Budget size revised to Rs1.63 trillion, with ambitious economic growthThe coalition government led by Nepali Congress has targeted a 7 percent economic growth, even as experts have warned of possible third Covid-19 wave.
Finance Minister Janardan Sharma on Friday presented Nepal’s annual financial plan of Rs1.63 trillion for the ongoing fiscal year 2021-22, nearly Rs15 billion less than the budget presented by the erstwhile KP Sharma Oli-led administration on May 29.
The Oli administration had brought the budget through an ordinance despite widespread protest from the opposition parties of that time.
Finance Minister Sharma has amended the existing budget through the replacement bill with some new commitments while cutting resources for many projects, including 1,400 smaller road projects whose preparatory works have not been completed.
There was an unusual scene at Parliament on Friday. Sharma ran to the podium to present the replacement bill as marshals gave him cover amid protests from the opposition CPN-UML. Sharma kept on reading the new budget amid the sloganeering by UML lawmakers who climbed over the marshals—and fell—as they tried to reach the podium.
The coalition government led by the Nepali Congress has set an ambitious 7 percent economic growth target this fiscal year, even as experts have been warning of a possible third Covid-19 wave. The growth target is slightly higher, by 0.5 percentage points, compared with that set by Sharma’s predecessor Bishnu Prasad Poudel.
The finance minister hopes to achieve the targeted economic growth amid the government’s target of fully vaccinating all population by mid-April next year, which is expected to give a fillip to economic activities.
As of Friday, 5.74 million [19 percent] people have received their first dose of Covid-19 vaccine while 5.12 million [17 percent] people have been fully vaccinated, according to the Ministry of Health and Population. The government aims to expand its vaccination coverage to 33 percent by next month.
The government’s growth target, however, is a bit more ambitious than what Fitch, an international credit rating agency, has projected after an evaluation of the country’s economy for the current fiscal year 2021-22.
In the first-ever assessment of Nepal's economy, Fitch Solutions, the international credit rating agency, has forecast Nepal's real gross domestic product (GDP) or economic growth to strengthen to 5 percent this fiscal year [mid-July 2021 to mid-July 2022] from the provisional estimate of 4 percent in the last fiscal year.
“Rising Covid-19 vaccination rates will allow further easing of containment measures, particularly in Kathmandu Valley, and also a more sustained and stronger revival in international tourism—both of which will support the broad services sector,” it said.
Construction will also receive a boost from transport and building projects, although labour constraints will continue to pose a risk to the sector's expansion, according to Fitch.
Nepal's economy has been projected to have grown by 4 percent in the fiscal year that ended in mid-July, reversing a 2.1 percent contraction in 2019-20, the first economic contraction in nearly four decades.
“Achieving a 7 percent growth target is very challenging,” Rameshore Khanal, a former finance secretary, told the Post. “Achieving 7 percent growth with the proposed capital expenditure and the possibility of poor recovery of sectors like tourism, manufacturing, and construction is unlikely.”
According to him, based on the current size of the economy, Nepal needs to spend around Rs1.4 trillion in capital formation to achieve the targeted growth.
“The government’s proposed capital expenditure is just Rs378.1 billion, while the private sector is expected to spend over Rs800 billion based on the usual 30:70 public and private expenditure ratio, annually,” said Khanal.
“There will still be a huge gap in expenditure to meet the targets.”
Even though the government increased the growth target, the new government has only slightly increased the capital budget by around Rs4 billion. The previous government had earmarked the capital budget at Rs374.26 billion.
The 15th plan [2019-20 to 2023-24] had aimed to take the country on a high growth trajectory but the Covid-19 pandemic that hit the country in early 2020 led to the economic contraction in 2019-20 instead.
Sharma aims to generate Rs1.05 trillion from revenues and Rs59.92 billion from foreign grants. According to Sharma, the resource deficit of Rs522 billion will be financed through foreign loans (Rs283.9 billion) and domestic loans (Rs239 billion).
The Oli administration had a resource deficit of Rs559.3 billion, which it had planned to finance through foreign loans of Rs309 billion and domestic loans of Rs250 billion.
Sharma, who had criticised the Oli administration for increasing the public debt during his three-and-a-half-year tenure while presenting the White Paper on the economy in August, has reduced the debt to be raised in the current fiscal year by Rs37 billion.
Former finance secretary Khanal said that domestic borrowing should have been cut down further as high domestic borrowing leads to liquidity crunch in the financial system, leading to a shortage of financial resources for the private sector, which, as a result, has to pay a high cost for borrowing. The government has sought to reduce the domestic debt by Rs11 billion.
Like the previous budget, the financial plan presented by the new government has failed to avoid the temptation of increasing the social security budget and it has announced long-term financial commitments for families of those who gave their lives contributing to the political changes. The government has announced allowances for renal patients for kidney transplantation, cancer patients and people with spinal injury.
As per the budgetary provision, martyrs’ families will get Rs3,000 a month while renal, cancer and spinal injury patients will get Rs5,000 a month from the government.
The government has also announced that it will provide a one time payment of Rs10,000 each for 500,000 poor households, based on certain criteria and the impact of the pandemic on them. But the government has yet to identify who the poor people are.
Sharma said he managed to secure Rs5 billion to buy vaccines by slashing expenditures on employee training, fuel, seminars and other expenses.
“The budget on these headings has been reduced by 10 percent,” he said.