Fiscal federalism gets off to slow start

- Post Report, Kathmandu

Dec 4, 2017-The implementation of fiscal federalism in the country got off to a slow start as a number of laws, guidelines and bodies are yet to be put in place to fully empower subnational governments. This challenge is being faced at a time when Nepal is all set to make a final transition from a unitary to a federal government system after the completion of state assembly and federal parliamentary elections on Thursday. 

Fiscal federalism is an integral part of the federal government system, as it allows lower tiers of government, namely states and local bodies, to enjoy what many call ‘economic self-rule’. Under this ‘self-rule’, subnational governments can design their own budget, make decisions on their own and adopt the necessary strategies to pursue development activities, create jobs and deliver public goods and services.

So far, three sets of acts have been introduced to operationalise fiscal federalism. They are the Local Government Operation Act, which defines functions of various components of local bodies; the Intergovernmental Fiscal Management Act, which spells out ways to provide grants to subnational governments and distribute the proceeds generated from the use of natural resources among the three tiers of government; and the National Natural Resource and Fiscal Commission Act, which enables the formation of a National Natural Resource and Fiscal Commission that will devise a formula for the distribution of revenues and royalties among the three tiers of government in an equitable manner besides fixing domestic debt ceilings.

Another law that the country needs to operationalise fiscal federalism is the Federal Financial Procedure Act, which will chart out ways to manage consolidated funds; frame, approve and spend the budget; maintain accounts and fiscal discipline; ascertain auditing standards and settle arrears.

“We have already started framing a draft bill,” said Nirmal Hari Adhikari, head of the Intergovernmental Fiscal Management Division at the Ministry of Finance. “Once the draft is ready, we will frame model financial procedure acts for states and local bodies. Based on these templates, subnational governments can introduce laws on financial procedures.”

Also in the offing are model tax guidelines for local bodies. Once these guidelines are ready, local bodies will get a fair idea of the processes involved in the collection of various taxes and fees.

The Intergovernmental Fiscal Management Act has allowed local bodies to collect property, house rent, real estate registration, vehicle, land, entertainment, advertisement, business and hoarding board taxes. They have also been allowed to levy fees on tourism activities, vehicle parking, rental services, collection of herbs and scrap, and operation of carts, rickshaws, cable cars and boats.

“Once we prepare model tax guidelines for local bodies, we will prepare similar templates for the states as well so that they will not face problems in revenue collection,” said Adhikari. “Also, model guidelines on public procurement need to be developed for the states as well as local bodies.” One of the big challenges faced by the central government in the implementation of fiscal federalism is a dearth of human resources who are capable of executing tasks in the federal setup. Many newly formed rural municipalities, for example, are still functioning as erstwhile village development committees, which were not empowered as today’s local bodies, said former finance secretary Shanta Raj Subedi. 

This is happening because many officials at the local bodies still do not know how to exercise authority, such as formulation of the budget, implementation of projects and management of expenses as enshrined in the constitution. 

The National Planning Commission (NPC), the apex body that frames the country’s development plans and policies, has started developing model periodic plans and budgets for local bodies. 

Also, the NPC is preparing to reintroduce the Medium Term Expenditure Framework (MTEF), as per a provision in the Intergovernmental Fiscal Management Act. The MTEF basically helps the government to identify expenditure needs in the medium term and find revenue sources to meet those needs. The MTEF also ensures budget continuation for multi-year projects and programmes after completion of the fiscal year. 

“But before we roll out the MTEF, we need to distribute the existing projects and programmes among the three tiers of government,” said Adhikari.

There is very little confusion regarding projects and programmes that will be implemented by the central government. But differences may arise in the implementation of projects and programmes at the state and local levels because the second tier of government is completely new, and many bodies at the local level have been formed through mergers. The Finance Ministry has already proposed setting up a six-member Public Expenditure Review Commission under former minister and former finance secretary Vidyadhar Mallik to look into this matter. 

The commission will chart out ways to reduce expenditure at the central, state and local levels, enhance the revenue mobilisation capacity of subnational governments, demarcate the economic and fiscal responsibilities among the three tiers of government, and assign programmes for central and subnational governments to avoid duplication.

Along with this, the government also needs to expedite the process of forming the National Natural Resource and Fiscal Commission, which will fix domestic debt ceilings for the three tiers of government and devise a formula for the distribution of two types of grants among the states and local bodies. 

The Intergovernmental Fiscal Management Act has envisaged four types of grants—fiscal equalisation, conditional, matching and special—for the states and local bodies to cover their recurrent and capital expenditure. Of these, fiscal equalisation and conditional grants will be distributed based on the formula devised by the National Natural Resource and Fiscal Commission. The commission, however, cannot get full shape now because its head must be chosen by the Constitutional Council which became defunct after the dissolution of Parliament. 

“Considering this hurdle and the need to distribute grants among local bodies in an equitable manner from the next fiscal year, we are planning to establish a secretariat of the commission after the December 7 election, and appoint a secretary to head it for the time being,” said Adhikari. “This, along with the formulation of procedures for the distribution of special and matching grants to the states and local bodies, will help us design the next fiscal year’s budget. So, a lot still needs to be done.”

Published: 04-12-2017 08:28

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