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Nepal’s legal and institutional reforms under fiscal federalism and public financial management at the provincial and local levels have continued but at a moderate pace, says the World Bank’s Nepal Fiscal Federalism Update 2024.

A reduction of available financial resources in fiscal year 2023 for provincial and local governments, mainly due to a decrease in federal revenue, led to the first fiscal deficit at the subnational level since the outset of fiscal federalism in 2017.

To enhance the outcomes of fiscal federalism and public financial management including improved revenue generation for all three tiers of government, the Fiscal Federalism Coordination Division at the Ministry of Finance was designated to coordinate public financial management reform efforts and the preparation and implementation of a Fiscal Federalism Roadmap.

This report provides a comprehensive review of the progress of fiscal federalism in Nepal. The recommendations are well aligned with our national-level vision on smoothing the fiscal transfers to help subnational governments carry out their responsibilities effectively. The report also informs and supports our ongoing efforts to clarify responsibilities among the three tiers of government and advance fiscal federalism,” said Dr Baikuntha Aryal, Chief Secretary.

Building on the first edition of the Nepal Fiscal Federalism Update, the 2024 edition explores in-depth the key pillars of fiscal federalism in Nepal: Revenue Assignment and Administration; Expenditure Assignment and Administration; Inter-Governmental Fiscal Transfers; Borrowing and Capital Finance; and Fiscal Revenue from Natural Resources. It recommends specific measures to upgrade the Inter-Governmental Fiscal Transfer system and establish a consolidated public financial management performance database that includes data from the subnational levels to enhance evidence-based decision making and transparency.

“The report highlights the need to upgrade institutional arrangements for the Intergovernmental Fiscal Transfers system to make the transfers more needs-based and timely, and to increase the fiscal autonomy of provincial and local governments, in order to improve fiscal federalism outcomes,” said Balananda Paudel, Chairman of the National Natural Resources and Fiscal Commission. The report also recommends strengthening provincial and local-level institutional arrangements for fiscal federalism and public financial management operations, including actions to improve budget credibility to improve delivery of services by subnational governments.

“Fiscal Federalism is a foundation for sustained service delivery by provincial and local governments. They need adequate financial resources and the ability to make spending decisions at the subnational level, in the spirit of federalism and the Constitution,” said Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka. “The World Bank is committed to supporting the Government of Nepal, in close collaboration with other development partners, to further solidify fiscal federalism in Nepal.”

The price of gold has dropped by Rs 700 per tola in the domestic market on Tuesday.

According to the Federation of Nepal Gold and Silver Dealers’ Association, the yellow metal is being traded at Rs 137, 400 per tola today. It was traded at Rs 138, 100 per tola on Monday.

Similarly, tejabi gold is being traded at Rs 136, 750 per tola. It was traded at Rs 137, 450 per tola.

Meanwhile, the silver is being traded at Rs 1,740 per tola today.

Prime Minister Pushpa Kamal Dahal has been stating in various forums that a budget of up to Rs 1.9trn would be needed for the fiscal year 2024/25.

The private sector, meanwhile, has been saying that a larger budget would have an adverse impact on them. Speaking at a pre-budget roundtable recently, business leaders said a large budget size will put pressure on resources, and as revenue and tax rates will have to be increased for this, ultimately the private sector will have to bear the brunt. They said that the government should bring a budget that can be implemented rather than focus on its size. In their suggestions to the finance ministry, which is preparing the budget for the upcoming fiscal year, they have requested the government to not exert pressure and dampen the morale of the private sector.

Rajesh Kumar Agrawal, President of the Confederation of Nepalese Industries (CNI), said that if the government focuses on a large budget, it will put pressure on the private sector. “This will help neither the government nor the private sector,” he added. “A wrong narrative is being created that credit extended to the private sector is being misused. This should be corrected.”

Likewise, Chandra Prasad Dhakal, president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), urged the government to bring a budget that can be implemented. “Since we recently held the 2024 Nepal Investment Summit, the coming fiscal year should be taken as the beginning of the investment decade. It seems that the monetary policy was not in sync with the budget. As a result, the government is not being able to achieve what it intends to achieve,” he added. Likewise, Nepal Chambers of Commerce (NCC) President Kamlesh Agrawal requested the government not to increase tax rates that would put an additional burden on the private sector. “Rising tax rates alone do not guarantee revenue growth. It can encourage smuggling,” he added.

Sunil KC, president of the Nepal Bankers’ Association, complained that construction entrepreneurs have been adversely affected as the government has not increased the size of capital expenditure which has ultimately led to an increase in bad loans in banks. “The construction sector accounts for the highest non-performing loans (NPLs) in the banking system. This situation has arisen because the government failed to make capital expenditures,” he added.

Likewise, Upendra Prasad Paudyal, president of the Bank and Financial Institutions Association of Nepal (BFIN), said NPL levels in the banking system can be controlled if the government is flexible towards the construction sector. “The government should encourage construction even by issuing bonds if needed. If that sector rises, NPLs will decrease, and other sectors will also improve,” he said.

On the other hand, Ganesh Karki, president of the Independent Power Producers’ Association (IPPAN), suggested that the budget give special priority to the hydropower sector, as hydropower construction not only generates electricity but also builds roads, triggers market expansion, and creates employment simultaneously.Similarly, Karan Kumar Chaudhary, president of the Nada Automobile Association of Nepal, complained that the government has forgotten the automobile sector. He said that the automobile sector has fallen victim to double taxation.

Economist Prof Dr Achyut Wagle suggested making bold decisions and showing courage for reforms, as the sectors traditionally considered the backbone of the economy are currently facing problems. “Nepal is falling behind as it has failed to identify and develop potential sectors. There is a need to explore new revenue sources,” he added. Likewise, Resham Thapa, head of the Department of Economics under Tribhuvan University, said local units shouldn’t be undermined while preparing the budget.

The Nepal Stock Exchange (NEPSE) gained 24.39 points to close at 1,998.89 points on Monday.

Similarly, the sensitive index surged by 5.83 points to close at 356. 65 points.

A total of 9,541,017-unit shares of 320 companies were traded for Rs 3. 40 billion.

Meanwhile, Narayani Development Bank Limited (NABBC), Samaj Laghubittya Bittiya Sanstha Limited (SAMAJ) and Mandu Hydropower Limited (MANDU) were the top gainers today, with their price surging by 10. 00 percent.

Likewise, CYC Nepal Laghubitta Bittiya Sanstha Limited (CYCL) was the top loser as its price fell by 5.65 percent.

At the end of the day, total market capitalization stood at Rs 3. 16 trillion.