Beware of headwinds

  • New govt must take moderate reformist path to give impetus to economic activities

Dec 12, 2017-

The left alliance has secured a resounding victory in the first ever state assembly and federal parliamentary elections, obtaining a clear mandate to rule the country for the next five years. The victory will help the alliance focus on core development issues, which could put an end to the economic inertia witnessed over the years.

Nepalis now want to see a complete overhaul of the economy, which has expanded by an average of around 4 percent per year in the last 45 years, except for some instances like in the last fiscal year when growth rate stood at 6.8 percent. The healthy margin of victory will definitely help the new government introduce favourable policies to attain this goal and raise the living standards.

Yet the new government will face considerable headwinds, especially because Nepal is experimenting with federalism for the first time and huge resources would be required to run the country.

One of the cornerstones of the constitution promulgated in September 2015 is fiscal federalism. This constitutional provision has empowered local bodies and states, and enabled them to design policies, make decisions and introduce budget. This devolution of power has paved the way for local bodies and states to pursue development activities on their own, which will require huge resources.

It is well known that most of the local bodies do not generate adequate resources to finance their expenditure needs. For example, tax income of now-defunct district development committees and municipalities, and income of village development committees accounted for less than 2 percent of the central government’s tax revenue. This is unlikely to change drastically in the federal set-up because local bodies have not been assigned buoyant revenue sources. This is the same for states. This indicates most of the local bodies and states will rely on the central government for grants to meet their expenditure needs.

The constitution has envisaged four types of grants for local bodies and states: fiscal equalisation, conditional, matching and special. The government, in the current fiscal year, has allocated funds to provide two of the four grants to local bodies and one of the four grants to states. These allocations have consumed over 18 percent of the government’s annual budget. If all the grants are extended in the next fiscal year, their share in the budget could exceed 50 percent. This will leave the central government with very little funds to cover other crucial expenses related to national security, management of federal administrations and embassies, higher education, debt servicing, pension, social security, reconstruction, implementation of national pride projects, and response to  natural disasters and other emergencies.

So, the cost of implementing federalism will be huge and they cannot be covered unless economic activities expand rapidly. It is well known that funds mobilised by the government would not be adequate to give desired impetus to economic activities. The government must attract private investment, both domestic and foreign.

In this regard, the new government should not embrace rigid Left policies, but take a moderate reformist path to create a level-playing field for the domestic private sector and foreign investors.

Published: 12-12-2017 08:13

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