Nepal Budget : Finance Minister in Catch-22 Situation

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.

Published by UWB

Pioneering blog from Nepal...since 2004.

31 thoughts on “Nepal Budget : Finance Minister in Catch-22 Situation

  1. Sure, its a rock and a hard place for him. Quiet a sound evaluation of the way things are, financailly speaking. To add to this equation, the rumor floating around is that Maoist want budget out only after they are included in the government, the crux is US does not agree. Yea, its catch 22 alright but at the expense of bread and butter of a nation- commerce.

  2. Nice Analysis….

    yes, nepal’s economy is downsliding… Its huge burden over finance minister…. but would he b able to announce new mesures and plans to help economy bounce back??? Its the big question.

    Regarding nepal’s current revenue collection and dependency on foreign aids, its very hard to believe he’ll make it.. But seeing his previous performances as finance minister, i doubt on his part. the main job today is cutting down Royal budget and security expenses but according to Today’s Kantipur report, its hard to do so. So from where he gonna start???? Apart from that Maoist are still there. Fear is still gripping the whole nation, and trauma is not yet over.

    The heavy task is ahead and seeing nepal’s current scenario, god will have to prevail on earth to make nepal’s economy back in track.

  3. Mahat is a mediocre economist. Without aid, donation he has no clue. The donors will not be helping unless they are sure the maoists will lay down arms, practice multiparty democracfy and liberal economics.

    Mahat should just forget it with the current situation, he is a nobody. If you need answers speak to Comrade Deb Gurung from the maoist party, he is the defacto Finance guy and without his go ahead this weasel Mahat does’nt have a prayer.

  4. With all that aid that has been promised?

    The reason of low revenue collection is because a. Impractical taxation rules
    b. Corrupt bureaucracy

    Businessmen every where in the world will try to avoid paying taxes.

  5. The budget of this temporary government will not give any direction. Maoist and SPAs goal is almost different. So, what is the use of this temporary budget?Once the maoist will come to the power they will turn upside-down the figures and allocations.

    People are more concern about Rs. 13000 per person of burden of loan to pay. How much it will rise in the name of development?? Every child of Nepal born with the burden of Rs. 13000 in their head.

  6. A barbed man is cooking KHICHADI for poor men. But this khichadi is poisonous or healthy, nobody knows. What maoists will put in this khichadi, it is upto everybody to wait and see.But it would be beneficial to rich and bad for poor as always.

  7. Surely, there will be more money then before when all foreign aid was frozen. I am not debating about the wisdom of foreign aid but in counting money in pure numerical terms.

    I hope the Maoists stick to their promise of free market economics.

  8. I am posting it here again because the blogger did not give any space for this topic for discussion. This issue can not be ignored because no Nepalese will be spared if the debt is not paid. This is how countries become banana repubilc in which Nepalese women will become prostitutes for western capitalists/tourists and men become their slaves working in factory owned by foriegners. Why can’t Nepalis think beyond political crap?? Why can’t Nepales see the example from Thailand, Phillipines, Cambodia, Laos, Indonesia, and all the Caribian countries. It’s pathetic.

    Here’s the news again. Think about your finacial future and generations that follow.

    All Nepalis have foreign debts: Auditor General

    RSS
    KATHMANDU, June 28 – Every Nepali has a foreign debt of Rs. 13,000 on his/her head.
    The government of Nepal has so far taken 324 billion 540 million rupees of foreign loans, according to the statistics of the Office of the Auditor General.

    Auditor General Gehendranath Adhikari disclosed at a programme organized by the Reporters’ Club Nepal here Wednesday that an audit of the expenditure accounts of the government of Nepal showed arrears of Rs. 28 billion 530 million.

    He said the arrears stood at Rs. 7 billion 240 million in 2005 and the Ministries with the highest amount in arrears are the Ministry of Finance with arrears of 25 per cent, the Ministry of Defence with arrears of 12 per cent, the Ministry of Home Affairs with an arrears of 10 per cent, the Ministry of Physical Planning and Works with an arrears of eight per cent and the Ministry of Local Development with an arrears of seven per cent.

    Stating that the arrears in revenue that the government is yet to realize so far stands at approximately Rs 28 billion, he said the revenue would gradually increase with the implementation of the same.

    He said as the government has been incurring a big loss from the public corporations, it would be appropriate to either privatize these corporations or sell their shares.

    The Auditor General said that the large amount of arrears was because of the non-transparency of the finance budget and the miscellaneous budget.

    Presenting the details of the Royal Palace expenditure, he said an amount of Rs. 165 million 700,000 was spend in fiscal year 2001/2002, Rs. 481 million 30,000 in fiscal year 2002/2003, Rs. 543 million 60,000 in fiscal year 2003/2004 and Rs. 365 million 60,000 in fiscal year 2004/2005 under this head.

  9. the article talks about gathering money to make budget. debt per person is another issue. nice and relevant analysis.

  10. I agree. At this stage it makes no sense to worry about foregin debt. We are on the verge on a fiscal crisis.
    The main issue is political stability. Ram Sharan has asked Indian businessmen for private investment but without the appropriate investment climate nothing is going to move forward.
    For a start these damn Maoist need to stop extorting money from local businesses!

  11. There will be no divine intervention and there will be NO donor nations if the Maoists take power in Nepal. Nepal will have the economy of Cambodia under the Khymer Rouge.

  12. Chhatra ji it is very good analysis. At this point of time responsible leaders have to be extremely serious about the country and clamp down defaulters. There are incountable ex-goverment officials of all categories who literally robbed public funds. If Nepal devises way to investigate thoroughly to collect illegally leaked money I strongly feel we can pay half of loans and have enough money for development. There are ex and current government officials whos property is inproportionate to their official earnings. That clearly shows concern government officials have used malpractices to make quick money.

    For an example a “SUBBA” at Tribhuvan Airport has so much property. Looking at his family root you will find nothing. One can tell how the property was collected.

    Another example an officer in excise customs or tax offices have several buildings in Kathmandu. What is their official earnings? Some ownest officials of same offices are still on rent! May be they are not ownest and sent some where abroad that can’t say.

    I happened to know some TAX officers go around houses of high ranking government officials and offer their service to adjust their taxes. Here Dr. Mahat is talking about low tax collection. When responsible officials are not discharging their duties then how tax collection go up? In addition in tax offices if a businessman has to pay Rs.250,000.00 for his business the officer offers him the deal. You pay Rs. 50,000.00 to me and pay only RS. 20,000.00 to the government. Naturally the businessman will agree because he only has to pay Rs.70,000.00 instead of Rs.250,000.00. This is how things go in Nepal. Year after year finance Minister presents budget at the end nothing works as planned. Simply Nepal does not have mechanism to control malpractices.

    The truth is even political parties use government funds for election. Like the money collected for telephone bills from general public, instead of using for development of Nepal Telecoomunications the money is used for election!!!

    Some government officials engaged in procurement in Army or Police force they make crores from commission from the supplier. Of course that money is only of a fraction. Bigger shares go to generals and IGPs!!!

    The FM invited Indian business community to invest in Nepal. With currect security and banking system no one will come to invest in Nepal. For that Nepal has to change lots of policies in banking sector. To this date in Nepal one can bring foreign currency in but can not take out of Nepal. There is no flexibility in banking at all. Because of that up to this date money laundering process through “HUNDI” is strong. Banks should allow to bring in and take out foreign currency freely to foreign currency earners. That way Nepalis working or living abroad will bank in Nepal. That way government can have access to the money to utilize. At present because of strct rules of Nepal banking Nepalis only bank outside Nepal. If not then current system will go on and only remitting in from abroad will not help that much. Because of that and no national productivity our economy is going down day by day.

    Nepal has to look in to setup good vocational training institutes. Every year Nepal has more than 250,000 school leavers. Amongst them on 10% to 15% can afford further education. Due to inaffordable situation their potentiality go to drain. It is high time that government has to think what she can offer school leavers for their future? To this date after their SLC they go to manpower agencies or brokers who send them to foregn countries for further studies. Government should be able to utilize our future generation by giving them good vocational training. With vocational training our young generation can earn more even they go abroad for jobs.

    If Nepal does not look in to setup industries to produce locally required necessities and produce manpower for national productivity the economy will never rise.

  13. Heard from a friend in Himalayan bank that Kantipur News house deposited about 60 crorer in 4 banks after the Andolan- one of the bank being them. This gravy train came from the north of the border (India).

    So it just goes to proves- money talks.

  14. Talking about the money; during Mr. Deuba’s Primistership Royal expenditure was increased almost by 7 times. I wonder whether new government will ask for justification or not. The inflation went up considerably during Deuba’s time. Now he is one of SPA Leader! Surely current government has to look in to this case again. It appears lots of misuse of government funds including funds from donors during that time.

    I always wish that our country develops like other countries. I do not worry about now but worry about our future for our young generations. This is the only time to dig out everything from the root and correct Nepal. Stop corruption and all malpractices. Government must establish a force to investigate every nitty gritty and find out whether the properties are propotion to their official earnings or not. This is the people’s mandate if givernment think about it. In case those assigned becomes corrupted there must be very strict rules for them.

  15. I totally agree with each of you. Corruption is the cancer of our nation. It is even the primary cause for the Maoists’ existence.

  16. At the moment, Stiglitz’ No. 1 issue is trade. He attacks the so-called Washington Consensus, which prescribes privatization, fiscal discipline, deregulation, and free trade as the cure for the developing world. He says that approach can rip the delicate social fabric of developing countries, provoking unrest. Instead, he says rich countries should lower tariffs and let the poorest countries keep their barriers mostly in place for now to protect jobs and develop domestic industries. Rich countries, he says, should help poor ones build the institutions and infrastructure they need before they can open their markets

  17. Pretty much bookish analysis.

    -Low tax collection is an incentive design problem. The solution is to decrease tax rates and increase tax base by making non compliance costlier. Revenue department officials need to have a non corruption bonus and a mechanism to be kicked out in the event of corruption. (carrot and stick)

    -Resource constraints: The key is local resource mobilization.This is close to Maoist policy of local capital formation.

    -Aid is to be strictly monitored and accepted only in priority fiels of education and health. Donor priorities such as this or that car and donor consultants are waste of money.

    -Keynesian or Washington consensus remedies are not feasible. Deficit financing is deadly for economic stability.

    -Think about Debt/GDP ratio and about debt servicing / budget ratio, you will really have to be cautious to take more conditional grants.

    -Populist policies or corruption on policy making level such as Dr. Roop Jyoti are the biggest danger as of now

  18. “PAC asks property details of royal family, ministers”

    Include the memeber of parliaments, and Maoists leaders.

  19. Extraordinary situations ask for extraordinary leadership,I hope Mr.Mahat has it in him to deliver.This is a historic oppertunity for him to write his name in the history books.
    As per the maoist’s economic agenda,I read an interesting writeup saying the death of Mao was a blessing in disguise for china as it brought Deng Xiao Peng to power and the rest is history.In our present condition,death to the maoist dogmatism would be great too.You cannot push us to believe what the people in Mao’s heartland have left out since decades.
    When u come out of darkness,even the light hurts your eyes for sometime,i hope its just that with the maoists.When they will be used to the life and light of the civilisation I guess they will realise what’s right and what’s wrong.
    I hope Mr.Mahat has it in him to show what’s right to the maoists and bring it out in practice.
    Regarding the statements of Prachanda,its for the consumption of his cadres and not us(the general public).Its an expired drug,toxic for the public but a requirement for the nerves of the far left.Ignore him!! that’s all we need to do.He knows that’s what his statements deserve but poor guy has to utter them to save his head from his own guys!!

  20. At this stage of the game Dr. Mahat is irrelevant. People can come here and talk about all these neo-liberal economic theories etc. but without political stability you can all take those ideas and flush it down the toilet since its going to be worth just that!

    I forsee a maoist dominated majority government. I don’t think they will implaement a strict communist economic model but I think they will focus on land reform and stop privatazation. They will want state control of many entriprises.

  21. Socialist hate business. Communists don’t want to know how the modern business is run. Maoists are most evil among them. on top of that Maoists just landed here from Jungle, who’s only economic theory is ‘extortion’.

    Nepali economy is in vary bad shape. I don’t see any good thing happening for Nepali economics. Foreign aid is not much help when your politics is bad. Maoists are the factor of fear, instability and uncertainity. i think they just chase away the business.

  22. Who on earth is going to come and invest in Nepal at a time when all the long established businesses in Nepal are either closing down or moving to India?

  23. Nobody’s ever expected any miracles from Nepals various Finance Ministers and Govt’s. We expect the Govt. just to keep the peace and they failed miserably. All we want from the Finance people is to avoid an economic collapse-I hope these idiots can do that much.

  24. Hi Bhudai, the common people are pregnant with hope. The Royalists and other established people fear for the future. The intellectuals in general are wary but more optimistic then ever before. Overall the mood is an optimistic one.

    Let’s hope the new Nepal is a good one for the majority of the Nepali people.

  25. The mood in Kathamndu was optimistic, but is getting more confused. There are obvious signs of politcal debate firing up, as especially the UML are under threat of losing many seats if an election occurs. Things have slowed down, the initial gusto of the parlaiamentarains is not there anymore. Questions are even being asked on the recent 8 point agreement. Hasty many say.
    The maoist, besides having a party office in Kupondole has also set up a “peoples court”, the first two to be called to the court were two senior UML cadre, with the tag line “You had better attend, otherwise…”.

    I wonder if we can drag Prachanda to the “peoples court” and try him in public and in full view of the media? I doubt it, but it is a thought.

    Optimism is prtesent amongs the intellects, but then these are the people who are most out of touch with ground activities. Common people are less optimistic then they were a month back. It’s a watch and wait, touch and go situation.

    With every new item to the list, there are more queries, the obvious one is when are they going to lay down their arms? Prachanda is definitely the man of the moment, but he too is doing a balancing act and has to tread carefully between looking good to the mainstream but convincing his hard core cadre why he is doing what he is doing. The reality, is the two cannot realistically agree, unless one gives in a lot to the other. How you can embrace multiparty democracy and at the same time have a totalitarian communist outlook is a puzzle to me? Maybe city talk and country talk are two different things, and he may have a dual policy for the nation – a city liberal and a country comrade. When the two collide, that’s when trouble will begin.

  26. Nepalese, better Gorkhalis, were good lahures (mercinaries) and the then kings of Nepal recieved royalties of their service. Hundreds of thousands Nepalese are trotting over the world, some with and some without arms, to serve their masters and that very remitance is the source of imcommming money as it is earned by poor Nepalese who have to feed their dependants here within this country. All others including we, the keyboard clicking ladies and gentlemen in this very blog, are wasters of that hard earned fereign currency.

    God bless Ramsharan if he can meet two end!

  27. I see the situation this way in the city;

    Country’s political power always goes from one to another but never extinguish and noone can hide it. Now, the total power is gone to the parliament visibly which can be considered as good symptons in terms of democracy. But people now started to realise that the power invisibly in the hand of someone and regulating according to their wish. In bitter way lets explain it, political leaders instead of being supremo because of the power in their hand they are being spoke-persons of USA, India and maoist. Sometimes moaist say we are ready to allow to inspect the UN, the political parties speak according. At the same time when India says there is no need of international internvention to settle the problem, then the same SPA leaders started to say we are capable to settle the problem and we don’t need international intervention. In the meantime when US ambassador says that without arms settlement we will not support SPAM’s government, then the same SPA leaders started to support it and start to give the speeches accordingly. Because of all these confusion, the interim constitution and interim government are being the liquid topics. In this situation how we can be optimistic about our coming budget and economy? Most of the rich people of Nepal and rich political actors (includes all) have already transfered their money to outside countries. It has been heard that more than trillion rupees are in India either in cash or land bought by rich people. Also it has been expected similar amount money outside India. It is not 2046, if you ask the people what will happen next then the answer is “it depends”.

  28. US stance on the maoists is good. give up arm and terror before joining the government. that is the sourc of terror, instability and uncertainty. other major factor is their extortion. for maoists the major source of revenue is extortion. think what happen when they join the government. SPA must make sure what hell they are dealing with.

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