Budget 2016/17 commits to Doing Business reforms

Finance Minister Bishnu Poudel presented the Budget for the upcoming fiscal year (July 2016 – July 2017) in the parliament last Saturday, May 28. The annual budget not only outlines annual resource allocations of the government in different sectors but also initiates and brings about several policy changes.

Firstly, in the Economic Freedom Country Audit Report 2015 that involved rounds of consultations with stakeholders, Samriddhi had recommended presenting the annual budget to the parliament at least two month prior to the start of the fiscal year so that the executive branch has full 12 months to implement the budget. In line with the recommendation made in the Country Audit Report, the new constitution mandated the early announcement of budget based on which this year’s budget was announced on May 28 (as opposed to July in the previous years).

Quick comment on the budget

A whooping 28 pc increase from previous year’s budget that include 25 pc increase in the compensation for public sector employees, increased expenditure on reconstruction, new levy in petroleum products, and other few other factors combined is expected to fuel further inflation. The budget deficit (which is 35 pc of the total budget) is said to be financed by foreign and domestic loans mostly. Needless to say, financing public expenditure through debt (both internal and external) poses a threat to macroeconomic stability. ‘Nationalism’ and ’self sufficiency’ have been the guiding philosophy of the budget projecting a belief that the overall investment in the economy should be and will be led by the state. This will have multiple effects, the most important being crowding out of private investment. The budget clearly places the state as the engine of growth and relegates the private sector to the side. Unfortunately, even a cursory glance at economic growth evidences from around the world shows us that economic growth is only possible when the state is truly able to accept the role of a facilitator and can place the private sector as a true engine of growth!

Samriddhi’s advocacy impact

Samriddhi has been conducting advocacy for reforms in agriculture, hydropower, education, business environment and investments, public enterprises, governance, regulations for micro and small enterprises, and trading across borders. We have been conducting advocacy activities on the above under the banner of Nepal Economic Growth Agenda organizing numerous small one-on-one meetings, engaging the stakeholders in the government and beyond through advocacy events like the Nepal Economic Summit, dozens of Econ-ity discussions involving the media and stakeholders, and publishing numerous articles on these issues.

The success of some of our advocacy efforts has been reflected in this year’s budget announcements.

Public Enterprises

In its publication “Policy Options for Public Enterprises Reform in Nepal: A look at two public enterprises” and in the list of recommendations Samriddhi made weeks before the budget announcement, it had clearly recommended strategic reform of the state owned Nepal Airlines Corporation by bringing it under the purview of the Company Act and seeking a strategic partner.

#270 in the budget announcement committed to converting the Nepali Airlines Corporation into a company and seeking a strategic partner or running it through management contract in the coming year.

Hydropower

In its policy analysis paper titled “Policy Options for Improved Electricity Transmission System in Nepal” published in July 2014, Samriddhi upheld the recommendation to establish a separate Transmission Company. In its other papers such as  “Investment Prospects & Challenges for Hydropower Development in Nepal” published in July 2012, and “Competition Watch in Key Growth Sectors of Nepalese Economy” published in July 2013, a systematic approach to unbundle the Nepal Electricity Authority (which currently oversees all aspects of electricity production – generation, transmission, distribution, and retail supply) was recommended.

#11 in the budget speech announced operation of National Transmission Grid Company, establishment of National Hydropower Production Company, and National Electricity Trade Company. These steps will lead to eventual unbundling of the Nepal Electricity Authority.

Agriculture

Recommendations Samriddhi made weeks before the budget announcement and handed over to the government during the budget preparation phase, included reforming the way agricultural subsidies were distributed such that the subsidies actually reached the targeted group and played a role in increasing productivity. One of the recommendations picked up by the budget was providing subsidy based on productivity. (#112)

Education

In its publications ‘Review & Overview of Economic Contribution of Education in Nepal (2012)’ and  ‘Possibility of Education Vouchers in Nepal (2015), Samriddhi had advocated for at least a piloting of education vouchers in Nepal.

#214 of the budget announcement has provisioned education vouchers for children from extremely marginalized communities such as Wadi, Haliya, Gandharva, Mashar, Dome, Chamar, etc.

Doing Business Reforms

Pertaining to Doing Business reform, Samriddhi has been actively working on easing entry to the market and exit (i.e. registering and closing down a company), trading across borders, and improving the environment for foreign investments.

Following are the provisions in the budget that are in line with the list of recommendations Samriddhi made and handed to the government weeks before the budget announcement:

#164 in the budget announcement committed to conducting targeted legal reforms in cost of doing business indicators that would establish Nepal as a lucrative investment destination.

#165 in the budget announcement committed to formulation and/or amendments in the Foreign Investment and Technology Transfer Act, Company Act, and Insolvency Act, among others.

#166 in the budget announcement committed to simplifying the process of registering a company and exiting.

#167 committed to amending the law and provisions in order to allow entrepreneurs to acquire more land above the land ceiling for industrial and business purposes.

#168 committed to amending provisions for joint ventures and starting operation of the secure transaction registrar’s office.

#174 committed to holding  Nepal Investors’ Summit in the upcoming year.

Reforms for Micro and Small Enterprises

In its publication that outlined hurdles faced by micro enterprises such as Kirana Pasals (small mom and pop shops) and made recommendations to the ease regulations to enhance their growth, Samriddhi recommended tax reforms for micro and small enterprises.

#404 in the budget announcement made a provision whereby small and medium enterprises making annual transactions below NRs. 10,000,000 need not perform an external audit and can declare their taxes themselves.