The government is completing two years without much to show in terms of meet­ing its own economic and development targets. It promised a high growth rate and better budget execution along with sound governance and formulation as well as imple­mentation of reforms to boost investment. The government was able to pass some invest­ment and social security related bills from the parliament, but their implementation is not satisfactory. In terms of major macroeconomic indicators, the government has undershot its own targets. It promised 8 percent GDP growth in 2018/19, and has set an even more ambitious 8.5 percent target for 2019/20, and a dou­ble-digit growth in a few years. However, according to the Central Bureau of Statistics, the economy is expected to grow at just 6.8 percent at basic prices (7.1 percent at mar­ket prices) in 2018/19. Although this marks the third consecutive year of 6-plus percent growth, it is still less than the government target. It does not indicate the economy is on a solid footing with strong fundamentals. The base year effect after the slump in economic activities due to the earthquake and block­ade, and temporary fiscal stimulus related to post-earthquake reconstruction and spending during the elections, have underpinned high growth rates in past three years. Surprisingly, despite all the talk about investment-friendly laws and regulations, there was a contraction of industrial output and a decline in net for­eign direct investment.

The government is set to miss the growth target in 2019/20 too. Although the finance minister continues to assert that the gov­ernment will be able to achieve the ambi­tious milestone, the consensus forecast right now is around 6 percent. Unfavorable mon­soon together with slower than expected industrial activities are exerting downward pressure on economic activities. In addi­tion to accelerated work in major infrastruc­ture projects, the pick-up in post-earth­quake reconstruction and tourist arrivals will be crucial to sustain around 6 percent growth this fiscal.

Perpetual underachievement

The progress on the fiscal sector is also one of perpetual underachievement. While intro­ducing 2019/20 budget one-and-a-half month before the start of the fiscal year, the govern­ment promised improved budget execution, specifically capital spending, and better coor­dination in terms of planning and implemen­tation among the three tiers of government. However, the data till the second half of this year show that the pace and pattern of budget execution won’t be any different from previ­ous years. Of the Rs 408 billion earmarked for capital budget, it was able to spend less than 15 percent by the first half of 2019/20.

Further, as in the past, we will most likely see bunching of spending in the last quar­ter. The government usually spends or dis­burses about 40 percent of actual capital expenditure in the last month of fiscal, raising concerns over quality of spending and gover­nance associated with public spending. From the beginning the budget lacked a robust, credible and a time-bound implementation plan to spend the earmarked money. There was no improvement in allocative efficiency during budget preparation. The same old issues have been plaguing budget execution: structural weaknesses in project preparation and implementation, low project readiness, bureaucratic hassle in approving and reap­proving projects, poor project management and contractor capacity, high fiduciary risk in project implementation at subnational level, and political interference both at planning and operational levels.

On the revenue front, too, the government is missing its own target. Revenue growth target of around 29 percent was ambitious in the first place, but the finance minister kept asserting that it is achievable. In the second half of 2019/20, the government is facing a revenue shortfall of nearly Rs 90 billion already. Revenue mobilization has been hit by declining imports and general slowdown in industrial activities. It appears the efforts to raise tax and non-tax revenues by boosting economic activities, to plug revenue leakages, and to formalize economic activities have been inadequate. The high government spending but slow revenue growth has led to widening fiscal deficit, which is projected to be above 6 percent of GDP. This deficit binge is putting pressure on interest rates.

Bad to worse

On the monetary front, things are not rosy either. Inflation is rising and will likely over­shoot the government’s 6.5 percent target. The consumer price inflation in each of the first five months of 2019/20 was higher than in the corresponding period in 2018/19. The average inflation so far this fiscal year is 6.3 percent, much higher than 4.6 percent in the first five months of 2018/19. This is largely driven by increase in prices of food and bev­erage, vegetables, fruits and spices. Overall money supply in the economy has declined too owing to the deceleration of remittance inflows. Both deposit and credit growth have slowed, but the latter is still higher than the former. The asset-liability mismatch remains unresolved. The low level of nonperforming assets, as per central bank’s statistics, is too good to be true. Evergreening of bad loans and dubious accounting of banking assets are real possibilities.

The vulnerabilities in the external sector remain. Exports have increased but imports have decreased, leading to a lower trade deficit compared to the first five months of last fiscal. The increase in exports is largely due to the export of palm oil, which alone constitutes 35 percent of total export to India. Nepali traders are adding nominal value to imported palm oil or related raw materials and exporting them to India by taking advan­tage of the preferential tariff. Meanwhile, the decline in imports is due to the decrease in demand for imported vehicles, gold and petroleum products. It has helped to reduce current account deficit, which was already at a high level.

Overall, the economic activities and gov­ernment’s performance are not up to the expectation. Progress in most indicators is undershooting the target set when the finance minister presented the budget for 2019/20. The government needs to be realistic about what can be done in the short-term given the constraints it is facing, particularly on financing ballooning expenditure needs and its capacity to deliver. The economy is not on a stable footing and the often talked about dividends from political stability is yet to be realized. The working culture of bureaucracy and the government is not much different from the past trend.

Bombastic statements about the soundness of the economy alone are not going to please worried investors. Some industries (such as cement, iron & steel, and hotels) that drasti­cally expanded capacity in the hope of accel­erated infrastructure development are now facing overcapacity or excess production. The tepid demand is affecting cashflows, which in turn hurt firms’ ability to repay interest and principal on time. There is a possibility that the loans owned by these industries and by small to medium scale hydropower projects might go bad. This will drastically affect the nonperforming assets of the banking sector