Challenging tasks ahead for new finance minister

Nepal’s economic situation is still in a  bad shape. According to the International Monetary Fund, the GDP growth is expected to recover modestly to 3.1 percent in the fiscal year 2023/24 from a weak two percent growth in the previous fiscal year. This achievement was made mainly  due to strong performance of export-oriented sectors and supported by increased agricultural production. 

IMF says capital spending is still weak, however, and imports are recovering only gradually, with year-on-year growth still negative. Political uncertainty continues to act as a headwind to growth. But the bright side is Nepali Congress and CPN-UML have come together to ensure political stability which is likely to contribute to the recovery. 

Nepal Stock Exchange (Nepse) index hit a 26-month high and breached the psychological 2,300-point mark on Tuesday. The stock market rally coincided with CPN-UML Vice-chairperson Bishnu Prasad Paudel’s return to the finance ministry for his third stint as the finance minister. The stock market rally bodes well for Paudel who has inherited a troubled economy. The government has struggled to increase capital expenditure, stimulate loan demand, boost private sector confidence and make the market dynamic. 

Paudel needs to restore investor confidence and stimulate economic growth. He has signaled his intent to focus on production and employment which is necessary given the current state of Nepal’s economy.  The banking sector has seen only a five percent increase in credit growth which is far below the government’s target of 11 percent. The sluggish credit growth is indicative of a broader economic malaise that Paudel must address.

The new finance minister also needs to tackle the issue of idle capital in the banking sector. With banks sitting on approximately Rs 700bn of loanable funds, Paudel needs to create an environment conducive to investment. This will be possible only through policy reforms and by bringing different initiatives to boost investor confidence and create opportunities for investments.

Effective implementation of the new fiscal budget will be another significant challenge for the new finance minister. Paudel must navigate the complexities of implementing a budget prepared by his predecessor. The fact that Paudel’s party, UML, publicly expressed dissatisfaction with certain aspects of the budget will make things further complicated for Paudel.

Minister Paudel also faces the challenge of improving public expenditure management and revenue collection. With capital expenditure falling short and revenue collection missing targets once again in the fiscal year 2023/24, Paudel must find ways to enhance government spending capacity and boost revenue streams for the government. 

Infrastructure development will be another challenging issue for Paudel. The Federation of Contractors Associations of Nepal (FCAN), the industry lobby of construction entrepreneurs, has claimed that the government owes contractors around Rs 40bn billion for completed works. It remains to be seen how Paudel resolves this issue and kick-starts new infrastructure projects which are crucial for economic growth and job creation.

Paudel must also address the challenges in the financial markets. The process of appointing a new chairperson for the Securities Board of Nepal (Sebon) has seen legal complexities. Many are saying that this contributed to the failure of the ruling coalition of UML and CPN (Maoist Center). The new finance minister will need to handle this issue carefully to ensure stability in the stock market which is often described as a mirror of the economy.

The new finance minister will also need to tackle inflation and maintain price stability. This will require careful management of monetary policy in coordination with the central bank. The finance minister enjoys a good rapport with Nepal Rastra Bank Governor Maha Prasad Adhikari who was appointed by the government led by his party.  

The finance minister will need to demonstrate strong leadership and implement effective policies to regain public and investor confidence. For this, he will have to introduce investor-friendly policies, streamline bureaucratic processes, combat corruption and improve the overall business environment. Additionally, he will need to work closely with other government agencies, the private sector, and international development partners to implement comprehensive economic reforms.

Paudel’s previous experience as finance minister in 2015 and 2021-2022 may prove valuable in navigating these challenges. However, overcoming these obstacles will require not only experience but also innovation, determination, and the ability to build consensus among various stakeholders.