Budget day: Concern is rising inflation and economists warn against bloated planExperts call for a budget that addresses current economic challenges while avoiding populist tilts in the election year.
Sanju Shrestha is worried about rising inflation.
Shrestha, 43, is a homemaker who lives in Tahachal, Kathmandu.
“I have been spending increasingly a lot on household essentials in recent days,” she told the Post on Saturday afternoon as she shared her anxiety about the coming days. “I hope the budget will address this issue.”
The Sher Bahadur Deuba government is set to present its budget for the fiscal year 2022-23 on Sunday.
Like Shrestha, Nepalis who are hit hard by inflation are looking forward to some measures that address their day-to-day lives.
“All I expect from the government is that the budget should address the issue of rising prices by bringing relief packages and some subsidies or tax waivers on essential goods like edible oil and cooking gas, among others,” said Shrestha.
According to the latest Nepal Rastra Bank monthly report on the country's macroeconomic and financial situation, inflation grew 7.28 percent year-on-year, hitting a 67-month high.
Prices of oil, both edible and non-edible, are already at record levels.
Transport fares, cargo charges, vegetable prices, restaurant bills, and the cost of milk, lentils and rice are already at all-time high. Inflation affects the people who have fixed earnings as every rise in inflation means their real income goes down.
Fuel, food items and metal prices are rising across the world due to the Russia-Ukraine war, and Nepal as an import-dependent country is feeling the heat.
While the massive import is contributing to inflation in the country, it has also been the cause of depleting foreign exchange reserves and a ballooning balance of payment deficit.
The balance of payment refers to the comparison between the money going out of the country and the money coming in.
And, there is a worry if the country is heading in the direction of Sri Lanka—an island nation in South Asia that has been unable to buy daily essentials and pay foreign loans due to an acute shortage of foreign currencies in the country.
Economists say that the new budget should address the challenges the economy is currently facing while looking into the problems faced by the poor and middle-income groups, like Shrestha.
They insist on a “right size” of the budget and measures to increase domestic production with the focus on reducing reliance on imported goods.
“The budget size must be modest,” said Nara Bahadur Thapa, former executive director of Nepal Rastra Bank. “It is necessary to control inflation.”
The proposed government expenditure ceiling for the next fiscal year 2022-23 beginning July 17 is around Rs1.74 trillion, about 7 percent higher than in the last budget, according to Ram Kumar Phuyal, a member of the National Planning Commission.
Thapa said that the government should avoid widening the budget deficit and should utilise the available resources by re-prioritising the sectors of investments.
“The tendency to print money to meet the resources gap will also increase inflation,” he said, referring to what the Colombo government did leading to the economic crisis in Sri Lanka.
Besides rising inflation, external sector of Nepal’s economy has been in a vulnerable situation, which forced the government to impose a complete ban on some of the “luxury” items like vehicles, alcohol, cigarettes and tobacco products, snacks like Lay’s potato chips and Kurkure, diamonds, and expensive mobile phones and television sets until the end of the current fiscal year.
“The country is in a crisis-oriented situation and the budget should address it,” said Govinda Nepal, an economist. “The upcoming budget should introduce policies that make the country self-reliant on certain basic products,” added Nepal, who is also a former member of the National Planning Commission.
According to Nepal, the country, at least, should ensure import substitution of certain agricultural products because it can be done at least in the short term.
According to a study conducted by the National Planning Commission, the country imported agricultural goods worth over Rs200 billion in the fiscal year 2019-20, which could be produced within the country. Most agricultural goods came from India, according to the study titled ‘Status of Export and Import of Agriculture Goods.”
The government appears to have responded to this call. As per the government’s policies and programmes for the next fiscal year, it will introduce a decade-long campaign titled “Domestic Production and Consumption Increment Campaign” to expand the market for Nepali goods.
“Where there is good domestic production of agricultural products, the budget should increase tariffs to make imported goods expensive within the limits set by the World Trade Organisation,” Nepal, the economist, told the Post.
He suggested continuing to discourage import of luxury items either through a ban or hiking taxes massively “at least for a year”.
The private sector, however, has been insisting on hiking duties on the import of goods defined as luxury items, instead of imposing a complete ban, arguing that bans could cause distortions in the market by giving rise to smuggling which would affect the government’s revenue.
Nepal, however, said that except finished consumer goods, the import of capital goods (machineries) and intermediate goods (raw materials and other goods which are used to produce final products) should not be discouraged because their imports would help increase domestic output and help boost the economy.
Speaking in Parliament on Saturday, Nepali Congress General Secretary Gagan Thapa warned against taking any decision that would further squeeze the foreign exchange reserves.
Nepal’s foreign exchange reserves have been declining since the beginning of the current fiscal year, dropping 18.2 percent to $9.61 billion in mid-April 2022 from $11.75 billion in mid-July 2021, according to the central bank’s statistics.
Petroleum products, whose prices are skyrocketing, have not only contributed to the massive trade deficit but also fuelled inflation in the country.
The government has announced through its policies and programmes for the next fiscal year that it will encourage consumption of electricity in transportation and kitchen. In fact, the policies and programmes talk about reviewing the electricity tariff to promote its use in the kitchen.
But making Nepalis move to electric cooking is easier said than done, given a lack of uninterrupted power supply.
Economist Nepal said that the policy must be implemented to ensure mass adoption of electricity in the kitchen.
“For this, electricity can be diverted to households from the industries during cooking hours while allowing industries to operate fully at other times to push for wider adoption of electric cooking,” he said.
The country will save foreign currency being spent on fuel, which is Nepal’s largest import item, with wider adoption of electricity in the kitchen.
During the first 10 months of the current fiscal year, Nepal imported petroleum products worth a staggering Rs243 billion, including cooking gas (Rs52 billion).
Despite worrying economic indicators, the country has not yet reached the level of the Sri Lankan crisis, but a narrative is building up that the country is on the verge of facing a huge crisis.
Economists say though the foreign exchange reserves are depleting fast, Nepal is in a “doable” situation. Nepal’s external debt is not as alarming as that of Sri Lanka which reached 119 percent of the Gross Domestic Product (GDP) in 2021, according to the International Monetary Fund.
According to the Public Debt Management Office, Nepal’s debt to GDP ratio is just over 40 percent as of the second quarter of the current fiscal year, and unlike Sri Lanka, Nepal’s external debt is dominated by soft loans which have longer repayment periods with minimal interest rates.
According to the Economic Survey 2021-22 unveiled on Saturday, there has been a slight decline in the government's debt to GDP ratio to 38.1 percent as of mid-March this fiscal. The government’s total debt as of mid-March stands at Rs1,848.19 billion. But, according to the report, the share of foreign loans has been rising in forein aid compared to grants.
“My concern is the government policy might be guided by the wrong narrative that Nepal has already become another Sri Lanka,” said Thapa, the former NRB official. “By putting too much emphasis on the Sri Lankan crisis, we should not make a mistake of squeezing our own economy by stopping economic activities.”
He, however, said that Nepal must learn from Sri Lanka’s crisis, which is an outcome of multiple factors like reduced tourism income and remittances, massive cuts in taxes and unplanned drive to move towards organic farming.
Since Nepal is in its election year, economists are also worried about some populist programmes by the government which they say could spell disaster.
Signs are already visible. Kantipur, the Post's sister paper, on Saturday reported that the government is preparing to lower the eligibility age for the elderly allowance to 68 years from the current 70 years.
The Nepali Congress in its election manifesto has promised to bring down the eligibility for getting the eldery allowance to 65 years.
“In an election year, political interests often guide economic policies,” Jagadish Chandra Pokharel, an economist, told the Post in a recent interview.
The government will, however, find it hard to manage necessary resources to fund populist programmes because its revenue will be affected when imports are discouraged. Economists have warned of long-term consequences of increasing social security expenditures without linking them with the country’s economic growth.
As the government is not in a position to generate enough revenue, economists suggest cutting on administrative expenses, which is on the rise by the year.
“The government can implement the recommendations of the Public Expenditure Review Commission, which has suggested the areas where costs can be reduced,” said Nepal, the economist.
As the whole world grapples with inflation, Nepalis are concerned about the possible rise in taxes on daily essentials, which could make life more difficult for a majority of the population.
Abhisha Oli, a 26-year-old college student, still remembers last year’s protest against the alleged hike in taxes on sanitary pads and diapers.
“The government is levying a high tax on sanitary pads and diapers making it costly and most of the time unaffordable for many girls,” Oli, who lives in Gurjudhara, Kathmandu, told the Post. “Price hikes in such products also impact the lives of many.”
After last year’s protest, the government clarified that no change had been made in taxes, but the government only incentivised domestic pad making companies.
Amid inflation concerns, many are wondering if the government would enlarge the budget, as such a move could also lead to price rises. If the budget is big, the government needs to find resources, which could lead to tax-inflation.
For Thapa, the former central bank official, one way of increasing the government revenue is ending tax exemptions being given to different businesses.
“The government should end the practice of tax exemption,” said Thapa. “The government can facilitate the businesses by improving transport logistics and providing incentives in electricity and water.”
According to him, the policy of tax cuts has not yielded desired results so far.
“There is no industrialisation in the country, nor has the trade deficit narrowed,” said Thapa. “It’s high time the government made prudent decisions.”