It is simple arithmetic: if a country's GDP growth is less than its population growth rate then its citizens are getting poorer. Nepal's population is growing at 2.24 percent a year, GDP growth this year will fall to 2.1 percent.

If the inflation rate, which has climbed from 1.7 percent last year to nearly 6 percent this year, is counted it means sharp erosion in purchasing power. Add to that the drop in investment, fall in tourism, plummeting agricultural and industrial production and it is clear that Nepal is getting poorer by the day.

Finance Minister Madhukar Rana, who is preparing the budget for presentation next week, has an unenviable task of paying for more with less.

Remittances from Nepali workers abroad, which served as a parachute for Nepal's economy, only grew by 3.7 percent this year (compared to 4 percent last year) even though the number of workers went up and money transfer became more streamlined. Nepalis aren't sending their money home and political instability has spurred capital flight.

Tourism revenue is down 33 percent this year, third country exports have fallen by 20 percent and there is a severe shortage of Indian currency to pay for imports. The Rastra Bank chartered a 757 recently to air-freight IRs 4 billion worth of cash from Bombay that it traded for US dollars. Private banks are awash in cash, but they have Rs 3 billion invested in unproductive sectors like housing and consumer lending.

Revenue is down not just because of the drop in import tariffs but also due to an estimated Rs 3 billion shortfall in tax collection this year. The Deuba government raised VAT by three percent and borrowed Rs 1.4 billion from Nepal Telecom's savings in order to meet rising military and administrative expenditure but that isn't something that can be repeated.

The most dramatic drop is in the development budget which has fallen from Rs 37 billion five years ago to less than Rs 10 billion in the first 11 months of this fiscal year (See chart). More worrying, in the absence of people's representatives in villages and districts, it is difficult to keep track of how the money is spent. It is an open secret in the Finance Ministry and National Planning Commission (NPC) that upto a quarter of the allocation to VDCs finds its way into Maoist hands, and 10 percent from other projects. There is little accountability about the rest.

"We know it is happening but we look away because at least the money goes to the villages and the people participate in development activities," one government official told us.

What has made the squeeze tighter is the suspension of aid after February First, including the Rs 5 billion budgetary support under the Poverty Reduction Strategy Papers. Many projects, including Rs 800 million worth of VDC grants and Rs 600 million for low-priority projects remain suspended since January.

The donors could come to the rescue but the Europeans and British have suspended new aid until democracy is restored. And instead of reassuring donors, the government has gone out of its way to rebuke them for meddling in its internal affairs. The World Bank is increasingly worried about a rollback in economic reforms and the ADB is so anxious about the ability of this government to implement Melamchi that it is running out of patience. Given the donor mood, the government will find it difficult to get the Germans to bankroll the 40 million Euro cost over-run on the Middle Marsyangdi hydro project.

The government has approached China and the Gulf countries for a fiscal rescue package, sources told us. But Finance Minister Rana who is preparing the 2005-6 budget to be approved by royal ordinance next week is already preparing for the worst. He dashed off a group email to the Rastra Bank governor, chief secretary, and the NPC warning them that he was against a donor-driven economy and Nepal should be prepared to go it alone. For many this harks back to the inward-looking Panchayat years when the slogan was: 'Domestic market, domestic production.'

Former Finance Minister and NC leader, Ram Sharan Mahat is aghast. He told us, "It's not just the political process that is being rolled back, even the economic reforms of the past 14 years are being dismantled." Former NPC member Yubaraj Khatiwada agrees: "At this rate, we will never reap the benefits of economic reforms instituted after the restoration of democracy in 1990."

The government is designing the budget in a three-year development package that corresponds with King Gyanendra's commitment in his royal proclamation on 1 February to bring democracy back on track in three years. To do this, the government would like to amalgamate development with security so zonal and district-level development projects like bridges, schools, roads, water supply will be implemented jointly by the military. This is how it is done in Afghanistan, and an NPC delegation recently visited Kabul to take a look.

The army has already submitted a proposal for Rs 5 billion at the NPC. The military's argument is that the lack of development is hampering its counterinsurgency operations and it can use service delivery as a hearts-and-minds tool to fight the insurgency.

IMF concerned

With just a week to go for the new budget, the International Monetary Fund (IMF) representative in Nepal, Sukhwinder Singh, has expressed his concern about the slow pace of economic reform in Nepal.

Singh said economic reforms had slowed down even before the February First move and was worried about the lack of progress in banks realising non-performing assets. Singh told the BBC Nepali Service in an interview aired on Tuesday night that if economic reforms were reactivated the IMF could resume the transfer of the promised $70 million tranche in aid to the Poverty Reduction Growth Fund (PRGF). If this happened, he said, Nepal may find it easier to convince other donors who are on 'wait-and-watch' mode to resume aid.

The comments came as economists warned that Nepal is suffering not just a rollback of democracy but also a rollback of the liberal economic policies instituted since 1990. Singh said the conflict had affected the economy considerably. "Nepal's economic growth rate was going well during the first and second halves of the 1990s but the growth rate started going down after 2001."