Nepal's political economy

The new government's biggest challenge is to save Nepal's economy (and itself) from collapse.

Photo: RSS

Prime Minister Pushpa Kamal Dahal is busy garnering support from parties left, right and centre for the 10 January vote of confidence he has to prove in the Federal Parliament. On Wednesday, he met Madhav Kumar Nepal of the Unified Socialist (US) for the first time since he broke away from the Nepali Congress (NC) led coalition.

With his Maoist Centre (MC) being only the third biggest party with a mere 32 seats in Parliament, Dahal has had to give away powerful ministries: Finance to Bishnu Paudel of the UML, and Home to Rabi Lamichhane of the Rastriya Swatantra Party (RSP).

And with less than a week before the confidence vote, there will be more wheeling and dealing behind the scenes. There is already talk of adding two more deputy prime ministers to specifically appease the far-right Rastriya Prajatantra Party (RPP) and Janata Samajbadi party (JSP).

The Constitution sets a limit of 25 ministers in the Cabinet. But Dahal has to balance the disparate demands from members of his coalition for posts. He will exceed that limit, and for that will have to split some ministries.

Read also: Oli-Dahal political déjà vu, Santa Gaha Magar

Dahal may be prime minister, but it is UML's K P Oli who is pulling the strings. As the head of a high-level political committee, Oli will essentially be running a parallel government. And given the past bad blood between Oli and Dahal, there is every possibility of them falling out, and the coalition falling apart.

The UML is the second largest party with 78 seats and has shrewdly gained the upper hand by playing the long game by agreeing to give Dahal the first go at premiership while bagging plum political positions for his party in the process.

The committee Oli heads is an extension of this power-sharing deal between him and Dahal. The fact that the Prime Minister is the executive head of Nepal but will now have to adhere to a committee on high-level political decisions has essentially turned Dahal into a puppet of Oli’s making.

But these power games have long stopped being of interest to the people. It was in fact the very frustration with political manipulation that voted independent collective RSP to be the fourth largest party in the 2022 elections.

Read also: For whom the bell tolls, Shristi Karki

But regardless of who is in the coalition or who has an upper hand, the biggest challenge for the new government in 2023 is to save Nepal from an impending economic collapse.

As of 4 January, the total expenditure of the Nepal government in the current fiscal year stands at Rs517 billion against its revenue of Rs362 billion. Nepal is unable to support the government’s spending, and herein lies the biggest problem.

The additional ministries in the new government and their staff will only add to unnecessary expenses in security, infrastructure, salary and other administrative costs. Increased ministries and staff doesn’t guarantee better service delivery either.

The appointment of Bishnu Paudel of the UML as  finance minister has made businesses hopeful, but there is only so much he can do to rectify the blunder made by his Maoist predecessor, Janardan Sharma. On Wednesday, Nepal Rastra Bank, acting  a directive from Paudel and Prime Minister Dahal has revised its new guidelines pertaining to current capital loans to spur investment.

Nepal’s imports decreased by 20.17% in the last five months compared to the same time period last year owing to the central bank’s ban on luxury items following rapidly declining foreign exchange reserves. This helped increase the reserves but also reduced revenue from imports, which continues to be the government’s biggest source of income.

Read also: New year challenge to new government, Editorial

In the meantime, Nepal’s export in the same time period decreased by 34.61% to Rs6.7 trillion and trade deficit by 18.77%. But reduced demand for goods and services can lead to a recession. Year-on-year inflation is also high at 8.08%. In response, banks have  increased interest on loans to reach more than 15% which has discouraged businesses from investing.

Moreover, leakage in revenue and lack of economic activities as well as investment in unproductive sectors continue to pose formidable challenges to Nepal’s stagnant economy which is propped by remittance money sent home by Nepalis ioverseas.

Those jobs have allowed the government to get away with not providing youth with enough employment opportunities at home. But remittance is an unsustainable source, especially as Nepal needs its workforce at home for agriculture, construction and manufacturing, among others.

Nepal needs to reduce its nonessential spending, stop revenue leakage in VAT and others, expedite development projects and promote industries and manufacturing at home. All of this will need to be facilitated by reformed policymaking, not just directives.

Instead, planners bring about ad-hoc schemes like Mobile Device Management System (MDMS) benefiting select businesses, further adding to the frustration of the common people and making service delivery even more difficult.

Sonia Awale