The tenure of people’s representatives elected in the 2017 provincial and local elections  elapsed without sub-national governments being able to raise internal loans. The new constitution of 2015 has granted these sub-national governments authority to raise internal loans. “The main reason behind the inability of sub-national governments to raise internal loans is the lack of the relevant federal law,” states the mid-term review of the budget released by the Finance Ministry. A new law on public debt management was authenticated by the President in October last year. However, the regulation is yet to be prepared. Section 14 of the Act Made to Intergovernmental Fiscal Arrangement says that the state (province) may raise internal loans by issuing bonds subject to the prevailing law.

But until last year, there was no federal law authorizing the provincial governments to raise internal loans. The federal government has been raising internal loans as authorized by the Public Debt Act-2002.

“In the last five years, the provinces failed to raise internal loans due to the lack of law,” said an official of the Economic Affairs Ministry, Bagmati Province. “There is also no institutional set up to deal with the internal loans at the provinces.” As per the amendment Act to Amend and Integrate the Laws on Public Debt Management, the Public Debt Management Office established in the center is also responsible for raising the public debt for the sub-national governments. This office has been authorized to issue any type of debt instrument to raise internal loans for the provinces and the local governments. The sub-national governments, however, have to get a nod from the federal government to raise internal loans. They can raise the internal loans within the limit set by the National Natural Resources and Fiscal Commission. The commission has been recommending the threshold of internal loans for provincial and local governments since the fiscal year 2018/19. It has been recommended that the provinces and the local governments each cannot raise internal loans beyond 12 percent of their internal revenue, and the amount they received through revenue sharing. Such a limit for the central government is 5.5 percent of the country’s Gross Domestic Product (GDP). But there is a question of whether the provincial and local governments are required to raise internal loans when they are struggling to spend the allocated budget. During the first six months of the current fiscal year, the average capital expenditure of the provinces stood at just 12 percent. “The provincial governments should also ensure a good internal rate of return while choosing the projects where the internal loans are used,” said the official of Bagmati province said. Provincial and local governments, however, cannot raise external loans. Only the federal government can borrow external loans. But the federal government can make external borrowing for the provinces and the local governments, according to the new law on public debt management. As per the law, consolidated funds of provincial and local governments will have to bear the liability for such loans.