Full text of the report prepared by Institute for Development Studies (IfDS)

1.INTRODUCTION

In the month of June and July, the coming budget, as in the past years, is the concern of majority of economists, traders, industrialists and journalists. A few newspapers have even presented recommendations for the coming budget analyzing in detail exhaustively the process of economic development and the current situation down to the regional level. Non-governmental national institutions, related to industry and trade, in particular, are busy preparing and forwarding their proposals, and demands as well, to the concerned ministries for the budget preparation. Yes, some economists, and mainly senior officials of our institution, have been presenting, at the concerned meetings and seminars, for some time objectives and suggestions on tackling hurdles and procedural difficulties that can and may be encountered while preparing the budget for the fiscal year 2006/07. No information has yet been received on the use of such recommendations they’ve had on the preparation of budget policy and programs and budget preparation procedure too.

It is no exaggeration to state that government officials, including the Minister of Finance, have their own problems. The current fiscal year ends on 16 July. By that time, the proposed budget and an appropriation bill have to be presented in the House of Representatives for the approval. As it takes relatively long time to get the budget approved, the government by the end of the current fiscal year must get the approval of the parliament to make expenditure in advance. Otherwise, it will have no legal basis to collect the revenue or to allocate funds from July 17. There are several other new difficulties, largely related to the understanding between the Seven Party Alliance (SPA) and the Maoists, that the government has to take into account in the preparation and approval of the proposed budget. It is easy to assume that the concerned officials of the government are aware of the emerging situation but, if they are not, it may create undesirable tension in the country. The current report explains in detail the reasons for the current problems followed by objective suggestions to solve the problem.

2. ISSUES OF DISCUSSION

We are all aware of the eight-point agreement between the SPA and the CPN (Maoists) of June 16 following the People’s Movement-2. This has, no doubt, clarified the nation’s situation and the direction the country is heading towards down to the level of the general people. It is an open secret that the country is moving from one state system to another. Unfortunately, adequate study hasn’t been conducted on the procedure for preparing a national budget in such a transitional phase. A casual study indicates that decisions have to be taken at the political level on many economic issues. For this, mainly, the budget should be prepared keeping in mind the (i) eight point agreement;(ii)the impact of the budgetary allocations on peace, security and development of the country and (iii) the impact of eight-point agreement per se in the economic development process. Political problems may be compounded by preparing the budget in a traditional style.

For the general public, the budget usually means the income and expenditure account of the government for the fiscal year 2006/07 to be presented by the Minister of Finance in the parliament before the speaker for approval. This is true in normal conditions. Following the presentation of the budget, normal practice is for the parliament to approve it after discussions for several days or weeks. But this year, because of the expected change in state management, politicians should be clear in time and they should educate others on, at least, three issues. They are:

a. Budget Preparation Procedure

b. Budget Approval Mechanism

c. Budget Implementation

These issues have been discussed here in detail.

3.Budget Preparation Procedure

According to article four of the eight-point agreement between SPA and the Maoists, the present government is only an interim government with a responsibility to form another interim government. Whether this government can or can’t prepare a budget is itself a subject for debate. Even accepting the budget can be presented by the current government- there is no other alternative either- Nepal Government alone cannot prepare the expected policies and programs to be incorporated in the budget. According to article five of the eight-point agreement, decision should be taken by the agreement on ‘subjects of national interest having long-term effect’. Accordingly, apart from the preparation of the budget, Maoist approval is essential for any subject to be implemented by the Nepal Government with long-term impact.

Interestingly, there are reports that the parliamentary committee is again looking into the legality of the eight-point agreement. This makes clear and exposes the limits of government thinking. Prachanda, in an interview with a national daily newspaper, said few days ago that the discussions are being held with the parties that coming budget should be presented only after the formation of an interim government. If this is not possible, Prachanda has presented two other alternatives:

(i) to issue the budget through ordinance and (ii) to present the budget with a minimum agreement with the Maoists. (Gorkhapatra, July 2, 2006).

Prachanda hasn’t clarified about how the difficulties encountered in preparing the budget will be resolved by presenting it through ordinance. Generally, this can give the false message of attempting to strengthen monarchy against the spirit of the People’s Movement-2. Likewise, if the government prepares the budget only with the ‘minimum agreement’ with the Maoists, the image of the seven parties and Maoists before the people will be destroyed even though the two factions may themselves be satisfied. It needs no emphasis to state that either there should be agreement on every subject of national importance having ‘long-term impact’ or the people should be told that the eight-point agreement has been frozen. Everyone understands that the concerned parties can not use any act, law and understanding for their own convenience by specifying ‘minimum’ and ‘maximum’ limitations.

Against this background, the only available alternative is to present the budget after the formation of an interim government. But if this procedure is adopted, the Nepal Government, after July 17 will have to encounter its own difficulties as explained earlier. At the same time, the readiness of various donors to help Nepal has officially come to light time to time. The donor community has clearly stated that the Nepal Government has not presented adequate programs and projects for consideration. If available information is any guide, no discussion has ever been taken place at any level between the Maoists and SPA about the possible use of the expected financial and other assistance from the donors. That’s why doubts can be genuinely raised whether the unilateral declaration of programs and projects for the presentation by the Nepal Government in the budget won’t create problems. The Maoists have been repeatedly saying that the nation may be split into two parts with the Maoists controlling major parts of rural areas. It is now not inappropriate if both sides try to utilize the foreign assistance in their areas of influence. But, firstly, there should be agreement between the SPA and the Maoists on the procedure on budget preparation.

4.Budget Approval Procedure

After the government prepares the budget, there’s still no clarity, as needed, concerning the procedure for its approval that is considered necessary. From the viewpoint of the Nepal Government, the budget can be approved by the parliament. But this doesn’t tally with the spirit of the eight-point agreement between the seven parties and the Maoists signed on June 16. At the news conference held on June 16 at the Prime Minister’s residence, and according to the statements of Prachanda, ‘ the main spirit of the decisions, the seven parties and we [Maoists] have chalked out here is the dissolution of the old parliament, the dissolution of the government we have formed and move towards a new direction’. But within this timeframe, parliament hasn’t been dissolved nor the people’s government. But it looks like the dissolution of parliament isn’t that easy either. The policy makers of the economic sector have taken this decision very lightly or even ignored it. Available information suggests that we have only two options.

(i) If the eight-point agreement is to be implemented, the budget for the fiscal year 2006/07 can be prepared only after the interim constitution is framed and an interim government of the seven party alliance as well as the Maoists is formed. If not, any other arrangement designed for the approval of the budget may not be accepted by all concerned. Or else, Maoists could be involved in the budget preparation and thus gain their approval for the budget. It’s amazing why the seven parties allowed a group which had just accepted the temporary ceasefire was brought in to form the government policies and programs. This is a good topic for detail research. Even after the present government brings out the new budget at its own discretion, with or minimum consultation with the Maoists, and if it is approved by the House of Representatives, Maoists may, despite the ceasefire, continue to raise taxes, if they have not already done so, in the areas under their influence to collect funds for their people’s government and the People’s Liberation Army. Prachanda has, in a circular, made it known on June 3 stating that only voluntary donation will be accepted by the Maoists and no force will be used to collect donations. He also instructed his party to suspend people’s courts in ‘ big cities and Kathmandu, the capital city’. This means, in effect, that the people’s courts in the villages will continue to operate as usual. When one considers this state of affairs, it appears that the understanding between the Nepal Government and Maoists is confined only in military affairs. In other areas, conditions are the same as before the ceasefire. The general public hasn’t reaped the economic benefits from the cessation of hostilities.

(ii)The other alternative is to prepare and approve the budget in accordance with the procedure followed by parliamentary system of government. Under this procedure, the Prime Minister presents, firstly, the policies and programs of the Nepal Government for the coming fiscal year starting July 17 before the House of Representatives for approval. Then, the Minister of Finance presents the Economic Survey analyzing the economic situation of the current fiscal year. After a gap of one or two days, the proposed budget is presented for the approval. The house takes a couple of days or more to study and debate the program and policies proposed in the budget.

This procedure has been followed by the Minister of Finance from 1991 in framing the budget and the same method has been expected to follow now despite the changed circumstances. At present, however, the budget has to be prepared under different terms and conditions. But the Minister of Finance apparently has failed to take into account the changed scenario. To the surprise of all, the Minister of Finance reportedly has said that coming budget will try to set aside some money for the Maoist militants. This was also reported by some newspapers. If this is true, then every Nepali will have to think seriously about the expected change in political and economic scenario. It is, however, necessary to analyze if it is a right decision for the government to set aside the financial resources for a party the detail information of whose military size, strength and the weapons in possession is not available. It is, at the same time, maintaining only a temporary ceasefire. There’s every possibility the money set aside by the government will be used by the Maoists to recruit more soldiers and/or to purchase additional weapons. No one can guarantee that this may not happen. The decision to finance the Maoists will be suicidal for the nation. It is, of course, not possible for the Minister of Finance to find better alternative to help Maoists for consolidating and expanding their strength and might.

5. Budget Implementation

In the transitional phase, the Minister of Finance should prepare a budget that helps to tackle the new situation rather than proposing plans and programs for long term growth and stability. It will be meaningless for a finance minister of an interim government formed to establish another interim government to claim that he has prepared the budget with the development plans, priorities and processes
When one discusses of the implementation of the budget for the fiscal year 2006/07, the first question that is usually asked is: Which budget? Is it the budget that is going to be presented by the Minister of Finance to the House of Representatives or the one which will be presented only after the formation of an interim government at a later date? There is every possibility that there will be at least two budgets in the next fiscal year. If the interim government is not being assembled within the fiscal year 2006/07 then the proposed budget by the current Minister of Finance will be of use. So the primary question arises: what is the budget’s timeframe? When the state is considering changing the system of governance, then how appropriate is it for the Minister of Finance of one system of government to prepare a budget for another system of government? This is a useless exercise. If the Minister of Finance so desires, he can present the analysis that may help the forthcoming government. But he should prepare the budget for the period before the formation of an interim government.

We are perhaps used to prepare budgets for one year. The practice continues. The economists, these days, following the traditional pattern are in a hurry to analyze and prepare the proposed budget in the same old fashion. This, of course, does not mean that all the economic woes will be resolved after the formation of an interim government. The possibility is that the problems will be compounded. We are planning to prepare another report on this subject. All will be duly notified.

6. CONCLUSION

We are all aware of the problems that have been discussed above. The problems have to be tackled in time. Primarily, it is very essential for the Nepal Government to present the budget 2006/07 and get it approved to continue its work. Similarly, the eight-point program has to be considered if there is no thought of its being scrapped. To be sure, few natural difficulties may crop up occasionally but can be resolved with mutual discussion. In the transitional phase, the Minister of Finance should prepare a budget that helps to tackle the new situation rather than proposing plans and programs for long term growth and stability. It will be meaningless for a finance minister of an interim government formed to establish another interim government to claim that he has prepared the budget with the development plans, priorities and processes. It is the duty of the new interim government after it is formed. So, while presenting a budget during the transition, delivering a long budgetary speech with the introduction of new economic policy or new taxation rates should be avoided. In addition, the eight point program does not allow such a procedure. The state should give its endorsement to any agreement only after a deep consideration and thought; and the agreement, once it is approved, should be implemented. It is also necessary to be alert if the opposition is taking advantage of many weaknesses of the state. It is the duty of civic society to alert the state from time to time.

It appears, at present, that the budget has to be conceived differently compared to the past. This year, the Prime Minister is going to present before the House of Representatives the policies and programs of the next fiscal year. (We have to see whether this will be the policy and program of one party of the conflict or a statement agreed by both in accordance with the spirit of the eight point agreement.) The proposed budget of the fiscal year 2006/07 can include a few programs without long term impact proposed in the policy statement of the government. Otherwise, it should just confine itself to present the estimated income and expenditure of the government for one year. This is in reality the scientific character of a transitional budget. Only such a clean and neat budget can facilitate the smooth working of a government in the coming months. This type of budget will also help the interim government to prepare its policies and programs to let the country move again. If the new budget is presented in the traditional style, there’s a strong possibility that the government will lose its credibility and the people’s faith. Squabbles between seven parties and Maoists may resurface.

(Unofficial translation of the summary of the report on the subject prepared by the Institute for Development Studies(IfDS) and read out by its executive director Dr. Raghab Dhoj Pant at a press conference held at its office in Kathmandu on July 6)