Now the economy, stupid

Bishnu Poudel has inherited the Finance Ministry at a time when the country’s finances are in a shambles because of ill-advised and inept policies of his predecessor.

The Nepal government is living beyond its means. Expenses are not in line with revenue. As of 11 January, the total expenditure of the Nepal government in the current fiscal year stands at Rs559 billion against revenue of only Rs398.7 billion. This year’s budget projected a 21% increase in revenue from last year. However, data as of November 2022 shows that revenue collection has actually decreased by 20%.

Revenue therefore has not kept pace with increases in government salaries, allowances, and bonuses. If this trend continues, the newly elected 7-party opposition-less coalition government will be in serious trouble.

Nepal’s imports decreased by 20.17% in the last five months compared to the same time period last year due to the Nepal Rastra Bank’s ban on luxury items to sustain dwindling foreign exchange reserves.

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With year-on-year inflation reaching 8.08%, ordinary citizens’ demand for goods and services has fallen sharply. Meanwhile, increased interest on loans to more than 15% as a response to rising inflation has discouraged investment.

Nepal’s primary sources of revenue are remittances, tourism, and export. Tourism is still not back on track post-Covid due to the Russian invasion of Ukraine, and the country’s exports in the last five months decreased by 34.61% as compared to the same time during the last fiscal year. This country is running just on remittance money that Nepalis abroad send home — either through official banking channels or hundi.

But Nepal cannot depend on remittance forever, especially as we need workers at home to stimulate the agriculture sector, manufacturing, construction and tourism, which in turn will create more domestic jobs.

Moreover, in his third term at the finance ministry, doubts as to Bishnu Poudel’s budget discipline are not exactly unfounded. Despite the country’s inability to spend, Poudel during his first term as Finance Minister in 2015 introduced a budget that was 28% larger than the previous fiscal year and passed it through ordinance. And during his second tenure in 2020, he revealed a budget that was 12% bigger than the previous one.

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Although the minister may have inherited a country facing financial ruin from his forerunner, his own record is not particularly stellar. He is also known for recklessly increasing spending by increasing salaries and social security allowances during his terms in office.

But the finance ministry and the minister think they are beyond reproach and criticism.

It might seem like a given, but the finance ministry needs to take the initiative to reduce the wasteful government expenditure. Minister Poudel must work towards bridging the communication gap formed between his ministry and Nepal Rastra Bank during Janardan Sharma’s tenure. Unlike his predecessor, Poudel cannot interfere with the central bank’s autonomy on monetary policies.

Too many parties in this coalition government means that there are too many hands on the budgetary honeypot. This will not make the minister’s job easy— but he will now have to navigate the will of seven political parties and their affiliated special interest groups and not be swayed by unreasonable demands from all sides. In fact, the Minister needs to be prepared to go against the coalition in order to prevent any misuse of the budget.

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As finance minister, Poudel also bears the responsibility of raising the morale of business institutions and people to encourage investment and stimulate the economy.

All of this is not to say that there have not been positives. Nepal’s foreign reserves increased by 2.5% from July 2022 to November 2022, following the embargo on the import of luxury items — even as there had been fears that Nepal would become ‘the next Sri Lanka’.

Likewise, Nepal Rastra Bank’s recent amendment of the Working Capital Loans Guideline to increase investment might ease the strain on the economy.

But embargoes and directives can only take the economy so far. Now, Poudel needs to work not just towards undoing and repairing the mismanagement of the ministry, but actively work towards policy reforms in order to get Nepal’s economy back on track.

The minister must thus focus on good governance, refuse to buy into the demands of special interest groups, and facilitate the protection and appropriate use of state resources.

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Ramesh Kumar