Economic Lieraure, Vol. XII (8-16), December 014 An Analysis of Trend and Sources of Defici Financing in Nepal Deo Narayan Suihar ABSTRACT Defici financing has emerged as an imporan ool of financing governmen expendiure. In Nepal, he share of fiscal defici o GDP raio was 5.5% in FY 010/11 in compare o 3.6% of FY 000/01. There are hree sources of defici financing i.e. foreign loan, domesic borrowing and cash balance and heir shares o fiscal defici have found 4.3%, 85.7% and -10.0% respecively in FY 010/11. The domesic borrowing o budge defici was found o be very high. The fiscal defici o expendiure raio was maximum 30.3% in FY 000/01 and minimum 16.8% in FY 010/11 respecively. This exhibis ha here was decreasing rend in raio in he sudy period. The regression equaion has been used o esimae he annual declining rae of fiscal defici o expendiure raio. The esimaes of he annual average and annual declining rae of defici/expendiure raio have been found o be 6.64% and - 0.846% respecively. From he resul, i is obvious ha fiscal defici/expendiure raio has been decreased by 0.846 % annually during he period of 11 years. This rend exhibis ha Nepal will ry o announce balanced budge in he near fuure. From he saisical analysis, he value of auocorrelaion is found o be 0.47 and is d-saisic has been esimaed 1.003, which no significan a 5% level of significance. Thus, he analysis jusifies ha here is no posiive auocorrelaion among error erms in he sudy period. Key words: fiscal defici, defici financing, fiscal indicaors, rends and growh, auocorrelaion, d-saisic. 1. BACKGROUND The erm defici financing is used o denoe he direc addiion o gross naional expendiure hrough budge defici, wheher he deficis are on revenue or of capial accoun. The essence of such policy lies, herefore, in governmen spending in excess of he revenue i receives in he shape of axes, earning of sae enerprises, loans from he public, deposis, funds, oher miscellaneous sources. The governmen may cover eiher by running down is accumulaed balances or by borrowing from he banking sysem (Shresha and Adhikari, 01: 48). Defici financing has emerged as an imporan ool of financing governmen expendiure. I can fill up he gap caused by he excess of governmen expendiure over is receips. I can be financed in wo ways: firs, borrowing by he governmen from foreign loan and domesic loan, which is called deb financing and second, fiscal defici can be financed by prining new money is called money financing of budge defici (Ahuja, 01:65). Mr. Suihar is Associae Professor a Deparmen of Economics, Prihvi Narayan Campus, T. U., Pokhara.
An Analysis of Trend and Sources of Defici Financing /9 If he governmen spends more han i raises in axaion i will have o borrow money. If i borrows by selling governmen securiies, including naional savings cerificaes o he non-bank privae secor (non-bank firms and general public) i will be using exising money. The purchasers will be likely o draw money ou of heir bank deposis. So, he rise in liquid asses resuling from increased governmen spending will be mached by an equal fall in liquid asses as money is wihdrawn. However, if a budge defici is financed by borrowing from he commercial banks or he cenral bank, money will increase. When a governmen borrows from is cenral bank i spends cheques drawn on bank. This spending increases commercial banks liquid asses and ha will increase heir abiliy o lend. Commercial banks will be able o lend more if he governmen borrows from loans by selling hem shor-erm governmen securiies. This is because hese securiies coun as liquid asses and so can be used as he basis for loans (Bamford and Gran, 011: 16). The erm of defici financing is used as an excess of expendiure incurred by he governmen over is curren income financed hrough public loans and he creaion of new money. I is also used as he scheme of he governmen expendiure in which he defici is me by uilizaion he cash balances wih cenral bank. Excess of expendiure over curren income is me from he sources of borrowing from he cenral bank, wihdrawal of cash balances, borrowing from he commercial banks and issue of new currency by he governmen or prining of new noes. In developing counries like Nepal defici financing is adoped o mee budgeary defici and resources needed o implemen developing planning. The resources needed o implemen differen ypes of developmen projecs canno mee by axaion and borrowing from he public only. The gap beween expendiure and income is fulfilled by foreign aid and defici financing ( Dahal, e.al., 014:308). A proper mehod of financing budge defici is borrowing by he governmen which issues bonds and sells i o he public hrough financial inermediaries such as banks, is called bond financing of budge defici. The fiscal defici, he resul of imbalance beween expendiure and non-deb resources, has been financed foreign loan, domesic borrowing and cash balance from he cenral bank (MOF, 008: 34). I is eviden from he conracion in economic growh rae in he recen pas ha he overall economic expansion has been affeced adversely due o slackness in he developmen aciviies. Therefore, o increase he developmen aciviies, he challenge is o mobilize revenue a leas o he level ha could mee he recurren and principal paymen expendiures. Similarly, here is a need o allocae bes possible amoun of resources for he capial oulay and give special prioriy o conrol unproducive and waseful expenses. This will give a posiive boos for he economic expansion and help o creae susainable base for he realizaion of higher economic developmen (MOF, 008: 35). The main objecive of his sudy is o show he fiscal defici/gdp raio, fiscal defici/expendiure raio & he share of foreign loan, domesic borrowing and cash balance o fiscal defici. Similarly, i aims o esimae he annual declining rae of fiscal defici o expendiure raio and o es he declining rae of his raio is significan or no. The sudy is very much helpful o hose people who wan o ge knowledge abou he saisical esimaion of a variable relaed o ime series and use of saisical ools. However, he findings of he sudy should be cauiously used because he
10/ Deo Narayan Suihar analysis is made only for 11 years. The daa before 000/01 have no been considered o analyze due o ime consrains and unavailable daa.. DATA AND METHODS This aricle is based on he secondary daa annually published by he Governmen of Nepal. The Economic Survey (FY 007/08, FY 010/11 of Nepal are he only sources of obaining saisical daa for he presen sudy (Table 1). The daa have been analyzed wih he help of differen saisical ools such as raio, percenage, equaion of sraigh line for esimaing he annual declining rae of fiscal defici/expendiure raio. The sandard error of esimae, -saisic of parameers 'a' and 'b', coefficien of deerminaion R, adjused coefficien of deerminaion R, coefficien of auocorrelaion and Durbin-Wason saisic have been calculaed. The esimaing equaion of sraigh line has been used in he form of Y=a+bX, where "a" and 'b' are parameers & 'a' sands for he annual average of fiscal defici/expendiure raio and 'b' represens annual declining rae of fiscal defici/expendiure raio. For hese wo parameers, he following wo normal equaions have been used: Y nabx XY ax bx e S y.. x has been used o find he sandard error of esimae, where, n and k sand n for number of years and parameers respecively. The saisical hypoheses for parameers 'a' and 'b' have been se up and esed. The -saisic has been used o es he significance hese parameers. The null and alernaive hypoheses for he parameer 'a' have been esed for he significance of annual average of defici/expendiure raio. Hypoheses for Parameer 'a' Null hypohesis, H0: a=0, i.e. annual average of defici/expendiure raio is no significan a 5% level of significance wih n- degrees of freedom. Alernaive hypohesis H 1 : a>0, i.e. annual average of defici/expendiure raio is significan a 5% level of significance wih n- degrees of freedom. The -saisic is also calculaed. The null and alernaive hypoheses for he parameer 'b' have been used for he significance of annual decrease in defici/expendiure raio. Hypoheses for Parameer 'b' Null hypohesis, H 0 : b=0, i.e. declining rae of defici /expendiure raio is no significan a 5% level of significance wih n- degrees of freedom. Alernaive hypohesis, H 1 : b<0, i.e. declining rae of defici /expendiure raio is significan a 5% level of significance wih n- degrees of freedom. Under null/alernaive hypoheses, he -es has been used.
An Analysis of Trend and Sources of Defici Financing /11 Coefficien of deerminaion R and adjused coefficien of deerminaion R have also been compued by using he following mehod: e R 1 e n and R 1 1. y y n k Similarly, he firs order auocorrelaion among error erms has been calculaed by using he formula: i i1 e e 1 e and he D-W saisic has been used o es he following hypohesis: Null hypohesis, H : 0, i.e. here is no presence of auocorrelaion among error erms. 0 Alernaive hypohesis, H : 0, i.e. here is presence of auocorrelaion among error erms. A The es saisic under null hypohesis is d i ( e e ) i 1 This saisic measures he correlaion beween each error and he error for he ime period immediaely preceeding one (Suihar, 010: 578). e 1 3. RESULTS AND DISCUSSION The presen sudy evaluaes he fiscal defici o GDP raio, which ranges from.9% in FY 003/04 o 5.5% in FY 000/01. This raio has been decreasing from FY 000/01 o FY 003/04 and hen increasing up o FY 008/09. Similarly, fiscal defici o expendiure raio flucuaes from 15.9% in FY 09/10 o 30.3% in FY 000/01. This raio has been found decreasing from FY 000/01 o FY 004/05 hen afer increasing gradually up o FY 007/08 (Table 1). There are hree sources of defici financing in our counry namely foreign loan, domesic borrowing and cash balance. The foreign loan o fiscal defici raio varies from 0.0% o 51.3%. I shows ha he minimum share of his raio was 0.0% in FY 008/09 and he maximum is 51.3% in FY 004/05. Similarly, he domesic loan o fiscal defici deviaes from 8.9% o 85.7%. I is obvious ha he minimum share of his raio was 8.9% in FY 000/01 and he maximum was 85.7% in FY 010/11. Likewise, he cash balance o fiscal defici raio varies from -10.0% o 43.0%. I is clear ha he minimum share of his raio was -10.0% in FY 010/11 and he maximum was 43.07% in FY 008/09 (Table 1).. This sudy also esimaes he average value and declining rae of defici o expendiure raio during 11 years. I has been esimaed hrough he analysis of ime series daa of 11 years from FY 000/01 o FY 010/11. I is obvious ha he annual average and declining rae of fiscal defici o expendiure raio during sudy period have been esimaed o be 6.64% and -0.846% respecively. This exhibis ha fiscal defici o expendiure raio is decreasing by 0.846% per year (Annex 1).
1/ Deo Narayan Suihar Table 1: GDP, Expendiure, Receips, Defici and Sources of Defici Financing (Rs. in millions) Fical Year GDP Expendiure Receips Defici Sources of defici financing 000/01 001/0 00/03 003/04 004/05 005/06 006/07 007/08 008/09 009/10 010/11 441519 459443 4931 536749 58941 654055 7787 815658 9887 1193679 1369430 79835.1 8007. 84006.1 8944.6 10560.4 110889. 133604.6 161349.9 1966.0 59689.1 95363.4 55647.0 57131.6 67568.9 73614.4 84513.9 86109.6 10351.9 17943. 169857.3 18491.7 45741. 4188.1 (5.5)* 940.6 (5.0) 16437. (3.3) 1588. (.9) 18046.5 (3.1) 4779.6 (3.8) 30091.7 (4.1) 37406.7 (4.6) 49804.7 (5.0) 41197.4 (3.5) 496. (3.6) Foreign loan Domesic loan 1044.0 (49.8) a 7698.7 (33.6) 4546.4 (7.7) 769.0 (48.) 966.1 (51.3) 814.3 (33.1) 10053.5 (33.4) 8979.9 (4.0) 9968.9 (0.0) 113.4 (7.) 1075.6 (4.3) 7000.0 (8.9) b 8000.0 (34.8) 8880.0 (54.4) 5607.8 (35.4) 8938.1 (49.5) 11834. (47.8) 1789.3 (59.5) 4496.4 (65.5) 18417.1 (37.0) 9914.0 (7.6) 4515.8 (85.7) Sources: Economic Survey, Fiscal Year 007/08, Table 1.1; 1, Table.1; 13. & Economic Survey, Fiscal Year 068/69, Nepali ed., Table 1.1: 1, Table.1; 13. Noes: *The figures in bracke show fiscal defici/gdp raio (in %). a The figures in bracke show foreign loan /fiscal defici raio (in %). b The figures in bracke show domesic loan /fiscal defici raio (in %). c The figures in bracke show cash balance /fiscal defici raio (in %). Cash balance 5144.1 (1.3) c 741.9 (31.6) 3010.8 (18.3) 591.4 (16.4) -157.7 (-0.8) 4731.1 (19.1) 145.9 (7.1) 3930.4 (10.5) 1418.7 (43.0) 60.0 (0.) -4969.1 (-10.0) The falling rend of fiscal defici/expendiure raio line exhibis ha defici proporion o governmen expendiure of Nepal is decreasing coninuously during he sudy period (Figure 1). The sandard error of esimae has been esimaed 3.9783%. Likewise, he sandard error of parameers 'a' annual average and 'b' annual declining rae are 0.686% and 0.379% respecively. The calculaed value of (a) is 38.86. I is greaer han he criical value of 0.05 (9)=.6 (Two ailed es), which comprises ha null hypohesis is rejeced and alernaive hypohesis is acceped a 5% level of significance wih 9 degree of freedom. Therefore, i is concluded ha annual average of defici o expendiure raio is significan. Bu he calculaed value of (b) has been found.3, which is less han he criical value of 0.05 (9)=.6 (Two ailed es). I jusifies ha null hypohesis is acceped a 5% level of significance wih 9 degree of freedom. From he resul, i is concluded ha fiscal defici o expendiure raio is no significan, bu i is decreasing by 0.846% annually during he sudy period.
An Analysis of Trend and Sources of Defici Financing /13 The coefficien of deerminaion is 0.971. I shows ha 97.1% of he oal variaion in defici o expendiure raio is explained by he variaion in ime variable. Similarly, he adjused coefficien of deerminaion is 0.9680, which exhibis ha 96.8% of he oal variance in defici/expendiure raio is explained by he variance in ime variable. Original Daa and Trend Line of Fiscal Defici/Expendiure Raio Fiscal Defici/Expendiure raio (% ) 35 30 5 0 15 10 5 0 000/01 001/0 00/03 003/04 004/05 005/06 006/07 007/08 008/09 009/10 010/11 Original Daa Trend Line Fiscal Year The coefficien of auocorrelaion () has been found o be 0.47 and is d-saisic has been d and d 1. 334, i.e. d d d ) ( U esimaed as 1.003. This value lies beween L 0. 937 U L a 5% level of significance wih k =1 and n=11. Hence, he es is inconclusive. Therefore, i is concluded ha here is presence of posiive auocorrelaion among error erms in he sudy period. 4. CONCLUSION From he analysis of daa, i is obvious ha he share of fiscal defici/gdp raio is flucuaed from.9% o 5.5% during sudy period. The share of fiscal defici/expendiure raio has been found o vary from 15.9% o 30.3% in he same period. Annual growh rae of defici/expendiure raio is also found -0.846%, which indicaes ha his raio is declining by Rs.846 housand per annum. The annual declining rend of fiscal defici o expendiure raio exhibis ha he Governmen of Nepal will be able o prepare and announce he balanced budge in near fuure. The coefficien of deerminaion is 0.971. I shows ha 97.1% of he oal variaion in defici o expendiure raio is explained by he variaion in ime variable. Similarly, he adjused coefficien of deerminaion is 0.9680, which exhibis ha 96.8% of he oal variance in defici/expendiure raio is explained by he variance in ime variable. The value of auocorrelaion is found o be 0.47 and is d-saisic has been esimaed 1.003, which is no significan a 5% level of significance. Thus, he analysis exhibis ha here is no posiive auocorrelaion among error erms in he sudy period.
14/ Deo Narayan Suihar REFERENCES Ahuja, H. L. (01). Macroeconomics Theory and Policy, Eigheenh revised ed.new Delhi: S. Chand and Company Ld. Bamford, Colin and Susan Gran (011). Economics, Second ed. Cambridge: Cambridge Universiy Press. Dahal, M. P. e.al. (014). Macroeconomics. Kahmandu: Buddha Academic Publishers and Disribuors Pv. Ld. Minisry of Finance (008). Economic Survey Fiscal Year 007/08. Kahmandu: Governmen of Nepal. Minisry of Finance (069). Economic Survey Fiscal Year 068/69, Nepali ed. Kahmandu: Governmen of Nepal. Shresha, R. G. and G. M. Adhikari (01). Macroecnomics, Revised Fourh ed. Kahmandu: Asia Publicaion Pv.Ld. Suihar, D. N. (010). Quaniyaive Techniques. Kahmandu: Pairavi Prakashan (Publishers and Disribuors) Annex I Fiscal Defici, Expendiure (Rs. In Million) and Calculaion of Sum and Square Values Year Defici Expendiure Defici/ Time X XY Expendiure (X) Ŷ e e raio (%) (Y) 000/01 001/0 00/03 003/04 004/05 005/06 006/07 007/08 008/09 009/10 010/11 4188.1 940.6 16437. 1588. 18046.5 4779.6 30091.7 37406.7 49804.7 41197.4 496. 79835.1 8007. 84006.1 8944.6 10560.4 110889. 133604.6 161349.9 1966.0 59689.1 95363.4 30.3 8.6 19.6 17.7 17.6.3.5 3..7 15.9 16.8 Y =37. Source: Adaped and calculaed from Table 1. 1 3 4 5 6 7 8 9 10 11 X =66 1 4 9 16 5 36 49 64 81 100 11 X =506 30.3 57. 58.8 70.8 88.0 133.8 157.5 185.6 04.3 159.0 184.8 XY =1330.1 5.8 4.9 4.1 3.3.4 1.6 0.7 19.9 19.0 18. 17.3 Ŷ =37. 4.5 3.7-4.5-5.6-4.8 0.7 1.8 3.3 3.7 -.3-0.5 0.5 13.69 0.5 31.36 3.04 0.49 3.4 10.89 13.69 5.9 0.5 0 e =14.4 4 Regression equaion of defici/expendiure raio (Y) on ime (X): Y=a+bX For he parameers 'a' and 'b', following wo normal equaions have been solved. Y nabxand Y ax bx Afer subsiuing he values: 37.=11a+66b and 1330.1=66a+506b Afer solving hese wo equaions, he values of 'a' and 'b' have been obained and he esimaed regression equaion is Ŷ 6.64 0.846X
S y..x e =3.9783, Se( a) n X x X =110, n An Analysis of Trend and Sources of Defici Financing /15 e 1 X =0.6801, Se ( b) n n x e 60.77 and ( ) 14. 1 e 84 a) e e X =0.3793 n x Y y Y =4941.5896, e ( Y Yˆ) e 1 a 6.64 38.86 and b 0.846 ( b). 3 Se(a) 0.6801 Se(b) 0.3793 ( n =14.44, Coefficien of deerminaion: R e 1 y =0.971,Adjused coefficien of deerminaion: R e / n 1 =0.9680, y / n 1 y y and - e =Explained variaion =Toal variaion, e =Unexplained variaion i i 1 e e e 1 60.77 14.44 0.47, d i ( e e i 1 e 1 ) 14.84 14.44 1.003