The Replacement Act has laid emphasis on production based economy

One of the main architects of the Replacement Bill which the government recently introduced, Madhu Kumar Marasini, Secretary at the Ministry of Finance, has garnered immense experience over the course of his career in government service. He has previously served in the Inland Revenue Department of the Finance Ministry and also at the World Bank headquarter as an advisor in the Southeast Asia constituency. Other sectors that Marasini has worked in are the International Economic Cooperation Coordination Division and as the Financial Comptroller General. For a brief period, he also served as the Consul General in New York under the Ministry of Foreign Affairs. He has also headed the Multilateral Trade and Trade Assistance Division of the Ministry of Industry, Commerce and Supplies and also worked in the capacity of Secretary of the Ministry of Economic Affairs and Planning of Lumbini Province. In early August this year, the government assigned Marasini as the Secretary of the Finance Ministry at a time when it was in a rush to table the Replacement Bill to replace the Ordinance Budget which was announced by the previous regime. The Bill has already been ratified by the Parliament and received the President’s seal. In this issue of Business 360, we caught up with Marasini to gain insight into the Replacement Act and its impact on the economy.

What are the main directions of the Replacement Act?

The Replacement Act has laid emphasis on reviving the economy that has been badly hit by the Covid 19 pandemic. We want to boost productivity and generate more employment by opening up the economy by ensuring Covid vaccines for all as well as ensuring sustained, stable and inclusive economy by maintaining fiscal discipline. We have to accelerate economic activities along with the economic revival to regain whatever we have lost on the economic front. To achieve this goal, we have to expedite development works, mainly big-ticket projects. We have envisioned to revive the economy and execute the budget in collaboration with the private sector. The private sector has an important role to play to achieve the growth target of 7% in fiscal 2021-22. On the other hand, we had to formalise the Ordinance Budget through the Replacement Bill and it was mandatory. While tabling the Replacement Bill in the Parliament, we decided to continue with the ongoing projects, national pride projects and other committed liabilities of the government. However, we have trimmed down projects that were included in the previous budget without enough groundwork for execution and downsized the budget. We have tied up the budget with fiscal discipline and accountability. Similarly, there were rising grievances from the public that the portion of public debt has been heavily increasing over the years without efficiency in projects and programme execution. We have duly considered these issues and tried to narrow down the public debt to a possible extent through the Replacement Act.

The Replacement Act has slightly slashed current expenditure and made marginal increment in capital expenditure. This is noteworthy as current expenditure has increased exponentially over the years. However, capital expenditure has also witnessed slow growth. Your views.

We have downsized the Ordinance Budget and increased capital expenditure and reduced current expenditure. We have done this with the objective to tie up the budget with fiscal discipline and accountability. For the first time, the fiscal budget has envisaged to spend at least 10% of the capital budget which is actually a new practice in budget execution. Earlier, we used to review the execution status every quadrimester. The Financial Procedure and Fiscal Accountability Act (2019) has provisioned to review budget execution status on a quarterly basis. However, rather than reviewing on a quarterly basis we have given a monthly target so that the ministries can sit and review with their line agencies and projects whether they have met the monthly expenditure target or not. We believe this will help us develop fiscal discipline and put an end to the phenomenon of last-hour expenses at the end of the fiscal year. For example, the Ministry of Physical Infrastructure and Transport can review expenditure with the Department of Roads and other implementing agencies. We have provisioned monthly review mechanism after discussions with the authorities. In line with the standard set for budget expenses the ministries have to achieve at least 10% expenditure target in the first three months of the fiscal and 10% each month for the next nine months. The Ministry of Finance is always ready to facilitate other executing agencies and ministries. We have trimmed down the projects that were included without any groundwork so that human resources can be utilised in focus areas - ongoing projects and national pride projects - where they can make progress. We are committed to increasing capital expenditure in a focused way albeit by maintaining fiscal discipline.

The Replacement Act has laid emphasis on production based economy. It has offered tax incentives for vehicle assembling plants, and iron/rod industries, among others. However, the tax incentive provided for the iron industry basically on import of sponge iron has created dispute as those producing iron rods by importing MS billet are opposing the idea?

We have provided tax incentives for production based industries eyeing three things: to narrow down the alarming trade deficit; utilise excess electricity in the country by creating favourable ground for electricity-intensive industries; and create jobs in the country. We will have excess electricity of around 400-500 megawatts from the coming wet season and we must have proper plans to utilise that. Energy consumption status shows the potential economic progress in newly industrialised emerging economies. Electricity is a vital commodity to enhance productivity in the economy, and we are going to utilise the excess power by creating a favourable ground to set up iron industries and other electricity-intensive industries for the larger benefit of the economy. There are no ifs and buts when it comes to moving forward towards production-based economy, creating jobs and having a growth centric approach which is why there is no hidden interest behind this provision. We have invited industries producing iron rods by importing MS billet to discuss how the government can facilitate them so that they will not get affected from the incentives being provided on import of sponge iron. If you look at our major imports, then MS billet is one among them and the government has a policy to encourage import of intermediate goods rather than finished products in the initial stage and then encourage production of intermediate goods too through import of raw materials in the next stage. We want to establish proper backward linkages for industries to the extent it is possible within the country. It is obvious that the government will support high value addition industries to minimise the trade deficit and save our scarce foreign exchange reserves.

The government has been offering incentives on taxes and electricity among others to production units and assembly plants. However, consumers should also benefit from these incentives provided to the business community. Why are these incentives not being reflected in consumer prices?

You have rightly pointed this out. Production itself is not sufficient for the economy; at the end of the day it must be consumed and consumer perspective is an important element for the government while offering any incentive or subsidy. We have summoned factory owners and tallied the price before the announcement of the incentives and the price they quoted after the government offered incentives to these factories. For instance, we saw a slight increase in consumer prices of iron rods and we sought clarification and asked them to lower the price as they are being offered tax incentives. They were trying to justify the price by indicating to the appreciation in the US dollar, however we dismissed their claims and urged them to lower consumer price as compared to before the announcement of the new provision in the budget. They agreed to lower the price of iron rods by four rupees per kg and a new price has already come into force.

The government has set the target to achieve 7% growth in the ongoing fiscal 2021-22. Why does the government always set ambitious targets despite being aware that the prevailing circumstances make it almost impossible to achieve?

The government must be ambitious but that ambition should not sound unrealistic. We believe that 7% growth target is achievable provided we open up the economy in a full-fledged manner by ensuring Covid vaccines for all as early as possible and we are moving towards that direction. We should not forget we had achieved 8.6% growth in fiscal 2016-17 by expediting massive post-reconstruction work after growth had nosedived to 0.07% in fiscal 2015-16. Economic activities have stalled since one-and-a-half years following the pandemic as stringent measures were enforced to stem the spread of the virus. Economic growth went down to negative territory (-2.1%) in fiscal 2019-20 and we could hardly achieve 1% to 2% growth in previous fiscal 2020-21. We have assumed 7% growth this fiscal in the context of low base of growth and gradual revival of the economy along with the massive vaccination drive. On the other hand, we have been offering interest subsidised loan schemes, working capital facility, refinancing facility, among others to regain the accumulated loss of the last one-and-a-half years and trigger further growth. In this context, I would like to assure you that this is a realistic target. The Asian Development Bank (ADB) has projected that Nepal’s economic growth will rebound to 4.1% in 2021 (January-December). Our fiscal year calendar is quite different and we believe that economic activities and government expenses will do well and we can spur growth. One of the most important elements that we can’t ignore is our economic engagement with India. Our economy is tied with the southern neighbour due to the currency peg and we have 65% trade concentration with India. Since the Indian government has targeted to achieve double-digit growth this will definitely have a trickle-down effect on our economy. Similarly, our northern neighbour China has been swiftly coming out from the harsh impact of the pandemic and we have around 12-13% trade with China. Revival of the Chinese economy will also have some trickle-down effect on us and we must expand our economic engagement with these two emerging giants.

The Replacement Act has a provision to distribute cash grants worth Rs 10,000 each to five lakh deprived households who used to be employed in the informal sector and lost theirlivelihood due to Covid 19 pandemic. Could you elaborate on the mechanisms that have been put in place to check the possible misuse of funds?

Most of the countries around the world provided cash grants and other subsidies to those at the bottom of the pyramid. We have offered interest rate subsidised credit, refinancing and certain discounts on the bills of government-run public utilities. We have mainly provided the incentives to the formal sector. We have a huge informal sector and it is assumed that 60% of the jobs are generated in the informal sector — transportation, construction, daily-wage labourers, among others. Against this backdrop, the new government has decided to look after those at the bottom of the pyramid and we have earmarked Rs five billion for this purpose as one-time grant transfer through banking channel. Considering the possible misuse of funds, we have decided to transfer the grants directly to the bank accounts of the beneficiaries and the beneficiaries will be selected based on the Human Development Index (HDI) rankings - property index. Even the Finance Minister or Finance Secretary cannot add or slash a single beneficiary household in the municipality or rural municipality they belong to. The municipalities and rural municipalities are responsible for listing beneficiary households and the funds will be transferred directly to their bank accounts. Where local level is involved, everyone in the grassroots is aware about the status of the beneficiary household. We have developed a transparent and proven procedure to hand over the cash grant to the beneficiaries and the procedure has been submitted to the Cabinet for endorsement.

How do you respond to criticism that the government announced this programme to gain popularity and influence voters in the upcoming elections?

There are always divided opinions in society. It can be an issue of debate by stating whether a small economy with limited capacity should come up with such programmes or not. If we look at other countries, a welfare state must have some schemes to incentivise the bottom of the pyramid. The cash grants distributed to deprived households will be injected back in the economy and this will create demand in our economy. This is a progressive programme. The government has announced the one-time cash grant for those who have lost employment due to the pandemic and the household has no other alternative. If any member of the family is receiving other social security allowance or they have other income generating alternatives or any member of the family is employed in a foreign country, then they will not be eligible to receive the grant. Similarly, this programme will help us expand the number of bank accounts or let’s say access to banking services. If only 50% of the potential beneficiaries already have a bank account then the remaining will also open bank accounts. This will certainly expand financial literacy among beneficiary families who are going to open bank accounts for the first time. We are sensitive towards proper utilisation of taxpayer’s money and have set a stringent mechanism to check the possible misuse of funds.

For the first time in the 70-year-long history of budget formulation and execution, Nepal witnessed a government shutdown this year. What are the negative consequences of the government shutdown?

It was for a short period and I have not seen any serious impact on the government. Some areas where it had an effect was for example where we had asked all ministries to delegate expenses authority to the line agencies by mid-September without delay; the shutdown for more than a week had an impact on this. We have also asked government agencies to clear the liabilities accrued by the end of each month and the shutdown definitely had an impact on government expenditure. The private sector also faced negative consequences in demand as government expenses were stalled. Banks were also under pressure to disburse loans due to tight liquidity and the interest rate on credit and deposit went up. Thus, the government shutdown had multiple impacts and consequences even in the private sector. However, it has recovered after the ratification of the budget. In the last one week, the government has spent Rs 60 billion including the outstanding dues of the shutdown period. The impacts are gradually being dealt with along with resumption of budget execution that was stalled for a short period.

The tax to GDP ratio is already on the higher side in Nepal as compared to regional economies. The Ministry of Finance has urged the tax administration to submit an action plan to double the revenue collection target. Do you think there is still room to levy more taxes without expanding the base of the economy?

We want to double our efforts to expand revenue by checking leakages, enforcing VAT bills properly or enforcing compliance and seeking other potential means to expand the tax bracket. We have instructed the tax authorities to optimise from the existing compliance. We have to build a source of financing in the budget through internal revenue as we have slashed our dependence on borrowing or public debt. On one hand the government has been talking about production-based economy and on the other revenue collection target has been increased. These are mutually exclusive in policy provisions. These are not mutually exclusive. We’ve provided tax incentives to promote investments to create a ground for a production-based economy. We have a huge portion of indirect tax means mainly on the consumption side. We have the room to tighten the screws to achieve the ideal stage of tax compliance and we also have a proven mechanism for revenue collection at the source of imports. Though we have increased the revenue target, we have not increased the tax rates. We are focused on expanding the tax net, like enforcing 1% income tax at source and bringing digital transactions within the tax loop. We are going to achieve the target through reforms and enhancing efforts on enforcing VAT bills, checking non-filers, internal audits, recovery of outstanding dues and preventing leakages.

The Replacement Act has announced amnesty to the provision of declaring source of funds while investing in infrastructure projects. Why has the Finance Ministry overlooked the compliance on money laundering prevention while announcing this provision?

Let me clarify on this provision. This is not an exclusive provision offered to investors. They have to abide by the prevailing laws including Money Laundering Prevention Act, 2008. We don’t allow investing funds generated through money laundering, corruption and other criminal activities defined by our law. We have already clarified this provision through a minister-level decision. We do not intend to attract investment by compromising on international compliance and prevailing national laws. This provision is to attract investment from the informal sector to the infrastructure sector till mid-April 2023 as we need more investment for the revival of Covid 19 hit economy.

Public debt to GDP ratio has already reached 40.5%. Is this not alarming when you consider the efficiency of project implementation?

This is not alarming. We have clearly mentioned in the Replacement Act that public debt will be utilised for productive sectors and capital formation. We must enhance efficiency and need to consciously look at the rate of return, asset creation, capital formation and debt servicing. Considering all these aspects we have downsized the internal borrowing and debt by Rs 37 billion in the budget, which is a substantive amount. The public debt position of 40.5% is moderate and we still have enough fiscal space under the circumstances of our efficiency. If we become more inefficient then we can say the public debt position is already on the red line or border line.

We have envisioned to revive the economy and execute the budget in collaboration with the private sector. The private sector has an important role to play to achieve the growth target of 7% in fiscal 2021-22.

We have been indecisive since long regarding the grant worth $500 million to be provided by the Millennium Challenge Corporation (MCC). You were involved in bringing MCC Compact in Nepal but are now silent at this critical juncture to mobilise this aid. The Finance Ministry has already given its stance and we are committed to taking forward the pact as agreed earlier. As a civil servant, there is no significance of speaking publicly about it. The Compact (agreement) has already been tabled in the Parliament and lawmakers are the custodian of this agreement. It largely depends on the political decision. The government has signed the Compact with the US and we are obliged to take it forward. The groundwork to execute the electricity transmission project (ETP) and road maintenance project (RMP) within five years is almost done. The development committee under the Ministry of Finance — Millennium Challenge Account (MCA) Nepal — has made rigorous effort to complete all the groundwork to complete the project within five years once implementation begins. The government had sought clarification from the MCC based on the questions raised by the public. In the covering letter dispatched to MCC, we clearly mentioned that these are the questions being raised by certain sections of our society, civil society, media and intellectuals and the response from the MCC has already been made public. We hope the misunderstanding among the people has been cleared. However, ultimately it is a political (parliamentary) decision to take forward the Compact signed with MCC.

As Secretary of the Ministry of Finance what are your future plans to bring structural transformation in the economy?

I am thinking of ushering in reforms on the institutional and legal fronts to leverage the efficiency of government services, expenditure as well as to lure private sector investment. I have the conviction to introduce some game-changer projects. I have worked hard to mobilise Japanese assistance in the Nagdhunga tunnel road project. My priorities will be addressing infrastructure impediments for public facilities and minimising the cost of doing business. Expressways, tunnel roads, dry ports, efficient and cheaper transport, ensuring reliable supply of electricity and quality internet services throughout the country are my priorities. Most importantly as the Finance Secretary, I have prioritised reforms by maintaining fiscal discipline and financial accountability, and ensuring stability as well as sustained and inclusive growth. You can see the start of public finance management (PFM) reform in the Replacement Act of this fiscal. We have trimmed down the projects that were included in the budget without proper groundwork and vowed to end the malpractice of providing funds for piecemeal projects. The Replacement Act has increased the size of capital expenditure, lowered the recurrent expenditure, downsized the inflated size of budget, slashed the debt (as source of financing) by Rs 37 billion, increased the revenue collection target by enhancing tax compliance and set the target to spend 10% capital budget each month. Reform is a collective effort and all segments of the society should encourage and increase vigilance to ensure the political ecosystem for reforms. The only alternative to reform is more reforms and there are no ifs and buts. We have also announced to set up High-Level Tax System Reform Committee to bring reforms in taxation. I have spent almost 26 years of my career at the Finance Ministry and learned a lot from my predecessors. I want to carry forward the reforms accordingly.