High-sounding budget holds little water
KATHMANDU, July 17:
After unveiling the budget for Fiscal Year 2014/15 in parliament last Sunday, Minister for Finance Ram Sharan Mahat received some positive responses from the private sector and economists for announcing legal reforms to attract private and foreign investment.
But investment doesn´t flow without being tangible improvement in doing business. This is something that Nepal has long experienced. In this regard, the budget failed to diagnose the deep-rooted problems of the economy like low job creation, burgeoning trade deficit, high inflation and low productivity.
It also failed to launch concrete reforms in health and education sectors where the state has been pouring lots of money but results are very poor. Mahat, who is known as an advocate of ´investment with efficiency´, forgot to unertake any reform initiatives in education and health sectors.
A study conducted by the World Bank in 2005 showed that the government needed Rs 2 billion for the redeployment of school teachers. The government would also face the additional financial burden of paying the salary of school teachers after the completion of the donor-assisted ´School Sector Reform Program´ (SSRP).
Similar to the free education program, sustainability of some of the welfare programs have also been questioned in the absence of proper reform. The finance minister overlooked these sectors but announced that the government would table new acts and required amendment in 35 legislatures to attract investments.
EXPENDITURE TREND AND ANNOUNCEMENT OF REFORMS
Two-thirds of the government´s capital expenditure gets spent during the last quarter of the fiscal year and line ministries start to transfer funds to other budgetary headings to show good performance.
This time the budget targeted spending more as capital expenditure -- Rs 116.75 billion --without changing the processes of how it is traditionally spent.
“With the current set-up in budget execution and approvals, it is a challenge to spend all the money,” senior economist Bishwambher Pyakuryal told Republica.
The Ministry of Finance (MoF) needs some clarity on these two issues since they will remain at the heart of the absorption capacity.
The budget for Fiscal Year 2013/14 at least blocked the system of transferring of funds in the last quarter.
Mahat, who is known as a qualified finance minister, removed this ban on such transfer of funds. He said that he was trying to reform the expenditure policy by bringing Fiscal Accountability Act. The budget has also promised a slew of new or amended acts.
That too is going to be difficult as these new and amended acts have been gathering dust at various ministries and during the previous Constituent Assembly (CA) for a long time. The process of enacting new or amended legislation is going to take a lot of time unless CA members fast track it. It is difficult to hope the process goes on fast track because the Special Economic Zone (SEZ) bill, which the finance minister announced he would bring out very soon, was first time tabled in 2007.
LACKS OF ACTION-MATRIX
The budget failed to announce an ‘action matrix’ for time-bound implementation of its plans.
“We´ve heard a lot of announcements like these in the past. But they remained just speeches,” Hari Bhakta Sharma, the senior vice president of the Confederation of Nepalese Industries (CNI) said, adding “The government should be action-oriented to achieve its outcomes, announcement alone doesn’t guarantee output.”
The government has to implement the budget by preparing action-matrices for time-bound implementation, according to private sector leaders.
Capital expenditure is also sluggish due to lack of a strong monitoring mechanism. The government announced that it would amend the Public Procurement Act to expedite development works but remained silent on establishing a strong mechanism for monitoring the development projects.
INFLATED BUDGET
The government plans to spend Rs 618.1 billion in Fiscal Year 2014/15 -- Rs 398.95 billion under the recurrent heading; Rs 116.75 billion under capital expenditure and Rs 102.39 billion under the financing heading. It is using last year´s savings (Rs 18.5 billion) as this year´s revenue to finance deficit. This is not a standard practice as last year´s savings cannot be this year´s revenue. The team involved in budget formulation has to generate money from somewhere to make up for the increase in expenditure at the last moment and they resorted to this one.
Ideally, countries use fiscal savings to either pay off debt or create a trust fund to finance infrastructure projects that run into deficit.
The Ministry of Finance folks decided to use that money to fund part of recurrent and capital expenditures. This inflated the budget a bit.
The finance minister has to answer what happens if we don´t have fiscal surplus in Fiscal Year 2015/16. Since the expenditure headings will be there in the Red Book already, from where will the government find the money to finance more expenditure in the Fiscal Year 2016 budget? They have only one option – raise taxes and tariffs.
“It is a very bad practice and bad fiscal accounting to include last year´s fiscal surplus as this year´s revenue and use that to finance deficit,” a renown economist requesting anonymity said, adding “This is going to set a bad precedent. Ideally, that money should go to a trust fund or a special purpose fund that is used for special purpose in a fast track way to finance infrastructure projects of national importance.”
Source: Republica
