The government is likely to reduce the budget for infrastructure development in the next fiscal year given that the government’s resource committee has lowered the budget ceiling for the Ministry of Infrastructure and Transport.

The maximum budget that the ministry would receive has been cut down since the economy is struggling and the government’s revenue collection during the current fiscal year has dropped sharply.

The government’s failure to spend the capital budget has also added to the woes of the economy since healthy capital spending creates demand for goods and services in the market.

“The budget ceiling for our ministry has been cut by around Rs54 billion for the next fiscal year 2023-2024,” said Arjun Jung Thapa, joint-secretary at the ministry. “The ceiling has been brought down to Rs113 billion from Rs167 billion in the current fiscal year.”

“There is a possibility of severe fund cuts in infrastructure projects, if the budget is reduced in line with the reduced ceiling,” he said. The government has usually been hiking the budget for the infrastructure sector when the country was witnessing a boom in revenue collections over the past several years.

However, the revenue growth went down sharply after the Covid pandemic hit the country. The revenue collection, however, has decreased markedly in the current fiscal year amid reduced economic activities and import cuts.

According to the Financial Comptroller General Office, the government had collected a total of Rs751.87 billion in revenues as of May 12 this fiscal year, a sharp drop from Rs865 billion collected during the same period last fiscal.

“In the absence of resources, it has been difficult to pay the contractors on time, which has affected the capital spending,” said Thapa.

Contractors say they have started receiving parts of payments government entities owe them for the accomplishment of their given tasks. “They have not paid for all the works completed,” said Rabi Singh, president of Federation of Contractors’ Association of Nepal. “The government agencies have, however, expressed their commitment to providing further payments.”

Particularly, the government has been arranging funds for high priority projects by transferring funds from other projects that have been unable to spend.

“Some projects that have been unable to spend have even returned the funds allocated to them,” said Gayatri Raman Khanal, information officer at the FCGO.

A boost in government spending also helps to spur private sector investments. Private sector firms are suppliers to various projects undertaken by government entities. With the government failing to spend its budget, the demand for goods produced by private enterprises has also gone down since the overall investment in the economy has fallen.

“I am surprised by the massive fall in the ratio of the Gross Fixed Capital Formation against Gross Domestic Product to 25 percent in the current fiscal year from 33 percent, just four to five years ago,” said Keshav Acharya, an economist. “This suggests neither the government nor the private sector invested in the fixed capital formation.”

Fixed capital consists of assets that are not consumed or destroyed in the production of goods and services and can be used multiple times. Property, plant and equipment are standard fixed capital items.

“When we cannot invest in capital formation, it cannot generate growth in the economy,” said Achayra. “In such a situation, there is no growth in employment generation and no revenue for the government.”

The government has reduced the budget ceilings for other ministries as well. For instance, it has reduced the ceiling for the health ministry massively by 42 percent since the Covid-induced crisis is largely over, according to officials.

The government, through a mid-term review of the budget for the current fiscal year, had downsized the total budget by 13.59 percent, totalling Rs 243.83 billion for the ongoing fiscal year 2022-2023, citing a plunge in the revenue collection.