Rocky road to Nepal’s economic recovery

People were expecting the budget for the upcoming fiscal 2020/21 to give them some relief. There was a hope that the government led by a party with socialist credentials and the agenda of prosperity would come up with a prudent fiscal policy to lift people up from the gloom of Covid-19 pandemic. Dashing the collective hope, the government has announced a budget that offers no reassurance of people’s economic safety.

Finance Minister Dr Yubaraj Khatiwada presented the budget of Rs 1,474.64 billion for the upcoming fiscal in the parliament without clarifying how it would help steer the path to prosperity that the government has promised. Dr. Khatiwada—who has spent most of his time since his retirement from the Nepal Rastra Bank (NRB) drafting election manifestos of Nepal Communist Party (NCP) (then CPN-UML)—has a knack for revenue collection and dealing with development partners.

Unfortunately, he lacks a political constituency, the most critical ingredient a finance minister needs to be bold enough to tell elected MPs how he wants to steer the economy in times of an unprecedented crisis. No surprise then that the new budget is hopelessly traditional, and without any good program to tackle the challenges created by Covid-19 ‘lockdown’ in the economy and in people’s lives.

Dr Khatiwada has projected 7 percent growth for the upcoming fiscal. But the reason behind his optimism is misplaced. He says such a growth is feasible as he is ‘confident’ the economy would again gain its vibrancy when the lockdown is lifted. Unfortunately, people do not share that ‘confidence’ as they are already short of cash to buy two meals a day. Small and medium enterprises (SMEs) or big corporate houses, they are all struggling to provide even minimum pay to their employees. The informal sector, meanwhile, has been decimated by the lockdown.

This Covid-19 crisis could have been exploited a lot better. This time could have been used to initiate bold reform agendas in health, education, and agriculture. Our public health system is already overwhelmed with just over 2,500 corona-infected cases. The government has allocated Rs 90.69 billion for health, which is much more compared to allocations in previous years. Yet there is no clarity on how this money will be spent.

Agriculture has gotten Rs 41.40 billion, along with subsidies in the procurement of chemical fertilizers. Moreover, this sector falls under the government’s flagship ‘Prime Minister Agriculture Modernization Project (PMAMP), which alone is worth some Rs 3.22 billion. The budget has announced ‘one local government, one product’ policy under this project. But there has been no study to find out which local government has a comparative advantage in which product. In this regard, the project may result in haphazard investments of scarce resources in the production of agricultural products that cannot be marketed.

A total of Rs 150 billion has been allocated to support businesses severely affected by the lockdown. Another fund of Rs 50 billion will give them subsidized loans. Since the NRB will manage these funds, an enormous volume of paperwork will be needed to be eligible for them, a big challenge for SMEs. So, there is room for doubt if these funds will really support SMEs. Industries will have to make a significant investment in covering the health of their workers, increasing the cost of production, and making the products less competitive.

Another program projected as a game-changer is the Prime Minister Employment Program (PMEP), which gets Rs 11.60 billion. This program aims to create 200,000 new jobs. But the program has been tainted with allegations of corruption. There is a risk of this money being funneled to local level party cadres.

Overall, most programs are similar to those in previous budgets, as if the pre- and post-corona ground realities are the same. The government could have helped the private sector steer through the crisis through tax policy reforms.

Tourism will suffer in the foreseeable future, as tourists won’t risk travel to a country with a weak health system. As Nepal cannot rely on tourism anymore, it must bank on some other sector as the foundation of the country’s future growth. As most farmers continue to practice subsistence agriculture, this is also not the sector that can support robust growth.

The only other growth avenue is technology. It could have allowed firms registered in other countries to bid for business in Nepal, as there is little chance that a Kathmandu-based firm will win an international bid. That could have set the foundation of a technology-driven, advanced economy.

In a nutshell, this budget’s scope is limited to sustaining the state apparatus and supporting ruling party politics.

This article was first published in The Annapurna Express on June 5, 2020.