The Finance Ministry has begun writing to several other ministries to put new projects on hold as it prepares to introduce the budget for the next fiscal year amid a slowing economy due to the effects of the Covid-19 pandemic.

The government has frozen new hires and there won't be an increase in the salaries of civil servants this year even as tax rates go up, according to Finance Ministry sources.

The impact of the lockdown on businesses and a drastic reduction in remittance, all caused by the Covid-19 pandemic, will be reflected in the reduced size of the annual budget and its spending allocation.

Ever since the government instituted a nationwide lockdown to prevent the spread of Covid-19, Nepal has been in the midst of financial stress. The lockdown, which has been in place for over a month, has reduced consumer spending and impacted domestic worker wages and money remitted by migrant workers, according to economists.

"This, in turn, has caused sales and income tax revenues, the major source of capital in the annual budget, to plummet,” said economist Bishwamber Pyakurel. "Given the deficit in financial resources, the government should dramatically reduce the size of the budget, with allocation only for development projects that are in the final phase of completion.”

According to government officials, the upcoming budget will focus on improving health infrastructure as the pandemic has brought to light its poor state, which has increased Nepal’s vulnerability to the coronavirus. The budget will also focus on employment generation, as tens of thousands of Nepali migrant workers are expected to return home after losing their jobs in foreign countries due to the global economic crisis caused by the pandemic.

The Ministry of Labour and Employment has projected that around 400,000 Nepalis are expected to return home. This number will supplement the thousands of domestic workers who will also lose jobs at home.

According to finance experts, a reduction in the size of the budget could benefit the country, as every year, a large budget is introduced and the government fails to spend it.

“This government appears to believe that a bigger budget brings about development and prosperity faster,” Ram Sharan Mahat, a former finance minister, told the Post. “But the success of the budget depends on its implementation."

According to Mahat, who is also the coordinator of the special budget committee formed by the opposition Nepali Congress, the size of the budget should not be bigger than Rs 1.2 trillion.

In February, the government had whittled down the budget for this fiscal year by 10 percent after realising that it wouldn't be able to spend the amounts allocated. In the mid-term budget review, Finance Minister Yubaraj Khatiwada had trimmed the budget down to Rs 1.38 trillion from Rs 1.53 trillion.

Pushpa Raj Kandel, vice-chairman of the National Planning Commission, told the Post early this week that the resource committee he heads will likely make a downward revision in the budget ceiling by 5-10 percent.

Various ministries and government agencies prepare a list of projects and programmes based on the ceiling set by the resource committee and the Finance Ministry, taking the planned projects into account, prepares the budget.

The Department of Roads expects its budget allocation to be reduced by 20-25 percent, said Shivahari Sapkota, the department spokesperson.

“Besides a reduction in the budget ceiling, we have been advised not to incorporate any new projects,” he said.

In the current fiscal year, the Road Department received a budget allocation of Rs124 billion. But in line with Mahat’s assessment, Sapkota admitted that only 32 percent of that budget had been spent so far, as most projects have stalled due to the ongoing lockdown. The lockdown, however, was only imposed on March 24, just around two months before the end of the fiscal year in mid-May.

The Ministry of Urban Development had a ceiling of Rs29 billion for the next fiscal year.

“We had prepared our programmes based on the ceiling given to us, but we have been told that the revised ceiling could go down by 15 percent,” said Madhusudan Adhikari, a secretary at the ministry.

According to Adhikari, his ministry will continue to implement the plan of creating urban centres along the mid-hill highways and constructing major infrastructure, including the new parliament building on the premises of Singha Durbar.

The government has been forced to lower the budget ceiling as it has been collecting far less revenue than in the previous years due to the lockdown. Customs offices are major sources of revenue for the treasury but ever since the closure of the international border, only medical goods and essential food items have come in, and these goods are either at zero or very low tariffs.

The domestic economy too has come to a standstill, affecting internal revenue collection. Income tax and value added tax have not been collected as the government decided on April 30 to allow businesses to postpone payments in light of the impact of Covid-19.

Given the shortfall in revenue collection, the government has been seeking more funds from donors, but donor economies too are predicted to contract in the aftermath of the pandemic, likely affecting the amounts they provide.

But the government is also under pressure to provide relief to the unemployed and stimulus packages to businesses.

"The government will need to roll out a raft of fiscal and monetary measures to provide credit and tax relief to companies, especially small businesses that have been hit hard by the outbreak,” said economist Pyakural.

The Central Bureau of Statistics last week projected the country’s economy to grow at a meagre 2.27 percent in the current fiscal year, the lowest since the 2015-16 fiscal year when the country witnessed a growth of just 0.2 percent after experiencing devastating earthquakes in 2015 followed by an Indian trade blockade.

With economic activities battered by the ongoing lockdown and uncertainty over the end to the pandemic, the government is facing the prospect of low revenue collection in the upcoming fiscal too, prompting it to review the budget ceiling.

As of mid-April, the federal government’s revenue collection had been short of its target by Rs200 billion, according to the Finance Ministry.

According to economist Pyakurel, the upcoming budget should be drafted with a clear roadmap for the next two years. “A poor response to the pandemic and a failure to revive the economy could be disastrous,” he said.