Saturday, October 17, 2020

Can Poudel revive economy?

 Bishnu Prasad Paudel has been appointed finance minister for the second time.

First time, when he was finance minister, the country was going through undeclared economic blockade imposed by India – after the declaration of Constitution – also in the immediate aftermath of devastating earthquakes that shook the country. And the economy was in tatters. 

But this time, the whole world is facing crisis due to coronavirus. Nepal obviously has been hit hard – despite the earlier finance minister Dr Yub Raj Khatiwada’s unacceptance – and the economy is again in tatters, this time the worst compared to in 2015. The economy is on the brink of recession amid a deadly Covid-19 pandemic.

The then finance minister Dr Khatiwada brought the budget for the current fiscal year – during the lockdown time that was imposed on March 24 to contain the spread of coronavirus till 120 days – as if the country is going through normal times. However, neither the last fiscal year’s budget could be implemented nor the current fiscal year’s budget will be implemented. And at this time, Prime Minister KP Sharma Oli has appointed Poudel as the finance minister on October 14. Can Poudel dare to revive the economy?

“Of course, Poudel can revive the economy, if he dares to come out of party polity, and think of the country,” according to senior economist Dr Chanrdmani Adhikari. “Extreme remedy is necessary to cure extreme disease,” he said, adding that the conventional remedy does not work on newer challenges. “Can Poudel dare to revive the economy depends on how accurately he diagnoses the disease?”

The government is short of resources, to fight the pandemic, he said, adding that maintaining the financial balance should be his the top priority as revenue is tanking due to a slump in economic activities amid the outbreak of coronavirus and subsequent containment measures imposed by the government. 

According to the Financial Comptroller General Office (FCGO), the government has been able to mobilise Rs 172.37 billion in revenue till October 17. But, during the period, the government spent Rs 182.85 billion in recurrent expenses – mainly the salaries and administrative cost – putting pressure on government treasury. The revenue mobilisation against the gross domestic product (GDP) in the last fiscal year declined after witnessing an ascending trend for 10 years, according to the Finance Ministry. Revenue to GDP ratio stood at 21.07 per cent, down from 23.99 per cent of GDP in the previous fiscal year.

Due to resources constraints Poudel’s predecessor Dr Khatiwada could not bring any stimulus package – through the budget for the current fiscal year – to rescue the economy, neither the central bank – though the Monetary Policy – rescue the private sector. The private sector – battered by the coronavirus and containment measures including lockdowns – want a relief and stimulus package from the government. Those who have lost their livelihoods and incomes are asking the government to support them. The government has neither been supportive to the private sector nor create employment and demand in the market. Will Poudel dare to create demand in the market, and help create employment?

Not only the revenue is shrinking but also external loan and grant due to global pandemic that has bleed the global economy red. The development partners are also facing economic crises, and it is less likely for them to come to Nepal’s rescue, though some of the multilateral agencies, including the World Bank (WB) and Asian Development Bank (ADB), have already helped Nepal. “Thus the government is borrowing from the domestic market – domestic borrowing – early in the current fiscal year to pay the salaries to the government employees, which is very unlikely,” Adhikari said, adding that raising domestic debt has its own limits. “There is a ceiling on domestic borrowing, and the government cannot collect more than Rs 225 billion in domestic debt.”

High domestic borrowing means higher interest rates, and crowding out private sector investment that is a must to give a push to the dipping economy.

Apart from the coronavirus crisis Poudel also faces the pressure from his own party to be populist by distributing the resources to the politically motivates programmes like his predecessor Dr Khatiwada. “Poudel has to find a balance between his party’s populist temptation, and medium as well as long-term economic development aspiration of the country,” Dr Adhikari said. “Can he dare to go against his party’s populist temptation?”

The 120-day lockdown and prohibitory orders have already resulted in massive closure of businesses with widespread job losses making millions jobless. “The four-month-long lockdown imposed to contain the spread of Covid-19 forced 61 per cent of businesses to close down completely, causing a dire effect on the economy by rendering tens of thousands of people jobless and disrupting the production and supply chain,” according to a survey released by the central bank in August.

The survey also revealed that 22.5 per cent of employees were laid off by businesses of the manufacturing and service sectors, and two-thirds of the laid-off employees were either working on a contract basis or were hired temporarily. Likewise, Sectors like tourism, aviation; micro, small and medium enterprises; and the transport sector suffered badly. Informal sector jobs have also been lost amid reduced economic activities.

On top of these economic problems, Poudel also has to face the humanitarian crisis. He has to find ways to prevent the country from facing an unprecedented humanitarian crisis. The crisis could be fought, if Poudel dare to cut down unnecessary expenses as prescribed by Public Expenditure Review Commission led by Dilli Raj Khanal. “The Commission recommended a number of measures to reduce administrative expenditure including shutting down various government offices,” Dr Adhikari said, adding that the government has not taken any step towards cutting down the unnecessary expenses. “The government, instead of cutting unnecessary expenses, is completely indulged in corruption in the time of coronavirus crisis.”

Could the newly appointed finance minister Poudel dare to reduce facilities enjoyed by the lawmakers and those holding constitutional posts, suspending the lawmaker-led Local Infrastructure Development Partnership Programme and controlling corruption.

In extraordinary situations, extraordinary measures are necessary, and Poudel needs to dare it.

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