A Glimpse of Budgetary Challenges in FY 2019/20

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A Glimpse of Budgetary Challenges in FY 2019/20

The government needs to take a whole new approach in the next budget so as to change the country’s economic direction.
 
--BY JAGDISH PRASAD AGRAWAL
 
It is said that “there are three kinds of lies – lies, damnable lies and statistics”. Such statistics mislead and create fictions and myths. Though YN Harari, the renowned scholar, says that “those who own the data own the future”, I believe that the reality lies in tangible achievements. Fictions and myths created by statistics start cracking on their own. They are no substitute for judgment. Lately, the GDP growth rate of a nation has become the prime indicator of its material and physical well-being. In the Nepali context, GDP projection from FY 2019/20 (2076/77 BS) has wavered between 8 percent to the latest revision of 5.5 percent though at one point of time it was projected to slide to 4.5 percent also. These projections are by no institution other than the World Bank, IMF, ADB and the variations may be because of the methodology. It is revealed from the statistics of the last five years that at the beginning of the financial year, it is at peak, mid-way it drops to its lowest and by the end it recovers to an in-between level. Accordingly there is euphoria of hope in the beginning, fierce debate when it goes down and a sense of satisfaction when it shows signs of recovery at the end. But these statistics and the debate there on are the grist for academic mills only.
 
An ordinary citizen is least concerned about them. In a budget, he looks for the measures which will make his livelihood easy, education and healthcare less expensive, government assistance in building a house of his own, allowances that will augment his income and last but not the least, is there any opportunity for him to find an employment close to where he lives. If he still has to migrate overseas to make his ends meet, he is totally disillusioned with the government and its budget which he then considers to be a damnable lie. In addition to the general mass, there are other sectors engaged in various commercial and economic activities which look forward to in the budget either to remove some of their handicaps or facilitate / incentivise their growth.
 
This essay is an attempt to highlight a few of the macro as well as micro level burning issues the government is already seriously gripped with. Nevertheless, it is a call for priority attention.
 
1. Poverty and Inequality
It has recently been reported that the richest 10 percent of Nepalis earn three times more than the 40 percent poorest which amount to saying that 10 percent of the country’s richest population has more than 26 times as much wealth as that of the poorest 40 percent. This inequality is on the rise. The reason attributed is land dependency, tax system, privatization of public services and the crony capitalism. These days when all governments the world over voluntarily and constitutionally are welfare driven whose priority responsibility remains the welfare of those who are the poorest, it is incomprehensible that the inequality is not shrinking. It seems the top-down approach is fatigued and over-regulated. The trickledown effect has become inadequate to lift up the people at the bottom. The corrective steps will be for the bottom layer of the masses to get into “the do it yourself” mode. It is time that the bottom-up approach also is put in place so that the inequality is narrowed from both ends.
 
Land is no more the reason for people remaining poor as a big chunk of the country’s population has already shifted from the dependency on land and this trend continues. The percentage of people depending on land has already come down in China and India and though it is highest at 66 percent in Nepal, it has to be brought down to maximum 40 percent within the next five years. Likewise, as in other countries, the basket of consumer goods for the lower income group attracts almost nil incidences of indirect taxes. In fact, the reason for low revenue collection ratio to GDP in Nepal is because of the narrow tax network. Privatization of public services, too, cannot be the reason behind the wide gap in incomes as these sectors have extensively facilitated and provided employment in education, health, transport, construction and what not. However, it cannot be denied that the co-efficient of inequality has worsened in Nepal and needs course correction. The fault lies not in liberalism and/or market orientation but in the lack of adequate timely policies, due processes to monitor them and the right people with integrity, experience and skills to lead and execute them. The state should have the political will to promote a competitive environment. While a prominent presence of the government is absolutely necessary in the education and health sectors, it will be challenging for the government to go on making space for the private sector so that the supply augmentation brings about quality in price as well as deliveries. The widening inequality is an issue of distribution and not an advocacy for reverting to state control.
 
Therefore, the next budget has to ensure that it does not fall into the trap of state intervention; rather it loosens its grip on some of the commercial activities that the state still hangs on. The direction of the budget has to shift more to the right with a focus on increasing private sector participation with effective monitoring so as to avoid and minimize distortion in quality, price and unfair trade practices. No matter how much tempting the idea of equality may be ideologically, the reality is that our traditions have always accepted hierarchy which still dominates society. Inequality in talent, skills, behaviors, creativity and initiative are biological facts which cannot be denied. Inequality is not only between the rich and the poor but more glaring among the poor themselves. Nevertheless, it is the responsibility of the state and society at large to create equal opportunities so that the economically marginalized people do not feel exploited, discriminated and suffocated. They fully deserve hand holding by the state as well as those who are privileged to have gone ahead.
 
The next financial years’ budget has to be a trend setter. It should not attempt to tame 10 percent of the richest; rather it should focus on enhancing employability of the youth at the bottom. The budget has to believe that if given the skills and opportunities, they will defy all odds to lead a better life than their parents lived.
 
In this connection, the PM’s employment scheme is a positive initiative which needs to be shaped to focus on skill-building and enhancement. This scheme should lead a massive technical skill development movement in Nepal. If conceived and executed ambitiously rationally and realistically, it may cater to the projected skill requirement of the country for the next decade. It may prove to be a turning point for inequality and poverty reduction in the next five years.
 
 
2. Trade Deficit and Export
On Chaitra 16,2074 BS, in the white paper presented to parliament, the finance minister had highlighted the alarming economic and financial situation of the country. One of the issues of great concern was the trade deficit which had ballooned 42 times in last 25 years to 34.4 percent of the GDP. The situation seems to have worsened further.
 
The already complex situation is further compounded in the long run by the number of workers migrating overseas coming down substantially as the importing countries have less demand of them. Because of the higher and higher need for revenues, the government finds it difficult to curb imports. Any pressure on the foreign exchange reserves will erode our capacity to import at this level in the future. It will be prudent that FY 2076/77 budget starts focusing on taking corrective steps from this financial year itself so that it is not too late. The issue of trade deficit is not an overnight solvable problem. It will require patience and pragmatic policy framework. Last year’s budget was that of consolidation and preparation, this year budget has to embark on correction and growth.
 
The corrective action can start by managing and controlling imports in three major sectors. The agricultural sector which accounts for approx. 30 percent of total import can be controlled by at least 20 percent value addition if the budget focuses on processing in Nepal. The processing here will not only revive closed rice, oil and lentil mills but also fetch further investment in agro-industry and engage people in the rural sector. Linkage of the farm to the factories will transform the subsistence level farming to a high commercial level volume-trade and farmer to an entrepreneur. In the long run the import of primary products will also be reduced. But rationalising import duty for encouraging indigenous processing cannot be overlooked.
 
It is an irony that the country so rich in hydro-power potential has to import petroleum products valued approximately at Rs 150 billion every year. The ensuing budget has to ensure that at least 1,000 MW of hydroelectricity is added to our distribution grid in FY 2076/77 so that import from India can be totally stopped and in the balance 500 mw can either be exported or start contributing to revenue generation for the government. For this the budget has to take war time measures including allocation of resources, so that the projects which are near completion are completed sooner than later. Furthermore, the emphasis should be on repair, maintenance and completion of the roads that exist and are in the pipeline rather than on new constructions. Similarly, scrapping worn-out vehicles will save fuel and control road accidents. These measures shall enable the country to limit import of petroleum products to the last years’ level.
 
Absence of a pan Nepal public transport system, easy availability of vehicle loans and ever increasing hunger for revenues have combined together to boost import of vehicles disproportionate to the length and condition of our roads.  This budget should set-up a technical group to suggest a comprehensive futuristic public transport system for diverse conditions in Nepal taking into account the hydro power that will be available with us in the near future.
 
Austerity measures in the government spending will send a positive message for others to follow. There is much wasteful non-productive expenditure at the government level. Such expenditures at the centre will trigger extravagancy at provincial and local government level as well. These and such other expenditure at the government level for political populism have deleterious impact on the ordinary citizen who also starts engaging in conspicuous consumption, the root cause of corruption and tax evasion.
 
3. Export Promotion
Export is part and parcel of addressing the trade deficit issues. But in the context of Nepal, export is not helping much because our export basket has no comparative advantage products and services in terms of price and quality. Secondly, export is a specialized trade. To India it was a protected export because of duty concession. So far, the manufacturers themselves have taken the lead whose primary focus is on exporting what they produce and not what is in demand? Therefore, we miserably failed to look outward to build right product, right linkages which could provide the right access to global market. China, Bangladesh, Vietnam developed as major exporters as they built their comparative advantage by allowing importers themselves to do contract manufacturing in their countries at very cheap costs. Our substantial foreign exchange reserves along with remittances made us complacent regarding not stressing much on exports. In order to focus more on balancing imports and exports, it may be wise that a separate ministry of external trade is instituted so that the country can take a long-term view of it. Our inward looking mindset in trade and commerce needs to change, for addressing adequately the issue of trade deficit. If addressed in time, trade deficit is an opportunity for investment for boosting indigenous production, and consolidating economy by curbing wasteful expenditures. The next budget should be the right occasion to hit the nails in this direction.
 
 
4. Unemployment
Nepal is fortunate to have an ideal population of approximately 27 million and, thanks to the government’s family planning programmes, the growth rate is restricted to a reasonable 1.3 percent per annum which if maintained at a slightly lower rate can turn into an asset rather than liability. 
 
As the Nepali youths have been migrating to Tibet and India for more than a century, Nepal has never faced the problems of the youth staying at home fully unemployed. Our concern has always been the non-availability of jobs in Nepal itself. Migration has become part of our culture and folk lore. This continues even today. The income of remittance pays for our trade deficit, if the demand in importing countries for workers slumps, we get panicky.
 
So far we have taken the convenient route of addressing the problem of unemployment through migration which has created an imbalance of demand and supply in Nepali labour market thereby escalating wages and triggering a whole circle of inflation and high costs. Farming has been affected, gender equations are imbalanced and though the remittances have enlarged domestic market, the conspicuous consumption resulting from there is not contributing much to capital formation. The next budget has to focus on creating jobs at home and reverting the trend of migration to overseas. The agricultural sector cannot sustain 70 percent of the population if it has to modernise and be commercially viable. They have to be shifted to other vocations. 
 
There are many other sectors such as MSME enterprises, construction, public transport, services and manufacturing which have great potential to provide jobs. But the lack of skills and technical training seems to be the main hurdle. In fact, Nepal calls for an aggressive human resource development program which so far has been a neglected agenda in our planning. To fulfill the assurance of good governance at all three levels, the government needs a transformed, technically sound and fresh bureaucracy. The next budget has to take cognizance of this shortcoming as any further delay is likely to result in Nepal lacking the right manpower to do any chores and we shall be forced to negotiate inward migration from neighboring countries as we do it for power.  To avoid such a situation, a massive political will is required to redirect public investment towards sectors that generate employment. Technology and skills, the two components of human resource development, will provide a long-term response to underemployment of the youth. Technology moves up in steps and each step creates a new platform which usually contains new capabilities. It is a chain reaction, the sooner we start the better for our progeny. The Nepali Diaspora around the world can be an asset in leading skill development programmes in Nepal.
 
5. Tax System
Tariffs send messages. They decides volumes and patterns of investments. Nepal has been the most enlightened country in SAARC to have undertaken drastic reforms in its tax regime in the 1990s. Once the simplest in this region, it is tending to be complicated recently under the pressures of resources mobilisation and also the compulsion of federal structure.
 
It is ironical that neighbouring India which reeled under a very complex system of indirect taxes for more than a century has chosen to simplify it through the Goods and Services Tax (GST), under which a consumer anywhere in India pays the same aggregated and transparent indirect tax on a product uniformly throughout the country, thereby integrating the Indian market into an organic whole. The Nepali market is disintegrating into seven different provinces because of the various taxes and fees levied by the provincial as well as local governments. This emerging chaotic system of indirect tax has the adverse potential to raise the costs, hurt domestic consumers, discourage indigenous production and eventually shrink the economy of the country.
 
In view of Nepal’s aspiration to graduate from a LDC country to a developing country, it is essential that we have a long term transparent tax policy fully integrated not only with our neighbor but also akin to international norms. Foreign direct investment (FDI) does not seek exemption but do favour a simple predictable progressive transparent tax regime. Expanding tax network, simplifying procedures, incentivizing investment, controlling tax evasions, all of these have to be the critical components of a long term tax regime. GST in India necessitates us to respond.
 
Many times politics and trade tend to collide in the sphere of legislation of tax policies, laws, rules and regulations as if the private sector is inimical to the public welfare. But if what is legislated for public welfare becomes counter-productive, it is good neither for people’s representatives nor for the private sector. The next budget has to reconcile the two so as to send positive messages to consumers as well as investors.
 
 
6. Resource Mobilization
In view of Nepal’s need to invest Rs 1,800 billion per annum to meet UN’s Sustainable Development Goals (SDGs) by 2030, the revenue collection which falls far short of even meeting general administrative expenditure only highlights the gravity of scarce financial resources. This scarcity of resources and inability to address the issues in each and every budget for the last five years is our weakness as well as a threat. It has further accentuated under federalism. This dire situation should deserve the attention of us all, the public, the private, the political parties and the government to co-ordinate and co-operate in arriving at a consensus which along with fiscal discipline may enable certain harsh measures which may not be popular at all.
 
Stopping frittering away public spending on too many projects which are neither commercially nor socially viable should be our first and foremost requirement. There has to be a fixed criterion for selecting projects for funding by budgetary allocation. It has been reported that thousands of projects worth approx. Rs 120 billion is in disarray for the last one decade. The corruption perception index for Nepal is not encouraging either. The budget for FY 2075/76 has to be a paradigm shift in response. Promises, if not delivered, not only fritter away resources but also dampen the people’s faith in government’s integrity. So it is politically prudent that in selecting projects, economic and social forces should play a bigger role. Too many welfare schemes directed for the same purposes need consolidation starting this financial year.
 
Revenue grows if the economy grows. In FY 2074/75, the total GDP of the country was Rs 3,300 billion and the revenue collection was approximately 20 percent of the amount. Doubling the economy in five years will require a compounded GDP growth rate of 15 percent per annum as against the present 5.5 percent. This is an enormous task and unless all the political parties come together to undertake it fears are that soon China the country with the highest GDP in the world in the north  and India the third largest GDP globally in the South may swamp and submerge us with no independent choices. The only available option is to invest in capital assets. Investment is slowing internally as well as externally because of high cost of production and high risks associated with investing. Risks in investment, whether internal or external, need to be assessed from an investors’ angle and remedial policy frame-work instituted to mitigate them and/or make them manageable.
 
The Doing Business report sends the message to potential investors what to expect here. The success and failure of last two decades of attempts to allure FDI in Nepal should be enough to teach us what sort of investment friendly ambience we need to usher. It is regrettable that we are still in an experimental phase. Unless the private sector in Nepal chooses to invest aggressively, message of friendly investment climate here will not percolate convincingly to them. It is not that every entrepreneur is eager to invest abroad. Those who invest abroad are few and they through their agents know what is happening in Nepal and therefore just promises may not help, the transformation has to speak loud in action. A culture of equity rather than loans should be the next generation reform. Foreign investors investing in Nepal will have a spillover effect of redirecting international loan and equity funds to Nepal. Even government PSU which are loss making and send negative message as to government’s role in the economy, may find buyers in the international community of investors. The non-resident Nepalis (NRNs) and their association can play a meaningful role in this regard.
 
There are phases in economic developmental evolution. The first phase is public sector domination, the second that of PPP model in which private sector is in transit mode and lastly it is the private sector which takes over fully. Nepal has come out partially from PSU’s dominated economy but has not entered into PPP model so that the private sector can fully take-over in the nearest future. The PPP model builds trusts. Europe has had many successful PPP models. India and Bangladesh, too, have successfully experimented the PPP model in selected sectors. Though Nepal enacted relevant laws long ago, it is yet to promote the PPP model aggressively. The model has four distinct advantages namely a) Budgetary enlargement b) Skill enhancement c) Entrepreneurial challenges for all the partners d) Synergy of working together. However, it is not easy to promote PPP as the peoples’ representative and the private sector do not trust each other or they form a nexus thereby the projects are doomed to fail. However, ways have been found to overcome these shortcomings and there is no reason to believe that they cannot be overcome in Nepal.
 
The reality-pressure demands that our economy has to shift from a loan-driven one to an equity-driven one. The perennial problem of paucity of funds with the banks for lending purpose has to be solved, if necessary by infusion of fresh fund by a few more internationally acclaimed banks. Savings retail as well as corporate can be incentivised. Banks also need to review their revenue model. For capital investments, the costs and the volatility of capital has to substantially come down. We have globalized our external trade but so far desisted from globalizing our capital market. The international linkage in external political relations needs to be leveraged to globalize our capital market. It will not only strengthen our political relations further but also showcase our investment opportunities and trade options. It will be difficult to attract large scale foreign investments and enlarge the economy to the desired levels unless and until the government makes a paradigm shift in scaling down the high cost economy to reasonable competitive levels and make the risks manageable.
 
7. Climate Change and Investment
The issue of knowing fully the impact of climate change on the dynamics of our economy has not found a centre-stage in our developmental strategy and efforts. The budget for FY 2076/77 must think beyond traditional determinants of growth. It is likely that if climate change is not factored in our efforts, the GDP growth will be adversely eroded affecting agriculture, production and standard of living of the poor, aggregating accentuating the already entrenched problem of poverty and inequality in rural areas. The next budget should open a new chapter of promoting a climate change investment plan which focuses on expediting generation of clean energy, replacing fossil fuel sooner than later, the control on carbon, emission, effluent treatments, waste management etc i.e. to massively and aggressively adopt technologies which are eco-friendly.
 
To conclude, the next budget has to start being a trend setter. It has not only to open up new avenues of futuristic agenda but also start giving new perspective and prescription to the old issues. The five C’s i.e. communication, competition, creativity, critical thinking and co-operation have to be the hall mark of our future strategic planning. Let the next budget flag it off. 
 
The writer is the Chairman of Nimbus Group.
 

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