The Kathmandu Post, 28 May 2018
As Finance Minister Yubaraj Khatiwada prepares to unveil the budget for the next fiscal year on Tuesday, he faces an uphill task of oiling the state machinery with the federal government reeling under financial stress, mainly due to growing budget deficit and depleting foreign reserves.
Outlined in the Economic Survey 2017-18, the financial stress could force the government to dig deep into the tax base to generate enough resources for financing the next fiscal plan.
The survey presented to both the Houses of Parliament on Sunday projected Nepal’s gross domestic product (GDP) to grow at 5.9 percent to Rs3 trillion this fiscal year. This is the second highest growth rate achieved by the country in the past decade.
While the survey highlights some positive indicators such as rises in per capita income and foreign direct investment (FDI) commitments, GDP growth of around six percent and better revenue mobilisation, the country’s economy is also challenged by a balance of payment (BoP) deficit, ever widening trade deficit, slowdown in remittance growth rate and rising inflation.
The survey shows that the budget deficit in the fiscal year ending mid-July is expected to grow by 10.4 percent. Another challenge will be rising inflation. Presenting the survey, Khatiwada said the country has started feeling the pressure of inflation. Inflation, which was tamed at 2.3 percent last fiscal year, grew to six percent in the eight months of the current fiscal year.
On the bright side, FDI commitments in the industrial sector, in the first eight months against the whole of last fiscal, have increased by more than two fold to Rs38.04 billion.
“This indicates that production and employment will increase in the coming days,” states the survey. Tourism has given a boost to the service sector, with record arrivals of 940,000 tourists in 2017. In the first eight months of the current fiscal, electricity generation increased 7.4 percent to 1,045 megawatt.
The country has also witnessed a massive infrastructure drive in the forms of road, highway and airport. According to the survey, recurrent expenditure has increased 37.4 percent to Rs403 billion mainly due to the federal and provincial elections, and resource transfer to the provincial and local governments.
However, the country’s main economic engine—agricultural sector—recorded a meagre 2.8 percent growth this fiscal. This is due to a drop in paddy yield caused largely by the floods in August.
According to the survey, public debt has reached Rs843 billion, which is 28 percent of the gross domestic product. Of the total debt, 53.9 percent is foreign loan. Per capita debt reached Rs28,963 this fiscal year, up from Rs24,270 last fiscal. The BoP deficit is Rs25 billion.
The revenue deficit is the result of last year’s reconstruction and election expenses, said economist Rameshwor Khanal. “Though it’s not good, it can be re-corrected by managing the expenses prudently next fiscal year,” said Khanal, suggesting that the government curb recurrent expenses.
Former finance secretary Khanal said the revenue gap could be managed through foreign aid. “Revenue gap of up to 5-6 percent is manageable in a normal situation,” he said. “If the situation prolongs, it will lead to an outflow of foreign currency as debt payment, affecting trade finance and investment in infrastructure.”
However, the government hopes that stability instilled after the three tiers of elections has created an investment-friendly climate, which could boost economic activities.