The budget for fiscal year 2015/16 has focused on reconstruction and recovery of the affected economy by the recent devastating earthquake. It continued with the liberal economic policy restarted by Finance Minister Ram Sharan Mahat's last year budget. This year's investor-friendly budget has not only given the message of recovering quake-affected economy as encouraged by the grand success of International Conference on Reconstruction that completed with the presentation of quality report on its impact, just two months after the April earthquake, but also further encouraged local and foreign investors.The budget proposed a total expenditure of Rs 819 billion which is 32 percent and 80 percent higher than last year's (2014/15) budget estimates and revised estimates respectively. Of the total budget, regular expenditure of Rs 484 billion comprises 59 percent, which is 21 and 42 percent higher than last year's regular and revised estimates, while 25 percent of the budget amounting Rs 209 billion is allocated for capital expenditure, 78 and 141 percent higher than last year's estimates and revised, and the rest 16 percent is left for financial management.
The total budget and capital expenditure seems quite higher than the previous year mainly because of allocation of reconstruction amount of Rs 74 billion. If the reconstruction amount is deducted from the total budget, it would be just 20 and 64 percent higher compared to last year's budget estimates and revised estimates respectively, and the capital expenditure will be only 15 and 32 percent above the respective estimates of last year. In this context, the proposed budget seems reasonable. However, in the context of low absorptive (expenditure) capacity, execution of the proposed budget poses a big challenge as Mahat himself has accepted.
Different provisions such as simplification of the Public Purchase Act, declaration of this year as budget execution year incorporating provision of enhancing expenditure capacity of government as well as private sector construction professionals along with special provision on transfer of project chief and delegation of the budget, will ascertain the full implementation of the capital budget. Despite the Reconstruction Authority (RA) ordinance, delay of appointing Chief Executive Officer of the Authority has created suspicion regarding the implementation of the reconstruction project in 2015/16. On the other hand, the proposed Constitution with the provision of anti-liberalization policy of the economy or directing towards socialist economy will not only hinder budget implementation but also leads to economic disaster.
Without being discouraged from the adverse effect of the quake, the budget accorded priority to reconstruction making special provisions such as enhancement of the capacity of fighting against such disaster, concentration (35 percent) of the capital budget on reconstruction, provision of separate RA, preparation of 50,000 trained youths by providing training on carpenter and masonry, plumbing and electricity, and also the provision of concessional house reconstruction loan including government grant assistance to the owners who have lost their houses. Despite huge loss of about Rs 700 billion, the allocated reconstruction amount does not seem inadequate in the context of doing preparatory and basic work this year, three to five years of reconstruction and enhancing existing expenditure capacity.
The budget has also concentrated on recovering economic activities of different affected sectors such as tourism, infrastructure, construction, agriculture, transport, trading, and business services which have made the economy functional as well as dynamic. Different budgetary provisions of increasing minimum VAT limit to Rs 500,000 from Rs 200,000 which was constant for 18 years since the beginning of the VAT system, no significant change in tax structure, relief package for the private sector has further encouraged the investment climate both for local and foreign investors. In addition, continuation of second generation policy reforms of liberalization launched again last year has added further impetus.
In the context of making agriculture—the mainstay of economy—competitive, a dozen of grant agro-programs are targeted to be launched, which will boost up the sector. Such provision of grant on agriculture, and different provisions made under the budget such as 100 percent increment of senior citizens' allowance, abolition of undesirable social security tax levied on pension for past six years, construction of 1,200 houses under people's residence program for underprivileged and marginalized community, relief package to the private sector, increment of Rs 500,000 to parliamentarian fund and 50 percent increase in each election area has made the budget populist. In this context, some analysts commented that this budget is in line with BP Koirala's social justice.
It has proposed total internal debt of Rs 88 billion, more than four percent of the GDP, which is higher than previous years. Although it has devised strategy to control its inflationary impact through monetary and administrative policies, inflation is estimated to reach two digits as such debt mainly goes to the unproductive sector. In this connection, it's difficult to achieve recent monetary policy's inflation target of 8.5 percent. Moreover, the GDP growth target of six percent seems unachievable primarily because of the fear of the proposed constitution's stance against liberalization, quake impact, poor plantation of the main crop (paddy) and prolonged political transition. The long-term targets of three to 20 years of development such as providing irrigational facilities in all agricultural lands, electricity and road access in all VDCs in three years including gravel road in every election area are quite ambitious, which require many things including political stability for their success.
To reduce the alarming trade deficit which is above one third of the GDP, the budget didn't take any measure to control import by curtailing undesirable regular expenses and conspicuous consumption on social function. Thus, immediate attention of the government is needed to address this situation. For the first time since the establishment of Nepal Rastra Bank, the government has provided autonomy to the central bank to fix the inflation target which by itself is a milestone. Execution of the financial sector development strategy and making the Citizen Investment Fund active in the secondary securities market are mentioned in the budget but it could not pay adequate attention to liberal reform of the banking system which had been affected by control regime introduced during the recent past. Immediate priority has to be accorded on structural reform of the Securities Board, and corporate privatization of NEPSE as well as Central Depository System (CDS), and full modernization of the securities market.
The author is the chairperson of Rastriya Banijya Bank
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