Policies to help recovery in Asia and the Pacific

The IMF’s Chang Yong Rhee argues that Asia’s growth is projected to contract by 1.6% in 2020 due to weaker global conditions and more protracted lockdown measures in several emerging economies. Since Asia is heavily dependent on global supply chains, a slowdown in global economy would automatically slow the region too. Assuming that there is no second wave of infections and with the ongoing unprecedented policy stimulus to support recovery (especially private demand), the IMF projects growth to rebound to 6.6% in 2021. Still, output will be 5% lower compared to pre-COVID-19 projections. 

However, this outlook may be optimistic due to: 

1. Slower growth in trade as supply chains continue to be affected (reorienting Asia’s growth model towards domestic demand and reducing its reliance on exports may take time)
2. Protracted lockdowns (physical distancing to reduce contagion will depress economic activity)
3. Rise in inequality (past pandemics led to higher income inequality and lower employment prospects for less educated population) as informal sector workers get hit
4. Weak household and corporate balance sheets (negatively affect investor sentiment or amplify uncertainties) 

Significant fiscal and monetary policy support is helpful, but they may not last long as a potential correction of the disconnect between financial markets and the real economy could exacerbate the already high borrowing costs for many Asian economies. A close coordination between monetary and fiscal policy measures (to support liquidity and demand); resource reallocation (streamlining the restructuring and insolvency frameworks, adequately capitalized banks, and facilitation of equity injections into viable firms and risk capital for new firms); and addressing inequalities (enhancing access to health and basic services, social safety nets, informality, etc) may be some policy options to respond to the emerging crisis. 

Meanwhile, Gita Gopinath argues that “in the absence of a medical solution, the strength of economic recovery is highly uncertain and the impact on sectors and countries uneven”. Many countries are reopening amidst a surge of cases. The June edition of WEO sharply downgraded global output growth forecast to -4.9% in 2020 followed by a partial recovery with growth at 5.4% in 2021. In absolute terms, the cumulative loss to the global economy comes to be around $12 trillion over two years. Upside risks to the forecast include availability of vaccines and treatments, and additional policy support. Downside risks to the forecast include further waves of infections (which could reverse mobility and spending), and rapidly tightening financial conditions (which could trigger debt distress). Geopolitical and trade tensions could further affect growth outlook.

The crisis is affecting export-dependent economies and jeopardizing prospects for income convergence. The staggered reopening of economies has also meant that the pick-up in activity is uneven. Some sectors have seen a surge in spending due to pent-up demand (retail), but contact-intensive services remain depressed. Lower-income and semi-skilled workers are particularly affected as work from home norms do not apply fully to them. 

Fiscal and monetary policy support has helped to check the downturn to some extent. 

• Advanced economies have a larger fiscal space, so they rolled out larger fiscal packages. 
• Emerging market and developing economies are somewhat constrained by fiscal space.
• The IMF estimates that global fiscal support is over $10 trillion in addition to accommodative monetary policy measures such as interest rate cuts, liquidity injections, and asset purchases. 
• The strong backing by central banks have contributed to rebounding of equity prices, narrowing of credit spreads, stabilization of portfolio flows to emerging and developing economies, and strengthening of currencies that sharply depreciated previously. 

These support measures may have to continued in the near future too. However, the IMF recommends countries to ensure proper fiscal accounting and transparency, and to keep independence of monetary policy intact. 

• The first priority is to respond to the health crisis through building health capacity, widespread testing, tracing, isolation and practicing safe distancing. 
• Affected people should be provided with unemployment insurance, wage subsidies, cash transfers. 
• Affected businesses should be provided with tax deferrals, loans, credit guarantees, and grants. 
• Digital payments will be helpful. 

Over the medium-term, policy support should facilitate reallocation of workers to sectors with growing demand and away from shrinking sectors. This could require worker training and hiring subsidies. Policies should also be designed to repair balance sheets and address debt overhangs (requires strong insolvency frameworks, and mechanisms for restructuring and disposing of distressed debt). Economies could also increase green public investment, and expand social safety net spending. 

The international community can support developing countries through concessional financing, debt relief and grants. Emerging market and developing economies could require larger access to international liquidity (through central bank swap lines, global financial safety net, and ensuring financial market stability). Since public debt is projected to shoot up, economies will need to roll out sound fiscal frameworks for medium-term consolidation (cutting back on wasteful spending, widening tax base, minimizing tax avoidance, and progressive tax system).

Government's counter-cyclical measures are helpful in maintaining demand

Despite strict lockdowns, supply chains disruptions, sharp economic contraction, and high unemployment rate, the COVID-19 recession is not expected to as worse as an economic depression. Zachary Karabell argues that this is due to the large fiscal stimulus by government and a commitment to unlimited liquidity by the central bank. It largely applies to the US economy, but some variant of it is true for all economy. 

Specifically, two factors are at play here. First, average unemployment benefit is higher than average wage per week, meaning that consumption demand across most households is in fact relatively strong. Second, the job losses are mostly in sectors required face-to-face contact, meaning that unemployment is not economy-wise. 

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There are two reasons, one positive and one decidedly not. The positive reason is that for all the clunky ineptitude of the social safety nets created in April by Congress in the form of direct payments, small business relief and expanded unemployment benefits, those considerable amounts of money ended up buoying the depressed fortunes of tens of millions of people. In fact, given the extra $600 a week emergency supplement provided by the federal government, many people at the lower end of the wage spectrum pre-COVid have been taking home more money weekly than when they were employed. The average amount earned by the 40 million people who have received unemployment at some point since March was less than $750 a week; the average amount received under the various emergency programs? $970 a week. That helps explain why overall economic activity hasn’t declined in lock-step with unemployment or with the contraction of so many industries. Those juiced benefits are due to expire in July, however, raising the prospect that unless those are extended further the trajectory will worsen.

The other reason isn’t so benign. In terms of unemployment statistics and how we discuss work, a job is a job is a job. But in terms of wages and a living wage, all jobs are not created equal. Not even close. For many millions of jobs, the pay is barely above what constitutes the poverty line and isn’t enough to cover food and shelter for one person let alone a family. Hence the strong push in recent years to raise the minimum wage to at least $15 an hour, which many cities such as Seattle have done but which the federal government has not.

In the current crisis, the preponderance of job losses have been human service industries, ones that depend of face-to-face contact and cannot be shifted via Zoom into the digital realm. Those industries – restaurants, hospitality, travel, tourism, retail stores, events – are also amongst the lowest paid. Overall, average earnings in the U.S. are $28 an hour. But earnings for leisure and hospitality are $16 an hour and for retail $20 an hour. Those tens of millions of workers were never accounting for the same level of consumer spending or home sales or travel dollars or economic activity as the tens of millions who work in construction or manufacturing or technology or higher-end service industries such as finance and consulting or public servants like teachers and police. The result is that you can have 15-20% unemployment with 40 million people out of work at one point or another in the past months and not have a one-to-one hit to economic activity. 

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Developing Asia to grow at the slowest pace since 1961

In the latest edition of ADO Supplement (June 2020), Asian Development Bank projected that developing Asia will grow by 0.1% in 2020 and then by 6.2% in 2021, thanks to a low base effect. This is a sharp downward revision from 2.2% projected in April edition of ADO 2020. 

Lockdowns and the associated decline in mobility outside home have constrained economic activities. External sector also doesn’t look that good because of a deeper contraction in the major advanced economies (the US, the Euro area, and Japan). 

The latest growth projections for developing Asia will be the lowest regional growth since 1961. Contraction is expected in all subregions except East Asia, where PRC and Taipei, China are projected to growth at a positive rate. 

However, recovery in 2021 will not be a V-shaped recovery as continued social distancing may be required amidst recurrent outbreaks. Furthermore, even if an economy succeeds in normalizing domestic activity, external demand will remain weak. ADB states that sovereign and financial crises cannot be ruled out, and social unrest is possible. US-PRC trade tension further exacerbates the situation. 

Uncertainty over the COVID-19 pandemic and the global recession will dampen economic sentiment in many economies. Some key drivers of growth such as tourism and exports (manufacturing) remain subdued.  

ADB projects growth in South Asia to contract by 3% and then recover at a rate of 4.9% in 2021. 

• The Indian economy is expected to contract by 4% in FY2021 and then growth by 5% in FY2022.  PMI index fell to the lowest level in April, reflecting not so rosy outlook for FY2021. Unemployment and exodus of migrant workers from urban areas have dampened demand (perhaps, turn out to be structural as reverse migration may not again reverse as in the pre-COVID era).
• Dip in export earnings and remittances will affect growth in Bangladesh, whose economy is expected to grow at 4.5% in FY2020 and recover to 7.5% in FY2021 (thanks to manufacturing output). 
• Tourism, manufacturing and construction activities are expected to get hit in Bhutan, resulting in growth projection of 2.4% in FY2020 and then 1.7% in FY2021 (as labor shortages hit construction sector, which gets migrant workers from India). 
• In Nepal, the government’s provisional estimate of growth for FY2020 is 2.3%, which will further decline as lockdown continue. Growth in FY2021 is projected at 3.1%.

Inflation will remain at low levels due to depressed demand and lower oil prices.

Impact of lockdown on employment, remittances and food security in Nepal

Measuring the human cost of lockdown in Nepal

Mushfiq Mobarak, Bishal Chalise and Corey Vernot write in Nepali Times:  

One of us (Mobarak) has been leading a team collecting large-sample data on the rural poor across 90 villages in Kailali and Kanchanpur to track labour mobility, wages, remittances, food security, and mental health before and after the lockdown. We collected five rounds of data from 2,600 households in monthly intervals since September 2019, and conducted the most recent round of phone surveys in April, 2020 immediately after the lockdown measures were enforced.

[...]Total hours in income-generating (wage or non-farm business) work for prime-age males have decreased 75% since January. Men are spending a bit more of that time on their own farm, but even accounting for that, total work hours are significantly below even the pre-harvest lean season in October. [...]The lockdown has had even larger effects on migrant families, because there has been a 61% dip in the remittance receipts since lockdown. A large part of this is because migrants who would normally be away, earning income elsewhere, were forced to return home; 65% of the migrants who were in either India or other cities in Nepal during 1 January – 1 April 2020 returned home in a rush during the first two weeks of April. Further, individual migrants who are still away are only able to send half of what they used to send before the lockdown. [...]Some 65% of our respondents worried about having enough food in the house when we spoke to them in late April. As a benchmark, that number was 67% in September-October 2019 (during the pre-harvest lean season), and 43% in January after the rice harvest. 

[..]In an experiment, when we provided some of these poor, rural, migrant-dependent households loans during the pre-harvest lean season in 2019, they invested a large portion of that money buying fertiliser. Agricultural investment was significantly higher than those who did not receive such loans.

Nepal's FY2021 budget at a critical juncture

It was published in The Kathmandu Post, 03 June 2020. An earlier blog post is here (in Nepali language here).

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The budget has failed to take advantage of a critical juncture

The government has, once again, not been able to enact structural change when afforded an opportunity by the extraordinary circumstances.

The federal government’s budget for the fiscal year 2020-21, presented by Finance Minister Yubaraj Khatiwada, prioritises short-term measures to respond to health, economic and employment crises caused by the novel coronavirus disease, Covid-19. The unique nature of concurrent health, demand and supply shocks due to the pandemic and the consequent lockdowns to contain its spread, meant that the government had no option but to increase spending in healthcare and social protection, even if it increased fiscal deficit sharply.

That said, this critical juncture is also an opportune moment to not only craft a short-term response to deal with the effect of Covid-19 on lives, livelihoods and the economy, but also to overhaul the existing inefficient systems and rectify long-running economic ills that are holding back inclusive economic growth and prosperity. Unfortunately, the budget loses sight of this opportunity at this critical juncture. Similarly, the budget is not clear about the medium-term strategy for economic recovery, growth-enhancing revenue policy and a consolidation plan to narrow the widening fiscal deficit.

The federal government’s total budget for the next fiscal year is Rs1.47 trillion, which is lower than the Rs1.53 trillion budget estimate for 2019-20, but 37.4 percent higher than the revised estimate. It comprises Rs948.9 billion as recurrent expenditures (64.4 percent of the total outlay), Rs352.9 billion as capital expenditures, and Rs172.8 billion as a financial provision. Note that fiscal transfers and conditional grants to subnational governments are also included in recurrent spending of the federal government. So, the capital spending allocation of all tiers of government is a bit higher than the one indicated in the centre’s budget.

Total central receipts (revenue and foreign grants) are expected to cover 65 percent of the budget. The government is planning to cover the budget gap by borrowing internally and externally. The fiscal deficit is expected to increase to about 8 percent of the gross domestic product.

Underwhelming response

The budget also includes a Covid-19 economic recovery package, but it is not really an additional fiscal package that is going to prop up subdued demand and business activities. Nor is it likely to restore the severely disrupted supply networks and output. Most of the already announced incentives and initiatives are subsumed in the budget, including a Rs100 billion refinancing facility by the central bank. The government is planning to set up a separate Rs50 billion fund to provide subsidised loans, at 5 percent interest, to sectors badly affected by the Covid-19. The government has not committed a full amount to the fund as it expects contributions from public enterprises and development partners. The operationalisation and effectiveness of this fund is uncertain, as there is no standard operating procedure that outlines eligibility and bureaucratic prerequisites.

Furthermore, the government argues that there is about NRs 60 billion worth of interest and utility subsidies, and tax concessions. There is also a plan to employ 700,000 people through direct employment, and provide training related to skills upgradation and technical education.

Besides these mundane, halfhearted measures to deal with the immediate effect of the crisis, the government had an opportunity to overhaul long-running economic ills and rigid systems that have fostered extractive economic and political institutions. It is easier to do when an economy reaches a critical juncture, which according to economists Daron Acemoglu and James Robinson are ‘major events that disrupt the existing political and economic balance’. In their book Why Nations Fail, they argue that at critical junctures a country can transform its extractive political and economic institutions into inclusive ones, resulting in meaningful socioeconomic changes and acceleration on the path to prosperity. Nepal reached this kind of critical juncture in the 1950s (end of Rana rule), 1990s (restoration of democracy), 2006 (end of Maoist insurgency and monarchy) and 2015 (catastrophic earthquakes). Unfortunately, we have missed opportunities to reorient economic and political institutions during these times for greater good. Instead, we have let the prevailing political-business nexus to capture land, labour, capital and product markets.

At the critical juncture created by the pandemic, we are once again missing a chance to roll out transformative reforms to create inclusive political and economic institutions. These include agricultural transformation; consolidation of social protection schemes with a unified digital registry of all beneficiaries (including the Prime Minister Employment Programme and cash allowances); rationalisation of ballooning recurrent spending; freeing markets from the clutches of cartels; changing revenue policy to support growth and innovation; nixing politically-oriented distributive spending; harmonising planning and financial reporting standards across all tiers of governments; prioritising projects strictly based on implementation readiness; sound governance framework to curb misappropriation of public funds, and, lastly, changes to legal, policy and institutional frameworks to increase private sector participation.

Most of these are transformative in nature and growth-enhancing structural changes that are relatively easy to roll out during critical junctures. They set in motion a process of creative destruction and creative creation processes, which are vital for enhancing private investment, innovation, and public services delivery. They also boost the entrepreneurial spirit and incentivise saving, investment and innovation.

Budget takeaways

Besides this missed opportunity, there are three particular macroeconomic takeaways. First, there is no medium-term recovery plan for a sustained recovery. The focus is on immediate-term only with increased funding for the healthcare sector and state-led employment creation. Propping up demand (through additional cash transfers, subsidy and income tax concessions) and maintaining supplies of essential goods and services (including through graded easing of the lockdown), even during the immediate-term, are pretty much ignored. A medium-term recovery strategy could at least include assistance for preventing layoffs in both organised and unorganised sectors, and saving struggling micro, small and medium enterprises from collapsing. The private sector has been largely left to fend the crisis for themselves.

Second, with declining revenue and increasing spending needs, the fiscal deficit is expected to be around 8 percent of GDP. Besides some discretionary spending—such as insurance cover for frontline staff and social security fund payments—other increased recurrent spending may not be easy to rollback. It will keep recurrent spending at a high level even after the crisis subsides. With consistently lower than expected revenue mobilisation since 2017-18 and an increase in recurrent spending, narrowing down the widening fiscal deficit will require a credible medium-term fiscal consolidation plan. A drastic increase in domestic borrowing to fund the deficit will likely squeeze liquidity and raise interest rates, thus crowding-out private investment.

Third, revenue and foreign aid budget estimates and growth targets are too ambitious. For instance, given the past trend, tinkering import duties alone will not be helpful to achieve revenue mobilisation target of 22 percent. Likewise, foreign grant and loans targets are 89 percent and 147 percent respectively—higher than the revised estimate for 2019-20. Note that even after the 2015 earthquakes, the government was able to mobilise less than 50 percent of foreign grants and loans estimated during the budget speech. Similarly, even with a favourable base effect, a GDP growth target of 7 percent is unrealistic, particularly given the prospect of a continued slowdown in agriculture (thanks to a shortage of chemical fertilisers and workers), subdued industrial activities (especially manufacturing and construction), and uncertainty over the recovery of services—especially in travel and tourism, wholesale and retail trade, transportation, real estate, and education.

महाव्याधिमा रूपान्तरणको अवसर गुमाएको बजेट

यो विचार गते जेठ १९, २०७७ नयाँ पत्रिका दैनिकमा प्रकाशीत भएको थियो।  Related blog here. 

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महाव्याधिमा रूपान्तरणको अवसर गुमाएको बजेट

यो महत्वपूर्ण मोडमा हामी फेरि एकपटक समावेशी राजनीतिक एवं आर्थिक संस्थाहरू जन्माउने रूपान्तरणकारी सुधारको अवसरबाट चुकेका छौँ

आर्थिक वर्ष ०७७-७८ को बजेटमा कोभिड-१९ महाव्याधिले निम्त्याएको स्वास्थ्य, आर्थिक एवं रोजगारीको संकटसँग जुझ्ने अल्पकालीन उपायलाई प्राथमिकता दिइएको छ । यद्यपि, बजेट आर्थिक वृद्धि उकास्ने राजस्व नीति निर्माण गर्न, आर्थिक पुनर्बहालीको मध्यकालीन रणनीति बनाउन र फराकिँदै गएको वित्तीय घाटालाई कम गर्ने मध्यम अवधिको ठोस वित्तीय योजना ल्याउनमा भने चुकेको छ।

०७७-७८ को बजेट

संघीय सरकारको बजेट १४ खर्ब ७४ अर्ब ६० करोड रुपैयाँको छ, जुन ०७६-७७ को अनुमानित बजेट १५ खर्ब ३२ अर्ब ९० करोड रुपैयाँभन्दा कम तर संशोधित बजेटभन्दा चाहिँ ३७ दशमलव ४ प्रतिशत उच्च हो । बजेटमा चालू खर्चतर्फ नौ खर्ब ४८ अर्ब ९० करोड (कुल विनियोजनको ६४ दशमलव ४ प्रतिशत), पुँजीगतमा तीन खर्ब ५२ अर्ब ९० करोड (२३ दशमलव ९ प्रतिशत) र वित्तीय व्यवस्थापनमा एक खर्ब ७२ अर्ब ८० करोड रुपैयाँ विनियोजन गरिएको छ।

कुल गार्हस्थ्य उत्पादन (जिडिपी)को ३५ दशमलव ९ प्रतिशतको यो बजेटमा पुँजीगततर्फ केवल ८ दशमलव ६ प्रतिशत छुट्याइएको छ । सरकारको कुल आय (राजस्व तथा वैदेशिक अनुदान)ले यो बजेटको ६५ प्रतिशत धान्ने अपेक्षा छ । नपुग स्रोत आन्तरिक एवं बाह्य ऋण उठाएर पूरा गर्ने लक्ष्य लिइएको छ । वित्तीय घाटा जिडिपीको करिब लगभग ८ प्रतिशतले बढ्ने अनुमान छ ।

०७६-७७ को संशोधित अनुमानको तुलनामा यो बजेट ३५ दशमलव २ प्रतिशत र पुँजीगत खर्चका हिसाबले ४७ दशमलव ६ प्रतिशत ठूलो छ । यसैगरी, राजस्व वृद्धिमा २२ प्रतिशतको लक्ष्य राखिएको छ । विनियोजित चालू बजेटको ५२ दशमलव ७ प्रतिशतजति प्रदेश र स्थानीय सरकारका लागि वित्तीय हस्तान्तरण (वित्तीय समानीकरण, ससर्त, पूरक एवं विशेष अनुदान) र निःसर्त अनुदानको रूपमा दिएको छ । यी अनुदान तल्ला तहको पुँजीगत एवंं चालू खर्च दुवैका लागि हुन् । यसैगरी, विनियोजित पुँजीगत बजेटको पनि लगभग ६४ प्रतिशत भौतिक निर्माणतर्फ, १८ दशमलव ७ प्रतिशत भवन निर्माण एवं खरिदमा र ५ दशमलव २ प्रतिशत भूमि अधिग्रहणका लागि छुट्याइएको छ । 

अवसरको क्षण 

कोभिड–१९ को प्रभाव एकदमै मौलिक छ । सरकारसँग स्वास्थ्य र सामाजिक सुरक्षा खर्च बढाउनुको विकल्प थिएन, भलै वित्तीय घाटा अकासियोस् । महामारी सिर्जित अवरोधले आर्थिक गतिविधि, जीवनशैली र जनजीविकामा नै गम्भीर प्रभाव पारिरहेको छ । यो यति व्यापक बनेको छ कि वास्तविक जिडिपी वृद्धि केन्द्रीय तथ्यांक विभागद्वारा प्रक्षेपित २ दशमलव ३ प्रतिशतभन्दा पनि तल झर्ने प्रक्षेपण छ । ०७७-७८ को बजेट महामारीको प्रभावप्रति प्रतिक्रिया जनाउने आर्थिक नीति कुद्ने एवं लामो समयदेखि थाती रहेको आर्थिक सुधारलाई अनुमोदन गर्ने स्वर्णिम अवसर थियो ।

कृषिको रूपान्तरण गर्ने, सबै लाभग्राही (प्रधानमन्त्री रोजगार कार्यक्रमलगायत)लाई एकीकृत डिजिटल रजिस्ट्रीमा ल्याएर सामाजिक सुरक्षाका योजनालाई सुदृढ बनाउने, बजारलाई कार्टेल र सिन्डिकेटको चंगुलबाट मुक्त बनाउने, अकासिँदो चालू खर्च औचित्यपूर्ण बनाउने, नवप्रवर्तन एवं आर्थिक वृद्धिलाई सघाउने गरी राजस्व नीतिमा परिवर्तन गर्ने, राजनीतिक अभीष्टले जथाभावी राज्यकोष बाँड्ने वितरणमुखी योजनामा रोक लगाउने, सबै तहका सरकारको वित्तीय रिपोर्टिङको मापदण्डमा एकरूपता ल्याउने, परियोजनाहरूलाई कार्यान्वयन तत्परताका आधारमा प्राथमिकीकरण गर्ने, सरकारी कोषको दुरुपयोग रोक्न गतिलो सुशासनको संरचना तयार गर्ने र निजी क्षेत्रको सहभागिता बढाउने गरी कानुन, अनुगमन, नीतिगत एवं संस्थागत संरचनामा परिवर्तन गर्ने सुअवसर थियो । यीमध्ये अधिकांश रूपान्तरणकारी छन् र संरचनात्मक परिवर्तन गरी वृद्धि उकास्ने खालका छन् ।

महामारीले सिर्जना गरेको संगीन घडीमा यस्ता सुधार तुलनात्मक रूपले सजिलो पनि हुन्छ । यसबाट सिर्जनात्मक विनाश र रचनात्मक सिर्जना तय हुनेछ, जुन निजी लगानी, नवप्रवर्तन र सार्वजनिक सेवा प्रवाहको अभिवृद्धिका लागि महत्वपूर्ण छन् । यिनले उद्यमशील भावनाका साथै बचत लगानी र नवप्रवर्तनलाई पनि प्रोत्साहित गराउँछन् ।

अमेरिकी अर्थशास्त्री डारोन एसिमोग्लु र जेम्स रोबिन्सनले आफ्नो पुस्तक ‘ह्वाई नेसन्स फेल’मा यसखाले ‘ठूला घटनाक्रमले मौजुदा राजनीतिक एवं आर्थिक सन्तुलनलाई खलबल्याउँछ’ भनेका छन् । यस्तो विशेष परिस्थितिमा राष्ट्रले समयमै लिने बाटोले सो मुलुकको समृद्धितर्फको मार्ग निर्धारण गर्छ । यस घडी हाम्रो सरकारसँग आर्थिक वृद्धि, रोजगारी, आय एवं जीवनस्तर उकास्ने दीर्घकालीन नीति बनाउन आवश्यक सहयोग र सहजता दुवै छ । हाम्रा निकम्मा राजनीतिक एवं आर्थिक संस्थाहरूलाई समावेशी वृद्धि अभिवृद्धि गर्ने व्यवस्थामा परिवर्तन गर्नु अपरिहार्य छ भन्ने नै हो ।

नेपाल यस्तो महत्वपूर्ण मोडमा सन् १९५० (राणाशाहीको अन्त्यसँगै)मा, सन् १९९० (प्रजातन्त्रको पुनर्बहालीसँगै) र सन् २००६ मा माओवादी द्वन्द्वको अन्त्य र  सन् २०१५ (भूकम्पपछि)मा पुगेको थियो । दुर्भाग्यवश, हामीले आर्थिक एवं राजनीतिक संस्थाहरूलाई सबैंको सर्वाेत्तम हितका खातिर परिवर्तन गर्ने सबै अवसर गुमायौँ । बरु, राजनीति र व्यवसायको अपवित्र साँठगाँठलाई जमिन, श्रम, पुँजी र बजारमाथि कब्जा जमाउन दियौँ । भाइरस सिर्जित यो महत्वपूर्ण मोडमा हामी फेरि एकपटक समावेशी राजनीतिक एवं आर्थिक संस्थाहरू जन्माउने रूपान्तरणकारी सुधारको अवसरबाट चुकेका छौँ ।

आर्थिक प्याकेज

कोभिड–१९ को आर्थिक पुनर्बहालीको प्याकेज वास्तवमा कुनै अतिरिक्त वित्तीय प्याकेज होेइन । यो प्याकेजमा पहिले नै घोषणा गरिएका राहत एवं पहलकदमीलाई बजेटमा समावेश गरिएको हो । जसमा राष्ट्र बैंकमार्फतको एक खर्बको पुनर्कर्जा सुविधा (सुरुमा यो ६० अर्बको थियो, जसलाई सरकारले एक खर्ब रुपैयाँ पु-याउने घोषणा गरेको छ) र महाव्याधि प्रभावित क्षेत्रलाई सहुलियतपूर्ण ऋण उपलब्ध गराउने भनिएको ५० अर्ब रुपैयाँको छुट्टै कोष नै बजेटमा आएको हो । पुनर्कर्जाको यो सुविधा एक वर्षका लागि हो, तर त्यसलाई अर्काे वर्षका लागि पनि विस्तार गर्न सकिनेछ ।

कामदारको तलब र व्यवसायलाई निरन्तरता दिन सञ्चालन पुँजीको अभावमा परेका व्यवसायलाई यो ५० अर्बको छुट्टै कोषबाट पाँच प्रतिशत ब्याजमा ऋण उपलब्ध गराइनेछ । सरकारले यो कोषमा सार्वजनिक क्षेत्र र विकास साझेदारहरूबाट पनि योगदानको अपेक्षा गरेको छ । यसको सञ्चालनको विस्तृत कार्यविधि आउनै बाँकी छ । यसैले हाललाई यो पुनर्कर्जाको सुविधाको प्रभावकारिता अन्योलग्रस्त छ । 

पुनर्कर्जा र नयाँ राहत कोषबाहेक ब्याज एवं युटिलिटी अनुदान र कर छुटमार्फत ६० अर्ब रुपैयाँको सहुलियत दिएकोे तर्क गरिएको छ । यसैगरी, सात लाख नागरिकलाई रोजगारी दिने योजनाको कुरा पनि छ । जसअन्तर्गत पुग–नपुग ३० प्रतिशत अर्थात् दुई लाखजतिले प्रधानमन्त्री रोजगार कार्यक्रममार्फत प्रत्यक्ष रोजगारी पाउनेछन् । बाँकीलाई सीप अभिवृद्धि तथा प्राविधिक तालिममार्फत रोजगार बनाउने योजना छ ।

लकडाउन अवधिको संगठित क्षेत्रका कामदार एवं रोजगारदाता दुवैले अनिवार्य समाजिक सुरक्षा कोषमा जम्मा गर्नुपर्ने रकम (आधारभूत तलबको ३१ प्रतिशत) सरकारले तिरिदिने भएको छ । बैंक ग्यारेन्टी र करारको अवधि पनि लकडाउन अवधिभरका लागि विस्तार गरिदिने भएको छ । फर्महरूको नवीकरण दस्तुरमा छुट दिइएको छ । सञ्चालन पुँजीका लागि सहुलियतपूर्ण ऋणको व्यवस्था गरेको छ भने स्वास्थ्यकर्मीको बिमालाई विस्तार गरिएको छ ।

तर, व्यवसायीले लिन चाहेनन् भने विशेष पुनर्कर्जा सुविधा र उद्धार कोष प्रभावकारी हुनेछैनन् । बैंकहरूले पनि आफ्ना विश्वसनीय ग्राहकलाई मात्रै थप कर्जा दिन खोज्नेछन् । संकटग्रस्त लघु, साना एवं मझौला उद्यमलाई पुनर्कर्जा दिन इच्छुक नहुन सक्छन् । यसैले पुनर्कर्जाको अवधि र ब्याजदर सामान्य पुनर्कर्जाको दरभन्दा कम नहुँदासम्म राष्ट्र बैंकबाट प्राप्त हुने पुनर्कर्जाको उपयोग थोरैले गर्ने सम्भावना रहन्छ । यसैगरी, अधिकांश लघु एवं मझौला उद्यम चुलिँदो ऋणको किस्ता र व्यवसाय सञ्चालनको अनिश्चिततासँग जुझिरहेका छन् ।

यस्तोमा कामदारलाई तलब दिन नयाँ ऋण लिन सायदै कुनै व्यवसायी इच्छुक हुन सक्लान् । भविष्यमा व्यवसायले अपेक्षित गति लिएन भने के गर्ने भन्ने डरले थप ऋण लिन रोक्नेछ । यसखालका व्यवसायलाई आफ्नो व्यवसाय टिकाउन अतिरिक्त सञ्चालन पुँजीका लागि अझै सहुलियतमा ऋण उपलब्ध गराउनुपर्ने थियो । 

बजेटमा लघु तथा साना उद्योगका लागि आयकरमा २५ देखि ७५ प्रतिशतसम्म छुटको व्यवस्था छ । तर, अधिकांश उद्यम अनौपचारिक क्षेत्रमा सञ्चालित छन् भन्ने कुरालाई हेक्का राखिएन । यसबाहेक यस्तो छुट पहिलेदेखि नै छ । अलिक धेरै समयका लागि विस्तार मात्रै गरिएको हो । यसैले यो उपाय पनि सहयोगीसिद्ध नहुन सक्छ । किनकि, यस्ता छुटको उपयोगिता अघिबाटै न्यून छ । असंगठित क्षेत्रका फर्म र कामदारलाई सम्बोधन गर्न समयानुकूल अपरम्परागत नीति उपाय चाहिन्छ । छुट छोटो अवधि होइन, मध्यम अवधिसम्म दिनुपर्छ । किनकि, तिनको आयमा छिटै सुधार हुनेवाला छैन, बरु सम्भव छ भने आयकर सधै“का लागि घटाइदिनुपर्छ ।

बृहत् अर्थशास्त्रीय परिदृश्य

पहिलो कुरा, स्वास्थ्य क्षेत्रको बजेट र रोजगारीका अस्थायी योजना केन्द्रमा राखेर केवल तत्कालको आवश्यकतामाथि ध्यान केन्द्रित भएर यो बजेट आएको छ । नगद प्रवाह, अनुदान र कर छुटमार्फत माग बढाउनु र अत्यावश्यक वस्तु तथा सेवाको आपूर्ति सहज बनाइराख्नु पनि अल्पकालीन चुनौती हुन् । दिगो पुनर्बहाली मध्यम अवधिको चुनौती हो ।

यसका लागि संगठित एवं असंगठित (ज्यालामा अनुदान वा कामदारलाई काममा रहन प्रोत्साहन दिएर) दुवै क्षेत्रका कामदारलाई बेतलबी बिदा हुनबाट जोगाउनुपर्छ । र, वित्तीय संकटसँग जुझिरहेका साना तथा मझौला उद्यमलाई न्यून दरमा सहुलियतपूर्ण कर्जा, लामो अवधिको पुनर्कर्जा योजना, सञ्चालन पुँजीको र ऋण ग्यारेन्टीका योजना सिर्जना गरेर धराशायी हुनबाट बचाउनुपर्छ ।

संकटमा निजी क्षेत्रलाई सरकारले उसकै बुतामा छोडिदिएको छ । धेरै व्यवसायसँग सञ्चालन बैंक खाता छैन, केही व्यवसाय बैंकका नजरमा पहिलेबाटै ऋणयोग्य छैनन् । यसैले पुनर्कर्जा र सहुलियतपूर्ण कर्जा योजनाले अपेक्षित गति लिन सक्दैन । प्रत्यक्ष वित्तीय प्रोत्साहन अवश्यक थियो, जुन बारेमा बजेट अस्पष्ट छ । राजस्व नीतिले पनि बाटो बिराएको छ, सन्दिग्ध तरिकाले विद्युतीय सवारीसाधन, मल र पेट्रोलियम पदार्थको कर बढेको छ ।

दोस्रो कुरा, महाव्याधिले सरकारको ०७६-७७ को बजेट कार्यान्वयन गर्ने सामर्थ्यमा गम्भीर प्रभाव पारेको छ । यो आर्थिक वर्षमा सरकारले कुल विनियोजित बजेटको केवल ७० प्रतिशत मात्रै उपयोग गर्न सकिने अनुमान छ । चालू, पुँजीगत एवं वित्तीय व्यवस्थापनतर्फ क्रमशः ७३ दशमलव ३ प्रतिशत, ५८ दशमलव ६ प्रतिशत र ७८ दशमलव ९ प्रतिशत खर्च हुने सरकारी अनुमान छ । राजस्व परिचालन पनि प्रभावित भएको छ । सरकारको राजस्व आम्दानी ०७६-७७ को अनुमानित बजेटको ७३ प्रतिशत मात्रै हुने आकलन छ । वैदेशिक अनुदान पनि केवल ५५ दशमलव २ प्रतिशत मात्रै प्राप्त हुने देखिँदै छ । वैदेशिक ऋण पनि ०७६-७७ को बजेटको अनुमानको केवल ३५ प्रतिशत मात्रै उठ्दै छ ।

तेस्रो, वित्तीय संयम राख्नु पनि छ । बजेटमा केही स्वविवेकीय खर्च पनि समावेश छन्, जस्तो कि अग्रमोर्चामा खटिएका कर्मचारीको बिमा, सामाजिक सुरक्षा कोषको भुक्तानी एवं सीप विकासका तालिम आदि । जुन केही समयका लागि हुन सक्छन् । तर, केही खर्च राजनीतिक विचारधाराका कारण पनि आएका छन्, महाव्याधिपछिसमेत कायम रहन सक्छन् । यसले चालू खर्च उच्च बनाउनेछ । यसैले उच्च खर्च र न्यून राजस्वका कारण वित्तीय घाटा जिडिपीको लगभग ८ प्रतिशत हुने प्रक्षेपण छ । यसकारण, मध्यम अवधिको वास्तविक आर्थिक योजना ल्याउनु जरुरी छ ।

चौथो, राजस्व परिचालन वृद्धिको लक्ष्य ०७६-७७ को संशोधित अनुमानभन्दा लगभग २२ प्रतिशत बढी छ । जुन अलि बढी नै महत्वाकांक्षी भयो । यसका दुइटा कारण छन् : पहिलो, लकडाउनपछि भोलि के हुन्छ भन्ने अनिश्चितताका कारण आर्थिक क्रियाकलाप नराम्ररी प्रभावित हुँदै छन्, दोस्रो, आयात र आन्तरिक व्यवसाय तत्कालै तंग्रिहाल्ने अपेक्षा गर्न सकिन्न । यसबाट राजस्व परिचालन प्रभावित हुनेछ ।

वास्वतमा निजी क्षेत्रका खासगरी पर्यटन क्षेत्रका थुप्रै लघु तथा साना एवं मझौला व्यवसाय धराशायी छन् । ०७६-७७ को संशोधित अनुमानको तुलनामा वैदेशिक अनुदान सहयोग ९० प्रतिशतले वृद्धिको अपेक्षा पनि वस्तुगत छैन । भूकम्पपछिसमेत यति धेरै वैदेशिक अनुदान आएको थिएन । त्यसयता कुनै पनि वर्ष सरकारले जति अनुदान सहयोगको अनुमान गरेको छ, त्यसको आधा पनि प्राप्त गर्न सकेको छैन। 

पाँचौँ, वैदेशिक सहयोगको अपेक्षा पनि अलि बढी नै महत्वाकांक्षी छ । वैदेशिक ऋण तथा अनुदान सहयोग तीन खर्ब ६० अर्ब रुपैयाँजति हुने अपेक्षा छ । आपत्कालीन बजेट सहयोगबाहेक, अन्य अधिकांश ऋण परियोजनाको प्रगतिमा भर पर्छन् । पुँजीगत खर्चको क्षमता न्यून भएका कारण अपेक्षित सबै ऋण प्राप्त गर्नु चुनौतीपूर्ण हुनेछ । अहिलेसम्म सरकारले बजेटमा उल्लेख गरिएको ४० प्रतिशत वैदेशिक ऋण मात्रै प्राप्त गर्न सकेको छ । 

छैटौँ, आन्तरिक ऋणमा धेरै ठूलो वृद्धिले तरलता अभाव सिर्जना गर्नेछ । घट्दो विप्रेषण, न्यून पुँजीगत खर्च, उच्च ऋण वृद्धि आदिबाट तरलतामा दबाब छ । साथै, धेरैजसो साना एवं मझौला व्यवसाय नगद प्रवाहको समस्यामा पुगेका कारण तिनले समयमै कर्जाको साँवा–ब्याज भुक्तानी गर्न नसक्दा पनि तरलताको अभाव छ । यसले ब्याजदरलाई उकालो लगाएर निजी लगानी थप निरुत्साहित गर्न सक्छ । यो वर्ष खुद आन्तरिक ऋण सापटी जिडिपीको लगभग ६ प्रतिशत हुने अनुमान छ, जुन ०७२-७३ भन्दा पहिले जिडिपीको शून्य दशमलव २ प्रतिशत मात्रै थियो ।

सातौँ, जिडिपीमा ७ प्रतिशतको वृद्धि लक्ष्यमा थप स्पष्टीकरण आवश्यक छ । लकडाउन अवधिको विस्तार, महाव्याधिको उत्कर्षको अनिश्चितता, माग एवं आपूर्तिको गिरावट आदिका कारण छिटै ‘भी सेप’को पुनर्बहाली अपेक्षा गर्न सकिँदैन । तथ्यांक विभागले जेठबाट आर्थिक गतिविधि बढ्दै जाने अनुमानका आधारमा गरेको ०७६-७७ मा २ दशमलव ३ प्रतिशतको वृद्धि हुने प्रक्षेपणभन्दा पनि वृद्धि खुम्चिने देखिँदै छ । श्रम, पुँजी र आपूर्तिका शृंखलामा पुगेको अवरोधले वृद्धिमा निरन्तर प्रभाव पारिरहनेछ ।

मौसम अनुकूलै रहे पनि श्रम र मलखादको अभावमा कृषि उत्पादन प्रभावित हुनेछ । विद्युत्, ग्यास र जलविद्युत्मा अपेक्षित वृद्धिका बाबजुद औद्योगिक गतिविधि दबाबमै रहनेछन् । भलै, माथिल्लो तामाकोसी र मेलम्ची सम्पन्न भएर थपिऊन् । निर्माणका गतिविधि पनि औसतभन्दा तलै रहनेछन् । खानी एवं उत्खननका गतिविधिमा पनि यस्तै हुनेछ । केही उत्पादनमूलक कम्पनी उठ्नै नसक्ने अवस्थामा पुग्न सक्छन् ।

उत्पादन थाल्न सक्षम कम्पनीले पनि पूर्ण क्षमताको उपयोग गर्न पाउनेछैनन् र उल्लेख्य कमीको साक्षात्कार गर्नेछन् । सेवा क्षेत्रको अवस्था पनि फरक छैन । आयातमा अवरोध कायमै रहने हुनाले थोक तथा खुद्रा व्यापारमा प्रभाव कायमै रहनेछ । नेपालको कृषि एवं उत्पादनमूलक उद्योगको पूर्ण क्षमता प्रदर्शन हुनेछैन । पर्यटन एवं ट्राभल क्षेत्र कहिलेसम्ममा सामान्य अवस्थामा फर्किएला, त्यो अनिश्चित छ । त्यसैगरी, हवाई र शिक्षा क्षेत्र पनि प्रभावित नै रहनेछन् । त्यसैले कुनै पनि क्षेत्रको परिदृश्य उत्साहजनक छैन । यस्तो विषय परिदृश्य नभोगेको ०७६-७७ को वास्तविक जिडिपी वृद्धिसमेत संकुचित हुने देखिएको सन्दर्भमा ०७७-७८ को यो ७ प्रतिशत वृद्धिको लक्ष्य ज्यादै महत्वाकांक्षी हो । 

Quick thoughts on Nepal’s FY2021 budget

Here are my quick thoughts on FY2021 budget

On 28 May 2020, Finance Minister Dr. Yuba Raj Khatiwada presented FY2021 budget (mid-July 2020 to mid-July 2021) to a joint session of the federal parliament. This is the third budget of the government that commands two-thirds majority in the parliament. The budget is designed to focus on scaling up health sector spending to respond to coronavirus disease, COVID-19, and its impact on the economy and livelihoods. 

The economic disruptions caused by COVID-19 pandemic have severely affected economic activities, lives and livelihoods. This disruption is widespread. The budget for next fiscal is an opportune moment to craft an economic policy to not only respond to COVID-19’s effect, but also to rectify the long pending economic issues such as agricultural transformation, consolidation of social protection schemes (including PM employment program), rationalization of recurrent spending (especially the wasteful ones), nixing some of the politically oriented distributive spending schemes, prioritization of projects, and changes to legal, regulatory, policy and institutional frameworks to increase private sector participation. Most of these are transformative in nature and are growth-enhancing structural changes that are relatively easy to rollout during critical junctures like the one created by COVID-19.

At the outset, FY2021 budget looks like it is trying to strike a balance between responding to the economic, lives, and livelihoods disruptions caused by the COVID-19 pandemic, and continuing with the traditional party-backed signature programs and projects. Given the uncertainty and circumstances under which FY2021 budget had to be unveiled, the finance minister has done a decent job. The prioritization on healthcare spending and some support to businesses is the right one for the coming fiscal, but estimates of revenue or receipts are a bit unrealistic. That said, we should not be too fussy about a surge in fiscal deficit at this stage, but the government should at least have a credible medium-term fiscal consolidation plan. 

However, the budget has also missed one thing that is really needed at this critical juncture: a bold fiscal move and an economic package to reorient the economy towards high value-added production and higher sectoral productivity. This is the time for taking bold steps to structurally transform labor and capital markets, and institutions. This opportunities during such critical juncture do not come often. One such opportunity is to create a unified digital registry of all social protection beneficiaries so that social transfers reach the targeted beneficiaries and leakages are minimized. 

The budget is notable in five ways:

First, there is COVID-19 economic recovery package, but it is not really an extra fiscal package. Most of the already announced incentives and initiatives were subsumed in the budget. It includes NRs 100 billion refinancing facility from the central bank (initially, it was NRs 60 billion refinancing facility, which the government announced to increase to NRs 100 billion), and a separate fund of NRs50 billion to provide subsidized loans to sectors affected by COVID-19. The refinancing facility will be for one year but it can be extended by another year. The separate fund will provide loans at 5% interest to businesses that are facing difficulties in retaining workers and to secure working capital to continue business. In addition to its own contribution, the government is hoping contributions from public enterprises and development partners to the NRs 50 billion fund. The effectiveness of this facility is uncertain at this moment and a detailed standard operating procedure for its roll out is awaited. Besides these refinancing facility and new relief funds, the government argues that there is about NRs 60 billion worth of interest subsidy, utility subsidy, and tax concession. There is a plan to provide employment to 700,000 people too.

Second, the government has committed to pay mandatory contributions to SSF by both workers and employees (total 21%) in organized sector for the duration of lockdown. It has also extended contract and bank guarantees for the period of the lockdown, provided tax concessions on renewal of firms, earmarked funds for concessional working capital loans, and provided insurance cover to healthcare workers. It has also increase incentives for frontline security and healthcare workers. These were continuation of the previous measures. Similarly, social security related cash allowances have been continued. 

Third, there is an increase in allocation for healthcare sector and employment generation. But there is also a decrease in allocation for infrastructure, probably because the government had to save money for healthcare sector and employment generation. 

Fourth, the government has given continuity to constituency development fund despite the call from the opposition to cancel it altogether and use the funds for the COVID-19 response. Now, each parliamentarian is earmarked NRs 40 million, down from NRs 60 million previously. Last year, the finance minister increased allocation for parliamentarians to NRs 60 million from NRs 40 million. Due the lack of accountability and sound oversight, there are reports (even in OAG’s reports) of misappropriation of funds.  

Fifth, the finance minister has tried to maintain fiscal discipline despite the increased expenditure needs and decreased revenue mobilization. The size of the budget has been reduced compare to FY2020 budget estimate, but increased by 37.4% compared to FY2020 revised estimate. Continued lockdown and lack of pick up in economic activities will hit revenue mobilization and further jeopardize fiscal discipline. A large increase in domestic borrowing will create liquidity shortages (already squeezed by deceleration of remittances, lower capital spending, higher credit growth, and now a potentially large number of MSMEs unable to service interest and principal payments on time due to cash flow problems). This might drive interest rates up and crowd out private investment. Since a spike in fiscal deficit was expected in FY2021 given the healthcare and social security related expenditure needs and declining revenue, the government should have also outlined a fiscal consolidation plan for the medium term. A pick up in economic activities will narrow down fiscal deficit if expenditure (especially recurrent) does not rise commensurately in the coming years. 

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

Budget outlay

The total expenditure outlay for FY2021 is NRs 1474.6 billion, which is lower than NRs 1532.9 billion budget estimate for FY2020 but 37.4% higher than the revised estimate for FY2020. The government expects to spend 91.8% of NRs 1215.1 billion allocated in FY2019 (NRs 1073.4 billion). However, given the expenditure trend so far, it is highly unlikely. Due to the lockdown and disruption to economic activities in the last two quarters of FY2020, the government expects to spend 70% of the earmarked budget for FY2020. 

FY2021 budget outlay comprises of NRs 948.9 billion as recurrent expenditures (64.4% of the total outlay), NRs352.9 billion as capital expenditures (23.9%), and NRs 172.8 billion as financial provision. 

As a share of GDP, total budget amounts to 35.9%, including just 8.6% for capital spending. As per FY2020 revised estimates, the government now expects to spend just 73.3% of planned recurrent budget and 58.6% of planned capital budget. Compared to the revised estimates, recurrent budget is up by 35.2% and capital spending by a whopping 47.6%. Without a viable implementation plan and the effect of lockdowns on labor mobility and availability of supplies, it is most likely to be underspent as before. 

FY2021 budget overview
GDP growth target (%)	7
Inflation target (%)
Budget allocation for FY2021	Rs billion	%
Projected total expenditure	1474.6
Recurrent	948.9	64.4
Capital	352.9	23.9
Financial provision	172.8	11.7
Projected total receipts	950.1
Revenue	889.6	93.6
Foreign grants	60.5	6.4
Projected budget surplus (+)/deficit (-)	-524.5
Projected deficit financing	524.5
Foreign loans	299.5	57.1
Domestic borrowing	225.0	42.9

Revenue

A total revenue target of NRs 889.6 billion (21.7% of GDP) has been set for FY2021 (or NRs 1011.8 billion if revenue sharing with subnational governments is included—24.7% of GDP). Foreign grants are expected to be NRs 60.5 billion (1.5% of GDP). Total central receipts (total revenue plus foreign grants less sharing of revenue with subnational governments) turns out to be NRs 950.1 billion (23.2% of GDP). The central government shares, 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 FY2020 is 27.6% of GDP. 

Compared to the revised estimate, revenue growth target for FY2021 is about 22%, which is ambitious in the first place due to the expected decline in nominal GDP. Tax buoyancy is less than one. The government has been unable to meet revenue target since FY2018.

Given that the GDP growth target itself is 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 plans to 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 22.3% of GDP in FY2021, down from 26.8% of GDP in FY2020. Non-tax revenue is projected to be 2.4% of GDP.

Deficit financing

Considering center’s expenditure and its share of revenue in total revenue mobilization, budget deficit turns out to be NRs 524.5 billion, which is to be financed by foreign loans equivalent to NRs 299.5 billion and domestic borrowing of NRs 225 billion. So, government’s revenue is able to fund only 60% of its projected expenditure in FY2021. The government expects foreign aid (grants and loans) to cover about a quarter of its expenditure needs. Domestic borrowing will cover 15% of its financing needs. 

This is going to exacerbate liquidity crunch in the financial market and raise interest rates. The government had a plan to raise NRs 195 billion in FY2020 and is hoping to raise almost 99% of it by mid-July 2020. 

Compared to the revised estimate for FY2020, the government is planning to increase net foreign borrowing by 88.7% to NRs 179.7 billion (4.4% of GDP) and net domestic borrowing by 77.4% to NRs 276.4 billion (6.7% 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 8% of GDP. Fiscal deficit is the difference between revenue including grants and expenditure including net lending. Primary deficit is projected to about 4.8% of GDP.

Where is recurrent budget going?

Almost 52.7% of planned recurrent budget of NRs 948.9 billion is going to subnational governments in the form of fiscal transfer (fiscal equalization, conditional, complementary and special grants) and unconditional grants. 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 14.6% of total recurrent budget. The government has earmarked NRs188.7 billion (4.6% of GDP) for social security spending and NRs74.4 billion for use of goods and services, which also includes some of the pet projects of politicians and government. 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. 

Compared to the revised estimate for FY2020, allocation for compensation of employees has decreased. It shows that the government is expecting tighter revenue conditions, forcing it to cut back on some recurrent spending. The government has already announced cutbacks on allowances for all but front line security and healthcare sector staff.  

The biggest increase within recurrent budget is for miscellaneous expenditure, followed by subsidies and social security. Interest payments are also increasing. Given the high fiscal deficit and accumulation of outstanding public debt due to the 2015 earthquake and fiscal profligacy during elections time, interest payments have been rising fast. Interest payments have more than tripled since FY2015.

Where is capital budget going?

Almost 64% of the planned capital budget of NRs 352.9 billion is going for civil works, 18.7% for constructing or purchasing buildings, and 5.2% for land acquisition. Compared to the FY2020 revised estimate, capital spending has been increased by 47.6%. Allocation for vehicle purchase within capital spending has decreased by 34.6%. In fact, spending on vehicle purchase by central government has been decreasing since FY2018 (this does not mean subnational governments have also decreased vehicles purchase under their capital budget). 

Major takeaways from FY2021 budget

First, COVID-19 has severely affected government’s finances in FY2020. The government is expected to utilize just 70% of total budget allocated for FY2020. For recurrent, capital and financial provision, it is 73.3%, 58.6% and 78.9%, respectively. Revenue mobilization too has suffered. Total central government receipts are expected to be 73% of budget estimate for FY2020. The lowest is for foreign grants, which is expected to be just 55.2% of the one expected in FY2020 budget. Similarly, foreign loans are expected to be just 35% of the estimate in FY2020 budget. 

Second, the focus is on immediate-term only with surge in healthcare sector budget and temporary employment schemes. The short-term challenge is also to prop up demand (through cash transfers, subsidy and tax concessions) and to maintain supplies of essential goods and services (graded easing of lockdown). The medium-term challenge is a sustained recovery. The latter requires preventing layoffs from both organized and unorganized sectors (wage subsidies and incentives to retain workers), and saving struggling MSMEs from collapsing (by offering subsidized credit at a very low rate, longer term refinancing schemes, infusing working capital or equity, and creating credit guarantee schemes. The budget is unclear on the recovery part, largely leaving private sector to fend the crisis for themselves. Refinancing facility and subsidized loan schemes do not take off as expected because some businesses do not have operational bank accounts and some are already not creditworthy in the eyes of the BFIs. A direct fiscal support is needed, but it is missing. 

The COVID-19 specific refinancing facility and recovery funds are not really going to be effective if businesses do not demand for it. Banks will be willing to extend further credit to creditworthy borrowers only, leaving behind the cash-strapped micro, small and medium enterprises (MSMEs). So, the utilization of refinancing facility from NRB will have few takers unless the refinancing tenure and interest rates are lower than the usual refinancing schemes. Similarly, at a time when many MSMEs are struggling with mounting debt payments and uncertainty over business operations, not many of them will be willing to take new loans to pay salary of employees. What if business never takes off as expected in the future? This will saddle them with more debt. The government should have extended even more generous loans on working capital or additional capital to sustain businesses. There are income tax exemptions for micro and small industries ranging from 25% to 75%, but most of these are operating in the informal sector and hence may not be eligible for these exemptions. Furthermore, these exemptions were already existing and now they are extended by few years. It may not be that helpful given that intake previously was already low. Unorganized sector firms and employees need an unconventional policy measure for the time being and an incentive for them to formalize eventually. Furthermore, the exemptions should be continued up to medium-term (because they cannot recover business and fix balance sheet so quickly) and if possible lower them permanently. 

Third, there is fiscal austerity of sort but not to the full extent expected. We should ideally be comparing FY2021 budget allocation with FY2020 revised estimate, not FY2020 budget estimate. The new allocations are made based on the realized or expected spending in the previous year. Compared to FY2020 revised estimate, total expenditure outlay for FY2021 is 37.4% higher. Higher allocation was warranted given the healthcare sector and social protection related spending needs. But the government could have also cut down other recurrent spending. It could also have re-prioritized spending by not including projects that are not expected to be completed over medium-term and are highly uncertain if they will ever be implemented. The larger slump in expenditure compared to center’s receipts is expected to sharply lower fiscal deficit in FY2020. However, due to higher spending and lower receipts (which itself is ambitious), fiscal deficit is expected to increase to around 8% of GDP in FY2021. Bringing this down in the coming years requires a medium-term fiscal consolidation plan. 

Fourth, revenue mobilization growth target is around 22% compared to FY2020 revised estimate. This is a bit ambitious because of two reasons: (i) there is uncertainty over the period of lockdown and what form it will take going forward, meaning that economic activities will be severely affected, and (ii) imports as well as domestic businesses are not expected to recover soon. Both of these will hit revenue mobilization. In fact, the private sector is bracing for collapse of many MSMEs, especially in the travel and tourism sector. Furthermore, an increase in foreign grants by about 90% compared to FY2020 revised estimate is also not a realistic scenario given that it was not this high (INR 60.5 billion) even during and after the 2015 earthquake. The government has been received less than 50% of the estimated grant receipts in budget since FY2015. This further increases fiscal deficit. 

Fifth, expectation of foreign aid receipts is also a bit ambitious. Foreign loans and grants are expected to be about NRs 360 billion. Apart from emergency budget support, most of the other loans are hinged on progress made in projects. With a low capital budget absorption capacity, it will be challenging to receive all the loans as expected. So far, the government has been able to receive around 40% of the expected foreign loans stipulated in budget speech. These will lead to a severe resource crunch for the government. 

Sixth, a large increase in domestic borrowing (about 77% compared to the revised or budget estimate for FY2002) will create liquidity shortages (already squeezed by deceleration of remittances, lower capital spending, higher credit growth, and now a potentially large number of MSMEs unable to service interest and principal payments on time due to cash flow problems). This might drive interest rates up and crowd out private investment. Net domestic borrowing is expected to increase to about 6% of GDP from a surplus of about 0.2% of GDP before FY2016.

Seventh, the government argues that capital spending is higher than the indicates. Generally, the grants that goes to the subnational governments are included as recurrent spending in the central government’s budget. To avoid confusion, the central government should practice an accounting system where it reports central, provincial and local government’s capital spending separately. Perhaps, FCGO can be the agency to do that. 

Eighth, there has to be more explanation for the 7% GDP growth target. Given the extended period of lockdown, uncertainty over the peak spread of COVID-19, and demand as well as supplies slump, a quick V-shaped recovery is not normal. GDP growth in FY2020 may in fact contract now because the 2.3% growth projection by CBS was done with the expectation that economic activities will pick up pace from mid-May. The disruption to labor, capital and supply chains will continue to affect output. Agricultural output will be affected because of shortage of two key inputs, labor and chemical fertilizers, despite the forecast of a normal monsoon. Industrial activities will also remain subdued despite the expected growth in electricity, gas and water sub-sector (more addition of hydropower including Upper Tamakoshi and completion of Melamchi). Construction activities will remain below average and so will mining and quarrying activities. Some manufacturing establishments may not recover at all and those able to resume production will see drastic drop in capacity utilization. On services sector, wholesale and retail trade activities will remain affected because imports will continue to be disrupted (it accounts for about 50% weight) and agricultural output will affect its transactions (accounts for about 25% weight). There is uncertainty over how quickly travel and tourism sector can recover, if at all. Similarly, air transport remains affected as well as education. So, outlook on all sectors is not encouraging. Even with a favorable base effect (FY2020 real GDP growth will likely contract), FY2021 GDP growth target of 7% is too ambitious. 

Ninth, COVID-19 has created a critical juncture for the economy. This is the time to overhaul laws, regulations and institutions so that pace and pattern of structural transformation is growth-enhancing. The government should give generous tax concessions (much more than neighboring countries) and make it easier for private sector to do business. It would help to generate non-agricultural jobs for the unemployed and returning migrant workers. It should also strengthen government mechanism and establish a technology-driven systems reforms so that public service delivery is efficient and leakages are minimized. A unified digital platform and registry for social protection would be transformation at this stage in terms to plugging fund leakages and to target beneficiaries without much bureaucratic or political hassle. These unfortunately are missing. 

Tenth, government-backed employment should only be a temporary social protection measure to fend off financial difficulties faced by the poor people. The plan to provide jobs to 700,000 people is too ambitious because there is not unified registry of unemployed workers and returning migrant workers. These are at the discretion of local governments and the work they are given are not of durable nature. Fudging of rolls is common and so is siphoning off of funds. The PM employment programme should be clubbed with the larger social protection schemes under a unified digital registry. The government expects 200,000 jobs from PMEP; 50,000 from skill training at subnational level; 75,000 from TVETs; 50,000 in private sector (subsidy for private firms employing state-trained workers); 50,000 from Youth and Small Entrepreneur Self Employment Fund, among others. The effectiveness of these programs are not that good at present.

Finallly, I have assumed FY2021 nominal GDP growth to be the same as in FY2020, although the nominal growth in FY2020 will actually be lower than the one estimated by CBS as the estimates pertain to an unrealistic assumption about the duration of the lockdown and resumption of economic activities. In that case, as a share of GDP, expenditure and revenue will be higher than indicated in this piece (as denominator NGDP value decreases).