Finance Minister needs divine intervention to activate the slackened economy and find requisite resources to finance his ‘rural-centric’ and path-breaking’ budget.
By Chattra Bahadur
An Analysis. UWB received this article in email.
Whereas the rest of the SPA (Seven Party Alliance) are jubilant of the victory over the ‘autocratic’ and ‘repressive’ royal regime, Finance Minister Ram Sharan Mahat must be burning midnight oil trying to figure the way out of the mess that he finds himself in. He had chosen easy way earlier and placed blame on the previous regime for the current economic mess by issuing ‘white paper’ on the condition of the Nepalese economy as soon as he became the finance minister. However, he may soon run out of options to pass the buck and absolve himself of any responsibility.
As reported in the media, Mahat has promised ‘rural-centric’ and ‘path-breaking’ budget for the fiscal year 2063/64. Unfortunately, as a finance minister, he cannot simply engage in weaving and selling pipe-dreams as others in the SPA usually do (perhaps, this is the reason why he has not been in public eye as frequently as others in the SPA are). And, before proposing a budget of aforementioned qualities, he has to resolve burgeoning evil: find resources. And, much to his dismay, his battle against this evil is becoming increasingly difficult.
Realizing the urgent need to find resources to maintain the country’s expenditure (such as development and regular expenditure, interest-costs on domestic and international loans, etc), the Finance Minister accompanied the Prime Minister on the visit to India after the changed political scenario in Nepal. His visit was imperative because internal-revenue generation in Nepal has been very low and there was no other immediate (and visible) way to generate/increase the same. The reasons for low tax collections are:
(a) non-compliance to tax rules and regulations by the majority of businessmen;
(b) collusion among businessmen, bureaucracy and politicians to evade taxes leading to high incidence of corruption; and
(c) impractical/antiquated tax laws coupled with exploitative tax officials.
And internal-revenue generation (by the means of taxes), which was already low, worsened after the Maoists’ insurgency reached its peak in early 2000s. Due to unstable and violent political situation, the economic activities had plummeted: it is obvious that the amount of taxes collected cannot increase when there is overall decline in the level of economic activity.
On his visit to India, Finance Minister Mahat appealed for private capital investments in the Nepalese business sector stating ‘favorable’ investment climate and business ‘opportunity’ after the changed political situation in Nepal. He also negotiated Indian ‘economic package’ deal for Nepal. On his return, in an interview, he expressed his happiness and satisfaction with India’s ‘positive’ response to the changed political environment, ‘deeply’ sympathetic toward her economic needs, ‘well intentioned’ generosity and ‘strong’ level of commitment for Nepal’s overall economic development.
At the same time, foreign donor governments, and bi-lateral and multi-lateral donor agencies also expressed their intention to resume suspended aid-programs and proposed fresh commitments for the overall economic development of Nepal with the change in the political situation in Nepal. And, it is well known that there is heavy reliance on the foreign-aid and grants to balance the budgetary deficit (resulting from inadequate internal-revenue generation but higher expenditure). The resumption of suspended aid-programs and fresh commitments do offer hope; however, Nepal has extremely poor record in utilization of the aid-money (larger portion of aid-money remains unutilized and is usually ‘frozen’). In addition, the aid-programs include statutory conditions to be fulfilled before one can ‘qualify’ to use that amount for the development purposes.
And these conditions usually become restrictive because of Nepal’s opaque procedural norms, lack of transparency, and poor implementation track record. Even when Nepal qualifies to utilize the aid-money, the larger chunk is spent in reimbursing foreign consultants appointed to ‘advise’ the implementing agency and ‘supervise’ the progress, purchasing specified foreign brand of vehicles, office equipment, etc. In the end, larger share of the aid-money finds its way back to the donor country and only a fraction being spent on the actual purpose for which such aid was given.
Furthermore, the ‘aid-program’ usually is a ‘soft-loan’. It is called soft-loan because of its unusually long repayable period of 25 to 50 years with very low interest-cost of about 0.25 to 0.55 per cent per annum. It may look cheap onset due to very-low interest cost; however, it involves substantial outflow in the long-run due to fluctuating exchange rate and weakening Nepalese currency. Since it has to be paid in the dollar-terms and when the Nepalese currency becomes weaker against dollar over a period of 25-50 years, it works out to be expensive later on. Though foreign-aid may provide immediate relief over financial distress, it has potential to bring negative impact on the government finances over a long period of time.
Of course, there is a strong temptation to suggest massive ‘deficit financing’ to activate the depressed economy as proposed by Keynes and followed by Roosevelt during the Great Depression in the US in 1930s. The basic idea is that the increased government-spending in the desirable sectors will provide income to the people to fulfill their consumption needs and their consumption expenditure will activate other areas of the economy to meet the increased demand; thus, having ‘multiplier’ effect. This is highly unlikely in Nepal’s case because of two reasons. Firstly, because of earlier agreements with the IMF and the World Bank, the government cannot borrow excessively from the central bank by issuing government bonds (technically, the government cannot engage in deficit financing by asking the central bank to print money so that it can borrow).
With this restriction (resulting from commitment to international funding agencies) and limited ability to collect diminishing amount of taxes, the Finance Minister is unlikely follow the Keynesian approach. Secondly, Nepal does not possess any worthwhile existing production infrastructure that can be quickly activated (referred to as supply-side constraint) to meet increased demand. Because it requires longer period to set up new production facility, imports will rise in case of increased demand. And increased amount imports do not increase economic activity (except trading) within the country nor is it likely to increase employment opportunities directly within Nepal. In addition, when amount of money in the hand of public rises, their consumption demands will rise; and without domestic mechanism to fulfill that increased demand, it gives rise to inflation (it becomes a case of too much money chasing few available goods, hence price rises).
The appeal of the Finance Minister to the Indian businessmen for private capital investments in the Nepalese business sector due to ‘favorable’ investment climate and business ‘opportunity’ may not find any takers. The incidents involving extortion attempt on Dabur Nepal and its subsequent decision to fold Nepal operations, frequent disruption of UTL’s telephone business (during the previous regime), kidnapping of employees of Surya Nepal, closure of Coca Cola’s Bharatpur plant, etc provide strong dissuasion to the investing companies.
In addition, ultra militant approach (in name of empowering workers) adopted by the Maoist-affiliated trade union and inability of the government to frame adequate and effective response has made the investors even more wary. It does not rocket science to understand that every investor wants his money to be safe and fetch respectable return. And both the conditions are unlikely to be met at prevalent political scenario of Nepal. Thus, unstable and unpredictable political situation, and non-adherence to basic legal norms will not attract any foreign investment in foreseeable future.
In such a situation, the Finance Minister needs divine intervention to activate the slackened economy and find requisite resources to finance his ‘rural-centric’ and path-breaking’ budget.