INTERVIEW-Nepal running out of money as political row festers

KATHMANDU Mon Nov 1, 2010 4:03pm IST

KATHMANDU Nov 1 (Reuters) - Nepal's government will run out of spending money in two weeks time if a political row that has blocked a new budget drags on, the finance minister said on Monday, making it unable to service its loans or pay salaries.

The Himalayan republic, South Asia's poorest economy, has been without an effective government since Prime Minister Madhav Kumar Nepal resigned in June, bowing to pressure from Maoists former rebels who want to head a new coalition government.

But lawmakers have failed to elect a new leader because no party commands the majority in parliament needed to rule, and the haggling for power has delayed the annual budget which was meant to be passed in mid-July, the start of the financial year.

The government has been spending from an interim budget allowed under the interim constitution, but money from that runs out on Nov. 16, Finance Minister Surendra Pandey told Reuters.

"This will be very serious and our credibility will be lost," he said. "We will have no money left even to pay for the food for the inmates of jails, old-age pension and run day-to-day administration beyond that day."

Officials said Nepal had no commercial debt. Outstanding foreign loans from international donors including the World Bank, the Asian Development Bank as well as some countries such as Japan totalled about $3.5 billion as of mid-March.

The Manila-based Asian Development Bank, Nepal's largest international donor, said development projects funded by aid agencies could slow down if the government failed to pay its share in the absence of a budget.

"If the deadlock continues development projects will face a serious crisis," Sultan Hafeez Rahman, ADB's director general for South Asia, said during a recent visit.

Nepal's economic growth, hit by years of conflict and political turmoil, fell to 3.5 percent in the fiscal year that ended in mid-July, down from 4 percent in the previous year.

Pandey said growth was unlikely to look up until the political deadlock had been resolved.

"This is a problem created politically and is pushing the economy towards a dangerous direction," he said.

"This could be affected further as the government can not collect taxes until the budget is passed. We may face a liquidity and credit crunch."

Analysts say the political row showed lack of trust between mainstream parties and the Maoists, who ended their decade-long civil war and gained a surprise victory in national elections two years ago.

The Maoists say the caretaker government cannot prepare the budget and insist that political parties must agree on a new coalition which should prepare the new budget for approval.

The delay in forming a new government government could heighten frustration in Nepal, complicating efforts to bring permanent peace to a country that is still emerging from an insurgency, analysts said.

Nearly a quarter of Nepal's 28 million people live on a daily income of less than a U.S. dollar and households in the remote countryside rely on remittances from millions of their relatives working in the Middle East, Malaysia and Korea.

But Pandey said even that source of income was shrinking.

"Our remittance receipts are declining as many Nepalis working abroad have either lost their jobs or are earning less due to global recession," he said. (Editing by Krittivas Mukherjee and Miral Fahmy)

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