Sangam Prasain & Prithvi Man Shrestha

Finance Minister Yubaraj Khatiwada is presenting the budget for fiscal year 2020-21 in Parliament on Thursday amid a host of challenges as the country faces a greater economic setback than it has ever experienced in the past. 

Khatiwada, who will be presenting the federal budget for the third time, faces the daunting task of dealing with the crisis created by the Covid-19 pandemic, which is likely to remain for quite some time, say economists.

The most urgent task for the budget will be to prevent the economic slowdown from turning into a full-blown crisis which could in turn lead to social unrest, they say.

"The employment outlook around the world is dire and thousands of Nepalis have already started to return home. It will be difficult for all of them to find jobs at home or abroad. Imagine what society will look like if there are thousands of people out of work,” said Chandra Prasad Dhakal, vice-president of the Federation of Nepalese Chambers of Commerce and Industry. “The budget therefore should focus on generating jobs and that can happen only if the private sector survives.”

According to Dhakal, the upcoming budget is likely to take measures to boost the morale of the private sector while also generating jobs and investing in food production.

“In the current situation, the government priority should be to create a maximum number of jobs,” said Pushpa Lal Shakya, former joint-secretary at the National Planning Commission, who has extensive experience in budget making. “The private sector cannot be expected to create more jobs as they are afraid of investing during times of unpredictability.” 

While the government is likely to stay away from launching new large-scale projects, it cannot put off building critical infrastructure completely as construction is vital to keeping the economy active.

The Nepali economy is currently in free fall, as are many other economies as the world braces for the deepest recession seen since the Great Depression of the 1930s. Nepal's economy is headed for a catastrophe, which can be worse than the combined effects of the earthquakes and the Indian embargo in 2015, say economists.

In 2015, the earthquakes affected just 22 districts while the Covid-19 pandemic and the subsequent lockdown have been nationwide. The trade embargo too lasted four months while the lockdown has been in place for two months and everything is already in a shambles.

The Central Bureau of Statistics last month projected Nepal’s economic growth at 2.27 percent, based on expectations that the lockdown will be lifted by mid-May and all manufacturing and production activities, except for international travel and tourism, resume operations. But that looks increasingly unlikely, given the daily increase in the number of Covid-19 cases.

A member at the National Planning Commission involved in budget making confirmed that the budget will include an economic recovery package but declined to comment on its size.

The parliamentary Finance Committee recently recommended that the government announce a financial package worth 5 percent of the country's GDP through the upcoming budget to offset the negative impacts of Covid-19 and keep the economy afloat. This translates to a financial package worth Rs 188 billion.

“Given the impact of the Covid-19 pandemic, the government is also preparing to revise the medium term three-year expenditure framework,” the source said.

The economic uncertainty driven by the Covid-19 pandemic has pushed many companies to the edge of bankruptcy.

“Most small enterprises will collapse if the crisis continues and the government does not come with support measures,” said Umesh Prasad Singh, acting president of Nepal Cottage and Small Industries. “Instead of supporting us during this crisis, the banks have not been supportive in postponing loan recovery as per the government’s decision.”

He also said that most small enterprises are in no position to pay the wages of workers. The sector claims to employ 2.6 million people.

Even industries and firms on solid footing prior to the outbreak may be forever changed. One good example is the hospitality industry. 

The hospitality industry received a savage blow from the Covid-19 outbreak and the subsequent containment measures just as it was preparing to begin another year of stellar growth following a strong performance in 2019.

Industry insiders do not expect things to stabilise for another two years, even after the lockdown ends. The sector had asked the government for policy intervention and relief packages in the run up to the budget. For the first time in Nepal’s history, hotel owners have asked the government for permission to shut down for at least six months.

Tourism, which is among the sectors with the highest investment in Nepal along with being a major foreign currency earner, has entered into deep depression with thousands of people rendered jobless. 

Besides economic packages for hard-hit sectors like tourism, the new budget will need to focus on the agriculture sector to boost productivity to feed the increased number of people and to provide employment opportunities, said Shakya.

“As unemployment in India has reached 24 percent, there can be a flow of Indians into Nepal in search of jobs. The labour market will be competitive and many enterprises will prefer to employ Indians because the labour law does not apply to them,” he said.

If the government is able to complete projects like the 456 MW Upper Tamakoshi Hydropower and manage the consumption of electricity by reducing tariffs for both businesses and households, that will help save foreign exchange at a time when remittance is declining, according to Shakya, the former planning commission joint-secretary.

Although most experts agree on the areas that the budget should focus on, there are different schools of thought regarding its size.

As the parliamentary Finance Committee has recommended that the government provide relief to industries, businesses and workers, a bigger budget seems necessary. The committee has suggested a budget of Rs 1.7 trillion for the next fiscal year. The budget for the current fiscal year is Rs 1.5 trillion.

A special economic committee formed by the opposition Nepali Congress has in turn suggested a budget of around Rs1.4 trillion, given the likely shortfall in revenue collection.

According to economist Bishwambher Pyakuryal, the government should bring out a Rs1.2 trillion budget with an extra Rs200 billion stimulus package.

Shakya, however, disagees.

“The government should increase spending during a recession. As the government spends, more people will get work. If you tighten spending, it will create fewer jobs at a time when we need more employment,” said Shakya.

According to Shakya, the government should introduce a big budget by borrowing more money from development partners if necessary.

Published on: 28 May 2020 | The Kathmandu Post