US embassy cable - 02KATHMANDU1344

UNCLAS SECTION 01 OF 02 KATHMANDU 001344 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR SA/INS 
LONDON FOR POL - RIEDEL 
 
E.O. 12958: N/A 
TAGS: EFIN, EAID, ECON, NP, Government of Nepal (GON) 
SUBJECT: NEPAL'S FY 03 BUDGET FOCUSES ON SECURITY, CUTS 
DEVELOPMENT EXPENDITURE 
 
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SUMMARY 
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1.  (SBU)  On July 8 Prime Minister Sher Bahadur Deuba 
presented a budget that for the first time puts "maintaining 
peace and security" in the face of the Maoist insurgency 
ahead of poverty alleviation as an "overriding priority." 
Introduced by royal ordinance in the absence of Parliament, 
the FY 03 budget increases security-related expenditures by 
43 percent while cutting development expenditures by 23 
percent.  The lean budget, which features the narrowest 
margin of increased expenditures ever, comes in the context 
of a dismal .8 percent growth in GDP.  End summary. 
 
 
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BUDGET BY ORDINANCE 
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2.  (U) On July 8 Prime Minister Sher Bahadur Deuba presented 
the USD 1.2 billion FY 03 budget to an assembly that included 
dignitaries from the Government of Nepal (GON), 
representatives from  the undissolved Upper House of 
Parliament, and members of the diplomatic community at the 
National Planning Commission.  The PM prefaced his speech by 
justifying both his decision to extend the state of emergency 
and his move to dissolve the Lower House of Parliament.  In 
the absence of Parliament, the budget had been approved by 
royal ordinance earlier the same day.  Nepal's fiscal year 
begins July 17. 
 
3.  (U)  The budget, presented in the shadow of the 
six-year-old Maoist insurgency, an extended state of 
emergency, a dissolved Lower House of Parliament, and 
impending national elections, was remarkable for several 
"firsts."  Projected expenditures, for example, for the first 
time declined (albeit by a modest 3 percent) in comparison to 
the previous fiscal year.  Another first:  "maintaining peace 
and security" displaced poverty alleviation as an "overriding 
priority" for the first time.  Thus requested levels for 
regular expenditures (about USD 736.4 million), boosted by a 
43 percent surge in defense spending, outstripped requests 
for development expenditures (about USD 495.8 million).  An 
effort to aim at more realistic revenue estimates, based 
primarily on improved tax and customs collection and 
increases in import duties for certain goods, resulted in 
projections 9 percent lower than the previous year.  Revenues 
are expected to account for about 58 percent of expenditures, 
with foreign grants and loans making up an additional 15 
percent and internal and external borrowing another 12.5 
percent.   A budget deficit that is 5.2 percent of GDP is 
projected. 
 
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WHAT MADE THE CUT 
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4.  (SBU) Since "development is not possible without peace," 
funding for the Ministries of Home and Defense together 
accounted for the single largest percent (23.6 percent) of 
regular expenditures.  Regular expenditures in general will 
be trimmed by an embargo on the procurement of new vehicles 
(except for the security forces), contracting out of cleaning 
and guard services for government offices, and the 
elimination of redundant positions in the Public Service 
Commission and in loss-making state-owned enterprises.  The 
PM ranked poverty alleviation and employment promotion next 
after this "investment for peace" required by the security 
forces.  Electricity and road construction programs received 
the most generous allotment of development expenditures at 18 
and 10 percent respectively, while education, irrigation, and 
health services netted 8.5 percent, 7.7 percent, and 7.1 
percent respectively. 
 
5.  (SBU)  Some of the development projects that escaped 
elimination under the uncharacteristically austere budget 
included improved credit programs for agricultural borrowers; 
subsidized training programs for former Maoists; 
micro-hydropower schemes to provide electricity to another 
5,000 households; the repair of infrastructure damaged by the 
insurgents; expanded Food for Work programs for former bonded 
laborers; and agricultural extension programs for apiculture, 
sericulture, and livestock raising for remote rural areas. 
The budget provided funding in the amount of approximately 
USD 7 million for national elections, now scheduled for 
November 13.  In an acknowledgement of widening unemployment 
figures, the PM also announced the Government plans to send 
100,000 young people abroad for foreign employment, with 
priority given to "people from poor, downtrodden and ethnic 
groups."  Foreign investment will be promoted by offering 
ten-year, multiple-entry visas to non-resident Nepali 
investors and by creating "a congenial atmosphere" for 
investors of other nationalities.  Funding to begin 
construction of an Export Processing Zone in the border city 
of Bhairawa is also set aside. 
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GRIM GROWTH FIGURES 
-------------------- 
 
6.  (U) The budget presentation followed closely upon the 
release of the annual Economic Survey, which reported a mere 
.8 percent in GDP growth in FY 02, the smallest increase in 
18 years.  (Note:  FY 01 GDP growth was 4.7 percent, while 
6.14 percent growth was posted in FY 00.  End note.) 
Agricultural productivity grew by only 1.7 percent, compared 
with 4.3 percent the previous year.  Non-agricultural growth, 
dragged down by the struggling tourism and garment 
industries, meanwhile, grew by a minute .2 percent, compared 
with 5 percent the previous year.  Per capita income declined 
from USD 240 to USD 226 during FY 02. 
 
7.  (SBU) The depressing performance of the current year 
notwithstanding, the Government of Nepal (GON) is nonetheless 
predicting an optimistic aggregate economic growth rate of 
4.3 percent during the upcoming fiscal year.  Much of the 
anticipated increase is predicated upon an inexplicably 
projected 4.9 percent increase in the non-agricultural 
sector. 
 
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COMMENT 
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8.  (SBU)  So far the FY 03 budget has generated only muted 
static from some quarters, including the Opposition Communist 
Party of Nepal - United Marxist Leninist (UML), both for its 
slicing of the usual array of development programs and its 
introduction despite the dissolution of Parliament.  While 
its estimates for next year's growth seem somewhat rosier 
than warranted--especially since we see no immediate relief 
in sight for the depressed garment and tourism 
industries--the GON appears to have made a legitimate effort 
to meet donor demands to pare expenditures and develop more 
modest projections for revenues.  In prior years the GON had 
proved unable to spend all of the funds allocated for 
development; the soaring costs of the insurgency have now 
forced it to prioritize its spending.  The scuttling of many 
GON-funded development projects is an unfortunate, but 
inescapable, casualty of the insurgency. 
MALINOWSKI