Concerns over development expenditure in new national budget

The new national budget of Nepal for 2005-2006 is in the process of being finalised and will be passed for royal assent by next week. However, senior economists are concerned that security costs will absorb revenues and there will be a corresponding slash in development expenditure. The government has been asked to present a realistic budget this financial year unlike the previous year and limit it to less than US $1.5 billion. Economists are concerned that most of the allocations estimated for development projects might be left unspent and be diverted towards large-scale security operations. Nepal’s public spending is already well below the internationally desired level of 25 percent of GDP with less investment in capital formation or development budgets. Former finance minister, Ram Sharan Mahat, said the situation last year meant that a large proportion of development capital never materialised. “Less than half of the $500 million meant for social and economic development was unutilised as most of the projects were not implemented,” Mahat said speaking to IRIN in the capital, Kathmandu, on Tuesday. He added that because of a lack of local elected bodies in the districts and villages, there could be no accountability or public transparency about the budgetary expenses. Security has become a top priority for the government and economists say it is inevitable the country will spend more on army and police operations particularly now that the Maoist insurgency is escalating. Some argue that more security investment is needed to protect government personnel and infrastructure, which have been constantly under attack throughout the past nine years of violent Maoist armed campaigning against the government. “In any conflict scenario, the defence budget will obviously increase but this does not mean we should decrease on development expenditure. The spending on priority sectors like health, education, agriculture is pathetic,” said a prominent Nepali economist Biswamber Pyakhurel. Analysts say that if this trend continues, it can only lead to further impoverishment of rural areas and force more villagers to become economic migrants. During the first government and donor interaction meeting last month since King Gyanendra assumed direct rule on 1 February, Finance Minister Madhukar Shamsher Rana, said that sustained spending on security is an investment for peace, better revenue generation, better development delivery, more national savings and investment. But the trend of increasing expenditure on security forces is alarming, said Pyakhurel. The expenditure for defence and police more than doubled over the past few years from 8.52 percent of the total government spending in 1997 to nearly 16.59 percent in 2004. The government however denies the allegations that it is more focused on security expenditure. “There will be a growth in development expenditure and we would like to focus on our priority programs as per our Tenth Plan, with special emphasis on poverty alleviation,” said Dr. Shanker Sharma, deputy head of the National Planning Commission, which is also one of the key government bodies involved in budgetary planning. Nepal’s Tenth Plan is also its Poverty Reduction Strategy Paper (PRSP) implemented since 2003. The strategy focuses on promoting non-agricultural sectors such as manufacturing, trade, services, improving social and economic services and infrastructure, economic and social inclusion of the poor and marginalised groups and the pursuit of good governance. “Our main challenge is to widen the development space in conflict areas especially in mobilising funds for community development. Implementing at the local level will not be easy,” explained Sharma, admitting that the government still had a long way to implement its development plans and projects. Economists are sceptical whether the government can ever achieve the development goals envisaged in the projected budget plans especially with the lack of elected bodies and the dominance of Maoists in rural areas. “There is a huge gap between budgetary estimation in the capital and implementation in the villages where development projects are diminishing at a large scale,” Mahat maintained. Meanwhile, there are concerns that the donor community is not yet committed to any stated amount of budgetary support they intend to provide. “The donors had a series of meetings but they have yet to announce their level of support,” said Pyakhurel. The government is also hoping for increased aid support since 80 percent of the development budget is dependent on foreign assistance. After the suspension of parliament rule and the establishment of direct rule by the King earlier this year, aid agencies, especially from Europe, have shown hesitation to fund government development projects and have not signed any new project agreements since. The Swiss development agency SDC and Danish aid agency DANIDA were the first to announce suspension of their bilateral aid and said that they would not sign any new project or programme agreement until further notice. “This is quite understandable given that the state has no capacity for proper aid utilisation,” remarked Pyakhurel.