1% in FY2019.

Key focus: agricultural mechanization, tourism (even giving 6 days paid leave and Rs25,000 allowance to public sector employees for tourism promotion), transportation, bridges, irrigation, industrial park, SEZ, education, healthcare, etc

Province 2

Province 2 has earmarked Rs37.4 billion for FY2020—of which about half is capital expenditure—, which is more than three times the amount it is planning to spending in FY2019. It is planning to meet 69% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 19.9% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue and borrowing about Rs 1.3 billion from the internal market.

It has allocated Rs20 million for each constituency (64) and Rs10 million for all assembly members (107). As a share of estimated provincial GDP, the size of province 2’s FY2020 budget is 7.5%, up from 2.8% in FY2019.

Key focus: healthcare, housing, transport, education, industrial corridor, vocational training

Province 3

Province 3 has earmarked Rs47.6 billion for FY2020—of which about 48% is capital expenditure—, which is 37.5% increase over the amount it is planning to spending in FY2019. It is planning to meet 66.1% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 14.2% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue.

It has allocated Rs1.98 billion for the assembly members to spend in the projects of their choosing. As a share of estimated provincial GDP, the size of province 3’s FY2020 budget is 2.9%, up from 2.4% in FY2019.

Key focus: industrial area, transport, education, health, agriculture, tourism (2020-2030), etc

Gandaki province

Gandaki province has earmarked Rs32.1 billion for FY2020—of which about 61.8% is capital expenditure—, which is almost double the amount it is planning to spending in FY2019. It is planning to meet 68.7% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 14.9% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue and borrowing about Rs 2 billion from the internal market and federal government.

It has allocated Rs72 million for the assembly members to spend in the projects of their choosing. As a share of estimated provincial GDP, the size of Gandaki province’s FY2020 budget is 9.7%, up from 5.6% in FY2019.

Key focus: transport, drinking water, irrigation, energy, urban development, tourism, agriculture, industrial area, education, health, etc

Province 5

Province 5 has earmarked Rs36.4 billion for FY2020—of which about 51% is capital expenditure—, which is 57.9% increase over the amount it is planning to spending in FY2019. It is planning to meet 73.7% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 13.7% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue.

It has allocated Rs312 million for the assembly members to spend in the projects of their choosing. As a share of estimated provincial GDP, the size of province 5’s FY2020 budget is 7.0%, up from 5.1% in FY2019.

Key focus: agriculture (interest subsidy), tourism, industrial area, education, health, transport, etc 

Karnali province

Karnali province has earmarked Rs34.4 billion for FY2020—of which about 62% is capital expenditure. It is planning to meet 71% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 26% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue and borrowing about Rs800 million from the internal market.

It has allocated Rs870 million for the assembly members to spend in the projects of their choosing. As a share of Karnali province’s GDP, the size of Karnali province’s FY2020 budget is 25%.

Key focus: infrastructure, transport, tourism, project preparation, engineering company, energy, irrigation, housing, education, healthcare, etc 

Sudur Paschim province

Sudur Paschim province has earmarked Rs28.2 billion for FY2020—of which about 62% is capital expenditure—, which is 54.1% increase over the amount it is planning to spending in FY2019. It is planning to meet 81.6% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 17% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue.

It has allocated Rs30 million for each constituency (32). As a share of estimated provincial GDP, the size of Sudur Paschim province’s FY2020 budget is 11%, up from 8.3% in FY2019.

Key focus: agriculture, tourism, industrial area, education, infrastructure, etc 

Few preliminary thoughts on FY2020 budget of the seven provinces.

First, the practice to make provincial budget documents consistent with the federal budget format is a good initiative. It will help in informed budget analysis and policy discourse.  However, there is no need to make provincial budget making processes and practices an exact copy of the federal budget, especially the tendency to distribute meager budget across sectors and in projects that are not ready for implementation. 

We had federal and local government budgets before as well, but provincial budgets are new. The budget allocations and the long-term vision embedded in it should provide answers to people who are questioning the relevance of provinces given the substantial autonomy of local governments. Provincial governments should ideally focus on priorities that are unique to the provinces, create institutional mechanism to link and cooperate on projects and programs with local governments and federal governments, and compete with each other to attract private sector investment by offering the best investment regime. This is the whole essence of cooperative and competitive federalism. However, this characteristic is missing in the provincial budgets. The provincial finance ministers are preoccupied with distributing small amount of budget across sectors and pet programs using the funds given to them by the federal government. Most of the small, populist projects have traditionally been carried out through the local governments. There is a high possibility of duplication of projects and misuse of funds. 

Second, provincial finance ministers have copied the federal government’s unpopular program to distribute money to parliamentarians to fund projects of their choosing. These are wasteful spending riddled with malpractices and corruption. Except in the case of provinces 5 and Gandaki, the money allocated to fund pet projects of assembly members accounts for more than 20% of their internal revenue. For instance, such spending account for almost half of the projected internal revenue of province 1. It is 78.4% of projected internal revenue in the case of province 2, 21.1% in province 3, 342.4% in Karnali province, and 282.3% in Sudur Paschim province. The provincial finance ministers have copied a very bad aspect of the federal budget. Cumulatively, federal and provincial constituency development fund amounts to about 0.7% of GDP. Finance Minister Dr. Yuba Raj Khatiwada increased constituency development fund to Rs60 million from Rs40 million in FY2020 federal budget. Gradually, even the 753 local governments will follow the same practice when they present their budgets. Furthermore, giving taxpayer’s money to parliamentarians to fund small pet project of their choosing, without much oversight, is essentially a way to restrict competition from new candidates in the next election as it could be used to keep core voter base intact and happy. 

Third, provinces 2, Gandaki and Karnali are planning to borrow money to meet expenditure needs. Although the federal government has published guidelines for internal borrowing by provincial and local governments, they haven’t actively borrowed money from the internal market so far. It remains to be seen how they will price their bills and bonds and at what interest rates. Most of the budget allocation is for capital projects because some of the federal grants are either conditional or have special provisions that the provinces have to comply with. The borrowed money from internal market and federal government should not be used to expand recurrent budget, especially non-targeted and duplicate subsidies and pet programs.  

Fourth, as in the case with the federal budget, none of the provincial finance ministers presented a viable plan for effective budget implementation. They have hardly used half of the allocated budget for this fiscal year. They still lack the required institutional set up and human resources to plan and implement projects. The tussle between federal and provincial governments over staff recruitment is not over yet. Eventually, the provinces will exhaust recurrent budget, but fall short on spending capital budget. This budget savings will then be used to inflate recurrent budget in the subsequent years. Capital spending will be affected by lack of coordination between federal and provincial governments (especially timely delegation of projects and authority to use funds), human resources and institutional set up, and required provincial laws and regulations. 

Sixth, the size of provincial budgets will get larger in the coming years as they mobilize more revenue and introduce new programs tailored to their voter base. However, we will continue to observe under-execution of budget because of the missing sub-national laws, policies, regulations and institutional framework that govern public spending. 

Seventh, the provincial finance ministers did not include provincial GDP growth targets. The Central Bureau of Statistics earlier provided real GDP growth estimates for FY2020 for the seven provinces and nominal GDP figures too. The data limitation makes it hard to do any reasonable forecast for provincial GDP. However, the provincial planning commissions could have at least looked at the main proxies or lead indicators (such as agricultural production, number of industries registered, capacity utilization of firms, IIP, credit growth, internal revenue mobilization, mining and quarrying activities, vehicles registration, energy generation, public expenditure, internal tourism including domestic airline flights, sale of petroleum fuel, etc) to get a sense of provincial growth path. A budget speech without growth target is somewhat aimless. 

[Note: Here I estimated provincial nominal GDP based on their FY2019 share in national nominal GDP. See this for national level nominal GDP. ]

Nepal's FY2020 budget: Party pleasing budget

It was published in The Kathmandu Post, 31 May 2019. An earlier blog on the budget is here

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Party pleasing budget

Finance Minister Yubaraj Khatiwada presented the incumbent government’s second annual budget on May 29 to a joint assembly of the federal Parliament. He argued that the fiscal year 2019-20 (FY2020) budget focuses on institutionalising the achievements made since FY2019’s budget, ensuring fair distribution of resources, and strengthening the social security regime. In reality, the budget was designed to satisfy disgruntled Nepal Communist Party (NCP) leaders who had censured the finance minister for not increasing their constituency development fund and social security allowance as promised in the party’s election manifesto.

Drawn between placating the NCP leaders and the need to stick to fiscal discipline and allocative efficiency, the finance minister chose the former. In effect, he again squandered an opportune moment to consolidate social security schemes; streamline scattered and incoherent projects and enhance the allocative efficiency of capital spending; rationalise recurrent spending; institute a sound governance regime while awarding and implementing projects; take transformative measures to bring about growth-enhancing structural changes in agriculture, labour and industrial markets; and institute fiscal discipline. This was warranted given the deteriorating fiscal, financial and external sectors.

Budget overview

The increase in budget for cash-based social security allowance, the constituency development programmes (to ensure elected representatives have money to fund pet projects), and the salary of public employees led to an outsized expenditure outlay for the next fiscal year. Almost two-thirds of the Rs1.53 trillion budget (an estimated 38.8 percent of GDP)--which is 27 percent higher than the revised expenditure estimate for FY2019--consists of recurrent spending. Within recurrent spending itself, half of the money is earmarked as fiscal transfers or grants to subnational governments. The federal government’s capital spending constitutes 26.6 percent of the budget. It is used to build roads, bridges, airports and other infrastructure that are crucial to increase the productive capacity of the economy.

The government is planning to meet 64 percent of total expenditure need in FY2020 by mobilising domestic revenue, 12.7 percent from domestic borrowing through sale of its treasury bills and bonds, and the remaining 23.3 percent from foreign grants and loans. The total federal revenue target of Rs981.1 billion (after deducting revenue sharing) is about 29 percent higher than the revised revenue estimate for the fiscal year 2018-19.

The federal government is earmarking Rs130.9 billion to be shared with provincial and local governments. As per the Constitution, the federal government is mandated to share a portion based on monthly collections, 30 percent of VAT and internal excise duty, and 50 percent of royalties from natural resources. This is in addition to fiscal transfers (fiscal equalisation, conditional, complementary and special grants) and unconditional grants out of the federal government’s expenditure outlay.

The budget has three notable features. First, the government increased cash allowance for citizens who are 70 years and above by Rs1,000, making it a total of Rs3,000 per month (plus Rs1,000 medical benefit). Considering about 1.3 million people are registered to receive this benefit, the government will have to additionally allocate at least Rs15 billion for this purpose. Similarly, single women (60 years and older, either divorced or unmarried), fully and partially disabled, and indigenous people will also get an additional Rs1,000 per month, making it a total of Rs2,000 per month for these groups.

Second, the finance minister succumbed to intense pressure to increase cash allowances and funds for parliamentarians that are used to finance incoherent pet projects without much governance and oversight. He increased such discretionary funds to Rs60 million, up from Rs40 million in the current fiscal year. Each directly elected representative will now be able to spend Rs60 million in projects of over Rs1 million. Even senior party leaders from NCP itself were against allocating funds to the parliamentarians, terming it a waste of taxpayers’ money and a breeding ground for misappropriation.

Third, the increase in public employees’ wages and compensation (adjusted every two years) put pressure on the budget envelope. Salary went up by 18 percent (for gazetted officers) to 20 percent (for non-gazetted officers). However, this increase is far higher than the average inflation during the same period. Raising public sector wages drastically affects private sector wages too and exerts inflationary pressures.

Same problems

Although the budget does not include specific new projects--except for universities or roads named after past leaders--it also does not do enough to consolidate scattered, wasteful pet projects introduced in the past. In fact, increasing the funds available to federal parliamentarians exacerbates the problem and perpetuates allocative inefficiency, which is one of the major causes of the chronically low capital spending. This kind of piecemeal funding to construct substandard youth clubs, temples, covered halls, playgrounds, dirt roads, and bridges, among others without coordination with other agencies and projects is an utter waste of taxpayers’ money. Indirectly, this is an avenue to distribute money to party supporters and party-affiliated contractors. Similarly, increasing elderly allowance is another bait to attract voters at the cost of fiscal prudence.

Furthermore, as in previous budgets, a robust, credible and time-bound implementation plan to spend the earmarked money is missing. This raises doubts over timely budget execution in FY2020 as well. Even with a two-thirds majority in Parliament and introduction of the budget one-and-a-half-months prior to the start of the fiscal year, the government is unable to change the pattern of capital spending, which tends to bunch toward the last quarter (over 40 percent of actual capital spending happens in the last month of the fiscal year).

Similarly, there are no measures to check the alarmingly high fiscal deficit, which stands at over 10 percent of GDP. Higher deficit exerts inflationary pressure, raises interest rates, crowds out the private sector and fuels imports, which in turn exacerbates the current account deficit. The government needs to rationalise recurrent spending--especially streamlining subsidies and allowances, and needs to avoid duplicate, incoherent and wasteful projects--to check the rising fiscal deficit since there is little that can be done to proportionally increase revenue from the usual sources. This could have been transformative in setting the course of budget formulation.

The finance minister has also set an ambitious GDP growth target of 8.5 percent even when knowing that this is unattainable due to the forecast of an unfavourable monsoon, which affects agriculture output. Prospects of high growth in the industrial sector (thanks to projected additional hydroelectricity generation and pick up in construction activities) and continued robust services sector growth alone are not going to push GDP growth that high. Similarly, the revenue target for the upcoming fiscal year may still be high given that the government will not meet its own target for the fiscal year 2018-19.

Overall, the budget is not too bad given the demand for Rs100 million for discretionary spending by parliamentarians and higher social security allowances (around Rs5,000 per month). It has given continuity to previous programmes and projects, including a commitment to improving the investment climate and government operations. However, it fails to rein in on scattered projects to enhance allocative efficiency and promote fiscal prudence given the alarmingly high fiscal deficit.

बजेटमा राजनीति हावी

यो बिचार कान्तिपुरमा जेष्ठ २६, २०७६ गते प्रकाशित भएको थियो।

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बजेटमा राजनीति हावी

आर्थिक वर्ष २०७६/७७ को बजेट निकै वितरणमुखी र ‘पपुलिस्ट’ भएको भन्दै धेरैले आलोचना गरे । बजेट भाषणको भोलिपल्ट अर्थ मन्त्रालयमा आयोजित पत्रकार सम्मेलनमा अर्थमन्त्री युवराज खतिवडाले भने, ‘दोधारे होइन, दुईधारे बजेट ल्याएँ ।’ उनले तीव्र आर्थिक वृद्धि गर्न भौतिक पूर्वाधारमा यथेष्ट बजेट विनियोजन गरेको र सामाजिक न्यायका लागि वृद्धभत्ता बढाएको सुनाए ।

अघिल्लो वर्ष आफैंलाई मन नपरेको भनिएको सांसदलाई बजेटको उनले यस पटक खुलेर समर्थन गरे । प्रथम दुई वर्षमा तीव्र आर्थिक वृद्धि गरेर आर्थिक आधारलाई फराकिलो बनाउँदै स्रोतको सुनिश्चित गरेपछि बल्ल भत्ता बढ्ने आफ्नै सिद्धान्तको उल्टो बाटो उनले रोजे । स्रोतको सुनिश्चितता नभएका बेला नै भत्ता बढाउनुले बजेट वितरणमुखी र दोधारे मात्र होइन, वित्तीय अनुशासनलाई तिलाञ्जली दिएर निहित पार्टीगत स्वार्थ पूरा गर्न ल्याइएको प्रस्ट हुन्छ ।

अघिल्ला सरकारहरूले गर्न नसकेका आर्थिक र सामाजिक क्षेत्रमा दूरगामी प्रभाव पर्ने नीतिगत र प्रक्रियागत सुधार गर्न सक्ने जनादेश र अवसर यो सरकारसँग छ । स्रोतले धान्नै नसक्ने वितरणमुखी र लोकप्रिय बजेट ल्याउन हतारिनुअघि केही वर्ष सामाजिक सुरक्षा कार्यक्रमहरूलाई चुस्त बनाई लक्षित वर्गसम्म पुर्‍याउने पहल गर्नु जरुरी थियो ।

पुँजीगत खर्चका संरचनागत समस्या हल गर्ने, बजेट बनाइने परम्परागत प्रणालीलाई बदलेर परियोजना छनोट र बजेट विनियोजनमा आमूल परिवर्तन गर्ने, कृषि र औद्योगिक क्षेत्रमा उत्पादन तथा उत्पादकत्व बढाउन संरचनागत परिवर्तनमा पहल गर्ने, भूमि र पुँजी उत्पादनमा परिचालन गर्न कानुनी तथा नीतिगत पहल गर्ने र बिग्रँदोवित्तीय अनुशासनलाई सपार्नेजस्ता काम गर्नु उपयुक्त हुन्थ्यो । यसबाट बजेट चुहावट कम पनि हुन्थ्यो र आर्थिक वृद्धि भई सरकारलाई यथेष्ट स्रोतसाधन पनि उपलब्ध हुन्थ्यो । भत्ता र सांसदलाई पैसा बाँड्न हतारिँदा वित्तीय अनुशासन, बैंकिङ र बाह्य क्षेत्रका समस्या झन् नियन्त्रणबाहिर पुग्ने अवस्था सिर्जना भएको छ ।

बजेट आर्थिक वृद्धि र रोजगारी सिर्जनातर्फ केन्द्रित हुने भएकाले प्रत्येक वर्ष आर्थिक वृद्धिको लक्ष्य अनिवार्य राखिन्छ साथै आर्थिक वृद्धि र रोजगारीले छुन नसकेका वर्गलाई सामाजिक सुरक्षामा समेट्ने गरिन्छ । बजेट अर्थराजनीतिक दस्ताबेज हो । यसकारण स्रोतले भ्याएसम्म वित्तीय सन्तुलन नखलबल्याई भविष्यमा खर्चको बोझ नपर्ने गरी बजेटको आकार र सामाजिक सुरक्षा कार्यक्रम ल्याइन्छ । यसपालिको बजेटमा आर्थिक पक्षभन्दा पनि राजनीतिक पक्ष हावी मात्रै होइन, ‘नेकपाकरण’ भएको प्रस्ट छ ।

चार विशेषता

यो बजेटका चार मुख्य विशेषता छन् ।

पहिलो, आर्थिक आवश्यकताभन्दा पनि स्रोत निर्क्योल नहुँदै प्रधानमन्त्रीको उर्दीका कारण सांसदहरूलाई आयोजना छनोट गरी पैसा बाँड्ने सीमा २ करोडबाट ६ करोड पुर्‍याइएको छ । अघिल्लो बजेटपछि यिनै अर्थमन्त्रीले सांसदलाई बजेट विनियोजन गलत भएको र राजनीतिक दबाबका कारण आफू ‘ट्र्यापमा परेँ’ भनेका थिए । अहिले खुलेरै समर्थन गर्दै छन्, मानौं सांसदलाई बजेट नदिए विकास–निर्माण नै ठप्प हुन्छ ! संविधानको मर्म र अर्थशास्त्रको सिद्धान्तविपरीत कसरी एकै वर्षमा यो कार्यक्रम राम्रो भयो ? अहिलेसम्मको सबैभन्दा आलोचित र दुरुपयोग भनिएको यो कार्यक्रमले कसरी सांसदलाई जनतासँग नजिक बनाउँछ ?

अन्तरसमन्वय नगरी आफ्नालाई पोस्न युवा क्लब, मन्दिर, कभर्ड हल, खेलकुद मैदान, एक वर्ष पनि नटिक्ने कच्ची बाटो र पुलमा खर्च गर्दा जनताबाट उठाएको करको कसरी सदुपयोग हुन्छ ? केन्द्र सरकारको सिको गर्दै प्रादेशिक सांसदहरूले पनि यस्तै बजेट माग गरेका छन् । कानुनी तथा नीतिगत काम र सरकार तथा विकास परियोजनाहरूको अनुगमन गर्नुको साटो सांसदलाई परियोजना छनोट र खर्च गर्न दिनु कुनै पनि हिसाबले न्यायोचित छैन ।

यो विकृतिलाई हल गर्न त परै जाओस्, झन् यसकै समर्थन गर्न अर्थशास्त्री अर्थमन्त्रीलाई सुहाउँदैन । शिक्षा र स्वास्थ्यमा बजेट अपुग भएका बेला सांसदहरूलाई अर्बौं रुपैयाँ पटके आयोजनामा मनखुसी खर्च गर्न दिनु कसरी जायज हुन सक्छ ? वृद्धवृद्धा, एकल महिला, अपांग तथा लोपोन्मुख जनजातिसहित करिब १३ लाखलाई प्रत्यक्ष्य लाभ हुने गरी भत्ता बढाउँदा कम्तीमा पनी १५ अर्ब अतिरिक्त बजेट चाहिन्छ ।

तीव्र आर्थिक वृद्धि नहुँदै र राजस्व नबढ्दै यसरी पैसा बाँड्न हतारिँदा भविष्यमा आर्थिक संकट आउँछ भन्ने हेक्का हुँदाहुँदै अर्थमन्त्री र प्रधानमन्त्रीको ध्यान अर्को चुनावतिर एकोहोरियो । छरपस्ट सामाजिक सुरक्षा कार्यक्रमहरूलाई लक्षित वर्गसम्म कसरी चुस्तसँग पुर्‍याएर राज्यको ढुकुटीमा कम बोझ पार्न सकिएला भनी अध्ययन गरेर सामाजिक सुरक्षा र भत्तासम्बन्धी कार्यक्रम ल्याउनुपर्थ्यो । सस्तो लोकप्रियताका लागि पैसा थप्ने काम भयो । सामाजिक सुरक्षामा मात्र अर्को वर्ष १५७ अर्ब खर्च हुनेछ, जुन तीन वर्षमा दोब्बरभन्दा बढी हो ।

दोस्रो विशेषता हो– विस्तारकारी बजेट । अघिल्लो बजेट वित्तीय अनुशासनभित्रै बसेको जस पाएका अर्थमन्त्रीले यो पटक धेरैको आलोचना खेप्नुपर्‍यो । २०७५/७६ को संशोधित अनुमानका आधारमा २०७६/७७ को बजेट झन्डै २७ प्रतिशत बढी हो । अनुमानित कुल गार्हस्थ्य उत्पादन (जीडीपी) को ३८.३ प्रतिशत हो ।

यसको मुख्य कारण हो– चालु खर्च २२ प्रतिशत र पुँजीगत खर्च ४९ प्रतिशतले बढ्नु । पुँजीगत खर्च बढ्दा ऋण लिए पनि फरक पर्दैन, किनकि यसले धेरै वर्षसम्म प्रतिफल दिइराख्छ । चालु खर्च बढ्नु राम्रो होइन, विशेष गरी कर्मचारीको तलबभत्ता र सामाजिक सुरक्षा खर्चका कारण । अहिलेको आवश्यकता चालु खर्च घटाएर पुँजीगत खर्च वृद्धि गर्नु हो । खर्च ह्वात्तै बढाउँदा राजस्व र वैदेशिक अनुदानले नपुगेर बजेट घाटा धान्नै नसक्ने गरेर जीडीपीको १०.७ प्रतिशत बराबर हुन गएको छ । चार वर्षअघि यो जीडीपीको ०.४ प्रतिशत मात्र थियो ।

तेस्रो, सरकारी कर्मचारीको तह हेरेर १८ देखि २० प्रतिशतसम्म तलब बढाउँदा चालु खर्चभित्र पारिश्रमिक तथा सुविधा २३.७ प्रतिशतले बढेको छ । सरकारी कर्मचारीको तलब र भत्ता दुई वर्षमा एक पटक समायोजन गरिन्छ । यसपटक विगत दुई वर्षको औसत मुद्रास्फीति दरभन्दा निकै धेरै वृद्धि गरिएको छ । यसले निजी क्षेत्रको तलब वृद्धि गर्न दबाब सिर्जना भएको छ । बजारमा खुद्रा मालसामान र तरकारीको मूल्यमा चाप सिर्जना भएको छ ।

२०७५/७६ मा कुल केन्द्रीय राजस्व लगभग चालु खर्च बराबर हुने सरकारकै अनुमान छ । २०७६/७७ मा राजस्व लक्ष्य भेटिएन भने चालु खर्च धान्न हम्मे पर्नेछ र वित्तीय सन्तुलन झन् बिग्रनेछ ।

चौथो, सबै नराम्रो पनि होइन । अर्थमन्त्रीले पार्टीको राजनीतिक दबाबका बाबजुद सकेसम्म न्यायोचित बजेट ल्याउने जमर्को गरेका छन् । सबै छात्रवृत्ति कार्यक्रमलाई एउटै ढाँचामा ल्याएर अपचलन घटाउने, स्कुले विद्यार्थीलाई दिँदै आएको दिवा खानाको पैसा आमालाई दिने, मेलम्ची र महत्त्वपूर्ण पूर्वाधार परियोजनालाई यथेष्ट बजेट दिने, सामुदायिक स्कुलका विद्यार्थीलाई निःशुल्क सेनेटरी प्याड दिने, बैंकिङ मर्जरलाई प्राथमिकता दिने, आन्तरिक उत्पादनलाई करको दर समायोजन गरेर प्रवर्द्धन गर्ने, राजस्व प्रशासन र कर प्रणालीमा संरचनागत परिवर्तन गर्ने योजना राम्रा हुन् । पुँजीगत खर्चलाई बढाउन सरकारी कर्मचारीसँग कामको सम्झौता गर्ने र पर्‍यो भने बाहिरबाट आयोजना प्रमुख ल्याउने योजना पनि सराहनीय छन् ।

कार्यान्वयन हुन्छ त ?

समग्रमा यो बजेटमा अर्थनीतिभन्दा राजनीति हावी छ, अर्थमन्त्रीभन्दा उनको पार्टी हावी छ । सञ्चार माध्यमले पनि वित्तीय अनुशासनमा खतिवडामा विचलन आएको र सम्झौता गरेको भनिसकेका छन् । सही हो, अघिल्लो बजेटजस्तो सन्तुलित छैन यसपटक ।

२०७५/७६ बजेटअगाडि अर्थतन्त्रको अवस्थाबारे श्वेतपत्र ल्याएर सरकार टाट पल्टिएको र सबै आर्थिक सूचक गिरेको भनेका अर्थमन्त्रीले अहिले आएर आफूले ल्याएको बजेटको समीक्षा गर्दा देश तीव्र आर्थिक वृद्धिका बाटामा बढेको बाहेक धेरै बोलेनन् । दुई वर्षअगाडिको औसत आर्थिक वृद्धि आधारभूत मूल्यमा ७ प्रतिशत थियो भने यो आर्थिक वर्ष ६.८ प्रतिशत हुने प्रारम्भिक अनुमान छ ।

पुँजीगत खर्च अघिल्लो वर्षभन्दा थोरै हुने अनुमान छ । बैंकिङ क्षेत्रमा तरलताको समस्या झनै बल्झिएको छ । सरकारले चाहेजति आन्तरिक ऋण उठाउन सकेको छैन । चालु खातामा घाटा अहिलेसम्मकै उच्च छ र विदेशी मुद्रा सञ्चिति घट्दो छ । आन्तरिक र विदेशी लगानी घटेको छ ।

समयमै नतिजा देखाउन यो सरकारले अब दुई पक्षमा जोड दिएर काम गर्नुपर्छ ।

पहिलो, बजेट पूर्ण कार्यान्वयन गरी पुँजीगत खर्च क्षमताका साथसाथै खर्चको गुणस्तर पनि बढाउने । डेढ महिनाअगाडि बजेट ल्याई कार्यान्वयन गर्ने खाका प्रकाशित गरे पनि यो आर्थिक वर्षमा पुँजीगत खर्चमा खासै प्रगति भएको छैन । विकासको असारे प्रवृत्तिले अन्तिम चौमासिकमा ६० प्रतिशत खर्च भुक्तानी हुन्छ ।

यसका कारण हुन्– परियोजना छनोट र कार्यान्वयनमा कर्मकाण्डी काम, परियोजना व्यवस्थान र ठेकेदारको क्षमतामा कमजोरी, स्थानीय तहमा खर्च गर्ने परियोजनामा बढ्दो आर्थिक अपचलन र योजना छनोट, कार्यान्वयन तहमै राजनीतिक हस्तक्षेप । निजी लागानी बढाउन भर्खर जारी भएका कानुनलाई पूर्णता दिन नीति, नियमावली, निर्देशिका र संस्थागत ढाँचा तुरुन्त तयार पार्नुपर्छ । यसले नीतिगत र कार्यान्वयनमा स्पष्टता दिन्छ ।

दोस्रो, सरकारी काम र परियोजनामा मौलाएको आर्थिक अपचलन तथा भ्रष्टाचारलाई नियन्त्रण गर्नुपर्छ र शान्तिसुरक्षामा खलल पर्न दिनु हुन्न । यति मात्र गरे पनि ६ प्रतिशतमाथिको आर्थिक वृद्धि हासिल गर्न कुनै समस्या हुँदैन ।

Advance VAT payment, one-third of SOEs in loss and more

Consumers, suppliers to share VAT burden

From The Himalayan Times: The government has introduced a new provision which makes it mandatory for consumers who purchase goods and services from contractors and consulting firms to deposit half of the value-added tax amount in the state coffers themselves. As per the existing provision, if a consumer purchases goods or services worth Rs 10,000 from a contractor or consultancy firm, s/he must deposit half of the VAT amount — Rs 650 — at the tax office on his/her own and pay the contractor the remaining amount. Yagya Prasad Dhungel, information officer at the Inland Revenue Department, said the existing VAT guideline had been amended to this effect in a bid to end the trend among firms to hold on to the collected VAT amount.

The government has introduced such a provision also because contractors and consultancy service providers were increasingly found to be collecting VAT from service seekers, but were reluctant to deposit the collected amount in the state coffers.“Till now sellers had been collecting VAT from buyers and depositing the collected amount in the tax office themselves. However, with the new policy, both buyers and sellers will have to deposit 50 per cent of the VAT amount,” said Dhungel. He added that the new provision would make both suppliers and consumers responsible towards VAT payment to the government.

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One-third of public enterprises post net loss despite heavy funding

From The Kathmandu Post: The dismal financial performance of the state-run enterprises continued in the last fiscal year with one-third of enterprises still reporting negative net income. Out of 39 public enterprises, only 26 earned profits in 2017-18. The government injected Rs164.42 billion in credit to these enterprises to run them, a rise by 0.67 percent as compared to previous fiscal year, according to the Annual Performance Review Report of Public Enterprises released by the Finance Ministry.

Similarly, the state equity investment in the public enterprises stood at Rs237 billion. The government, however, received Rs9.89 billion as dividend, up 27.28 percent as compared to previous year. When compared with huge capital injection for the public enterprises by the government, the dividend returns is just 4 percent. 

The performance of enterprises in the manufacturing sector, in particular, appeared pathetic as the state has not received any return from them in the last five years. These manufacturing businesses are—Dairy Development Corporation, Herbs Production and Processing Company, Hetauda Cement Industries, Janakpur Cigarette Factory, Nepal Drugs, Udayapur Cement Industries and Nepal Orind Magnesite. Instead, there was an increase in cumulative loss in five of these enterprises except Hetauda Cement and Udayapur Cement industries. The net profit of 26 enterprises rose by a mere 4.88 percent to Rs43.44 billion in the review period.

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Route permits discarded for unregistered committees

From myRepublica: The Department of Transportation Management (DoTM) has canceled the route permits of all vehicles operated by transportation committees registered under Associations Registration Act 2034 BS. The government had given deadline till Saturday, June 1, for the transportation committees registered as associations to get registered as companies and to get listed in the department. The department has said that the route renewal, registration, and permit of transportation committees registered as associations instead of companies have been discarded.

According to Company Registrar's Office, 160 committees have been registered as companies. “We had given a deadline for registration till Saturday night,” said registrar of the office Bhuwan Hari Aryal. He said that the office was carrying out internal works on the registered companies. “Verification of the companies is going on, therefore, the number may increase or decrease,” he said. He said that as the entrepreneurs waited until the last hour, there was a huge crowd at the office.

Quick thoughts on Nepal’s FY2020 budget

Here are my quick thoughts on FY2020 budget:

On 29 may 2019, Finance Minister Dr. Yuba Raj Khatiwada presented FY2020 budget (mid-July 2019 to mid-July 2020) to a joint assembly of the federal parliament. This is the second budget of the government that commands two-thirds majority in the parliament. It is designed to placate the dissatisfied NCP politicians that were batting for more discretionary funds and to adhere to party’s election manifesto, particularly increasing cash-based social security allowances. The finance minister argues that FY2020 budget focuses on institutionalizing the achievements of FY2019, fair distribution of resources, and strong social security regime. 

This was an opportune time to consolidate social security schemes, streamline scattered and incoherent projects and enhance allocative efficiency of capital spending, institute sound governance regime while awarding and implementing projects, take transformative measures to bring about growth-enhancing structural changes in agriculture, labor and industrial markets, and institute some fiscal discipline. However, these were overshadowed by the urge to bring out a distributive and populist budget. Given the deteriorating state of fiscal, financial and external sectors, the focus of FY2020 budget should have been on allocative efficiency, targeted social security assistance under one framework, and fiscal discipline. 

The budget is notable in four ways:

First, in FY2019, the finance minister tried his best to maintain fiscal discipline by resisting pressure from NCP leaders to increase social security allowances and by not overblowing the already high government expenditure. However, this year the finance minister yielded to intense pressure to increase cash allowances and funds for parliamentarians that are used to finance incoherent pet projects without much governance and oversight. The finance minister increased discretionary funds to be used by parliamentarians to Rs60 million, up from Rs40 million. Even senior party leaders from NCP itself were against allocating funds to the parliamentarians, terming it a waste of taxpayers’ money and a breeding ground for misappropriation.

Meanwhile, the government increased cash allowance for 70 years and above by Rs1000, making it a total of Rs3000 per month (plus Rs1000 medical benefit). There are about 1.3 million people registered to get that benefit. The government has to allocate at least Rs15 billion additional money for this purpose. Similarly, single woman (60 years and older, either divorced or unmarried), fully and partially disabled, and indigenous people will also get an additional Rs1000 per month, making it a total of Rs2000 per month. 

Second, compared to revised estimate of FY2019 budget, the FY2020 budget outlay increased by about 27%. Total federal budget is about 38.3% of GDP, marginally higher than 38% of GDP in FY2019. Here I assume nominal GDP to increase by 15.4% in FY2020 (if you increase this growth rate of nominal GDP like the government did in its latest version of MTEF to show 8.5% real GDP growth, then the size of budget will appear smaller). Fiscal deficit is expected to be about 10.7% of GDP. This is too high and a deficit binge expenditure model will exacerbate inflation as well as liquidity situation in the financial market, which then affects interest rates and crowds out the private sector. 

Fiscal discipline is at stake here. The revised estimates for FY2019 shows that tax and non-tax revenue is projected to barely cover recurrent spending (24.8% of GDP vs 24.4% of GDP, respectively). In FY2020, revenue is projected to be 26% of GDP and recurrent spending is projected to be 23.9% of GDP. Net domestic borrowing is about 4% of GDP and fiscal deficit is about 10% of GDP.

Third, the revision of public employees’ wages and compensation (which happens every two years) contributed to the large size of the budget. Salary went up by 18% (for gazetted officers) to 20% (for non-gazetted officers). However, this increase is far higher than the average inflation rate during the same period. Raising public sector wages drastically affects private sector wages too and exerts inflationary pressures.

Fourth, there are no new programs as such but existing ones are too scattered too. There are some efforts to bring scholarship assistance under one framework and to introduce conditionality on the use of assistance to ensure accountability and greater impact (such as giving payment to mothers of child that need day meal in schools). Similarly, the government has committed to bring all social security assistance under one framework. Melamchi project has been allocated additional money to continue the stalled work. Crucial airport construction and infrastructure works are prioritized. The commitment to consolidate the number of BFIs and to design a revenue regime that favors domestic production is commendable. The private sector seem happy with the budget but are suspicious of its implementation. 

More on these later, but first let us look at the macroeconomic specifics:

Budget outlay

The total expenditure outlay for FY2020 is NRs1532.9 billion (an estimated 38.8% of GDP), which is 27% higher than the revised expenditure estimate for FY2019. The government expects to spend 91.8% of NRs1215.1 billion allocated in FY2019. However, given the expenditure trend so far, it is highly unlikely. 

FY2020 budget outlay comprises of NRs957.1 billion as recurrent expenditures (62.4% of the total outlay), NRs408.1 billion as capital expenditures (26.6%), and NRs167.5 billion as financial provision. 

As a share of GDP, total budget amounts to 38.3%, including just 10.2% for capital spending. As per FY2019 revised estimates, the government now expects to spend just 92.6% of planned recurrent budget and 86.9% of planned capital budget. Compared to the revised estimates, recurrent spending is up by 22.3% and capital spending by a whopping 49.6%. Capital budget has been increased at a time when its absorption rate is lower than in FY2018. Without a viable implementation plan, it is not going to fully spent. 

FY2020 budget overview
GDP growth target (%)	8.5
Inflation target (%)	6
Budget allocation for FY2020	Rs billion	%
Projected total expenditure	1532.7
Recurrent	957.1	62.4
Capital	408.1	26.6
Financial provision	167.5	10.9
Projected total revenue	1039.1
Revenue	981.1	94.4
Foreign grants	58.0	5.6
Projected budget surplus (+)/deficit (-)	-493.5
Projected deficit financing	493.3
Foreign loans	298.3	60.5
Domestic borrowing	195.0	39.5

Revenue

A total revenue target of NRs1,112 billion (27.8% of GDP) has been set for FY2019 (or NRs981.1 billion if revenue sharing with subnational governments is excluded). Foreign grants are expected to be NRs58 billion (1.5% of GDP). Total revenue plus foreign grants less sharing of revenue with subnational governments leaves the government with NRs1039.1 billion. The government will share, based on monthly collections, 30% of VAT and internal excise duty, and 50% of royalties from natural resources with subnational governments. The revised estimate for federal revenue mobilization (including grants) in FY2019 is 25.7% of GDP. Compared to the revised estimate, revenue growth target for FY2020 is 29.5%, which is ambitious and was achieved just once in the last decade. The government had a similar target in FY2019 but failed to achieve it.  

Given that the GDP growth target itself is overly ambitious, and revenue administration reforms along with tinkering of import tariff on some non-essential items have its limit in increasing import-based revenue, it needs to be seen how this government will achieve the revenue target.

Nepal’s revenue mobilization is already one of the highest among low-income countries and about 45% of it comes from taxes on imports. Tax revenue is projected to be around 25.2% of GDP in FY2020, up from 22.4% of GDP in FY2019. Non-tax revenue is projected to be 2.6% of GDP.

Deficit financing

Considering federal expenditure and its share of revenue in total revenue mobilization, the budget deficit turns out to be NRs493.5 billion, which is financed by foreign loans equivalent to NRs298.3 billion and domestic borrowing of NRs195 billion. This is going to exacerbate liquidity crunch in the financial market and raise interest rates. The government had an ambitious plan to raise NRs136.9 billion in FY2019, but its bill and bonds are undersubscribed at the moment. 

The government is planning to increase net foreign borrowing by 45.7% to NRs272 billion (6.8% of GDP) and net domestic borrowing by 13.3% to NRs136.9 billion (3.9% of GDP). Again, without substantial improvement in budget execution capacity, it is unlikely that the government will be able to borrow the targeted amount. 

Overall, fiscal deficit is projected to be about 10.7% of GDP. Fiscal deficit is the difference between revenue including grants and expenditure including net lending.

Where is recurrent budget going?

Almost 53.5% of planned recurrent budget of NRs957.1 billion is going to provincial and local governments in the form of fiscal transfer (fiscal equalization, conditional, complementary and special grants) and unconditional grants. This is where pet projects of politicians are usually embedded in as these grants are to cover both recurrent and capital spending at subnational level. The other big ticket item is the compensation of employees, which takes up about 15.2% of total recurrent budget. The government has earmarked NRs157.3.1 billion (3.9% of GDP) for social security spending and NRs73.6 billion for use of goods and services. Use of goods and services consists of (i) rent & services; (ii) operation and maintenance of capital assets; (iii) office materials and services; (iv) consultancy and other services fee;(v) program expenses; (vi) monitoring, evaluation and travel expenses; (vii) recurrent contingencies; and (viii) miscellaneous.

Where is capital budget going?

Almost 57.5% of the planned capital budget of NRs408.1 billion is going for civil works, 22.1% for constructing or purchasing building, and 6.9% for land acquisition. Compared to the FY2019 revised estimate, capital spending has been increased by 49.6%. Some of this expenditure also include post-disaster related reconstruction activities.

Subnational governments

Grants to provincial and local governments (under federal government’s recurrent expenditure) consist of revenue sharing as mandated by the constitution, NNRFC Act, and Intergovernmental Fiscal Management Act. The central government needs to share 30% of VAT and internal excise duty (15% each to local and provincial governments) mobilized in a given year. Similarly, it has to share 50% of royalties generated from natural resources (mountaineering, electricity, forests, mines and minerals). In addition, on expenditure side, it categorically allocates fiscal equalization and conditional as well as unconditional grants. 

Total grants or transfers to subnational governments is projected to be NRs463 billion and revenue sharing of NRs130.9 billion. Some local governments are using these grants to purchase vehicles and other goods instead of using them in local level capital projects. There are high fiduciary risk when local governments use such grants without much oversight and institutional capacity to execute projects. 

Grants to sub-national governments	Rs billion
Total grants	463.0
Unconditional	149.3
Fiscal transfer	313.7
Province government	99.9
Fiscal equalization	55.3
Conditional	44.55
Local government	213.8
Fiscal equalization	90.0
Conditional	123.9

Major takeaways from FY2020 budget

First, the finance minister has tried to give continuity to the programs and projects he launched in FY2019 budget. However, some of the projects were never initiated, indicating allocative inefficiency. Rationalization of recurrent expenditures— especially to streamline subsidies and allowances, and to avoid duplicate, incoherent and wasteful projects—  is missing too. This could have been transformative in setting the course of budget formulation. He could have also facilitated closure of defunct public enterprises that are not in operation or not making any profit for a long period of time. There is no point in keeping employees of such public enterprises in the payroll. Similarly, steps could have been taken to root out redundant temporary/contractual staff, often in lower tier jobs in government offices, who were hired by politicians without a work plan. 

Second, the finance minister succumbed to political pressure and increased allowances as well as funds for parliamentarians. Each directly elected representative will now be able to spend Rs60 million in projects of over Rs1 million. This kind of piecemeal funding to construct substandard youth clubs, temples, covered halls, playground, local roads, bridges, etc without coordination with other agencies and projects is an utter waste of taxpayers’ money. Indirectly, this is an avenue to distribute money to party supporters and party-affiliated contractors. Similarly, increasing elderly allowance is another bait to attract voters at the cost of fiscal prudence. 

Third, like in the previous budget, a robust, credible and a time-bound implementation plan to spend the earmarked money is missing. So, improvements in allocative efficiency in budget preparation, and its impact on budget execution, remain a far cry. Granted that the budget speech would not ideally elaborate on implementation plan. However, since this lies at the heart of the chronically low capital spending in the first place, it should have been briefly elaborated. In the past, the MOF released an implementation plan few day after the budget speech. But, that also didn’t work. The core issues for chronically low capital spending (structural weaknesses in project preparation and implementation, low project readiness, bureaucratic hassle in approving and reapproving projects, poor project management and contractor capacity, high fiduciary risk in project implementation at subnational level, and political interference both at planning and operational levels) and bunching of spending in the last quarter (note that over 40% of actual capital spending happens in the last month of fiscal year) are hardly addressed in the budget, as always. This raises doubt over timely budget execution in FY2020 as well. As an example, hiring project head from outside of government service does not add much value if person has to go through the same bureaucracy to get routine approvals and authorizations. 

Fourth, revenue target also seems to be a bit ambitious given that the government failed to achieve the target in FY2019. Compared to revised estimate of FY2019, revenue growth target is set at around 29% (compared to FY2019 budget estimate, growth target is just 18% but this is not the right comparison here). This target is going to go up if the government is unable to mobilize Rs757.5 billion revised estimate for FY2019 (which is 91% of the FY2019 budget target). The government really has to up its game in plugging leakages and also hope that economic activities accelerate as expected to meet the revenue target. Tax rates are unchanged except for some adjustment in custom duties and additional tax on petrol and diesel to fund road maintenance (by the way, government has been already levying similar tax for road maintenance and for construction of Budhi Gandaki). Custom duty on imported chicken is up from 10% to 30%, and custom and excise duty on sugary products have increased. Same with alcoholic drinks and cigarettes. Some of the agricultural goods on which tariffs have been raised (such as sugar) raises the possibility of higher domestic prices. The manipulation of sugar prices by domestic produces by forcing the government to impose quantitative restrictions in import is already a hotly debated issue. 

There are three ways to increase revenue: (i) a higher GDP growth rate means accelerated economic activities, which means higher tax and nontax revenue; (ii) plug revenue leakages like under-invoicing of imported goods, selective tax waivers either due to corruption or political pressure, automated revenue administration, enhance capacity of local bodies to raise local revenues (they know the locality better, for instance, house or land or services tax), etc.; and (iii) a tax regime that promotes formal economy (exorbitantly high income and corporate tax rates encourage informality and narrows tax base). 

Fifth, the fiscal deficit (and primary deficit) is at alarming level. Higher deficit exerts inflationary pressure, raises interest rates, crowds out private sector and fuels imports. Expansionary fiscal and monetary policies need to be managed well. 

Sixth, the government seems overly optimistic in its ability to raise money from the domestic market. In FY2019, it was unable to sell its bills and bonds as the financial market committed to buy just half of what it proposed to sell in May. On the one hand, the government wants to borrow more from domestic market to meet its ballooning expenditure needs. On the other hand, tight liquidity situation in the financial sector continues unabated as BFIs are close to the credit to core capital-cum-deposit (CCD) ratio of 80. In this situation, trying to raise more money from the domestic market will further push up interest rates and crowd-out the private sector. [That said, with high interest rates amidst tight liquidity, BFIs are maintaining profit margin.]

Seventh, GDP growth target of 8.5% is too ambitious. GDP growth (at basic prices) will likely be between 6.0% and 6.5% (at producers’ prices between 6.4% and 6.8%). Unfavorable monsoon (expected to be below average for much of the country) will lower agricultural growth, but industrial sector will likely grow at a robust pace. Specifically, post-earthquake reconstruction work will continue to act as a stimulus (government is bankrolling most of the reconstruction work even for private houses) and hydroelectricity generation will nearly double as 456 MW Upper Tamakoshi, 40 MW Khanikhola-1, 42.5 MW Sanjen, 111 MW Rasuwagadhi, and 82MW Lower Solu, among others are expected to be completed by mid-July 2020. Similarly, provided that public capital spending accelerates as expected (which means completion of the hydropower projects as well as notable progress in Melamchi, GBIA, PIA, national highways, etc), construction activities will pick-up pace lost in FY2019. Meanwhile, adequate and stable supply of electricity, and implementation of the investment-friendly laws and regulations will likely support manufacturing activities. Services sector growth will continue to be high, underpinned by wholesale and retail trading activities and tourism activities (Visit Nepal 2020 will draw in more number of tourists). The downside risks to the forecast are slow public capital spending as in the past, continued tight liquidity in the financial sector and an adverse investment climate due to security risks. 

Eighth, the government really needs to work on two fronts to boost GDP growth rate: (i) enhance public budget execution capacity, and increase private investment by implementing the recently enacted laws, which need to be supplemented by policies, regulations, guidelines, and institutional framework; and (ii) ensure sound governance and security. Better budget execution means faster project completion, which stimulates economic activities. This in turn will increase revenue and create jobs. On promotion of private investment, so far industrial policy and export promotion incentives are like tokens given to the private sector because they complain a lot. They need relatively and reasonably good business-friendly policies (it would have been better if the government set a target to climb few notches up the annual Doing Business ranking), and an ecosystem where there is a steady flow of investment in enhancing human capital and institutions. 

Unfortunately, except for the usual high-sounding commitments, there is no structured viable vision or policy to promote backward and forward linkages in industrial and agribusiness sectors. Private sector needs an enabling environment to flourish: infrastructure (like good roads network), adequate and reliable electricity supply, sensible tax regimes so that raw materials are not taxed higher than final goods produced out of it, strong financial sector, adequate labor pool and human capital, clear and stable policies, etc. Furthermore, we also need to think of how we can lower electricity tariff for industries as we move from deficit to surplus production by FY2020. It could also encourage use of electric vehicles and promote innovation, especially in SME sector. Additionally, it could promote import-competing production and help to lower trade deficit. A meaningful structural transformation that forms the basis for sustained and inclusive growth as well as adequate jobs creation requires transformative thinking, incentives and policies. 

Overall, FY2020 budget is not too bad given the demand for NRs100 million for discretionary spending by parliamentarians and higher social security allowances. It has also given continuity to previous programs and projects, including commitment to improve investment climate and government operations. However, it doesn’t rein in on scattered projects, enhance allocative efficiency and promote fiscal prudence given the alarmingly high fiscal deficit. This could be a big ask from the finance minister given that he is under intense political pressure to bring out a distributive and populist budget that is consistent with NCP’s election manifesto.