Government whittles down budget after failing to increase spendingDespite the 10 percent cut, it believes that the bold growth target of 8.5 percent can still be achieved.
Presenting a mid-term review of the annual financial plan on Wednesday, Finance Minister Yuba Raj Khatiwada said that it had been trimmed to Rs1.38 trillion from the Rs1.53 trillion announced on May 30 last year.
Despite the cut, the government believes that it can still achieve the bold growth target of 8.5 percent. “Most of the economic indicators are improving,” said Khatiwada.
"Our initial report suggests that we are on track to spend 80 percent of our capital budget and 90 percent of our recurrent expenditure,” he told a press meet. “This gives us ample room to believe that economic growth, though it will not reach our targeted number, will get close to it,” said Khatiwada, without giving figures.
He said that there are many ongoing reforms. “We will get rid of the spending budget by the end of the fiscal year from now onwards as all project contracts have to be awarded by mid-March. “The concerned authority needs to surrender the budget if it fails to use it by mid-March.”
A major portion of development projects, such as road building, takes place towards the end of the fiscal year when the monsoon starts intensifying.
As a result, capital spending gets bunched up in the final months of the fiscal year. The spending rush also leads to poor quality construction which requires major repair and maintenance in later years, resulting in a waste of taxpayer money.
Following the budget revision, Rs944.68 billion will be set aside for recurrent expenditure, Rs326.81 billion for capital expenditure, and Rs154.69 billion for financing provisions. More than Rs81 billion has been slashed from the capital spending budget.
The Finance Ministry has also revised its sources of funds. It will raise Rs43.55 billion through foreign grants, down from the original proposal of Rs57.99 billion. It plans to take foreign loans amounting to Rs299 billion, and raise Rs113.25 billion in revenues and domestic loans.
Among the series of ambitious proposals and goals, the government budget had planned to keep inflation at 6 percent, a target some analysts had called 'questionable' at that time.
In the mid-term review, the Finance Ministry said that inflation remained high at 6.4 percent, compared to 4.2 percent during the same period in the last fiscal year. “The inflationary pressure was a result of a price hike in some food commodities,” said Khatiwada.
The ministry said that only 27.6 percent or Rs422.55 billion had been spent in the first six months of the fiscal year. The ministry said that recurrent spending was recorded at 35 percent and capital spending at 17.7 percent in the first half. It said that 15 percent of the budget under the financing heading had been spent.
Out of the Rs102 billion allocated for national pride projects, only 19 percent or Rs20 billion has been spent so far, the ministry said.
Many international multilateral agencies have projected that Nepal’s economic growth rate may be over 6 percent this fiscal year. The International Monetary Fund has said that Nepal's economic growth will moderate to 6 percent while the Asian Development Bank has projected a growth rate of 6.3 percent for this fiscal year.
Minister Khatiwada claimed that except for a few crops, the overall agriculture sector had shown growth and that industrial production had expanded. Nepal’s exports grew by 26 percent and the trade deficit has been narrowing, he said.
The balance of payments, which was negative in the same period last year, showed a surplus of Rs26.65 billion in the first six months of this fiscal year. The net foreign exchange reserve has increased by Rs57 billion to Rs1.96 trillion, enough to pay for imports of merchandise goods and services for 8.4 months.
“There has been increased investment in the hospitality, hydropower, airport, road, school and other private housing sectors. All this indicates that Nepal will achieve high economic growth in this fiscal year as well,” said Khatiwada.
But some economists say Nepal’s outlook will be different after China’s coronavirus outbreak.
Former finance minister Ram Sharan Mahat said that the outbreak was a new risk to Nepal’s economic outlook. “Most of our large-scale projects have Chinese contractors, and they have been locked down in their country since mid-January after they returned for New Year celebrations,” he said.
The hydropower sector, especially Chinese-funded projects, may see a large impact.
The 456 megawatt Tamakoshi Hydropower Project in Dolakha district, which has reached the final phase of completion, could be impacted by the absence of skilled Chinese workers who were heavily involved in the scheme, said officials.
The 140 megawatt Tanahu Hydropower Project on the Seti River, 111 megawatt Rasuwagadhi Hydroelectric Project, 120 megawatt Rasuwa-Bhotekoshi Hydropower Project, 102 megawatt Madhya Bhotekoshi Hydropower Project, and the 37 megawatt Upper Trishuli 3B Hydropower Project are all being built by Chinese contractors.
There are at least five transmission line projects being constructed by Chinese firms—the 220 kV Bharatpur-Bardaghat, Chilime-Trishuli 3B and Ramechhap-Garjyang transmission line projects, and the 132 kV Bharatpur and 220 kV Trishuli substation projects.
In the Kathmandu Valley, the smart electricity metering project has also been awarded to a Chinese contractor. The ongoing construction of two international airports in Pokhara and Bhairahawa has already been affected, as half of the skilled Chinese workers who went home for the holidays are under lockdown and unable to return.
According to Mahat, the ongoing Visit Nepal 2020 campaign has also been impacted by the virus outbreak, and hotels and restaurants including other service sectors are being hit after arrivals from China started to drop sharply.
“It’s too early to comment, but the economic impact of the coronavirus outbreak could shave some percentage points from the full-year GDP growth,” he said. “The economic growth of over 8 percent is a high target. They keep on setting high targets, irrespective of their poor preparation.”