With just Rs1 billion in account, most of Rs50 billion fund to aid pandemic-hit sectors may be foreign loansThe government, five months after announcement to set up the economic rehabilitation fund, has made plans to use external loans that it can use at its discretion to lend to businesses at subsidised interest rates.
In his budget speech back in June, then finance minister Yubaraj Khatiwada had announced a Rs50 billion fund for economic rehabilitation of the pandemic-hit sectors.
The source for the funds would be foreign aid, government owned entities and the government’s own resources. With the government having contributed a mere Rs1 billion to the fund, it was clear that most would come as external loans.
But the government has, after five months since the announcement, finally planned how the external loans will be provisioned.
“Foreign aid meant for economic recovery and not tied to any particular project can be injected to this fund,” said Shreekrishna Nepal, chief of the international economic cooperation coordination division at the Finance Ministry.
The government has so far allocated a mere Rs1 billion to the fund to provide subsidised loans for the pandemic-affected cottage, small and medium industries and tourism enterprises at an interest rate of five percent to pay staff salaries and for enterprises facing shortages of working capital to continue operations amid the pandemic.
The decision to use foreign aid for the rehabilitation fund comes amid shrinking revenues. During the first quarter of the fiscal year 2020-21 from mid-July to mid-October, the federal government’s revenue shrank by 9.1 percent to Rs172.36 billion, according to the Finance Ministry. As such, the government is struggling even to meet its administrative costs with the revenue.
Foreign aid usually comes in two forms: for a specific purpose and for general budgetary support which the government can use in any way it wants in its prioritised sectors. The government has planned to use the latter for the rehabilitation fund.
Money that has been received as policy credits can be used for the fund, said Nepal. “The government has not been looking for separate financing from donors targeting the economic rehabilitation fund.”
But it is not just the funds that the government had been indecisive about.
Last week, the Cabinet endorsed the Business Continuity Credit Extension Working Procedure-2020, which has provisions on extension of credit from the economic rehabilitation fund to the pandemic-hit enterprises.
On Friday, the board meeting of the fund, headed by Finance Secretary Sishir Kumar Dhungana, decided that banks and financial institutions would call for credit applications from November 25.
As per the working procedure, banks and financial institutions will be required to decide on extending loans within 15 days of receiving an application.
“It is the government’s commitment to arrange funds up to Rs 50 billion which will happen anyhow,” said Nepal.
It was not immediately clear what amount of resources will be needed to provide subsidised loans as the central bank, where the fund will be established, is yet to enforce the working procedure.
As per the working procedure endorsed by the Cabinet, banks and financial institutions are required to provide credit to the targeted sectors at an interest rate of five percent in the first year and six percent in the second year. Banks and financial institutions will get reimbursement at the interest rate of two percent in the first year and three percent in the second year.
An enterprise will get loans depending on the impact of the pandemic. An enterprise from the most affected sector can get up to Rs100 million while an enterprise from a sector facing medium level impact will get a maximum Rs70 million. An enterprise from a partially affected sector can get up to Rs50 million.
The government plans to provide half of the total credit for the most affected sector while 30 percent will go to the sector facing medium level impact and 20 percent to partially affected sectors.
The setting up of the fund will mean that loans from multilateral agencies will continue to grow.
Even though the country received limited amounts in budgetary support in the past, of late the portion of such credit which the government can use in any sector of its priority has been growing.
In the fiscal year 2019-20, the government received budgetary support of Rs116 billion from the donors, which is nearly 53 percent total foreign aid, according to the Finance Ministry. In the previous fiscal year 2018-19, only 15 percent was received in the form of budget support, according to the Development Cooperation Report 2018-19.
This year too the government has also been signing a number of loan agreements with multilateral donors including the World Bank, the Asian Development Bank and International Monetary Fund to revive the economy battered by the pandemic.
As of the first quarter of the fiscal, the government has already received foreign aid pledges of Rs85.4 billion, according to the ministry, compared to Rs219.88 billion in the whole of last fiscal year.
Meanwhile, according to officials at the Finance Ministry, they are yet to calculate how much funds could be injected by the government, various government entities and donors.
“We will be discussing the issue in the next few days,” said Jhakka Acharya, chief of the financial sector management and corporation coordination division at the ministry.
Tourism, particularly hotels, is one of the sectors most affected by the pandemic and entrepreneurs are optimistic about getting subsidised loans under this scheme.
Binayak Shah, first vice-president of Hotel Association of Nepal, said they welcomed the working procedure even though it was introduced late and now want its early implementation.
He, however, said they were still concerned over the number of pre-conditions to receive the credit.
“It is difficult for many hotels to put additional collateral to get the loans,” he said. “The rule for enterprises to retain the staff is also concerning because there is no hope for the tourism sector’s revival for the next one or two years.”