Budget may not be growth oriented
Jul 9, 2015-
The government is preparing the budget for the next fiscal year which is specially tailored to revive the economy battered by the earthquake. The disaster can be converted into an opportunity to attract large investments in critical sectors if there is a right policy environment and institutional arrangement.
However, I don’t see any favourable context to make the next fiscal year’s budget more growth oriented. The current context allows the government to create the usual kind of budget to run the economy as usual, and there will be big budget allocations for reconstruction to show that the government is active in carrying out reconstruction irrespective of whether the allocated resources will be spent or not.
The next budget will not be growth oriented because the future of the current government in uncertain. The political parties have made a deal that this government will go after the promulgation of the new constitution. It is also uncertain when the constitution will be promulgated.
In such a situation, the government cannot carry out policy reforms. Even if it takes the initiative, there won’t be a political commitment from the subsequent government. Against this backdrop, expecting a budget that will create a better investment climate, accelerate investment and propel high growth is simply futile.
So, even if this government brings an investment oriented budget, it will
not have time to implement
it because it has to go when the new constitution is promulgated.
Why I am saying that this budget will allocate a huge budget for reconstruction but spending will be low is because the government has not yet made the
necessary preparations to create a situation where spending on reconstruction will accelerate.
Although the government hastily formed the National Reconstruction Authority before the International Conference on Nepal’s Reconstruction, it failed to show similar urgency in making appointments to the authority and preparing its working procedure to enable it to work instantly. There won’t be a resource crunch for the reconstruction efforts, but there is doubt about the spending.
This fiscal year’s budget was brought by a stable government which had promised many economic reforms. At the end of the year, almost all the promised policy and legal reforms did not happen. The Finance Ministry, which promised start-up funds for innovative ideas, could not implement the idea. Capital spending has remained disappointing this year too. Hardly any new projects could move ahead and the existing projects too could not progress at a faster rate. In this context, there is no environment for bringing an ambitious budget.
Likewise, achieving a high trajectory growth through the next fiscal’s budget will be difficult. If the institutional mechanism and working procedure for the authority had been prepared by now, expenditure would have accelerated and a higher than 6 percent growth would be possible.
In the current context, capital spending of Rs180 billion will be enough to attain 6 percent growth as long as all the money is spent. Capital spending is largely reflected in the growth rate because there is a 30-40 percent labour component and the wage payments are counted in the GDP and the use of domestic products will further propel growth. If the authority cannot work immediately, conducting the reconstruction efforts through the existing mechanism will result in big spending because it takes a lot of time just to appoint the contractor.
If the government has zeal, it can mobilize communities for spending right now. It can instantly engage communities by forming committees to spend on rebuilding. The government can give such committees the responsibility of reconstructing houses in their communities by releasing the committed resources of Rs200,000 on instalment basis as per the pace of work.
The government can then inform the market about the number of houses being constructed and the required construction materials. After getting such information, manufacturers of construction materials will try to cash in on the opportunity.
If domestic production is increased, GDP will also grow accordingly. Many people have gone abroad for jobs as they don’t know about the wage structure in Nepal. There is a chance for higher wages here, and many migrant workers can return to the country to engage in reconstruction work if the right information is disseminated.
As far as private sector investment is concerned, there is no situation for greater investment because of the government’s failure to move ahead with policy and legal reforms as announced.
Given the fluid political situation in the country, private sector investors will wait and see for the next few months. Had the new constitution been promulgated, the private sector would have been interested in making investments.
Madhesi parties have not supported the draft of the new constitution. You cannot rule out anarchic activities completely and the situation may go out of control.
The investment commitments in the hydropower sector such as for the Upper Karnali, West Seti and Arun III projects have not been implemented yet. The foreign investors in these projects will study the situation for the next few months. Without the development of hydropower and transmission lines, we cannot attract massive investments in the manufacturing sector.
Therefore, the private sector will not make massive investments next year. After the signing of a Power Trade Agreement (PTA) with India and Project Development Agreements with a few companies for the development of some big hydropower projects, the private sector had expected policy and legal reforms which, unfortunately, did not happen in the last 12 months. At a time when the country’s main focus has been on reconstruction, who will be interested in policy and legal reforms?
Even in such an unfriendly context, the government can carry out certain projects without delay. It could have started rebuilding the damaged infrastructure at Basantapur, Patan and Bhaktapur durbar squares immediately.
These are projects where the government should not apply the tender process because of the specialised nature of the reconstruction work. The government should find skilled people for reconstructing the damaged heritage sites so that their originality will not be lost.
Although the context is not right, the next budget can do certain things. We must ensure the execution of critical projects, both old and new, which will help us minimize losses in the event of disasters such as flooding.
For example, there is only one road connecting Kathmandu with the outside world. The budget can ensure that another good quality road is built to ensure smooth supplies. That can be Kanti Highway, Kulekhani-Hetauda road and expansion of BP highway at certain narrow locations. Similar alternative roads for big cities are needed.
I have said many times that there should be several roads connecting Kathmandu. People say it is not viable economically. But, not only two, four fast-track roads are feasible in Kathmandu. You see a dozen roads connecting Copenhagen whose population is just 2.5 million while we have 4 million people in the valley. We have to think that we will be richer in the coming years and people will have cars of their own.
Given the delay in policy and legal reforms, the government can announce policy reforms which can be implemented without making new laws. Such reforms can be carried out through just one announcement. If the finance minister announces that firms applying for de-registration will be freed of all obligations, that will help create an investment climate. Many people don’t want to invest in industry because the current policies and laws don’t allow investors to exit the business. So, they go into trading business where they don’t have to make a big capital investment.
Another thing the government can announce through the budget is that no generation licence is needed for hydro projects up to 10 MW after obtaining a survey licence.
Promoters have to please government officials after completing the survey to acquire the generation licence. Why is there dual licensing? First, competent promoters should be chosen while issuing survey licences. If dual licensing is ended, those who have acquired the survey licence will go for generation.
Another thing that the government can do is set up special purpose vehicles like the National Reconstruction Authority to deal with big and critical infrastructure projects. Such a separate authority with a fast track mechanism can help complete big projects at a faster pace. India has formed a highway authority. China and Singapore have implemented big projects through special purpose vehicles.
(Based on conversation with the Post)
Published: 10-07-2015 08:53