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With the end of the first half of the current fiscal year, the government has failed to meet the revenue target. The worrying sign is, unlike in past years, the government's overall revenue collection has decreased significantly in this fiscal compared to the last fiscal year. The revenue administration has been struggling to meet the revenue target from the first months of the current fiscal. According to the Financial Comptroller General Office (FCGO), the government's overall revenue collection (tax and non-tax) stood at Rs 458.98 billion in the first six months of FY 2022/23 compared to Rs 542 billion in the corresponding period of FY 2021/22. In the review period, the tax revenue collection totaled Rs 405.26 billion, a sharp drop from Rs 493.92 billion during the same period of the last fiscal year. The government had targeted to collect Rs 651.62 billion during the first six months of the current fiscal year. However, the target got missed by 30 percent. Though revenue administration officials blame higher revenue targets and import restrictions as major reasons behind decreased revenue collection, economists point out economic mismanagements under the former Finance Minister Janardan Sharma as one of the key reasons behind sluggish revenue collection. According to a former finance secretary, Sharma filled the key position of the Finance Ministry with inexperienced and incompetent administrators which resulted in a leakage of revenue. “The revenue target itself was not scientific given that the import restrictions were already in place when the federal budget was announced,” he said. Amid fear that the country would move in the direction of Sri Lanka due to depleting foreign exchange reserves, the government and the central bank introduced a series of restrictive measures to discourage imports - from import restrictions to cash margin provisions on opening letters of credit (LCs). The central bank made it mandatory for the importers to deposit a cash margin of up to 100 percent to open LC for importing nearly 50 types of goods; this policy arrangement is still in place. The policy was first introduced for 10 types of goods in December 2021 and was expanded to more goods in February 2022. In April 2022, the government imposed import restrictions on 10 types of goods including automobiles, alcohol, and expensive mobile phones among others. Though the government lifted the import restrictions in mid-December 2022, the impact of the policy is still visible in the government's revenue collection. On the one hand, import restrictions caused a sharp reduction in revenue collection, on the other hand, the shortage of loanable funds in the banking system contributed to a slowdown in the country's economy. As a result of import control and reduced economic activities, both customs and inland revenues have slumped in this fiscal. The Department of Customs (DoC) reported a deficit of more than Rs 120 billion in its revenue collection target while the Inland Revenue Department (IRD) has also reported collection of less than the targeted revenue. IRD aimed to collect Rs 106 billion in revenue in Poush (mid-December to mid-January) but managed to collect only Rs 71 billion. IRD's revenue collection fell short of 21 percent of the target in the first six months. The department had set a target of collecting Rs 281 billion in revenue by the end of January but only collected Rs 222 billion. IRD collected Rs 225 billion in the first six-month of FY 2021/22. As a result, the government revenue collection has been barely sufficient even to meet recurrent expenditure with the government’s revenue collection. The government's recurrent expenditure stood at Rs 455 billion against the total revenue collection of Rs 458.98 billion, according to FCGO. Capital expenditure remains dismal  In the first six months of the current fiscal year, the government's administrative expenditure surged while development expenditure continued to stay sluggish. The FCGO data shows recurrent expenditure stood at 38.46 percent of the allocated recurrent budget which was 31 percent in the corresponding period of the last fiscal year. Though the government introduced a guideline on austerity measures to control administrative expenditure, it appears that there has been little progress in this regard with a sharp rise in recurrent expenditure. Similarly, capital expenditure stood at 14.05 percent and expenditure of the budget under financial management stood at 29.44 percent in the review period. The latest statistics indicate a slight improvement compared to 13.44 percent capital expenditure and 26.12 percent expenditure of budget under financial management during the same period of the last fiscal year. Officials said with the government struggling to collect revenue, it has also been unable to make timely payments to the contractors for the work they completed. The ministries having a huge budget for development projects are reporting that they are not getting an extra budget from the Finance Ministry to expedite the development projects with the latter showing a shortage of resources. The contractors say they are not being paid timely by the government for the works that have been completed affecting their ability to expedite works of the development projects. “When construction activities slump, the government doesn't get taxes including Value Added Tax from the sector,” said a contractor, adding, "Construction activities are an important source of VAT for the government.” Data Target vs Collection

Prime Minister Pushpa Kamal Dahal has directed government authorities to take forward the development of the Budhi Gandaki Hydropower Project. The Prime Minister in a discussion on Thursday instructed Chief Secretary Shankar Das Bairagi to move ahead with all necessary works to start the development of the Budhi Gandaki Hydropower Project. The members of parliament representing different constituencies in Gorkha and Dhading were also present in the discussion. Dahal himself has also been elected as a member of parliament from Gorkha-2. The development of the much-talked-about project has failed to take off despite the government deciding to develop it on its own resources. The newly established Budhi Gandaki Jalbidhyut Public Limited has failed to come into operation with the finance ministry not providing the required Rs 10 million to the company. The company established in early September last year to develop the 1200MW Budhi Gandaki Hydropower Project is awaiting a budget release by the ministry so that it would get a permit from the Office of Company Registrar to commence operations. According to a board member of the company, the finance ministry denied releasing the fund ahead of the election, citing the code of conduct implemented by the Election Commission. “It is not clear when the fund will be disbursed as the new government has just been formed,” the company's director said. Budhi Gandaki is a ready-to-go project as its detailed project report (DPR) has already been prepared and the compensation distribution to the residents of the project-affected areas for the acquired land is also about to complete. The project will be Nepal's largest reservoir-type hydropower project and the total cost of its development has been initially estimated at USD 2.6 billion. The project, which will be built on the Budhi Gandaki River, is located at the boundary between the Gorkha and Dhading districts. However, ensuring adequate resources and closing the project's budget gap will be a difficult undertaking for the government. “As a ready-to-go project following the completion of DPR and almost completed compensation distribution process, the next challenge is to ensure sufficient funds to develop this project,” the board member said. “Once the company comes into operation, our focus will be to complete the financial closure.” A committee headed by the then National Planning Commission Vice-chairperson Swarnim Wagle has recommended the government in 2017 to develop this project with domestic resources. The committee suggested providing viability gap funding that will cover around one-third of the project development cost. As per the report, the government could cover the cost of land acquisition and resettlement of displaced families which could total as high as Rs 94 billion. According to the report, a significant chunk of resources can be generated from government institutions. An infrastructure tax being imposed on imported fuel could be an important source of revenue that can be used to develop the project. “Based on an average increase in petroleum consumption by 10 percent a year, as much as Rs164 billion can be collected from taxes imposed on fuel alone by the fiscal year 2026-27," reads the report. This estimated tax collection was calculated based on Rs 5 per liter infrastructure/carbon tax on sales of petroleum products (except cooking gas) that the government had imposed in 2015 to manage the financial resources for developing the Budhi Gandaki project. From the fiscal year 2018/19, the government started charging taxes under the name of ‘infrastructure development tax.’ The tax was also raised to Rs 10 per liter of petroleum products. According to the report, the extra fund can also be generated from government-owned entities like Nepal Electricity Authority, Employees Provident Fund, Nepal Telecom, Rastriya Beema Sansthan, Hydroelectric Investment and Development Company, Upper Tamakoshi Hydropower Company, Chilime Hydropower Company, Nepal Army, Nepal Police, and the general public could be tapped for the project. The report also stated the resources could also be generated from international donor agencies or by the issuance of project-specific bonds and credits from the project’s suppliers. However, the company’s director said that the government has not yet discussed with the donor agencies about potential funding from them. “This is the option that can be explored once the company comes into operation,” the director said. Massive sums of money have already been spent by the government to compensate the residents of the project-affected areas for the acquisition of their lands. According to the project's Environment, Compensation Distribution, Resettlement, and Rehabilitation Unit, Rs 41 billion has already been spent towards that end. It has been estimated that 58,000 ropanis of land will be needed to develop this project. For the project, hardly any difficulty in land acquisition has been experienced. There is also a broader political consensus for the development of this project with major political parties agreeing on Budhi Gandaki as an important hydropower project to ensure the energy security of the country for the coming decades. In 2017, the Pushpa Kamal Dahal-led government awarded a contract to build the project without competitive bidding to China Gezhouba Group Corporation under the engineering, procurement, construction, and financing (EPCF) modality. This was overturned by the Sher Bahadur Deuba-led government in November 2017. However, in September 2018, the then KP Sharma Oli administration decided in favor of the Chinese company, reversing the decision of the Deuba-led government. In April last year, the Deuba administration again terminated the license granted to the Chinese company as the contractor was not making any progress to move ahead with the development of the project. The government anticipates finishing the project eight years after the commencement of construction works.

Nepal Investment Bank (NIB) and Mega Bank on Wednesday started the unified business, completing their seven-month-long merger process. With the merger coming to a logical conclusion, NIB's long effort of becoming a larger bank has finally materialized. The merged entity is named Nepal Investment Mega Bank (NIMB). NIB approached the Himalayan Bank last year for the union and the two institutions even struck a merger deal in May 2021. However, the merger was aborted after seven months in January 2022. The annual general meeting of the Himalayan Bank rejected the bank's merger with NIBL after the Employees Provident Fund (EPF) and a group of investors led by Manoj Bahadur Shrestha refused to go ahead with the merger. Following the failed attempt, NIB approached Mega Bank and signed a memorandum of understanding (MoU) on June 10, 2022, agreeing on a swap ratio of 100:90 and that the entity formed after the merger will use the core banking system of NIB. The new entity NIMB has a seven-member board led by Chairman Prithvi Bahadur Pande, while Prajanaya Rajbhandary, Kabi Kumar Tibrewala, Gopal Khanal, Madan Kumar Acharya, Mukti Ram Pandey and Manju Basnett are the directors. NIB CEO Jyoti Prakash Pandey has been named the CEO of NIMB. Post-merger, the bank's paid-up capital has reached Rs 34.43 billion while deposits and extension of loans stood at Rs 360 billion and Rs 329 billion, respectively. The bank's total capital now stood at Rs 58 billion and its customer base has increased to 3 million. NIB is one of the country's oldest commercial banks, established in 1986 as Nepal Indosuez Bank. It is Nepal's second private sector bank which was established as a joint venture between Nepali and French partners. In 2002, a group of Nepali investors led by Pande acquired the 50 percent shareholding of the French partner Credit Agricole Indosuez in Nepal Indosuez Bank, and named the bank Nepal Investment Bank Ltd. Mega Bank started its operations on July 23, 2010 and had completed 12 years of operation in the banking sector.  

After lifting seven months-long import restrictions on automobiles, alcohol, and high-end mobiles in mid-December last year, Nepal Rastra Bank (NRB) appears to be moving in the direction of further easing the measures taken to discourage imports. The central bank is now said to be considering removing the provision that made the importers of certain types of goods deposit cash in the banks before opening the letters of credit (LCs) to import such goods. The provision requiring cash margin was made in order to discourage imports which had widened the balance of payment deficit and depleted foreign exchange reserves since the early days of fiscal 2021-22. Though these restrictive measures contributed to reducing imports and improving the country's external sector to a certain extent, they also resulted in a huge decline in government revenue which is heavily reliant on imports. The slowdown in revenue collection forced the government to lift import restrictions on the imports of vehicles, alcohol and expensive mobile phones in mid-December, 2022. Now, the central bank is also considering abolishing the provision of cash margin which is another import control measure. “Internal discussions were held regarding removing the provision of cash margin and we have reached the conclusion that the provision should now be abolished,” a senior official of NRB said under the condition of anonymity. “However, no decision has been taken on the matter and it is also not immediately clear whether the provision will be gradually abolished and fully done at once.” The officials said that it has also not been certain whether the provision will be removed immediately or when it is done during the second quarter review of the monetary policy. Importers have been demanding that the import control measures should be relaxed. Even after the ban on the import of automobiles was lifted, the importers of automobile dealers have not cleared their four-wheelers parked at the different customs yards. According to the Department of Customs, over 2800 four-wheelers including cars, SUVs, buses and trucks have remained stuck at customs yards. “Automobile dealers have been reluctant to clear these imported vehicles stating that they are still in agitation demanding the removal of the provision that requires importers to deposit cash margin before they can order goods,” said an official at the Department of Customs. In December 2021, the central bank first made it mandatory for the importers of 10 types of goods to maintain a 100 percent cash margin while opening LCs for imports. The importers were required to maintain a 100 percent margin at the concerned banks to open a letter of credit for the import items like alcoholic beverages, tobacco, silver, furniture, sugar, and foods containing sweeteners, glucose, mineral water, energy drinks, cosmetics, shampoos, hair dyes, caps, shoes, umbrellas, and building supplies like bricks, marble, tiles, and ceramics, among others. And, on February 9, 2022, the NRB further increased the number of import items requiring a 100 percent cash margin to 43 while it fixed the cash margin needed for the import of four types of goods at 50 percent. But the NRB in early December 2022 rolled back its decision to keep a 100 percent margin provision on the import of construction material, seats, and expansible polystyrene goods. Amid import control measures, the customs revenue collection stood at Rs 157 billion in revenue against the target of Rs 257 billion until mid-December, according to the Department of Customs. While the less than targeted revenue collection forced the government to rethink the import control measures, international agencies such as International Monetary Fund has also been asking the government to halt the policy stating that these measures brought distortion in the market. The central bank is also of the view that there has been some improvement in the country's external sector as the balance of payment (BoP) has turned surplus, and foreign exchange reserves have increased as well as remittance inflow. The BoP has remained positive by Rs 20 billion during the first four months of the current fiscal year while foreign exchange reserves also increased by 2.5 percent to Rs 1246.27 till mid-November, according to the central bank. “We cannot continue the import restrictions forever and we have to stop at some point and there is a consensus at the central bank that it is time to revisit the import control measures,” the central bank official said. But there are fears that the country's external sector could again come under stress if the NRB removes the cash margin provision. Economists say imports will be encouraged once the central bank removes the cash margin provision, which will further hit the country's forex reserves.