Nepali economy has been surviving a number of challenges for quite a long time: Nominal economic growth, increasing current expenditures, dwindling exports, burgeoning imports, depleting foreign exchange, growing unemployment, rising inflation and moribund financial institutes are bare realities of our economy. The efficacy of upcoming budget should be evaluated in light of impacts it could make on these parameters.
Apart from economic growth and employment, other economic indicators can be examined by the existing data and performances. Economic growth, dragged by the service sector, has already decelerated due to infrastructural constraints. Similarly, the current expenditure uses up nearly all government tax revenue. And much hyped new revenue raising scheme cannot be expected when the growth rate in current fiscal year is hovering around mere 15 percent contributing to double digit inflation and nominal GDP growth. If any other efforts to raise tax revenue are initiated without eliminating loopholes in the system it will bring more disasters to the country.
The scope of tradable sector cannot be expanded just by stroke policy measure of single year when there is no surplus in the traditional export items nor any products or services to cope with export competitiveness. Imports are bound to increase due to declining domestic production, increased demand of growing population and rising earnings of emigrant workers.
Borrowing costs shot up in the recent years with growing demand for loans. But inherent weaknesses of financial sector have shown the signs of un-sustainability of higher interests. The rate cannot be reduced substantially when internal borrowing, government consumption and private consumption are in the rising trends ultimately giving way to pressures on liquidity and foreign reserves through declining saving rates.
The present policy of the central bank has completely failed to contain financial crisis. Yet, it is in the mood to proliferate its organizations at the cost of financial institutes without taking into account its policy failings. When there are standard regulations and commitment to enforce them, it does not require myriad of employees to execute reforms. Skilled workforce equipped with expertise to use soft-ware will do enough to perform analytical research with stroke of fingertips. Central bank does not seem to be aware of this.
If the central bank had felt it necessary to make individual banks comply with capital adequacy rule and possession of sufficient assets, banking crisis could have been partly averted. Investment in real estate is not so much the cause of crisis as the persistent economic failure of productivity and competitiveness. When there was not any other investment opportunities, in its given level of infrastructural bottleneck and political instability, the crisis would have been subsided by means of other avenue. Only route to economic growth is a reform that slashes costs and boosts up productivity. The financial sector is bound to go in tune with ebbs and flows of entire economic health of the country. Monetary policy cannot be panacea; at most, it can falsify the economic fabric of a nation.
Despite this, government is neither in the position to consider serious spending reforms nor is there the prospect of tax rise. If any schemes are incorporated in the budget just for populist agenda, they are what the country does not require any more. Populist programs are, often, driven not by careful consideration of the economy but by party ideology.
Take another example. Over the years, in the name of maintaining macroeconomic stability, the salary of the public employees has not been raised but the trend of increasing the number of employees and other entitlements has persistently drained out the scarce resources. On the one hand, overall employees are grossly underpaid and, on the other, remuneration of high ranking public employees is in the ascending curb. To cure the ailing economy, the first and foremost task should be avoiding wasteful spending. For example, the provision of two vehicles for the officials of joint secretary level and setting up air conditioner (AC) in their offices for being high ranking civil servants should be immediately scrapped. Likewise, the costly privileges enjoyed by CEOs of banks, higher authorities of central bank and top bureaucrats have to be slashed.
People have great deal of grievances and they cannot be addressed just by a single budget unless all the wrong trends are broken. To make budget result oriented, first the direction has to be changed. Budget should be evaluated based on whether it is in right direction to bear positive outcomes in the future.
After the budget endorsement, the flow of funds in unproductive sector will further exacerbate the economic situation in the country. Imports will prop up while the export will remain unaffected. Raising the internal loan will absorb savings and liquidity crunch will not see any improvement. Inflation is expected to continue to increase with supply constraints and liquidity. Reserve position will depend on the mercy of remittance. The growth in the revenue mobilization will stand at 15 percent just enough to make up the inflation and nominal growth. Share market will hover at the same level and its eye-catching attraction will be over for long. Commitment to increase the investment in productive sector over consumption will not be met during the implementation period though at the outset the capital expenditures will be estimated higher in order to justify the proposed expenditure.
But, at the end, leadership will not have such easy ride with economy even after the budget.
In the circumstances, people will be led to believe that pinning hopes on government for development is useless. They will be convinced that the government lacks the political determination to enact reforms and hence nothing better comes out of any budget. Then hope turns into pessimism and prospect of economic growth a mere pipedream.
The writer is an Under Secretary at Ministry of Finance
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