Dr Khatiwada's Third Budget : Will it Revive the Covid-19 Stricken Economy?

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Dr Khatiwada's Third Budget :  Will it Revive the Covid-19 Stricken Economy?

Finance Minister Dr Yubaraj Khatiwada's third budget was supposed to encompass government’s vision to revive and revitilise the economy hard hit by the Covid-19 pandemic. However, the country’s private sector is dissatisfied with the measures announced and opinions are divided on whether or not the key targets in revenue collection, employment generation and agriculture sector development will be realised.

--BY TEAM NEWBIZ

The Federal Budget for the fiscal year 2020/21 was perhaps one of the most anticipated ones, in recent years. The fact that Finance Minister Dr Yubaraj Khatiwada was presenting the budget against the backdrop of the Covid-19 pandemic made the budget one to watch out for. The private sector which has been crippled badly by the lockdown, extended consecutively for eight times since its enforcement on March 24, was looking for some kind of fiscal stimulus and the people were expecting relief measures to survive the steep economic downturn created by the Covid-19 crisis.

Unlike his past two budget speeches, Dr Khatiwada presented the upcoming fiscal year’s budget in a very different scenario. The global recession triggered by the Covid-19 pandemic has hit Nepal’s two main sources of income, remittances and tourism, the worst, making resource management much more difficult for the government. Other key sectors including agriculture, manufacturing, construction, transport and financial services have also taken unprecedented hits from the severe economic headwinds arising from the global health emergency.

All this made the job of Dr Khatiwada, a seasoned economist who in the past served as vice chairman of National Planning Commission (NPC) twice and governor of Nepal Rastra Bank (NRB) once, difficult as he had to walk a tightrope maintaining a critical balance between the expectations of the private sector and the general public and fiscal prudence. He had no alternative but to increase spending in healthcare, health infrastructure and social security to address the crisis that the Covid-19 pandemic has unfolded in Nepal’s public health and employment sectors amid the significant squeeze in government revenue.

However, the budget has failed to meet the expectations of business community members and economists who hoped that the government would announce comprehensive measures to steer the country’s economy out of the deep recession. While Dr Khatiwada has received appreciation for downsizing the budget, a rare instance in Nepal’s budgeting in recent times, he has been criticised for not bringing the much needed stimulus package for transformative reforms.

Former Prime Minister and Minister for Finance Dr Baburam Bhattarai sees a lost opportunity in the budget and thinks it as conventional. “The pandemic –induced crisis had presented a right time for the finance minister to turn challenges into opportunities. But his divided loyalties stopped him from doing so. The budget has failed to prioritise economic sectors that need significant investment to revive,” he said, during an online interaction programme organised by the Society of Economic Journalists- Nepal (SEJON) on May 29.

While it is easy for supporters of the ruling party to dismiss Dr Bhattarai’s comment as ‘biased’ as he has been a leader of an opposition party, other economists and leaders of the business fraternity hold views similar to him. Writing in his personal blog economist Chandan Sapkota said, “The budget has missed one thing that is really needed at this critical juncture: a bold fiscal move and an economic package to reorient the economy towards high value-added production and higher sectoral productivity. This is the time for taking bold steps to structurally transform labor and capital markets, and institutions. Opportunities like these do not come often.”

The budget also received a lukewarm welcome from the country’s private sector which was expecting that the government would announce a comprehensive stimulus package to bailout the crisis-stricken businesses.  “This is no ordinary budget as it was announced under extraordinary circumstances and we have hoped that the government would seriously pay heed to our suggestions,” said Shekhar Golchha, senior vice president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI). According to him, the measures announced in the budget are inadequate to revive the pandemic-stricken economy. “We have suggested the government to come up with a stimulus package equaling 5 percent of the country’s GDP.

We have also suggested distribution of food materials and cash to the needy population to increase the aggregate demand in the market gradually moving the economy which came to a grinding halt due to the lockdown,” he mentioned adding, “The Covid-19 pandemic is not only a public health emergency, it has also created an economic crisis and it requires huge government investment to respond to the economic impacts.”

Ambitious growth target
At a time when the country’s economy has entered into a recession which is being called the steepest in living memory, the 7 percent economic growth rate target in the budget set for the upcoming fiscal year seems far too unrealistic. After lowering the economic growth projection to 2.3 percent for the current fiscal year in the Economic Survey from the earlier estimate of 8.5 percent, the government has raised the target to 7 percent for FY2020/21.  Experts are warning that Nepal’s economic growth could slide into negative territory in the current fiscal year for the first time after four decades if the situation does not improve.

Given the fact that the transmission of coronavirus has intensified across the globe with the apparent failure of restrictive measures such as lockdowns, the government’s hope for a quick rebound in economic activities and 7 percent growth is overly ambitious, they say. According to them, the full impact of the Covid-19 pandemic is yet to be felt as no one knows how long the crisis triggered by the global health emergency will go on for.

“The 7 percent economic growth target is challenging because of protracted halt in industrial and business activities and decline in remittance inflow which has already gone down by 20 percent and could further decrease by 50 percent in the coming months,” said Dr Shanker Sharma, former vice chairman of National Planning Commission.

FNCC Senior Vice President Golchha is also of the view that the 7 percent growth rate target as unachievable in the current adverse situation. “The 7 percent economic growth rate target set for the upcoming fiscal year in the budget is unrealistic as the recovery will take a long time,” Golchha told New Business Age.

The economic growth projection of the government also doesn’t match the estimations of multilateral lenders. The World Bank in its latest report has said that Nepal's growth would remain at 1.8 percent in FY 2020, mainly due to adverse microeconomic climate in addition to the drop in tourism, while the forecasts of the Asian Development Bank (ADB) and International Monetary Fund (IMF) have been 2.4 percent and 1.5 percent, respectively. While the forecasts of different agencies vary from each other which may be due to the rapidly changing situation and high uncertainty caused by Covid-19, the estimates paint a bleak outlook for Nepal and indicate that the macroeconomic environment won’t improve soon.

Nepal, which relies on imports, is also vulnerable to various external shocks besides its internal problems.  The Himalayan nation is susceptible to supply chain disruptions and will also be impacted by the economic slump in neighbouring countries. "Economies like Nepal are also vulnerable to sharper-than expected deceleration in India, an important intraregional trade partner," reads the World Bank’s 2020 Global Economic Prospects.

Moving away from his own usual path, Dr Khatiwada this time refrained from bringing an expansionary budget full of populist programmes. The size of the FY2020/21 budget or projected total expenditure projected stands at Rs 1,474.64 billion which is Rs 58.36 billion or 4 percent less than Rs 1,533 billion of the current fiscal year. To finance the expenditure, revenue collection target of Rs 889.62 billion has been set in the budget.

However, given the recession that has plagued every sector of the economy, which is likely to continue until a vaccine or credible cure for Covid-19 is found and is available globally, the revenue target set by the government looks ambitious as the pandemic will continue to disrupt domestic as well as international trade and commerce. With business and personal incomes dwindling this year due to the Covid-19 crisis, as warned by institutions like the World Bank and World Economic Forum, the tax paying readiness of businesses and individuals has taken a downhill turn which will have an impact on the government coffers.

The current sharp dip in revenue collection is indicative of the gloomy prospects that many see will last for at least a year. According to the Financial Controller’s General Office (FGCO), only about 60 percent of the revenue collection target of Rs 981 billion set for the current fiscal year has been met till June 5 due to the lockdown and disruptions in Nepal’s international trade. The revenue collection from March 24 to the third week of June amounted to Rs 83 billion and the government’s revenue account, which had a surplus of Rs 100 billion before the start of the lockdown in March 24, now has a surplus of Rs 5.27 billion.

“The revenue target is challenging as demand will remain low in the next fiscal year, hence impacting collection of VAT and income taxes,” commented Vishnu Agrawal, senior vice president of the Confederation of Nepalese Industries (CNI) during SEJON’s virtual interaction programme. Similarly, economist Sapkota also doubts the government’s ability to raise its income in this adverse period of time. “Given that the GDP growth target itself is ambitious, and revenue administration reforms along with tinkering of import tariff on some non-essential items have its limit in increasing import-based revenue, it needs to be seen how the government plans to achieve the revenue target,” wrote Sapkota in his blogpost.

The mounting difficulties in managing finances has led Dr Khatiwada to increase targets in other resources. The budget aims to collect Rs 299.5 billion from external debt, Rs 225 billion from domestic borrowing and Rs 60.52 billion from foreign grants. But economists say that the government has not been able to focus on its approach to raise money from these resources.  According to them, it shouldn’t have hesitated to increase foreign borrowing as Nepal’s relatively low debt-to-GDP ratio allows enough fiscal space to manoeuvre at this time of heightened urgency and uncertainty. “Foreign debt accounts for 32 percent of Nepal’s GDP. It can be increased to 60-65 percent. The government must not hesitate to take loans from outside in these trying times,” said former Prime Minister Dr Bhattarai. Nepal is among the countries with low public debt levels; the country’s debt-to-ratio currently stands at 31.80 percent which is expected to rise to 35 percent by the end of 2022.

In the meantime, former finance minister and other experts have cautioned against the target to raise Rs 225 billion in internal loans. According to them, as the Covid-19 pandemic and lockdown has crippled Nepal’s domestic and foreign economic transactions, raising internal debts to this size would deprive businesses of the much-needed resources available domestically hence threatening the country’s financial stability.

“In the past, the government used to limit internal loans to 2-3 percent of GDP. But this time it has been set at 5 percent. If the government increases internal borrowings, it will reduce the liquidity in the financial market and will affect the generation of jobs and expansion of industrial and business activities,” mentioned Dr Ram Sharan Mahat. Sapkota also agrees with Dr Mahat. “This is going to exacerbate liquidity crunch in the financial market and increase interest rates. The government had a plan to raise Rs 195 billion in FY2020 and is hoping to raise almost 99 percent of it by mid-July 2020,” he said.

Of the total allocations in the budget, Rs 352.91 billion has been allocated for capital expenditure and Rs 172 billion for financial provisioning. But given the poor track record of the government in spending the money due to sluggishness in developmental activities and its own low capacity, meeting the capital expenditure target remains doubtful. Of the Rs 313 billion allocated for capital expenditure in FY 2019/20 budget, only 35 percent has been spent in the 10 months of the current fiscal year.

Creating 800,000 Jobs
The Covid-19 crisis has ravaged the global job market and a large number of Nepalis, both working at home and abroad, have lost their jobs over the last three months with more layoffs looming. “It is probably for the first time we are facing a challenge related to employment of this magnitude,” said Golchha. According to him, 500,000 Nepali youths are returning to the country after losing their jobs abroad. Similarly, 500,000-700,000 people working within the country, majorly in sectors including, tourism and hospitality, transport and manufacturing, risk losing their jobs imminently. “Besides, the 500,000 youths who enter the job market every year won’t be getting any work. It will take a monumental effort to manage some 1.5 million jobless youths in the country,” he added.

The starkest warning in this regard has come from the International Labour Organization (ILO) which in its latest report has said that the Covid-19 pandemic and lockdown imposed by the government has put 3.7 million jobs in Nepal at risk. “Based on the higher-impact scenario, the jobs disrupted include nearly 780,000 workers in wholesale and retail trade, 446,000 in manufacturing, 404,000 in construction, 211,000 in transport and 62,000 in accommodation and food service activities and 83,000 in other services, real estate and administrative activities,” reads the report.

To address the crisis in the jobs market, Dr Khatiwada has put a major emphasis on employment generation in the upcoming fiscal year’s budget. The budget has incorporated new programmes as well as expanded the existing ones to generate 800,000 jobs. Budget allocation for the government's flagship programme, Prime Minister Employment Programme (PMEP) has been increased by more than double with an aim to provide jobs to 200,000 people. Similarly, Rs 1 billion has been allocated to provide vocational trainings such as handicraft items production, plumbing, electronics, cookery, tailoring, beautician, barber at federal and local levels to generate an additional 50,000 jobs. Besides, Rs 4.34 billion has been allocated for different types of technical training programmes for 75,000 youths. The budget has aimed to generate 40,000 jobs through Small Farmers Credit Programme and 12,000 jobs through Self-employment Credit Programme. It has also targeted to create 127,000 through micro entrepreneurship programmes. "32,000 institutions promoted by the Poverty Alleviation Fund will be transformed into cooperatives to create 150,000 jobs," stated the budget.

In his budget speech, the Finance Minister also said that local bodies will run infrastructure development and social programmes such as 'Food for Work’ targeting people from poor families. In a country like Nepal, where only 50,000 jobs are generated yearly by public and private sectors combined, providing employment opportunities to 800,000 people, as aimed in the budget, is challenging which will require considerate effort to pull off.

Disappointed Private Sector
Hard hit by the extended lockdown that has crippled cash flow and supply chains, the country's business community was expecting Dr Khatiwada to announce a huge stimulus package. The private sector had suggested that a comprehensive stimulus package totaling 5 percent of the country's GDP was the need of the hour. But Dr Khatiwada announced measures equaling 4 percent of the GDP. Leaders of major private sector bodies like FNCCI and CNI have expressed their disappointment over the measures.

“The relief measures announced in the Federal Budget for FY2020/21 are inadequate to kickstart the economic recovery,” said Satish Kumar More, president of CNI while unveiling the post-webinar report of the ‘CNI- Economic Survival Series’ virtually on June 1, adding, “I urge the government to come up with a comprehensive stimulus to take the Covid-19 pandemic-stricken economy out of the slump.”

According to Golchha, the budget overall is nothing short of encouraging but also not disappointing as well. “Several of our demands and suggestions such as a refinancing programme and other measures have been incorporated in the budget. Nonetheless, relief has come in a very scattered manner. Many programmes that were already in the government pipeline have been included in the relief measures. So, we have doubts on the level of relief the budget will actually provide to the crisis mired business sector,” he expressed.

While the stimulus package was not met with universal approval, economists and private sector agree that several measures announced in the budget will provide relief to the business sector. For example, there is big tax exemption for micro and small enterprises that have been hit hardest by the Covid-19 crisis. Small enterprises with annual turnover of less than Rs 2 million will be eligible for a tax exemption of 75 percent while those with a turnover between Rs 2-5 million are eligible for 50 percent tax exemption. Enterprises with an annual turnover between Rs 5-10 million will be exempted 25 percent, according to the budget.

Meanwhile, industries set up in industrial areas will receive income tax exemptions of 50 percent for five years after commencing their operations.

Furthermore, a waiver of value added tax (VAT) on the import of raw materials, including ethanol for the production of sanitisers for domestic pharmaceutical companies has been announced under the condition that the materials are procured from local enterprises.

Focus on Health Infrastructure
As the transmission of Covid-19 continues to put pressure on the already weak public healthcare system in Nepal, the budget for the health sector has been increased by a whopping 32 percent in the upcoming fiscal year’s budget. Dr Khatiwada has announced Rs 90.69 billion for the health sector which was Rs 68.78 billion for the current fiscal. Rs 6 billion has been allocated for the treatment of Covid-19 infected, and Rs 500,000 has been provisioned to provide insurance coverage for health workers dealing with all infectious diseases.

While the health sector’s share in the annual budget has increased to 6 percent compared to 4.9 percent in the current fiscal year, experts say it may not be enough to address the challenges posed by Covid-19 along with managing regular health services.

The Finance Minister has announced government plans to increase the number of hospital beds at district and zone-level hospitals, and intensive care beds at various hospitals.  Rs 12.46 billion has been allocated for the development of additional healthcare infrastructure across the country. The money will be used to set up a 300-bed infectious disease hospital in Kathmandu, and a 50-bed hospital in the capitals of all seven provinces. Similarly, state-run hospitals in the Kathmandu Valley are to get 250 more ICU beds. Besides, plans to expand the capacity of the National Public Health Laboratory, set up high-tech laboratories in all provinces, and enhance the capacity of the Department of Drug Administration have also been announced in the budget.

Refocusing the Agriculture Sector
The agriculture sector, which contributes 27 percent to the country's GDP, is back in focus because of increased expectation that the sector will provide employment and entrepreneurship opportunities to those who return from foreign employment and jobless youths. Even before the budget was presented at parliament, it was expected that funding for the agriculture sector would be increased substantially. This expectation was supported by the argument that the government in its policies and programmes had stated that it would prioritise agriculture as a major employment generating sector. The budget aims to promote the agriculture sector as a major attraction for new jobseekers through the ‘One Local Level, One Agriculture Product Programme’.

Increasing financial access of farmers is another major agriculture sector related announcement. “To ensure that farmers have access to credit from banks and financial institutions, the concept of farmers’ credit card will be introduced,” said the budget. It has also provisioned programmes such as establishment of land banks and there are plans to increase productive yield of crops. Moreover, the budget has also lowered customs duty on the import of seeds and primary agricultural tools and agriculture reform fees.

Relief Measures in a Nutshell
• Amount equivalent to one fourth of the minimum wage will be provided to informal sector workers affected by COVID-19, not involved in food for employment programme.

• A separate fund run by NRB of Rs 50 billion for concessional rate of 5% loan for payment of salary to the employees and running business to MSMEs, cottage and tourism industries.

• Electricity will be provided free to small household consumers consuming less than 10 units, with 25 percent discount to consumers consuming up to 150 units and with 15 percent discount to consumers consuming up to 250 units.

• Manufacturing industries affected by COVID-19 will be provided full discount of demand charge during the lockdown and 50% discount during low demand period.

• NRB will provide refinance facility up to Rs 100 billion to provide concessional loan at 5% interest to the MSMEs, agriculture, cottage, production-based industries and hotel and tourism industries.

• 50% discount will be provided on payment of annual premium for group insurance of more than Rs 100,000 under corona disease insurance programme.

• Government will bear insurance expenses for health workers, women health volunteers, etc.

• Amount of employer – employee contribution to SSF will be deposited by the government for the period of the lockdown. Such amount can be received as loan/advance by employer for payment of salary and should be repaid as the situation improves.

• Concession on parking charges, renewal fees, flying license fees and infrastructure tax on aviation fuel will be provided to air service industry.

• Concession on license and equipment renewal fees, loan for working capital and term extension on bank guarantee and contracts will be provided to negate corona’s impact in construction, transport, communication, cinema sector.

• Budget of Rs 0.5 billion is allocated for disbursing loans at 2% interest for funding initial capital to encourage startup businesses with innovative ideas and utilising opportunities generated due to COVID-19.

Displeasure within the Cabinet
Two sitting ministers of Oli cabinet have expressed their displeasure over the budget provisions related to their ministries. Immediately after the budget, Education Minister Giriraj Mani Pokharel publicly said the provision of private schools to support public schools was not the idea pushed by his ministry.

Pokharel said this was done without consultation with the Education Ministry. Education Ministry officials said the Finance Minister Khatiwada's plan of assigning private schools for overhauling the country's public education system has come without consultation with stakeholders and institutions responsible for the same.

Dr Khatiwada’s announcement also did not meet the expectations even of his fellow cabinet member Ghanashyam Bhusal, minister for Agriculture and Livestock Development. The total budget allocation for the sector is Rs 41.4 billion, which is less than 4 percent of the total estimate. Bhusal is said to be highly dissatisfied with the budget because of the non-inclusion of his recommendations despite the increase in allocation compared to past years. According to sources close to the matter, Bhusal’s disappointment is directed at scattered programmes in the budget which he thinks won’t be helpful to uplift the agriculture sector.

Responding to the queries raised by the lawmakers at parliament, Bhusal said, "The budget has not incorporated provisions that the Ministry of Agriculture and Livestock Development has envisioned. Hence, I am not happy with the budget even though many have lauded this budget."

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