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Monday, June 3, 2019

‘Govt missed historic opportunity to bring transformative sequence of five budgets’

Last week, Finance Minister Yubaraj Khatiwada unveiled the second federal budget. Though the budget tried to introduce some measures whose effective execution might accelerate project development, the government has been criticised for a few populist programmes that will swell the country’s recurrent expenditure and other ambitious economic targets. Against this backdrop, Sujan Dhungana of The Himalayan Times talked to former vice-chairman of National Planning Commission and also a senior economist Swarnim Wagle to know about the spirit of the budget, its implications and other issues. Excerpts:

Swarnim Wagle

What is your evaluation of the budget for 2019-20?

Personally, I am not too enthused by the budget for the upcoming fiscal. It lacks the bold reforms that we expected from a strong and stable government with a defined tenure. Populist urges have not been tamed and in this regard, the size of the budget is inflated. This implies that Nepal’s pace of indebtedness — both domestic and international — will aggravate much faster than the earlier projection. There has been no fundamental change in the taxation regime and broader incentive structures, which means the prospect of putting Nepal on a much higher and sustainable growth trajectory in the future is missing. On the positive side, the budget has tried to drop all its pretences about doing big and ambitious projects and focused on existing infrastructure projects. The budget has also introduced some changes to the way large projects will be managed. If such measures are executed properly, we can expect some positive changes. Thirdly, there is some piecemeal attempt to promote production base of the country. On the whole, this is not a bad budget. But on a relative scale, the budget is definitely underwhelming because from a government that is as stable and strong like this, one had expected much more. In the budget presented by the finance minister last year, I had seen a clear mental roadmap of a sequence of five transformative budgets, one building on the other and really strengthening the foundation of the economy. But in the second year itself, that discipline has been broken and the finance minister has been unable to withstand the populist pressure. Thus, the historic opportunity that the country had has almost been wasted. The big fear now is that instead of five game-changing budgets that could really take Nepal towards a new path, what we have now are two budgets that will be remembered as whimpers that did not build a proper foundation, and the remaining three budgets will all be ad hoc. From this perspective, the opportunity to have five major budgets has been squandered off into a piecemeal sequence of ad hoc budgets that together will not result in anything significant.

But the previous governments, including those led by Nepali Congress, had also given enough space to populist programmes in their budget. What do you have to say on this?

Primarily, the budget for the upcoming fiscal year has introduced four major programmes that are highly populist in nature. The first one is raising budget for the Local Infrastructure Development Partnership programme. It was initially introduced when there were no elected representatives and at the time when federalism was just an idea in the constitution. Now, the situation is fundamentally different. There are close to 36,000 elected representatives who have a defined mandate to execute development works across 760 governments. Members of Parliament (MPs) coming in with their own resources undermines the aforementioned principle and promotes a form of patronage politics, which is not fair to future democratic challengers. This ultimately weakens democratic accountability. Regarding the old age pension, it is now well accepted that it has contributed to enhance the self-esteem of our senior citizens. But the issue is, these sorts of programmes should gradually be made need-based and targeted after a certain threshold. Elderly pension of Rs 2,000 per month is well accepted and the country can afford it. The nature of such programmes should have been altered gradually. I don’t personally begrudge the salary hike of the civil servants, as it was not raised since the last few years. But what incentive designs have been built into this mechanism so that greater productivity can be extracted from civil servants matters a lot. The challenge in public administration today is actually to limit the size of the government, especially against the backdrop of ballooning recurrent expenditure of the government. A government as strong as this should have been in the position to take some unpopular decisions by raising the salary structure based on performance, raising salary structure of the bureaucracy that actually begins to deliver and at the same time take unpopular decisions to retrench the size of the government. This would have been an unpopular decision but the government could counter balance them. Even salaries in the Indian bureaucracy are much higher. Nepal is in the low equilibrium track, where salaries are low and so is the productivity. Instead of such low equilibrium, we should be aiming to go towards high productivity and high wages. The government should also take austerity measures to limit recurrent expenditures so that efficiency can be extracted with existing resources. The other major populist programme includes the kind of protection that has been given to select industrialists and entrepreneurs. The budget appears to be quite selective by protecting those who have access and influence. But those who are not well organised and do not have access have been deprived of such protection from the government. For example, the poultry industry has been receiving strong protection for many years. It is good that Nepal is inching towards self-sufficiency in poultry industry. But by limiting cheaper imports, consumers are being obliged to pay a higher price at the same time. This is also true with the cement industry. Sometimes, the government buries the harm that is being imposed on the average Nepali consumer around a nationalist rhetoric that it is worth imposing all these import duties and quantitative restrictions because it is worth promoting Nepali industries. This is fine up to a point. But there has to be a sunset clause or a definite period in which these protected industries should be able to be highly competitive and compete with foreign industries. But this is not the case among Nepali industries. The government should adopt a policy to phase out protective policies given to certain industries if they fail to compete within the next few years.

The government seems to be prioritising the public investment drive by allocating a major chunk of resources to the development of infrastructure through the budget. Is it that the government is trying to overlook the role of private sector in development?

There needs to be a clear division of labour in infrastructure building. Big hydro, irrigation and highway projects are normally undertaken by the state as they involve land acquisition issues and they also give a lot of social returns that are higher than what the private investors would normally be able to explore. In cases when social returns are greater than private returns, the state’s involvement can be justified even on economic grounds. There are other areas where private sector is competent in its own right. For example, private sector can easily undertake projects related to road transport. The only area where I think the government has tended to overstretch its mandate is the hydro sector, where the private sector is already competitive. The state should not try competing with the private sector in hydropower. But, the government should stretch into areas like large power storage projects or transmission line projects, where the private sector might not be able to go.

Is it that the government is trying to steer growth drive itself instead of playing the role of a facilitator?

The government has acknowledged that over two-thirds of the economic activity comes from the private sector and the national development needs, in terms of the sustainable development goals or the national growth, can only be met if all pillars of the economy, especially the private sector, are sufficiently incentivised and motivated to invest, take risks and go into different areas. But in practice, the government has, because of its orthodox orientation in economics, failed to encourage the private sector. The language that the government speaks should have been that of a facilitator and encouraging the private sector. But this is not the case among those different leading ministries of the government. When you are using the rhetoric of private sector promotion but your modus operandi is of picking select entrepreneurs and industrialists, you are basically advancing the culture of crony capitalism, where on the surface you are giving certain leadership role to the private sector but deep inside you are nurturing the unholy alliance between the politics, bureaucracy and the business class that are more interested in extracting rents rather than taking risks and becoming a true entrepreneur.

Low budget spending has remained a historical problem in Nepal’s economy. Even in this fiscal, the government has been able to spend merely 45 per cent of the development budget so far. Meanwhile, the finance minister is vowing to improve such expenditures dramatically in the next fiscal. Do you expect any change in the spending pattern of the government in 2019-20?

The Ministry of Finance had released a six-month assessment of the budget execution a few months ago. Last year, the government announced a budget of Rs 1,315 billion and the finance minister later scaled it down to Rs 1,199 billion and recently he increased it to Rs 1,208 billion. This clearly shows the government’s inability to spend the budget. This is a massive climb down for a government like this, which has a strong implementing power. Situation is even worse on the revenue front. The finance minister aimed to raise Rs 945 billion in revenue and settled for Rs 860 billion. This also reflects the fragile tax enforcement and implementing capacity of the government. If such is the experience in terms of executing the budget, the finance minister should have been much more circumspect and modest in setting targets for the next fiscal year. A very credible and realistic budget size would have been 15 per cent nominal growth on the amount that the finance minister has aimed to spend. That would have given us the figure of just around Rs 1,380 billion. But he has gone for close to 30 per cent increase in revenue in the budget size. On the revenue front too, against the backdrop of spectacular failure to raise the declared amount, the government has gone for 30 per cent growth. I give the benefit of doubt to the finance minister, given that he has announced a few measures that he says will help the government to meet those targets. Especially on budget execution, the finance minister has talked about performance contract with managers, maintaining discipline in transferring those who are working at a reasonable pace, possibly bringing in managers from outside the bureaucracy, amending the Public Procurement Act, tightening the multi-year contracting modality and also making the monitoring apparatus much more direct and effective. But I don’t believe all these are enough to meet the management deficit that we have in the country. All these measures may not have transformative effect within next one or two years. How faithfully will the government execute all these announcements is the real test. The other problem with this government is that it is quite insular in its approach to engaging with external talents. So, there are doubts the government will be able to tempt and attract world-class talents in managing some of country’s big projects.

So, you mean that growth targets, including the economic growth projection of 8.5 per cent for next fiscal, are unrealistic?

On revenue front, it is definitely unrealistic given previous experiences. For such an ambitious revenue collection target, government’s perspective towards taxpayers has to change. I doubt this will happen overnight. There is no fundamental departure in the tax structure in the budget. There is a paradox in the economy which says that sometimes when you lower tax rate, you can raise greater revenue. Such kind of risk-taking and experimentation should have been employed in the budget. But the finance minister was badgered by his own people so much that he was unable to take any unpopular decisions. In fact, the government has missed the historic opportunity to bring transformative sequence of five budgets. Such a powerful government has begun to mimic the character of a highly unstable government. Similarly, the 8.5 per cent growth target is again an ambitious target and is far from reality. Even this year the target was eight per cent and the government has managed to take it up to 6.8 per cent growth with lot of data massaging. Those targets set in this budget and other periodic plans of the government are far from reality.

The post ‘Govt missed historic opportunity to bring transformative sequence of five budgets’ appeared first on The Himalayan Times.



from Business – The Himalayan Times http://bit.ly/2JUTPwq

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