Budget Review

A.R. Bhattarai
CEO
N.R.N. Nepal Development Fund

2023/24 Opinions expressed are solely my own and do

not express the views or opinions of the NDF.
 Budget 2023/24

According to the National Accounts Statistics (NAS) for the ninth months of FY
2022/23, the preliminary estimate of the growth rate of Gross Domestic Product
(GDP) at basic price is 2.16%. Further, the NAS has revised the growth estimate
for FY 2021/22 and 2020/21 to 5.26% and 4.49% respectively.
Expected Index

Particulars Budget 2020/21 Budget 2021/22 Budget 2022/23 Budget 2022/23

Growth Rate 7.0% 6.5% 8.0% 6.0%
Inflation 7.0% 6.5% 7.0% 6.5%
Particulars Actual 2020/21 Actual 2021/22 Estimated 2022/23 Estimated 2023/24
Growth Rate 5.26% 4.49% 2.16% 3.5-4.5%
Inflation 3.6% 7.3% 7-8% 6.7-7.7%
 Inflation Growth Rate of Seasonally Unadjusted National Quarterly GDP by Economic Activities (at basic Price ,
Economic Growth 2010/11)

The economic growth for the year Given the increase in price of oil 2078/79 2079/80
2022-23 is estimated to remain and war between Russia and Industrial Classification 2021/22 2022/23
below 3% against the ambitious Ukraine the inflation has reached
above target level. For FY 2023/24 Q1 Q2 Q3 Q4 Q1 P Q2 R Average
growth target of 8%. For FY
the GoN set target rate of inflation A Agriculture, forestry and fishing 2.7 3.4 2.3 0.7 1.6 2.6 Up
2023/24 GoN set GDP growth
at 6.5%
target rate at 6% B Mining and quarrying 24.0 8.1 8.2 -5.3 -12.4 -16.4 Down
Growth 2022/23
C Manufacturing 4.8 3.8 5.7 10.7 -2.9 -4.3 Down
Nepal GDP forecast
World Bank D Electricity, gas, steam and air conditioning supply 16.6 22.4 54.0 69.3 27.5 8.0 Down
Jan. 2023 5.1% (No change from Oct. 2022) E Water supply; sewerage, waste management 0.5 0.5 1.7 0.3 0.2 0.1 Down
April 2023 4.1% (1% down from Jan 2023)
F Construction 14.2 10.1 13.1 1.3 -15.0 -20.6 Down
Wholesale and retail trade; repair of motor vehicles &
IMF Jan. 2023 5.1% (0.9% up from Oct 2022) G motorcycles -12.2 14.0 0.2 46.9 0.7 -9.7 Down
March 2023 4.40 (0.6% down from Jan 2023)
H Transportation and storage 16.4 7.6 -3.1 -5.4 -0.4 -5.5 Down
ADB. Sept. 2022 4.7% I Accommodation and food service activities -4.5 2.6 19.2 42.9 45.8 20.4 Down
April 2023 4.1% (0.6% down from previous J Information and communication 10.6 5.4 0.5 -2.0 0.3 1.9 Down
forecast)
K Financial and insurance activities 3.9 -1.7 5.8 14.6 14.6 14.0 Up
15.00
L Real estate activities 3.8 3.8 3.8 3.8 2.2 2.2 Down
11.84
10.00 M Professional, scientific and technical activities 2.6 3.6 3.0 5.8 6.6 6.3 Up

6.73 N Administrative and support service activities -0.3 3.5 8.4 5.9 7.0 4.3 Down
5.00 Public administration and defence; compulsory social
3.9 O security 7.9 7.9 -0.6 1.7 4.6 5.7 Up
- P Education 10.1 6.6 -2.3 2.5 -0.3 2.6 Down
2018/19 2019/20 2020/21 2021/22 2022/23e QII 2023/24e
Q Human health and social work activities 1.3 14.4 4.5 8.3 7.2 1.5 Down
(5.00) R, S, Arts, entertainment and recreation; Other service
T activities; and Activities of households as employers 4.5 2.9 5.3 2.5 0.5 0.8 Down
Inflation GDP Interest rate
Aggregate 3.3 6.4 3.2 9.0 1.7 -1.1 Down
Government of Nepal Receipts & Payments Status Government of Nepal Treasury (USD= 119 NPR) (USD in million)
Government Receipts & Payments F/Y
Annual Budget 29/05/2023 % age
Status 1 USD= NPR 130 2016/ Mid-Month Septemb Octobe Novemb Decemb Februar
1. Revenue (USD in 17 August er r er er Januaryy March April May June July
10,793.44 6,065.94 56.20%
million)
a) Tax Revenue 9,964.43 5,505.81 55.25% Expenditure
b) Non Tax Revenue 829.01 560.13 67.57% 16 450 1,487 2,104 2,577 3,397 4,098 4,687 5,665 6,756 7,550 9,750
2. Grants 426.60 36.94 8.66%
F/Y
3. Other Receipts - 280.38 2020/ Revenue
21 494 885 1,448 2,018 2,531 3,548 4,189 4,800 5,747 6,395 6,826 7,885
Total Receipt 11,220.04 6,383.26 56.89%
2. Total Expenditure from Treasury
13,798.75 8,473.60 61.41% Position
Treasury 1,652 1,748 1,793 1,857 2,065 2,477 2,893 3,241 3,282 2,668 2,651 1,682
a. Recurrent 9,101.81 6,335.07 69.60%
Expenditure
b. Capital 2,926.03 1,052.54 35.97% 82 643 1,940 2,381 3,187 4,090 4,892 5,576 6,535 7,428 8,385 10,465
c. Financing 1,770.91 1,085.98 61.32% F/Y
Deficit (2,578.71) (2,090.33) 2021/ Revenue
22 784 1,417 2,143 2,809 3,466 4,555 5,155 5,754 6,632 7,214 7,851 8,900
Key Economic Indicators
Treasury
Particulars Mid-April 2023 (USD=130 NPR) Position 2,338 2,467 2,006 2,316 2,447 2,335 2,558 2,818 2,799 2,710 2,933 1,897
Inflation remained 7.76 percent on y-o-y basis which was 7.44 % on Expenditure
CPI-Inflation
previous month. 180 1,048 2,888 3,596 4,707 5,505 5,505 6,449
F/Y
Imports decreased 16.1 percent, exports decreased 26.3 percent and 2022/ Revenue
External 670 1,209 2,253 2,747 3,857 4,325 4,325 4,897
trade deficit decreased 17.9 percent. In the previous year, Imports 23
Trade increased 32 percent and exports increased 69.4 percent. Treasury
Position 2,473 2,238 1,536 1,533 1,673 1,722 1,722 1,602
Remittances increased 13.9 percent in USD terms. In the previous
Remittances
month, it was increased by 14.8 percent in USD terms.
Ownership Structure of Government Securities
Balance of Balance of Payments remained at a surplus of $ 1.39 billion compared
Payments to a surplus of $ 1.12. billion in corresponding previous month
7.76
Broad money (M2) increased 6.6 percent. On y-o-y basis, M2 increased 2.22
Broad 4.37
9.9 percent. In the corresponding previous year, Broad money (M2) 77.41 2.15
money (M2)
increased 3.5 percent. On y-o-y basis, M2 increased 10.4 percent. 10.46
Deposits at BFIs increased 7 percent and private sector credit increased
3.5 percent. On y-o-y basis, deposits increased 11 percent and private
Deposits and
sector credit increased 3.2 percent. Deposits at BFIs increased 5.1 NRB Secondary Market Commercial Banks Development Banks
Loans and
percent and private sector credit increased 13.5 percent. On y-o-y
advances
basis, deposits increased 12.2 percent and private sector credit 17.8 Finance Companies Other
percent.
Budget Source and Allocation 2023/24
Budget Sources
Exchange Factor 1 USD = NPR 120 1 USD= NRP 132
Actual Budget Actual Budget Revised Amount
Amount ($ Million) Amount ($ Actual Amount ($ Amount ($ Million) ($ Million) Budget ($ Million)
Allocated Budget 2020/21 Million) 2021/22 Million) 2021/22 2022/23 2022/23 Variance 2023/24
Current Expenditure 3,764.18 5,655.11 4,535.35 6,278.36 5,336.60 -15.00% 5,618.92
Capital Expenditure 1,906.97 3,118.91 1,801.78 3,169.87 2,152.88 -32.08% 2,288.44
Financial Provisioning 1,864.53 1,733.15 1,752.41 1,918.48 1,693.83 -11.71% 2,329.19
Intergovernmental Fiscal
Transfer 3,287.63 3,222.64 3,383.96 3,581.94 3,358.33 -6.24% 3,030.96
Total 10,823.31 13,729.81 11,473.50 14,948.65 12,541.65 -16.10% 13,267.52
Budget Allocations
Exchange Factor 1 USD = NPR 120 1 USD= NRP 132
Budget Budget Revised
Revised Amount Budget Amount Budget Amount Change
Amount ($ Amount ($ Amount ($ Budget Amount ($
($ Million) ($ Million) ($ Million) Variance (Revised 2022/23 to
Revenue Million) Million) Million) Million) 2023/24
2021/22 2021/22 2022/23 Budget 20223/4)
Sources 2020/21 2021/22 2022/23

Tax Revenue 7,211.40 8,540.89 8,487.72 8,216.69 10,334.32 8,666.67 -16.14% 9,462.27 9.18%
Foreign
Grant 304.01 528.14 206.74 229.07 462.15 320.49 -30.65% 375.33 17.11%
Deficit 3,307.90 4,660.78 3,368.19 3,027.74 4,152.18 3,554.50 -14.39% 3,429.92 -3.50%

Foreign Debt 1,441.24 2,577.44 1,440.65 1,089.11 2,018.84 1,421.16 -29.61% 1,611.74 13.41%
Domestic
Debt 1,866.67 2,083.33 1,927.53 1,938.63 2,133.33 2,133.33 0.00% 1,818.18 -14.77%
Total 10,823.32 13,729.80 12,062.64 11,473.50 14,948.64 12,541.65 -16.10% 13,267.52 5.79%
12,000 90.00%
11,367 76.04%
10,237 80.00%
10,000 77.16%
70.00%
8,000
60.00%
6,000 50.00%

2,503 40.00%
4,000
30.00% 16.74%
2,000 2,235
1,079 20.00%
796 16.85%
- 10.00% 7.22%
6.00%
Aallocation Aallocation
0.00%
2022/23 2023/24 In % age In % age
Central Province Local Central Province Local

Observations:
•The global unrest and surge in commodity prices will impact government revenue receipt. Hence, the revenue growth target of 9.18% seems challenging
•Mobilization of $1,611 million foreign loan seems ambitious. Besides, emergency financial assistance from multilateral agencies, mobilization of other loans
hinges on progress made on projects. Hence, there is a need for ramping up of capital budget absorption capacity
•Domestic borrowing of $ 1,818 million along with limited liquidity of bonds and unexpected additional tax burden related to M&A transactions, tax issues
related to FPO, and increasing non-performing loans may pressure BFI’s. BFIs will not be motivated to lend to the private sector.
•Target of mobilization of the foreign grant of $375 million is higher than the grant received in the last few years.
•$3,031 million has been allocated to the provincial and local government, approximately 22.84 of the budget. It is 1.12% less than the previous year’s
allocation.
•Government aims to enhance the role of sub-national governments in national priority projects
Some sections of the Finance Act has imposed tax retroactively therefore those clause may require explanatory notes.
Budget Source and Allocation 2023/24
Areas of Budget allocation 2021/22 2022/23 2023/24 Compare to last year Sectoral distribution
Amount in $ Amount in $ Amount in $
Mn in % age Mn in % age Mn in % age In figure In % • The allocation for general
public service and
General Public Service 4,034 29.42% 4,779 31.97% 4,777 36.00% Down Up
Defense 414 3.02% 462 3.09% 434 3.27% Down Up
Economic affair constitute
Public Order and Safety 484 3.53% 545 3.65% 539 4.07% Down Up approximately 58.33% of
Economic Affair 3,684 26.87% 3,890 26.02% 2,962 22.32% Down Down the budget.
Enviromnental Protection 105 0.76% 92 0.61% 65 0.49% Down Down • Decrease in allocation
Housing and Community allocation of budget for
Ametinies 671 4.89% 738 4.94% 500 3.77% Down Down
Health 1,180 8.60% 1,027 6.87% 779 5.87% Down Down
Health and Environmental
Recreation, Culture and protection by 24% and
Religion 56 0.41% 80 0.54% 50 0.38% Down Down 29% respectively.
Education 1,500 10.94% 1,641 10.98% 1,498 11.29% Down Up
• Budget for Recreation,
Social protection 1,582 11.54% 1,694 11.34% 1,663 12.53% Down Up
Total 13,709 100% 14,949 100% 13,268 1.00 Culture and Religion has
been decreased by 37%.
Exchnage Factor USD 1 = NPR 120 USD 1 = NPR 132

Commitment of Budget 22.32%

• Boost to economic growth
through by increasing economic
activities for achieving
sustainable growth%.
• Improve confidence of private 36.00%
sector.
• Improve business and investment
Areas of Budget allocation General Public Service Defense Public Order and Safety
environment.
• Maintain financial stability. Economic Affair Enviromnental Protection Housing and Community Ametinies Health
• Improve governance. Recrecation, Culture and Religion Education Social protection
 2023/24’s Budget
Should Prioritize
Nepal needs an emergency economic plan to jump-start the
economy and get the economy back on track by maintaining: -
a) Fiscal balance,
b) Financial stability and
c) Anchor inflation to reasonable limit.

(Partially Addressed)
 01 Economic Recovery
04 Agriculture/Farm sector
q Support the recovery of agriculture, tourism, industry, construction and other affected
businesses by current crisis. Provide regulatory forbearance. (Not addended)
q Restructure tax system and generate more revenue from assets monetizing q The Government should announce the “Kisan Utpadan Bikri Yojana” (KUBY) scheme, which
(Addressed) should provide a guaranteed income of Rs 30,000 per year to small and marginal farmers.
q Reinforce market monitoring, inspection, and supervision further contribute to the (Not addressed)
regulatory work. (Addressed) q Interest subvention of 2% should be announced for farmers affected by natural calamities. An
q Support financial sector consolidation. (Not addressed) (New tax liability has been additional 3% relaxation should be given for timely repayment of agriculture loans. This
imposed) scheme should be extended to farmers engaged in animal husbandry and fishery-related
activities and deprive sector loans. (Not addressed)
02 Qualitative and Practical Education
05 Infrastructure Development and Real estate/Construction
q Establishment of qualitative and practical education system, enhanced use of
information technology (Addressed)
q Completion of the projects having immediate benefit and other ongoing projects within the
q Enhance the University’s capacity to engage with industry and build
collaboration. (Addressed) next few years (Addressed)
q Encourage investments in infrastructure (roads & electricity) (Addressed)
q Provide support for conducting entrepreneurship development and skill
q Strengthen regulation & reduce government involvement in markets (Addressed)
development training programmes. (Addressed)
q Reduce tariffs for infrastructure related imports (Addressed)
q Remove barriers to FDI and setup benchmark rates for raising long term debt from the market;
03 Employment Creation and Social Security (Addressed)

q Creation of work and employment opportunities, food security, social security

and housing. (Addressed) 06 Micro, Medium and Small Enterprises (MSMEs)
q Adopt problem base learning system to produce high skilled workforce
q Upskill migrant workers, Provide information, language, & soft skills for migrants, q 2% interest rebate for MSMEs registered under VAT for loans up to Rs. 2 crore (Not addressed)
Diversify destinations for temporary migration. (Addressed) q Requirement of sourcing by government enterprises from SMEs should be increase to 20%, of
q Develop labor data base to facilitate the process to create working groups (Not which, at least 5% to be sourced from women-led SMEs (Not addressed)
addressed) q Credit Linked Capital Subsidy (CLCS) for Technology Upgradation (Not addressed)
q SMEs register the at Social Security should get tax rebate of 5% on taxable q Set up common facility centres (for testing, training, raw material depot, effluent treatment,
amount. (Not addressed) complementing production processes, etc (Not addressed)
q Social Security should be announced for workers in the unorganized sector with a
monthly income upto Rs.15,000. (Not addressed)
 10 VAT and Capital Gain Taxes
Health.
07 Health
q Multiple VAT rates should (0% for Agricultural products) be introduced within the next two
q Creation and upgradation of health infrastructure years (Not addressed)
q Capacity enhancement of health workers q Proportionate exemption on long-term capital gains arising from proceeds of sale of shares,
q Minimize health risk due outbake of any disease subject to:
q Increase action to reduce environmental risk q 2% Capital Gain tax on the stock held for more than 5 year.
q Develop health insurance markets, q Amount of capital gain shall not exceed Rs 10 lakh. (Not addressed)
(Partially Addressed) q Real Estate developers should be allowed deduct 50% of Capital Gain derived from
development of affordable housing below Rs. 1.5 crore. (Not addressed)
New tax has been introduced
08 Assets Monetization
11 The principle of financial good governance
q Monetization involves creating new sources of revenue for the government
by unlocking the value of public assets. q Adoption of established principles of good governance and market discipline to develop a
(Partially Addressed) healthy system.
q Increasing inclusiveness & strengthening the rule of law is essential to addressing sources of
fragility. Development of qualitative and accessible public services with accountable and
09 Corporate Taxes transparent governance
q To support progress in other areas public institutions should be improve.
q Domestic companies with a turnover not exceeding Rs. 20 crore during (Partially Addressed)
FY 2023/24 should be tax at the rate of 16%. The base year turnover for
this reduced tax rate should be FY 2022/23. (Not addressed) 12 Natural resource Development

q The Government should push towards technology-intensive tax

assessments and return processing within the next two years. This is q Support agricultural growth by improving market access, & year-round irrigation
directed towards eliminating personal interface and bringing q Enable private sector investment in energy, transport, health, education.
transparency. (Not addressed) q Improve planning & interagency coordination among government agencies.
(Partially Addressed
The 2023 Budget will be looked at from two critical angles. First, the expectation of a boost to economic growth through capital expenditure, and second, the ability to contain
fiscal deficit in the increasingly uncertain global economy. Government should not only focus on tax collection but also on monetizing its assets to generate more revenue and
reduce the fiscal deficit. Government should set a target to monetize some assets, use resources thus generated to boost Infrastructure, revive the economy, and provide
relief to consumption-led sectors struggling after the pandemic.
2023/24’s Budget
should focus on
 01 Public investment 04 Governance and sector structure
q Increase public investment for building modern infrastructure
q Support inclusive development q Reducing overlapping roles of government agencies
q Improve institutional capacity for public procurement, contract q Improve inter-agency coordination
management q Increase experience with private participation
q Define a procedure for asset management and maintenance q Improve accountability & strengthen rule of law, amend FITTA and other laws and regulations
(Partially Addressed) q Support diaspora to invest in Nepal
q Reduce barrier to entry and exit and increase access to international market for investment
02 Startup ecosystem (Partially Addressed)

05 Underserved and unserved MSME segments

q Provide the conducive environment to both new and existing fintech
companies/start ups
q Ease access to funding at concessional rates and lower taxation q Improve access to credit and provide loan or overdraft facilities
q Assisting startups through policies and support and et-up Startup Nepal q Regulate informal lending sector
hubs to support incorporation, registration, grievance handling q Ease business registration process
(Partially Addressed) q Support digital infrastructure and innovation and develop business models that cater to the
bottom of the pyramid
03 Energy transition, and climate action (Partially Addressed)

06 Make in Nepal
q Switching to energy-efficient solutions
q Budget should shape the tomorrow of Nepal’s energy path
q Encourage green investment q 2% interest rebate for MSMEs registered under VAT for loans up to Rs 2 crore
q Rupee debt raised from the international market, through suitable q Requirement of sourcing by government enterprises from SMEs should be increase to 25%, of
instruments created for the purpose; which, at least 5% to be sourced from women-led SMEs
q Governments must lead green investment, remove regulatory obstacles q E-procurement System (EpS) platform should be implemented to Public Sector Enterprises
and support economic activities, q Ensure availability of longer tenor debt finance for make in Nepal projects.
(Partially Addressed) (Partially Addressed)

The budget must take a transformative approach to boost economic growth and sustainable development driven by the development and improvement of
Logistics Infrastructure. Government must increase government expenditure on infrastructure. On the Direct Tax front, the government should review the
basic income tax exemption limit and income slabs and the tax rates. Additionally, the Government should announce and implement tax and regulatory
measures which should go a long way towards removing taxpayer difficulties, reducing litigation, providing certainty, and widening the tax base.
 Nine Enablers of Nepalese economy

As the capital expenditure is crucial for achieving growth objectives of the Federal structure Economy, Nepal
should focus on following basic principles.
(Partially Addressed)

1 2 3 4 5 6 7 8 9

Design Long Prepare Project Reduce Improve Implement Design an Appoint Support Enabling
term vision and Banks - Budgetary procurement stringent effective competent effective legal Sectoral policy
strategy for investment processes to efficiency and contact monitoring project institutional operation
economic project speed up capital maintain management system to personnels led framework and framework
development preparation to expenditure, budgetary and improve the by a dynamic promote
and social invite local as discipline, enforcement productivity of person, investment
harmony, well as foreign requirements to investment,
investment, maintain the
time schedule of
the project.

The Government of Nepal must plan effectively and effectively and should continuously monitor its activities to
achieve sustainable high growth.
 Improve regulatory capacity enhancing the quality of supervision, supported by the data and Partially addressed
regulatory upgrades and improve the autonomy and accountability framework of the NRB.
Review aggressive monetary-tightening stance and review policy rates. As interest rates higher for Addressed
longer than currently anticipated. Debt servicing costs could escalate and add to financial stability risks.

Redesign other policies to maintain inflation targets with a margin of 2% on either side. Not Addressed
Provide a clear guidance on restructuring and rescheduling of loan. Review the risk grading, Partially addressed
rescheduled and restructured loans of hard-hit sectors and SMEs facing cash flow crisis. (The
provisioning requirement of 12.5% has discouraged BFI to enter workout arrangements and encourage
the auction of collateral.)

Implement interest rate spread effectively. It is more than a permissible level. Partially Addressed
Review the working capital guidelines to match sectorial requirements. Not Addressed
QIII NRB should ensure that banks’ loan classification correctly reflects the asset quality of the banking Partially addressed

Monetary system and review loan classification policy (currently default is determined based on non-payment (3
months 6 months and year.)

Policy Review assets and liability pricing policies and allow BFIs to reduce interest beyond the 10% limit. Partially addressed
However, maintain the higher limit of 5% for upwards revision. Review Interest rate adjustment
Review mismatch - deposits rates on a monthly, loan rates on a quarterly basis
NRB should review liquidity policy and provide liquidity in the system where necessary and review the Not Addressed
refinance facility. (Excess SLR holdings does not provide collateral buffers to banks for availing funds
under the SLF.)
Review the accounting treatments for capitalized interest during the construction period. Not Addressed
Review risk weighted on margin loans and private vehicle loans. Not Addressed
Implement Countercyclical capital buffer in phase wise manner and rollout policies to support the gap Partially addressed
created by accounting treatment of debenture.
Promote loan to the sector which encourage use of domestic resources improve productivity and Partially addressed
competitiveness
Support highly impacted sectors such as MSMEs, construction, retail, etc. through some regulatory Addressed
forbearance
 Best regards,
Bhattarai
Thank You! https://nepaldevelopmentfund.com/

https://www.linkedin.com/in/analrajbhattarai/