Ignoring various challenges that could spell trouble for the economy, Finance Minister Sharma introduces a budget that aims to appease voters.

The government has introduced a budget of Rs 1,793.83 billion for the upcoming fiscal year 2022/23. With the coalition government eying the upcoming provincial and federal parliament elections that must be held this year, the budget promises a number of populist programmes aimed at pleasing voters. Such a bloated budget not only ignores the shortage of resources and weak spending capacity but also risks exacerbating the current stress in the economy.

While some of the tax incentives announced by the government may help in boosting domestic production, the budget for the upcoming fiscal year 2022/23 failed to introduce measures to address the existing immediate and long-term challenges facing by the economy. This budget can neither help transform the economy nor does it address the current economic challenges.  

Finance Minister Janardan Sharma’s budget has very little to offer relief to the private sector that was expecting some big economic reform announcements. His budget shows he did not think beyond the upcoming election. Many of his distributive programmes in the budget would not only channel the precious resources for the wrong purpose but also add a burden of price rises on the consumers. Finance Minister Sharma has announced a 15 percent raise on the salary of civil servants. Though the average life expectancy of Nepali is rising, he decided to lower the age bar for elderly citizens to draw a senior citizen allowance to 68 from 70.

To appease middle-class families, Finance Minister Sharma also increased the income tax slab to Rs 500,000 for individuals and Rs 600,000 for a couple. This tax measure offers relief to salary earners by helping them to save some amount from tax payments. However, this could also hit the revenue of the government if it cannot expand the tax net commensurate with the reduction in the tax slab.

The budget has become bloated due to a desire of Finance Minister Sharma to become popular and please one and all. While he slightly lowered the budget introduced by his predecessor through the replacement bill for the current fiscal year, his populist programmes and facilities unnecessarily increased the budget for the upcoming fiscal year.

The increase in the size of the budget is driven mostly by a rise in allocations toward the recurrent side. His generosity in handouts is reflected in the surge of recurrent expenditure to Rs 753.4 billion. The recurrent expenditure mainly includes administrative costs, salaries, and handouts like social security allowances. Finance Minister Sharma announced Rs 380.38 billion for the capital expenditures that is spent mainly for the development projects and purchase of equipment and other machinery which help in capital formation. Toward financial management, the government allocated Rs 230.22 billion for the upcoming fiscal year. Sub-national governments, or provinces and local units, will receive Rs 429.83 billion in fiscal transfers from the federal government, according to the budget that is currently in the parliament for approval.

The government plans to mobilize Rs 1,240 billion in revenue and Rs 55.46 billion in foreign grants to finance the budget. Finance Minister Sharma announced that the government would raise Rs 242.26 billion from foreign loans. For financing the deficit, the government would mobilize Rs 256 billion in domestic debt, according to the budget.

Private sector leaders say that it would be difficult for the government to meet the revenue target which has been increased significantly for the upcoming fiscal year. As the income tax slab has been increased and measures to restrict imports including vehicles and luxury goods have been enforced, the government will find it harder to meet the revenue. Similarly, there is a less chance to realize the foreign grant in line with the target in the budget as development partners are slashing their assistance to underdeveloped countries amid slowdown in the global economy. Raising debt is an option for the government. However, foreign debt, if not managed properly, could come back later to haunt the economy. The government’s plan to increase internal loans in the upcoming fiscal year could crowd out the private sector investment and worsen the liquidity situation in the banking sector which has already driven up interest rates to ultra high level.

Some export-boosting measures
Some of the measures announced in the budget to help farmers, boost domestic production and export to address the growing trade deficit have drawn praises from the private sector.

Announcements to set up a microfinance fund worth Rs 500 billion to provide cheaper loans to farmers, lowering the threshold for foreign direct investment to Rs 20 million, eight percent cash incentives on the exports of clinker, cement, steel, footwear, processed water and information technology, two to 15 percent waiver on electricity tariffs for big industries consuming huge electricity are some of the provisions that could boost domestic production and promote exports if implemented properly.

These provisions have elated private sector leaders. “The budget seems focused on industry and agriculture and broadly addresses the concerns of the private sector which is positive,” says Shekhar Golchha, president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI).

Controversial budget
Finance Minister Sharma’s budget for the upcoming fiscal year not only faced criticisms for favoring some industrial groups at the expense of others, but also courted controversy after a news report from a daily paper revealed involvement of unauthorized persons in finalizing the budget.

There was a huge backlash in the parliament over the alleged involvement of a former Nasu (a Non-Gazetted First Class Permanent Employee) in tweaking tax rates favorable to some industry groups in the night before the budget day.

“Tax is a secret matter. This is also a matter of national interest and security. The parliament must act on the issue of unauthorized involvement in the budget writing process,” says Surendra Panday, a member of the House of Representatives.

Finance Minister Sharma, however, dismissed the news report. “The budget is in favor of people and the economy. When there was nothing to criticize, a false and fabricated story that an unauthorized person tweaked the tax rate was created,” says Finance Minister Sharma.