Finance Minister presented an outlay of Rs 337.9 billion for the fiscal year 2010/11 on Nov 24, 2010 through Presidential Ordinance as per the Article 96(a) of the Interim Constitution. The effort of the ruling government to resist violent objections by presenting the budget is indeed a commendable task. The stalled economic activities can now be revived and the possibility of state failure can at least be temporarily postponed. However, the country faces serious challenges to implement the budget due to fluid political environment and conflicting policy adjustments by failing to establish linkages between key economic variables.
The fault lines of the budget will be discussed briefly after explaining the structure of the budget. Of the total appropriations, Rs 190.32 billion (56.3 percent) has been proposed for recurrent expenditure and Rs 129.54 billion (38.3 percent) for the capital expenditure. Similarly, 5.4 percent or Rs 18.42 billion has been proposed for the repayment of principal.
The estimated spending is 30.4 percent higher than last year´s preliminary estimate of revised expenditure. Rs 178.61billion (52.9 percent) has been allocated for development programs and Rs 159.29 billion (47.1 percent) for general administration.
Of the total sources of financing estimated at Rs 281.99 billion required to meet the expenditures for current fiscal year, Rs 216.64 billion is expected to meet from revenue and Rs 65.34 billion will be accessed from foreign grants. The deficit remains at Rs 55.91 billion. Of the total deficit, Rs 22.23 billion will be financed from foreign loans, and Rs 33.68 billion from domestic borrowings.
Based on the sector-wise budgetary allocation, education receives top priority amounting to Rs 57.64 billion followed by local development (Rs 27.88 billion), road infrastructure, transportation (Rs 27.16 billion), health (Rs 24.51 billion), and agriculture/irrigation (Rs 22.1 billion) respectively. Rs 30.56 billion is earmarked for loan repayment. It indicates, although the priority allocation is maintained, the budget provides continuity to the works that were initiated by the 2009/10 Budget rather than proposing new programs.
Despite a substantial rise of 15.4 percent in the prices of food and beverages group, the annual average consumer price inflation moderated to 10.5 percent in 2009/10 compared to an increase of 13.2 percent in 2008/09. During the first two months of the FY 2010/11, the Consumer Price Index remained at 8.6 percent. Double digit inflation has remained before the global financial crisis of late 2007 and early 2008. Against this background, the government aims at limiting inflation to 7 percent in 2010/11. This is doubtful.
Inflation in Nepal has become corollary to recession in the sense that there is higher prices and a fall in the purchasing power of money. Due to high unemployment level and a total trade deficit of Rs 316.67 billion (46.5 percent) during 2009/10, there is a possibility of depression. In Nepal currently, it is a period of reduced economic activity, an indicator of a business cycle contraction. The estimated economic growth rate of 4.5 percent is therefore, difficult to achieve.
IMF in its World Economic Outlook 2010 has downscaled Nepal’s economic growth for 2010 to 3 percent from earlier estimates of 3.5 percent. The growth estimate for 2011 is however, 4 percent. The budget estimates the growth rate at 4.5 percent. In Nepal since last one and half decade, inequality has coexisted with growth making economic growth unsustainable. We still experience the limitation in productive capacity and Nepal’s export product miserably lack global competitiveness. In case, there is a high growth (which does not seem possible) and the country slows down from above-potential growth rates because of the escalating political uncertainties, inflationary pressure develops and economic performance declines.
The resource allocation of the current budget by increasing the size of the budget in the anticipation of higher growth is therefore, risky. The budget does not justify the link between Three Year Interim Plan (TYIP 2010/11-2012/13) and annual allocation. For example, the breakdown of resources stands at Rs 312.78 billion for the FY 2010/11 and the budget for the same year provisions Rs 337.90 billion. This is Rs 25.12 billion higher than it was proposed in TYIP. If one links TYIP’s growth estimate of 5.5 percent and budgetary projection of 4.5 percent with that of other institutional estimates including the World Bank, the size of budgetary deficit is inevitable to increase.
World Bank and IFC have brought out Doing Business 2011 report by analyzing three key factors – starting business, operating business and closing business. It is discouraging to find that during last five year period it was difficult and costly to do business in Nepal. Nepal has reported poor performance in all the three fronts identified by the World Bank and IFC. Nepal has slipped four positions (116 from 112 in 2010) in the global ranking. As the private sector complains, even when the business is incurring loss, there are many legal obstacles to closing it down. Therefore, Nepal is ranked 107 in closing the business. This discourages private investments. Implementable policy addressing closure has long been unresolved issue in Nepal’s policy document.
Finance Minister presented an outlay of Rs 337.9 billion for the fiscal year 2010/11 on Nov 24, 2010. However, the country faces serious challenges to implement the budget due to fluid political environment and conflicting policy adjustments by failing to establish linkages between key economic variables.
Also, in the Failed State Index 2010, Nepal ranks 25th. Since the Foreign Policy and the Fund for Peace began publishing such index in 2005, Nepal has not improved noticeably by making state failure a chronic condition. In Global Competitiveness Index 2010-11 published by the World Economic Forum, Nepal is ranked 130 (out of a total 132) position with a score of 3.34. The policy is silent to assess the ramifications of such results revealed by important global reports. This has happened because the government failed in meeting basic requirements such as institutions, infrastructure, macroeconomic environment, health and primary education. Mere allocation has not helped in meeting the budgetary goals.
The budget earmarks 47 percent resources in poverty reduction program without indicating the baseline poverty incidence. Varying statistical information on Nepal’s poverty has been made public in less than one year. For example, Nepal Living Standard Survey II, 2003/04 states 31 percent poverty incidence; National Planning Commission estimates 25.4 percent, ADB Outlook 2010 shows the percent of population living on less than $1.25 a day is 55.1 and Multidimensional Poverty Index estimates Nepal’s poverty at 64.7 percent. Without making any explanations on poverty line, the allocation of resources will have no meaning especially for the targeted programs.
The budgetary policy is expansionary, which is not qualified by recent macroeconomic indicators. The government can increase demand through expansionary policy by reducing tax rates, increasing expenditure, widening the budget deficit and increasing loans from banking institutions. Given the possibility to raise internal demand for increasing production, this policy may be helpful. Domestic production has not been meeting additional demand. The government is not in a position to increase investments through additional spending since economy lacks excess capacity.
Therefore, no immediate possibility is seen to use all available alternatives to resist expansionary policy. This indicates Nepal should reprioritize existing priorities, focus on immediate needs by allowing conditional grants and resources at the local level. Remember, higher revenue collection is not the only answer for a successful budget, it is the skill of reconciliation between the income and expenditure.