Budget Implementation Challenges

– Tula Raj Basyal
Former Executive Director, Nepal Rastra Bank, and
Former Senior Economic Advisor, Ministry of Finance, Government of Nepal

Dismal Growth and High Inflation

Implementing the budget and attaining its stated policy goals comprise daunting challenges particularly in Nepal which has passed through domestic conflict followed by long spell of political transition during the last two decades. Among the various goals of the 13^th Plan (2013/14-2015/16), economic growth target was set at 6.0 percent (agriculture 4.5 percent and non-agriculture 6.7 percent). According to the data published by the Central Bureau of Statistics (CBS), economic growth during the Plan period averaged at 3.07 percent, with agriculture and non-agriculture growth at 2.22 percent and 3.35 percent respectively. So, the aggregate growth shortfall was 2.93 (agriculture 2.28 and non-agriculture 3.35) percentage points. In other words, the growth attained was just half of the target. Assuming population growth at 1.35 percent, per capita income average growth during the Plan period was 1.70 percent only as compared to the Plan projection at 4.6 percent. Inflation averaged at 8.7 percent against the target of 7.0 percent during the Plan period. Thus, sluggish growth and high inflation characterized this period. The target of reducing the poverty ratio to 18.0 percent at the end of the Plan period from 25.4 percent at the start of the Plan and raising the employment by an annual average rate of 3.0 percent during the Plan period could not be measured due to lack of data. However, it is estimated that the effects of political transition, earthquake, and blockade have had considerable negative impacts on poverty ratio and employment targets.

Low Investment

The investment climate deteriorated during the Plan period. Although the average growth of the government gross fixed capital formation (GFCF) was higher than that of the private GFCF in the Plan period, the share of the government GFCF in the total GFCF could not improve much as planned due to already existing modest level of government GFCF and higher level of private investment. The GFCF as percent of gross domestic product (GDP) was projected at 25.63 (government 8.08 and private 17.55 respectively) during the Plan period compared to the ratio of 19.97 (government 3.93 and private 16.04) in the Plan’s base year (2012/13). Thus, of the total GFCF during the Plan period, the GFCF share of government and private was projected at 31.53 percent and 68.47 percent respectively. The GFCF encountered negative growth during 2015/16 when the private GFCF contracted by 17.50 percent, contracting the total GFCF by 12.28 percent. The GFCF/GDP ratio in 2015/16 reached 21.32 (government 5.03 and private 16.29). The private GFCF as percent of the total GFCF fell to 76.41 in 2015/16 from its level at 80.31 in 2012/13. During the Plan period, the actual share of government GFCF in the total GFCF averaged at 20.87 percent as against the Plan projection of 31.53 percent while the share of private GFCF averaged at 79.13 percent as against the Plan projection of 68.47 percent. The 13^th Plan projected the incremental capital-output ratio (ICOR) at 4.9:1. However, the ICOR during the Plan period went up to 7.61:1, with GDP at constant price increasing by Rs. 66.22 billion compared to the GFCF amounting to Rs.503.92 billion during the Plan period.

Budget Projections and Actuals

The planning and budgetary exercise in Nepal generally suffers from the problem of over/under-projection. As regards the aggregates which are considered that the more would be the better, the practice is over-projecting. Examples would be the targets for economic growth, investment and capital expenditure, revenue, employment, poverty reduction, etc. In other cases where the opposite is considered as true, the practice is under-projecting examples of which would include the targets for inflation, trade deficit, budget deficit, etc.

As two-year average percent of the actual total expenditure in the first year of the 13^th Plan and that revised estimate in the second year of the Plan, the recurrent expenditure was greater than that projected in the Plan and that estimated in the budget (Table 1). However, in the case of capital expenditure, the two-year average percent of the total was lower than that projected in the Plan and that estimated in the budget. The two-year average budget balance as percent of GDP showed surplus in comparison to deficit as projected in the Plan and as estimated in the budgets. Foreign aid inflows as percent of the total expenditure in these two years averaged around 63.0 percent of the planned and budgeted figures. The average of budget estimates in these two years was greater than the Plan estimate in the case of recurrent expenditure while the ratio mobilized in the case of capital expenditure averaged 65 percent of the Plan projection and 76.0 percent of the budget estimate.

Suggested Measures

Mobilizing higher level of resources through revenue and foreign grants and ensuring the optimal utilization of the resources mobilized both domestically and externally is important. Making investment-friendly environment and encouraging more resources to be devoted to the growth of the export, industry, agriculture, power, infrastructure, tourism, and other optimal uses would be essential. The quality of government expenditure needs to be raised so as to accelerate economic growth and poverty reduction. There is the need to minimize inefficiency, leakages, and wastage in the government expenditure by expediting decision-making, revamping development administration, ensuring fiscal prudence, and reducing the ICOR. Ensuring effective monitoring, evaluation, and feeding-back in the budgetary and financial management system would be crucial. The following points are well worth noting in this respect:

• Implement only projects that could be completed as per the established time, cost, and quality standards
• For better outcomes including higher economic growth, employment, poverty reduction, etc., avoid unfocused and scattered spending of resources by only selecting implementable projects and programs
• Strictly conform to the norms underlying successful project management, including implementing fair system of reward and punishment for the personnel engaged in the projects
• Expedite the process of reimbursement of funds in the foreign-aided projects
• Allocate adequate resources for raising the capability required for project implementation

Table 1. Budget Indicators—Plan and Progress

¹Revenue Surplus=Revenue minus Recurrent Expenditure

Reference: 13^th Plan, June 2014, National Planning Commission and Budget Statements, various years, Government of Nepal, Ministry of Finance