BUDGET 2024/25 HINGES ON EFFECTIVE IMPLEMENTATION

The government has allocated a budget of Rs 1.86 trillion for the fiscal year 2024-25, prioritising economic growth. This budget focuses on increasing production, enhancing capacity, and creating jobs. The government also plans to improve the business environment, public finance management, the financial sector, and public administration to address limitations hindering economic development. 

Nepal’s economy faces significant challenges. The Covid 19 pandemic’s lingering effects, coupled with global turmoil and rising import costs, have created a difficult environment. Analysts have criticised the new budget for lacking immediate relief programmes, particularly for small and medium enterprises (SMEs). These businesses, considered the backbone of the economy for job creation and stability, feel overlooked by the current budget’s focus. 

The budget has not addressed the pressing issues of revitalising the supply chain of SMEs, job loss and rampant outbound migration of youth to seek job opportunities overseas, according to Keshab Acharya, a senior economist. 

Comparing budget 2024/25 with the budget of current fiscal year

(Source: Ministry of Finance)

Fiscal policy again relies on monetary policy to address economic problems 

The fiscal policy 2024/25 has again resorted to the monetary policy to solve issues, like in the past, rather than addressing the serious challenges of the economy through fiscal stimulus. Seeking solutions to economic ills through the monetary policy is a deadly idea, according to Nara Bahadur Thapa, Former Executive Director of Nepal Rastra Bank. He states, “Revitalising the economy without proper fiscal stimulus is challenging.” Unlike the past, the fiscal budget has clearly mentioned that the monetary policy is a tool to execute the budget. “Nepal Rastra Bank shall formulate a supportive monetary policy,” the fiscal budget stated. The fiscal policy has pushed Nepal Rastra Bank into a tight spot by setting an inflation target of 5.5%, slightly lower than the economic growth target of 6%. With the announcement of amendments in the interest rate subsidy related guidelines, a total of Rs 11 billion has been earmarked in the budget for granting subsidised credit through banks and financial institutions. The effective implementation of subsidised credit scheme could be instrumental for SMEs.

Resource constraints and overreliance on domestic debt

The fiscal budget relies on the monetary policy to meet growth targets. It aims to create a friendly environment for private sector borrowing. Yet, excessive reliance on domestic debt for the budget could lead to a crowding out effect. This means private businesses may struggle to get loans from banks and financial institutions (BFIs) to invest in their growth, potentially hindering overall economic expansion.

The private sector anticipates decrease in borrowing costs. Banks and financial institutions currently hold ample liquidity, suggesting a potential opportunity for lower interest rates. However, this optimism is tempered by the government’s plan to raise a significant amount of domestic debt, totaling Rs 330 billion in fiscal 2024/25. This heavy borrowing could limit the availability of credit for private businesses. 

The government faces pressure to manage a large budget in a challenging economic climate as it faces resource crunch. The Rs 1,860.3 billion budget represents 30.76% of the country’s projected GDP of Rs 6,047.13 billion for the upcoming fiscal year 2024/25.

The fiscal budget plans to rely on domestic debt for 17.7% of its resources. This represents a 37.5% increase compared to the current fiscal year, where the government raised only Rs 240 billion through domestic borrowing.

(Source: Ministry of Finance)

The government has been facing trouble in resource mobilisation as revenue mobilisation has dropped. Along with a major slump in revenue, the government has resorted to domestic debt as a prominent source for budget financing. 

Against the backdrop of declining consumption and slumping imports, the government’s revenue collection target has stagnated. The revenue target has increased by a mere 0.9% to Rs 1,260.30 billion in the upcoming fiscal.

Reform initiatives, private sector development for buoyant tax system 

As revenue has slumped significantly over a period of time, it seems that the government has realised the importance of private sector development, investments, production and jobs for a sound growth of the economy. Slow implementation of budget, higher credit rates, lack of production and consumption adversely affect economic activities. As a result, the government has not been able to meet the revenue collection target. “Slump in consumer demand, low credit expansion, capacity underutilisation of productive sector and squeezed imports caused a slowdown in economic activities,” stated the fiscal budget 2024/25. 

According to the Financial Comptroller General Office, revenue mobilisation till mid-June, a month prior to the end of fiscal year 2023/24 stood at Rs 944.59 billion or only 64.5%. Revenue mobilisation has declined heavily over the years along with the drop in imports as revenue mobilsation has a very strong and positive correlation with imports. 

Imports and revenue mobilisation

(*Till 10 months of current fiscal year, Source: Ministry of Finance)

Against this backdrop, the fiscal budget has envisaged to promote and collaborate with the private sector to attain economic prosperity. Among the five objectives mentioned in the budget, one is to enhance investment and accelerate economic activities by boosting the confidence of the private sector. Similarly, other objectives of the budget are boosting production, productivity and employment; developing human resources; lowering economic inequality and poverty through appropriate mobilisation of resources and ensuring effective delivery of public services. 

The fiscal budget has also announced to collaborate with the private sector for the transformative development of agriculture, energy, ICT, tourism, entrepreneurship development and industrial sectors. 

In a nutshell, the fiscal budged has envisioned to change the landscape of the Nepali economy from import-based to production-based. “The orientation of the budget is pretty good; however, lack of implementation might not fulfill the objectives as envisioned in the document,” said Hari Bhakta Sharma, Former President of the Confederation of Nepalese Industries (CNI).

Where will the budget be spent? 

Committed liabilities of the government such as salaries and perks of civil servants; social security expenses; grants to subnational level and other agencies – committees, development boards and councils; interest expenses of foreign and domestic debt; and investment in state-owned enterprises have elevated the recurrent expenses to Rs 741.70 billion in the upcoming fiscal year. Over the years, there has been only a marginal increase in the capital expenditure that is spent for capital formation, asset creation and infrastructure development, among others, that enhance the productive capacity of the economy. 

Capital Expenditure

(Source: Budget 2024/25)

Fiscal transfer to local levels  

(Rs in billion, Source: Intergovernmental fiscal transfer 2024/25, Ministry of Finance)   

Fiscal transfer to provinces

(Rs in billion, Source: Intergovernmental fiscal transfer 2024/25, Ministry of Finance)   

Provincial budget 2024/25      

Changes in tax headings and controversies 

Some of the tax related provisions have landed into controversy as the fiscal budget has made several changes in the tax headings. There is controversy over the increase of customs tariff on raw materials of MS-billet. Erstwhile Finance Minister, Janardan Sharma, had lowered customs duty on sponge iron and scrap citing that these industries have high value addition in production of rods, and also to increase electricity consumption. However, the upcoming fiscal budget has levied 2.5% customs tariff on the import of sponge iron and scrap to produce rods from the earlier 1%. The fiscal budget 2023/24 had levied 1% customs tariff on import of sponge iron and scraps. For those producing rods from MS-billet, who had to pay 5% customs duty, the fiscal budget 2024/25 has withdrawn excise duty which was Rs 2,500 per metric tonne on MS-billet. Industrialists have said that the budget has made a great disparity between industries producing rods from sponge iron that has high value addition and those producing from MS-billet with low value addition. 

Besides, the fiscal budget 2024/25 has waived Value Added Tax (VAT) on the import of potatoes, onions and apples. On electric vehicles (EVs), the fiscal budget has increased customs tariff by five percentage points to 15% and 5% for excise duty. While buying an EV of up to 50-kilowatt battery capacity, a consumer has to pay 15% customs tariff and 5% excise, earlier, only 10% customs was levied. For EVs of above 50-kilowatt battery capacity, additional 5%/5% customs tariff and excise duties will be levied. 

The fiscal budget 2024/25 has levied excise on assembled EVs that is 50% less than non-assembled ones. This provision has adversely affected the assembling plants producing EVs in Nepal. Moreover, the budget has slapped a fee of Rs 1,500 on Indian trucks, bullets and lorries ferrying goods to Nepal. The fiscal budget has levied up to 1% green tax on petroleum products and other sectors having high emissions through which the government wants to promote/incentivise green components. However, the government has also scrapped incentives provided to promote green economy. 

Budget implementation

Considering the challenges of budget implementation, the fiscal budget has announced a few measures to expedite and ensure effective implementation of the budget. There are concerns about the implementation of the new budget. Past shortcomings raise doubts about whether this plan will deliver beyond new tax measures.

Chandra Prasad Dhakal, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), has said that the budget will have an impact only if it is implemented properly. The private sector umbrella organisations – FNCCI, Confederation of Nepalese Industries and Nepal Chamber of Commerce – have hailed the budget, however, they severely doubt the implementation aspect. 

The fiscal budget 2024/25 has announced a few provisions to improve the performance of the government in implementing the budget. The budget has underscored strengthening the Public Procurement Monitoring Office and amending the standard bidding document for construction and consultancy procurement. “E-bidding will be strengthened and there will be an arrangement to avail entire database of contractors and consultants. Further, third party rating of the company involved in contract management will be conducted,” the fiscal budget has stated. “Standards will be developed and implemented to select the project chief through competition for the timely and effective implementation of projects. Unless the project chief is unable to achieve the lowest marks as mentioned in the performance contract, they will not be transferred within the project period.”

The fiscal budget proposes a project readiness filter to ensure foreign aid – loans and grants – aligns with national priorities. This will better prepare projects for implementation. Additionally, the government will create a unified law for development projects, aiming to increase stakeholder and community participation. To expedite completion of critical projects, a two-shift work schedule will be implemented with incentives for early finish. An action plan for the current budget’s implementation is targeted for mid-June 2024, followed by procedures and guidelines for the upcoming 2024/25 budget by mid-July 2024.