May Analysis: Economy and Development

0 Comments


Timeline of Major Events

DateEvent
11 MayAnnual Consumer Inflation reached 7.28 percent during the first nine months of the current fiscal year 2021/22.
15 MayNepal Oil Corporation hiked prices of petrol, diesel and kerosene by Nrs. 10 per litre each.
16 MayNepal received FDI commitments worth Nrs. 34.54 billion during the first ten months of the current fiscal year 2021/22.
23 MayNepal Oil Corporation hiked prices of petrol, diesel and kerosene for the second time in eight days by Nrs. 10 per litre each.
24 MayPresident Bidya Devi Bhandari presented the policy and programmes for the upcoming fiscal year (FY) 2022/23.
29 MayFinance Minister Janardan Sharma presented the annual budget of Nrs. 1.793 trillion for the upcoming fiscal year (FY) 2022/23. 

A new fiscal, a new budget

Finance Minister Janardan Sharma presented an annual budget of Nrs. 1.793 trillion for the fiscal year (FY) 2022/23 on 29 May 2022. Out of the total budget, Nrs. 753.40 billion (42 percent) has been allocated as recurrent expenditure, Nrs. 380 billion (21.2 percent) as capital expenditure and Nrs. 230 billion for financial management. The new budget is Nrs. 146 billion more than the amount allocated for the current fiscal year (FY) 2021/22.

Photo: RSS

Table 2: Fiscal budget for the last five years.

Fiscal Year (FY)Amount in Nrs.
2022/231.793 trillion
2021/221.632 trillion
2020/211,474.64 billion
2019/201,532.97 billion
2018/191.31 trillion

                                                                                                    (Source – Ministry of Finance)

  • Major highlights of the national budget
  • Of the allocated budget, the government has targeted to finance Nrs. 1.240 trillion from revenue mobilisation, Nrs. 256 billion from domestic borrowing, Nrs. 242.2 billion from foreign loans, and Nrs. 55.46 billion from foreign grants.
  • The government has targeted an economic growth rate of 8 percent for the upcoming fiscal year (FY) 2022/23 as compared to a target of 6.5 percent for the current fiscal year (FY) 2021/22.
  • The government has allocated Nrs. 55.97 billion to the Ministry of Agriculture and Livestock Development, Nrs. 10.41 billion to the Ministry of Industry, Commerce and Supplies, Nrs. 13 billion to the Ministry of Forests and Environment, Nrs. 9.38 billion to the Ministry of Culture, Tourism and Civil Aviation, Nrs. 69.38 billion to the Ministry of Health and Population, and Nrs. 2.46 billion to the Ministry of Youth and Sports.
  • Nrs. 7.05 billion has been allocated for the Prime Minister’s Employment Program, imports of paddy, maize, wheat and vegetables is to be reduced by 30 percent, and minimum limit for foreign investment has been reduced to Nrs. 20 million from Nrs. 50 million.
  • Senior citizens above 68 years are to get social security allowance, salary of civil servants has been increased by 15 percent, and one percent tax is to be levied on singles on income up to Nrs. 500,000 annually and up to Nrs. 600,000 for couples.

Analysis

The national budget introduced this year once again is exuberant with a high economic growth target. Finance Minister Janardan Sharma presented a total budget of Nrs. 1.793 trillion and a growth target of 8 percent, both of which have been targeted under the assumption that the effects of the pandemic and existing economic troubles shall be dealt with within a few months. Nevertheless, the budget does have some positive aspects. The budget has prioritised increasing the human development index by 0.65 percent to accelerate the nation’s ambition of transitioning into a developing country. Similarly, the government has also emphasised the agriculture sector by allocating Nrs. 10 billion for the agriculture promotion program, handing over of agriculture zones over to the provinces, establishing a ‘farmers welfare fund’ as seed money to agricultural farmers and allocating an additional 50 million to the local governments for the transformation of traditional agricultural techniques to a more modern one. Likewise, development of physical infrastructure has also received its due importance. Adequate budget has been allocated for the construction of petroleum pipelines along the Amlekhgunj-Lothar (Chitwan) and Siliguri-Charaali (Jhapa), Bhairahawa and Simara special economic zones are to be brought into operation, Nrs. 3.79 billion has been allocated for industrial infrastructures, Nrs. 43.95 billion allocated for the construction of transmission lines and substations, Nrs. 6.53 billion allocated for rail and metro-rail projects, alongside ensuring that the budget allocated for national pride projects will not be transferred to projects other than the national pride projects. Moreover, the lowering of the minimum threshold for FDI injection from Nrs. 50 million to Nrs. 20 million has been well-welcomed. Furthermore, the focus on the health sector wherein Nrs. 100 million has been allocated for free kidney transplant programme for the underprivileged, Nrs. 1.5 billion as allowances for people living with chronic diseases such as cancer and kidney problems and Nrs. 7.5 billion for the health insurance programme has been well appreciated.   

In conjunction with the positive aspects, there are areas where the budget has severely lacked. The government has failed to accommodate core issues revolving around poverty, inflation, employment creation, manufacturing and productivity among others. For instance, the government’s plan of increasing money supply into the financial markets contradicts its plan of taming the rising national inflation rate which according to the nine months data of the central bank (Nepal Rastra Bank) stands at 7.28 percent. Likewise, the lowering of the eligible age for elderly allowance from 70 to 68 and increment in salary of public officials by 15 percent is anticipated to heavily burden the national treasury which is already weak owing to high imports and depleting foreign exchange reserves. Similarly, while the Finance Minister announced cash schemes of up to 8 percent for products including clinker, cement, steel, footwear, processed water, ICT-based services, and services related to business process outsourcing; domestic products such as carpets and ready-made garments failed in receiving similar incentives/schemes. Moreover, the low allocation of Nrs. 380 billion towards capital expenditure as compared to the allocation of Nrs. 753.40 billion towards recurrent expenditure is anticipated to hamper physical and social infrastructure building with higher taxes and revenues mobilised towards making payment for ballooning recurrent expenses; ultimately leading the economy towards resource deficit.

Rising petroleum prices, rising inflation

Nepal Oil Corporation (NOC) increased prices of petrol, diesel and kerosene by Nrs. 10 litre each on 14 May 2022. With the revision, prices of petrol stood at Nrs. 170 per litre, diesel at Nrs. 153 per litre and kerosene at Nrs. 153 per litre. However, despite the adjustment, NOC reported that it was operating under a loss of Nrs. 4.25 billion fort nightlies. Fast forward to 22 May 2022, NOC increased fuel prices once again for the second time in a span of eight days. With the most recent adjustment, the new prices for petrol, diesel and kerosene stands at Nrs. 180, Nrs. 163 and Nrs. 163 per litre, respectively.

Table 2: Change in price of petroleum products in May

ProductPrice (as of 14 May 2022)Price (as of 22 May 2022)
PetrolNrs. 170/litreNrs. 180/litre
Diesel/KeroseneNrs. 153/litreNrs. 163/litre
Cooking GasNrs. 1,600/litreNrs. 1,800/litre

                                                                                               (Source – Nepal Oil Corporation)

Analysis

The new hike in petroleum prices comes at a time when the national inflation rate and balance of payments (BOP) deficit has risen to an all-time high level. According to Nepal Rastra Bank’s (NRB) monthly report – Current Macroeconomic and Financial Situation of Nepal – the annual consumer inflation and BOP deficit has reached 7.28 percent and Nrs. 268.26 billion respectively during the first nine months of the current fiscal year (FY) 2021/22. Similarly, total foreign exchange reserve has reduced by 16.5 percent, reaching Nrs. 1,167.92 billion during the same review period. Considering this, the recent increase in petroleum prices comes at a time when end-consumers are already reeling under soaring price hikes of daily necessities and other consumable goods. Being an import-dependent nation, inflation is primarily driven by imports in Nepal. With the country importing more than what it exports; domestic prices have been on a spiral. According to NRB’s same report, the country imported merchandise imports of Nrs. 1466.66 billion as compared to merchandise exports of Nrs. 160.57 billion. Similarly, within the imports bill, import for petroleum fuel stands at 14.1 percent of total imports. Any increase in the prices of imported final goods directly impacts expenditure-based measures of inflation. In simpler words, excessive import increases imported inflation leading to increase in domestic costs of production and prices of domestically produced goods. This can be vividly seen in the Nepali economy today. With little incentive to produce domestically, the country’s over-reliance on imports is costing dearly to the general public, in particular pressuring the lower and middle-income households. Moreover, it has also shed light on the faulty policies that the nation has implemented in managing imports and exports. With imports becoming an easier method of catering to domestic needs, most manufacturing sectors have also been left with little incentive to produce goods that actively contribute towards the national gross domestic production (GDP); further exacerbating the overall national inflation rate.

Leave a Reply

Your email address will not be published.