With the formation of the new cabinet of ministers, all eyes are now on how the Pushpa Kamal Dahal-led government will resurrect the economy and boost the morale of the private sector.
As soon as he takes office, the new Finance Minister Bishnu Poudel has to get into action. As the economy grapples with multiple issues, Poudel has his task cut out. From increasing capital expenditure, improving revenue collection, and uplifting the morale of the private sector, Poudel, in his third stint as Finance Minister, has a lot to do to resurrect the recession-mired economy.
The continued recovery of the country’s external sector is expected to give some breathing space to the new finance minister. The latest macroeconomic report published by the Nepal Rastra Bank (NRB) shows the balance of payment (BOP), remittance inflow and forex reserves all have increased, offering some level of respite to the government.
Nepal’s balance of payments (BOP) is at a surplus of Rs 20.03bn, and forex reserves have increased by 2.5 percent to Rs 1,246.27bn in mid-Nov 2022. The current state of the forex reserve is sufficient to cover merchandise imports for 9.7 months, and merchandise and services imports for 8.4 months.
But, declining imports and the slowdown in economic activities have put the government’s budgetary position, primarily in revenue collection, in a shaky position. The government revenue has been declining drastically over the last couple of months.
While the import restrictions on vehicles, expensive mobile sets, and foreign liquors, helped the country to avert the looming forex reserves crisis, the government is now facing another crisis as it struggles to collect the targeted revenue as current revenue collection is not sufficient even to meet growing recurrent expenditure.
The government has failed to meet the revenue collection target in the first five months. According to the Financial Comptroller General Office (FCGO), the government’s revenue collection has a shortfall of Rs 138bn of the target during this period.
Poudel, who is known as a ‘facilitator’ for his successful involvement in many political and governmental dealings and a private sector-friendly leader, Poudel will have to first bring the relationship between the Ministry of Finance (MoF) and Nepal Rastra Bank (NRB) to a ‘working level’. The deterioration of the relationship between the ministry and the central bank during Janardan Sharma’s tenure has cost the economy dearly. Many observers and business community members say the lack of trust between two key institutions driving the economy is the main cause of the current economic mess.
Given that current NRB Governor Maha Prasad Adhikari was appointed by the then UML-led government, it is expected that the finance minister-governor relations will be better during Poudel’s tenure.
Economists and private sector representatives say economic revival should be the prime agenda of the new government. Economist Keshav Acharya says the first thing the new Finance Minister has to do is to convene a meeting with the National Planning Commission and Nepal Rastra Bank to take stock of the economy, i.e., the government fiscal situation, and monetary situation. “As soon as he takes charge of the Finance Ministry, the new minister has to sit down with them (NPC and NRB) for a detailed and serious review of the state of the economy,” he said.
The interest rate of banks and financial institutions has doubled within a year due to a prolonged liquidity crunch. Despite raising the interest rates, banks are struggling to provide loans. On the other hand, the private sector is now reluctant to expand investments by borrowing money at higher interest rates. Poudel has to walk a tightrope of providing stability to the interest rate, as well as boosting the confidence of investors.
Amid the current private sector-government face-off, the most worrying aspect is the deep slowdown in business and production activities. Most types of business activities have slumped to levels never seen before. How the new government and new finance minister re energize the private sector will be the key to the country’s economic revival.
The recent surveys carried out by the Federation of Nepalese Chambers of Commerce and Industry and Confederation of Nepalese Industry show that the capacity utilization of manufacturing industries has hit a new low, investment plans have been put on hold and overall market demand in the country has shrunk dramatically.
The FNCCI survey shows industries producing construction materials like cement and iron, and steel are operating at 30 percent of their installed capacity. The sales of daily consumable goods have declined by 18 percent, while the electrical equipment transactions have decreased by 55 percent. The housing and real estate transactions dropped by 48 percent in the first four months of the current fiscal year, while the stock market transactions have declined by 40 percent during the review period, according to the federation.
Similarly, the CNI survey said that new investments have halted in almost all sectors with 70 percent of investors postponing their new investment plans due to rising interest rates, impact on cash flow, and a huge drop in market demand for goods and services.
With the private sector continuing its protest against high-interest rates and working capital loan guidelines, the new Finance Minister, according to Acharya, should ask the NRB which are the issues that can be addressed and cannot be addressed.
According to Acharya, the new finance minister should also intervene in the country’s development administration to make capital expenditure meaningful. “He should also hold a discussion with the NPC team on what are the issues that hold the government agencies to expedite the capital expenditure,” said Acharya adding that there is an urgent need to identify the legal, administrative and political factors that have been affecting capital expenditure.
The new Finance Minister also has to sit down with the concerned ministries directly related to the economy such as Energy, Industry & Commerce, Physical Infrastructure, and Transport—to expedite capital expenditure as well as resolve the issues related to the private sector.
Given the continuous slide in revenue collection, Poudel has the challenge to arrest this slide and improve the revenue. Acharya says Poudel would do well if he implements the report of the Public Expenditure Review Commission. “Given the state of revenue collection, the Finance Ministry must hold a serious review meeting to find the causes and way out,” said Acharya.
The private sector says the first and only priority of the government should be the economy. “Economic revival should be the only priority of the new government,” said Deepak Raj Joshi, Director General of CNI.
I will consider suggestions of experts and stakeholders: Minister Poudel
The newly appointed Deputy Prime Minister and Finance Minister Bishnu Paudel on Monday said that the economy has reached the point of crisis. Paudel said he will work hard to bring the economy back on track. “The economy is on the brink of crisis, we have to work hard to bring it back to a safe place,” Paudel said after assuming office on Monday. “I will identify the problems and consider suggestions of experts and stakeholders to find a solution.”
