The private sector's displeasure over high-interest rates is yet to subside and the financial sector is facing a possible storm in the form of rising bad loans and problems in loan recovery.
The challenges in front of Mahat are not different from his predecessor Bishnu Poudel who had to leave due to the breakup of the earlier ruling alliance when he was trying to install much-needed urgency in the system. Now, Mahat has to start from where Poudel has left and bring the crisis-ridden economy on track. Taking a clue from Poudel who'd reach out to the private sector as well as the Nepal Rastra Bank governor, Dr. Mahat while assuming office on Friday tried to strike the right chord by saying that he is expecting support and collaboration from all stakeholders. "The entire state mechanism will work to resolve the current economic crisis. There should be coordinated roles of the central bank and Finance Ministry for resolving the issues," he said on Friday. The statistics show a deficit in government budgetary operation due to the widening gap in revenue collection and expenditure. As of April 2, the government's budget is in deficit by Rs 180 billion. The income of the government is Rs 655.22 billion while the expenditure has crossed Rs 836 billion. It is increasingly becoming difficult for the Finance Ministry to meet current expenses from the income of the government. "The revenue collection and foreign assistance have not risen according to the target. On the contrary, the government's expenditure has increased massively," said economist Chandramani Adhikari, "There must be concrete steps taken for resource management." According to him, the government should emphasize the collection of arrears as well as plug the revenue leakages to increase resources. By announcing a committee to formulate a cash flow plan on Friday, newly appointed finance minister Mahat has shown he is aware of the problems. The committee will be led by the chief of the budget and program division of the ministry. The committee will have representation from Financial Comptroller General Office (FCGO), Nepal Rastra Bank, and the Public Debt Management Office. Given the high-interest rates, lending of BFIs has remained dismal as the private sector held back their new investment plans. And, the country's economic growth in the first quarter is limited to 0.8 percent. The private sector says improving government expenditure to increase cash flow in the market has to be done urgently. "The money flow in the market has been severely disrupted. The government has to spend to increase the cash flow in the market. However, the government's income is not as per the target," said Pashupati Murarka, former President of Federation of Nepalese Chambers of Commerce and Industries (FNCCI). Economist Bishwas Gauchan is of the view that structural reforms are needed to resolve the current crisis. "Though there has been some improvement in the economy due to the government's tightening of imports. However, in reality, the problem is where it lies," he said, "To resolve the problem in the long term, structural reform is necessary." According to Gauchan, Nepal's economy has been based on remittances for a long time. "Now we need to find an alternative to remittances to boost the economy," he said. Gauchan pointed out that most of the loans have been used for consumption activities, for buying real estate and vehicles and not for the productive sector. "Now, there must be a policy to use banks' loans to productive sectors while discouraging loans to the real estate sector,'' he said. Immediately after his appointment, Dr. Mahat reached out to the central bank governor Maha Prasad Adhikari as well as telephoned leaders of the private sector bodies. This has given a positive message. But his real test will begin as he sits down with his team at the finance ministry for drafting next fiscal year's budget. How he will manage the expectation of the private sector that wants interest rates in single digits as well as manage prudency in fiscal management will be crucial. His brother and former finance minister Dr. Ram Saran Mahat is still remembered for prudent fiscal management as he guarded the state treasury with zeal. Will the new finance minister take a cue from his celebrated brother?
