Swelling government treasury hurts private sector demand

The swelling government treasury has hurt the private sector demand.
The government inefficiency in expediting development expenditures has made budget surplus of Rs 43 billion at present but lending capacity of banks and financial institutions has been clipped due to tightening liquidity.
“The swelling treasury will clip lending capacity of banks and financial institutions pushing interest rates higher,” said former finance secretary Rameshwor Khanal. “Public expenditure would have expanded banks and financial institutions capacity to lend more that could have pulled the interest rates little lower encouraging the private sector to borrow,” he said, adding that there has been demand in real estate, hydropower, agriculture and tourism sectors. “But low public expenditure has squeezed liquidity from the market making it difficult to borrow by the private sector apart from pushing interest rates higher.”
The private sector has also been blaming higher interest rates for their low borrowing capacity apart from frequent bandh and load shedding for the low industrial production.
Higher cost of production and transportation have pushed the inflation also higher up, Khanal said, adding the inflation has been continuously looking up to double digit despite the low money supply due to ballooning informal economy.
Decrease in public spending and increase in non-budgetary expenses has fuelled the informal economy that is projected as big as the formal economy at present, according to Prof Dr Bishwambher Pykuryal.
The low public spending will hit the private sector’s ability to invest that would neither generate employment nor create aggregate demand, he said, adding that it will also be hard for basic service delivery in the social sector in case of continuous low public spending.
The Dr Baburam Bhattarai-led government, due to its failure in forging political consensus in absence of parliament, brought interim public expenditure arrangement of Rs 351.93 billion that has allocated Rs 51.29 billion for the development expenses.
However, by the end of seven month (mid-February), the government has been able to spend only Rs 9.48 billion but the revenue mobilisation has been witnessing a growth rate of around 25 per cent.
“Bhattarai led government’s failure in financial management has also created huge budget surplus,” he said.
However, the full-fledged budget could help build private sector and development partners’ confidence, he said, hoping that the new government formed under Chief Justice Khil Raj Regmi today would immediately bring the full-fledged budget and restore confidence of private sector and development partners.
However, the private sector doubt the newly formed government’s role in rescuing the economy.