How to increase the capital expenditure capability?

How to increase the capital expenditure capability?

Capital expenditure is the country’s spending on infrastructural developments. Such infrastructure in the long term can enhance a country's economic development. It is important for income and employment generation. However, on an average the share of capital expenditure remained sluggish in Nepal where budgets mostly cover recurrent expenditure. In addition, actual capital expenditure is minimal. Similarly,  the average capital expenditure to GDP ratio has declined. 

The ratio of Consolidated Recurrent Expenditure, Capital Expenditure, and Financial Expenditure relative to total Consolidated Expenditure for the three tiers of government after adjustments stands at 57.01%, 31.54%, and 11.45%, respectively, in FY 2022/23. This distribution reflects a significant allocation toward recurrent expenses, leaving lesser space for development spending.

A concerning trend is observed in Capital Expenditure relative to Revenue, which has been decreasing over the years, reaching as low as 0.28 in FY 2022/23. This decline indicates reduced fiscal capacity to invest in infrastructure and developmental projects. Over the years, the Capital Expenditure to Revenue ratio has shown fluctuations:

• 2018/19: 0.32

• 2019/20: 0.25

• 2020/21: 0.30

• 2021/22: 0.26

• 2022/23: 0.28

Similarly, the Capital Expenditure as a percentage of total expenditure has been on a declining trend, reaching 16.51% in FY 2022/23, compared to 21.75% in FY 2018/19. This decline highlights the diminishing focus on capital investments:

• 2018/19: 21.75%

• 2019/20: 17.33%

• 2020/21: 19.12%

• 2021/22: 16.50%

• 2022/23: 16.51%

According to the Consolidated Financial Statement of FY 2022/23, these trends underscore the need for a strategic realignment of fiscal priorities to ensure adequate resources for development initiatives.

Furthermore, the National Urban Development Strategy estimates a requirement of Rs 2.22 trillion to bridge the infrastructure deficit by FY 2030/31. Addressing this gap will necessitate a substantial increase in capital expenditure, improved revenue generation, and efficient fiscal management to meet the country’s developmental goals and infrastructure needs.

Examples: 

Dozens of major projects in Karnali stalled - The Himalayan Times 

Plans to create industrial villages in 10 districts of Karnali stalled 

Lumbini Province spends only 17% capital budget in first half of fiscal year 

Pappu’s incomplete projects stand as eyesore

Reasons:

• due to the negligence of the contractor companies.

• Policy difference between province and planning commission

• Proper lack of external investment  

• geography not linked with development

• spending mostly over recurrent expenses.  

• Spending habits: low spending in the first quarter to technical challenges, including delays caused by the rainy season, time taken for project agreements, and major festivals like Dashain and Tihar. 

Suggestions:

•  restructure the fiscal calendar, suggesting that the development expenditure deadline should be shifted from the end of the fiscal year in mid-July to mid-March for better progress.

• terminating the problematic projects with negligent companies and blacklisting them

• Coordinated approach of development plans with three tiers of government, and inclusive development with local participation; elimination of duplication and inappropriate federal spending 

• Making the procurement progress quicker reducing bureaucratic hurdles 

• Linking annual budget and periodic plans with the Medium Term Expenditure Framework (MTEF)