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.
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)
Foreign grants are a special type of aid that provides non-payable financial or in-kind assistance. Since foreign grants require no repayment of principal or interest, they carry the risk of misuse. Consequently, grants are often provided based on the trustworthiness of the recipient country and its socio-political stability. To maximize their impact, foreign grants should be strategically allocated to technological advancements and the country's key development priorities.
Current Context and Strategic Focus
For countries like Nepal, which have historically relied on foreign grants, these resources remain crucial in addressing pressing challenges such as climate change and achieving Sustainable Development Goals (SDGs). However, effective utilization of these grants requires a strategic approach:
Prioritize Non-Conditional Grants:
Focus on securing grants with minimal conditions to avoid undue external interference in domestic policymaking.
Advocate for flexibility in the use of grants to align with national priorities and long-term development goals.
Strengthen Trust and Partnerships:
Ensure transparency and accountability in grant utilization to foster mutual trust between donors and recipients.
Implement robust monitoring and evaluation mechanisms to demonstrate the effective use of funds.
Channel Grants Towards Development Priorities:
Allocate grants to sectors with high impact, such as renewable energy, education, healthcare, and infrastructure.
Use grants to support technological innovations that enhance productivity and sustainability.
Improve Absorption Capacity:
Build institutional capacity to efficiently manage and disburse grants.
Streamline bureaucratic processes to reduce delays and improve fund utilization rates.
Performance Analysis
The contribution of foreign loans to expenditure in Nepal has shown a declining trend from 2018/19 to 2022/23, with figures at 2.01%, 2.13%, 3.05%, 2.10%, and 1.65%, respectively. Additionally, the government has only been able to secure 15% of the foreign grants in recent years (7.72 billion against an annual estimate of Rs. 52.33 billion) in FY2024/25. This highlights a significant gap in achieving targeted grant acquisition and utilization.
Recommendations for Improvement
Enhance Donor Relations:
Engage proactively with international donors through regular dialogues to align interests and priorities.
Showcase successful grant-funded projects to build credibility and attract further support.
Address Administrative Challenges:
Simplify procedures for grant approval and implementation.
Train personnel in grant management and reporting to meet donor expectations.
Promote Strategic Alignment:
Align grant utilization with national development strategies and international commitments such as the SDGs.
Emphasize Nepal’s role in global challenges like climate change to secure targeted grants.
Leverage Data and Technology:
Use data-driven approaches to identify priority areas for grant allocation.
Invest in digital tools to monitor grant-funded projects and ensure accountability.
By implementing these measures, Nepal can optimize the impact of foreign grants, reduce dependency on conditional assistance, and strengthen its path toward sustainable development.
Discuss the poverty and unemployment scenario of Nepal. Highlight the legal provisions of poverty and unemployment in Nepal. How do you think poverty and food security are related?
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Model Ans:
Poverty and Unemployment Scenario in Nepal
Nepal, as a developing country, faces significant challenges in reducing poverty and unemployment. Both issues are deeply interlinked and impact the country's socio-economic development.
Poverty Scenario
Nepal's poverty rate has declined over the years, but it remains a critical concern:
Multidimensional Poverty: As of recent data, 16.6% of the population lives in multidimensional poverty, which includes lack of access to health, education, and living standards.
Income Poverty: The poverty rate based on international standards (living under $1.90/day) is about 17.4%.
Regional Disparities: Poverty is more severe in rural areas, especially in the Karnali and Sudurpaschim Provinces, compared to urban areas like Kathmandu Valley.
Contributing Factors: Low productivity in agriculture, lack of industrial growth, inadequate education and healthcare systems, and infrastructure deficits exacerbate poverty.
Unemployment Scenario
Unemployment and underemployment are persistent challenges:
Unemployment Rate: Official unemployment rates hover around 4-5%, but the figure for underemployment is much higher, with a significant proportion of the workforce engaged in low-paying or seasonal jobs.
Youth Unemployment: Nearly 20% of Nepal's youth are unemployed, leading to a surge in labor migration to countries like Malaysia, the Gulf nations, and India.
Skills Mismatch: Many workers lack the skills needed for better-paying jobs, creating a gap between available jobs and workforce capacity.
Post-COVID-19 Impact: The pandemic severely affected tourism and small businesses, further worsening unemployment.
Legal Provisions on Poverty and Unemployment in Nepal
Nepal has incorporated several legal measures to tackle poverty and unemployment:
Constitution of Nepal (2015):
Right to Employment (Article 33): Every citizen has the right to employment, and the state is responsible for providing work opportunities.
Social Security and Justice (Article 43): Ensures rights to social security for economically vulnerable groups.
Directive Principles and Policies: Mandates the state to work towards poverty alleviation, equitable resource distribution, and economic empowerment.
Poverty Alleviation Policies:
Poverty Alleviation Fund (PAF) Act, 2006: Focuses on community-driven development programs to empower the poor and marginalized.
Sustainable Development Goals (SDGs): Nepal aligns its development agenda with SDG 1 (No Poverty) and SDG 8 (Decent Work and Economic Growth).
Employment Laws:
Employment Service Center Regulation, 2018: Provides mechanisms for job seekers to connect with employers.
Prime Minister Employment Program (PMEP), 2019: Aims to provide 100 days of guaranteed employment per year for unemployed citizens.
Labor Acts:
Labor Act, 2017: Protects workers' rights and regulates fair wages, working conditions, and employment contracts.
Relationship Between Poverty and Unemployment
Poverty and unemployment are deeply interconnected and influence each other in a cyclical manner:
Unemployment Leads to Poverty:
Lack of jobs means no income, pushing households below the poverty line.
The absence of financial security makes it harder for people to access education, healthcare, and better living conditions.
Poverty Causes Unemployment:
Poor individuals often lack education and skills required for higher-paying jobs.
They are often excluded from economic opportunities due to social or geographical marginalization.
Vicious Cycle:
Poverty restricts access to resources like education and healthcare, leading to low productivity and employability.
Unemployment keeps people trapped in poverty, further reinforcing the cycle.
Multiplier Effect:
High unemployment reduces overall economic demand, slowing growth and exacerbating poverty.
Poor economic growth further limits job creation, perpetuating unemployment.
Conclusion
Addressing poverty and unemployment in Nepal requires a comprehensive approach. Enhancing education and skill development, boosting agricultural and industrial productivity, promoting entrepreneurship, and ensuring equitable distribution of resources are vital. Legal provisions, if implemented effectively, can play a significant role in breaking the cycle of poverty and unemployment, ultimately contributing to Nepal's sustainable development.
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Backdrop:
Economic Survry 2022/23
Among the province-wise population distribution, multidimensional
Poverty is highest in Karnali at 39.5 percent and lowest in Bagmati at 7.0 percent.
Out of 5526704 Nepali workers who have received new work permit for foreign
employment by mid March 2023, 94.4 percent are male and 5.6 percent are female.
Out of 337144 people who received work permit by mid March of FY 2022/23,
90.0% are men and 10.0% are women. As of mid March of 2023, 85,804 workers
have gone to South Korea for foreign employment through the EPS system
Nepal Living Standards Survey 2022-23
The Fourth Nepal Living Standards Survey 2022-23 report released by the National Statistics Office reveals that as many as 20.27 percent of the population lived below the poverty line in 2023 compared to 25.16 percent in 2011.
According to the statistics office, the poverty rate was calculated based on a revised poverty line of Rs72,908 per person per year that is required to fulfill their basic food and non-food consumption needs.
The poverty rate in urban areas stood at 18.34 percent while it is 24.66 percent in rural areas, the survey showed. Province-wise, the poverty rate is the highest (34.16 percent) in Sudurpaschim and lowest in Gandaki Province (11.88 percent).
Nepal has made significant strides in poverty reduction since the restoration of democracy in 1990. When the first living standard survey was conducted in 1995-96, Nepal’s poverty rate was 42 percent, which declined to 31 percent by the time of the second survey in 2003-04.
Labour Market Profile Nepal – 2022/2023
The relatively low unemployment rate at around 5.1% in 2021 is shadowed by a broader underutilisation rate of 39%. Nepal’s youth unemployment rate is remarkable lower than the Southern Asia average. dazzled by one of the highest NEET rates (those not in employment, education, or training) and the massive out-migration of young men
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FIGHTING INEQUALITY IN NEPAL, Jan 2019
More than 500,000 people enter the labour force each year in Nepal, but employment opportunities are limited and 80% of these people leave to seek employment abroad. For those who stay, too many face insecure jobs and underemployment: 31.8% of Nepali labourers work less than 40 hours per week, and for a growing percentage this is not by choice. Young people particularly are struggling to find work: 15–24 year-olds are more than twice as likely to be unemployed than adults.
Wages have increased in recent years; however, they remain low for the average worker, and women continue to earn significantly less than their male counterparts. Establishing and strengthening minimum wages can play a significant role in reducing inequality. However, 96% of workers are employed in the informal sector,35 where minimum wages and other provisions, such as the Social Security Fund, are less likely to be honoured and harder to enforce. The CRI Index shows that in Nepal respect for trade unions and the rights of women in the workplace is very poor, and the country is ranked for labour rights among the lowest countries in the world in the Index. There are no laws to prevent discrimination based on gender and no law against rape in the workplace.
There is also worrying evidence of the exploitation of children and vulnerable groups in Nepal; the International Labour Organization estimates that 6.2 million children are currently at work in Nepal, with 2.1 million of them working in hazardous conditions.37 Bonded and forced labour are also still highly prevalent in Nepal, with more than 100,000 bonded labourer households involved in agriculture. These people are excluded from prosperity and denied their rights.
Legal Provisions: The Labour Law of 2017, the Contributory Social Security Law of 2017, the Right to Employment Act of 2018.
Article 43 of the Constitution preserves the fundamental right to social protection for all children. Similarly, The Child Rights Act 2018 provides a bundle of rights to children, including the rights to a dignified life, appropriate care, nutrition, and free basic health services.
https://theannapurnaexpress.com/story/48636/
Despite huge prospect of electricity generation, the country is able to produce only 3,200 megawatt and around 5,568 MW large scale power projects are under construction based on Public-Private Partnership (PPP) modality.
https://risingnepaldaily.com/news/42285
Recently, the General Federation of Nepalese Trade Unions (GEFONT) released their Labor Audit Report- 2080 BS, highlighting trends in labor conditions in Nepal. The report indicated that about 21.7 percent of industrial enterprises in Nepal are not paying their laborers the minimum wage, marking a six percent increase from previous years. Despite the government setting the minimum wage at Rs 17,300 per month, implementation remains poor.
12. Public Enterprise Management - Amongst the 69 public enterprises (PEs)
operated previously, 30 PEs have been privatized and 44 PEs are in existence at
present along with the PEs established in later years, out of which 42 PEs are in
operation.
8. Public Enterprises Management - The following improvements are to be done
with regards to the financial management of public enterprises:
8.1. An umbrella policy should be formulated and implemented for operating the public
enterprises (PEs) effective and commercial manner. In addition, integrated law and
strategic plan and business work plan should also be formulated and implemented
in line with the policy.
8.2. By analyzing relevancy of existing PEs, clear preferences need to be determined
about the PEs which need - to be continued with the government's involvement, to
be operated under public-private partnership, to be run under management contract,
to be operated from private sector, and to be merged with one another or liquidated.
Except the PEs providing basic services, certain percent of government shares
existed in remaining PEs are to be privatized gradually, and the management
efficiencies of PEs are to be enhanced encouraging the participation of strategic
partners.
8.3. There should be arrangements for giving the responsibility of board of directors to
the specialist having professional capabilities, appointing chief executives making
competition on the basis of business work plan, and making work performance
contract with chief executive and taking decision about the continuity of a chief
executive on the basis of its annual work performance.
8.4. The accounts of share and loan investments of the governments in PEs and receipt
of interests and dividends thereon should be updated by reconciling regularly. The
principal and interest to be paid to the Government of Nepal by PEs should be timely
settled preparing necessary financial plans. The outstanding rent and lease rents due
from the privatized PEs since long period should be recovered along with applicable
fees, interest and fines as per laws making timely follow-up.
8.5. Nepal Financial Reporting Standards need to be fully implemented to maintain
fiscal discipline in PEs. By making the internal controls system effective, the final
audits should be completed timely basis, and arrangements should be made for
implementing the audit observations/ recommendations.
8.6. By making proper safeguards and utilization of the assets - lands, buildings etc.
owned by the PEs, the records of assets should be properly maintained and reports
of same should also be regularly prepared.
8.7. Appropriate control measures should be adopted to keep the operating expenditure
of the PEs within reasonable limits. In view of change occurred in business work
plan, work scope and technology, the employee's position of PEs should be
reviewed conducting Organization and Management Survey. The performance
evaluation of employees are to be conducted on the basis of job description and
work performance indicators of the employees, the such performances are to be
linked with their career development.
8.8. The unsettled disputes of the privatized PEs need to be shorted out. Regular
Monitoring are to be conducted pursuant to the implementation of provisions
specified in agreements of the privatized PEs. The assets of the liquidated or nonoperational PEs, the like - machinery tools, lands, buildings, and equipment etc.
should be utilized by obtaining the records of such assets.
Cases:
Electricity Trade: there is no provision in the Electricity Act 2049 B.S. to allow the private sector to trade in electricity and the new Electricity Act has not yet been enacted, the demand of energy producers has not been met so far.
Nepal Electricity Authority (NEA) is the sole buyer of electricity generated by private companies. But now due to the uncertainty of the market, the NEA has frequently stopped the Power Purchase Agreement (PPA) with the private sector for run-of river projects.
“If power trade is opened for the private sector, any privately-owned power trading company can also enter PPA with such developers by searching new destinations in the electricity market on their own,” said Karki.
The private sector has been playing an important role in the development of hydropower in Nepal since the introduction of the Electricity Act 1992 (2049 B.S.). The installed capacity of hydropower projects has now reached about 3,000 MW from the very first-ever generation of 500 KW from Chandrajyoti Hydro-electric in Pharping, the first hydropower of Nepal.