As the government struggles to re-allocate money earmakred for development to the Maoist war, it will need to figure out a way to cut spending without affecting development.

This is an impossible task and cannot be met without donor support. Donors will also be watching keenly to see what gets cut. For instance, if prime minister's Sher Bahadur Deuba's 41-member jumbo cabinet stays intact, and the budget for basic health and primary education is cut it will send all the wrong signals.
"Cutting the cabinet size would be the first thing the prime minister should do," one Congress insider told us. "After all, the need to appease Congress dissidents is no longer relevant." The enlarged cabinet was expected to cost the exchequer minimum Rs 5 billion a year extra, including claims some may have in the budget.

Asked this week whether he contemplated trimming his "jumbo" cabinet, Deuba had this flippant remark: "I cannot fly smaller aircraft, I can only fly jumbos."

Although the first impact of the war was felt on the budget, in the medium term it is going to hurt Nepal's macroeconomic stability. The government's economic growth estimate in July of six percent for this year now has to be re-calculated. The IMF's forecast of three percent may now be more realistic, but even that estimate doesn't factor in the war. Tourism has seen a 43 percent decline in November compared to last year, revenue collection has plummeted (last year was good partly because of advance payments), industrial production is down and so are all export items. Agriculture and overseas remittances are the only two sectors shoring up the economy.

The minimum any recovery in export will require is peace. Tourism recovery is an even more distant prospect-because in addition to all our marketing inefficiencies and image problems-the emergency has put Nepal out of bounds for most tourists. The impact of a tourism slump will be felt downstream to hotels, banks, right down to transport, retailers, vegetable farmers and porters.

The government is damned if it does, and damned if it doesn't. Security spending cannot be cut, nor can development be put on hold. Aid can provide short-term relief, but it will not come forever. Borrowing from the private sector may initially mop excess liquidity in the market, but will crowd out potential investment in productive activity. Printing more notes will increase money supply and trigger inflation-which, again, will hit the poor hardest.

The government has approached some donors for military hardware, mainly helicopters. The army says it has a problem of logistics fighting a guerrilla war in mountainous terrain. The military has a wish list that it is showing some donors, and these include fixed-wing short-take off and landing aircraft, transport helicopters and light attack helicopters with night vision equipment.

The ideal situation would be if the new hardware came as aid. The army may be getting at least two Indian-assembled Chetahs (a version of the French Alouettes) light helicopters with high-altitude capability, and its order for two Russian Mi-17s is scheduled for delivery end-December. The government could activate earlier US offers for helicopters for the paramilitary, and even ask for the heavy-lift Lockheed C-130 Hercules.
"Helicopters may be good for tactical deployment, but the Hercules is a very robust aircraft that could also be useful for relief operations in peace time,"says Sachit SJB Rana, former army chief. "C-130s cannot land in STOL airfields but are very good air support," adds Rana who saw action in the anti-Khampa operations in the 1970s and was in the paratroops when the British Royal Air Force flew C-130 sorties to drop food during a famine in Far West Nepal in 1983.