So, what has actually contributed to such performances? As far as the development activities of the current fiscal year relative to preceding year are concerned, there are, however, not significant differences with GDP at current price rising almost at the same rate in both years.
Is it due to, relatively speaking, sluggish performances of the government in general and the Minister of Finance in particular of the preceding year? We have no objective answer. When the current prime minister was asked by a correspondent of BBC “You have vowed to continue the positive works of the previous government. Could you list them?”, he said, “Revenue collection, for instance.” This led us to assume that the current government will follow the policy of the Maoists in revenue administration, at least in part, in the next budget that is expected to be submitted in the parliament on July 9.
What policy would actually be replicated and why? This is a billion-dollar question, but we do not have the answer yet.
Let me try. About 80 percent of the change in revenue is due to increased receipts from import, non-tax revenue and income, in that order.
The receipt from income tax, excluding the receipts from VDIS as it is a measure that can not be replicated next year, is partly due to relatively high growth in gross domestic product last year and partly due to high efficiency shown by the staff of the ministry in revenue collection. Several government corporations perhaps have paid income tax in advance but this, to the best of my knowledge, is the regular practice followed by the ministry.
The receipts from import duty, including VAT (70 percent of the receipts from VAT is collected at custom point), have contributed almost one third of increase in revenue. The import in the first nine months has reached Rs. 200 billion, which is equivalent to about 25 percent of estimated GDP for the current year!
The slow growth in domestic output at a rate not higher than the growth in population coupled with an increase in receipts from remittances by 60 percent to reach Rs.150 billion in mid-April led to a sharp rise in domestic demand. The rise in domestic demand, on the other hand, was the prime factor for the rise in import with corresponding growth in receipts from custom duty and VAT.
We conducted econometric test to judge the validity of our argument that in Nepal slow growth in real income followed by the rise in receipts from remittances led to rise in imports and deterioration in balance of trade. This, in turn, led to the rise in government revenue from import. This hypothesis turns out to be correct with a margin of error of plus or minus three percent. But similarly when we try to predict the current year receipts from import, using last year data on growth and receipts from remittances, it is somewhat lower than what has been actually realized now.
The above situation may have emerged due to improvements in custom administration, though the detail has yet to be worked out. It is reported in the media that the fear among the staff and business community of the Maoist leadership was very high. It might have led to some decline in corruption in customs as the habit of honesty, as is well known, is built on the bedrock of fear of detection. Similarly, it is reported that the ministry has introduced a system of financial incentive to staff on monthly basis at custom depending on their performances in resources mobilization. A communist minister adopting capitalist measures to revenue collection may also have contributed to such growth. Again, the detail has to be worked out.
In particular, the people have taken high hopes after the completion of the election to the constituent assembly. As a result, the economic activities have increased at a much higher rate compared to preceding year. This is almost similar to country’s experience after the political change of 1990. This has resulted in rising receipts from non-tax revenue which contributed almost one quarter of the increase in government revenue in the first nine months of the current fiscal year.
Similarly, transaction in land and housing increased at such a high rate that registration fee increased by Rs.1.52 billion or 67 percent in the first nine months compared with a growth of less than half a billion last year. But as the political fighting started to increase, the economic activities, including the sale and purchase of land, have started to decline and so is the revenue from registration fee.
Some of the increase in government revenue, for example, the revenue from interest tax or export tax, was due to lag effect of the preceding year.
The collection of government revenue has been relatively satisfactory due partly to improvement in revenue administration. The same, however, cannot be said with respect to overall financial management. The government fund is lying idle in the Nepal Rastra Bank. The government efforts to revenue collection alone have simply crowded out the financial market with negative impact on private sector investment and growth in income in real terms.
Still, the budget target on government revenue is relatively ambitious. It aims to collect Rs.141.7 billion in the current year compared with Rs. 107.5 billion last year. In the nine months, it has collected Rs. 98.7 billion and if it goes even at the same spirit in the remaining months it will still be 10 percent behind the target.
It is, however, not possible to keep up the momentum. First, there is no major source like VDIS and the income from remittances may not increase at the same pace with negative effect on receipts from import duty. There will be major shortfall in receipts from custom and income tax. As far as receipts from registration and other non tax revenue are concerned, it has already shown a sluggish trend due to deteriorating political situation and uncertainty.
We must, however, congratulate the staff of Ministry of Finance for their performance in the current year. The new government must try to maintain the spirit of the staff in the coming days. That is what it can replicate from the former government. But without public trust as exhibited immediately after the election to the Constituent Assembly, it is virtually impossible to improve economic performances. National consensus and collaboration are the most potent economic measures to improve financial management.
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