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The budget urgently made difficult decisions, sometimes unpopular decisions, to restore solvency and create a macroeconomic framework that would allow Nepal to compete in the world and attract foreign investment to help jumpstart our moribund economy.

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By being a Finance Minister for the fourth time DPM Adhikari’s personal choice and personal happiness might have replaced by social responsibility and political obligation. We must salute to his personal efforts and endeavors. He presented the fourth budget after the elections of the Constituent Assembly which was formed after series of historical struggles, people's movement and the Madhes movement.

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The objectives of the Budget of the Fiscal Year 2011-12, inter-alia, are: to assist in formulation of new constitution and completion of  remaining works of peace process, to provide relief to the general public, conflict victim, martyrs and disappeared people, to minimize social conflict and advance inclusive development  process through creating a basis for sovereign, self reliant and free economy by using national capital and resources to the maximum extent and increasing access of poor and deprived on resources including land, to achieve higher economic growth based on social justice and  employment opportunities by increasing investment of public, private and cooperative sectors for commercialization of agriculture, rehabilitation of industries and expansion of service sector, to maintain geographic, regional and demographic balance and to assist the proposed federal structure by intensifying the development of infrastructure and, to increase public confidence through maintaining macroeconomic stability and improving governance in the financial system.

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Just as in the developed countries, rising and persistent budget deficits have become a major cause for concern in the developing countries also. But in spite of the urgency and  the importance which is being attached to this issue, it is surprising that, except for a very  few attempts at the quantification of the possible economic effects of these deficits, there has been no systematic study of this area for many of the developing countries. This is particularly the case for the Asian countries. Of the total sources of financing to meet the expenditure proposed for the next Fiscal Year, a total of Rs. 241.77 billion will be met from revenue, Rs. 5.93 billion from repayment of principal amount and Rs.70.13 billion from foreign grants, leaving a deficit of Rs. 67.06 billion. Of this deficit, Rs. 29.65 billion will be met from foreign loan and remaining Rs. 37.41 billion from domestic borrowing. It can be seen from the government budget constraint that a necessary condition for the growth of public debt over time is the existence of fiscal deficits. However, this is not a sufficient condition if the deficits are totally financed by foreign grants or monetary  expansion. In such an event the debt to GDP ratio will not grow, and in fact may fall. The issue of monetization of budget deficits in the developing countries is an important one.

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Maintenance of overall macroeconomic stability, advancement of works on reform and governance for the stability of financial sector, maintain budget deficit within a safe limit, allocation of budget with a view to balance regional and demographic features, maintenance of financial discipline through accountability and transparency, bring  normalcy in public service delivery through reforms in distribution system and make an effective price monitoring system.

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The budget urgently, made difficult decisions, sometimes unpopular decisions, to restore solvency and create a macroeconomic framework that would allow Nepal to compete in the world and attract foreign investment to help jumpstart our moribund economy. This year’s budget needs to be focused towards achieving a higher growth rate by  improving macroeconomic indicators, expanding capital market and enhancing confidence, promoting  private sector investment by expanding physical and economic infrastructures, and focusing economic activities in the productive sectors. Finance minister is confident that this budget will be able to accelerate economic growth and ensure equitable development.

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Macroeconomic indicators of the last three years after the elections of the Constituent Assembly as well as the status of those indicators to date seem not so encouraging.   Economic growth rate for the current Fiscal Year is estimated to be 3.5 percent. Average economic growth rate over the last three years was below 4.0 percent. Inflation, which persisted at double digit during the last two years, has come to a single digit in this year. As of 15 June of the Fiscal Year, i.e. first 11 months, both imports  and exports have increased approximately by 6.0 percent. Despite an increase in the merchandise export compared to previous year, trade deficit continued to increase during the last three years. Similarly, since last Fiscal Year, the Nepalese economy started recording a balance of payment deficit. Despite this, foreign exchange reserves remains sufficient to meet 7 months equivalent imports of goods and  services . Revised total expenditure of the current Fiscal Year is estimated to be Rs. 306.27 billion. Current expenditure is estimated to be Rs. 180.14 billion, capital expenditure Rs. 108.08 billion, and principal repayment Rs. 18.04 billion. Even though the size of the total budget has been increasing continuously, availability of budget for capital expenditure is squeezing because of the rapid rise in current  expenditure. At the same time, absorptive capacity of foreign aid has also been gradually eroding. Revenue mobilization, hence collection, in this Fiscal Year was  adversely affected due to delayed submission of the current Fiscal Year budget, non expansion of economic activities and decreased  imports. Revenue collection is estimated to be Rs. 206 billion- and increase by 14.4 percent over the actual collection of the last Fiscal Year.

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The present Budget has many things that were necessary, but not terribly popular. What the Finance Minster did was good policy, but not always good politics.  It seems that his task was not to win a popularity contest, but rather to prepare Nepal for the new challenges besetting Nepal.

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Finance minister determined as one of our highest priorities that we had to rebuild the  infrastructure of our nation if we were to become an economic follower of our  regional partner and neighboring countries and of the world in the new century. Considering that the sustainable peace is possible through speedy economic development, necessary budget has been allocated for the implementation of development programs for peace in order to  accomplish infrastructure development works up to the village level  Necessary budget has also been allocated for the reconstruction of infrastructures which were damaged during the conflict period and  remained unconstructed.

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In providing a big-push to infrastructure development, primary target of the Budget was the energy sector. Finance Minster has accorded high priority on energy development. With regard to  concept and forthcoming program of the Government to mitigate energy crisis and with a view to set up an effective mechanism for the  enhancement of investment in energy sector by mobilizing domestic and  external resources, a Hydropower Development and Investment Company, with a paid up capital of Rs. 8 billion, has already been  registered.

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And it is the social sector that our accomplishments have the most special meaning to  the Nepali . Reading out the budget document, Adhikari said the government would provide allowances to widows from the day their husbands die.  Similarly, the Muslim Commission would be formed for the welfare of Nepali Muslim communities and the government will provide incentives to open factories that produce chemical fertilizers in Nepal.  Real Estate business would be carried out through brokers.

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Main points of the budget 2011-12, among others, are: Tea refining center would be opened in Ilam district, North-South (Lok Marga) road construction would be prioritized, Kathmandu-Tarai express road tracks would be opened next year, Additional budget would be allocated for tourism road construction, LamoSangu-Jiri road section would be extended, Sitapaila-Dharke road section would be constructed, Flyover construction in Kathmandu would be expedited, Possibility of metro monorail construction in the Capital would be studied, Electricity would be distributed in every house, Structure of the Nepal Electricity Authority would be changed, Power supply in the cities like Kathamndu, Dharan, Itahari among other business towns would be made permanent, Street lamps would be installed in the cities, Free training impartment to youths for self-employment. Rickshaw labourers would be provided with assistance to own the rickshaws, Second International Airport to be constructed in Nijghad, Monitoring of local development, Suspension bridges would replace Twines across the nation, Government to help Civil Aviation Authority of Nepal buy additional airplanes, Industrial sectors would be announced peace zone, Medicinal herbs refining center would be established in Nepalgunj .All Dalit and female students would be able to enjoy free education up to 12th standard in community schools.

Financial Sector and Capital Market

There is a need to inclusion of the investors from remote areas and to widen the scope of capital market, a policy should be adopted to open branches of NEPSE outside Kathmandu. For this to happen the operationalisation of CDS will be a milestone. However, recently in Pokhara, Biratnagar, Birgunj, Narayangarh, Butwal and some other cities the member broker of the NESPE has started operating. The figure is about 10 percent of the total transaction carried out per day. The recent budget takes that Measures related to liquidity management, reforms in the capital market, balanced expansion of banks and financial institution and control of financial crimes will be expedited. In this regard, corporate governance will be maintained to enhance trust upon banks and financial institutions. Banks and the financial institutions with Government  involvement will be restructured with necessary capitalization. Monitoring and supervision of banks and financial institutions will be made effective by enhancing the capacity of Nepal Rastra Bank, Nepal Securities Board(SEBON) and Insurance Board. of Nepal The High Level Financial Sector Coordination Committee will be made more active.

Effective from next Fiscal Year, Nepal Rastra Bank will make an arrangement whereby any depositor (individual, company or entity) depositing more than or equal to Rs. 1 million in a bank or financial institution will have to make a self declaration that the money being deposited is not earned illegally from sources such as terrorism, drug and human trafficking, and organized crime.

In order to address the problem of sluggishness in the stock market, commercial housing, and real estate transactions, Finance Minster has reduced the rates of capital gain tax from 10 to 5 percent to individual and from 15 to 10 percent to the Institution.. In addition, Nepal Rastra Bank has already took the decision that on the real estate loans taken from  banks and financial institutions can be renewed after the interest is paid by July 16, 2011. Likewise, in regards to borrowing limit against the  collateral of the securities, banks and financial institutions are allowed to decide on their own.

Nepal Securities Board (SEBON) is now supposed to prepare necessary guidelines within mid October, 2011 to invest the listed Nepali to invest in Nepali securities. The five year Capital Market Development Master Plan(CMDMP) will be implemented in phase wise manner from the next Fiscal Year.

While taking into consideration the fall in the capital market, a  concession will be provided to investments coming from institutional investors such as mutual Funds. Wide scale publicity will be launched in  schools, college and villages for creating awareness among public on share transactions.  An electronic transaction of share will be initiated to enable share transaction from major cities of the country and from foreign countries. Central depository scheme will be operationalized and indexed securities  transaction will be made transparent and IT friendly.

Capital account convertibility and the internet based trading will be needed apart from the  repatriation clauses in the relevant acts, rules , regulations, if any might   needs to be amended and looked into.  Â

Real sector companies have prime role for the uniform and sustainable development of a country and capital market as well. But Nepalese capital market is hugely concentrated at banking and financial sector companies and the number of actively traded real sector companies is very low. The operating process and decision making process of industrial and production sectors companies in Nepal are still not so transparent. Moreover, some large real sector companies are running as private limited. So, there is a need to convert such companies to public limited and made them transparent. For this to happen the present Economic Act under the Budget Speech has made the provision of relaxing the tax rate by ten percent in production industries, tourism, Hydro power production, transmission and distribution services if they are listed in the Securities market and or NEPSE. This is a welcome start.

What we want to be accomplished -- concretely and specifically – is our legacy to the people of Nepal.  We opened up education, and we opened up markets. We opened up opportunity and we opened up foreign investment. We opened economic development and opened up our rural villages. Above all, we opened minds. We opened up individual choice.

To sum up, the country is passing through a very difficult path and the transition to the peace building process is not easy. It is in this context the recent budget will provide some breathing space and headway to address the problems that, we, are confronting on a daily basis.

(Singh is General Manager, Nepal Stock Exchange. He can be reached at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it )