Getting fiscal priorities rightIt is hard to be elated by looking at the government’s programmes for the upcoming fiscal year.
Finally, we seem to have come out of the Covid-19 pandemic. The World Health Organization (WHO) declared that the Covid is now an established and ongoing health issue, which means that it is no longer a public health emergency of international concern. The relief of returning to normal should lead to a flow of energy reverberating the entire economy to go to the normal cycle of demand and supply. This is particularly important to underpin in our case, as we are preparing the budget for fiscal year (FY) 2023-24.
The government’s growth projection for FY 2022-23 has alluded to a weakening economy and low investment. The National Statistics Office (NSO) has unveiled the analytical work by stating that gross domestic product (GDP) growth for FY 2022-23 will remain at just 2.16 percent at the base price. The growth rate for FY 2022-23 is quite a fall from the growth projections of the previous years. The NSO has projected the growth for FY 2021-22 and FY 2020-21 at 5.26 and 4.49 percent respectively. The confidence of investors will remain low owing to the dismal economic growth and the political uncertainty triggered by the unsatiable power hunger of new forces and the corrupt mindset of old forces. The neglect of political leadership has been an issue in rescuing the economy in crisis. Against this backdrop, the government must bring a budget that enables the private sector to be more active and invest confidently.
The past three years have witnessed a marginal increase in the contribution of the tertiary sector in the economy, whereas the contribution of the primary and secondary sectors is decreasing. Despite this, the government has remained indifferent to the challenges faced by the services sector. The government should come up with an action plan embedded with the budget that unlocks the key constraints for the services sector to thrive. This brings us to the question: What can the government do at this point? Well, it can take several actions, including streamlining the interest rates that give priority sectors a way out along with lubricating the process of doing business.
Missing link: MSMEs
At the beginning of 2020, Covid-19 posed a global threat to public health, ravaging supply chains and economies. Micro, small, and medium enterprises (MSMEs) suffered the most, along with the hospitality sector, due to the pandemic. Nepal’s tourism sector was hit hard, forcing many entrepreneurs to go bankrupt. The government should, therefore, focus on helping MSMEs, particularly tourism MSMEs, by enhancing access to finance. The International Finance Corporation (IFC) estimates that 65 million firms, or 40 percent of formal MSMEs in developing countries, have an unmet financing need of US$5.2 trillion annually, equivalent to 1.4 times the current level of global MSME lending. In Nepal, approximately 3 million people are employed by MSMEs, which is 45 percent of total jobs. The Asian Development Bank (ADB) estimates that the financing gap for MSMEs in Nepal is US$3.6 million. The government should devise a plan to boost the confidence of the tourism sector and bridge the financing gap for MSMEs through the budget.
Pessimistic Kose-Ohnsorge report
In the long term, the growth prospects are falling. A report from the World Bank, titled Falling Long-Term Growth Prospects: Trends, Expectations, and Policies, edited by M Ayhan Kose and Franziska Ohnsorge, argues that a structural growth slowdown is underway. The report states that at current trends, the global potential growth rate—the maximum rate at which an economy can grow without igniting inflation—is expected to fall to a three-decade low over the remainder of the 2020s. Nearly all the forces that have powered growth and prosperity since the early 1990s have weakened. The report further argues that such a slowdown is not merely due to shocks and aftershocks in the last three years but also other structural issues, such as declining investment growth and total factor productivity. The global slowdown will certainly reflect on the domestic economy as well.
If the growth continues to fall or remains at its lowest throughout the 2020s, Nepal will lose the demographic dividend by 2030. This means we will lose hope of becoming a prosperous middle-income country and eventually a developed one. Nepal’s growth path is unclear and disconcerting. As the government is preparing its 16th periodic plan, there needs to be a real public-private dialogue right from the beginning on each aspect of it and all its strategies.
The government has proposed broad areas of principles and priorities in Parliament that are being challenged by opposition forces. Finance Minister Prakash Sharan Mahat presented the Principles and Priorities of Fiscal Budget 2023-24 on May 7, 2023. The principles are categorised into six major themes: Ensuring sustainable, expansive and inclusive economic growth as well as integrated economic stability; social justice and development of the social sector; sustainable development and climate change; strengthening federalism; promoting the private sector as the driver of economic growth; and promoting good governance and improving service delivery.
Moreover, the government has put forward some very similar programmes to those of the previous fiscal years. For instance, agricultural programmes to increase the farmers’ income and improve their lifestyle; industrial sector development and productivity increases to reduce trade deficit; programmes to support MSMEs; and programmes to promote entrepreneurship and encourage start-ups. Most of the other programmes are just repetitions of the past ones. Anchoring hydropower, natural resources and tourism as priority sectors is nothing new.
Carefully crafted specific programmes within these sectors are needed so that there can be more focus and the right implementation. In most cases, the government’s failure is not lack of programmes and priority sectors but rather a robust programme that can be implemented linearly. More importantly, governments often fail to implement their own annual programmes and policies primarily due to capability traps, as explained by Pritchett, Woolcock & Andrews in their analysis on The Mechanisms of Persistent Implementation Failure. In Nepal, most policies and programmes do not yield desired results because our state agencies lack the capability to implement them on time and in the right way.
It is hard to get elated just by looking at the principles and programmes proposed by the government, although they are yet to be endorsed by Parliament. What remains to be seen is the actual budget allocation for the priority areas. Even more important is the timely and efficient implementation of the budget. That will determine whether we can prove Kose and Ohnsorge wrong in the remaining years of the 2020s.