Experts call for moves to sustain economic reformExperts on Thursday urged the government to formulate better fiscal measures and enhance tax reform to achieve its economic reform targets.
Experts on Thursday urged the government to formulate better fiscal measures and enhance tax reform to achieve its economic reform targets. They called for initiatives to reduce the existing high capital output ratio, improve road connectivity, ensure good governance and check the high recurrent expenditure as part of comprehensive economic reform.
Nepal launched economic reform more than two decades ago by adopting a liberalisation policy. Since then, the country has seen improvements in social indicators in particular. However, slow development in the manufacturing sector, increased migrant worker departures, widening gap between exports and imports, bureaucratic inefficiency, political instability and widespread corruption have prevented the country from achieving its economic goals.
Speaking on the subject ‘Tax Policy and Reforms in South Asian Countries’ at a programme organised by the South Asia Network of Economic Research Institutes (SANEI), former finance minister Ram Sharan Mahat said the government should consider reform as a continuous endeavour.
According to him, the government needs to address the sharp deterioration in productivity and export competitiveness that have been seen of late. “Only these measures can make the economic reform process sustainable,” Mahat said.
Nepal’s public investment is not only low at around 5 percent of GDP, but also inefficient as reflected in the high incremental capital-output ratio, Mahat said while presenting a paper entitled ‘Economic Reforms in South Asia with Special Reference to Nepal’. “Under-spending the capital budget due to prolonged delays in the completion of projects is evidence of inefficiency which also increases costs.”
Although economic recovery seems to have gained momentum with the country achieving a growth rate of 6.9 percent last year, a soaring trade deficit, increasing dependency on foreign aid and loans, widening current account deficit and low capital expenditure, among others, are posing a severe threat to Nepal’s economy.
Following the establishment of a federal system, the government needs to make large budget allocations for regular expenditure. The administrative expenses of the three tiers of government—federal, provincial and local—amount to at least 40 percent of the country’s GDP, Mahat said. “The federal transition cost is likely to stand at 3-4 percent of GDP annually for the next four years.”
Mahat stressed the need to attract more private and foreign direct investment by expanding high quality infrastructure like roads and airports and improving rural connectivity.
Economist Dilli Raj Khanal blamed previous governments for over-emphasising deregulation under the pretext of economic reform. As a result, issues like inequality, exclusion and ecological imbalance were not properly addressed. “The present government, therefore, needs to bring comprehensive reform measures to check these problems.”
SR Osmani, professor at the University of Ulster, UK, cautioned the government about distortions in the labour market that have impeded economic productivity and transformation.
Pierre Jacquet, president of the Global Development Network, stressed the need to set a promising relationship between public spending, public taxation and inequality.
“The government needs to use taxes to change the behaviour in connection with the provision of public goods and the protection of the environment by reforming the tax system,” he said.