The November 27 review meeting of the government’s performance in the first quarter of the current fiscal year (2024-25) was reportedly a big disappointment to the ministers and secretaries. Prime Minister KP Sharam Oli lambasted the dismal performance of key ministries and was irked by the worrisome economic indicators.

Nepali economy reels under unpalatable paradoxical indicators. On the upside, the current account surplus is Rs112 billion, whereas the balance of payment is also in surplus of Rs185 billion. Further, the remittance inflow is impressive, with more than 10 percent growth. The foreign currency reserve is the highest in Nepal's history, touching $16.6 billion. The loanable liquidity available in the banking system has crossed Rs700 billion. Similarly, the non-performing assets in banks and financial institutions have gone up to 4.5 percent of disbursement. In its first quarterly review published last week, the Nepal Rastra Bank has chosen not to change its main monetary policy stance.

During the first four months of the current fiscal year, till mid-November, merchandise exports were only Rs46 billion against the import of Rs513.4 billion. Capital expenditure remains pathetic at less than 11 percent of the capital allocation of Rs357 billion while it should have crossed at least 35 percent on average. Similarly, revenue collection is short of its quarterly target by about 15 percent. However, public debt is expanding exponentially, crossing 45 percent of the national gross domestic product (GDP) at Rs5.7 trillion. Development partners have not released any grants so far during the last four months of the fiscal year, and public financial management has thus become increasingly challenging.

An agonising question here is: Despite some strong fiscal and monetary fundamentals as indicated above, why has the economic administration of the state failed to utilise them and waded through a widespread loss of confidence among investors, consumers and players in the market? Apparently, the reason for economic underperformance and pessimism is not only the inadequacy of financial resources but also the lack of failure in the overall economic management of the government on both fiscal and non-fiscal fronts.

Economic management

Economic management covers the quality of three closely related policy areas: Fiscal and monetary policies and sovereign debt. It is almost everything about an economy’s operation and governance.

Despite shrinking revenue and alarmingly ebbing financial assistance from its development partners, managing a smooth stream of financial resources has been the greatest challenge to Nepal's fiscal policy or budget balance. Over the decades, subsequent governments have failed to consolidate their tax base and tax net, and undermined the importance of exploring new sources of capital to flow into the economy. Overdependence on import-based revenue is antithetical to the very idea of making the economy self-sustainable. The cause of concern is that the sovereign has barely demonstrated the management skills required to bridge the development financing gap, which is becoming herculean with time.

Nepal Government’s official review report states that “to achieve the targets of the 2030 Agenda (Sustainable Development Goals and Paris Agreement 2030), a total investment of $163 billion is required for 2024-30, i.e. more than $23 billion per year”. This is an impossible task given that Nepal's total national budget in actual is barely $10 billion. Unless the government demonstrates its creative resource management ability, our dream of development and prosperity will not even be partially realised.

The second glaring challenge is the lack of capacity for resource absorption at the government’s executing units, from federal ministries to ward offices in municipalities. Not only has the capital budget allocation come to 18 percent of the total budget outlay, but only about 60 percent of it is spent. This is purely a question of management efficiency at all levels: Project prioritisation, project implementation and project management at the ground level.

Third, the biggest hurdle for the provincial and local levels is the lack of skilled human resources with economic understanding and management skills. Finding and maintaining human resources with thematic and sectoral competence, even at the provincial level, for planning, prioritisation, public procurement, plan implementation, expenditure effectiveness and expenditure monitoring is proving daunting. The situation is far more dire at the municipality level.

Due to the lack of efficient economic management in all three tiers of the government, the necessity to review formulas of equalisation, grant allocation, revenue and other financial resource sharing does not seem to be the priority of the dispensation. After almost a decade of fiscal federalism, it is now imperative to have an evidence-based approach to review the institutional and operational efficacy of the gamut of public financial management under the federal polity.

Emerging challenges

Evidently, Nepal's conventional economic management paradigm faces challenges stemming from the vicious cycle of low resource availability and efficiency and low level of economic output (growth). A peek into the future brings about a new set of challenges to the fore. Among dozens of issues, three problems warrant immediate policy attention.

One, Nepal's political and bureaucratic decision-making process has summarily failed to take the state’s federal architecture into due cognisance. Such evasion, omission and ad-hocism are more pronounced in economic and financial matters.

Two, a critical departure is inevitable to manage the trade-off between Nepal's acute infrastructural social development needs and the obligation to make all these sustainable and environment-friendly. The unequivocal necessity to reduce the risk of climate change-induced disasters and prepare for post-disaster rescue, relief and rehabilitation compels us to source additional financial resources and their effective mobilisation.

Finally, like any other developing country, Nepal's prospects of catching up to become a digitally advanced and knowledge-centric nation are contingent on its ability to invest in these capital-intensive endeavours. To bridge the growing digital divide across regions, ethnicities, economic classes and genders, effective economic management would entail not only finding the financial means but also involving a substantial social capital for judicious outcomes from every drop of the nation's investment.