By IPS Correspondents
KATHMANDU, Jul 17 2006 (IPS)

Nepal begins its new fiscal year on Monday with the stated intention of spending nearly two billion US dollars, much of it on boosting social services.

But Nepal’s coalition government, which announced the annual budget last Wednesday with much fanfare, may find the money hard to come by. And even if it succeeds in raising enough funds, effective spending at the local level remains uncertain.

That is because the rebel Maoists, who influence a large swathe of this impoverished mountainous nation of 26 million people, have publicly stated that the budget programmes cannot be implemented without their support. And the recently announced budget, they have said, is a ‘side issue’ designed to take away the focus from the burning issue of the day.

“We will not allow the implementation of the budget at the local level,” Dev Gurung, a top Maoist leader and member of its negotiating, team said. “The government is side-stepping the issue of forming an interim government, which is the main issue of the day.”

Gurung has a point because the Maoists and the Seven Party Alliance (SPA) government struck an agreement in June to dissolve the present government and parliament and replace it with an interim one. The annual budget, the Maoists say, should have been brought by that interim government.

But haggling over the interim government has continued mainly because of SPA members’ reluctance to dissolve parliament which was revived in April after a four-year hiatus. It was a period in which the leftist rebels and King Gyanendra’s rightist dictatorship both gained ground in Nepal. In April, a spirited peoples’ movement stripped the king’s powers. Since then, the SPA government and Maoists have been observing a ceasefire as they negotiate a permanent peace.

SPA leaders say the Maoists’ concerns about the budget is unfounded because Nepal needs the budget even to run the administration from Jul. 17, the beginning of the fiscal year. “Without bringing this budget, how will the government function,” asks Ram Sharan Mahat, the finance minister who unveiled the budget last week.

Procedural issues notwithstanding, the fact remains that implementation of the programmes at the local level cannot move ahead without Maoist cooperation. They are in de facto control of half a dozen districts in western Nepal, and have pervasive influence in most other rural areas. The government’s local machinery that implements programmes at the village level – the village secretariats – have all fled to urban centres following years of attacks by the rebels. Only government schools and health posts remain standing, and they too have to bow to Maoist diktat. This makes Maoist cooperation vital.

“I cannot see how the SPA government implements its programmes beyond the cities,” says a conflict specialist working with one of Nepal’s major donors. “Maoist cadres will not allow any activity until they are part of the interim government.”

But the budget is a double-edged sword for the Maoists too, because the policy document has not only drastically cut funds for Nepal’s royal palace and security forces, but also increased social spending from previous years – particularly in health, education and drinking water facilities, which together take up 26 percent of the budget. It also increased old age allowance, widow and disability allowance and also revived discretionary spending for lawmakers to finance projects in their constituencies.

All these programmes are popular at the village and district levels, and obstructing them would be to risk public wrath. “They (Maoists) are extremely sensitive to how they are perceived by the people. That will put pressure on them not to obstruct at least the social programmes,” the conflict specialist says.

There was a ray of hope late last week as the SPA coalition got down with top Maoist leaders to work out the interim government. The two sides have agreed to a summit meeting between Prime Minister Girija Prasad Koirala and top Maoist leader Prachanda on Jul. 21.

That meeting, all sides hope, will finally pave the way for the interim government demanded by the Maoists. SPA leaders say the summit could also decide to form an “interim parliament” which could allay the misgivings of the SPA constituents.

But even if those issues are amicably sorted out, Nepal still needs funds from donors to actually implement the programmes. One of the poorest countries in the world, Nepal’s traditional development budget is financed overwhelmingly by international donors which have recently committed to support the peace process. But the budget projects of such support could turn out to be misplaced.

“Nepal’s problem has always been utilisation of funds rather than paucity of funds,” says Joerg Frieden, chief of the Swiss Development Cooperation (SDC) mission in Kathmandu. “In this context, I don’t see the international community greatly increasing the funding. Maybe a ten percent increase, but not too much.”

That could changed dramatically if the budget is tightly integrated with the peace process, especially focusing on the decommissioning of Maoist arms, demobilization of their army and reconstructing the ravaged infrastructure.

Some donors say the problem now is that the budget and peace process are not deeply integrated because of the uncertain political climate. Indeed, the new budget allocates less than one percent funds to the peace process and the holding of constituent assembly elections – seen as the key to permanent peace.

And then there is the “problem” posed by a U.S. law. Washington, which has put the Maoists on its terrorist list, is barred by law from supporting a government in which the Maoists are a major constituent. This effectively puts U.S. funds to the future interim government in jeopardy.

Excerpt: