Government spending hit by slowed revenue inflowOfficials admit that there have been some issues related to payment, but say that the problem is not as severe as made out to be.
Contractor Tanka Chaulagain has not received around Rs160 million from the government for various building projects, including a bridge along the mid-hill highway.
Insiders say the government is low on cash because of slowed revenue collection with the economy in a slump.
“The situation is more severe in infrastructure projects, mainly in the provincial and local governments,” said Chaulagain. “How can we function when the government does not pay us on time? We are not getting bank loans either. Without running capital, it’s difficult to take part in tenders.”
A World Bank report published on Tuesday said a decline in construction activities was one of the key reasons behind Nepal’s slowed economic growth in the current fiscal year.
The construction sector has faced various problems. First, prices of construction materials rose significantly.
Second, credit extended to the construction sector (including residential housing) declined due to lack of loanable funds and high interest rates.
Third, the temporary closure of illegal crusher factories in January 2023 led to a shortage of construction materials such as sand and gravel.
The government instantly backtracked on its decision, and allowed the “illegal” plants to operate under the condition that they get registered and pay taxes by mid-July.
In the first quarter of the current fiscal year, the construction sector, which contributes nearly 7 percent to the country’s gross domestic product, posted a negative growth of 24 percent, according to the Central Bureau of Statistics.
Contractors say that because of low revenue collection this fiscal year, payment issues will be more serious in the next fiscal year.
Contractor Bishnu Bhai Shrestha has a similar story. He says the government owes him around Rs100 million.
Shrestha is currently implementing a Rs600 million school reconstruction project in Sindhupalchok and a Rs250 million building project in Gauradaha, Jhapa.
“There is no cash flow,” he said. “Our projects have been affected.”
A delegation of contractors met with Finance Secretary Toyam Raya on Tuesday and drew his attention towards the payment issues. Raya has asked them to present their grievances in writing.
Nirmal Aryal, deputy director of the Federation of Contractors' Associations of Nepal, said the government owes more than Rs60 billion to various contractors across the country.
Nepal’s construction sector witnessed double-digit growth for two consecutive years following the reconstruction drive after the 2015 earthquake. In 2018-19, the sector saw a robust 8 percent growth, taking the annual output of the construction sector to over Rs 232 billion.
The construction business was hit after the lockdowns began in March 2020, and workers started migrating in search of work.
Just as the industry began recovering in 2022, the country went into a financial crisis.
Around 1.5 million workers are estimated to be engaged in the construction sector. In addition, it employs around 500,000 skilled Indian labourers.
Rabi Singh, president of the Federation of Contractors' Associations of Nepal, told the Post in a recent interview that development works were progressing at a snail’s pace due to inflation and the absence of cash flow.
“The government does not have enough funds to invest in infrastructure as it has been struggling to manage its daily expenses,” he said.
Government officials admit that there have been some issues related to payment, but argue that the problem is not as severe as made out to be.
“Inflation is a worldwide phenomenon and there is a provision for extra payment for the increased cost of construction in big projects,” said Bhimarjun Adhikari, spokesperson for the Ministry of Physical Infrastructure and Transport. “It cannot be made an issue to halt development activities.”
With nearly three months left before the end of the fiscal year, capital expenditure was recorded at a meagre Rs97.91 billion as of Tuesday, which is around 26 percent of the initial target, according to the statistics of the Financial Comptroller General Office.
The Department of Roads has requested the Finance Ministry to arrange Rs23 billion as they are facing problems financing ongoing development activities.
Last year, contractors abruptly halted work at 3,500 of the 5,000 projects across the country citing rising prices of construction materials following the Russia-Ukraine war in February 2022.
The contractors asked the government to adjust the inflation rate in the projects they were working on, largely affecting development across the country.
“There is a provision to address increased cost of construction according to Nepal Rastra Bank’s inflation index,” said Ramhari Pokharel, spokesperson for the Department of Roads, which receives a major chunk of the budget every year.
“Though the Finance Ministry has not been able to manage additional funds, we have received unofficial communication that Rs10 billion has been approved for the Roads Department,” said Pokharel.
In Nepal, construction activities usually pick up after the Dashain and Tihar festivals in the autumn, and most of the capital budget is spent in the second half of the fiscal year.
With the end of the monsoon, the October-March period is the peak time for construction activities.