The measures adopted by the Nepalese government are not enough to bring the ailing economy back on track
Revenue is largely generated through import tax, but it suffered most after the government imposed a ban on the imports of certain luxury goods to save foreign exchange reserves, which was barely enough to import goods for more than six months.Tourist arrivals in the country started picking up afterthe long pandemic-induced lockdowns. But the deadly air crash of Yeti Airlines in Pokhara on 15 January and the ban by the European Union on all the Nepalese airlines from flying in the European sky has given a bad reputation to Nepal airlines regarding the safety of air passengers. This might affect the tourism economy significantly in the time to come. The revenue collection of the government declined from INR 542 billion in the first six months of the fiscal year 2021-22 to INR 459 billion in the first six months of the current fiscal year 2022-23. Revenue is largely generated through import tax, but it suffered most after the government imposed a ban on the imports of certain luxury goods to save foreign exchange reserves, which was barely enough to import goods for more than six months. Revenue generation that is falling fast is largely import-based. The problem with the government is that if it controls imports, the revenue is likely to be affected. But if it allows imports to increase, there would be a further depletion of foreign exchange reserves. So, in both ways, Nepal is likely to suffer. The decline in revenue collection on the one hand and the increase in the recurrent expenditure on the other have forced the Nepal government to get more domestic and foreign loans. During the first half of the fiscal year 2022-23, the capital expenditure by the government was recorded as low as 12 per cent. This has also caused a liquidity crisis in the financial sector, adversely affecting private investment and the purchasing power of the people.
The decline in revenue collection on the one hand and the increase in the recurrent expenditure on the other have forced the Nepal government to get more domestic and foreign loans.Most of the development projects in the country are hardest hit due to the fund crunch with the government, apart from that of the banks and financial institutions. The government has not been able to pay the contractors on time. Nepal’s oldest Tribhuvan University is finding it difficult to provide pensions to its retired teachers and other staff. The Pension Management Office of the government finds a shortfall of about INR 20 billion to facilitate pension distribution in the current fiscal year. There are about 283,000 pensioners in the country from civil service, security agencies, teachers, intelligence, judiciary, and other areas. It follows that there is a downward trend in most of the sectors of the national economy. To bring the ailing economy back on track, the newly formed government under the Maoist leader Pushpa Kamal Dahal ‘Prachanda’ is considering policy-level reforms to systematize the inflow of remittance which is one of the major sources of earnings. Nepal has received remittances worth $8 billion a year, which is nearly one-fourth of Nepal’s total GDP, but again the larger chunk of remittance hardly comes through official channels. It is also worrying that it is rarely used in the productive sector or even for job creation. Moreover, the government has started appealing the Non-Resident Nepalese (NRN) working overseas to make an investment in such sectors as agriculture, tourism, energy, infrastructure human resources, industries, and service sector for the promotion of the economy. Also, the government is considering reducing the administrative cost by 15 percent.
However, some of the measures that the government is considering for revamping the economy are haphazard and they are not likely to bring the ailing economy on the right track. A hard decision would have to be made to increase the tax net, which, however, is possible only if the bureaucratic efficiency is enhanced and a balance in fiscal and monetary policies is maintained. Certain areas of comparative and competitive advantages would have to be explored to see how the domestic production of goods is increased for exports in the international market. In this respect, the agricultural sector would have to be modernised for which massive investment would have to be made in this sector both from domestic and foreign sources. Presently, farm and animal products occupy 40 percent of Nepal’s total imports, which itself speaks volumes of its potential role in production, export promotion, and job creation. The government may promote cooperative farming to reap the advantage of large-scale farming by bringing fragmented farmlands together.
A hard decision would have to be made to increase the tax net, which, however, is possible only if the bureaucratic efficiency is enhanced and a balance in fiscal and monetary policies is maintained.
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Hari Bansh Jha is a Visiting Fellow at ORF. Formerly a professor of economics at Nepal's Tribhuvan University, Hari Bansh’s areas of interest include, Nepal-China-India strategic ...Read More +