Study the following macroeconomic situation of Nepal and answer the questions followed:
Government holds key responsibilities of assuring the availability of infrastructures, social amenities, peace, security, and stability without compromising macroeconomic balance and debt sustainability. Upholding the role of supporter, facilitator, and caretaker, it needs to invest in social overhead capital to support development goals and simultaneously finance the recurrent expenditure. The capacity of the government to spend on recurrent and capital expenditures depend upon the amount of revenues it generates. Government revenue is a matter of concern for policymakers. Government revenue is more crucial in developing countries as they need a plethora of funds for developmental activities. Developing countries will need to rely substantially on domestic resource mobilization as excessive reliance on foreign financing creates problems of debt in the long run. Revenue mobilization in Nepal has remained satisfactory so far. Government revenue to GDP ratio also increased from 14.6 percent in 2009/10 to 20.07 percent in 2023/24. The major sources of revenues are expected to accrue from taxes (income, capital gains and profits which are direct taxes are expected to (26%) VAT (28%), taxes on foreign trade of which import taxes (duties) comprises 22% and excise duty comprises 14%. These four tax categories constitute more than 87% of the tax revenues received. Total budget size of current fiscal year is Rs.1,751.315 billion which comprise of recurrent expenditure of Rs 1,141.78 billion which is 65.19 percent, capital expenditure of Rs 302.68 billion which is 17.24 percent and financial management of Rs 307.45 billion which is 17.55 percent of total budget in current fiscal year. Out of total budget, the major budget for internal and external debt is Rs 330.36 billion, which is around 18 percent of total budget. This reflect the situation of resource gap in Nepal.The proposed budget plans to finance this deficit primarily through loans: foreign loans from multilateral and bilateral partners (50%), domestic loans (40%) & foreign grants (multilateral and bilateral partners (10%). However government revenue is not enough to cover government expenditures. The size of government revenue and expenditure expanded with the implementation of federalism. The increasing budget deficit has raised serious concerns in Nepal. Historically, development activities are financed through foreign aid as government revenue is not sufficient to cover the recurrent expenditure. The inadequacy of government revenue to fulfil recurrent expenditures pose a serious threat to macroeconomic stability. It is essential to break the widening budget deficit by adopting measures to strengthen the economy: Different factors that revenue collection in the economy: such as nominal GDP, imports, exchange rate, foreign aid etc.
Questions:
a. Identify the major issues in a given case.
b. Explain the major sources of government revenue in Nepal.
c. What are the causes of resource gap in Nepal and how does government of Nepal fulfil this resource gap?
d. What are the major difficulties for revenue mobilization in Nepal and what type of fiscal measures do you suggest to overcome for this problem? Explain.
