February Analysis: Economy and Development

0 Comments


In terms of Economy and Development, this review period saw the Nepali economy record a 64 months high price rate for daily consumption goods, making it exorbitant for the general public to buy basic necessities. In addition, the price of petroleum and gasoline fuels also skyrocketed with Nepal Oil Corporation hiking the prices of fuel products twice within the same month. The Nepali economy also saw rising tension and polarization among political parties with regards to the Millennium Challenge Corporation Nepal Compact and the economic benefits associated with it. Lastly, the government revised its national annual budget and affirmed that its projected growth and expenditure target is unattainable in the current fiscal

Timeline of Major Event

DateEvents
02 FebruaryNepal Oil Corporation hiked fuel price for the first time for the month of February.
09 FebruaryNepal Rastra Bank revealed that remittance earnings reduced by 5.5 percent during the first six months of the current fiscal year.
10 FebruaryThe government trimmed down the annual budget by 5.3 percent or Nrs. 86.55 billion; revising it down to Nrs. 1.54 trillion.
20 FebruaryNepal Oil Corporation hiked fuel price for the second time for the month of February.
21 FebruaryInflation crossed the central bank’s ceiling of 6.5 percent to reach 7 percent in the current fiscal.
27 FebruaryThe ruling alliance agreed to vote in favor of the Millennium Challenge Corporation Nepal Compact.

Fear regarding fuel prices amidst the Russia-Ukraine crisis

Photo: RSS

Context

The state-owned Nepal Oil Corporation (NOC) increased the price for petroleum products twice within the month of February. Initially, NOC on 02 February 2022, increased the prices of petrol, diesel and kerosene to Nrs. 142 per liter and Nrs. 125 per liter. Fast forward to eighteen days, the corporation on 20 February 2022 increased prices for petrol, diesel and kerosene to Nrs. 145 per liter and Nrs. 128 per liter. Moreover, with the Russia-Ukraine crisis, domestic fuel prices are forecasted to inflate anywhere between Nrs. 180-200 per liter in the upcoming days.

Analysis

The Nepali economy has become accustomed to exorbitant hikes in gasoline and petroleum prices. However, the recent increase comes at a time when the economy is undergoing high rates of inflation. According to Nepal Rastra Bank’s (NRB) monthly report – Current Macroeconomic and Financial Situation of Nepal, inflation across the country has crossed the central bank’s ceiling limit of 6.5 percent to reach 7 percent within the first six months of the current fiscal. Similarly, prices of consumption goods including oil, lentils, rice and vegetables recorded a 64 months high point during the same review period. Considering this, the Russia-Ukraine crisis comes as a huge threat to smaller nations like Nepal which is completely dependent on importing fuel for its domestic demands. Any spike in global oil prices driven by global supply disruptions brings inflationary, fiscal and external risks to smaller economies. Analyzing this for Nepal, a global fuel crisis can directly hit the state’s exchequer. Similarly, as the country is reeling under a fuel imports bill of Nrs. 132.19 billion; Nepal’s foreign exchanges (FOREX) are expected to deplete faster in the upcoming days. With this, the current account deficit too is expected to widen. Moreover, rising fuel prices also imposes fiscal pressure on the government; in particular – price subsidies. The government of Nepal subsidies the retail prices of petroleum products to ensure end consumers can afford it. However, with exorbitant fuel prices, providing fuel subsidies can turn into a huge challenge; ultimately impacting the end consumers purchasing capacity.

MCC Nepal Compact and the Nepali economy-

Context

The ruling alliance, on 27 February 2022 voted to pass the Millennium Challenge Corporation (MCC) Nepal Compact in the House of Representative (HoR). The compact was passed after the Communist Party of Nepal (Maoist Centre), the CPN (Unified Socialist) and the Janata Samajbadi Party (JSP) – the three partners in the Deuba government agreed to vote in favor of the compact with an interpretative declaration.

Analysis

Nepal is soon expected to attain energy surplus due to completion of a number of hydropower plants. As of mid-January 2022, the country’s installed capacity has crossed 2,000 megawatts and investments by the general public on private power plants has reached Nrs. 215 billion. Moreover, a report titled ‘Economic Benefits from Nepal-India Electricity Trade’ has revealed that Nepal stands a chance of generating revenue worth Nrs. 310 billion per annum by 2030 by trading electricity with India. However, the country lags required infrastructure needed for cross-border electricity trade. Considering this, Nepal can greatly benefit from construction of a 315 kilometers double circuit 400kV transmission line as envisioned in the MCC Compact. With all five segments of the transmission line – New Butwal-India, New Butwal-New Damauli, New Damauli-Ratmate, Ratemate-Hetauda, and Hetauda-Lapsephedi – providing link for power projects to the national grid; both cross-border electricity trade and reliability of power supply are anticipated to enhance under the MCC compact. Similarly, high cost of transportation, weak logistics, insufficient road networks and low capital on transport has been plaguing Nepal’s road system. The MCC compact aims to increase funds for road maintenance, rehabilitate 300 kilometers of roads and create strategic road networks. With this, the country can profit significantly in terms of domestic and cross-border mobility for both commodities and passengers.

However, international assistance doesn’t automatically usher development, reduce poverty or lessen inequality. The electricity produced under MCC is not for local consumption but for cross-border trade. Thus, direct benefits to the local economy seems unattainable under the compact. Likewise, the possibility of lucrative procurement contracts and employment opportunities under road development projects must also be assessed before the projects are implemented.

Government revises national budget during mid-term review-

Context

Finance Minister Janardan Sharma on 10 February 2022 revised the government’s annual plan of revenue and expenditure by 5.3 percent. With the reduction, the revised budget stands at Nrs. 1.54 trillion, smaller by Nrs. 86.55 billion as compared to the previous amount of Nrs. 1.63 trillion. Corresponding to the budget revision, recurrent expenditure stands at Nrs. 1.35 trillion, capital expenditure at Nrs. 40.32 billion and financial management at Nrs. 170.49 billion. Similarly, Minister Sharma has also revised the government’s sources of funds; with Nrs. 50 billion to be raised through foreign grants, Nrs. 206 billion from foreign loans and Nrs. 1.18 trillion from revenues and domestic loans.

Table 1: Budget Revisions for the last three fiscal years.

Fiscal Year (FY)Actual Budget (in Nrs. trillion)Revised Budget (in Nrs. trillion)
2021/221.631.54
2020/211.4741.344
2019/201.5321.38
Source – Ministry of Finance

Analysis

A government’s budget revision post mid-term review is a common phenomenon. Considering this, the recent budget reduction does not come as a surprise, more so due to the fact that Minister Sharma introduced an ambitious national budget of Nrs. 1.63 trillion and predicted an economic growth target of 7 percent for an economy still recovering from the second deadly wave of the Covid-19 pandemic. While the Deuba government has blamed political instability, late announcement of the substitution bill and the third wave of the pandemic for the budget cut; a closer look into budget planning and formulation reveals that populist policies and incompetent development strategies has led to the recent revision. This in turn has impacted the implementation and completion of remaining projects and programmes within the current fiscal. Moreover, frequent changes and revisions are also projected to affect the country’s capital/development expenditure. Capital expenditure has always been low in Nepal. Looking at the figures for the current fiscal, the Deuba government has only spent 16 percent of its capital expenditure on development activities. With the new revision, capital expenses are expected to be spent slower; ultimately hampering infrastructural development. 

Leave a Reply

Your email address will not be published.