Slow first quarter revenue may force government to borrow moreAuthorities may fail to show urgency to make up for the gap amid sluggish spending, thereby upending economic activities, experts say.
After failing to meet the revenue target in the fiscal year 2019-20, the government’s revenue collection outlook this fiscal year, which started on July 15, does not look very promising, if data from the early months is anything to go by.
According to the Finance Ministry, the government could collect 87.35 percent of the total target in revenues during the first quarter of the current fiscal year (from mid-July–mid-October).
The government was able to collect just Rs172.36 billion against its target of Rs197.33 billion in the first quarter of this fiscal year amid reduced imports due to reasons including the Covid-19 pandemic, as per the Finance Ministry.
“One of the main reasons why the revenue target was not met was a slump in imports,” said Suman Dahal, director general at the Department of Customs. “As a result, we could not raise the expected amount from customs duty, value added tax and excise duty.”
According to the Department of Customs, imports reduced by 12.74 percent to Rs292.26 billion during the first quarter of the current fiscal year compared to the same period last fiscal year.
A major concern is that the overall revenue collection could not meet even the government’s recurrent expenditure, which is rising amid the Covid-19 pandemic.
According to the Financial Comptroller General Office, the government agency responsible for keeping records of state’s income and expenditure, the government collected revenue of Rs227.21 billion as of Tuesday but recurrent expenditure stood at Rs251.37 billion.
The government has been able to sustain recurrent expenditure only with the availability of resources collected from various administrative penalties and money from the unspent budget in the last fiscal year, according to the Financial Comptroller General Office.
“Government failing to collect enough revenue means that the country is forced to rely more on domestic and external borrowing, increasing the country’s debt burden,” said Bidyadhar Mallik, former minister and former finance secretary. “The requirement to borrow even to sustain the recurrent expenditure means the country will fail to utilise the loans even in development activities.”
As of last fiscal year, the country's debt to gross domestic product (GDP) ratio reached over 40 percent which experts say is concerning for long-term debt sustainability.
“We are safe till now because the debt to GDP ratio is below 50 percent, but time has now come to be cautious and serious about the debt sustainability of the country,” Nara Bahadur Thapa, former executive director of Nepal Rastra Bank, had told the Post in August.
According to Bhanu Acharya, former auditor general, the current debt level is not alarming but borrowing debt even for recurrent expenditure could lead the country to debt trap.
Acharya said when he was finance secretary in the early 2000s, he had experienced a debt crisis, as the debt to GDP ratio had gone over 60 percent.
“Since I have experienced the debt crisis, I must say we should not increase debt except for investing in extremely productive projects,” he said.
Amid the pandemic, the government has not been able to spend the budget, particularly in development activities. As of Tuesday, the government’s capital expenditure stood at 7.54 percent of total capital budget, according to the Financial Comptroller General Office.
The pandemic-induced lockdown and prohibitory orders had resulted in closure of businesses with widespread job losses.
The government has not been able to generate enough resources, while there is a growing call for support for people and sectors badly affected by the pandemic.
The ongoing coronavirus pandemic, whose end seems nowhere in sight, has already hit the country’s economy hard. The World Bank said last month that Nepal’s economy could grow by as low as 0.6 percent in the current fiscal year 2020-21, against the government’s target of 7 percent.
“It is time to reduce recurrent expenditure and increase capital expenditure to achieve some positive economic growth,” Acharya told the Post.
The government has not imposed a lockdown since it lifted the restriction orders on July 21. Businesses are trying to get back on their feet after they were hit hard by the four-month lockdown. But as the coronavirus cases are rising, there are concerns if the economic activities can completely get back on track.
As of Wednesday, the number of coronavirus cases in Nepal has reached 202,329 with 1,174 deaths. The country reported 2,569 new infections in the last 24 hours, according to the Health Ministry.
While reducing imports is part of the government policy in view of ballooning balance of payment deficit, deceleration of economic activities due to the pandemic has led to reduction in imports of machineries and construction materials, major contributors to the government’s coffers.
The country's balance of payments registered a surplus of Rs67.63 billion during the first two months of the current fiscal year due to reduced imports, according to the Nepal Rastra Bank.
Such surplus was Rs8.83 billion in the same period last fiscal year. The balance of payment is the balance between the money that comes to the country and the amount of money that goes outside.
Expectation defying remittance inflow coupled with reduced imports also helped maintain high foreign exchange reserves.
Foreign exchange reserves of $12.2 billion is enough to sustain goods and service imports for 14.9 months, according to the central bank.
The concern is, according to Mallik, the government may not feel the urgency to increase the revenue, as it has failed to spend the budget amid the coronavirus pandemic.
“This will mean reduced economic activities,” said Mallik. “We need to increase both revenue and expenditure to achieve good economic growth.”