Ensuring Effective Implementation of the Budget:
Need for Complying with the Planned Budget Aggregates
– Tula Raj Basyal
Former Executive Director, Nepal Rastra Bank, and
Former Senior Economic Advisor, Ministry of Finance, Government of Nepal
1. Actual Budget Aggregates not in Line with the Plan and Budget
The actual budget aggregates are seen falling apart and deviate significantly from their estimates as per the periodic development plans as well as the annual budget statements. Foreign aid is mobilized much less than what is planned and budgeted in the related documents. The capacity to spend capital expenditure is similarly low. Project management in the government sector needs much improvement. Such problems erode the credibility of the role and contribution of the plan and budget. Consequently, scarce resources are misallocated and the socio-economic development objectives are not met. This puts Nepal in the vicious cycle of under-development. This needs to be corrected if Nepal is to be uplifted from its status as the country having the second lowest per capita income in the whole of Asia.
2. Budget Surplus/Deficit: Large Deviation among Planned, Budgeted, and Actual Ratios
The 13th Plan (2013/14-2015/16) projected budget deficit/GDP ratios at 0.93 percent in 2013/14, 0.94 percent in 2014/15, and 0.59 percent in 2015/16. Accordingly, the annual budget for 2013/14 estimated budget deficit/GDP ratio at 0.74 percent. However, the actual balance for the year turned out to be a surplus of 2.07 percent of GDP. For 2014/15, the budget estimated a surplus of 0.04 percent of GDP while the revised estimate for the year showed a surplus of 0.26 percent. For 2015/16, the budget projected a deficit of 4.77 percent of GDP. The revised estimate for this year shall be known at the time of presentation of budget for 2016/17 which is sure to disclose a situation misaligned with the budget commitments.
3. External Debt/GDP Ratio
The 13th Plan projected external debt inflow/GDP ratio at 2.77 percent in 2013/14, 2.67 percent in 2014/15, and 2.52 percent in 2015/16. The annual budget for 2013/14 estimated external debt inflow/GDP ratio at 2.22 percent. However, the actual ratio for the year turned out to be much less, viz., 0.92 percent. For 2014/15, the budget estimated external debt inflow at 2.34 percent while the revised estimate for the year showed an inflow of 1.20 percent of GDP. For 2015/16, the budget estimated much higher external debt inflow at 4.22 percent of GDP. The prevailing conditions during the year imply that the actual progress shall be much lower than what is estimated. It could be concluded that the annual budget estimates with respect to external debt inflow are not consistent with the 13th Plan projections while the actual ratios deviate from both the 13th Plan and budget estimates.
4. Domestic Debt/GDP Ratio
According to the 13th Plan, the projected domestic debt inflow/GDP ratio was 2.27 percent in 2013/14, 2.25 percent in 2014/15, and 2.24 percent in 2015/16. Accordingly, the annual budget estimated domestic debt inflow/GDP ratio at 2.24 percent for 2013/14, 2.49 percent for 2014/15, and a much higher 3.91 percent for 2015/16. However, the actual ratio in 2013/14 turned out to be much less, viz., 1.02 percent of GDP. For 2014/15, the revised estimate showed an inflow of 2.0 percent of GDP. The revised estimate for the whole of 2015/16 shall be known at the time of presentation of budget for 2016/17. Yet for the nine months of 2015/16, the domestic debt inflow/GDP ratio reached 1.89 percent. The annual budget estimate with respect to the domestic debt inflow is inconsistent with the 13th Plan projection while the actual ratios largely deviate from both the 13th Plan and budget estimates.
5. Surplus Treasury Position
While the 13TH Plan and annual budgets plan/budget for zero cash balance, the actual balance shows either surplus or overdraft. There was cash surplus of Rs. 23.32 billion and Rs. 10.31 billion at the end of 2013/14 and 2014/15, accounting, as percent of GDP, 1.19 percent and 0.49 percent respectively. Cash surplus at the end of nine months of the fiscal year (2015/16) amounted to Rs. 116.96 billion, reaching 5.20 percent of GDP for 2015/16. Surplus treasury position throughout the Plan period signals deficiency in cash planning and inefficiency in cash management. Domestic debt inflows at Rs. 19.98 billion in 2013/14, Rs. 42.42 billion in 2014/15, and Rs. 42.58 billion in 2015/16 (nine months) were incurred at high interest burden for the government. If absence of cash planning resulted in accumulation of cash balance, particularly the surplus attributed to domestic debt inflows, then the condition of cash surplus would be hard to justify.
6. Decelerating Growth and Higher Inflation
Growth decelerated from 5.99 percent in 2013/14 to 2.73 percent in 2014/15 and to 0.56 percent in 2015/16 (average 3.07 percent) in comparison to the 13th Plan targets of 5.5 percent, 6.0 percent, and 6.5 percent (average 6.0 percent) respectively. The budgets for these years had growth targets at 5.5 percent, 6.0 percent, and 6.0 percent (average 5.83 percent) respectively. The 13th Plan had targeted an average inflation at 7.0 percent during the three-year Plan period compared to the budget target at 8.0 percent each in 2013/14 and 2014/15 and monetary policy target at 8.5 percent in 2015/16. Thus, inflation targets for the same year were different among the official documents, which undermined the credibility of inflation-fighting measures. The respective inflation during these three years was 9.1 percent, 7.2 percent, and 9.7 percent (9 months), averaging 8.7 percent. The budget statement for 2015/16 did not find it necessary to fix the target for inflation, thereby making the central bank responsible for both choosing and pursuing the target for inflation. This will create the conflict of interest for the central bank. As the same institution is the target-setter and target enforcer, this could undermine the credibility and effectiveness of the monetary policy. Therefore, such practice should be discontinued and the budget statement should disclose the target for inflation.
7. Monetary Projection: Deviation between 13th Plan and Monetary Policy
The 13th Plan projected annual growth of broad money, domestic credit, and private sector credit at 14.5 percent, 16 percent, and 17.5 percent in the three years respectively. Instead, the monetary policies for the first two years projected broad money growth at 16 percent each (average 16.0 percent). The actual broad money growth for the two years averaged at 19.5 percent, far higher than the projection. Domestic credit growth for the two years was projected at 17.9 percent compared to the actual average at 14.14 percent, far lower than the projection. Monetary policies projected private sector credit growth for the two years at an average of 18.0 percent compared to the actual average growth at 18.85 percent. Thus, actual domestic credit growth was lower while private sector credit growth and broad money growth were higher compared to projections for the two years. This shows inconsistent and unrealistic monetary projections both between the 13th Plan and monetary statements. Such a practice could undermine the credibility of monetary policy.
8. Loans of Banking System and Economic Growth
Loans and advances of the banking system increased by 14.4 percent in 2013/14, 17.5 percent in 2014/15, and, in the nine months of 2015/16, by 13.4 percent compared to the 12.4 percent growth in the similar period of the previous year. Economic growth rates during these three years have been 5.99 percent, 2.73 percent, and 0.56 percent. This means that the growth rate of bank loans may not necessarily contribute economic growth.
9. Foreign Aid-High Targets and Low Mobilization
The 13th Plan’s projections of foreign aid (grants and debt inflows) as ratios of GDP were 6.07 percent, 5.94 percent, and 5.86 percent in the respective three years. The budget’s estimates in these three years as ratios of GDP were 6.53 percent, 5.93 percent, and 9.15 percent respectively. The actual ratios for the first two years were 3.07 percent and 2.98 percent respectively. Going by the available indicators so far during the current fiscal year, foreign aid mobilization is set to witness shortfall vis-à-vis the ambitious projection as per the budget.
Inflows of actual grants, external debt, and total foreign aid in the first two years of the Plan averaged at 56.06 percent, 46.32 percent, and 51.19 percent of the budget estimates respectively. Total foreign aid received during the two years averaged at 50.95 percent and 51.43 percent of the budget estimates respectively. This shows that the foreign aid received has been around 50 percent of the budget estimate.
10. Recurrent Expenditure
The 13th Plan projected recurrent expenditure, as percent of GDP, at 17.62, 18.15, and 18.48 in the respective three years of the Plan. For these years, the budget estimated, as percent of GDP, at 17.99, 18.81, and 21.54 respectively. The actual ratios for the two years turned out to be 15.45 percent and 16.0 percent of GDP, lower than the projections of the 13th Plan and budgets. In the first two years of the 13th Plan, actual recurrent expenditure ratios were 2.17 and 2.15 percentage points lower than the planned ratios.
11. Capital Expenditure
The 13th Plan projected capital expenditure, as percent of GDP, at 5.05, 5.72, and 6.38 during the three years of the 13th Plan respectively. Accordingly, the budget estimated these ratios, as percent of GDP, at 4.33, 5.51, and 9.33 respectively. The actual ratios for the two years were 3.39 percent and 4.08 percent of GDP, lower than the projections of the 13th Plan and budgets. This year’s ambitious target of capital expenditure is unlikely to be met. In the first two years of the 13th Plan, actual capital expenditure ratios were 1.66 and 1.64 percentage points lower than the planned ratios. Capital expenditure already remaining at modest levels, these shortfalls from the planned targets are indeed substantial.
12. Ratio of Recurrent and Capital Expenditure to their Total
The 13th Plan projected first two years’ recurrent and capital expenditure, as average percent of their total, at 76.88 percent and 23.12 percent respectively. The budgets for these two years estimated an average of 79.0 percent and 21.0 percent respectively. The actual share percent during the two years was an average of 80.83 percent and 19.17 percent respectively. So, in actual terms, the share of recurrent expenditure in the total was 3.95 percentage points more while the share of capital expenditure in the total was 3.95 percentage points less than the Plan projection.
Budget planning and management system in Nepal is weak. Insufficient attention has been paid to the work of tracking, monitoring, and constant updating the budget aggregates along with implementing appropriate corrective actions. Cash planning and management as a means of optimum utilization of resources is lacking. Capital expenditure should be expedited as per Plan and budget. Efficiency of recurrent expenditure needs to be constantly monitored and corrective actions accordingly undertaken. Resources that have been mobilized in the government coffers should not remain idle. If their productive use is not ensured, it will prove far more expensive for the government and the economy. Scarce resources should not be scattered and national efforts dissipated in unworkable projects and programs. Rather, resources should be concentrated to complete the projects in pre-determined time, cost, and quality. Foreign aid mobilization and utilization capacity needs to be substantially raised in the priority sector and area. The budget system should strictly follow the policies, priorities, and guidelines of the Plan in such a way that the actual budget results are consistent with the relevant Plan documents which could also be reviewed and updated by the appropriate authority of the land as per necessity. There is the urgent need for complying with the budget aggregates as provided in the Plan documents as a source of effective implementation of the budgets.
It would be relevant to highlight some important provisions with respect to fiscal management and resource allocation that have been incorporated in Nepal’s Constitution, especially for achieving rapid economic growth and sustainable economic development coupled with ending economic inequality (Article 50 (3). According to the Constitution, the Government of Nepal shall obtain foreign assistance and borrow loans which shall be so obtained or borrowed as to maintain macroeconomic stability of the country. Provisions relating to the management of budget deficits and other fiscal discipline of the Federation, State, and Local level shall be as provided for in the Federal law. The necessary policy, guidelines, and laws, which the Federal Government is empowered to make and will be applicable for also the States as per Article 59 (2), should be instrumental in ensuring fiscal responsibility and controlling the likely widening fiscal expansion. Such federal law should incorporate prudent terms and conditions which need to be effectively enforced.