Restoring business confidence would be tough task for Finance Minister Prakash Sharan MahatManaging resources for important funding is another challenge for the Nepali Congress spokesperson as revenue drops.
Prithvi Man Shrestha
As the country’s economy faces multiple challenges including low growth, slump in market demand, high inflation and troubled government finance, Nepal appointed an economic expert as finance minister on Friday.
Nepali Congress spokesperson Prakash Sharan Mahat, who holds a PhD in Economics from the US-based Southern Illinois University, was given the role in the latest Cabinet expansion. He has the responsibility to fix the broken economy.
After assuming office, Mahat said that his focus would be on instilling optimism among the stakeholders of the economy and boosting business confidence. “It is necessary to create a business environment by addressing the concerns of industrialists, traders and Non-resident Nepalis too,” he said.
Mahat said he would coordinate with the Nepal Rastra Bank for introducing measures necessary to improve the business climate.
The business outlook at the moment looks gloomy, with the private sector complaining that the lack of demand for goods and services in the market has forced them to slash output.
Businesspeople complained that demands remained subdued even during the Dashain and Tihar festivals and federal and provincial elections. That resulted in a seven-year low economic growth of 0.8 percent in the first quarter of the fiscal year 2022-23.
Nepal had witnessed negative growth in five sectors: construction, mining and quarrying, wholesale and retail and repair of motor vehicles, transportation and storage, and education, according to the National Statistics Office figures.
The combined contribution of the five sectors to the economy stood at 37.2 percent in the last fiscal year 2021-22, the agency said.
Mining and quarrying and the construction industry had suffered the most, as they reported 29.2 percent and 24 percent negative growth, respectively.
“Now, the new finance minister’s major focus should be on taking the business community into confidence and encouraging their investments,” said Bidyadhar Mallik, a former minister and finance secretary. “He has to start consultations and try to convince the community that the government is eager to listen.”
Citing the reduced demand, businesses have been reluctant to clear even the goods that have arrived at the customs points.
Automobile dealers are yet to get customs clearance of vehicles, which were imported based on letters of credit issued before the government imposed a blanket ban on the import of automobiles in April last year. About 2,800 vehicles and their parts have been collecting dust at customs yards for the last several months.
According to the Department of Customs, automobile dealers have been reluctant to get customs clearance for the vehicles citing reduced demands as well as lack of auto loans, among others.
“The government should convince them to complete the customs clearance process of goods parked at the customs offices assuring them that the government is ready to create an environment to increase demands,” said Mallik.
Economists said that the crisis of confidence in the government has also stemmed from the current political situation. Just two months after the Pushpa Kamal Dahal-led government was formed in late December last year with the backing of CPN-UML, the coalition broke down and another coalition of eight political parties including the Nepali Congress and the CPN (Maoist Centre) was formed. And it has already been over a month since the formation of the new coalition, but Dahal has not been able to give full shape to his Cabinet.
“Concerns about political and policy stability is one of the reasons why business confidence has been low,” said Economist Raghubir Bista. “The governance should be brought on track to restore business confidence.”
It has been months since the business community started complaining about poor demands in the market. “Small businesses have been closing down affecting employment, and inflation is running high dampening the demands from the consumers,” said Bista.
The overall demand for goods slumped by 28.28 percent during the first quarter of the current fiscal year, the Confederation of Nepalese Industries said in its December 2022 report.
Due to reduced demands in the market, the government’s inland revenue collection was badly affected.
At the same time, the government’s import control measures including complete ban on goods like automobiles, expensive mobile and alcoholic products also contributed to a sharp decline in the government’s revenue.
As a result, the government’s revenue collection has not been enough even to sustain its recurrent expenditure, according to the Financial Comptroller General Office (FCGO). The government's revenue collection stood at Rs612.66 billion while recurrent expenditure was Rs650.51 billion as of March 20, according to the FCGO.
Finance Minister Mahat said boosting the revenue was his major priority. He, however, insisted that he was not in favour of increasing the tax rate but to broaden the tax base.
Without boosting economic activities in the market, it will be difficult for the government to collect revenue as targeted. Creating consumer demands in the market will help boost economic activities.
The government itself has tools to create demands in the market by spending its budget, particularly the capital expenditure. The capital budget spending as of March 30 stood at around 25 percent, according to the FCGO. “Capital budget spending should be accelerated which enables the contractors to buy construction materials and the money that reaches the hands of the workers are also spent bridging vibrancy in the economy,” said Mallik.
Citing the lack of necessary budget, government agencies have been delaying payments to contractors and suppliers. In a recent interview, Rabi Singh, president of Contractors’ Association of Nepal, said that the contractors were facing a cash crunch with both the government and banks not providing financial resources to continue the construction activities.
After failing to collect enough revenue, the government has been struggling to get the resources to make payments. “To revive the economy, it is necessary to increase the government’s spending even if it means borrowing from donors,” said Mallik.
Nepal’s debt liability has been growing rapidly in recent years. But, economists say there is still a lot of ‘fiscal space’ for borrowing. But the only concern, according to them, is whether the borrowed sum is used in the sectors and projects which yield high returns. “The government’s failure to make payment increases distrust of the government. When the economy is slowing, the government should be able to spend even by taking loans,” said Mallik.
The private investment has also been dampened by high interest rates of the banks and financial institutions. Lately, along with the improvement in liquidity in the banking sector, banks and financial institutions have started to lower interest rates on deposits. But they are yet to lower lending rates as demanded by the business community. “The new finance minister should consult the central bank on how the issue of interest rate could be addressed,” said Bista.