Laxmi Capital News
'Execution challenges should be addressed collectively'

The first federal budget forfiscal 2018-19 presented on May 29 drew widespread criticism, with even theruling party members stating it failed to give an impression that thegovernment is putting enough effort to translate the vision of economic prosperity.Critics have alleged that Finance Minister Yubaraj Khatiwada hasignored the promises made in the left alliance manifesto while preparing thebudget. Private sector is unhappy as tax rates under several headings have beenincreased, against low incentives. However, the finance minister claims thatthe budget has focused on generating employment, developing entrepreneurship,boosting production and redistributing growth in an inclusive andgender-friendly manner. Finance Minister Khatiwada spoke to Pushpa RajAcharya of The Himalayan Times onhow the federal budget intends to bring transformation in the economy.Excerpts:

Even the ruling party membersare expressing dissatisfaction with the budget 2018-19 saying it is moderate interms of size, has not addressed aspirations of the people and missed theopportunity to leapfrog Nepal’s economy. What will you like to say on this?

People are comparing next year’sfederal budget with the current year’s budget, which is based on unitarygovernment structure. We now have 761 budget systems in federal government. Thefederal government is handing over resources to sub-national governments. Nextyear’s budget is 44 per cent of gross domestic product, which is historical.The size of our consolidated budget (761 governments plus federal government)would amount to at least Rs 1,550 billion and the consolidated capitalexpenditure is around Rs 650 billion. It is kind of a paradigm shift on thewhole budgetary system. We are raising revenue at 35 per cent compared to currentfiscal year. The budget is quite ambitious. I often mention Newton’s second lawof motion that states that the rate of change of momentum of a body is directlyproportional to the force applied (or big force is required to push thestagnant economy). As we are envisioning a big jump, we have given a large pushto revenue generation. But, there is conceptual problem in understanding thebudget even for economists and former finance ministers, which is why I saidthat an apple should be compared with an apple and an orange with an orangewhile addressing the Parliament.

So, the federal budget willaddress the structural constraints of the economy mentioned in your whitepaper?

This is the starting point to correctthe fiscal system. I will cite a few examples. First, we have stoppedunfinanced budgeting process. We have only accounted for the revenue, foreignaid and domestic borrowing, which can be collected and mobilised. We have notincluded any fictitious numbers. Second, we have tried to be as transparent aspossible in allocating budget, as provincial and local governments would haveseparate budgets. Third, we have streamlined reforms by plugging all loopholesin the revenue system, including VAT refund. The government was being cheatedin numerous ways, so we have corrected indirect tax system. In direct taxsystem, we have become more progressive in terms of structure of tax rates. Wehave not raised the tax burden too much. Also, we have opened doors forprovincial and local governments to work with private sector and cooperativesin a more candid and clear manner. We will be working in a more consolidatedbudgetary framework, which should widen economic growth and address the fiscalchallenges that I cited in the whitepaper.

You have been repeatedlyasking private sector to engage in production sector, and saying imports shouldcreate optimum value addition in the economy rather than promoting excessiveconsumerism. But the private sector says they do not see any ground to becompetitive in industrial production. In this context, how will the targets setthrough the budget be achieved?

An economy should be sustainableenvironmentally as well as fiscally. The remittances have been lubricating oureconomy, which has basically fuelled consumption. But it is not a lastingsolution and we have to provide opportunities for the youth to work in thecountry by generating jobs. The trading community, which is thriving because ofremittances, should shift their business towards setting up industries. Also,making money through trade deflection and arbitrage between prices does notwork. While trading is less risky and a means to make a quick buck, ourchallenge is to show that industries can also be less-risky andentrepreneurship can be developed in industries and a degree of protection willbe provided through a transparent tax system, customs, excise, in productionand exports wherever applicable; financing could be made easier; cost of doingbusiness will be reduced and that could encourage private sector to come intothis area. There are 20 different areas/avenues in which we have sought supportfrom the private sector. Now we want to sit with private sector and developbylaws and regulations to encourage their participation. And I do hope thisjoint effort will propel the economy to new heights.

You have talked aboutprotecting industries. But experts say it will raise inefficiency in theeconomy. What is your take on this?

Industries will get adequateprotection, but it will not be an absolute or indefinite protection. Currentlythere are many cases of dumping and rampant import of low quality, cheap goodsthat are distorting the markets. Our protection will be in two folds — ourproducts should be competitive in terms of both quality and price. We have bindingrates in customs and limitations in VAT because there is no differentialtreatment in imported and domestic goods while levying VAT. The only window toprotect domestic industries is excise. We have used excise as an intermediaryapproach to protect domestic industries, but it cannot be a long-term solution.There are complaints of price coalition among domestic industries, which we arelooking into seriously. The whole approach is to seek paradigm shift frominvestment in trading business to industry by channelising all the productiveresources towards the areas where we can generate output, income, andemployment. Moreover, private players engaged in productive economic activitiesare happy already.

What is your response to therealty traders and stock market investors who are unhappy with your budget?

Housing and share market are alsonecessary to accommodate people and mobilise funds. But my suggestion to thebusiness community is not to speculate on those things. Housing is necessary,but do not take it as speculative asset. Investors can invest in share market,but should be aware of the risks involved. Investing without assessing riskswill only lead us to crisis.

The budget has envisagedself-reliant, resilient and interdependent economy. Could you please elaborate?

These are the basic premises. Take forexample, food. We are not talking about being self-reliant in all kinds of foodwe consume. But we must have adequate production, smooth supply and minimumbuffer stock of certain staples. The second is related to health security. Wesuffered a trade blockade some two years back. This is why we have encouragedprivate sector to chip in investment in pharmaceuticals industry, healthcare.Energy security is another. We are currently dependent on import to cater toour domestic demand, but that situation should change over the next five yearsat the most. This could significantly bring down our petroleum import over thenext 10 years. The other aspect in which we want to be secured is jobs. Thoseworking abroad are not secured. Job opportunity and its security — safety andstability in workplace — have been stressed. We have also underscored the needof robust infrastructure to prod industrial development. These are the areasthat we have identified as critical.

The budget 2018-19 has focusedon creating entrepreneurship and talked about providing access to financethrough banks to returnee migrants, women, Dalits and youths. Do you believethat the banks and financial institutions will execute this policy?

All entities are a part of the broadersystem of the state. Banking sector has been operating in freedom, but nobusiness can go beyond the policy of the state. Yes, the state should becareful in intervening the market forces and we have the wisdom not to overlyinterfere in the business practice of the private sector. If there are certainnational priorities like promoting agriculture, tourism and SMEs, where all thestakeholders should take part, I don’t think only the banks can be given theliberty to do as they please. I do hope that some of the things that we haveinitiated through the budget will be addressed through monetary policy ofcentral bank.

Due to huge financingrequirements and low savings of the country, the central bank has allowed banksto borrow from foreign banks to invest in the country. Some Indian jointventure banks have proposed to borrow in Indian currency. What’s your view onthis?

I think it is a valid proposal. I havepersonally encouraged banks to borrow from foreign banks to invest in Nepal. Ifthat fits the business model, there should be no problem in borrowing.Currently our domestic savings is just 15 per cent of GDP, while our investmentrequirement is 45 per cent of GDP. We need to bring in money from externalsources to meet the investment requirements. As government’s borrowing cannotjump overnight, we have limited sources to borrow. If banks can bring in moneyfrom third countries and India, we have to encourage them. Risks related toexchange rate are limited and for short-term loans, they themselves can hedgeit. For longer term loans, there should be an institutional mechanism to managelong-term hedging.

The budget has talked aboutdeveloping 750-megawatt West SetiHydel project through internal resources. Butthe Investment Board is not willing to withdraw the project from Chinese firm.Why this contradiction between MoF and Investment Board Nepal though yourepresent IBN as its vice chair?

It’s a project that has been put onhold since several years. This is a key project of far west region, or Province7. They say the project should be implemented and the government is alsoplanning to have at least one storage project based on the viability. We pickedthe project on the condition that if the party with whom MoU is signed is notinterested, we would take up this project with our own financing. We havecommunicated with the Chinese party numerous times. If they are interested, wecan talk with them. But if they are not serious, we don’t want to keep thisproject lingering for long. If the Chinese party will not do it, we won’t awardthis project to another party. We will implement it through our own resources.

Lastly, are you hopeful thatthe budget will be executed properly because we have been facing challenges inbudget execution since long?

This budget is a bit ambitious. Wehave targeted eight per cent growth through execution of budget and people areasking ‘where is the capital investment to achieve the high growth?’ Ouraccounting system has some errors, the money allocated under financing headingis also invested in capital formation. Like, the funds spent through our publiccorporations like Nepal Electricity Authority, Civil Aviation Authority ofNepal are also capital investment under financing heading. The grant amounttransferred to sub-national governments is from recurrent expenditure heading.If we segregate the capital budget component, the consolidated amount ofcapital budget will easily reach Rs 650 billion and this is a landmark budget.If we achieve eight per cent growth, 400,000 people will get new jobopportunities and additional 100,000 from employment schemes.While there are challenges in execution, we should be addressing them in acollective manner.

Source:The Himalayan Times, 13th June 2018

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