Challenges galore for new government

  • economic development in federal nepal
- RUPAK D SHARMA, Kathmandu

Dec 15, 2017-

Good governance. Jobs. Development. These are three areas the new government is likely to focus on if speech delivered by KP Sharma Oli on Monday is anything to go by.

Oli, who is referred to as the prime-minister-in-waiting, made the speech in the eastern Nepali district of Jhapa after the left alliance secured a resounding victory in the first ever state assembly and federal parliamentary elections.

The statement from the chairman of the Communist Party of Nepal (Unified Marxist Leninist) comes at a time when many are fearing whether the alliance, which is likely to secure almost two-third seats in Parliament, would introduce ultra left policies to contain various sectors and curb freedom of speech.

Good governance, jobs and development are interrelated. Good governance helps accelerate the pace of development; and rapid development, in turn, generates jobs. A combination of the three, it is said, would help Nepal attain economic prosperity, a phrase which has started gaining currency in Nepal. 

Economic prosperity, however, is a term that is hard to pin down, as its definition differs among people and groups. Yet it broadly refers to creation of large number of decent jobs that can uplift living standard of people, according to Swarnim Wagle, vice chairman of the National Planning Commission (NPC), the apex body that frames country’s development plans and policies.

“In quantitative terms, this would mean gaining at least a lower-middle income status by global standards over the next decade.” To earn that status, Nepal must raise per capita income from existing $862 to at least $1,500 in the next 10 years. 

Economists say the goal of almost doubling per capita income is attainable because the country is likely to get a stable government, because the new constitution has clearly mentioned that no-confidence motion cannot be moved against the prime minister for two years from the day of his or her appointment. 

This constitutional provision is likely to end the games of musical chair being played by leading political parties since the mid-1990s to grab the premier’s seat -- albeit questions are now being raised on certainty of tenure of federal ministers as well.

This concern is being raised because securing the seat of the prime minister for two years would mean nothing if ministers are shuffled frequently to reward those who helped the alliance secure a victory.

Such a move would not ensure policy stability, which is one of the overarching goals of political stability. However, it is too early to draw conclusions, so the benefit of doubt must be given to the alliance, which has obtained people’s mandate to rule the country for the next five years.

Yet the big question is how will the new government deliver economic prosperity? What kind of plans and policies need to be framed to achieve the goal? And how different would they be from the present ones?

“The new government need not make policy departures or take a paradigm shift to attain high growth,” says former NPC vice chairman Yubaraj Khatiwada, who is close to the Communist Party of Nepal (Unified Marxist Leninist). 

Nepal has already prepared drafts of a slew of laws, such as the Foreign Investment and Technology Transfer Bill, Commercial Agriculture Bill and Public Private Partnership Bill, to grease the wheels of development and economic growth.  

The country also has an inventory of 21 national pride projects, which includes mega schemes on highway, irrigation, hydroelectricity, airport and drinking water. Completion of these projects would narrow down the infrastructure gap, which is one of the biggest binding constraints for Nepal’s rapid growth.

If all the projects are completed and laws that have been drafted are introduced, Nepal can well achieve its development goals. But that has not happened so far because of lack of execution capacity.

It is therefore not surprising Nepal’s economy has grown by an average of around 4 percent per year in the last 45 years, except for spurts like 6.9 percent seen in the last fiscal year. 

“The new government must recast implementation plans to ensure timely launch and completion of development projects and programmes,” says Khatiwada, who is also former central bank governor.

“Also, decision-making process should be expedited so that the private sector does not have to wait for too long to get various permissions. Among others, bodies like Investment Board Nepal should be strengthened to draw more foreign investment....These measures would help us sustain high growth.”

Nepal badly needs to sustain high economic growth not only to deliver prosperity but to generate adequate revenue to institutionalise federalism, which is going to be costly because of devolution of responsibilities and authorities from the central to state and local governments.

One precondition for high public revenue is high economic growth, according to former revenue secretary Rameshore Khanal. “Once growth picks up revenue generation will automatically go up because tax buoyancy in Nepal is quite high,” says Khanal.

The buoyancy of taxes collected by the central government jumped from 1.3 in fiscal year 2013-14 to around 2.2 in 2016-17. This means 1 percent nominal GDP growth led to 1.3 percent hike in revenue collection in 2013-14 and 2.2 percent hike in 2017-18.

This indicates growth and revenue are correlated. In other words, the country may not be able to generate adequate income to meet expenditure needs of many local bodies and states unless it gears up for higher trajectory of economic growth.

Nepal’s move from unitary to federal government system has enabled local bodies and states to design policies, make decisions, introduce budget and deliver public goods and services on their own. This has laid the groundwork for bottom-up development. But many local bodies do not have the capacity to generate financial resources on their own to pursue development works. 

The revenue generated by local bodies in the past, when Nepal had not made a shift from unitary system of government, always accounted for less than two percent of the central government’s tax income. This is unlikely to change drastically in the federal setup because local bodies have not been assigned vibrant revenue sources. This is the same for states.

This is expected to put the burden of pursuing development works of local bodies on the shoulders of the central government. This basically means most of the local bodies and states will completely rely on the central government for grants to meet expenditure needs. 

Local bodies can reduce their dependency on the central government by enhancing tax compliance, according to Khatiwada. It is said tax compliance rate at local bodies is “mere 35 percent”. “This can be improved if local governments are able to make people pay taxes,” said Khatiwada.

But rural municipalities, which account for 61 percent of local bodies in the country, may not even find viable sources to generate revenue to begin with, because of lack of vibrancy in their economies.

So, some of these rural municipalities will have no option but to rely on central government’s grants. “But they will have to devise strategies to operate like corporations to maximise income,” Khanal said.

For this, local bodies need not impose additional taxes, because higher tax rates will only annoy taxpayers, according to Khanal. “They should instead focus on increasing the flow of non-tax revenue, such as fees collected from, say, parking lots or operation of bus terminals with shopping facilities.”

It is not known whether newly-formed local bodies can look for innovative revenue sources because many elected representatives and officials have very little or no knowledge about fiscal federalism. 

“This is where central government should come in and help build capacity of human resources at the local level. This will help them establish their autonomy, institutionalise fiscal federalism and decentralise growth,” Khatiwada said. 

Published: 15-12-2017 08:43

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