Govt’s plan to defer transfers may hit fiscal federalism

- RUPAK D SHARMA, Kathmandu
If the Finance Ministry had decided not to transfer grants to all the local bodies because of underperformance of Kathmandu Metropolitan City, it would be unfortunate for Nepal, which is transitioning into a federal country - Rameshore Khanal, former finance secretary

Nov 2, 2017-The plan to institutionalise fiscal federalism has faced first big hurdle, as the Ministry of Finance is mulling over releasing the second tranche of grants to local bodies based on their fund utilisation capacity, a move that goes against the spirit of the constitution and may prevent formation of strong local governments.

After Nepal moved from unitary to federal government system following promulgation of the new constitution in September 2015, the central government had decided to transfer grants to bank accounts of 753 local bodies every four months—in mid-July, mid-November and mid-March. This system was developed to enable local bodies to cater basic public services, like healthcare and education, build basic infrastructure and execute other works.

The central government has decided to provide four types of grants — fiscal equalisation, conditional, matching and special — to local bodies. Of these grants, matching and special grants will be transferred to local bodies after formation of the National Natural Resource and Fiscal Commission. The commission needs to be formed by the Constitutional Council led by the prime minister and cannot be established now because of absence of lawmakers following dissolution of Parliament. 

Yet to ensure commission’s absence does not trigger shortage of funds at local bodies, the central government’s budget of this fiscal year has allocated Rs225 billion for distribution of two other grants, fiscal equalisation and conditional. Around Rs75 billion of the allocated fund was transferred to bank accounts of local bodies in mid-July, as the first tranche. Now, only two weeks are remaining for disbursement of second tranche of grants. But the Ministry of Finance has said all the local bodies may not receive funds in mid-November as per the commitment made in the past, “as many may not have utilised funds transferred in mid-July”.

“Transferring more funds to local bodies that have not used available stock of money does not make much sense,” said Finance Secretary Shankar Prasad Adhikari. “We will soon get data on expenditure made by local bodies and top-up their accounts if they have utilised funds transferred in mid-July.”

Some say the government is planning to defer fund transfer to local bodies due to lack of funds. 

The main source of income for the government is various forms of taxes and fees. The government, however, cannot generate much income in the initial months of the fiscal year, as taxpayers pay their first instalment of income tax—which makes second biggest contribution to the government’s revenue—only after completion of six months of the fiscal year, or in mid-January. This revenue collection trend has not changed much in the current fiscal year as well. Yet the government is not facing shortage of funds because it has over Rs100 billion in savings from the last fiscal year. A portion of this savings, according to the Ministry of Finance, cannot be used as it has been pledged for works like post-earthquake reconstruction. But even after deducting this amount, the government has over Rs70 billion that can be immediately used. The government can transfer this money to local bodies.

“The government should not renege on its promise, and transfer the committed amount to local bodies on time,” said former finance secretary Rameshore Khanal. “This is because local bodies formed under the federal setup are independent subnational governments and should not be treated like local units formed at the time when the country had unitary system of government.”

There are suspicions that the government may have decided to defer fund transfers to local bodies because of “underperformance of Kathmandu Metropolitan City”. “If that is the case, it is unfortunate for Nepal, which is transitioning into a federal country because all local bodies should not suffer because of mistake made by one,” Khanal said, adding, “The central government should, however, monitor performance of local bodies from time to time and conduct social audits as well to see whether funds are being properly used.”

Published: 02-11-2017 08:01

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