Making plans credible
- In spite of a long history of development planning, results have consistently fallen short of forecasts
Oct 28, 2016-
Despite a long budgeting and planning experience, Nepal’s development outcomes have been inadequate, which is reflected in massive unemployment and a large population below the poverty line. The 2016 per capita income is the second lowest among Asian countries. During the last two decades, the average growth rate has been the lowest among the member states of the South Asian Association for Regional Cooperation (Saarc). The deviation between projections and actuals with respect to economic aggregates has become wider.
Efforts to expedite investment-led socio-economic transformation has failed as shown by the actual ratio of the government’s gross fixed capital formation (GFCF) as a percent of the gross domestic product (GDP), which averaged 18.6 percent vis-à-vis the average plan target of 31.2 percent during the past 16 years. Therefore, the development process needs to be made credible by focusing on innovative policy interventions and sound implementation arrangements to address the development needs of the people and foster the long-term interest of the economy.
Low growth, high inflation
The economy has long been characterised by a low-growth and high-inflation syndrome. The 12th and 13th three-year plans (fiscal 2010-11 to 2012-13 and 2013-14 to 2015-16) projected average growth rates of 5.9 percent and 6.4 percent respectively. However, actual growth rates did not rise beyond 4.1 percent and 3.1 percent respectively. Likewise, average inflation was projected at 7.0 percent during both these plan periods. However, actual inflation rose to 9.2 percent and 8.7 percent respectively. This shows that the projected growth could not be achieved while actual inflation exceeded the estimate. Considering the performance of the past six years, when the average growth rate of 3.6 percent was well short of the projected 6.1 percent, attaining 7.2 percent growth as envisaged by the 14th three-year plan (fiscal 2016-17 to 2018-19) does not look feasible unless there is substantial capacity enhancement in the public sector.
The incremental capital-output ratio (ICOR) in the six years covered by the 12th and the 13th plans was estimated to be 5.3:1, meaning that 5.3 units of investment were required to get one unit of output during the plan period. The actual ICOR during these six years averaged 6.9:1, much higher than the estimate. The higher ICOR meant that more investment was required to get one additional unit of output.
It may be observed that the earthquake and the blockade in fiscal 2014-15 and 2015-16 respectively decreased the efficiency of investment and increased the ICOR sharply. Ignoring the implications of such recent developments in the economy, it is premature to assume, in the absence of detailed analysis of the subject, that the ICOR will remain at the usual 5.2:1 during the 14th plan period.
The budget deficit as a ratio of GDP was projected at an average of 8.6 percent during the 12th plan. This ratio was far higher than the 5.0 percent limit recommended for developing countries. Such a limit is placed to make the budget deficit sustainable, avoid unfavourable domestic and external macroeconomic impacts and implications, and ensure fiscal accountability. In actual terms, there was no budget deficit during the 12th plan period as projected; rather there was a budget surplus of 0.08 percent of GDP. During the 13th plan, the budget deficit/GDP ratio was drastically reduced to an average of 0.8 percent. Actually, there was a budget surplus/GDP ratio of 0.03 percent during this plan period also.
The 14th plan has again projected a very high budget deficit/GDP ratio
of 8.5 percent. The budget for the current year has projected a budget
deficit/GDP ratio of 10.0 percent which is higher than the plan’s projection of 9.6 percent for the year. The reasons for projecting a high budget deficit
ratio during the 12th and 14th plans and projecting a very low budget deficit ratio during the 13th plan—while the actual budget balance showed a surplus during the 12th and 13th plan periods—could not be identified.
Similarly, uncertainty and risk characterise the implementation of the 14th plan for reasons including the projection of such an excessive budget deficit where the problems of price spiral and supply shocks have not yet been addressed. Price policy which has been treated as a separate macroeconomic policy since the second plan (fiscal 1962-63 to 1964-65) has been discontinued in the 14th plan. Especially when the constitution has adopted a policy of ending black marketeering, monopolies and artificial shortages and controlling competition, thereby protecting consumer interest, the subject should be retained when a detailed plan document is being prepared.
Erosion of public trust
Ad hoc assumptions on subjects like ICOR and budget deficit show that the National Planning Commission has adopted a totally ritualistic process of plan formulation. Besides, such an approach undermines the credibility of Nepal’s planning and development endeavours. In an economy which has the lowest growth rate among Saarc countries and the second lowest per capita income among Asian countries, such negligence and lack of accountability towards plan formulation is indeed deplorable.
To conclude, planning, budgeting and other policymaking exercises in Nepal have not yet delivered the desired outcomes. There is a massive level of unemployment, forcing hundreds of thousands of youths to leave annually for job destinations abroad. A low implementation capacity and disruptions in project schedules resulting in cost and time overruns have become the norm rather than the exception in the government. Large differences in projected economic aggregates and actual outcomes point to an urgent need to raise the government’s implementation capacity. Such a huge gap between the target and the performance has also eroded public confidence and credibility with regard to policymaking and implementation arrangements. Therefore, the capacity to formulate credible plans and the capability to monitor and evaluate the implementation process in the public sector should become a
Basyal is a former executive director of Nepal Rastra Bank and a former senior economic advisor to the Ministry of Finance
Published: 28-10-2016 08:12