World Bank (WB) has asked the government to strengthen its public financial management systems and practices, as it has eroded the country’s ability to fully utilise budget.
Despite the timely budget for the current fiscal year 2012-13, the government failed to expedite the capital expenditure, stated the multilateral development partner’s Nepal Economic Update 2014 which was released here today.
“The answer to under-investment lies in public financial management systems that are well defined on paper but dysfunctional in practice, with critical gaps at all stages of budget planning, formulation and execution as well as deficient oversight capacity and systems,” said World Bank country director for Nepal Johannes Zutt.
Because of low public spending, the country recorded a budget surplus last fiscal year and that trend is expected to be repeated this fiscal year too, he said, adding it is a paradox that public investment has not picked up despite the fiscal space.
The government is expected to have around Rs 35 billion budget surplus in the current fiscal year.
Fiscal discipline is a means to an end but in Nepal it appears to be pursued as an end in itself, with the government unable to plan and implement the budget, the annual report stated, adding that Nepal should carry out an in-depth review of the entire budget chain from planning to budgeting and execution. “It is essential for Nepal to take advantage of the ‘fiscal space’ because private investment also depends on public investment. If there will be low public investment the private sector will also not spend.
World Bank suspects ever-greening of loan
Many banks and financial institutions are supporting cash-strapped borrowers as they are extending additional credit line to enable them to repay the old debt that are encouraged ever-greening of bad loans, the report stated categorically suspecting the level of bad debt in the banking sector to be higher than that reported by the central bank. Nepal Rastra Bank’s report stated that the non-performing loan – popularly known as bad loans – currently stands at an average of 3.8 per cent. But the World Bank suspects huge ever-greening of loan to avoid provisioning. “Although we do not have data on the proportion of such loans, recurrent anecdotal evidence suggests that ever-greening is widespread,” said World Bank’s senior country economist Aurlien Kruse.
When a bank extends new loan to pay old loan, it is called ever-greening. “It is quite common, and appropriate, for banks to revisit the original terms of a loan when solvent corporate clients are faced with temporary liquidity shortage,” it added.
Do not fix spread rate
World Bank has suggested the central bank not to fix spread rate – that is the difference between borrowing and lending interest rates – that according to it could distort the ability of banks and financial institutions. The central bank has directed the commercial banks to maintain spread rate at five per cent from the next fiscal year 2013-14. But the bankers said that fixing the spread rate will hurt the financial sector. The World Bank has also argued that the cap on interest rates spreads will weaken the balance sheet of the banks and also worsens the quality of services. “The restriction on fees could dampen investment in innovative delivery channels and technology,” World Bank country director for Nepal Johannes Zutt said, adding that it will also affect the environment of competition and encourage curtail in lending to small medium enterprises and the long term projects. “Likewise, directed lending also distorts the ability of banks to optimally allocate credit as well as crowding funds in the micro finance institutions.”
Only 86 per cent of the firms are getting banking services, according to the report that adds, “of them, only 35 per cent are getting credit.”
Economic growth projected at 4.5 per cent
World Bank has projected 4.5 per cent economic growth for the current fiscal year 2013-14 – lower than the government’s projection of 5.5 per cent – due to better agriculture output. However, it has claimed that the inflation will climb close to double-digit against the government’s 8.5 per cent. Country director of the World Bank for Nepal and Bangladesh Johannes Jutt said that Nepal is losing its market share in the global market due to lack of efficiency and political instability. Suggested the government increase investment in infrastructure, he also asked the private sector to create job opportunities and boost productivity.