The economic challenges facing DeubaThe new prime minister has appointed somebody with unknown credentials as finance minister.
Sher Bahadur Deuba replaced KP Oli as prime minister last week. He has inherited a highly sluggish economy due to the bad fiscal governance of the past, and the pains exacerbated by the Covid-19 pandemic. But the new prime minister also seemed to be indifferent to recognising the immensity of the impending economic hardships and risks. He appointed Janardan Sharma, who has never made his academic credentials public, as finance minister. Sharma certainly is a close confidante of Pushpa Kamal Dahal, chairman of the Maoist Centre, the largest coalition partner in the Deuba-led government. But assigning the finance portfolio to a trained economist shouldn’t have been a political bargaining chip for Dahal during these critical times. To recollect, the economic ills caused by the Oli government was not an item on the main agenda of the five-party opposition alliance formed to dislodge him.
For at least the past 15 years, the practice of appointing a politician, often considered very close to the ruling chief but without even a reasonable level of formal education, let alone in economics, has been repeated constantly. It has taken an obvious toll on Nepal's economic management as manifested in tardy economic growth, massive misappropriation and corruption, and a seemingly irreversible risk on the sustainability of the external sector. It is now an open secret that through the appointment of henchmen instead of professionals, party bigwigs harbour ominous intentions of using this "lucrative" ministry to mint lucre, very often in the interest of the political "godfather". Deuba seemed to have deliberately relented here.
At the programme organised to welcome Sharma as the new minister last Thursday, central bank Governor Maha Prasad Adhikari warned that external sector stability remained precarious due to an exponential rise in the trade deficit coupled with the unavailability of means to curb it in the near future. An added challenge for the upcoming monetary policy will be to resurrect the economy ravaged by the effects of Covid-19-induced lockdowns.
The macroeconomic indicators of the past 11 months of the fiscal year that ended July 15 are gravely worrisome except for the inflow of workers' remittances and tolerable inflation figures. Remittance increased by 10.4 percent to approximately $10.8 billion in the review period. Although the number of migrant workers leaving the country has substantially decreased, the increase in remittance may be attributed to many factors. They include increased amount of dispatches to their dependent families to support them during the pandemic, sustained income and labour security of Nepali workers due to increasingly favourable labour laws in several host countries, and the nature of the jobs taken by most Nepalis, like caregiving, that largely remained unaffected by Covid-19. The consumer price index-based inflation remained at 4.19 percent, contained mainly due to loss of many economic activities for the last one and a half years.
The most alarming figures are in international trade. The total trade deficit increased by 24.6 percent to $10.5 billion during these 11 months, taking the export-import ratio to 9:10. The total import value is more than $11.5 billion. Exports to China have fallen by 17.4 percent. The rise in exports by almost 39 percent is, as always, misleading. One, the total export value is barely $1 billion; and, two, the exact value addition on exported items produced using almost entirely imported inputs hardly leaves any real benefit to the economy. After a long time, the balance of payments also went into a deficit of Rs15 billion. This is indeed an alarm bell even though the foreign exchange reserves of $11.71 billion may look comfortable in the short run. The federal government's capital spending amounted to only Rs143 billion during the period, barely 41 percent of the capital allocation. This is certainly a cause of concern about the economy's absorptive capacity.
Another facet of the crisis in financial management is cropping up from the provinces due to the utter political factionalism. Four out of the seven provincial budgets have either been passed through questionable parliamentary processes or face impediments. Even after five years and as many exercises to present the annual "own fiscal bill" by the local governments, the institutionalisation of the budget process and enhancement of allocative efficiency remain critical. These hiccups in fiscal federalism have given ground for those raising questions about the very raison d'être of federalism in Nepal.
The historic court verdict on July 12 reinstating the federal Parliament dissolved by KP Oli and installing Deuba as prime minister also stated that the budget for the next fiscal year 2021-22 presented through an ordinance by the Oli government "was inappropriate and against the representative system of government". This provides space to the new government "to correct" the "ordnance for budget practice". An overhaul of the budget presented by the outgoing Oli government is indeed a practical necessity to drop many populist programmes and insert grossly missed priorities. However, there are a few very critical catches, too. The constitution specifically mentions that the federal annual budget must be presented on the 15th of the Nepali month of Jestha (end of May). Does that constitutional provision allow the government to present the budget afresh? And, should that provision be violated now with its potential unwanted pitfalls for the future?
Nevertheless, Minister Sharma has announced plans to issue a White Paper on the country's economy and present the budget for the fiscal year 2021-22 in Parliament. It still lacks clarity whether he plans to present the same ordinance budget in the House for ratification or a new one.
Since the government of the day has all the leverage to amend the ordinance budget through amendment, it would only espouse a better national budget culture if the current government could refrain from two political adventurisms. First, not to disregard the importance of the constitutionally set budget date by presenting an entirely new budget since nothing would stop the government from accommodating all its programmes and priorities while passing the ordinance through Parliament. Second, while agreeing that the issuance of the economic White Paper is entirely the government's prerogative, it, however, should not be a political rebuke aimed solely at discrediting the previous government instead of presenting the current state of the country's economy, as did Yubaraj Khatiwada immediately after he took over as finance minister in 2018.
The upcoming monetary policy can also address issues surrounding fiscal relief packages to assist pandemic-hit areas in the economy and boost manufacturing, import substitution and, possibly, exports.