Policy experts urge structural reforms, Private sector trust at pre-budget dialogue for FY 2026/27

KATHMANDU: A high-level pre-budget discussion organized by the Management Association of Nepal on Sunday brought together policymakers, former finance leaders, economists, and private sector representatives, calling for structural reforms, improved governance, and stronger private sector engagement ahead of Nepal’s fiscal year 2083/84 (2026/27) budget.

The event, titled “Pre-Budget Discussion: Paving the Way for Prosperity,” was held under the chairmanship of MAN President Hem Kumari Adhikari, with Dr. Sanjaya Acharya, a member of the National Planning Commission, attending as chief guest.

Government Signals Gradual Reform, Not Quick Fixes

Addressing the program, Dr. Acharya emphasized that the current government—elected with a strong public mandate—faces high expectations but cannot resolve long-standing structural problems through a single budget.

He noted that Nepal’s economic challenges are deeply rooted in years of systemic inefficiencies and distortions, cautioning against unrealistic expectations of immediate transformation. Instead, he said, the upcoming budget would focus on laying the foundation for long-term reforms, strengthening governance, and creating programs capable of generating multiplier effects in the national economy.

Dr. Acharya also revealed that the government is considering reforms in complementary and special grant mechanisms, encouraging provincial and local governments to become more resource-efficient and financially resilient.

Productivity, Logistics Costs, and FDI Barriers Highlighted

A key concern raised by the National Planning Commission member was Nepal’s low labor productivity relative to wage levels, alongside high logistics and transit costs in trade, which continue to discourage foreign direct investment (FDI).

He stressed the need for targeted reforms to improve competitiveness and attract investment, while also calling for greater respect and engagement with the private sector, which contributes around 80% to the economy and 85% to employment.

On taxation, Dr. Acharya referenced global practices since the 1980s, advocating for a lower tax rate with a broader base. He emphasized the importance of designing a system that encourages voluntary compliance, noting that optimal tax thresholds should be determined through evidence-based analysis.

He further indicated that the government is moving away from indiscriminate excise duties, focusing instead on taxing goods that have negative health and environmental impacts.

Climate Finance and Global Fund Access

Dr. Acharya acknowledged that Nepal has not been able to fully benefit from global climate financing mechanisms despite its strong case for climate justice. He said the government would prioritize improving access to international climate funds in the upcoming fiscal framework.

Former Finance Minister Calls for Clarity in Tax Policy

Delivering special remarks, former Finance Minister Yubaraj Khatiwada urged the government to revisit existing formulas governing royalty distribution and fiscal transfers, including complementary and special grants.

He stressed that while the government has been advocating for lower tax rates and broader tax coverage, it must clearly define maximum tax thresholds to ensure policy consistency and predictability.

Khatiwada also highlighted practical challenges in customs enforcement, particularly regarding cross-border passenger goods from India. He argued that enforcement should be based on intent and frequency rather than blanket restrictions, suggesting amendments to existing baggage rules to differentiate between third-country travelers and cross-border movement.

Reflecting on past policy decisions, he noted that VAT refunds on goods such as oil, garments, mobile phones, and sugar failed to deliver expected benefits and were therefore scrapped during his tenure. He recommended gradually reducing VAT exemptions moving forward.

He also criticized provisions in public procurement rules that allow projects to be executed through user committees, arguing that such mechanisms—introduced during the conflict period—have contributed to inefficiencies and corruption, and should be reconsidered.

Budget Priorities: Production, Jobs, and Investment

Former Chief Secretary Baikuntha Aryal presented a detailed working paper, identifying production growth, employment generation, and investment expansion as the core priorities for the upcoming budget.

He called for reforms in the budget system to improve allocation efficiency and implementation capacity, alongside stronger monitoring and performance-based incentives.

To address rigidities in budget execution, Aryal proposed exploring agency-based budgeting models, allowing flexibility in spending across different headings within a project instead of strict line-item constraints.

He also recommended reforms in social protection, suggesting that under social security programs, the government could directly cover health insurance premiums equivalent to one to two months’ allowance, while continuing regular benefits for the remaining months.

Aryal emphasized the need to improve the investment climate through policy reforms and to prioritize high-return infrastructure projects that generate economic synergy, rather than spreading limited resources thinly across multiple sectors.

Experts Stress Digital Governance and Capital Spending Efficiency

Commenting on the paper, former National Planning Commission member Ramesh Chandra Paudel highlighted the importance of digitalization in strengthening governance, while senior chartered accountant Sudarshan Raj Pandey raised concerns over Nepal’s weak capital expenditure performance.

Pandey noted that only 17–20% of the national budget is allocated to capital expenditure, and actual spending remains significantly lower, undermining infrastructure development and long-term growth.

He recommended that the government focus on full budget execution, mobilize long-term savings instruments in response to excess liquidity, and enhance transparency in tax administration and public finance systems.

He also expressed concern over political interference in tax policies, citing the removal of a 1% tax in education and health sectors that had previously improved transparency.

Pandey further stressed the need to enhance Nepal’s credibility to attract FDI and to simplify exit mechanisms for foreign investors.

Private Sector Calls for Demand Revival and Sectoral Focus

Representing the private sector, Deepak Malhotra, senior vice president of the Nepal Chamber of Commerce, pointed out that aggregate demand in the economy remains weak, affecting key sectors.

He urged the government to prioritize sectors such as real estate and construction, which have strong linkages with multiple ancillary industries and can stimulate broader economic activity.

Malhotra also called for the introduction of a multi-rate VAT system to better align taxation with sectoral realities.

A Platform for Policy Dialogue

The Management Association of Nepal has been organizing pre-budget discussions as an annual flagship initiative, providing a platform for constructive dialogue between policymakers, experts, and the private sector.

As Nepal prepares its FY 2083/84 budget, the discussion underscored a common message: structural reforms, policy clarity, and effective implementation will be critical to restoring economic momentum and building long-term prosperity.