Deficit budget posing grave risk to economy: Experts

KATHMANDU, JUL 25 -

Experts on Monday warned that deficit budget could pose grave risks to the country’s economy, given the slow pace of revenue collection.

The government has brought Rs 137-billion deficit budget this fiscal year, as the annual budget size is Rs 385.90 billion and the revenue collection target stands at Rs 247 billion, including repayment of principal amount.

Senior Resident Representative of the International Monetary Fund (IMF) to Nepal and India Sanjaya Panth said given the revenue collection unlikely to keep up the pace set earlier years, the size of the budget should not have been that big. He termed the increased recurrent spending compared to slow revenue growth a ‘significant risk’ that Nepal faces currently.

The size of the recurrent expenditure appropriated in the budget for the current fiscal year is bigger than the expected revenue collection. The budget has allocated Rs 266.61 billion for recurrent expenditure.

Given the current budget announcing several populist programmes, former Finance Secretary Rameshwor Khanal said the budget needs a correction in the middle of the fiscal year. He said the spendthrift fiscal orientation could erode the fiscal space which could have been better used for capital formation.

At an interaction organised by the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the experts also urged that interest rates in Nepal be adjusted in line with India’s. As the Nepali currency’s exchange rate is tagged with that of India, Nepal cannot go long without adjusting its interest rates as per that of India, said Panth.

Khanal said the country’s low productivity compared to India resulted in poor export performance which has created difficulties in maintaining exchange rates pegging with the Indian currency.

The experts also had common a voice about the need for ensuring good corporate governance and strengthening the central bank’s supervision amid some financial institutions landing in trouble due to bad governance.

Saying that the Nepali economy is facing three major challenges—high inflation, weak exports and slow remittance growth —Panth said Nepal would find it hard to address these problems fully given the current external environment and low productivity.

According to him, commodity prices have receded to some extent recently in the international markets, but it will not decrease significantly. “Nepal will have to suffer from this situation as well,” he said.

Nepal’s manufacturing sector has been shrinking and the economy is being fuelled by consumption, not investment. “Investment is necessary for sustainable growth,” Panth said. According to the economic survey 2010-11, consumption is as high as 93.3 percent of the gross domestic product.

Khanal urged political consensus on major economic issues, including right to property, protection of investment, positive attitude towards foreign direct investment and natural resource exploitation for realising Nepal’s potential.

Economist Madan Kumar Dahal was of the view that the economy was not being able to grow at a faster speed due to low investment in the agriculture sector from both the government and the private sector.