On July 13 the government unveiled a Rs 618 billion annual budget for the

fiscal year 2014-15 with significant investment promised in energy,

infrastructure, agriculture and irrigation sectors. Finance Minister Dr Ram Sharan
Mahat, who has time and again committed to kick-start second generation of
economic reforms, termed the budget as reform-and investment-oriented.
Though the budget has not introduced any new programmes as such and has
drawn mixed reactions from experts and politicians, the minister believes that
the fiscal policy will help give momentum to the sluggish national economy.
Heres an analysis by Siromani Dhungana:
This is the first time that the government succeeded in introducing full-fledged
budget on time in the last four years. The delayed implementation of the budget
had resulted in economic stagnation, as economic activities could not speed up
in the absence of a spur from the government, the largest spender. Though
timely budget announcement this year is expected to change the scenario for
the better, the journey ahead is not easy for the Finance Minister.
Expansionary Fiscal Policy
Considering the Rs 596 billion ceiling put forward by the National Planning
Commission (NPC) the budget was bigger-than-expected. The Minister crossed
the recommended ceiling mostly because of two reasons. Despite his reluctance,
he had to concede to the pressure of the MPs from the largest partners of the
ruling coalition Nepali Congress and CPN-UML to earmark Rs 10 million for
infrastructure project in each constituency. Next to it, the budget increased the
amount of constituency development fund, provided to each of the 601 MPs for
funding various development activities in their respective constituency as per
their discretion, from the erstwhile Rs 1 million to Rs 1.5 million per MP. Adding
to it, the budget made upward revisions in the civil servants salary and other
perks as well.
Despite being flexible in its spending, the budget did not make any major hikes
in the taxation rates. Expansionary budget, like the one under discussion, is
expected to accelerate economic growth, help in employment creation and in
poverty reduction. However, analysts claim that this budget comes with many
risks. It may create demand pressures and fuel inflation. Analysts claim its
forecast of a 8 percent inflation rate to be unrealistic.
High Hopes on policy Reforms
Hopes from the five-time Finance Minister were (and are) high among private
investors and the general public. There are expectations from different quarters
for tangible economic reforms that include kick-starting investment climate,
improving business climate and putting the country back on a path of faster
growth, as he did in 1990.
It seems he has put effort in reforming policies. It is essential to develop the
country as an attractive investment destination to achieve high, sustainable and
wide economic growth. Various reform measures will be carried out in the coming

Fiscal Year in order to increase domestic and foreign investment, he said in the
budget speech, which promises revision of nine major laws and policies (see
table).
Financial Accountability
Emphasizing the need for making budget presentation, appropriation and
implementation more responsible and accountable, the budget speech has
promised formulation of the Budget Management and Financial Accountability
law.
Financial accountability law is considered necessary for better governance and
accountability. Such law generally includes ranges of issues including how to
ensure maximum spending of the budget and what actions are to be taken
against government agencies and projects that only get the budget approved
without making actual spending. Similarly, the law also helps in reducing offbudget expenditure while increasing allocated resources.
Financial accountability law may help discourage the trend of allocating
resources for projects, which are included in the budget under political pressure.
Finance Minister has shown commitment in careful handling of public money by
expressing commitment to formulate this law.
Upbeat Private Sector
The main achievement of this budget announcement is that it has won back the
lost confidence of the private sector. The two largest private sector umbrella
organisations Federation of Nepalese Chambers of Commerce and Industry
(FNCCI) and Confederation of Nepalese Industries (CNI) hailed the budget
saying it is pro-private sector and that the government has largely addressed
many demands of the private sector. Both organizations welcomed some major
initiatives taken by the government such as promise to end power crisis in three
years, develop infrastructure required for industrial sector, promote
entrepreneurship through creation of venture fund, and build special economic
zones, among others.
The budget, which aims to lay a strong foundation for graduation of the country
from the group of least developed countries to that of developing nations by
2022, has focused on development of energy and agriculture sectors, human
resources and entrepreneurship, which the FNCCI admires, FNCCI said.
Coalition Influence
In some points, the Finance Minister has deviated from his own philosophy, i.e.
the notion of free market economy. He has backtracked from his earlier
commitment to stop providing Rs 50 million to each of the lawmakers. He
continued social security allowances without any revisions. Probably, he did not
want to take risk due to fear of being unpopular. In 1990, he was assertive in
implementing liberal economic policies. Now, his budget has some socialist

provisions. It seems therere tremendous changes in Dr Mahats working style

and he is not in mood to confront opposition leaders and coalition partners.
Budget Implementation
Nepali politicians have been unpopular due to the trend of making big promises
and delivering less. Despite some weaknesses, the budget has taken a positive
direction but we need real action to convert intent into reality. Private sector is
also cautious on this. For instance, FNCCI has said in its statement, the business
climate will definitely improve only if the programmes and reform agenda spelled
out by the budget are truly implemented. Similarly, CNI has also underlined on
the need to focus on budget implementation to reap maximum benefits from the
new policy and reforms announcements made by budget.
For effective implementation of this budget, this government should be able to
avoid major obstacles such as political pressure and bureaucratic hurdles, among
others. But the question here is: Can Dr Mahat implement the reforms promised
in budget in the backdrop of these potential obstacles?
Challenge Ahead
An economist recently privately commented on the change in Dr Mahats work
style stating, he was more like an economist and less a politician in 1990 but
now he has changed and become more like politician. He claimed that Dr
Mahats success would depend on his ability to confront with bureaucrats and
opposition leaders and contain their unnecessary pressure. Though this will be a
hard task, he will have to stand for real implementation of the budget. Former
Prime Minister Dr Baburam Bhattarai expressed dissatisfaction towards the
budget by claiming that instead of kick-starting, the budget will kickback the
economy 20 year backwards.
Despite criticism, the budget has buoyed the private sector through its promises
for much sought after economic reforms. The budgets and by extension Dr
Mahats promise to revive the economy will hinge on the governments ability to
create conducive environment for implementing all the promised policy reforms
and to bring the private sector into confidence.
(This article was originally published in New Business

KATHMANDU, JUL 13 - Finance Minister Ram Sharan Mahat on Sunday presented

the annual budget of Rs 618 billion focusing on economic reforms, energy,
infrastructure and agriculture. But under pressure from lawmakers he also
included allocations for some controversial and populist programmes, mainly the
Constituency Development Fund (CDF).
The budget is private sector-friendly as it has sought to address such demands
as policy and economic reforms, measures against syndicate system, tax and
other incentives to the industrial sector.

Under the CDF, each lawmaker will be given Rs 10 million, instead of Rs 50

million that had been demanded. Mahat has, however, assured the lawmakers
that each constituency will get projects worth Rs 50 million.
Despite reports of massive embezzlement of Parliamentary Development Fund,
under which each lawmaker was getting Rs 1 million, the government increased
its size to Rs 1.5 million.
The Finance Minister, who has been promising to kick start second-generation
economic reforms for increasing domestic and foreign investments, said he
would introduce new legislations and policies in the industry, energy, commerce
and banking and financial sectors.
The budget has promised amending the existing Company Act, Competition Act
and Market Protection Act and Insolvency Act to ease set up, renew and liquidate
companies. Industrial Enterprise Act, Foreign Investment and Technology Transfer
Act, Foreign Investment Policy, Industrial Intellectual Property, Special Economic
Zone Act, Electricity Act, New Labour Act and Public Procurement Act are among
legal and policy documents to be either amended or new Acts will be introduced,
according to the budget.
Through the reform measures, the government on one hand aims to promote
investment while aiming to control anomalies of the market on the other.
Despite Supreme Courts ruling against syndicate system, the government has
so far failed to implement the courts verdict. The budget has vowed to scrap the
registration of those involved in such practice and blacklist them.
Likewise, given the development projects getting damaged shortly after the
construction, the budget has promised that the contractors will be made
responsible to ensure quality at least for five years of construction.
However, former National Planning Commission (NPC) vice-chairman Jagadish
Chandra Pokharel said that announced reform measures must be implemented
as early as possible to discourage attacks on such measures from various
interest groups later. It is very challenging to implement measures announced
against syndicate without full cooperation from stakeholders, he added.
To encourage the entrepreneurship, Minister Mahat announced that the
government would establish a start up fund with Rs 500 million to help
entrepreneurs having new knowledge but facing lack of capital.
Besides announcing the reform measures, the government has also talked about
providing a full tax exemption for five years to production-related industries
having investment over Rs 1 billion and tourism industry having investment over
Rs 2 billion, and half the following three years.
Announcement of providing Rs 5 million per megawatt to hydropower developers
for the hydropower projects connecting power to the national grid by the fiscal
year

2022-23 and promise to make it mandatory to purchase domestic goods even if

they are 15 percent dearer are other private sector-friendly policies.
The private sector has welcomed the budget for its private sector-friendly tone.
We are pleased with the budget as it has addressed many of the private sectors
demands, said Pradeep Jung Pandey, president of Federation of Nepalese
Chambers of Commerce and Industry (FNCCI). We want its implementation.
With the country facing longer load-shedding, the budget has talked about
eradicating power problem within the next three years when the government
expects additional 1,188MW of power from the projects developed under the
government and private sector initiative.
Solar energy has been prioritised in the budget with the government promising
to produce 25MW from solar energy next fiscal year while promising to buy such
power even from households.
In order to check the surging number of youths leaving for foreign employment,
the government has announced low-interest loans at not more than 6 percent.
The government has allocated Rs 1 billion for this purpose.
The announcement of introducing Act, interest subsidy for farm mechanisation
and exemption in customs duty for tea industry are other initiatives in the
agriculture sector.
In infrastructure, the government has promised starting construction of
Kathmandu-Tarai Fast Track this year while keeping the door open for domestic
and foreign investors to enter into project.
With the Nepal Oil Corporation (NOC) failing to adjust oil prices in line with the
international market price, the government has announced to establish the price
stabilisation fund. Although the NOCs
loss is too high, the government has just allocated Rs 500 million for the
purpose.
The government has targeted to attain an economic growth of 6 percent in the
next fiscal year while the inflation target has been kept at 8 percent.
However, former NPC Vice-chairman Pokharel said the growth target is lower
against the reform measures announced.
The nations economy should grow more than 8 percent to achieve target of
graduating the country to developing country by 2022 from current least
developed country status, said Mahat during the budget presentation.
BUDGETSPEAK
-

Parliamentary development fund hiked to Rs 1.5 million from Rs 1 million

- Hydro projects to generate within 2022-23 to get Rs 5m subsidy per

megawatt
-

Firms running syndicate to be blacklisted

- NEA to be unbundled into three entitiesgeneration, transmission and

distribution
-

New Act on cooperative deposits and credit security to be introduced

Re-insurance company with Rs 5b capital

Provisioning must for saving co-ops

Youths to get credits at maximum six percent for agriculture start-ups

Income tax threshold hiked: Rs 250k per person and Rs 300k per couple

Elderly to get additional Rs 2,000 for health care

Act on property documentation

State agencies to buy domestic goods even if they are 15 pc dearer