Nepal Budget 2077/78 - Unexciting programs defined by incremental but essential improvements

Macroeconomic Outlook

Nepal’s macroeconomic outlook is similar to the past few years with the same systematic deficiencies and behavior patterns. Dependence on remittance is still quite high (annual remittance is equal to 25.4% of GDP¹) which drives a consumption culture (National Consumption is 81.9% of GDP²) The export to import ratio while improving is still 12.5³ (compared to 15.5 the last fiscal) which shows there is still a tremendous imbalance in the national accounts. The GDP growth for the FY stood at 2.3% as opposed to 7% as targeted by the previous budget mainly owing to COVID-19’s impact. Similarly, Inflation Stood at 6.5% against a target of 4.5%. However, FX reserves grew by 11.25% to NPR 11.56 Trillion. Overall, despite effects of COVID-19, the macroeconomic indicators still point towards a positive outlook.

Budget Performance (2075/76)

With regards to the performance, the budget for FY 2075/76 continued the trend of ballooning recurrent expenditure vis-à-vis total expenditure observed since 2063 B.S.   However, owing to the pandemic and inefficient mechanism, only 70% of the budgeted expenditure (NPR 10.7 Trillion) is projected to be made in the FY. Recurrent, Capital and Financing Expenditures are projected to be 73.3%, 58.6%, and 78.8% of their respective allocated budgets.  Total Tax collection stood at NPR 8.27 Trillion (74.4% of targeted amount.)

Budget Overview

The total budget for FY is NPR 14.74 Trillion which is a decrease of 4% compared to last years budget. Recurrent Expenditure for the FY is budgeted at NPR 9.48, Capital Expenditure is Budgeted at NPR 3.52 Trillion and  Financial Management Expenditure is budgeted at NPR Rs 1.72 Trillion. In order to fund the expenditure; Tax Revenue of NPR 8.89 Trillion will be combined with Foreign Aid worth NPR 60.52 Trillion, Foreign Loan of NPR 2.99 Trillion and Internal Debt of NPR 2.25 Trillion.

¹ Economic Survey 2076/77, MOF

² Economic Survey 2076/77, MOF

³ Macroeconomic Update, NRB

As can be seen,the total tax revenue of the nation now cannot support even its recurrent expenditure which is a very worrying sign as we now basically have to borrow money just to keep the nation running as it is. There is an urgent need to cut unnecessary expenses which has not been forthcoming with the budget. The budget intends to grow the GDP by 7% and inflation rate is expected to be capped at around 6%

The major implications of the budget  for various specific areas are as follows:

Health

Health sector has seen an increase in funding owing to the COVID-19 pandemic and the realization that our healthcare system is not able to handle even a small-scale outbreak of disease. Hence, budgetary provisions for establishing at least one infectious disease hospital in all provinces with a capacity of 50 and another hospital in the capital with capacity of 300. Similarly, the push to establish small scale hospital in local levels is also going create some economic opportunities while improving the quality of life. Additional facilities including for front line health workers is intended to improve motivation levels.

Provision of mandatory health Insurance for all in three years and earmarking of funds for covering 40% of total population for this year as a social security measure is sure to improve access to health but questions remain over integration with private hospitals. Policy measures for establishing a Centre for Disease Control and Food and Drug Administration will modernize the health system greatly and is a welcome addition.

General Relief Measures

Refinancing Fund worth NPR 100 Billion to provide subsidized loans at 5% to COVID-19 affected SME and Cottage industries, manufacturing industries, Hotel and Tourism Enterprises was introduced to ensure cost of financing is low during these difficult times for hard hit industries which will help them recover faster in the long run.

Payments for Social Security for registered organization during the period of pandemic to be made by government (recovery following normalization ) for easing cash flow restriction and allowing for payment of remuneration to employees.

Travel and Tourism

Reduction in Aviation Fuel Tax and other taxes and service charges which reduces operating cost of airlines for the time period of pandemic when their fleet is grounded.

Tax break of 20% for tourism related industries for the FY which for the time period can help manage certain portion of damage caused due to the pandemic.

Keeps the door open for tourism holiday and extensive internal tourism in the FY after the resolution of current pandemic to uplift the tourism industry. One province one tourist destination is continuation for similar type of programs in the past but can add value if executed properly.

SMEs

Specialized fund worth NPR 50 Billion for providing subsidized loan at 5% to SMEs and Corona Affected Tourism Industries for covering operation costs and employee remuneration has been established to ensure companies can continue to operate above the red in these difficult times.

In line with government policy of supporting small enterprises tax rebate of 75%, 50% and 25% to SMEs and Cottage industries with total revenue up to NPR 2 Million, NPR 2-5 Million and NPR 5-10 Million respectively as they do not have the financial capacity to survive very long during crises.

Extension of tax-free operation to 7 years for new SMEs from 5 years and 10 years from 7 years for those driven with women at the helm.

Agriculture

Provision of minimum support price for agricultural produce from this FY will ensure better prices for farmers and encourage them to produce more.

Innovation fund worth 500 Million for funding new types of projects in various areas including agriculture.

Establishment of pocket sectors for specific agricultural products in 250 local levels to promote specialized agriculture and reduce oversupply

Provision of paying premiums after production of crops for farmers will improve access to insurance to farmers who do not have necessary capital to insure their products otherwise.

Textile based agriculture such as silk, cotton, and wool to be provided grants.

Government will support production and export of cash crops and medicinal herbs to improve balance of trade.

Continuity of grants for fertilizers and sugarcane farmers so that production is cheap, and farmers can actually benefit through it and keep on producing.

Discount on import of raw materials and instruments/machinery used in agriculture.

Industries

Establishment of new industrial villages in 130 locations besides new commercial roads  to promote greater industry and productivity.

Improvement in Hedging Regulation can open up newer industries to FDI as risk bearing mechanism becomes present.

Financial Sector

Policy for encouraging mergers of BFIs has been continued but with no additional financial incentives, this will not spur further M&As. Time extension for loan payment and insurance premiums is implicitly and explicitly endorsed. Digitization and cashless economy to be encouraged and the implementation of national payment gateway will facilitate the same. Provision for Interest Capitalization maybe upcoming with monetary policy based on the prevailing situation at that time. BFIs not benefited as expected by budget with NPAs expected to worsen and income to fall.

Automation of Stock Market and start of commodity trading should improve market conditions and drive better growth as access becomes better and more stability is provided as a result. Introduction of stock dealer will play stabilizing role as well. Debenture market may mature due to policies.

Tax Implications

No change in income tax slab. Increase in import duties of agricultural produce to promote better domestic consumption and discourage import of agricultural produce.

Small taxpayers can pay taxes online and get tax clearance which improves tax administration.

Provision on tax discount on lump sum payment for pension schemes that get added to Social Security fund (6% to 15% on final claim amount) introduced to make switching to SSF lucrative.

Other Impactful Provisions

• Nepal to become energy self -sufficient in the coming FY as 1300+ MW to be added to national grid and promote energy trading.
• contract and temporary employees in government institutions to be enrolled in SSF to improve its goodwill and reach.
• Continuation of work in projects of national pride and similar infrastructure projects with addition of Mahakali Irrigation project as that of National pride Project.
• No change in tax slab for individuals owing to no change in salary in the budget.
• Day time tiffin program extended to all districts and expected to benefit many children and improve retention rate.
• Cost of Social Security has reached 67.5 Billion which is 4.6% of total budget and will need restructuring in future for sustainability.
• Various skills development and employment programs to manage internal unemployment and people who might be back home due to COVID-19 from abroad.
• Digitization of 10 Million records of citizens to move towards national id card in three years for better governance and data tracking.
• Funds worth NPR 3.6 Billion to be provided to SKBBL for disbursement through co-operative to promote SMEs.
• Anti-dumping regulation will be implemented in order to discourage imports of substandard FMCG products and supervision will be strengthened to control fake FMCG products and for quality control.
• Sick industries will be revived by the help of private sector which will lead to more productivity in the market.
• Tax breaks on certain industrial raw materials.
• Continuation of provision of land bank from previous budget, where land can be taken in lease to establish large projects.
• Establishment of satellite cities around Kathmandu valley for better urbanization and improved quality of life.
• Tax discounts for Telecommunication companies and Medicine companies as they are essential in these trying times to keep people healthy and in their homes.
• Deduction in various allowances of civil servants is done more as a token measure in favor of actual restructuring and cost reduction.
• Establishment of 39 border check outposts and regional airbase for Nepali army to improve border security and national security among border issues with India.

Key Takeaways

With the impact of COVID-19 and policy measures put in place to control its spread, Nepal’s Economy faces a huge challenge akin to or greater than that experienced following the Gorkha Earthquake of 2015. The additional caveat being that besides affecting domestic industries pretty hard, this pandemic has resulted in a direct impact on remittance coming into the country and presents a prospect of massive reverse migration of workers to the country. These are both scenarios Nepal has not been privy to since remittance income started playing a major role in the national economy some two decades ago. This is further compounded by a major impact on majority of private enterprise with mobility limited tremendously and overall consumption declining on the back of stay at home measures. Hospitality and Travel related businesses are the worst hit with tourist numbers hitting almost zero in the last month as all travel within and beyond the country at a standstill since the lockdown measures took hold more than two months ago. The financial sector is also feeling the effects of a drop in interest rates for loans to businesses directly affected by the pandemic which was beginning to show in their finances.

Hence, there was an expectation that the new budget would introduce substantial measures to help ailing private businesses and the financial sector. And while certain measures such as the increment of the refinancing fund, concessional loans for covering employee expenses alongside tax breaks and discounts on electricity charges were instituted , covid-19 related measures mostly pertained to increasing funding for the health sector, additional focus on employment generation, and tax breaks for travel and hospitality as well as SMEs. While these were good measures providing relief to the affected businesses, larger private institutions and BFIS did not experience significant relief as opposed to SMEs which the budget catered more towards. However, the monetary policy which is due in two months can be expected to be provided additional relief for BFIs if the current situation persists.

Completion of  credit rating of Nepal, alongside amendments in hedging regulations, introduction of stock dealer company in the stock exchange and the prospect of Electricity self-sufficiency and trade as well as the completion of post-earthquake reconstruction point to a positive outlook for the nation.  The growth in number of taxpayers is substantial owing the policy of mandatory PAN and the budget has effectively endorsed the Millennium Challenge Compact as being operational without conclusion of its ratification in parliament.

Overall, the budget addresses the basics and carries on with the socialist government policy of favoring smaller enterprises and measures for health service improvement and creation of employment which the budget makes good strides towards. There are few exciting programs and most projects are extensions of running budgeted programs. Besides the inclusion of Mahakali Irrigation Project as national pride project, all other infrastructure projects are carrying over from the last budget.  In this regard, the budget is functional and not flamboyant and while that may not be in line with the governments past policies, functional and incremental during tough times is not necessarily nonideal.

- Nimesh Adhikary

The Author is Head - Research, Development and Compliance, Himalayan Capital Limited. He is also the faculty of Buisness Research Methodology (AP) for MBA at KFA Business School & IT.