Asking the Woman Question: Should the “Tampon Tax” be Exempted?

Image by: The Kathmandu Post

SHARAD PRASAD KOIRALA*

1. Introduction

Nepal currently levies 13% Value Added Tax (VAT) on sanitary napkins and other similar feminine articles (collectively called “tampon tax”) under the category of luxury goods.¹ There exists a 15% import duty on sanitary napkins, while the import duty on essential raw materials for production of sanitary napkins like cotton and pinewood pulp aerate is at 5% for domestic producers of sanitary napkins.² The result of higher import duties and VAT is an increase in the market price of menstrual products and thus, affordability becomes a bigger issue than availability. It has been observed that due to such affordability-availability issues, a large percentage of menstruating Nepalese women use unhygienic alternatives to sanitary napkins,³ which adds to the unhygienic menstrual practices (taboos) in Nepal. Additionally, the unjustified tampon tax adds to the legal, social, and economic inferiority of women in the country.⁴

Period poverty is an important area of concern in the Nepalese context. Be it the affordability of sanitary products at the individual and family level, or the accessibility to sanitary products, toilets, hand washing facilities along with menstrual hygiene education at home, schools, or workplaces, women during their menstrual days face great challenges. Further, menstrual issues have been one of the main reasons for school absenteeism among female students in Nepal.⁵ There have been many efforts by various organisations to address this issue of “period poverty” and school absenteeism by ensuring free accessibility to sanitary napkins. The government allocated NPR 1.8 Billion (approximately USD 16 Million) in FY 2076-2077, for the free distribution of sanitary napkins in government-aided schools⁶ but, there were a lot of shortcomings in its application.⁷ Therefore, a potential solution that the government has largely ignored, could be a simple change in the legislation by removing such sanitary napkins from the category of luxury goods, which, however slightly, would lessen the burden on the consumers.

2. Asking the Woman Question

Questioning is a means to “valid knowing”.⁸ However, historically, feminist questions on taxation had largely remained ignored.⁹ Women’s historic absence from legislative bodies has paved the way to the gender-biased tax system that we see today.¹⁰ While most of the taxation laws are gender-neutral, what can be seen is the presence of “gender blindness” because the reality that is present is that, when it comes to tax exemptions in necessary goods, gender has a centre-stage but has been ignored.¹¹ For example, in some states of the US, one can observe that tax exemption was provided on non-essential goods but not on menstrual goods.¹² Such “red tax” has been read with a much broader concept of “pink tax”, where it has been observed that feminine products were taxed more than their male equivalents.¹³ Only by asking the woman question can justifications and rationalisation be demanded and the discrimination and disabilities caused by such taxation, be removed.¹⁴ The woman question(s) while addressing the issue of suffrage were; why women should not vote and why should women vote.¹⁵ On similar lines, the questions this article addresses are; is tampon tax discriminatory, thus violating the constitution and, if there is any justification for such discriminatory tampon tax in Nepal. The objective of asking the woman question is to identify the gender implication of the laws that apparently seem gender-neutral or objective. In the legal field, asking the woman question means to examine how the law fails to take into account the experiences and values that are more typical of women than of men.¹⁶ Similarly, there also exists the critical tax theory, which asks why tax laws are the way they are and their impact on divisions of society like race, colour, sex, gender, etc.,¹⁷ which has been addressed below.

3. Fundamental Right and Human Right Violation

3.1. Violation of International Human Rights

The tax hurdle on the path to menstrual hygiene violates the AAAQ framework i.e. availability, accessibility, acceptability, and quality framework of the International Convention on Economic, Social and Cultural Rights (ICESCR).¹⁸ Furthermore, such discriminatory taxation violates Article 12 and Article 14 (2) (h) of the Convention on the Elimination of all Forms of Discrimination Against Women (CEDAW).¹⁹ While Nepal has ratified these international conventions, it has largely failed in its application.²⁰ Tampon taxation is another such instance of violation of the aforementioned international conventions.

3.2. Is the Tampon Tax Discriminatory?

(While the tampon tax might violate many provisions of the constitution, the article is only concerned with such taxation being discriminatory.)

The European Court of Human Rights (ECtHR) has recognised discriminatory tax treatment on the basis of sex. For instance, in the case of Van Raatle v. the Netherlands,²¹ the ECtHR found it to be discriminatory to exempt unmarried and childless women above 45 years of age from taxation (as under the General Childcare Benefits Act) without such exemption being provided to men who fulfil the same criteria. Similarly, the court has found it discriminatory to provide Widow’s Bereavement Allowance (tax benefit) to widows but not to widowers, as such tax benefit lacked a legitimate aim.²² Similarly, in lack of legitimate justification and objective, the court found a tax regime to be discriminatory in another case as well, wherein, the widow would have been provided with the tax benefit, had she been in the same circumstances as the widower. However, the widower was not provided with such tax benefit.²³ (Lack of legitimate justification and objective of tampon tax in case of Nepal has been discussed below in 3.2.1.)

However, in regard to the violation of the right to equality, the first question that arises is; is the tampon tax discriminatory? For instance, as a critique of feminist jurisprudence, there arose an argument that there cannot arise discrimination on the grounds of pregnancy simply because a man cannot get pregnant but a woman can.²⁴ A similar reasoning can be seen in the case of Geduldig v. Aiello.²⁵ So, is a similar argument applicable here? Can it be argued that there cannot arise tax discrimination simply because menstruation is a natural phenomenon only seen in females, and not in males? This can be answered by looking into the case of Bray v. Alexandria Women’s Health Clinic wherein it was decided that “a tax on wearing yarmulkes is a tax on Jews”.²⁶ On this basis, it has been argued that taxing sanitary napkins as luxury goods is analogous to taxing yarmulkes as luxury goods, and thus is discriminatory.²⁷ The question is not to be answered on the grounds of biological differences between the sexes but on the fact that one’s essential commodity is taxed more in comparison to the others’ essential commodity. For instance, authors have taken the example of spermicidal contraceptives and erectile-dysfunction medicines being tax-free, as a ground to justify why women’s menstrual products should also be tax-free.²⁸ Further, it has been rightly argued that Gedulgid (a decision which has been largely criticised) while poses a challenge to the argument that tampon tax should be considered as a sex-based discrimination, cannot be implemented in case of discriminatory tampon taxation. Observing the Indian Case of Nargesh Meerza,²⁹ wherein it was decided that penalising pregnancy amounts to sex-based discrimination even if a man cannot get pregnant, it can be concluded that biological differences in sex do not prevent discrimination from being established. A sex-based tax is discriminatory even if members of the other sex occasionally are the purchasers of the product.³⁰ Therefore, it is on these grounds that tampon taxation violates the right to equality.³¹

3.2.1. Is there any Justification for the Discrimination?

There are tax differences between the two sexes that are not discriminatory because of the presence of a legitimate objective that the law aims to achieve. For example, the difference in taxation between the two sexes in the case of land registration.³² However, is there any similar justification for the presence of tampon tax in Nepal?

It has been argued that one of the reasons to keep the tampon tax is that it contributes to the state’s budget.³³ However, given that a very less portion of women use sanitary napkins, the argument fails in the Nepalese context. Further, the argument fails because, given the practice of welfare state, the government instead is spending money to make the products available for free of costs. Therefore, revenue does not seem to be the reason to keep the tampon tax. Further, even if it did contribute substantially to the state’s budget, it cannot justify the discriminatory measure.³⁴ Next, economists argue that inelastic goods need to be taxed for revenue generation. However, this argument is defeated by the reasons provided above against the budget contribution argument. Further, given the presence of alternative products (although unhygienic) in Nepal, sanitary napkins are somewhat elastic products, even if they might be inelastic in developed nations.³⁵

3.2.1.1 Case Where Sanitary Napkins is Produced by Domestic Manufacturers.

The next argument on why the tampon tax should exist, can be understood by taking a recent example from India. Finance Minister of India, Nirmala Sitharaman, while dealing with Integrated Goods and Services Tax (IGST) on COVID-19 relief materials and services, stated that a tax exemption would increase the manufacturing costs, as the tax credit obtained upon purchase of input goods cannot be deducted against the final output GST liability. The input tax credit gets blocked and thus, the price will be raised by the producers bringing back the situation that existed while the tax was imposed.³⁶ Now, this argument that price will increase in case of exemption assumes that the role of the state is absent. The solution to this input tax blockage (in case of tax exemption) is that the state can bear the cost of the blocked input tax credit. The state can also put a cap on the increase in price (profiteering) that can be done by the producers. For instance, the Black Marketing Act, 2032 (1975) puts a cap of 20% on profiteering.³⁷ It is within this 20% that the producers can increase their profit margin to recover the blocked input tax.

Now, the reasonable solution, instead of VAT exemption, is to classify sanitary napkins as zero-rated goods.³⁸ (Further discussed below). Adding sanitary napkins to zero-rated goods as listed under Schedule-II of the Value Added Tax Act, 2052 (1996) should be done. When it comes to zero-rated goods, there can be no tax on input supplies or the input tax can be credited, despite the final product not being taxed. However, in context of Nepal, firstly, there is no system for exemption on input tax in as under the “zero-rated classification”. Thus, the only option is that the input tax is credited despite the output not being taxed, thus refunding the input tax.³⁹ While zero-rated goods are mostly in regard to exports, there is a need to recognise sanitary napkins (along with other necessary goods) as zero-rated goods despite them not being exported.

VAT exemption may instead be detrimental to the aim of removing period poverty, and enlisting sanitary napkins as a zero-rated good seems to be the way forward. An observation made in the case of India, observed that the price increases due to exemption.⁴⁰ (See the figure below). Now, while the government can take the burden of removing input tax blockage (in case of exemptions), it can also lessen the price burden by lessening the import duty on the materials required for production in the first place.

Therefore, it can be concluded (from 3.2.1 and 3.2.1.1) that there does not appear to be any reasonable justification to the discriminatory tampon tax in Nepal and, thus, it should be removed with the product being enlisted as a zero-rated good, while also decreasing the import duties.

Figure 1: Impact of GST Exemption on Sanitary Napkins.
Source: Saral Designs.

(However, while classifying necessary goods as zero-rated goods is more efficient, it should be noted that, generally, in practice, exemption is provided on necessary goods instead of enlisting them as a zero-rated good. A plain reading of Schedule-II of the VAT Act concludes that only those goods and services that are exported outside of Nepal are provided with “zero-rated privilege”. Therefore, in practice, sanitary napkins made for domestic consumption will not fall under Schedule-II. Next, while exemption can be useful, as the final 13% of tax is not applied, but it does not ensure that selling price will decrease, as the producers can increase the price of the product since their input tax is not being credited.)

3.2.1.2 In case of Import of Sanitary Napkins

Tax exemption might be effective only in case where the sanitary napkins are being imported. Currently, there is no exemption on sanitary napkins. Thus, upon import, custom duty, excise duty, and VAT are applicable, which raises the price. Finally, again, output tax is applicable along with a profit margin which again adds to the price.

Once exemption as under Schedule-I of the VAT Act is provided, there is no presence VAT or “input tax” upon import (unlike that in the case of manufacturing). Thus, there is no issue of blockage of input tax due to exemption (since input tax does not exist). Thus, a VAT exemption on the output tax can be effective here in case of imports, due to the absence of input tax blockage. However, what should be understood is that, while there is no issue of input tax blockage, the initial cost (cost of production or rather, cost of import) itself is very high (due to high custom duty and excise) in case of import as compared to the case of manufacturers, and thus, the selling price is still high as was in the case of manufacturers being provided with exemption.

In the case of Nepal, sanitary napkins are largely imported and an alternative to make such products more accessible with the government’s involvement would be to make the nation self-sufficient in regard to such products. Thus, manufacturing such products is important. However, as already noted, in the case of manufacture, tax exemption is not effective. Thus, it can be concluded that tax exemption in the case of manufacturing and tax exemption in the case of import, both are ineffective as price would still be high. Thus, the reasonable solution is to make the nation self-sufficient with enough manufacturers and enlisting the product as zero-rated good.

4. Conclusion

The concept of human flourishing is important to be understood. The theory provides that necessities like food, shelter, etc., including necessities like education, medical supplies, etc. should be accessible without any taxation.⁴¹ The income tax of Nepal follows progressive taxation, while indirect tax, although equal for all, is regressive in nature because the lower-income class spend more percentage of their income on indirect tax than those belonging to the high-income class. Tampon tax adds to such regressive nature of indirect taxation, disproportionately affecting females.⁴² It is to prevent such regressive taxation that countries provide exemption (or enlist them as a zero-rated good) when it comes to essential goods. We can thus conclude that zero-rated products benefit the lower-income consumers,⁴³ which should be the aim of a welfare state. However, such practice has not been observed when it comes to sanitary napkins.

One can observe that courts (in the US) have interpreted menstrual products to fall within the definition of “medical necessities” to provide such articles with a tax exemption.⁴⁴ However, the position was not so in the past. It was only achieved after the “woman question” was asked and addressed. The reasonable solution lies on the individual states; their legislature and the courts to address the problem.⁴⁵ A writ has been filed before the Supreme Court for removal of such taxation. Therefore, the court should recognise these grounds and direct removal of luxury tax from products that fall within the classification of medical necessity. It is true that “exemption” or “zero-rated classification” of sanitary napkins might not affect the issue of period poverty substantially. Rather than taxation, the issue with affordability is due to poverty and price itself, of which, the tampon tax forms a lesser percentage. However, the court should be more concerned with what is wrong and what is right rather than the degree of influence of the removal of such taxation, and establish that the tampon tax is discriminatory.

(The article attempts to highlight why VAT exemption might not be as effective as intended. It might help to reduce the price but it might not achieve this end. What is more effective is enlisting the good as a zero rated good, which absolutely helps in reducing the price for the consumers by removing the VAT.)

(Further, although the article uses the term “sanitary napkins”, the arguments and suggestions can be used in regard to other sanitary products as well.)

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*Sharad Prasad Koirala is a Founding Partner at Learned and Lawyers, Kathmandu. He specialises in Nepalese Taxation Law. He has been assisted by Sankalpa Koirala for the purpose of this article.

(The editorial board is thankful towards CA Durga Prasad Gnawali, Partner at NBSM, for his advice.)

(This article has been prepared for informational purposes only and does not constitute legal advice. The information contained is not intended to create a lawyer-client relationship. The views expressed in the article does not reflect the the official position of the institutions to which the authors are affiliated. Readers should not act upon this without seeking advice from professional advisers.)

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1 Value Added Tax Act 1996, s 7.

2 Shuvangi Khadka, ‘Making sanitary pads cheaper or free?’ (Econ-ity, 15 April 2021) <https://econitynepal.com/making-sanitary-pads-cheaper-or-free/ > accessed 14 August 2021

3 Samantha Friborg, ‘How 1 Education Focused Program Tackles Period Poverty in Nepal’ Brogen Magazine (Seattle, 4 October 2020) <https://www.borgenmagazine.com/period-poverty-in-nepal/ > accessed 14 August 2021

4 United States v. Virginia, 518 U.S. 515, 516 (1996)

5 Niroj Bhattarai, Alexandra Bernasek and Anita Alves Pena, ‘Factors Affecting School Attendance and Implications for Student Achievement by Gender in Nepal’ (2020) Review of Political Economy < https://www.tandfonline.com/doi/abs/10.1080/09538259.2020.1769296?journalCode=crpe20 > accessed 14 August 2021; Bridget J. Crawford, ‘Tampon Taxes, Discrimination and Human Rights’ (2017) Wisconsin Law Review 491<https://digitalcommons.pace.edu/cgi/viewcontent.cgi?article=2068&context=lawfaculty > accessed 12 August 2021

6 Editorial, ‘1.3 million girls in Nepal to receive free menstrual supplies’ (Reliefweb, 3 September 2020) <https://reliefweb.int/report/nepal/13-million-girls-nepal-receive-free-menstrual-supplies > accessed 13 August 2021

7 Editorial, ‘Sanitary pad: Ahile nisulka, pachi k hola’ BBC News Nepali (Kathmandu, 15 February 2020) <https://www.bbc.com/nepali/news-51030781> accessed 13 August 2021

8 Cochac Elkayam-Levy, ‘A Path to Transformation: Asking “the Woman Question” in International Law’ (2021) 42 (3) Michigan Journal of International Law 429 < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3543189> accessed 13 August 2021

9 Lawrence Zelenak, ‘Taking Critical Tax Theory Seriously’ (1998) 76 North Carolina Law Review 1521 <https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1535&context=faculty_scholarship > accessed 12 August 2021

10 Maya Rhoden, ‘President Obama Doesn’t Understand the ‘Tampon Tax’ Either’ TIME (15 January 2016) <http://time.com/4183108/obama-tampon-tax-sanitary/&gt; accessed 14 August 2021

11 Hailaire Barnett, Introduction to Feminist Jurisprudence (Cavendish Publishing 1998) 22

12 Bridget J. Crawford and Emily Gold Waldman, ‘The Unconstitutional Tampon Tax’ (2018) 53 University of Richmond Law Review 439 <https://lawreview.richmond.edu/files/2019/02/CrawfordWaldman-532.pdf> accessed 14 August 2021

13 Suzanne Herman, ‘A Blood-Red-Herring: Why Revenue Concerns Are Overestimated in the Fight to End the “Tampon Tax”‘ (2021) 48 Fordham Urb LJ 595 < https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=2835&context=ulj > accessed 14 August 2021

14 Hailaire Barnett (n 11).

15 Carolyn Hardesty, ‘The Woman Question Today’ (1987) 272 (3) The North American Review 89 < https://www.jstor.org/stable/25124890 > accessed 14 August 2021

16 Katherine T. Barlett, ‘Feminist Legal Methods’ (1990) 103 Harvard Law Review 829 <https://scholarship.law.duke.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1119&context=faculty_scholarship> accessed 14 August 2021

17 Anthony C. Infanti and Bridget J. Crawford, Critical Tax Theory: An Introduction (Cambridge University Press 2009) 11

18 International Convention on Economic, Social and Cultural Rights (adopted 16 December 1966, entered into force 3 January 1976) 993 UNTS 3 (ICESCR) art 12; Office of the High Commissioner for Human Rights, ‘CESCR General Comment No. 14: The Right to the Highest Attainable Standard of Health’ (Art. 12)’ (E/C.12/2000/4)

19 International Convention on Economic, Social and Cultural Rights, arts 12 and 14 (2) (h).; Bridget Crawford ‘Tampon Tax be Gone: What the US Can Learn from India’s #LahuKaLagaan Repeal (Part II/II)’ (National Law School of India Review, 25 December 2018) <https://nlsir.com/tampon-tax-be-gone-what-the-us-can-learn-from-indias-lahukalagaan-repeal-part-ii-ii/ > accessed 12 August 2021

20 Dagan Omwesiga, ‘Tax Regime in Nepal – Implications on Human Rights’ (2018) 6 Kathmandu Sch L Rev 68 < https://kslreview.org/index.php/kslr/article/view/949> accessed 12 August 2021

21 Van Raalte v Netherlands App no 20060/92 (ECtHR, 1997)

22 Hobbs v United Kingdom App no 29750/09 (ECtHR, 2007)

23 Willis v United Kingdom App no 36042/97 (ECtHR, 2002)

24 Katherine T. Barlett, ‘Feminist Legal Methods’ (n 16) 841-842.

25 Geduldig v. Aiello, 417 U.S. 484 (1974)

26 Bray v. Alexandria Women’s Health Clinic, 506 U.S. 263, 270 (1993)

27 İlayda Eskitaşçıoğlu, ‘Access to Menstrual Products is a Constitutional Right. Period.’ (Verfassungsblog, 5 December 2019) <https://verfassungsblog.de/access-to-menstrual-products-is-a-constitutional-right-period/&gt; accessed 14 August 2021

28 Bridget J. Crawford and Emily Gold Waldman, ‘The Unconstitutional Tampon Tax’ (n 12) 439.

29 Air India v. Nargesh Meerza, 1981 AIR 1829

30 Victoria Hartman, ‘End the Bloody Taxation: Seeing Red on the Unconstitutional Tax on Tampons’ (2017) 112 Nw U L Rev 313 < https://scholarlycommons.law.northwestern.edu/nulr/vol112/iss2/4/ > accessed 14 August 2021

31 Constitution of Nepal 2015, art 18.

32 Dagan Omwesiga, ‘Tax Regime in Nepal – Implications on Human Rights’ (n 20).

33 Suzanne Herman, ‘A Blood-Red-Herring: Why Revenue Concerns Are Overestimated in the Fight to End the “Tampon Tax”‘(n 13) 620.

34 Christopher Cotropia and Kyle Rozema, ‘Who Benefits from Repealing Tampon Taxes: Empirical Evidence from New Jersey’ (2018) 15 J Empirical Legal Stud 620 <https://scholarship.richmond.edu/law-faculty-publications/1503/&gt; accessed 14 August 2021

35 ibid 627.

36 Deepak Joshi, ‘India’s Taxation Policy is Behind the COVID Curve’ The WIRE (New Delhi, 19 May 2021) <https://thewire.in/government/india-gst-covid-19-relief-materials-solutions > accessed 14 August 2021

37 Black Marketing Act 1975, s 3.

38 Deepak Joshi, ‘India’s Taxation Policy is Behind the COVID Curve’ (n 36).

39 Seena Twayana, ‘What is the difference between NO VAT and ZERO VAT’ Kaagmandu Magazine (Kathmandu, 3 September 2019) <https://www.kmagz.com/what-is-the-difference-between-no-vat-and-zero-vat/ > accessed 14 August 2021

40 Editorial, ‘1 year later: Impact of GST exemption on Sanitary Napkins’ (Saral Designs) <https://saraldesigns.in/1-year-later-impact-of-gst-exemption-on-sanitary-napkins/> accessed 14 August 2021

41 Tsilly Dagan, ‘The Currency of Taxation’ (2016) 84 Fordham L Rev 2537 < https://ir.lawnet.fordham.edu/flr/vol84/iss6/7/> accessed 14 August 2021

42 Jorene Ooi, ‘Bleeding Women Dry: Tampon Taxes and Menstrual Inequity’ (2018) 113 Nw U L Rev 109 < https://scholarlycommons.law.northwestern.edu/nulr/vol113/iss1/3/ > accessed 14 August 2021

43 Suzanne Herman, ‘A Blood-Red-Herring: Why Revenue Concerns Are Overestimated in the Fight to End the “Tampon Tax”‘(n 13).

44 Bridget J. Crawford, ‘Tampon Taxes, Discrimination and Human Rights’ (n 5) 531-534.

45 ibid 512-513.

Nepal’s Budget Deficit and Economic Growth: Effects and Implications

Aaryaa Subedi*

1. Introduction

The idea of budget deficit primarily developed after World War II as countries’ revenue was no more enough to support its expenditure.  Before that, a government always generated balanced budget where its expenditure was equal to its revenue except in cases of war where expenses were much higher.[1]  During World War I, countries like England and United States tried to mobilize additional revenues to meet with the war expenses and their income tax system was an evident example of this.[2]  Additionally, as the prevailing practice was fiscal prudence, the countries generally had surpluses following these years which was used to pay off national debts.[3]

Government expenditure is one of the indicators of a country’s Gross Domestic Product (GDP) and is determined by a country’s annual budget outlay.[4]  The outlay also gives an insight into the country’s expected revenue for the year.[5]  Any financial situation in which there is an excess of the country’s total budget expenditures over its total budget receipts (excluding any borrowings) during the fiscal year is termed as fiscal deficit.[6]

2. The Theoretical Debate

Keynesian economics supports government spending on infrastructure, unemployment benefits and education, as it believes that government should play an active role in increasing demand so as to boost growth.[7]  However, neo-classical economists criticized the Keynesian view on fiscal policy and explained its impact on private saving through theory of Ricardian equivalence.  As per Ricardian equivalence, increased debt-financing will not help increase demand in any way as consumers will start saving, anticipating an increase in taxes to pay off these debts.[8]

The classical and neo-classical economists also believed that an increase in public spending will increase the interest rates leading to the “crowding out” of private investments based on the assumption that the economy is at full employment or potential production.  Similarly, if the economy is in an allocative and productive situation, public spending would require reallocation of certain factors of production from private to public sector, which would only move the resources from one sector to another without increasing the overall production or capacity in the economy, making public spending ineffective.[9]

Keynesian economists, on the other hand, argue that fiscal deficits result in an increase in domestic production which makes the private investors more optimistic about the economy increasing the private consumption and investment, thus, leading to a “crowding in” effect.[10]  However, the crowding in effect is based on the assumption that the unemployment level is very high and public spending in such a case would increase employment rather than interest rates.[11]

3. Fiscal Deficit: The Nepalese Context

As a developing country, Nepal has been experiencing fiscal deficit since the first fiscal budget of the country prepared in 1951 A.D.[12] and the trend has continued till the recent budget which showed an estimated fiscal deficit of around NPR 524.50 billion.[13] Despite facing budget deficits early on, it was during the 80s that the internal borrowing of the country escalated drastically.  Within this duration of rapid increase, growth rate also fluctuated within a very wide margin of 6.3% and 68.2% and reached the peak during the time when fiscal deficit was highest[14] which shows the inclination towards Keynesian economics.

On the other hand, budget deficits were found to be interest rate neutral in Nepal and were not crowding out private investment.[15]  Changes to interest rates are directly related to changes in price levels[16] which is one of the causes behind macroeconomic instability.[17] Additionally, changes in interest rate is also one of the driving factors of budget deficit-led economic growth.[18]  . However, given that budget deficit were found to not have any significant effect on interest rates in Nepal[19], an inclination towards Ricardian approach can be observed in the Nepalese economy.

4. Short Run Implications

In the short run, fiscal deficit has shown growth and stability as government helps to reduce recession by increasing spending on employment opportunities and lowering tax to increase revenue of the businesses.[20] Fiscal deficit leading  to deficit financing increases the money supply in an economy, which in Nepal, is done through foreign loan and domestic borrowing.[21] As per the money market equilibrium, increase in money supply leads to a decrease in interest rates and a decrease in interest rates leads to an increased demand for money, hence, again, leading to an increase in interest rates.[22]

The initial decrease in interest rate leads to increase in investment and consumption due to the increase in purchasing power of the public.  This leads to an increase in aggregate demand. However, as the interest rate rises, a subsequent fall in aggregate demand is observed. Nonetheless, the overall effect is positive. Therefore, in the short run, as aggregate demand rises, the national income tends to increase with an increase in price level due to which deficit financing leads to growth in the short run.

5. Long Run Implications

Matter of long-run deficits depends entirely on how and where government spends its budget rather than the act of spending itself.  The extent to which fiscal deficits affect the economic growth was seen to depend on the expenditure composition[23] as well as the source of financing.[24]  In countries where the expenditure was concentrated on administrative expenses like wages, the economic growth was observed to be low whereas in countries where the spending was focused in areas of capital formation and other non-wage goods and services, the output was prominent.[25]  Similarly, if the deficit is financed through seigniorage, it can stimulate or enhance growth whereas in case of financing through domestic or external debt, negative marginal effects were observed in both low and high deficit countries.[26]

In the long run, a higher level of money supply also results in increase in the price level. Higher price level causes decline in exports and increase in imports due to increase in prices of local goods, ultimately impacting balance of payment and depletion of the international reserves of the country.  This pressure also affects the strength of the domestic currency.  Thus, higher level of fiscal deficit is likely to lead to macroeconomic instability.

In unstable macroeconomic situations, economic growth is difficult to come by.[27] If government spends more by borrowing from the private sector, it reduces private sector investment thus lowering the growth rate as government spending crowds out private sector spending.  However, in case of Nepal, so far, such events of “crowding out” and macroeconomic instability due to budget deficits are yet to be observed.[28]

6. Conclusion

Various conclusions have been derived regarding the impact of fiscal deficit on a country’s GDP.  A budget deficit implies reduced taxes and increase in government expenditure which leads to an increase in aggregate demand and hence, the increase in GDP.[29]  Productive expenditure has been observed to have a positive relationship in the long run with economic growth.[30]  In this regard, an increase in budget deficit is likely to have a positive impact on the economy.  

Nonetheless, higher level of fiscal deficit refers to an increase in money supply that pushes prices upwards thus increasing the macroeconomic instability.[31]  Fiscal deficit has also been observed to have negative effects on private investments, foreign direct investments and net exports.[32]

Staying conscious regarding the negative effects of a budget deficit, although Nepal has been trying to maintain lower fiscal deficits, this would lead to government cutting expenditure to maintain macroeconomic stability which would compromise both growth and development.   Additionally, the number of resources available in the economy for growth is limited, which must be used effectively.  Given that Nepal’s economy is yet to show any definitive short run or long run effects of budget deficit, debate regarding government led growth and private sector growth has continued in Nepal.

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* The author is a B.B.A. graduate from Kathmandu University School of Management, Nepal.

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[1] Alvin Rabushka, From Adam Smith to the Wealth of America (1st edn, Transaction Books 1985)

[2] Kenneth Scheve and DavidStasavage,  ‘The Conscription of Wealth: Mass Warfare and the Demand for Progressive Taxation’ (2010) 64 (4) International Organization  < www.jstor.org/stable/40930448  > accessed 11 February 2021

[3] Rabushka (n 1).

[4] Glenda Maluleke, ‘The Determinants of Government Expenditure: Analysis of the Empirical Literature from 1995 to 2016’ (2017) 13 (2) Acta Universitatis Danubis < http://journals.univ-danubius.ro/index.php/oeconomica/article/view/3850/3993#:~:text=The%20findings%20of%20the%20study%20indicated%20that%20there%20is%20a,with%20lower%20per%20capita%20GDP.&text=Trade%20openness%20is%20another%20variable,a%20determinant%20of%20government%20expenditure > accessed 10 February 2021

[5] Bill Dorotinsky, ‘The Budget Preparation Process’ < http://www1.worldbank.org/publicsector/LearningProgram/PEAM/DorotinskyBackCh4.pdf > accessed 11 February 2021

[6] J. Singh,  ‘3 Types of Budget Deficits and their Measures’ (Economics Discussion) < http://www.economicsdiscussion.net/budget/3-types-of-budget-deficits-and-their-measures-micro-economics/753 >  accessed 10 February 2021

[7] Kimberly Amadeo, ‘Keynesian Economics Theory’ (The Balance, 31 January 2021) < https://www.thebalance.com/keynesian-economics-theory-definition-4159776 > accessed 9 February 2021

[8] Jim Chappelow, ‘Ricardian Equivalence’ (Investopedia, 22 November 2020) < https://www.investopedia.com/terms/r/ricardianequivalence.asp > accessed 10 February 2021

[9] Zeljko Maric, ‘Crowding Out vs. Crowding in Effects in Transitional Countries’ (2015) 15 (4) Perspectives of Innovations, Economics and Business < https://academicpublishingplatforms.com/article.php?journal=PIEB&number=24&article=2221 > accessed 11 February 2021

[10] Ali Salman Saleh and Charles Harvie, ‘The Budget Deficit and Economic Performance: A Sruvey’ (2005) 50 (2) The Singapore Economic Review < https://www.worldscientific.com/doi/abs/10.1142/S0217590805001986 > accessed 10 Februaary 2021

[11] Zeljiko Maric ( n 9).

[12] Govinda Bahadur Thapa, ‘Deficit Financing : Implications and Management’ (2005) 17 NRB Economic Review < https://ideas.repec.org/a/nrb/journl/v17y2005p16-26.html > accessed 10 February 2021

[13] Ishan Bista and Shraddha Ghimire, ‘National Budget 2020/21: An Analytical Review’ (Nepal Economic Forum, 29 May 2020)  < https://nepaleconomicforum.org/neftake/national-budget-2020-21-an-analytical-review/ > accessed 10 February 2021

[14] Bodhi B. Bajracharya, ‘Fiscal Deficit in Nepal: Its Sources and Monetary Implications’ (1990) 4 NRB Economic Review 16, 22

[15] Shoora B. Paudyal ‘Do Budget Deficits Raise Interest Rates in Nepal?’ (2013) 25 (1) NRB Economic Review

[16] ‘Demand, Supply, and Equilibrium in the Money Market’ (M Libraries, University of Minnesota) < https://open.lib.umn.edu/principleseconomics/chapter/25-2-demand-supply-and-equilibrium-in-the-money-market/#:~:text=Money%20market%20equilibrium%20occurs%20at,GDP%20and%20the%20price%20level  > accessed 11February 2021

[17] Elwasila Saeed Elamin Mohamed, ‘Macroeconomic Instability and Economic Growth in Sudan E’ (Arkawit 14^th Annual Conference on “Sudan Economic Matter”, University of Khartoum, Sudan, November 2018)

[18] Govinda Bahadur Thapa, ‘Deficit Financing : Implications and Management’ (n 12).

[19] ibid.

[20] Sean Ross, ‘Understanding the Effects of Fiscal Deficits on an Economy’ (Investopedia, 9 January 2021) <https://www.investopedia.com/ask/answers/021015/what-effect-fiscal-deficit-economy.asp#:~:text=Fiscal%20Deficit%20Impact%20on%20the%20Economy&text=2%EF%BB%BF%20Others%20argue%20that,taxes%2C%20higher%20inflation%20or%20both > accessed 10 February 2021

[21] Government of Nepal, Ministry of Finance, Economic Survey 2019/20 (2020)

[22] ‘Demand, Supply, and Equilibrium in the Money Market’ (n 16).

[23] Sanjeev Gupta, Benedict Clements, Emanuele Baldacci and Carlos Mulas-Grandos, ‘Fiscal Policy, Expenditure Composition, and Growth in Low-Income Countries’ (2005) 24 (3) Journal of International Money and Finance < https://doi.org/10.1016/j.jimonfin.2005.01.004 > accessed 09 February 2021; Ramu MR, Anantha and Gayithri K, ‘Fiscal Deficit Composition and Economic Growth Relation in India: A Time Series Econometric Analysis’ (2016) 367 MPRA Paper no. 76304, 3 < https://mpra.ub.uni-muenchen.de/76304/ > accessed 09 February 2021

[24] Christopher S. Adam and David L. Bevan, ‘Fiscal Deficits and Growth in Developing Countries’ (2005) 89 (4) Journal of Public Economics < https://doi.org/10.1016/j.jpubeco.2004.02.006 > accessed 09 February 2021

[25] Sanjeev Gupta, Benedict Clements, Emanuele Baldacci and Carlos Mulas-Grandos, ‘Fiscal Policy, Expenditure Composition, and Growth in Low-Income Countries’ (n 23).

[26] Christopher S. Adam and David L. Bevan, ‘Fiscal Deficits and Growth in Developing Countries’ (n 24).

[27] Elwasila Saeed Elamin Mohamed, ‘Macroeconomic Instability and Economic Growth in Sudan E’ (n 17).

[28] Shoora B. Paudyal ‘Do Budget Deficits Raise Interest Rates in Nepal?’ (n 15).

[29] Tejvan Pettinger, ‘Economic Effects of a Budget Deficit’ (Economics Help, 28 August 2017) < https://www.economicshelp.org/macroeconomics/fiscal-policy/effects-budget-deficit/ > accessed 07 February 2021

[30] Lingxiao Wang, Adelina Dumitrescu Peculea and Handuo Xu, ‘The Relationship Between Public Expenditure and Economic Rrowth in Romania: Does it obey Wagner’s or Keynes’s Law? (2016) 23 (3) Theoretical and Applied Economics < http://store.ectap.ro/articole/1197.pdf > accesed 09 February 2021; Nur Hayati Abd Rahman, ‘The Relationship between Budget Deficit and Economic Growth from Malaysia’s Prespective: An ARDL Approach’ (2012) 38 InterntionalProceedings of Economics Development and Research < http://www.ipedr.com/vol38/011-ICEBI2012-A00020.pdf > accessed 09 February 2021

[31] Govinda Bahadur Thapa, ‘Deficit Financing : Implications and Management’ (n 12).

[32] Le Thanh Tung, ‘The Effect of Fiscal Deficit on Economic Growth in an Emerging Economy: Evidence from Vietnam’ (2018) 11 (3) Journal of International Studies < https://www.jois.eu/?456,en_the-effect-of-fiscal-deficit-on-economic-growth-in-an-emerging-economy-evidence-from-vietnam > accessed 09 February 2021

Currency Manipulation: Is This a Trade War?

SUDIKSHYA SHARMA*

1. Introduction

Currency manipulation has not ceased to become a subject of debate among nations in today’s scenario. Such strategies have survived the middle ages and exists even today.[1] It refers to the act taken by governments in order to change the value of their currencies relative to other currencies for some motives. One of the motives for such actions by wealthy nations is to gain an unfair competition advantage in the global trade market.[2] The countries basically manipulate the currencies to make their exports efficaciously cheaper which in return makes imports quite expensive.[3] Instead of leaving the currencies to freely fluctuate, the value of currencies is changed against other currencies by fixing the rate of exchange or changing its value (increasing or decreasing); such changes itself being subject to national policy intervention,[4] which results in global trade imbalance in long run by distorting currency prices. The countries with massive trade deficits often use the term, “currency manipulation” in their political discussion. Foreigners, are accused for their “vile action” when it comes to trade deficits, by the politicians and the citizens of a certain country. However, saving a tiny amount of income and running massive government budget deficit can be the actual reason behind trade deficit.

2. Currency Manipulation & Global Economy

Currency manipulation has severe effects on the global economy. It is accountable for millions of job loss in the United States (US) and Europe.[5] Many scholars have argued that China, being the major currency manipulator,[6] has led to possible threat in the trade market. With the currency being devaluated, the market shares in manufacturing industries of China may increase more and more and that may probably lead to increase in pricing power, which ultimately threatens the jobs around the globe.[7] The industries that are highly export-oriented can be annihilated by unjust strong currency. Many Foreign Direct Investors (FDIs) tend to undertake capital flight due to expected currency manipulation or devaluation of the currency.[8] The countries which are substantial importers can be a subject to inflation. There can be the huge impact in the labor composition as well as in the productivity as the manufacturing sectors mostly engage in trade and bear huge percent of job loss.[9]

3. The Ongoing Debate

Many economists have claimed that China has been manipulating its currency so as to provide negative effects for United States.[10] The Department of Treasury of the United States has stated that China has taken a solid step to devalue its currency in order to gain a competitive advantage in an unfair manner.[11]At the moment, the recent debate is whether or not the other countries are using policies in order to weaken the value of their currency for gaining a trade advantage. Suppose, if some other country devaluates its currency with respect to the dollar, US imports from the country becomes less expensive and the exports to the country becomes more expensive. This result in negative affect to US exports to the country and the producers of import-sensitive goods in US may feel difficult to compete with imports from the country. But it benefits the US consumers who buy imported products and businesses that depend on inputs from other country because the product becomes less expensive.[12]

Japan was immensely condemned for undervaluing its currency during the first decade of 21^st century whereas Germany is being accused of currency manipulation because it has largest current account surplus in the world. But the irony is that it does not have its own currency and uses Euro.[13] Also, China was just moving towards the flexible exchange rate and therefore, it was accused of currency manipulation. [14]But several claims have been made that the accusation on China is not true. The United States have also been accusing Brazil and Argentina as currency manipulators to give artificial boost on export of the products.[15] Also, the International Monetary fund (IMF) and the World Trade Organizations (WTO) are not able to take a direct action regarding currency manipulation because the rules of WTO is quite unclear regarding the issue and IMF does not have any sort of jurisdiction to change exchange rate policies of any countries. However, they can impact in an indirect manner.[16]

4. Conclusion / Suggestion

With the ongoing issue of currency manipulation, countries like Nepal, which extremely depend on import, can be benefited when it comes to importing goods. However, Nepal already has pegged currency with India,[17] with whom it trades the most. Article IV of Articles of Agreement of the IMF provides members with general obligations to avoid manipulating exchange rates in international monetary system.[18] Currency Manipulation also violates the Most Favoured Nation principle, the national treatment principle and tariff bindings.[19] However, so as to solve the ongoing issue, WTO and IMF should come together, by rectifying the disconnect between the two, and resolving inherent weaknesses among themselves[20] to bring out clear policies. A new organization can also be formed to monitor currency manipulation which shall be overlooked by the WTO and the IMF. Bilateral or multilateral agreement between countries can also be formed to prevent such manipulations.[21]

Many of the currencies in the world seem undervalued because the US dollar is very strong. So, US dollar being strong, United States is considered to be an amazing place to settle the cash during economic uncertainty in the world. The United States also has inflation-adjusted interest rates which makes the US dollar strong. Foreign money also flows in the banks of US, US stocks are purchased and the investment in real estate is made, which has made the US dollar strong, which essentially might make other currencies undervalued as compared. So, it is difficult to identify whether the countries are actually manipulating the currencies to adjust balance in payment and to gain competitive advantage or is it just the dollar being strong. So, the question arises; is this a trade war?

* The author is a B.B.A. student at College of Applied Business, Kathmandu, Nepal

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[1] H. van Werveke, ‘Currency Manipulation in the Middle Ages: The Case of Louis de Male, Count of Falnders’ (1949) 31 Transaction of the Royal Historical Society <https://www.jstor.org/stable/3678637> accessed 26 November 2020

[2] Ernest H. Preeg, ‘Exchange Rate Manipulation to Gain an Unfair Competitive Advantage: The Case Against Japan and China’ in  C. Fred Bergsten and John Williamson (eds), Dollar Overvaluation and the World Economy (Institute of International Economics 2003)

[3] Robert Kimmel, ‘What is currency manipulation?’ The Straits Times (2 July 2017) <https://www.straitstimes.com/business/what-is-currency-manipulation> accessed 26 November, 2020

[4]  Tarek A. Hassan, Thomas M. Mertens and Tony Zhang, ‘Currency Manipulation’ (2019) National Bureau of Economic Research, Cambridge Working Paper 22790, 3 < https://www.nber.org/papers/w22790 > accessed 3 December 2020

[5] Laurence Howard, ‘Chinese Currency Manipulation: Are There Any Solutions?’ (2013) 27 Emory International Law Review <https://law.emory.edu/eilr/content/volume-27/issue-2/comments/chinese-currency-manipulation.html> accessed 26 November, 2020

[6] Wei Liu and Libing Deng, ‘Who is the Exchange Rate Manipulator: China or America?’ (2012) 3(3) World Review of Political Economy < https://www.jstor.org/stable/10.13169/worlrevipoliecon.3.3.0344 > accessed 29 November 2020

[7] Peter Navarro and Stephen S. Roach, ‘China’s Currency Manipulation: A Policy Debate’ (2012) 175(3) World Affairs < https://www.jstor.org/stable/41639016 > accessed 29 November 2020

[8] Troy Segal, ‘Currency Fluctuations: How they Affect the Economy?’ (Investopedia, 23 August 2019) <https://www.investopedia.com/articles/forex/080613/effects-currency-fluctuations-economy.asp> accessed 29 November 2020

[9] Ernest H. Preeg, ‘Exchange Rate Manipulation to Gain an Unfair Competitive Advantage: The Case Against Japan and China’ (n 2).

[10] Bryan Mercurio and Celine Sze Ning Leung, ‘Is China a “Currency Manipulator”?: The Legitimacy of China’s Exchange Regime Under the Current International Legal Framework’ (2009) 43(3) The International Lawyer 1257

[11] Ana Swanson, ‘The U.S. Labeled China a Currency Manipulator. Here’s What It Means’ The New York Times (6 August 2019) <https://www.nytimes.com/2019/08/06/business/economy/china-currency-manipulator.html> accessed 29 November 2020

[12] Rebecca M. Nelson, ‘Debates over Currency Manipulation’ (Congressional Research Service, 28 January 2020) <https://fas.org/sgp/crs/misc/IF10049.pdf> accessed 29 November 2020

[13] Scott Sumner, ‘Currency Manipulation: Reframing the Debate’ (Mercatus Center, February 2020) <https://www.mercatus.org/system/files/sumner_-_policy_brief_-_currency_manipulation_and_exchange_rates_-_v1.pdf > accessed 3 December 2020

[14] ibid.

[15] Farok J. Contractor, ‘Currency manipulation and why Trump is picking on Brazil and Argentina’ The Conversation (4 December 2019) <https://theconversation.com/currency-manipulation-and-why-trump-is-picking-on-brazil-and-argentina-128210> accessed 29 November 2020

[16] Economic and Social Council, ‘The Issue of Currency Manipulation’ (Economic and Social Council, THIMUN Affiliated Conference)

[17] Jason Fernando, ‘Nepalese Rupee (NPR)’ (Investopedia, 10 October 2019) < https://www.investopedia.com/terms/n/npr.asp#:~:text=The%20NPR%20is%20the%20national,with%20declining%20rates%20of%20inflation > accessed 29 November 2020

[18] Articles of Agreement of International Monetary Fund (adopted 22 July 1944, entered into force 27 December 1945) 2 UNTS 39 (IMF Agreement) art IV (1) (iii)

[19] Johnathan E. Sanford, ‘Currency Manipulation: The IMF and WTO’ (Congressional Research Service, 28 January 2011) <https://fas.org/sgp/crs/misc/RS22658.pdf> accessed 29 November 2020; Vera Thorstensen and Carolina Muller, ‘How does International Trade Regulation Addresses Exchange Rates Measures?’ (2014) 70(2) Revista Dierito GV < https://www.scielo.br/scielo.php?script=sci_arttext&pid=S1808-24322014000200379 > accessed 30 November 2020

[20] ibid.

[21] Chen Yu, ‘Currency Manipulation and WTO Laws: Should the Anti-Dumping Mechanism Be Entirely Dumped?’ (2019) 20(6) The Journal of World Investment & Trade <https://brill.com/view/journals/jwit/20/6/article-p891_5.xml?language=en > accessed 3 December 2020