The Government of Nepal (GoN) is committed to pursuing and deepening reforms to ensure fiscal sustainability through improved Public Financial Management (PFM). Building upon the economic reforms carried out in 1990s, the reform initiatives are a regular and continuous process. Introduction of Medium-Term Expenditure Framework (MTEF) in early 2000s, implementation of recommendations of two powerful Public Expenditure Review Commissions (PERC), introduction of Medium Term Budgetary Framework (MTBF) for the local bodies, starting of Second Generation Economic Reform are crucial steps the Government of Nepal has crossed so far. A number of legal, policy and procedure reform activities have undertaken to consolidate the PFM reform initiatives.
Nepalese economy has rebounded in the fiscal year 2016/17 after two extremely challenging years, stricken by consecutive exogenous shocks in the form of devastating earthquake which costed USD 7 billion and the economic blockade costing USD 9 billion to the economy. The fiscal year 2016/17 was the year of high economic growth of 6.9 percent, the highest in two and a half decades and low inflation of 4.5 percent, the lowest in 10 years. While all macroeconomic indicators but international trade are largely positive, the lower absorption capacity of the public sector remains a challenge. The decades long political transition resulting in frequent changes in the bureaucracy being one of the major causes to weak capacity.
After promulgation of the Constitution in 2015, the country has moved to federal governance structure, scrapping the centuries old unitary governance system. The three tiers of governments at federal, state and local levels have specific constitutional mandates in carrying out the development activities and responsibility of service delivery. The Constitution has provisioned seven state governments and the gon has decided to establish 753 local governments in the country. Comparing the number of state and local governments with the country’s size of geography and population, it is a paramount task to stabilize the system with enough resource backing and to ensure the undisrupted service delivery. Although transition process may continue for coming several years, this will require the devolution and reassignment of functions, funds and personnel to state and local governments. While continuing the PFM reform process and accommodating the new context, the current and future reform initiatives, gon is all set to establish a framework to transition to fiscal federalism, and to further strengthen public financial management and revenue collection at all three tiers of the governments to ensure fiscal sustainability.
The Constitution of Nepal, in adopting a federal system, has devolved significant service delivery and resources to local governments. The transition of service delivery from the currently centralized system to local governments presents array of challenges to transfer funds and resources to local governments to enable them to provide quality services. To meet these objectives, the gon has already begun the process of formulating and adopting new rules and regulations and several PFM related actions that will guide the transition and govern fiscal federalism.
OBJECTIVE:
This consultancy is to assist the government fiscal reform team to complete the identified activities under the below reform pillars:
Pillar One: Establish a framework to move towards fiscal federalism
Pillar Two: Improve the policy framework for public financial management and revenue collection
FINDINGS:
Pillar One:
i. The Parliament has approved the Federal Financial Procedures Bill which provides guidance on budget execution (Cabinet Approval/ CA-2018).
The government has (a) Established National Disaster Risk Reduction and Management Council; (b) Approved disaster management national policy and plan; (c) Issued disaster management policy guidelines to provincial and local governments; and, (d) Initiated developing baseline on climate change, in order to strengthen disaster management response and initiate disaster risk reduction actions.
ii. Local Governments have established: (a) Local Consolidated Fund and (b) Chief administrative office has received authorization to spend within seven days of local assembly approval of the annual budget.
iii. The National Natural Resources and Fiscal Commission has adopted the framework for the calculation and devolution of two grants (equalization and conditional) and has made the formula of the equalization grant public.
iv. National Women Commission has; (a) established a 24-hour Helpline manned by trained helpline staff; (b) establish a case processing system to track service provisions; and, (c) issued protocols and guidelines for survivor support, case prioritization and service access.
Pillar Two:
i. the Government has; (a) adopted the Local Finance Procedures Bill and its procedural directives; and, (b) adopted the Local Administrative Revenue Bill and its procedural directives to strengthen provincial and local governments’ public financial management. Similarly, the Government has also instituted a system of public disclosure of local government expenditure reports by making them available on the website of the Financial Comptroller General’s Office to increase transparency and support citizens’ engagement.
ii. To ensure budget realism at the local level, the local governments’ council has mandated the preparation of a 3-year MTEF in line with the Local Government Development Plan.
iii. The Cabinet has endorsed and submitted to Parliament the Fiscal Responsibility and Budget Management Bill (FRBMB) to ensure fiscal discipline and increase accountability.
iv. The Financial Comptroller General Office has adopted the new internal control guidelines (2017) and, the cabinet has submitted 2017 Audit Bill to the Parliament for approval in order to strengthen expenditure control.
v. The government has established the Revenue Management Information System at the provincial and local level to provide revenue collection information.
vi. To strengthen tax policy and administration, the cabinet has approved the Single Tax Code Bill which will harmonize all tax codes.
vii. To widen the tax base and strengthen compliance, the Government has adopted a decree eliminating some tax expenditures.
RECOMMENDATIONS
i. Expenditure on public primary education undertaken by the federal government should be fully undertaken by the local governments by FY 2019.
ii. Spending of all three tiers of the government should be as per the Federal Financial Procedural Act.
iii. Disaster preparedness and response institutions and plans should be in place at federal and provincial governments as per DRRM Act.
iv. Local government expenditure should be initiated within one week of budget approval as per Local Government Management Act.
v. Equalization grants to all province and local governments for FY2019 budget should made as per the new equalization formula.
vi. Deviation between consolidated budget estimates and actual total spending should be reduced to less than 15 percent
vii. Proportion of capital expenditure undertaken in the last trimester should be reduced to 65 percent.
viii. Audit irregularities should be reduced at least by 40 percent.
ix. Data on tax collections should be made available on a real-time basis by FY2019.
