Both of the top regulators of the economy - Ministry of Finance and Nepal Rastra Bank – brought out the mid-term review of their respective policies and made some changes in the middle of February. Both hope these changes will solve the ongoing problems of the economy, namely the sluggish progress in development expenditure and scarcity of loanable funds in the banks. Wish their wishes come true.
But will these measures really correct the ongoing anomalies? There is plenty of room to doubt. The measures announced by the top regulators are only marginal, not hitting the root of the problem. The government, that is the Ministry of Finance, has made it easier for the bureaucrats to speed up the expenditure. This may address the problem caused by government’s budget surplus. But this has two major flaws. One, it is temporary solution. Second, fiscal prudence is compromised by making it easier for the bureaucrats to spend money. This may result in increased corruption.
Similarly, the measures announced by the central bank in its mid-tem policy review are temporary and compromise on the principle of prudence banking. The long-term solution to the problem requires more than that. But the authorities don’t seem to be bothered about the long term. They know the problem as well as the solution to it, but they are simply reluctant to act accordingly. For example, the early signals of these problems were visible right in the first quarter of the fiscal year. But neither the government in its four-monthly regular review nor the central bank in its first quarter review paid any heed to these signals. Their negligence to let the problem blow up is simply unforgivable.
Clearly, the current problems are caused by the overblown government budget that was announced on May 28 last year by the government headed by CPN-UML. Lots of projects and programmes included in that budget were just for the sake of populism. That is proved by the fact that the amount spent on most of such big ticket populist projects was so small (in some projects even zero). These projects simply helped expansionary expectation among the banks and the business community. That encouraged banks to go for credit expansion. But the subsequent failure of government to spend money on these projects halted the deposit growth in the banks. Hence the current credit crunch.
Though the deposit growth was sluggish also because the remittance growth was sluggish and a lot of money was spent in imports resulting in lower Balance of Payments surplus, the real problem lies in the preparation of government budget. The solution to that is Fiscal Responsibility Act. Those involved in the budget preparation and implementation should be held accountable for their respective responsibility in this process. The urgency of such a measure is more pronounced now because while the allocated budget is not being spent, the same ministries and departments are demanding additional budget for other projects and programmes that were not included in the original budget. Such Act should come into force as soon as possible because the process for preparing the budget for the next fiscal year has already started and the next budget is to be announced on May 29, the day fixed by the Constitution.