First, it strains the already precarious fiscal balance. This hike means the government will have to pay Rs. 6.35 billion more in salary and allowances and Rs. 930 million more for pensioners than what has been earmarked in the budget. Where will the government get this additional money? Since the revenue target is already too ambitious, it’s difficult if not impossible to meet this by mobilizing additional revenue. Then the only option left before the government is to bring a supplementary budget by April next year and make necessary inter-head transfer of resources. It’s possible that such a supplementary budget may even announce a comprehensive reallocation of resources.
Second, it could hit expenditure in the development activities. Since the government can hardly slash the non-development expenditure, which is often spent by the end of the fiscal year, it will have to turn to development expenditure for help. This will be unfortunate, given that our recurrent expenditure is already higher than our capital expenditure. Moreover, capital expenditure remains unspent year after year because of lack of absorption capacity of the Nepali economy.
Third, the rise in disposable income of the civil servants will also create pressure on the already high price level in the market. Despite the government’s efforts to curtail rising prices, inflation rate remains at a robust 12 percent. The rise in salary and allowances of the civil servants will increase liquidity in the market thereby creating additional pressure on the inflation rate. The commoners, who do not have a fixed source of income, will feel the brunt of the price rise.
The post-budget salary hike has therefore added more challenges to the finance ministry and central bank officials. Now the finance ministry officials must double their efforts to raise the targeted revenue, if not to surpass it and reach out to the donor agencies to mobilize the targeted foreign assistance, which is already high. If they fail on both fronts, it will create huge fiscal imbalance and may create pressure on macroeconomic balance in the future. The central bank should also keep an eye on inflation and use necessary monetary instruments to bring it down to single digit.
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