NEPAL'S BUDGET: BROAD PROMISES, UNREALISTIC

UNCLAS SECTION 01 OF 03 KATHMANDU 000674

SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ECON EFIN ETRD PTER KCRM NP
SUBJECT: NEPAL'S BUDGET: BROAD PROMISES, UNREALISTIC
ASSUMPTIONS

Summary
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1. (U) The Government of Nepal recently unveiled its
policies and programs for fiscal 2009/10, and a USD 3.7
billion budget to support them, with the aim of, among other
things, fostering faster economic growth, curbing inflation,
boosting infrastructure development, and expanding social
services to the downtrodden, all while moving the ongoing
peace process forward. Widespread criticism of these
proposals from business leaders, economists, leading
lawmakers from its 22-party coalition, and many others,
indicate that the new Communist Party of Nepal-United Marxist
Leninist-led government is off target. The general consensus
among critics is that the Government lacks the capacity
necessary to fulfill the plethora of promises it has made.

Policies and Programs Promise Something for Everyone
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2. (U) On July 9, President Ram Baran Yadav presented the
Communist Party of Nepal-United Marxist Leninist (UML)-led
government's annual programs and policies to parliament,
giving top priority to completion of constitution drafting,
state restructuring and economic growth. He pledged that
Nepal's new constitution will be completed "on the basis of
national consensus" before the May 2010 deadline, federalism
would be institutionalized and a strong "socialism-oriented"
economy that emphasizes public-private partnerships would be
created. In his 94-point overview of the Governmentof
Nepal's (GON's) priorities for fiscal year 2009/10, which
began on July 16, the President also promised that law and
order would be strengthened and "impunity will be eliminated."


3. (U) While improved governance and economic performance
were emphasized, the Government's program and policies, which
were formally endorsed by parliament on July 12, contain
sweeping promises for almost every sector of Nepali society.
At one point during his presentation, Yadav vowed, "All
legitimate demands put forward by the workers, peasants,
women, youths, students, teachers, professors, intellectuals,
doctors, engineers, lawyers, civil servants, journalists,
entrepreneurs, cultural artists, the landless, the squatters,
the conflicted affected, the displaced, freed bonded
laborers, the haliyas (agricultural bonded labors),badis
(the lowest formerly "untouchable" caste),and the disabled
will be gradually fulfilled through mutual dialogue."

Big Budget Proposed to Fulfill Big Promises
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4. (U) The GON has proposed a Rs. 285.9 billion (USD 3.7
billion) budget in support of its policies and programs.
Introduced on July 13, it is nearly 34 percent larger than
the FY 2008/09 budget and more than double the amount the
government spent two years ago. Finance Minister Surendra
Pandey said the government expects to raise Rs.176 billion in
revenues, 24 percent above the record level of revenues
collected by the previous Maoist-led government. The balance
of financing for the budget will come from increased foreign
loans and domestic borrowing. The government, which took
power in May, anticipates receiving Rs. 56.9 billion (USD 739
million) in foreign grants, a 64.7-percent increase, and Rs.
21 billion (USD 273 million) in bilateral and multilateral
loans, more than double the amount received last year. It is
estimated that the budget deficit will still total Rs. 52.4
billion (USD 680 million),43 percent more than the estimated
deficit for FY 2009/10.


5. (U) In his budget address, Pandey reiterated that
drafting a new constitution was the government's top
priority, and he pledged that "there will be no shortcoming
in financial or other resources for the Constituent Assembly
(CA)" to complete the task. There is no line item in the
budget specifically earmarked for this purpose, but it does
budget a total of Rs. 770 million (USD 10 million) to the CA
to carry out both its legislative and constitution-writing
responsibilities. Last year, Rs. 723 million was initially
allocated to the CA, but, according to the most recent
estimates, it spent Rs. 743 million (USD 9.6 million, based
on the current exchange rate.)


6. (U) The largest share of the budget, 45.6 percent, is
earmarked for social services, including education, which

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accounts for 16.3 percent of total spending. According to
Pandey, the budget will ensure the "fundamental right" of
easy access to education for all citizens. Transportation,
agriculture, electricity and other "economic services"
account for 23.2 percent spending. Defense and police will
each receive slightly more than 5 percent of total spending,
while 10 percent will go to servicing loans. Overall
spending is higher, but the share of spending for each
general budget categories is largely unchanged from FY
2008/09.

Infrastructure Targeted
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7. (U) The GON plans to make a massive investment in
infrastructure improvement and development in FY 2009/10,
emphasizing roads, irrigation and electricity production and
distribution. Road construction, upgrading and maintenance
are budgeted at Rs. 18.5 billion (USD 240 million),a
68-percent increase over spending the previous fiscal year.
This includes Rs. 252.3 million (USD 3.3 million) to begin
construction of the Kathmandu-Nijgasdh Fast Track, a
mega-road project designed to cut travel time between the
Kathmandu Valley and the Terai, the country's industrial and
agricultural heartland. Aiming to increase agricultural
production and boost employment, The government allocated
Rs. 7.9 billion (USD 102 million) for irrigation projects.


8. (U) Pandey announced that the GON is formulating plans to
develop at least 25,000 megawatts (MW) of hydropower
capacity, about 40 times Nepal's current capacity, over the
next 20 years. The Rs. 14.7 billion (USD 190 million)
budgeted for the energy sector includes funds to begin
construction of the 130MW Upper Seti project and to carry out
feasibility studies of four other large-scale projects. The
government also plans to repair and extend electrical
transmission lines, including construction of new lines that
will allow greater imports from India, (Comment: Last year,
the Maoist-led government launched a 10-year plan to add
10,000 MWs of hydropower capacity, but failed to initiate a
single project during its nine months in power. The latest
estimates show that the former government spent less than
half of the Rs. 12.7 billion it had allocated for the energy
sector.)

After Dismal Year, Lofty Economic Goals Set
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9. (U) Implementation of the proposed budget, according to
Pandey, will boost economic growth and slash inflation. He
said the government's goal is to increase the gross domestic
product (GDP) by 5.5 percent in FY 2009/10, while cutting
inflation to 7 percent. The day before his budget speech,
the Finance Ministry released its annual economic survey,
showing that, based on data from the first eight months, the
economy grew by just 3.9 percent in FY 2008/09, compared to
5.3 percent in the previous year. The consumer price index
rose 12 percent, up from 7.7 percent the previous year.


10. (U) Growth in the agricultural sector, which accounts
for about one third of the total GDP, fell to 2.1. percent,
less than half the previous year's rate. The
non-agricultural sector grew by 4.8. percent, compared to
5.7. percent in FY 2007/08. The Ministry blamed slow
agricultural growth on adverse weather and attributed the
non-agricultural sector's weak performance to the energy
crisis, "bandhs" (strikes) and other problems. Pandey
predicted that the agricultural sector will grow by 3.3
percent in FY 2009/100, while the non-agricultural sector
will expand by 6.6 percent.

Faint Praise Accompanies Loud Criticism
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11. (U) The GON's economic projections for the new fiscal
year have been questioned by many people, including
Biswambhar Pyakurel, a leading economist, who accused
government officials of making its projections "without doing
their homework." Pyakurel said the government failed to take
into consideration the impact of global economic crisis, in
particular its potential affect on remittances from overseas
workers. Remittances from workers currently account for
about 17 percent of the total GDP, not including those
working in India, but some projections indicate that they

KATHMANDU 00000674 003 OF 003


will to fall to 13 or 14 percent of GDP as a result of the
economic crisis, according to Pyakurel. He added that, while
the government may be able to gain "some control" over
inflation, "there is no way Nepal can obtain 7-percent
inflation."


12. (U) Business leaders hailed certain policies and
programs, including elimination of both the tax on scrap and
the development tax of 1.5. percent and the 25-percent
reduction in the prevailing highest customs duty raise, but
they have roundly criticized the government for not doing
enough to create an environment for investment and wider
economic growth. Kush Kumar Joshi, President of the
Federation of Nepalese Chambers of Commerce and Industry,
lambasted the government moving ahead with the
Kathmandu-Nijgasdh Fast Track on its own despite the private
sector's desire to participate in the project, saying it was
an indication that the government is not committed to
fulfilling its promise of greatly expanding greater
public-private partnerships. UML lawmaker and leading
businessman Binod Kumar Chaudhary agreed: "The budget has
failed to encourage industrialists."


13. (U) Joshi, Chaudhary and others criticized the budget
for failing to support the government's pledge to bring an
end to bandhs and to strengthen overall governance.
Chaudhary said, "Increasing capital expenditure alone will
not be enough in the context of weak governance." Economist
Pyakurel concurred that the number of projects the government
plans to undertake is "unmanageable" due to weak governance,
especially at the district and village level. Nepali
Congress lawmaker and former finance minister Ram Sharan
Mahat also cited weak governance as a major obstacle when he
questioned whether the government's budget could be
implemented during the first day of budget deliberations.

Comment
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14. (U) Budget deliberations are ongoing. There is no
statutory deadline, but they are commonly completed within a
month of the start of the parliament's budget session, which,
this year, was July 8, Given that the GON is counting on
receiving more than USD 2 billion in foreign grants and loans
to close the projected gap between revenues and expenditures,
the USG should anticipate being approached by Nepali
officials with hat in hand, seeking increased bilateral
assistance, support in securing funding from international
financial institutions or, most likely, both.
















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