Finance Minister Paudel faces an economy in crisis. Where does he start?

Published On: October 15, 2020 11:00 PM NPT By: Sagar Ghimire  | @sagarghi

Paudel faces twin challenges of pleasing voters and keeping the economy afloat  

KATHMANDU, Oct 15: This is the second time Bishnu Prasad Paudel has been appointed the finance minister. A common attribute between his two stints is: crisis. 

Back in November 2015 when he was appointed the finance minister, the economy was bearing the brunt of the undeclared economic blockade imposed by India in the immediate aftermath of earthquakes in April. 

Now he is assuming the portfolio to oversee the finances of the government — and of the country as an extension — at a time when the economy is on the brink of recession amid a deadly pandemic. 

During his both stints, he has inherited the economy from his predecessors who are technocrats with deep understanding and experiences on managing finance and economy. He had succeeded finance minister Ram Sharan Mahat in 2015, and Yuba Raj Khatiwada is his predecessor now. 

For any finance minister, the numbers are supremely important. 

This common attribute demonstrates daunting challenges that Finance Minister Paudel will have to deal during his tenure. 

His immediate challenge will be to save the economy from the pandemic. But how could he do this? The revenue is tanking due to a slump in economic activities amid the outbreak of coronavirus and subsequent containment measures imposed by the government. 

The private sector has its own expectations. Battered by the coronavirus and containment measures including lockdowns, they want a relief and stimulus package from the government, including tax breaks and deferrals. Those who have lost their livelihoods and incomes are right to seek government support. Fighting against the coronavirus immediately requires billions of rupees in resources. 

Where will the money come from? 

The government treasury is dipping, and likely to end in a deficit. Finance ministry officials are now scrambling to mobilize financial resources even to meet recurrent expenditures. 

Paudel takes over the reign of the finance ministry during a hardship that is not confined to our national borders. 

The pandemic has plunged the global economy into one of the worst recessions. Unlike his previous stint in 2015, when the earthquakes and the Indian blockade had wreaked havoc on the economy, Finance Minister Paudel now has a little wiggle room to reach out to international donors to mobilize international assistance. 

Development partners are also facing economic crises, and it is unlikely for them to come to our rescue. Some of the multilateral agencies, including the World Bank, seemed to have become generous toward Nepal when Khatiwada was the finance minister. 

One source that the finance minister could resort to is debts. But raising debt has its own limits. There is a ceiling on domestic borrowing. The government cannot collect more than 225 billion rupees in domestic debt. High borrowing also means higher interest rates, and crowding out private sector investment that is a must at this moment. 

Can he change the track record of a populist finance minister?

Crisis apart, another most difficult conundrum new Finance Minister Poudel faces is finding a balance between his or his governing party’s populist temptation, and medium as well as long-term economic development aspiration of the country. 

His track record shows that he is not an uncompromising finance minister on maintaining financial or treasury discipline. Even when the country was undergoing economic hardship in the aftermath of earthquakes and the blockade by India, he had pursued a number of distributive policies. 

By expanding and increasing multi-year contracts for development projects, the government had to bear liabilities worth billions. 

By allowing multi-year contracts for numerous projects even without figuring out the source of financing, he had promoted a tradition that many economists blame for perpetuating financial indiscipline in the budgeting system. At a time when inflation was skyrocketing and the economy was chronically ill, he had decided to raise the budget for government employees by 25 percent. 

The controversial Constituency Development Program saw a significant raise during his last tenure. He increased the funding under this program to five million rupees from two million rupees for each lawmaker in addition to thirty million for each electoral constituency from fifteen million under the Constituency Infrastructure Special Program. The direct budget allocation to legislators continues till the current budget. As an influential leader of the ruling Nepal Communist Party, he lobbied to continue the program that the erstwhile finance minister Khatiwada was reportedly against. 

His comeback to the Finance Ministry also comes at a time when half of NCP’s five-year tenure term has been completed. With the ruling party now eying another election, finance minister Paudel will be under pressure to deliver what was promised to the people in the last election as well as handouts and distributive programs to please voters. 

There are ambitious programs, including railways, infrastructure projects, double-digit growth and high per capita income, that the NCP has included in its election manifesto that, even if started, holds potential to propel the country toward long-term development and prosperity.

Also, there are many distributive, handouts and populist programs promised to the people that could spell trouble for the economy during these difficult times.

As an influential leader within the ruling party, Paudel enjoys support from both chairmen KP Sharma Oli and Pushpa Kamal Dahal. He has the political leverage to steer the economy toward the direction of his choice. This was not the case with his predecessor Khatiwada who was often in the crosshairs of intraparty disputes.  

Whatever path the new finance minister takes is not going to be easy.

As they say, turbulence tests the quality of a pilot. 


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