Why is the government in a deep fiscal hole?The government has a target of collecting Rs1,403 billion in revenue in the current fiscal year.
The Ministry of Finance decided to cut the government’s administrative expenditures by 20 percent and later asked the provincial and local governments to do the same, citing reduced revenue amid an ever-increasing liability.
According to the ministry, the federal government’s treasury turned negative by Rs90 billion as revenue could not be collected as targeted while liabilities increased in areas of salary, pension, social security allowances, domestic and external debts, supply of chemical fertilisers, and disaster management.
State of revenue collection
The government has the target of collecting Rs1,403 billion in revenue in the current fiscal year, 39.11 percent more than the total revenue generated in 2021-22. In the last fiscal year, the government collected Rs1,008.63 billion, according to the Financial Comptroller General Office.
But the government this year has not even been able to match the kind of revenue it collected in the last fiscal year, let alone collect more to meet the new target.
“In fact, the revenue target was kept artificially high because of the fresh liabilities created by the government, although it was clear that meeting the target would not be easy,” former finance secretary Rameshore Khanal told the Post early last month. “Now, despite the low revenue collection, there is no way the government can cut compulsory liabilities.”
Officials say revenue collection was badly affected because of import control measures. During the first six months of this fiscal, Nepal’s imports dropped by 20.7 percent to Rs792.77 billion, according to Nepal Rastra Bank. Before lifting the import ban on vehicles, expensive mobiles, and alcohol in mid-December last year, they were on the prohibited list for imports from April last year. Likewise, the central bank had made it mandatory to deposit cash margins up to 100 percent to open letters of credit for the import of certain goods.
However, Khanal sees the problem of reduced revenue as a broader problem. “Incapable political and administrative leaderships at the finance ministry are also responsible,” he said.
The government itself admitted that its liability increased because of the decision to hike salaries of public officials by 15 percent, which automatically led to a rise in pensions for retired public officials.
The social security allowance liability also increased because of the lowering of the eligibility age for elderly allowance from 70 years to 68 years from the current fiscal year.
The cost of salaries and allowances for government employees and office bearers this year would rise by over Rs44 billion, according to the budget document of the current fiscal year.
But even increased allocation will not be enough to cover increased liabilities as they have ballooned in light of the populist decisions.
The Pension Management Office said that it is facing a shortfall of around Rs20 billion to distribute pensions in the current fiscal year, with the government allocating far less budget than required.
“We need around Rs75 billion to distribute in pensions in the current fiscal year against the budgetary allocation of around Rs55 billion,” Bishnu Prasad Kharel, chief of the Pension Management Office, told the Post in late January. “That’s why we have sent a request to the finance ministry through Financial Comptroller General Office that around Rs17 billion more be provided to us.”
The Department of National ID and Civil Registration, responsible for the social security pay, said the given budget would not be enough to cover the projected expenditure on social security allowances.
In order to meet the increased liability of social security, the government has allocated Rs105.7 billion, which is an increase of Rs17 billion from last year’s estimate, according to the planned expenditure details, known as the ‘Red Book’, published by the ministry.
An official at the social security section of the department said they require over Rs113 billion to cover increased liabilities. “It is an estimate based on a current number of beneficiaries which stood at3.62 million as of Wednesday,” the official said. “If the number of beneficiaries further increases, even Rs113 billion will not be enough.”
As a result of the government’s lowering of the elderly age, a total of 244,736 beneficiaries increased in this category in the first half of the current fiscal year, according to the department. The total number of beneficiaries increased from 2.04 million in 2021-22 to 3.62 million as of the first week of February, according to the department.
Despite the inadequacy of the budget, the department is yet to seek more money from the finance ministry, according to the official. “But we may demand an extra budget for the fourth quarter.”
Poor debt servicing
The finance ministry said in late January that the funds set aside for debt servicing will not be enough due to the high interest rate of domestic debt and continued devaluation of the Nepali currency against the US dollar.
A total of Rs186.6 billion has been allocated for loan repayment in the current fiscal year, of which Rs134.32 billion is for internal debt servicing. In the last fiscal year, the government had spent Rs121.99 billion in debt servicing.
But the Public Debt Management Office (PDMO) said that the allocated budget will not be enough to repay the internal loans because of increased interest rates in the first half of the fiscal year owing to the liquidity crunch in the banking sector.
“We estimate a shortage of Rs20-Rs25 billion for internal debt servicing,” said Dilaram Giri, information officer at the PDMO. “Our estimate is that the allocated budget will be enough to service external debt so long as the exchange rate remains in the range of Rs130 to a US dollar.”
Populism driving up liabilities
Before the local elections in May 2022, the Nepali Congress had announced in its manifesto to reduce the eligibility age for elderly allowance to 68 years. The budget introduced by the Congress-led government subsequently reduced the eligibility age even though life expectancy of Nepalis has been rising steadily over the years.
There is also a competition among political parties to create long-term liabilities for the country by announcing new populist programmes.
Also, the Common Minimum Programme unveiled by the ruling parties in early January promises to provide, for free, up to 10,000 litres of drinking water per family per month, and 30 and 50 units of electricity per household a month, during the dry and wet seasons, respectively.
The programme also promised a raise in the monthly social security allowance, and an increase in the number of social security allowance beneficiaries from 3.62 million now to six million in five years.
Former minister and finance secretary Bidyadhar Mallik said adding liabilities without a guarantee of resources to meet them is a recipe for disaster. With the government burdening the state with more and more of compulsory liability, the government has now been forced to cut the capital budget.
The finance ministry has asked government agencies to take its approval even to implement development projects that are yet to be contracted out. “Because of additional compulsory liability in social security allowances, salary and pension, the government has now been forced to cut spending on infrastructure projects,” said Mallik. “The government is a major investor in infrastructure in Nepal. Without investing in a capital-generating sector, how can you achieve higher economic growth? And without such growth, how will you collect more revenue?”