“The report highlights the need to develop a fiscal federalism roadmap that encompasses a clear set of actions, sequence, timeline, and responsible actors to improve fiscal federalism outcomes in Nepal,” said Balananda Paudel, Chairperson of the National Natural Resource and Fiscal Commission.
The report says the intergovernmental fiscal transfer (IGFT) mechanisms need to be revised to make them more effective and introduce more flexibility. Four types of such mechanisms have been established to distribute funds from the Federal Government to PLGs and from provincial to local governments. While provincial and local governments received nearly 36.7 percent of the federal money through intergovernmental fiscal transfers which amounted to 64.8 percent of their revenue in the fiscal year 2021. The largest and proportionally growing fund transfers to subnational governments, in the past five years, have been through conditional grants. Since conditional grants are heavily earmarked, they limit PLGs’ spending autonomy and maintain undue control from the federal government on PLG spending. The share of conditional grants needs to be gradually lowered and other grants including equalization grants be increased following the expenditure capacity of the provincial and local government increases, according to the report “There is room to improve the current IGFT system to make the transfers more flexible, clear, and timely, as well as increasingly performance-based, to enable PLGs to better align their available resources with planning processes and investment priorities and facilitate better outcomes of PLG service delivery,” reads the report According to the World Bank, while considerable progress has been made on sub-national public financial management (PFM) performance, the report says, challenges remain in terms of the effectiveness of certain processes and compliance with the applicable policies of sub-national public financial management. “The proportion of conditional grants seems to be high in the early years of federalization due to the transfer of projects to provincial and local governments being operationalized by the federal government in the past and contributing the salary and allowances of teachers and health staff deputed in the local governments and it will be gradually improved as situation changes. The recommendations are well aligned with our national development plan and further support our ongoing efforts to advance fiscal federalism,” said Ram Prasad Ghimire, Revenue Secretary at the Ministry of Finance. The Nepal Fiscal Federalism Update identifies key reforms to help Nepal improve fiscal federalism outcomes. It recommends developing a fiscal federalism roadmap to guide and monitor the reforms in this area, reinforcing the Intergovernmental Fiscal Transfer system, and establishing a consolidated PFM performance database at the subnational level. It also recommends amending the legal framework to clarify the concurrent and shared responsibilities among the three tiers of government, strengthening the capacity of provincial and local government staff to carry out PFM-related functions, and reinforcing systems to improve the budget credibility and delivery of services by subnational governments. “Fiscal Federalism is a foundation for sustained service delivery by provincial and local governments. To this, they need adequate financial resources and the ability to make spending decisions at the subnational level, in the spirit of federalism,” said Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka.
