Near-debt experience

During the governing UML rally at Darbar Marg last month, Prime Minister K P Oli listed a host of economic woes that had rendered the country “inoperable”.

His main concern was rising national debt. He said the country could not afford to take on any more loans.

“The treasury is empty while our debt is sky high, revenue and manufacturing are down and smuggling is rampant,” Oli told the rally that created massive traffic jams during rush hour on Friday. “We collected 24% less revenue last year than the one before it.”

But just two weeks later, the prime minister was in Beijing to sign a BRI Framework Cooperation Agreement. His coalition partner Nepali Congress (NC) had insisted that the deal should not have loan components. The Chinese did not agree, and the BRI agreement for 10 projects under an ‘aid assistance financing' (read: loans) was signed.

Nepal’s public debt to GDP ratio stands at 44%. And even though the figure for China is 83% and Japan 250%, those countries have robust exports and vast reserves. A more telling statistic is that Nepal’s debt has increased 5-fold to Rs2.5 trillion in the last decade.

“Indiscriminate borrowing has made us skittish about seeking more loans to finance development,” says economist Keshav Acharya. “But we are not in a position to reject loans for infrastructure.”

Nepal’s national debt servicing now exceeds its capital expenditure for development. This year’s budget allocated Rs352 billion for capital expenditure, while Rs367 billion was for loan repayment. Loan repayment will increase, which means less money for development.

Nepal had to raise 29% of its annual budget from borrowing because of continuing decline in revenue. Just this year, institutions including the World Bank and the ADB extended long-term low-interest loans worth Rs548 billion in budgetary support.

The government has also been propping up the treasury with internal loans because it is at a deficit of Rs86 billion. Another Rs84 billion in internal loans have piled up since July.

“We cannot afford to borrow uncontrollably like this, and instead take loans to invest in projects that increase economic output, create jobs, and provide returns,” adds Acharya.

Falling revenue collection has been exacerbated by a sluggish economy. Ironically, a decreasing import bill also means less revenue from taxes. Last fiscal year, revenue collection fell to Rs1.03 trillion from a target of Rs1.422 trillion. So far this fiscal year, only a quarter of the target has been collected.

Corruption, tax evasion and capital flight also take their toll. Two monitoring teams were formed to look into tax evasion in October. The government also reduced the customs duty on gold and silver to reduce smuggling and increase revenue from legal imports.

“Around 40% of imports were through informal channels even when we were able to reach our target revenue through customs,” says former Secretary Kewal Bhandari. “Smuggling has obviously become more rampant now.”

Meanwhile, demand for consumer goods and real estate transactions remain sluggish, further impacting revenue. Construction and manufacturing are in a recession. The construction sector recorded negative 11.2% slump during the third quarter of the last fiscal year. Wholesale and retail trade decreased by 2.7%.

The prime minister must have been briefed on these figures, which is why he sounded the alarm at his rally last month that was supposed to be a political show of strength. His government has no option but to carry out major structural reforms in laws, the tax system, and clean up the administration to ensure financial stability and push growth.

The Economic Reform Commission under Finance Secretary Rameshore Khanal is supposed to offer fix-its. But this is not the first time such a Commission has been formed. Earlier recommendations were never implemented.

Last year’s High-Level Tax Reform Advisory Committee led by former Finance Secretary Bidyadhar Mallik projected a revenue increase of up to Rs3 trillion annually through tax reforms. Nepal Rastra Bank Governor Maha Prasad Adhikari is proposing a campaign to build 10,000 low-cost housing units in Kathmandu under public-private partnership to kickstart the construction sector.

Economist Keshav Acharya believes Nepal’s economy can be steered in a better direction with existing resources through state restructuring and prudent use of government expenditure.

He warns, “We will find ourselves in an even bigger soup if we do not carry out a major shake-up to increase revenue, slash expenditure and reduce further loans.”