Nepali business people, political parties and even economist had offered their appreciation to the government for a timely announcement of the annual budget after the process had been mired in hiccups in the previous five years.
This had raised hopes for a better economic environment at a time when the country was reeling under the frequent disruptions in budget announcement for the past years. But, government officials are losing hope about achieving some crucial targets set in the budget.
“Though we set out to attain 5.5 percent growth in the current fiscal year, it looks this is not possible. But we hope we can achieve 5 percent growth despite a disappointing progress in capital spending,” Finance Secretary Shanta Raj Subedi said at an event in Chitwan last week.
In the last fiscal year too, the government had had to revise down the economic growth target to 3.6 percent from 5.1 percent announced in the budget due to low capital spending, resulting in slowing of economic activities in the country.
In its ‘Marco-Economic Update 2013’, the Asian Development Bank had said a few months back that Nepal’s target of 5.5 percent growth in Gross Domestic Product (GDP) was ‘ambitious’ and limiting inflation within 8 percent was ‘conservative’.
Naoyuki Shinohara, the deputy managing director of the International Monetary Fund (IMF), in his visit to Nepal in November last year also forecast that Nepal would be able to achieve around 4.5 percent growth this year.
Despite the announcement of a full-fledged budget, the situation has looked no different from previous years which were marked with low budgetary spending. Though the government spent an overall 30 percent of the total budget, capital spending, which is crucial for pushing up economic growth, has been disappointing this year. During the first six months of the current fiscal year, capital expenditure stood at 13 percent of the total capital budget.
Out of a total of Rs 85.09 billion allocated for capital expenditure, only Rs 11.50 billion was spent during the review period. However, regular expenditures reached to around Rs 130 billion out of a total of Rs 353.41 billon allocated under the heading for the fiscal year.
“We succeeded in bringing out the annual budget on time but we could not end problems facing the country in implementing development projects on time,” added Subedi.
Total commitments for assistance from development partners increased to over Rs 53 billion during the first six months of the current fiscal year, up from around Rs 15 billion recorded during the same period last year.
But, slow progress in capital spending has hampered the utilization of development assistance extended by donors.
In a clear reflection of growing concern among donors over Nepal’s ability to spend development aid, Australian ambassador Glen White expressed his dissatisfaction during a meeting with Finance Minister Shankar Koirala on Wednesday, stating that Nepal has not been able to spend the health assistance provided by Australia.
The trend of slow progress in capital spending is not a new phenomenon in the country. Hosts of problems regarding land acquisition, relocation of squatters from project sites, frequent problems in collection river products used for infrastructure projects and slow progress in awarding contracts, have hampered the progress in capital expenditure.
“We came to know that just announcing the budget on time cannot resolve problems that have existed in spending development budget, we need to end several chronic problems that still exit in our budgetary system and implementation process,” said Ram Saran Pudasaini, the chief of the Monitoring and Evaluation Division at the Ministry of Finance (MoF).
A team led by Pudasaini, is on tour to different districts in the mid and far-western regions to assess the implementation of big projects.
He said disruption in smooth implementation of big development projects is a major factor that has limited capital spending.
Sikta Irrigation Project, which is one of the government’s priority projects, has been reeling under prolonged disputes about the compensation against the land acquired for the project.
Similarly, the implementation of RaniJamara Irrigation, another ‘most prioritized project’, also hit a roadblock due to persisting problems in resettlement of squatters, who have been occupying project site.
“These two crucial irrigation projects are examples of how land acquisition is affecting implementation of national priority projects. We have many other projects that deal with extension of transmission lines and construction of highways which are also facing the same fate,” added Pudasaini.
Like his team, two other teams from MoF are traveling to sites of major development projects to assess the real problem for execution of such projects. The teams are submitting reports on implementation of big projects and offering recommendations to deal with the problems identified in the projects.
“Our report with recommendations to deal with the problems will be included in the upcoming mid-term review of budget implementation,” he said. He, however, says that the pace of implementation will go up in the coming days as the process to award contracts in most of the big projects has been completed.
In the past, development projects used to complain that the government allocated insufficient budget. But, this year the government has allocated sufficient funds and MoF officials have been repeatedly pledging that such highly prioritized projects will not face budget scarcity. Even the National Planning Commission (NPC) – the apex policy-making body of the government -- directly intervened in the budget allocation process for such projects to ensure sufficient budget for them.
MoF has identified 68 big projects that the ministry directly wants to specially monitor implementation of.
There were high hopes among policymakers, business people and the general populace that the timely budget announcement immediately followed by authorization for spending would boost capital spending unlike in the previous years.
As double-digit inflation was hitting the general people hard, the current budget set a target of containing inflation to 8 percent -- an ambitious target right when the value of the Nepali currency hit record lows against the US dollar, cost of production kept rising and energy crisis was persisting.
The current budget itself has identified that rising inflation has hit producers and consumers due to rise in prices of commodities and their cost of production.
Similarly, the current monitory policy formulated by Nepal Rastra Bank, the central monetary authority -- also stated that the devaluation of the Nepali currency and rising volume of remittance pushed up inflation.
But, the recent macro-economic report released by NRB shows that inflation hit 10.3 percent in mid-December. Tools adopted by NRB in its monetary policy are looking ineffective in controlling soaring inflation.
India also faced the same plight as Nepal due to the stronger greenback against the Indian rupee, to which the Nepali rupee is pegged.
The Reserve Bank of India (RBI), the Indian central Bank, recently made a host of recommendations to limit inflation at 4 percent in the long run and 6 percent within a couple of years.
Inflation in India had accelerated to 18.4 percent in September; its highest since mid-2010, mainly contributed by the skyrocketing prices of vegetables, including onions.
Given the direct trade relation with India -- which covers two-thirds of Nepal’s trade, inflation in India highly influences the Nepali market. The rising cost of production on the back of the energy crisis, soaring prices of imported raw materials and supply constraints in the domestic market are all set to continue driving up inflation in Nepal which has already spiraled beyond the government’s target of 8 percent.