VZCZCXRO5203
PP RUEHCI
DE RUEHKT #0674/01 2050114
ZNR UUUUU ZZH
P 240114Z JUL 09
FM AMEMBASSY KATHMANDU
TO RUEHC/SECSTATE WASHDC PRIORITY 0528
INFO RUEHBJ/AMEMBASSY BEIJING 7047
RUEHLM/AMEMBASSY COLOMBO 7365
RUEHKA/AMEMBASSY DHAKA 2696
RUEHNE/AMEMBASSY NEW DELHI 3139
RUEHCI/AMCONSUL KOLKATA 4679
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHHMUNA/HQ USPACOM HONOLULU HI//J2X/J2C/J2D/J2I//

UNCLAS SECTION 01 OF 03 KATHMANDU 000674 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ECON EFIN ETRD PTER KCRM NP
SUBJECT: NEPAL'S BUDGET: BROAD PROMISES, UNREALISTIC 
ASSUMPTIONS 
 
Summary 
------- 
 
¶1. (U)  The Government of Nepal recently unveiled its 
policies and programs for fiscal 2009/10, and a USD 3.7 
billion budget to support them, with the aim of, among other 
things, fostering faster economic growth, curbing inflation, 
boosting infrastructure development, and expanding social 
services to the downtrodden, all while moving the ongoing 
peace process forward.  Widespread criticism of these 
proposals from business leaders, economists, leading 
lawmakers from its 22-party coalition, and many others, 
indicate that the new Communist Party of Nepal-United Marxist 
Leninist-led government is off target.  The general consensus 
among critics is that the Government lacks the capacity 
necessary to fulfill the plethora of promises it has made. 
 
Policies and Programs Promise Something for Everyone 
--------------------------------------------- ------ 
 
¶2. (U)  On July 9, President Ram Baran Yadav presented the 
Communist Party of Nepal-United Marxist Leninist (UML)-led 
government's annual programs and policies to parliament, 
giving top priority to completion of constitution drafting, 
state restructuring and economic growth.  He pledged that 
Nepal's new constitution will be completed "on the basis of 
national consensus" before the May 2010 deadline, federalism 
would be institutionalized and a strong "socialism-oriented" 
economy that emphasizes public-private partnerships would be 
created.  In his 94-point overview of the Governmentof 
Nepal's (GON's) priorities for fiscal year 2009/10, which 
began on July 16, the President also promised that law and 
order would be strengthened and "impunity will be eliminated." 
 
¶3. (U)  While improved governance and economic performance 
were emphasized, the Government's program and policies, which 
were formally endorsed by parliament on July 12, contain 
sweeping promises for almost every sector of Nepali society. 
At one point during his presentation, Yadav vowed, "All 
legitimate demands put forward by the workers, peasants, 
women, youths, students, teachers, professors, intellectuals, 
doctors, engineers, lawyers, civil servants, journalists, 
entrepreneurs, cultural artists, the landless, the squatters, 
the conflicted affected, the displaced, freed bonded 
laborers, the haliyas (agricultural bonded labors), badis 
(the lowest formerly "untouchable" caste), and the disabled 
will be gradually fulfilled through mutual dialogue." 
 
Big Budget Proposed to Fulfill Big Promises 
------------------------------------------- 
 
¶4. (U)  The GON has proposed a Rs. 285.9 billion (USD 3.7 
billion) budget in support of its policies and programs. 
Introduced on July 13, it is nearly 34 percent larger than 
the FY 2008/09 budget and more than double the amount the 
government spent two years ago.  Finance Minister Surendra 
Pandey said the government expects to raise Rs.176 billion in 
revenues, 24 percent above the record level of revenues 
collected by the previous Maoist-led government.  The balance 
of financing for the budget will come from increased foreign 
loans and domestic borrowing.  The government, which took 
power in May, anticipates receiving Rs. 56.9 billion (USD 739 
million) in foreign grants, a 64.7-percent increase, and Rs. 
21 billion (USD 273 million) in bilateral and multilateral 
loans, more than double the amount received last year.  It is 
estimated that the budget deficit will still total Rs. 52.4 
billion (USD 680 million), 43 percent more than the estimated 
deficit for FY 2009/10. 
 
¶5. (U)  In his budget address, Pandey reiterated that 
drafting a new constitution was the government's top 
priority, and he pledged that "there will be no shortcoming 
in financial or other resources for the Constituent Assembly 
(CA)" to complete the task. There is no line item in the 
budget specifically earmarked for this purpose, but it does 
budget a total of Rs. 770 million (USD 10 million) to the CA 
to carry out both its legislative and constitution-writing 
responsibilities.    Last year, Rs. 723 million was initially 
allocated to the CA, but, according to the most recent 
estimates, it spent Rs. 743 million (USD 9.6 million, based 
on the current exchange rate.) 
 
¶6. (U)  The largest share of the budget, 45.6 percent, is 
earmarked for social services, including education, which 
 
KATHMANDU 00000674  002 OF 003 
 
 
accounts for 16.3 percent of total spending.  According to 
Pandey, the budget will ensure the "fundamental right" of 
easy access to education for all citizens.  Transportation, 
agriculture, electricity and other "economic services" 
account for 23.2 percent spending.  Defense and police will 
each receive slightly more than 5 percent of total spending, 
while 10 percent will go to servicing loans.  Overall 
spending is higher, but the share of spending for each 
general budget categories is largely unchanged from FY 
2008/09. 
 
Infrastructure Targeted 
----------------------- 
 
¶7. (U)  The GON plans to make a massive investment in 
infrastructure improvement and development in FY 2009/10, 
emphasizing roads, irrigation and electricity production and 
distribution.  Road construction, upgrading and maintenance 
are budgeted at Rs. 18.5 billion (USD 240 million), a 
68-percent increase over spending the previous fiscal year. 
This includes Rs. 252.3 million (USD 3.3 million) to begin 
construction of the Kathmandu-Nijgasdh Fast Track, a 
mega-road project designed to cut travel time between the 
Kathmandu Valley and the Terai, the country's industrial and 
agricultural heartland.  Aiming to increase agricultural 
production and boost employment,  The government allocated 
Rs. 7.9 billion (USD 102 million) for irrigation projects. 
 
¶8. (U)  Pandey announced that the GON is formulating plans to 
develop at least 25,000 megawatts (MW) of hydropower 
capacity, about 40 times Nepal's current capacity, over the 
next 20 years.  The Rs. 14.7 billion (USD 190 million) 
budgeted for the energy sector includes funds to begin 
construction of the 130MW Upper Seti project and to carry out 
feasibility studies of four other large-scale projects.  The 
government also plans to repair and extend electrical 
transmission lines, including construction of new lines that 
will allow greater imports from India,   (Comment: Last year, 
the Maoist-led government launched a 10-year plan to add 
10,000 MWs of hydropower capacity, but failed to initiate a 
single project during its nine months in power.  The latest 
estimates show that the former government spent less than 
half of the Rs. 12.7 billion it had allocated for the energy 
sector.) 
 
After Dismal Year, Lofty Economic Goals Set 
------------------------------------------- 
 
¶9. (U)  Implementation of the proposed budget, according to 
Pandey, will boost economic growth and slash inflation.  He 
said the government's goal is to increase the gross domestic 
product (GDP) by 5.5 percent in FY 2009/10, while cutting 
inflation to 7 percent.  The day before his budget speech, 
the Finance Ministry released its annual economic survey, 
showing that, based on data from the first eight months, the 
economy grew by just 3.9 percent in FY 2008/09, compared to 
5.3 percent in the previous year. The consumer price index 
rose 12 percent, up from 7.7 percent the previous year. 
 
¶10. (U)  Growth in the agricultural sector, which accounts 
for about one third of the total GDP, fell to 2.1. percent, 
less than half the previous year's rate.  The 
non-agricultural sector grew by 4.8. percent, compared to 
5.7. percent in FY 2007/08.  The Ministry blamed slow 
agricultural growth on adverse weather and attributed the 
non-agricultural sector's weak performance to the energy 
crisis, "bandhs" (strikes) and other problems.  Pandey 
predicted that the agricultural sector will grow by 3.3 
percent in FY 2009/100, while the non-agricultural sector 
will expand by 6.6 percent. 
 
Faint Praise Accompanies Loud Criticism 
--------------------------------------- 
 
¶11. (U)  The GON's economic projections for the new fiscal 
year have been questioned by many people, including 
Biswambhar Pyakurel, a leading economist, who accused 
government officials of making its projections "without doing 
their homework."  Pyakurel said the government failed to take 
into consideration the impact of global economic crisis, in 
particular its potential affect on remittances from overseas 
workers.  Remittances from workers currently account for 
about 17 percent of the total GDP, not including those 
working in India, but some projections indicate that they 
 
KATHMANDU 00000674  003 OF 003 
 
 
will to fall to 13 or 14 percent of GDP as a result of the 
economic crisis, according to Pyakurel.  He added that, while 
the government may be able to gain "some control" over 
inflation, "there is no way Nepal can obtain 7-percent 
inflation." 
 
¶12. (U)  Business leaders hailed certain policies and 
programs, including elimination of both the tax on scrap and 
the development tax of 1.5. percent and the 25-percent 
reduction in the prevailing highest customs duty raise, but 
they have roundly criticized the government for not doing 
enough to create an environment for investment and wider 
economic growth.  Kush Kumar Joshi, President of the 
Federation of Nepalese Chambers of Commerce and Industry, 
lambasted the government moving ahead with the 
Kathmandu-Nijgasdh Fast Track on its own despite the private 
sector's desire to participate in the project, saying it was 
an indication that the government is not committed to 
fulfilling its promise of greatly expanding greater 
public-private partnerships.  UML lawmaker and leading 
businessman Binod Kumar Chaudhary agreed: "The budget has 
failed to encourage industrialists." 
 
¶13. (U)  Joshi, Chaudhary and others criticized the budget 
for failing to support the government's pledge to bring an 
end to bandhs and to strengthen overall governance. 
Chaudhary said, "Increasing capital expenditure alone will 
not be enough in the context of weak governance."  Economist 
Pyakurel concurred that the number of projects the government 
plans to undertake is "unmanageable" due to weak governance, 
especially at the district and village level.  Nepali 
Congress lawmaker and former finance minister Ram Sharan 
Mahat also cited weak governance as a major obstacle when he 
questioned whether the government's budget could be 
implemented during the first day of budget deliberations. 
 
Comment 
------- 
 
¶14. (U)  Budget deliberations are ongoing.  There is no 
statutory deadline, but they are commonly completed within a 
month of the start of the parliament's budget session, which, 
this year, was July 8,  Given that the GON is counting on 
receiving more than USD 2 billion in foreign grants and loans 
to close the projected gap between revenues and expenditures, 
the USG should anticipate being approached by Nepali 
officials with hat in hand, seeking increased bilateral 
assistance, support in securing funding from international 
financial institutions or, most likely, both. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MOON