Deputy Prime Minister and Finance Minister Bharat Mohan Adhikari has had to work, somewhat literally, on a war footing to prepare for Friday's budget announcement.

Appointed only two weeks ago, the 68-year-old minister (pictured, right) needed to bring himself up-to-date with state finance, accommodate the interests of coalition partners and still be true to his UML party platform.

Adhikari has already been mocked for toning down his position on slashing the military and royal palace budgets. When his party was agitating on the streets those were great slogans, but things seem to change once in government.

Senior sources in the Finance Ministry told us privately that Adhikari has come under pressure from Prime Minister Deuba, who holds the royal palace affairs and defence portfolios, not to touch the two allocations.

UML central committee members grilled Adhikari earlier this week for not being more assertive. In last year's budget, security expenses stood at Rs 13.5 billion and nearly Rs 330 million was set aside for the palace. The increase in the military budget has been justified on the grounds that it is still within three percent of the GDP.

The government's mid-term evaluation of last year's budget had stated that security expenses would have to be raised, but did not say by how much. The army wants a 30 percent increase for new recruitment and weapons.
Even though only three-quarters of the last development budget was actually spent, allocations are being raised from Rs 41 billion to Rs 47 billion this year. Donors want a cap on development expenditure unless there is disbursement.

The finance minister has been working on a strategy he calls 'Participatory Community Based Projects' to increase development spending by giving grants to village bodies. But the plan is controversial because some believe the money allocated for grassroots service delivery could fall into Maoist hands.

But Adhikari is not worried about this, saying, "We want to use this budget as a confidence building measure to build trust with the Maoists."

Other members of the coalition are sharply opposed to the money falling into Maoist hands. Science and Technology Minister Balaram Ghartimagar of the RPP said the idea was absurd. "We haven't discussed it, so how can such an idea be implemented," he asked.

Some international agencies that have been monitoring the budget preparation suspect Adhikari's community participation scheme is a ruse for political patronage. "It looks like a political gimmick," said one official. "It remains to be seen if these programs will end up merely as duplication of other similar programs in the budget." Others are worried the money will allow Maoists to take the credit for development, or worse, subsidise their war.

Shankar Sharma of the National Planning Commission says Adhikari's plans need not necessarily involve Maoists. "The idea is to use the help of facilitators and mobilisers, just like some donors are already doing in Maoist-affected areas," he says. The Quick Impact Program of the World Food Program and the German aid agency GTZ both use local 'facilitators' to ensure that food aid reaches the most vulnerable.

To ensure that his plan trickles down to the grassroots, Adhikari also wants to reintroduce ideas he had mooted in his previous tenure as finance minister during the nine-month UML rule in 1994, including the 'Afno gaun afai banun' package, under which a lumpsum will be distributed directly to the VDCs.

Political leaders from parties not in the coalition have already questioned the legality of such programs. "This is a government that has been appointed to hold elections, how can it introduce new programs and policies?" asks former Finance Minister Ram Sharan Mahat of the Girija NC. "Till recently, Minister Adhikari used to criticise the budgets that were presented through ordinance, and now he is doing the same."

Adhikari's immediate predecessor, Prakash Chandra Lohani of the RPP, also slams the plan. "The budget is prepared by people who have no mandate to do the job," he says. "About five people have been allowed to work on the budget just because they are close to the parties in power."

The finance minister insists he wants to make a ground-breaking "peace budget" but the danger is that his original goals may be getting hopelessly watered down because of coalition politics. But finance ministry officials say one basic feature of Friday's budget will remain unchanged: its broad categorisation under new headings of 'recurrent' and 'capital' expenditure. Until last year, Nepal's budget had always been presented under the headings of 'regular' and 'development' expenditure.

Officials say the change should help check duplication of expenditure headings. "In past budgets, we have seen allocations made for the same expenses under both the regular and development headings, often several times," says pro-UML economist Dilli Raj Khanal, who has been helping Adhikari with the paperwork. "We will be able to save more than Rs five billion in the next two years." (See interview)

Under the new budget framework, recurrent expenditure will include overheads and money spent for debt servicing, whereas investments will come under capital expenditure. Khanal and officials at the finance ministry believe that the total budget figure this year will go up compared to last year's Rs 102 billion plus mark.

Despite the rise, money should not be a big problem for the government since its revenue source is on the rise and donors have committed to stand by it as long as it does not miss out on the mantra of the Poverty Reduction Strategy Paper.

During the current fiscal year, total revenue generation till mid-June was nearly Rs 52 billion, up by almost 14 percent from 2002-03. The biggest component in the revenue was tax collection-almost Rs 42 billion. The non-tax part also increased by about 10 percent. VAT collection grew by 6.6 percent compared to last year but, notably, the growth in the import segment of VAT dropped to one percent from last year's increase of 22.37 percent. "This was because of the devaluation of the US dollar and the slump in the import business," explains VAT Department Director General, Avanendra Krishna Shrestha.

With bodies like the Poverty Alleviation Fund and the poverty monitoring section at the NPC, the government expects donors to live up to their commitments made at the Nepal Development Forum last April. The government had asked for $560 million annual assistance for the poverty reduction program, to which the World Bank Vice President Praful C Patel had said, "As long as the program is implemented, money is not a problem."

The International Monetary Fund has suggested that the government should focus even more on increasing revenue and prioritisation of expenditures. Says the fund's Nepal director, Sukhwinder Singh: "We believe that there must be control on domestic borrowing."