Implications of Poor Budgetary Performance

– This article was originally published by Ayushma Maharjan in the Himalayan Times on the February 10, 2019.

For several years now, actual capital expenditure of Nepal has consistently been far below the target, with some serious negative repercussions to the national economy. This fiscal year has been no different than the previous ones, as the statistics from Financial Comptroller General Office (FCGO) shows that the government has been able to spend merely 17.68% of the total budget allocated for capital expenditure in the first six months.

With the promulgation of the new constitution and the ensuing political stability,it was believed that economy would finally take front seat again and the longstanding problem of poor capital spending would begin to slowly subside. The government was expected to provide a range of social and infrastructural facilities needed by its citizenries, at an affordable cost.  On the contrary, Nepal has continued to be a victim of poor budget implementation. This has amplified the challenges that persist in the country which has averted Nepal to achieve the expected level of economic growth. This is evident from our slow-paced development, consistent infrastructural decays and delays, project abandonment, deplorable road, to mention but a few. Moreover, only seven out of twenty-one national pride projects have achieved fifty percent progress, some of which have even surpassed their completion deadline.

It is perceptible that budgeting has not been taken seriously in Nepal. This matter can be attributed to inadequate planning, lack of adequate professional knowledge and politicization by every successive government. Likewise, the citizens believe that the government considers this as an annual event and a routine administrative exercise and never shows recourse towards it. This inability to prioritize a proper budget execution plan has huge implications in the national economy.

Poor Performance of Development Projects

The government’s inability to abide by the capital expenditure target marginalizes the completion of development projects. This however, has little or no impact in the recurrent expenditures which raises a serious question over efficiency and optimality of our resource allocation. The continuity of this context is likely to delay or abandon the development projects of national interest. While the capital expenditure trend of Nepal improved in Fiscal Year 2018 with execution rate of 79.7%, the statistics showed that 40% of the budget was spent only in the last month. This depicts that, with lack of proper execution plan, the government will feel a greater pressure to spend more towards the end of the fiscal year for the completion of essential infrastructure projects, hindering its quality.

Dissuasion to Investment

Capital spending in physical infrastructure or development project creates an important, and often positive influence on the business environment and economic development of any country that aspires to achieve high level of economic growth.Protracted delays of these projects impair and discourage investments in domestic markets.Such unanticipated delays in projects depict the uncertainty that persists in the country which erodes predictability in the market and makes it apparently inimical for long term investments.Nepal, for its economic growth requires high level of domestic as well as foreign investment and further negligence on capital budget execution can dampen the opportunity to acquire these investments.

Stifles Economic Development

Right capital expenditure has a direct and positive impact on the economic growth of a nation. Capital expenditure is one of the basic components of development, which is expected to provide infrastructures and facilities in order to achieve high level of productivity in various sector of the economy.Having said that, delay in any such expenditure might be an important factor contributing towards slow economic progress. Moreover, adjournment of infrastructural and development projects requires government to hold huge amount of funds in its coffers. This stifles growth since the investment allocated in project is frozen and cannot be used in other productive sector of the economy. In Fiscal Year 2018, chronic underspending nature of capital budget in the first three quarter resulted in liquidity crunch, which thereby led to the inability of private sector to acquire substantial funds to invest elsewhere.

Debt Accumulation

The government, in order to meet higher financing requirements of a nation, raises internal and external debts, with liability of repaying back with interest. Inability to spend this money can cause delay in projects which will further defer the process of capital gain and freeze capital. This frozen amount will compound the interest liability which will predominately contribute to debt accumulation.

For our economy to prosper, the government needs to understand the implications of proper budgeting and its execution, particularly in terms of investing in capital projects. Budget planning, formulation, and execution should undergo a joint consultative review of inter-ministerial arrangements with clear roles of the NPC, the MoF, the FCGO, line ministries and the new sub-national governments (wherever their association is deemed necessary by the Constitution). Furthermore, government needs to develop a sound pre-budget process that enables wider public input to guide it in formulating a budget that addresses emerging needs of the economy.