Time for Finance Ministry to look into effective austerity measures

KATHMANDU: As revenue mobilization has been dismal since the second month of the current fiscal year 2020/21, there are high chances that the government treasury could soon face a crisis.

After the government imposed a prohibitory order in Kathmandu valley and several other districts to prevent the spread of the COVID-19, revenue collection has been almost nil since mid-August (first week of Bhadra).

A very nominal amount is being collected at the customs points and inland revenue mobilization has been totally closed. The government needs more than Rs 40 billion for regular and mandatory fiscal liabilities.

However, due to the prohibitory order of the local administrations and the rising cases of Covid-19 infections, economic activities across the country have halted, which directly affects the government treasury.

Going by the current trend, domestic revenue mobilization in the first quadrimester of this fiscal year, which holds a major stake of the revenue collection, will be weak. Likewise, international trade has also suffered and the domestic market is also facing low demand. This has affected revenue collection and revenue generation from the customs offices.

“There will be more challenges in the near future and the government facing a critical revenue situation is also not very far away,” a high-level official at the Ministry of Finance who did not want to be named, said. “If revenue mobilization in the coming days too is similar to the situation we are facing now then the government will not have resources to spend on its mandatory liabilities,” he added.

This is not the first time that the government is facing a crisis in treasury management. Earlier too, in May and June, the government faced a severe financial crisis when it was not able to collect the second tranche of income tax, valued added tax and excise duty from mid-February onward.

At the time, Finance Minister Yuba Raj Khatiwada had mentioned in the parliament that the government was facing a cash crunch to manage mandatory liabilities like salaries for government officials and social security funds.

What could be the way out?

The government has the option of curbing unnecessary expenditures and utilizing the available resources in highly prioritized areas. Finance Minister Khatiwada and his team could adopt effective austerity measures for the prudent use of the treasury in this crisis.

On April 2, Finance Secretary Sishir Kumar Dhungana had issued a letter to all the secretaries of the government informing them about the suspension of the allocated budget under 14 different headings including vehicle purchase and land acquisition.

“We cannot for sure say how long this situation will continue and the Finance Ministry is planning to take action regarding cutting some recurrent and capital expenditures,” a source at the MoF said. “A decision will soon be taken after we have analyzed the resources and expenditures.”

In the initial days of his tenure the finance minister had urged all the government authorities to cut unnecessary spending. However, at present the Finance Ministry itself has not been following Khatiwada’s directions. Amid the nationwide lockdown, the Financial Comptroller General Office, which is under the Finance Ministry, purchased a vehicle worth Rs 50 lakh.

“We all know that the situation right now is not favorable, hence we will take some serious action to salvage the treasury,” Finance Secretary Dhungana informed.

The Finance Ministry is responsible for managing resources for regular development activities, mandatory expenses and health care. If the impact of the COVID-19 becomes even more severe, the government will be obliged to raise its expenditure on the health care system.

“If the current situation prevails for a longer time then we will suspend some budget headings,” a joint secretary at the Finance Ministry said. “We can suspend some programs like vehicle and furniture purchase, land acquisition and training and seminars.”

The government fundamentally has three sources to manage the treasury – tax collection, domestic borrowing and international grants and loans. If the crisis continues then tax collection will definitely be affected and domestic borrowings also have limitations. In such a scenario the government will have to borrow from the international market to operate the most essential services.

“We will have to manage both our resources and expenditures,” the Finance Ministry said. “In a critical situation we will resort to massively cutting down our spending.”