A Disappointing Picture of Capital Expenditure

Published On: May 10, 2023 09:00 AM NPT By: Suraj Ghimire

Suraj Ghimire

Suraj Ghimire

The author is a lecturer of Economics at Rupandehi Campus, Bhairahawa.

Expenditure made by the government on infrastructure and development projects is referred to as public capital expenditure. This spending is primarily focused on areas such as roads, bridges, buildings, communication, energy, and irrigation. Capital expenditure plays a crucial role in boosting production, income, and employment within the economy. Economists argue that every one rupee spent on capital expenditure by the government has a five-fold impact on the market. Additionally, attracting private and foreign investment is vital as it strengthens the investment multiplier.

Ironically, when we examine the data from the past decade, Nepal's capital expenditure has not even reached two-thirds of the total allocation. Only 22.82 percent of the allocated capital expenditure budget has been spent during the last eight months of the current fiscal year. Consequently, it appears that approximately 77 percent of the allocation needs to be spent within the remaining four months. This pattern seems to repeat the tradition of spending two-thirds of the capital expenditure in the final one-third of each year. This poor performance has persisted for the past two to three decades. In other words, it seems that 40 percent of the capital expenditure is typically spent in the last month of each year. Consequently, there are concerns regarding the quality of projects that can be completed with funds spent in such a manner.

Government capital expenditure is crucial for developing economies like Nepal, where inadequate infrastructure poses a major obstacle for both the public and private sectors. Unfortunately, the underutilization of capital expenditure has become a recurring issue in Nepal, with an average of only 67.5% of the allocated funds being spent over the past ten fiscal years. This failure to improve capital expenditure has led to frequent delays and interruptions in development and construction projects.

Economists have estimated that in order to achieve a one percent economic growth rate, a capital expenditure of over Rs 1 trillion 60 billion is necessary. They strongly recommend against compromising on capital expenditure in order to meet the economic growth targets set by the annual budget. In previous years, the budget presentation and approval process faced delays, which was considered the primary reason for the untimely spending of the budget. Furthermore, procedures such as budget authorization, disbursement, and program approval have posed challenges in expediting the expenditure process.

The nature of rushed capital expenditure that occurs after the beginning of the month of Ashad (the last month of the Nepali fiscal year) does not provide a clear roadmap for development. To address the issue of delayed development and ensure timely budget implementation, the constitution has mandated that the budget must be presented by the 15th of Jyestha. Similarly, the previous requirements for budget approval by the National Planning Commission and expenditure authorization have been removed. However, despite these changes, there has been little improvement in the pace of spending.

Ideally, the purchase plan should be finalized during the first quarter, with the procurement of goods and services taking place in the subsequent second and third quarters. However, in practice, the completion of necessary procedures for establishing a purchase plan often progresses slowly during the first quarter. As a result, the actual execution of the plan is frequently delayed until the second or even third quarter.

Due to the high frequency of employee transfers during the months of Shrawan, Bhadra, and Ashwin, it becomes challenging for working employees to prepare the purchase plan and complete the necessary procedures during the first quarter. Additionally, delays in receiving payment bills, non-delivery of essential documents, and the absence of test certifications, despite the completion of work beforehand, further contribute to the problem. As a result, payments are often made at the last moment, but the proportion of such payments remains relatively low.

On the other hand, there are potential weaknesses in adhering to financial discipline, monitoring processes, and demonstrating the efficiency of expenditure. The concentration of expenditure in specific beneficiary areas also hampers timely execution of capital expenditure and raises concerns about its effectiveness.

Several factors contribute to the slow growth of the economy, including the following: 1) Allocating a low budget for capital expenditure. 2) Inability to spend the capital budget on time. 3) Expenditures on unproductive sectors disguised as capital expenditure. There is a concern that funds allocated for capital expenditure are sometimes directed towards unproductive sectors. This includes expenses on imported items such as training, conferences, seminars, computers, furniture, air conditioners, and refrigerators. Consequently, even if the capital amount is spent, the overall impact and results achieved may be limited. It is important to ensure that capital expenditure is primarily directed towards productive sectors, infrastructure development, and initiatives that yield tangible benefits for the economy.

Despite the existence of budget direction, monitoring and evaluation guidelines, and various procedures, their implementation remains significantly weak. The methods for expenditure, legal processes, contract procedures, contractor selection, work evaluation, and expense management lack scientific approaches. As a result, there is a need for initiatives to address the barriers to capital expenditure and improve the implementation process.

Even though the capital budget allocated for direct public development is low, the burden of current expenses continues to rise, becoming increasingly unaffordable. Two-thirds of the overall budget is being utilized for daily administrative costs, employee salaries, and similar expenditures. This predicament, where revenues struggle to cover ordinary expenses, poses a challenge for long-term economic growth. Surprisingly, the government has not made any notable efforts to address this issue.

The practice of allocating a low budget and failing to spend the allocated funds has hindered the progress of economic development. According to economic assumptions, 30 percent of the capital expenditure is dedicated to labor, meaning that capital expenditure plays a crucial role in creating employment opportunities. However, due to inadequate capital expenditure in the country, thousands of Nepalis are losing job prospects each year. Consequently, it is imperative for the government to overcome the existing obstacles and ensure timely capital expenditure.

Efforts must be made to enhance various aspects, such as the turnover rate of government employees, the prevalence of corruption, the functioning of commissaries, and the policy process regarding expenditures. Additionally, it is crucial to break the habit of last-minute spending at the end of the fiscal year, as this practice raises concerns about the quality of expenditures.

Capital expenditure plays a vital role in driving economic development in any country, and the competence of a government is evaluated based on its timely and effective management of such expenditures. Therefore, it is crucial for the government to be attentive and responsive in addressing the shortcomings associated with capital expenditure. Moreover, equal importance should be given to the qualitative outcomes resulting from capital expenditure.

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