Prime Minister Pushpa Kamal Dahal got it right when he acknowledged the sorry state of the Nepali economy, and made its revival the first priority of his government. But one wonders if he remembers that the architect who created this mess is no other than one of his most trusted lieutenants, Janardan Sharma, who was finance minister in the erstwhile Congress-Maoist coalition government headed by Sher Bahadur Deuba. Sharma's mishandling of the economy in the last one and a half years in collusion with a handful of Deuba's henchmen resulted in the fiasco the country finds itself in today.

But the optimism produced by the prime minister's reassuring proclamation quickly turned to despair by his choice of Bishnu Paudel as finance minister. The structure of the committee formed to draft the government's common minimum programme is another cause for dejection. Paudel failed to make any noticeable contribution towards addressing the chronic ailments of the economy during his two stints as finance minister, and the committee failed to include even a single economist or planner as member.

“Putting the economy on top of the priority list” has become an overused platitude by successive governments. Given the downward trend in many crucial sectors of the economy, if the new government fails to take bold corrective measures beyond speaking in cliché, that will be another costly missed opportunity for the country.

Absorption capacity

Nepal's pathetic resource absorption capacity has become chronic. The first half of fiscal 2022-23 is about to end, but the capital expenditure by the government has not crossed even 12 percent of the allocated capital budget. This indicates sheer institutional inefficiency and political obliviousness to the problem. Low capital expenditure is the main cause of the liquidity crisis in the financial system, low private investment, delay in public works and reduced purchasing power of consumers. All this has an adverse effect on economic growth. No populist window-dressing is likely to reverse the trend. The Dahal government, too, doesn't appear to be interested in listening to informed voices, let alone implementing their advice.

During the first four months of the fiscal year, Nepal's exports reached only Rs54.77 billion against imports totalling Rs532.69 billion. The trade deficit, including the loss in service imports of Rs23.3 billion, has crossed Rs500 billion. These figures were from the period when the government had imposed a ban on imports of 10 luxury goods. The only possible way to eliminate the trade deficit is import substitution and export promotion. The contribution of the manufacturing sector to the national economy has fallen to nearly 4 percent. Not a single effective policy has come out to facilitate the production of any product on a commercial scale. The mainstay of our economy is claimed to be agriculture, but the import bill of farm and animal products now exceeds 40 percent of total imports.

The external sector has remained shaky not only because of the burgeoning trade deficit. The bleeding of foreign exchange from the system, formally and informally, is huge. Expenses on education, health and recreation and tourism exceed $4 billion against the inflow of workers' remittances of $8 billion a year.

Nepal's policy of encouraging foreign employment instead of creating jobs in the country is clearly erroneous. The country's regulatory system has failed to trace the hefty outflow of capital through shady channels. Over-dependence on only remittance income for foreign exchange is risky. It is also socially unjust to allow the country's ruling elite and well-to-do class to fritter foreign exchange earned by the working class people toiling in foreign lands. Therefore, the whole debate on employment, foreign employment and remittances needs to be reviewed.

Encouraging imports

Nepal's revenue base is so weak that the revenues are not enough to cover recurrent expenditure. What is more appalling is that revenue generation is entirely import based, and the only way to enable the revenue administration to meet its collection target is to encourage imports. When the government imposed a ban on the import of “luxury” goods, it resulted in revenue collection falling short of the target during the last six months. Other structural flaws, like the widespread practice of under-invoicing in imports and the pervasive conflict of interest of “extractive” policymakers, are crippling the system. The politicians and top bureaucrats are among the recipients of lucre who are proving to be a major impediment to reform. The onus of proving that the new government stands on the side of reform lies on Prime Minister Dahal.

Despite the adoption of a federal polity in Nepal, the intent of all seven provincial governments appears to be tilted toward fiscal centralism instead of consolidating the constitutionally designed fiscal federalism. This has had implications on the functionality and delivery of the provincial and local governments. For lack of training and capacity building of the elected executives of these subnational units, public financial management and service delivery have remained suboptimal. The provincial and local governments are unable to spend the budget as they have planned. Citing their inability to enhance the efficiency of public expenditure, the undesirable practice of recentralisation was brought in by past governments. Will this government act in accordance with the essence of fiscal federalism?