The government’s capital spending hovered around 35 percent of the total allocation in the first nine months of the current fiscal year, signalling low fund absorptive capacity in the country.

The government allocated a budget of Rs335.2 billion for capital spending in the current fiscal year. Of this, Rs117.9 billion was spent as of Thursday, according to the latest statistics of the Financial Comptroller General Office. This is an indication that the government will not be able to fully utilise capital budget in the current fiscal year as well.

Capital spending should rise rapidly in a low-income developing country like Nepal, as it would accelerate the pace of building roads, bridges, airports, hydropower plants, irrigation projects and railway tracks, bridging the wide infrastructure gap. Instead, recurrent expenditure—spending on salaries, pension, grants and subsidies, among others—is soaring in Nepal. In the first nine months of the current fiscal year, the government utilised 64.3 percent of the recurrent budget, while capital spending has failed to gather pace.

In each of the last five years, the government allocated up to 64 percent of the annual budget for recurrent expenditure and around 21 percent of the total budget for capital expenditure. Ironically, the government fully utilised the recurrent budget in these five years, but never managed to spend over 72 percent of the fund allocated for capital spending, the latest white paper on current economic situation says. 

This inability to fully utilise capital budget has prevented people from gaining access to various public goods.

Per capita electricity consumption in Nepal, which boasts of being one of the world’s richest countries in water resources, stands at 160 units, which is the lowest in South Asia. Low production of electricity has affected many industries, which have no option but to rely on diesel-powered generators. This has raised their operation cost. 

Another crucial infrastructure required for industrial development is roads. But Nepal has 0.55 km of road in every sq km of land area. In urban areas, road density stands at 1.6 km per sq km of land area. This is very low compared to international standard of 5km per sq km of land area, according to the white paper. The government is fully aware of these problems, yet it has not taken concrete measures to expedite capital spending. 

Some of the reasons for low capital spending are delays in: appointment of contractors, extension of spending authority to project implementing agencies, land acquisition, settlement of disputes related to cost variation, and issuance of permit to cut down trees in forest areas and supply of construction materials, such as stones and sand.

Also, inclusion of projects in the annual budget without conducting any feasibility study has been delaying capital spending. This year, local, provincial and federal elections also prevented capital spending from gathering pace, as most of the officials were mobilised to polling areas and were not able to focus on project implementation, Ministry of Finance officials said.

Problems such as these have always caused capital expenditure to bunch towards the latter part of the financial year. In the last seven fiscal years, almost 70 percent of the capital budget was spent in the final four months of the year, according to the Finance Ministry. This kind of spending raises chances of development of sub-standard projects, which tends to push up maintenance costs.