The seven provinces of Nepal presented their fiscal bills (budgets) for the next fiscal year starting mid-July at their respective provincial assemblies last Wednesday. The cumulative allocation of 305.46 billion rupees is only about 17% of the budget of 1,794.83 billion rupees which is in the process of being ratified by the federal parliament. June 25 in their municipal/rural assemblies. Policies and programs normally form the basis of budgets.
Local units, with the exception of a few large urban municipalities, depend almost entirely on formula-based fiscal transfers in the form of grants and revenue sharing, primarily from the federal treasury and, to some extent, provincial treasuries. Their own income contributes only marginally to their income. Nevertheless, a local unit receives at least Rs 150 million in the coming financial year from the higher level of government. The continuation of such a top-heavy allocation practice is a clear revelation that the devolution of fiscal power to subnational governments or the implementation of fiscal federalism, in the true federal spirit, is severely restricted.
The budgetary practice of provincial and local governments over the past five years of their existence has neither reflected the federal spirit of fiscal independence nor shaken the chronic malaise of Nepal’s budgetary system. Capital expenditure allocation in Nepal’s national budget has barely exceeded 25% of total funding over the past two decades. According to the latest economic survey published by the Ministry of Finance, the investment budget allocation, even at the local level, represents less than 40% of their total budget. This defeats the very purpose of federalism with substantially empowered local government expected to deliver services to the people at their doorsteps by spending most of the funds on development and non-recurring expenditures.
The disconnect between policies and programs and budget allocation has now extended down to the local level. Local government budgets have also become victims of ritualism, cheap populism and cut-price disbursements. The most problematic feature of local and provincial fiscal governance is no longer the scarcity of financial resources, but rather a glaring absence of absorptive capacity and a lack of accountability where significant expenditures have been made. In fiscal year 2021-22, total local government capital expenditure amounted to 56.6% of the capital allocation, while at the provincial level it was 64.6%. The previous year, it was even less, 46.2%, at the local level. The projects to be implemented by local governments are mainly small in size and in the interest of direct users. As such, spending the full capital allocation is an ideal possibility. For the new set of elected local executives for the next five years, a much improved level of capital spending must add to their budget execution plan.
Undoubtedly, this imperative can only be met with adequate political will, the requisite expertise in budget formulation and a thorough understanding of the problems associated with low capital expenditure. Provincial budgets presented last week were glaringly lacking in corrective action even though it was the fifth and final budget presented by the current set of elected executives, as provincial assembly elections are due in less than a month. a year. Newly elected leaders at the local level certainly need to demonstrate their understanding to find ways to improve fiscal governance in general and increase capital spending in particular to better meet the development needs of their constituents.
At the local level, the challenge of formulating a budget generally in an acceptable format persists. Local governments depend almost entirely on the amount of the windfall grant rather than rooting the budget in their own predictable sources. Budgeting freedom is therefore limited and it is still possible that even the amount allocated to supply-driven projects will be difficult to spend compared to demand-driven projects.
Legally, the deputy chief of each commune is the coordinator of the local revenue advisory committee. In practice, this is akin to the “minister of finance” at the municipal level. However, this arrangement failed to deliver the goods in the same spirit and yield. The gap between the knowledge of public finance management of the elected deputy mayor (vice-president in rural municipalities) in particular and the role assigned to them by the 2017 law on intergovernmental fiscal arrangements is glaring.
Another reason for low capital expenditure is the lack of institutionalization of the process from project identification to budget allocation. Projects are often selected on the basis of personal political interest without any cost-benefit analysis. Other project preparation parameters like a Detailed Project Report (DPR), project implementation, Environmental Impact Assessment (EIA), land acquisition plan and project approval. Felling of trees is rarely taken into account before allocation. The practice of creating a bank of projects is still a chimera even at the centre, and even less so at the local level.
Confusion over public procurement is a critical factor contributing to the low level of local government capital expenditure. The law directly related to public procurement, even at the local level, is the Public Procurement Act 2007. It went through 11 supposed changes to make it usable even for local groups, but failed to make the process any easier.
The highly centralized mindset of conducting government procurement under one federal law is proving counterproductive. If the idea of applying this law by force even at the local level is the efficiency of mobilizing resources, reducing costs and improving transparency, the federal authorities have not understood that this can best be done by making the provincial and local levels responsible and accountable within their respective jurisdictions according to laws or mechanisms such as public hearings designed and implemented by themselves. Now is the time for local governments, when visioning and scoping their next five-year term, to consider these factors in their development plans and budget allocation. New leaders must dare to think outside the box for the better.