Development projects suffer from funds crunch as government revenue takes hit

With the government facing a resource crunch, contractors complained of not being paid on time even for completed works.

Prithvi Man Shrestha

Prithvi Man Shrestha

The Kathmandu Post


Administrative costs are ever growing but capital expenditure remains dismal. Post File Photo

January 5, 2023

KATHAMANDU – It has been a month since the Ministry of Energy, Water Resources and Irrigation sent a request to the Ministry of Finance seeking an extra Rs4 billion to implement several irrigation and river control projects.

According to the ministry, due to limited resources allocated to the projects, it had to seek extra help from the finance ministry to continue work on several development projects, some of which are ‘National Pride Projects.’

“Citing a shortage of funds, the finance ministry has not given us a single penny,” said Keshav Kumar Sharma, Water Resources and Irrigation secretary. “We got the finance ministry’s approval to transfer Rs1 billion to the needy projects by transferring funds from various budget headings.”

According to Sharma, a number of irrigation projects including Babai, Rani-Jamara-Kulariya, Sunsari-Morang, Bagmati, and river control projects such as Narayani River Management Project, Kamala River Training Project, and Karnali River Management Project all require extra funds.

Babai and Rani-Jamara-Kulariya are national pride projects. “We immediately need an extra Rs5 billion for these projects,” said Sharma. With development-focused ministries seeking extra resources for construction and payment of completed works, the finance ministry is struggling to generate enough funds.

According to the Financial Comptroller General Office (FCGO), which keeps records of the government’s income and expenditure, the revenue collected so far is not enough even to meet the demands for recurrent (administrative) expenditures.

For example, the government’s revenue collection as of January 3 of the current fiscal year 2022-23 is Rs360.22 billion while its recurrent expenditure is Rs406.54 billion. Administrative costs are ever growing while the capital spending has remained dismal, at 11.51 percent, as of January 3, according to the FCGO.

In his 30-point directive to the secretaries on Tuesday, Prime Minister Pushpa Kamal Dahal raised questions over poor revenue collection: which came to just 25 percent of the annual target, as of December 30 last year.

“Economic recession and decrease in imports may have played a role in the decline in revenue,” said the prime minister. “Even the collection of income tax has been below the target.”

He said the country’s fiscal health is in crisis, given the poor revenue collection, equally poor capital spending, and billions of rupees in unsettled accounts.

On Wednesday, Prime Minister Dahal held discussions with Deputy Prime Minister and Finance Minister Bishnu Poudel and central bank governor Maha Prasad Adhikari about the status of the economy, issues of the banking sector, and measures needed to improve the situation, the prime minister’s personal secretariat said in a statement.

Amid poor revenue collections, the government lifted the ban on the import of vehicles, liquors, and high-end mobile phones effective from mid-December last year, after banning their imports for over seven months.

With the government facing a resource crunch, contractors complained of not being paid on time even for completed works.

Rabi Singh, the president of the Federation of Contractors’ Association of Nepal (FCAN), said government agencies not paying contractors on time is nothing new and the tradition has continued this fiscal year also.

“I have yet to receive payments for two drinking water projects in Namobuddha of Kavre, and Phidim of Panchthar although I submitted the bills several months ago,” said Singh. “The bills are worth Rs50 million and Rs30 million.”

The FCAN, the umbrella organisation of contractors, has also submitted a memorandum regarding the problems of contractors to Deputy PM and Finance Minister Bishnu Poudel, Deputy PM and Physical Infrastructure Minister Narayan Kaji Shrestha, and Deputy PM Home Minister Rabi Lamichhane.

The FCAN has called for clearance of outstanding bills within 30 days.

“The contractors have not been able to speed up construction works due to the lack of funds with the banks as well as in the government,” said Singh.

As the government is struggling to collect revenue, the banking sector is facing a shortage of loanable funds, a situation commonly known as a liquidity crunch.

According to Prakash Kumar Shrestha, chief of the economic research division at the Nepal Rastra Bank, banks and financial institutions have been able to lend only around Rs3 billion since mid-October while their deposit collection stood at around Rs100 billion.

The BFIs have been using increased deposits to meet the statutory requirements rather than in fresh lending.

The BFIs are supposed to maintain a credit-to-deposit ratio of under 90 percent and they have successfully managed to bring the ratio down to around 87 percent from over 90 percent at the end of the last fiscal year, according to the central bank.

With liquidity continuing to be tight in the banking system, the contractors have also failed to get loans to carry out construction projects.

“Usually, construction works speed up after festivals and elections, but that is not the case this time owing to a shortage of funds with the contractors,” said Singh. “As the contractors also cannot pay taxes due to slow progress in construction works, the government is struggling with funds shortage.”

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