White paper and red flagsThe recent white paper on the economy presented by Finance Minister Yuba Raj Khatiwada has sparked a debate among economists and politicians. The paper has brought the country’s poor economic conditions to the fore and raised a number of red flags.
The recent white paper on the economy presented by Finance Minister Yuba Raj Khatiwada has sparked a debate among economists and politicians. The paper has brought the country’s poor economic conditions to the fore and raised a number of red flags. According to the paper, all economic sectors have reached a stage of alarm and the state coffers are empty. Some politicians and economists are not in a mood to accept this diagnosis even though the general public has acknowledged it.
Especially, leaders of the Nepali Congress (NC), the former ruling party which is currently in the opposition, have slammed the white paper and called it a fabricated document. They are opposed to it and argue that the status of the Nepali economy is not as described in the paper. Former finance minister Ram Sharan Mahat also came down heavily on Khatiwada and accused him of cherry picking statistics. This kind of flak from NC leaders and economists belonging to the political right are understandable as the incumbent finance minister has given enough indications that the decisions taken by the NC government to gain popularity will not be implemented.
Actions speak louder
It is essential to analyse whether the paper is a fabricated document or a genuine account. Nepal has been facing a persistent downturn in economic activities over a number of years: poor private sector growth, unmanaged service sector, weak financial sector, foreign direct investment drought, unproductive foreign aid and grants, sluggish capital expenditure by the government, defunct industrial sector, soaring unemployment, nervous entrepreneurship, tapering remittance growth and widening trade deficit are a few indicators of the current Nepali economy. Therefore, the evidence and the statistics in the paper indeed corroborate Nepal’s present economic condition.
An in-depth analysis needs to be done to determine the major causes behind the current economic condition and possible ways to overcome them. There might be a number of political, financial, economic and social issues behind it. However, an unstable government and poor development policies are the major ones. It is evident that the Nepal government has long failed to promote capital formation in the country. Capital expenditure has slumped and government expenditure is limited to recurrent activities, leading to a budget deficit. As far as the budget deficit is concerned, it is obvious from the development perspective, especially in a low-income country like Nepal.
Economists agree that a budget deficit due to capital formation or capital expenditure is rational for the development of the economy. It, in fact, creates private sector wealth, while surpluses in the developing phase drain it. However, the deficit should not be a creation of recurrent expenditure. According to Nepal Rastra Bank statistics, the average recurrent expenditure in the last five years was more than 60 percent of the total government expenditure, while the average capital expenditure remains below 20 percent.
Similarly, the government budget balance shows a budget deficit of Rs200 billion without any clear development project sources. This indicates that the budget deficit is the sole creation of recurrent expenditure, and it is likely to grow in the coming years since the country has been transformed into a federal system. The crux of the problem is that it might create a situation where the government has to use foreign grants to cover regular expenses. Thus, without question, it indicates that the Nepali economy faces a tough road ahead. However, despite the gloomy economic outlook, the current political environment has given an opportunity to Finance Minister Khatiwada to heal the macroeconomic indicators of Nepal.
Steps to be taken
In this situation, it is important that the incumbent government urgently work on economic policies and create an investment-friendly environment in the country to sustain and mind the austerity of the Nepali economy. If the government fails to increase foreign direct investment and get the private sector to invest in industry, the economy is sure to fail. Similarly, the widening trade deficit and narrowing remittance inflow are going to pose challenges for the government to keep the state coffers filled.
Nepal needs to sit down with its major trade partners, India and China, to find ways to reduce the trade deficit and save the country from ‘dollar drain’. Likewise, foreign grants and aid should be used in the productive sectors. Above all, the government should focus on strengthening its capacity to spend the allocated capital expenditure in time and increase economic activities in the country. Therefore, Finance Minister Khatiwada has to ensure that these issues are addressed in the fiscal policy for 2018-19 and prepare the budget accordingly for the country’s economic development.
Bist and Joshi are MBA graduates from Pokhara University