The debate on the proposed budget for Fiscal Year 2024-25, beginning July 16, has begun in the federal Parliament. The debate, though, is a mere ritual. Neither is the debate likely to change the allocation of a single rupee nor is any resource available to upscale or add projects. However, the fiscal bill has somehow rightly diagnosed the maladies that hold back the growth of the Nepali economy. Economic activities could not expand due to a fall in consumer demand, low credit expansion, low capacity of the manufacturing sector and a decline in goods imports. Yet, the growth rate in the current fiscal year is expected to be 3.9 percent at producers’ prices as against only 3.1 percent estimated by the International Monetary Fund.

Also, Finance Minister Barshaman Pun hoped to take the capital expenditure to Rs215.3 billion (71.3 percent of the capital allocation) and collect Rs1,253.5 billion (88.1 percent of the target) in around six weeks of the current fiscal year that remain. Even these substantially downsized targets are unlikely to be met. By June 2, the government had spent only Rs127.85 billion (42.32 percent of the allocation) towards capital expenditure and collected a revenue of Rs873.66 billion (61.42 percent of the target).

Despite acknowledging these growth constraints, the proposed fiscal policy fails to prescribe credible means to restore the confidence of consumers and investors. It is only by restoring the confidence of consumers, investors, and the market that the economy can be reinvigorated. Ironically, the finance minister instead expects appreciation for being 'unambitious' and 'pragmatic' while setting a subdued revenue target of Rs1,260 billion and allocating a capital budget of Rs352.3 billion.

Bulging deficit

The FY 2024-25 budget is a hugely deficit budget by Rs547.8 billion out of the total proposed outlay of Rs1,860.3 billion. The deficit alone is 29.44 percent of the allocation and 9.6 percent of the revised gross domestic product (GDP) value of Rs5,705 billion (USD 42.5 billion). In the coming fiscal year, Rs330 billion will be raised from domestic borrowings and Rs217.7 billion from external borrowings. Even if the revenue of Rs1,260 billion projected by the budget were to be collected, the government cannot escape the current expenditure of Rs1,140.6 billion and default on debt service obligation of Rs357.3 billion.

This means that the sum of revenue and domestic debt will only be enough to cover the expenditures under these two headings, thus leaving an extremely thin scope for generating resources for the Rs352.3 billion allocated for capital expenditures. On the one hand, capital allocation is barely 19 percent of the total allocation, the lowest ratio in Nepal's budget history. On the other, Nepal faces a chronic problem of underspending the earmarked capital budget. An added risk is that due to declining consumption and imports, the revenue target seems unattainable.

Raising loans from external lenders has always been challenging. For example, in the current fiscal year, only half of the expected Rs213 billion would be available for the government to mobilise. If all proposed debts are realised by the next fiscal year, the public debt will climb above 52 percent of GDP.

Under such resource constraints, limited economic activities from the funds transferred by the federal government to the provincial and local levels might marginally contribute to growth and development. However, capital expenditure to implement the large and transformative projects of the federal government looks bleak. This essentially means that the country's economic growth will remain constricted for a few more years.

'Transformative' priorities

The new budget has chosen five sectors as transformative: Agriculture, energy, information technology, tourism promotion, and entrepreneurship and industrial development. There is hardly any debate or novelty in these priorities and objectives. Some initiatives like added focus, at least in theory, on information technology are certainly timely and appropriate. But even in these chosen areas, the fiscal bill has remained short of removing key policy or structural bottlenecks that are proving daunting in realising the true potentials of these sectors. These missed opportunities could have been tapped mostly without draining the exchequer.

Agricultural transformation without first arranging enough land for commercial agriculture is only a pipedream. Haphazard urbanisation has taken place on the most fertile land. The arable land is fragmented into generally tiny 30 million plots under the title of 13.5 million landowners. The average plot size is 0.3 hectares. The fault lies in the ad hoc and largely failed land use planning, which the government has failed to give due attention to.

On energy, Nepal first needs to develop a comprehensive blueprint for the energy economy. On the one hand, the thrill of exporting electricity has swayed national emotion; on the other, industries are demanding to meet their demand for power before exporting it at much cheaper rates than they are charged. It is appropriate to develop an automatic system of providing tariff concessions to manufacturing industries proportionate to the value addition of their products. Lack of coordination among the government agencies overseeing land, forest, environment and infrastructure development remains the main impediment in the construction of both power projects and transmission lines.

Despite bullish ambitions, the government has not been designating an appropriate location for an IT park and developing it with appropriate power, communication, and transport connectivity. Nepal also needs to think beyond adventure and backpacking tourism by developing unique-value products, destinations, and infrastructure to cater to high-value tourists.

The most challenging of all has been to increase productivity and create employment opportunities. The contribution of manufacturing to GDP has fallen below the 4 percent mark. Chronic underinvestment has paralysed the industrial sector. Missing both backward and forward linkages has made the 'herding' model of industries unsustainable. In all these sectors, the budget has taken only a cosmetic approach rather than putting genuine efforts into transforming them. Some key sectors under pressure due to an economic downward spiral, like real estate and housing, cooperatives, microfinance and construction, are highly disappointed with the utter neglect of the budget to address their problems.

Most importantly, the government has failed to realise that without a substantive stimulus package through bold fiscal and monetary policies, the economy has reached a stage of self-recovery on its own. Nepal is destined to reel under recession for some time to come. Growth is a further distant expectation.