NEPAL FISCAL FEDERALISM UPDATE May 2024 © [2024] International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of, or failure to use, the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of the World Bank, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution: Please cite the work as follows: World Bank. 2024. Nepal Fiscal Federalism Update (May 2024). Washington, D.C.: World Bank. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. All photos and captions by Nabin Baral for the World Bank. Cover Concept and Design by Print Communication Pvt Ltd. NEPAL FISCAL FEDERALISM UPDATE May 2024 Contents Tables iv Figures iv Boxes v Acronyms vi Acknowledgments vii Executive Summary viii Chapter 1: Macro-fiscal Update on Provincial and Local Governments 1 1.1 Economic growth slowed in all provinces, with the largest provincial economy, Bagmati, experiencing the lowest growth rate, mainly due to the contraction of wholesale and retail trade 2 1.2 Most local governments also experienced a decline in economic activity in FY23 5 1.3 Fiscal balances of provincial and local governments fell into deficit in FY23 for the first time since the implementation of fiscal federalism 5 1.4 Consolidated revenue and grants of provincial and local governments declined to a record low in FY23 due to a decrease in intergovernmental grants and revenue sharing 7 1.5 Provincial and local government spending edged up marginally in FY23 9 1.6 A large gap remains between sub-national governments’ own expenditure and own revenue 11 1.7 Budget credibility is undermined by lack of alignment between periodic development plans, medium-term expenditure frameworks (MTEF), and budgets, as well as significant allocation to the category of ‘Economic Miscellaneous’ spending 12 Chapter 2: Enabling Legal, Policy, and Institutional Frameworks, with Emphasis on Provincial Governments 15 2.1 Legal and institutional setup for fiscal federalism in the provinces has evolved 17 2.2 Own-source revenue collection has stagnated, reflecting moderate improvement in policy on revenue assignment and weakness in revenue administration 19 2.3 Expenditure assignment is advancing, but is not supported by effective procurement management 20 2.4 The Inter-Governmental Fiscal Transfers System requires upgraded institutional arrangements for effective management 22 2.5 The regulatory framework on borrowing and capital finance is evolving 26 2.6 There has been limited progress made in the sustainable and equitable mobilization and distribution of natural resources revenue 26 Chapter 3: Progress on Public Financial Management by Provincial and Local Governments 29 3.1 While most local governments adhered to legal requirements for annual budgets and budget spending delegation, progress in preparing periodic development plans and MTEFs remains limited 30 3.2 Although local governments seem to be compliant with legal provisions on maintaining accounts according to national accounting standards, the budget transparency of local governments remains low 32 3.3 Although there has been an improvement in the number of local governments preparing procurement plans, close to half of local governments have still not prepared them 34 3.4 Internal control systems are improving in PLGs, but the coverage of this key oversight mechanism remains limited 35 3.5 Audit irregularities at both provincial and local levels decreased 36 3.6 Compliance with preparing and publishing the annual budget execution report deteriorated for local governments, while public hearings improved 37 Chapter 4: Key Recommendations from the NFFU 2024 39 References 45 Acts and Guidelines 46 Annex 1. List of Key Stakeholders Consulted 48 Annex 2a. List of 115 Municipalities Sampled in OAG Analysis 49 Annex 2b. List of 444 Municipalities Sampled in LISA Analysis 50 Annex 3a. Macro-Fiscal Statistics for Provinces (Figures A1–A7) 52 Annex 3b. Fiscal Statistics for Four Types of Municipalities (Figures A8–A11) 66 Annex 4. Complementary Studies on Fiscal Federalism in Nepal 70 Nepal Fiscal Federalism Update, May 2024 | iii Tables Table 2.1. Snapshot of the five key pillars of fiscal federalism in Nepal 16 Table 2.2. Key provincial-level institutions for the implementation of fiscal federalism and PFM 17 Table 2.3. Status of enactment of Provincial Civil Service Acts and civil service recruitment 18 Table 2.4. Schedule for allocation grants 25 Table 2.5. Key roles of the four institutions on borrowing and capital financing 26 Table 2.6. Natural resource royalty distribution to PLGs by source FY21 27 Table 4.1. Progress on implementation of recommendations in NFFU 2023, and summary of key recommendations in NFFU 2024 40 Figures Figure 1.1. All Nepal’s provincial economies grew at a slower pace in FY23… 2 Figure 1.2. …driven primarily by the services sector… 2 Figure 1.3. … particularly wholesale and retail trade 3 Figure 1.4. Manufacturing sub-sector in all seven provinces contracted in FY23 3 Figure 1.5. Bagmati contributed more than one-third of national economic growth in FY23 4 Figure 1.6. Fiscal balance of all provinces moved into deficit in FY23, the first time since FY19 6 Figure 1.7. Fiscal balance of local governments also fell into deficit in FY23, the first time since FY19 6 Figure 1.8. Provincial government revenue and grants plummeted in FY23 8 Figure 1.9. Local government revenue and grants also plummeted in FY23 8 Figure 1.10. Provincial government spending increased marginally in FY23 9 Figure 1.11. Local government spending decreased marginally in FY23 10 Figure 1.12. Vertical fiscal gap remained higher for local governments than provincial governments in FY23 11 Figure 1.13. Provincial government underspending increased in FY23 12 Figure 1.14. Local government underspending decreased marginally in FY23 12 Figure 1.15a. Recurrent spending allocation under budgets, MTEFs, and periodic plans 13 Figure 1.15b. Capital spending allocation under budgets, MTEFs, and periodic plans 13 Figure 2.1. Budget allocations for the four types of grants from the federal government to PLGs 22 Figure 3.1. Percentage of local governments preparing periodic development plans 30 Figure 3.2. Percentage of local governments preparing only spatial-based development plans 30 Figure 3.3. Percentage of local governments preparing and implementing MTEFs, and annual development programs based on the spatial-based development plans 31 Figure 3.4. Percentage of local governments preparing annual budget and program based on recommendations of the three committees 31 Figure 3.5. Percentage of local governments submitting annual budget to their local assembly 32 Figure 3.6. Percentage of local governments with their local assembly endorsing submitted budget within the legally stipulated timeline 32 iv Figure 3.7. Percentage of local governments complying with legal provisions on budget spending delegation 32 Figure 3.8. Percentage of local governments complying with legal provisions on maintaining accounts in line with national accounting standards 33 Figure 3.9a. Percentage of local governments making budget speech publicly available 33 Figure 3.9b. Percentage of local governments with three sets of figures available in budget speech 33 Figure 3.9c. Percentage of local governments with revenue estimate available for budget year 34 Figure 3.9d. Percentage of local governments with spending estimate based on economic classification available for budget year 34 Figure 3.9e. Percentage of local governments with spending estimate based on functional classification available for budget year 34 Figure 3.10. Percentage of local governments preparing and fully implementing master and annual procurement plans 35 Figure 3.11. Percentage of local governments preparing and fully implementing internal control systems 35 Figure 3.12. Percentage of local governments performing and not-performing internal audit 35 Figure 3.13. Audit irregularities as share of audited amount for provinces 37 Figure 3.14. Audit irregularities as share of audited amount for all local governments by municipality type 37 Figure 3.15. Percentage of local governments preparing and making the annual budget execution report public within the legally stipulated timeline 37 Figure 3.16a. Percentage of local governments conducting at least one public hearing every four months 38 Figure 3.16b. Percentage of local governments with two public hearings during the evaluation period 38 Figure A1. Macro-fiscal statistics for Koshi 52 Figure A2. Macro-fiscal statistics for Madhesh 54 Figure A3. Macro-fiscal statistics for Bagmati 56 Figure A4. Macro-fiscal statistics for Gandaki 58 Figure A5. Macro-fiscal statistics for Lumbini 60 Figure A6. Macro-fiscal statistics for Karnali 62 Figure A7. Macro-fiscal statistics for Sudurpashchim 64 Figure A8. Fiscal statistics for metropolitan cities 66 Figure A9. Fiscal statistics for sub-metropolitan cities 67 Figure A10. Fiscal statistics for urban municipalities 68 Figure A11. Fiscal statistics for rural municipalities 69 Boxes Box 1.1. Poverty rates across provinces 4 Box 1.2. Background on nighttime lights data 5 Box 2.1. Does the federal civil service bill reinforce fiscal federalism? 19 Box 2.2. Expenditure assignment implications of the Water Supply and Sanitation Act (2022) and draft Regulations (as of March 2024) 21 Box 2.3. Guidance criteria to incorporate performance elements in IGFTs in Nepal 23 Nepal Fiscal Federalism Update, May 2024 | v Acronyms CAO Chief Administrative Officer CG Conditional Grant FCGO Financial Comptroller General Office FEG Fiscal Equalization Grant FFCD Fiscal Federalism Coordination Division FY Fiscal Year GDP Gross Domestic Product IGFA Act Intergovernmental Fiscal Arrangement Act IGFT Inter-Governmental Fiscal Transfer LISA Local Government Institutional Capacity Self-Assessment MAPS Methodology for Assessing Procurement Systems MoF Ministry of Finance MoFAGA Ministry of Federal Affairs and General Administration MoFE Ministry of Forests and Environment MTEF Medium-Term Expenditure Framework NARMIN National Association of Rural Municipalities in Nepal NASC Nepal Administrative Staff College NFFU Nepal Fiscal Federalism Update NNRFC National Natural Resources and Fiscal Commission NPC National Planning Commission NPR Nepali Rupee NRB Nepal Rastra Bank OAG Office of the Auditor General OPMCM Office of the Prime Minister and Council of Ministers PAC Public Accounts Committee PCGG Provincial Center for Good Governance PDMO Public Debt Management Office PFM Public Financial Management PLG Provincial and Local Government PMoFEA Provincial Ministries of Finance and Economic Affairs PPC Provincial Planning Commission PPMO Public Procurement Management Office PSC Public Service Commission PTCO Provincial Treasury Controller Office SuTRA Sub-National Treasury Regulatory Application TDF Town Development Fund VFG Vertical Fiscal Gap vi Acknowledgements This second edition of the Nepal Fiscal Federalism Update was produced by the World Bank Macroeconomics, Public Sector, Trade, and Investment team for Nepal and was led by Yoshihiro Saito (Public Sector Specialist, ESAC1), Nayan Krishna Joshi (Country Economist, ESAC1), and Marcela Rozo (Senior Public Sector Specialist, ESAC1), and consisting of Syed Waseem Abbas Kazmi (Senior Financial Management Specialist, ESAG1), Abdoul Ganiou Mijiyawa (Senior Economist, ESAC1), Ojeswee Pande (Extended Term Consultant, ESAC1), Durgesh Kumar Pradhan (Consultant, ESAC1), Prabin Dongol (Consultant, ESAC1), and Shreeram Ghimire (Team Associate, SACNP). Inputs were received from Arvind Nair (Senior Economist, ESAC1), Bishwa Raj Basaula (Financial Management Specialist, ESAG1), Lokendra Phadera (Economist, ESAPV), Haider Raza (Senior Procurement Specialist, ESARU), Soyesh Lakhey (Consultant, ESAC1) and Rameshore Khanal (Consultant). The team wishes to thank peer reviewers Zubair Khurshid Bhatti (Lead Public Sector Specialist, EAEG2), Rama Krishnan Venkateswaran (Lead Public Sector Specialist, EEAG1), Anwar Shah (Fiscal Federalism Expert), and Krishna Pathak (Team Leader for ADB Nepal, Public Sector Management team) for providing quality assurance. The team also wants to express its appreciation to the participants in the various consultation meetings for their inputs and feedback on the document. The report was produced under the guidance of Mathew Verghis (Regional Director, Equitable Growth, Finance and Institutions [EFI], South Asia Region), Faris Hadad-Zervos (Country Director for Maldives, Nepal, and Sri Lanka), Lada Strelkova (Manager, Operations for Maldives, Nepal, and Sri Lanka), and Shabih Ali Mohib (Practice Manager, ESAC1). Akash Shrestha (External Affairs Officer, ECRSA) and Avinashi Paudel (External Affairs Associate, ECRSA) managed media relations and outreach. Nepal Fiscal Federalism Update, May 2024 | vii Executive Summary The World Bank’s Nepal Fiscal Federalism Update With spending remaining relatively unchanged at (NFFU) aims to report annually on the progress of fiscal around 12 percent of GDP, lower revenue and grants federalism in Nepal and identify implementation gaps. in FY23 led to a deficit for both provincial and local This second update reviews the progress on fiscal governments, the first time since FY19. Provincial federalism since the publication of the first report and deficits reached 0.3 percent of GDP in FY23, while provides an update on economic conditions across local government deficits stood at 0.4 percent of GDP. provinces and local governments. Considering their These deficits were financed using the opening cash important role in fiscal federalism and the recent growth and bank balances, reflecting unspent unconditional of public debate on the role of provincial governments, fiscal equalization grants (FEGs) and revenue sharing this edition places special emphasis on the provincial from previous fiscal years. The severity of the deficit level of government. varies significantly across provinces and municipality types, with Sudurpashchim and urban municipalities experiencing the largest deficits. Growth has been slow and deficits have manifested across provinces and most Provincial and local governments in Nepal local governments. underspent their budgets in FY23. Provincial governments underspent at a rate of 34 percent, while In fiscal year (FY) 23, Nepal’s provinces saw their local governments underspent at a rate of 24.4 percent. slowest growth since FY20, ranging from 1.4 Program expenses (recurrent expenditure), public percent in Bagmati to 3.3 percent in Gandaki, construction (capital expenditure) and contingencies driven by a decline in wholesale and retail trade (recurrent and capital components) were the common and manufacturing. Import restrictions implemented drivers of underspending for sub-national governments. by the federal government in the first half of FY23 to Underspending at the provincial level continues to manage external pressures resulted in a significant be explained by a lack of alignment between periodic decline in the wholesale and trade sub-sector across development plans, the medium-term expenditure all provinces, while manufacturing and construction framework (MTEF), and the budget, as well as the sub-sectors also contracted, in part due to the elevated allocation of a significant portion of the budget to the prices of manufactured goods and construction category of ‘Economic Miscellaneous.’ materials. Bagmati, which has the largest services sector, contributed to the slowdown in national growth. Progress on the regulatory framework The slowdown in growth along with import for fiscal federalism and institutional restrictions led to a decline in federal revenue from 23.1 percent of gross domestic product (GDP) in FY22 development has been slow, and to 19.2 percent of GDP in FY23. This, in turn, caused urgent action is needed on reinforcing a decrease of 1.3 percentage points of GDP in fiscal expenditure and revenue assignments, transfers (including revenue sharing) to sub-national as well as upgrading the Inter- governments. Consequently, in FY23, provincial revenue and grants plunged by 0.9 percentage points of GDP to a Governmental Fiscal Transfers System. record low of 3.5 percent, and local government revenue Nepal’s legal and institutional reform under fiscal and grants fell by 1 percentage point to 8 percent of GDP. federalism has been progressing moderately. At the While all provinces and municipality types experienced institutional and strategic levels, the Fiscal Federalism this decline, Sudurpashchim and urban municipalities Coordination Division (FFCD) at the Ministry of Finance saw the largest decrease. viii (MoF) has the mandate to coordinate the implementation The Inter-Governmental Fiscal Transfers (IGFTs) of fiscal federalism, including for the development of System requires upgraded institutional arrangements fiscal federalism strategies. In addition, since November for effective management. The reliance of local 2023, FFCD has been designated as the unit responsible governments on the four types of IGFTs is still high – 74.3 for coordinating public financial management (PFM) percent of total local government revenue in FY23, which strategies. Proactive reviews on regulatory frameworks, is slightly less than the 76.2 percent in FY202 – while such as the Local Government Operations Act (2017) CGs to local governments have increased slightly over and Inter-Governmental Fiscal Arrangement Act (2017), the same period, from 43.5 percent to 46.5 percent of together with the review of the Unbundling Report1 led by total revenue.3 The overall trend of IGFTs has remained the Office of the Prime Minister and Council of Ministers unchanged, with the largest proportion of resources for (OPMCM), are underway to further clarify the division of local governments being transferred through CGs. responsibilities among the three tiers of government. CGs could be decreased and FEGs increased to The enabling environment for fiscal federalism enable planning and decision-making by PLGs and PFM at the provincial level is slowly advancing. according to bottom-up needs. Furthermore, the design Following federal-level institutional developments, of CGs can be improved by establishing a transparent, provincial-level institutions responsible for fiscal consultative process and a technical methodology to federalism and PFM are in the process of developing increase the predictability of financial resources, as well their core building blocks. By December 2023, all seven as by adopting mechanisms to increase the flexibility of provinces had enacted their Provincial Civil Service PLGs in the programming and use of these grants. Acts (PSCA), paving the way for the recruitment of sub-national civil servants. The dependence of provincial Progress has been made on public governments on conditional grants (CG) as a share of their total revenue decreased from 19.6 percent in FY22 to financial management at the provincial 17.3 percent in FY23, which indicates a marginal increase and local government level, although in the fiscal autonomy of provincial governments. challenges persist. Enhancing the capacity for revenue administration at the provincial level ought to be encouraged to further Local governments are making strides in planning empower provincial fiscal autonomy. and budgeting practices. For example, (a) more local governments are preparing periodic development More progress needs to be made on revenue and plans, MTEFs, and annual programs; (b) almost all local expenditure assignments across the three levels governments have established the required committees of government. For instance, some of the sectoral for budget preparation; (c) thematic budget ceilings are legal and regulatory frameworks, such as the Water increasingly being determined based on legal guidelines; Supply and Sanitation Regulations and the Education and (d) most local governments delegate spending Bill (currently under review by Parliament), should authority as required by law. However, challenges remain provide further clarity on expenditure assignment in the in terms of preparing MTEFs and annual programs based sectors, determining which tier of government holds on spatial periodic plans. what spending power. On revenue assignment, the Construction Materials Management and Regulation Local governments largely complied with accounting Bill was submitted to Parliament in November 2023 and standards, but budget transparency remains low. is expected to provide clarity on the division of revenue While some types of budget information like revenue and rights and responsibilities between provincial and local spending estimates are becoming more publicly available governments (PLGs) regarding natural resources. It is for the budget year, problems with comparability and important to enact these regulatory frameworks without transparency persist in budget speeches, despite the delay to give clarity on concurrent responsibilities among adoption of the Sub-National Treasury Regulatory the three tiers of government. 1 An Unbundling Report was prepared by the Office of the Prime Minister and Council of Ministers in 2017 to clarify Schedules 5–9 of the Constitution of Nepal 2015. The second review of the Unbundling Report is ongoing. 2 Data from the National Natural Resources and Fiscal Commission (NNRFC) website (https://www.nnrfc.gov.np/). 3 Data from the Ministry of Finance. Nepal Fiscal Federalism Update, May 2024 | ix n  Executive Summary Application (SuTRA) by almost all local governments. Progress in the uptake of For example, unlike federal and provincial governments, recommendations contained in the more than 90 percent of sampled local governments did not present three sets of figures4 (estimates for the NFFU 2023 has been moderate. upcoming year, revised estimates for the current year, Moderate progress has been made against the six and actual figures from the previous year) or consistent key recommendations highlighted by NFFU 2023. documentation on budgets based on administrative, Since the first edition of the NFFU in 2023 (with a data economic, and functional classifications. This prevents cut-off date of March 2023), some progress has been comparisons between budgets and execution. made in the actions recommended by the report in There has been progress in terms of procurement terms of the enabling legal, policy, and institutional capacity and internal control systems at the frameworks and the PFM implementation status of local level, although there is ample room for PLGs. Among these are the decision by the government improvement. The number of local governments to prepare a Fiscal Federalism Roadmap for Nepal, led preparing and fully implementing master and annual by the FFCD under the MoF, and the ongoing process procurement plans increased from FY22 to FY23. to review the Unbundling Report through an exercise According to LISA data, 44.1 percent of 444 local led by the OPMCM to give further clarity on expenditure governments prepared and fully implemented these and revenue assignments among the three tiers of plans in FY23, marking a considerable increase from governments. However, there has been limited progress 29.1 percent of local governments in FY22. There was on some other key recommendations, such as the also a considerable increase in the number of local important reforms needed on the assignment and governments that prepared, fully implemented, and management of conditional grants (for details, see the regularly monitored internal control systems. Despite this recommendation matrix below). progress, close to half of the local governments sampled The key recommendations of this report build on in FY23 did not prepare any procurement-related plan, the progress achieved since the last NFFU and the and more than half did not have an internal control remaining gaps. They refer to reforms or amendments system. in the legal framework, reinforcement of the IGFT Despite a decrease in audit irregularities and system, facilitating economic and PFM-related data an increase in public hearings, fewer local production and access, reform of the procurement governments are complying with legal deadlines system, strengthening PFM and procurement capacity, for financial reporting. Local governments are and reinforcement of PLGs’ budget credibility. The increasingly failing to prepare and publish their annual recommendations are summarized in the following budget execution reports within the mandated timeframe table5, along with a proposed level of priority (short and of three months after the fiscal year ends. This decline in medium term) based on their feasibility, impact, and adherence to the legal requirement is widespread across sequencing. all municipality types. The compliance rates in FY23 ranged from a low of 17 percent in metropolitan cities to a high of 22 percent in rural municipalities. 4 Recommended by the Government Finance Statistics (GFS) and Classification of the Functions of Government (COFOG) standards. 5 The table below is reproduced in Chapter 4 as Table 4.1. Progress on implementation of recommendations in NFFU 2023, and summary of key recommendations in NFFU 2024 Recommendations Recent Developments Recommendations Responsible in NFFU 2023 Since March 2023 in NFFU 2024 Institutions Short term Fiscal federalism and PFM reform national strategies Develop a fiscal federalism The MoF FFCD was designated Develop, validate, and implement MoF (lead agency) roadmap based on relevant to coordinate the preparation the fiscal federalism roadmap. in coordination with government strategies, of the update of the PFM While the FFCD is committed to the National Natural such as the Public Financial reform strategy. The FFCD has developing the roadmap, this Resources and Fiscal Management strategy (2017) the mandate to prepare the NFFU reiterates the importance of Commission (NNRFC), and Capacity Development Fiscal Federalism Roadmap. preparing it through a consultative National Planning Action Plan on Fiscal The FFCD is advancing these process that involves provincial Commission (NPC) and Federalism (2022). commitments. and local governments and swiftly PLGs advancing its implementation. Legal framework amendments Pass updated Fiscal Procedures Provincial Ministries of and Financial Accountability Acts, Finance and Economic aligned with the corresponding Affairs (PMoFEA) federal-level framework, in the five remaining provinces. IGFT System Reinforce the IGFT System a. The NNRFC has been Upgrade institutional MoF (lead agency) to make transfers more reviewing the FEG arrangements for IGFTs to make in coordination with flexible, clear, and timely, formula, aiming to have the transfers more needs-based, NNRFC, NPC, line as well as increasingly a more transparent and clear, and timely, and increase the ministries and PLGs performance-based. More user-friendly methodology fiscal autonomy of PLGs. In addition specifically, do the following: that better reflects the to the recommendations in NFFU NNRFC (lead agency) evolution of the situation 2023, this report recommends the a. Update the methodology MoF (lead agency) of PLGs. following: for calculating FEGs. in coordination with b. No significant progress a. Establish a transparent, NNRFC, NPC, line b. Limit earmarking in has been made on the consultative process and ministries and PLGs conditional grants as part flexibilization of conditional technical methodology for of the transition towards grants. determining the divisible pool the principle of sectoral for IGFTs to help increase the block grants. c. While the NPC and NNRFC predictability of the financial have emphasized the need c. Strengthen the resources. to enhance coordination inter-governmental regarding these four types b. Conclude and implement the coordination mechanism of grants, no significant review of the FEG formula. among the key fiscal measures have been taken institutions of the MoF, c. Improve the design and to address this point. NNRFC, and NPC. implementation of conditional grants by: ¾¾ Reducing CGs and increasing FEGs to enable PLG planning and decision-making according to bottom-up needs ¾¾ Maintaining CGs only for federal responsibilities implemented through PLGs and for areas of PLG responsibilities where international commitments exist Nepal Fiscal Federalism Update, May 2024 | xi n  Executive Summary Recommendations Recent Developments Recommendations Responsible in NFFU 2023 Since March 2023 in NFFU 2024 Institutions ¾¾ Allocating CGs based on clear criteria and transparent procedures, including aligning allocations with PLGs’ needs by improving vertical coordination ¾¾ Determining and publishing the amount of CGs earlier in the fiscal year to facilitate planning and more efficient execution Access to PFM-related data Establish a consolidated The NNRFC’s performance In addition to establishing a MoF (lead agency) PFM performance indicators and the Ministry of consolidated PFM performance in coordination with database to enhance Federal Affairs and General database (NFFU 2023 FCGO, NNRFC, and monitoring and evaluation Administration’s (MoFAGA’s) recommendation), enable the National Statistics of the overall performance Local Government Institutional PFM data of PLGs to be published Office (NSO) of PLGs in relation to public Capacity Self-Assessment by the federal government financial management. (LISA) data are publicly by amending the federal Fiscal available. The LISA data Procedures and Financial also includes some PFM Accountability Act to authorize the performance information at federal government to disclose the local level. However, more disaggregated PFM data collected needs to be done to create a by PLGs through their centrally consolidated PFM database. managed information management systems. Procurement related reforms Conduct a comprehensive Public Procurement MAPS6 assessment of public Monitoring Office procurement. This will help in making informed decisions and introducing necessary procurement reforms involving eGovernment procurement and institutional and regulatory frameworks in the context of federalism. Medium term Clarification of concurrent responsibilities Amend the legal The OPMCM has been Approve and implement the Office of Prime Minister framework to clarify the reviewing the Unbundling reviewed Unbundling Report and and Council of Ministers concurrent and shared Report. Several sectoral acts pass the sectoral acts to clarify (lead agency) in responsibilities among and policies are under review, the concurrent responsibilities coordination with line three tiers of government. such as the Education Bill among the three tiers of government ministries and Federal and the Water Supply, and related to expenditure assignments Parliament Sanitation Regulation. and revenue from natural resources. 6 Methodology for Assessing Procurement Systems xii Recommendations Recent Developments Recommendations Responsible in NFFU 2023 Since March 2023 in NFFU 2024 Institutions PFM and procurement capacity Strengthen the capacity Various capacity-building Strengthen internal audit MoFAGA (coordinating of PLGs’ PFM human efforts are being undertaken and oversight mechanisms of agency) in coordination resources to carry out the by the government and provincial and local governments with PCGGs and the required functions. development partners. While by providing training on these areas, Office of the Auditor concerned federal agencies increasing human resources, and General (OAG) and training institutes are establishing institutional oversight actively providing training mechanisms such as the Account to PLG staff to bolster Committees of PLGs. In addition, PFM-related technical strengthen the procurement expertise, there is a need to capacity of PLGs. harmonize capacity-building efforts among the key institutions such as PCGGs, Nepal Administrative Staff College (NASC), and PFM training academy. Strengthen the revenue divisions PMoFEAs of Provincial Ministries of Finance and Economic Affairs (PMoFEAs) to effectively perform revenue management roles and increase provincial level own-source revenue. Budget credibility Reinforce systems to No significant progress In addition to the NFFU 2023 Provincial line improve budget credibility has been made on this recommendations on this topic, ministries, PCGGs, and and service delivery of recommendation. improve budget credibility by: Provincial Planning PLGs by strengthening: Commissions a. Reviewing the Provincial a. The alignment of Appropriations Acts and periodic development amending virement rules to plans, MTEFs, and annual restrict extensive administrative budgets reallocations b. Cash management b. Enhancing the capacity of local systems governments to adhere to the Intergovernmental Fiscal c. Provincial Appropriations Arrangement Act 2017 and Local Acts by setting limits on Government Operations Act the amount for budget 2017, particularly concerning sub-heading ‘Economic the formulation of periodic Miscellaneous’ development plans, MTEFs, and annual development programs c. Standardizing budget speeches by developing guidelines or templates for consistent content and format to allow comparability across all local governments Developing local-level GDP data Develop and implement a system NSO for generating local-level GDP data. Nepal Fiscal Federalism Update, May 2024 | xiii xiv CHAPTER 1 Macro-fiscal Update on Provincial and Local Governments Nepal Fiscal Federalism Update, May 2024 | 1 n C hapter 1  n   Macro-Fiscal Update on Provincial and Local Governments 1.1 Economic growth slowed in all provinces, with the largest provincial economy, Bagmati, experiencing the lowest growth rate, mainly due to the contraction of wholesale and retail trade In FY23, Nepal’s provinces experienced their slowest in the first half of FY237 to manage external pressures. economic growth since FY20 (Figure 1.1). This slowdown These restrictions resulted in a significant decline of over was in both the services and industrial sectors (Figure 2 percent in the wholesale and trade sub-sector across 1.2). The services sector’s performance was particularly all provinces. The manufacturing and construction weak due to a contraction in the wholesale and trade sub-sectors within the industrial sector also contracted8 sub-sector (Figure 1.3). This decline can be attributed to (Figure 1.4). The provinces of Madhesh and Karnali were import restrictions imposed by the federal government most affected by the decline in manufacturing. Figure 1.1. All Nepal’s provincial economies grew at a slower pace in FY23 … ;ƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚͿ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϴ ;ƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚͿ ϲ͘ϯ ϲ͘ϰ ϲ ϱ͘Ϭϱ͘ϱ &zϮϬ ϱ͘ϭ &zϮϭ &zϮϮ ϱ͘Ϭ &zϮϯϱ͘ϯ ϱ͘ϲ ϰ͘ϳ ϱ͘Ϭ ϰ͘ϴϰ͘ϴ ϰ͘ϴ ϴ ϰ͘ϱϰ͘ϲ ϰ͘Ϯ ϲ͘ϯ ϲ͘ϰ ϯ͘ϯ ϰ ϱ͘ϲ ϲ ϱ͘Ϭϱ͘ϱ Ϯ͘Ϭ ϱ͘ϭ ϰ͘ϳϱ͘Ϭ Ϯ͘ϭ ϱ͘Ϭϱ͘ϯ ϭ͘ϵ Ϯ͘Ϭϰ͘ϴϰ͘ϴϭ͘ϴ ϰ͘ϴ ϭ͘ϵ ϰ͘ϱϰ͘ϲ ϭ͘ϳ ϭ͘ϰ ϰ͘Ϯ ϭ͘ϰ Ϯ ϰ Ϭ͘Ϭ ϯ͘ϯ Ϭ Ϯ͘Ϭ ϭ͘ϳ Ϯ͘ϭ ϭ͘ϵ Ϯ͘Ϭ ϭ͘ϴ ϭ͘ϵ Ϯ ϭ͘ϰ ϭ͘ϰ ͲϮ Ϭ͘Ϭ ͲϬ͘ϳ ͲϬ͘ϴ Ϭ ͲϮ͘Ϭ ͲϮ͘ϰ Ͳϰ ͲϬ͘ϳ ͲϮ ͲϬ͘ϴ Ͳϲ ͲϮ͘Ϭ ͲϮ͘ϰ Ͳϰ Ͳϱ͘ϳ &ŝŐϭ͘ϭ Ͳϴ Ͳϲ <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ EĂƚŝŽŶĂů Ͳϱ͘ϳ &ŝŐϭ͘ϭ Ͳϴ <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ EĂƚŝŽŶĂů Sources: National Statistics Office and World Bank staff calculations Figure 1.2. … driven primarily by the services sector … ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ ZĞĂů'WĂƚďĂƐŝĐƉƌŝĐĞƐ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ϰ͘Ϭ ϯ͘ϱ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ ZĞĂů'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϰ͘Ϭ ϯ͘Ϭ ϯ͘ϱ Ϯ͘ϱ ϯ͘Ϭ Ϯ͘Ϭ Ϯ͘ϱ ϭ͘ϱ Ϯ͘Ϭ ϭ͘Ϭ ϭ͘ϱ Ϭ͘ϱ ϭ͘Ϭ Ϭ͘Ϭ &ŝŐϭ͘Ϯ Ϭ͘ϱ ͲϬ͘ϱ &ŝŐϭ͘Ϯ Ϭ͘Ϭ <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ EĂƚŝŽŶĂů ͲϬ͘ϱ <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ EĂƚŝŽŶĂů ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽƐĞƌǀŝĐĞƐ'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ tŚŽůĞƐĂůĞĂŶĚƌĞƚĂŝůƚƌĂĚĞ dƌĂŶƐƉŽƌƚĂƚŝŽŶĂŶĚƐƚŽƌĂŐĞ ĐĐŽŵŵŽĚĂƚŝŽŶĂŶĚĨŽŽĚƐĞƌǀŝĐĞ Sources: National Statistics Office and World Bank staff calculations &ŝŶĂŶĐŝĂůĂŶĚŝŶƐƵƌĂŶĐĞĂĐƚŝǀŝƚŝĞƐ ZĞĂůĞƐƚĂƚĞĂĐƚŝǀŝƚŝĞƐ WƵďůŝĐĂĚŵŝŶŝƐƚƌĂƚŝŽŶĂŶĚĚĞĨĞŶĐĞ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽƐĞƌǀŝĐĞƐ'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ĚƵĐĂƚŝŽŶ tŚŽůĞƐĂůĞĂŶĚƌĞƚĂŝůƚƌĂĚĞ KƚŚĞƌƐĞƌǀŝĐĞƐ dƌĂŶƐƉŽƌƚĂƚŝŽŶĂŶĚƐƚŽƌĂŐĞ ^ĞƌǀŝĐĞƐ ĐĐŽŵŵŽĚĂƚŝŽŶĂŶĚĨŽŽĚƐĞƌǀŝĐĞ &ŝŶĂŶĐŝĂůĂŶĚŝŶƐƵƌĂŶĐĞĂĐƚŝǀŝƚŝĞƐ ZĞĂůĞƐƚĂƚĞĂĐƚŝǀŝƚŝĞƐ WƵďůŝĐĂĚŵŝŶŝƐƚƌĂƚŝŽŶĂŶĚĚĞĨĞŶĐĞ 2 Ϯ͘ϱ ĚƵĐĂƚŝŽŶ KƚŚĞƌƐĞƌǀŝĐĞƐ ^ĞƌǀŝĐĞƐ Ϯ͘Ϭ Ϯ͘ϱ ϭ͘ϱ Ϯ͘Ϭ ϭ͘ϱ ϭ͘Ϭ Ϭ͘ϱ &ŝŐϭ͘Ϯ Ϭ͘Ϭ ͲϬ͘ϱ <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ EĂƚŝŽŶĂů Figure 1.3. … particularly wholesale and retail trade ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽƐĞƌǀŝĐĞƐ'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ tŚŽůĞƐĂůĞĂŶĚƌĞƚĂŝůƚƌĂĚĞ dƌĂŶƐƉŽƌƚĂƚŝŽŶĂŶĚƐƚŽƌĂŐĞ ĐĐŽŵŵŽĚĂƚŝŽŶĂŶĚĨŽŽĚƐĞƌǀŝĐĞ &ŝŶĂŶĐŝĂůĂŶĚŝŶƐƵƌĂŶĐĞĂĐƚŝǀŝƚŝĞƐ ZĞĂůĞƐƚĂƚĞĂĐƚŝǀŝƚŝĞƐ WƵďůŝĐĂĚŵŝŶŝƐƚƌĂƚŝŽŶĂŶĚĚĞĨĞŶĐĞ ĚƵĐĂƚŝŽŶ KƚŚĞƌƐĞƌǀŝĐĞƐ ^ĞƌǀŝĐĞƐ Ϯ͘ϱ Ϯ͘Ϭ ϭ͘ϱ ϭ͘Ϭ Ϭ͘ϱ Ϭ͘Ϭ &ŝŐϭ͘ϯ ͲϬ͘ϱ Ͳϭ͘Ϭ <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ EĂƚŝŽŶĂů Sources: National Statistics Office and World Bank staff calculations Figure 1.4. Manufacturing sub-sector in all seven provinces contracted in FY23 ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽŝŶĚƵƐƚƌŝĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ DŝŶŝŶŐĂŶĚƋƵĂƌƌLJŝŶŐ DĂŶƵĨĂĐƚƵƌŝŶŐ ůĞĐƚƌŝĐŝƚLJ͕ŐĂƐ͕ƐƚĞĂŵĂŶĚĂŝƌĐŽŶĚŝƚŝŽŶŝŶŐƐƵƉƉůLJ tĂƚĞƌƐƵƉƉůLJ͖ƐĞǁĞƌĂŐĞ͕ǁĂƐƚĞŵĂŶĂŐĞŵĞŶƚ ŽŶƐƚƌƵĐƚŝŽŶ /ŶĚƵƐƚƌLJ Ϯ͘Ϭ ϭ͘ϱ ϭ͘Ϭ Ϭ͘ϱ Ϭ͘Ϭ &ŝŐϭ͘ϰ ͲϬ͘ϱ Ͳϭ͘Ϭ <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ EĂƚŝŽŶĂů Sources: National Statistics Office and World Bank staff calculations ;ƉŽǀĞƌƚLJŚĞĂĚĐŽƵŶƚƌĂƚĞ͕ƉĞƌĐĞŶƚͿ TheϰϬagriculture sector remained resilient in FY23, ϯϰ͘Ϯ agricultural land across the provinces. According to the ϯϱ withϯϬ heterogenous performance across provinces. Ϯϲ͘ϳ 2021 agricultural census, Koshi, Madhesh, and Lumbini Ϯϰ͘ϰ Ϯϱ registeredϮϮ͘ϱ Karnali the lowest contribution of agriculture ϮϬ͘ϯ more than 19 percent of national agricultural land hold ϮϬ ϭϳ͘Ϯ to economic 0.2 percentage growth atϭϮ͘ϲ ϭϭ͘ϵ points, while each, and unsurprisingly, the sector contributes at least ϭϱ Madhesh ϭϬ led with a contribution of 1.4 percentage points 1 percentage point to real gross domestic product (GDP) ϱ This variation reflects, in part, the distribution of in FY23. growth in these provinces. Ϭ Ždžϭ͘ϭ 7 Import restrictions were first imposed on December 29, 2021, and were continued until January 19, 2023. Import restriction measures include bans on specific goods imports, requirements to open a Letter of Credit for importation, and the further requirement of cash deposits (cash margins) backing such Letters of Credit. 8 The decline was partly due to lower production of key construction materials (cement, basic iron, and steel) and vegetable oils in the first half of FY23. Higher frequency indicators suggest that the decline continued in the second half of FY23. Lower demand resulting from the elevated price of manufactured goods and construction materials further weighed on industrial output, which increased by a meager 0.6 percent (see World Bank 2023b). ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽŶĂƚŝŽŶĂůƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ Nepal Fiscal Federalism Update, May 2024 | 3 ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ EĞƚƚĂdžĞƐ ZĞĂů'W Ϭ͘ϳ ϭ͘Ϭ Ϭ͘ϱ n  Ϭ͘Ϭ C hapter 1  n   Macro-Fiscal Update on Provincial and Local Governments &ŝŐϭ͘ϰ ͲϬ͘ϱ Ͳϭ͘Ϭ <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ Box 1.1. Poverty rates across provinces The Nepal Living Standard Survey 2022/23 ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽŝŶĚƵƐƚƌŝĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ shows significant differences in poverty ;ƉŽǀĞƌƚLJŚĞĂĚĐŽƵŶƚƌĂƚĞ͕ƉĞƌĐĞŶƚͿ DŝŶŝŶŐĂŶĚƋƵĂƌƌLJŝŶŐ DĂŶƵĨĂĐƚƵƌŝŶŐ rates across the country’s seven provinces. ϰϬ ůĞĐƚƌŝĐŝƚLJ͕ŐĂƐ͕ƐƚĞĂŵĂŶĚĂŝƌĐŽŶĚŝƚŝŽŶŝŶŐƐƵƉƉůLJ ϯϰ͘Ϯ tĂƚĞƌƐƵƉƉůLJ͖ƐĞǁĞƌĂŐĞ͕ǁĂƐƚĞŵĂŶĂŐĞŵĞŶƚ Sudurpashchim has the highest poverty ϯϱ ŽŶƐƚƌƵĐƚŝŽŶ /ŶĚƵƐƚƌLJ Ϯϲ͘ϳ ϯϬ Ϯϰ͘ϰ rate at 34.2 percent, followed by Karnali Ϯϱ Ϯ͘Ϭ ϮϮ͘ϱ ϮϬ͘ϯ ϭϳ͘Ϯ at 26.7 percent. Conversely, Bagmati and ϮϬ ϭϮ͘ϲ ϭ͘ϱ ϭϱ ϭϭ͘ϵ Gandaki boast the lowest rates, sitting at ϭϬ 12.6 percent and 11.9 percent, respectively. ϭ͘Ϭ ϱ While Madhesh and Lumbini have poverty Ϭ Ϭ͘ϱ rates (22.5 percent and 24.4 percent) above the national average (20.3 percent), they Ϭ͘Ϭ also Ždžϭ͘ϭ &ŝŐϭ͘ϰ hold larger portions of the total population. ͲϬ͘ϱ This translates to these two provinces having the highest number of people living in poverty Ͳϭ͘Ϭ <ŽƐŚŝand 22.8 (25.1 percent percent, respectively). DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ EĂƚŝŽŶĂů ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽŶĂƚŝŽŶĂůƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ Note: Poverty rate computed using 2023 National Poverty Line Source: National Statistics Office ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ EĞƚƚĂdžĞƐ ;ƉŽǀĞƌƚLJŚĞĂĚĐŽƵŶƚƌĂƚĞ͕ƉĞƌĐĞŶƚͿ Ϭ͘ϳ ϰϬ Ϭ͘ϲ ϯϰ͘Ϯ Bagmati, ϯϱ the largest provincial economy, saw a driver of Nepal’s national growth (Figure 1.5). National significant ϯϬ decrease in growth rate, Ϯϰ͘ϰ falling Ϯϲ͘ϳ from 6.3 Ϭ͘ϱ economic growth shrank to 1.9 percent in FY23 from Ϯϱ ϮϮ͘ϱ percent in FY22 to just 1.4 percent in FY23 (Figure ϮϬ͘ϯ 5.6 percent in FY22, driven by a decline in the services ϮϬ ϭϳ͘Ϯ Ϭ͘ϰ ϭϱThis slowdown wasϭϮ͘ϲ 1.1). mirroredϭϭ͘ϵ in all other provinces, and industrial sector growth. Bagmati accounts for 24.9 ϭϬ Ϭ͘ϯ although the growth rate in other provinces was higher percent of the services sector in Nepal, and the services ϱ than Ϭ͘Ϯ Ϭ in Bagmati. Gandaki led with a growth rate of 3.3 sector in Bagmati alone contributed 0.42 percentage percent in FY23. &ŝŐϭ͘ϱ Ϭ͘ϭ points to the overall national growth of 1.9 percent in FY23. Following Bagmati were Koshi, Madhesh, and Ždžϭ͘ϭ The slowdown in Bagmati contributed to a slowing Ϭ͘Ϭin Lumbini, each contributing a 6–7 percent share of the national growth in FY23, as this province is the major ͲϬ͘ϭ national services sector. <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ Figure 1.5. Bagmati contributed more than one-third of national economic growth in FY23 ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽŶĂƚŝŽŶĂůƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ EĞƚƚĂdžĞƐ ZĞĂů'W Ϭ͘ϳ Ϭ͘ϲ Ϭ͘ϱ Ϭ͘ϰ Ϭ͘ϯ Ϭ͘Ϯ &ŝŐϭ͘ϱ Ϭ͘ϭ Ϭ͘Ϭ ͲϬ͘ϭ <ŽƐŚŝ DĂĚŚĞƐŚ ĂŐŵĂƚŝ 'ĂŶĚĂŬŝ >ƵŵďŝŶŝ <ĂƌŶĂůŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ Sources: National Statistics Office and World Bank staff calculations 4 1.2 Most local governments also experienced a decline in economic activity in FY23 Local governments experienced a decline in However, it is important to note that nighttime lights data economic activity in FY23, as indicated by nighttime might underestimate activity in agriculture-dependent lights data. Growth analysis at the local level relies on regions or services sectors with lower light emissions. nighttime lights data, as local government GDP data are As such, local governments, in collaboration with the not available. According to the nighttime lights data, National Statistical Office, could explore strategies to all but 10 percent of Nepal’s 753 local governments develop and implement a system for generating reliable experienced a decline in economic activity in FY23. local-level GDP data. Box 1.2. Background on nighttime lights data Nighttime lights data, as detected by satellites, are increasingly used as a proxy to indicate economic activity (Martinez 2022; Gibson and Boe-Gibson 2021; Gibson and Boe-Gibson 2020). There are four potential advantages of using this data compared to the traditional GDP measure: n They are available in real time and at a higher frequency (daily). n They are less prone to manipulation. n They are freely available and comparable between countries irrespective of the quality of statistical systems. n They are available at the local level and are useful for developing countries like Nepal where local level GDP data is not available. The nighttime lights data used in this study is Visible Infrared Imaging Radiometer Suite Day/Night Band (VIIRS DNB) (Román et al 2020). 1.3 Fiscal balances of provincial and local governments fell into deficit in FY23 for the first time since the implementation of fiscal federalism Provincial governments recorded a consolidated fiscal marginally by 0.1 percentage points to 3.8 percent of balance deficit of 0.3 percent of GDP in FY23, the first GDP in FY23. However, there is considerable variation in time since the implementation of fiscal federalism fiscal balances among provinces, ranging from a deficit began in FY19 (Figure 1.6). This was driven by lower of 0.8 percent of GDP in Sudurpashchim to a surplus of revenue and grants, which decreased from 4.4 percent 0.2 percent of GDP in Madhesh (Annex 3, Figures A2–A8). of GDP in FY22 to a record low of 3.5 percent of GDP in Madhesh is the only province that has consistently had a FY23. On the other hand, expenditure increased only fiscal surplus over the last five years. Nepal Fiscal Federalism Update, May 2024 | 5 n C hapter 1  n   Macro-Fiscal Update on Provincial and Local Governments Figure 1.6. Fiscal balance of all provinces moved into deficit in FY23, the first time since FY19 ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϱ ϰ ϯ Ϯ ϭ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ &ŝŐϭ͘ϲ Ͳϭ ϱ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ Sources: Provincial Budget Speeches,9 National Statistics Office, and World Bank staff calculations ϯ ;ĨŝƐĐĂůďĂůĂŶĐĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϯ Local governments also registered a deficit of 0.4 contrast, expenditure decreased slightly by only percent ϭ of ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ GDP in FY23, the first time since FY19 &ŝƐĐĂůďĂůĂŶĐĞ 0.2 percentage pointsKƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ of GDP over the same period. (Figure 1.7). This shift stemmed from a significant Among the different municipality types, rural and ϭϬϬ &ŝŐϭ͘ϲ decrease in revenue and grants, which fell by 1 urban municipalities experienced relatively larger Ͳϭ ϴ percentage point of GDP compared to FY22. In fiscal deficit (Annex 3, Figures A8–A11). &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϲ ϰ1.7. Fiscal balance of all local governments also fell into deficit in FY23, the first time since FY19 Figure Ϯ ;ĨŝƐĐĂůďĂůĂŶĐĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ &ŝŐϭ͘ϳ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ͲϮ ϭϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϴ ϲ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϰ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ Ϯ ϱ Ϭ &ŝŐϭ͘ϳ ϰ ͲϮ ϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϯ Financial Comptroller General Office, National Statistics Office, and World Bank staff calculations Sources: ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &ŝŐϭ͘ϴ ϭ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ Ϭ 9 ϱ as indicated In Nepal, in the Constitution (2015), &zϮϬ &zϭϵ Article 119, a ‘budget speech’ &zϮϭ &zϮϮ is where the Minister for Finance &zϮϯ of the Government of Nepal presents to both houses of the Federal Parliament an estimate of revenue, money required to meet the charges on the Federal Consolidated Fund, money required to meet the expenditure to be provided for in the Federal Appropriation Act, a statement of expenses allocated to every ministry in the previous fiscal year, and particulars of whether or not theϰobjectives of the expense have been achieved. It is required they present this at the end May of each fiscal year. Provincial governments present their budget speeches in the provincial parliament, while local governments present their budget speeches in the local assembly. ϯ 6 Ϯ &ŝŐϭ͘ϴ Despite provisions allowing for domestic borrowing and Lumbini had budgeted domestic borrowing to meet to finance fiscal deficits within prescribed limits, their fiscal deficits in FY23. But no province actually raised none of the provinces exercised this option in FY23. domestic loans to finance their fiscal deficit in FY23. The Intergovernmental Fiscal Arrangement Act allows Instead, provincial and local governments relied sub-national governments to present deficit budgets and on opening cash and bank balances, reflecting past take loans domestically, within the specified limits set by underspending, to finance the fiscal deficit in FY23 the National Natural Resource and Fiscal Commission. (Figures 1.6 and 1.7). These balances mainly consisted of For provincial governments, the FY23 borrowing limit was unspent unconditional fiscal equalization grants (FEGs) capped at 12 percent of revenue shared by the federal and revenue sharing from previous fiscal years. Between government and their own-source revenue. Similarly, FY22 and FY23, the aggregate opening cash and bank local governments have the same ceiling, calculated as balances of provincial and local governments increased a share of revenue shared by the federal and provincial by 0.2 percentage points to 1.5 and 1.9 percent of GDP, governments along with their own-source revenue. In respectively. accordance with legal provisions, Madhesh, Gandaki, 1.4 Consolidated revenue and grants of provincial and local governments declined to a record low in FY23 due to a decrease in intergovernmental grants and revenue sharing Provincial governments’ revenue and grants federal government grants fell by 0.5 percentage points, plummeted to 3.5 percent of GDP in FY23, a decline while revenue sharing accounted for the remaining of 0.9 percentage points compared to FY22 (Figure decrease. The decline in intergovernmental grants was 1.8). This drop was primarily driven by a decrease in widespread, with equalization grants (-0.18 percentage intergovernmental revenue, which makes up over points) and conditional grants (-0.26 percentage points) 90 percent of provincial revenue. The decline in experiencing the most significant drops. Conversely, intergovernmental revenue reflected a shortfall in provincial governments’ own sources of revenue – federal tax collection due to slowing in growth and consisting mainly of non-tax sources like driving license import restrictions.10 This revenue includes grants fees (54 percent), business registration fees (8 percent), from the federal government and revenue sharing transport sector income12 (13 percent), and service arrangements between various levels of government.11 charges (22 percent) – remained relatively stable. Within the category of intergovernmental revenue, 10 The import restrictions imposed in FY22, which were eventually lifted in January 2023, along with slower economic growth, led to a decline in revenue due to Nepal’s high reliance on trade-related tax revenue (see World Bank 2023a for details). As a result of decline, the federal government cut 50 percent of the third installment of the fiscal equalization grants to be provided to the provincial and local governments in FY23. 11 In FY23, intergovernmental grants constituted 49.3 percent of overall intergovernmental revenue, while revenue sharing from the federal government comprised 31.8 percent, with the remainder including revenue sharing between provinces and local governments. See World Bank (2023b) for information on fiscal transfers and revenue distribution mechanisms across the three levels of government. 12 For example, parking fee. Nepal Fiscal Federalism Update, May 2024 | 7 Ϯ n  Ϭ C hapter 1  n   Macro-Fiscal Update on Provincial and Local Governments &ŝŐϭ͘ϳ ͲϮ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure 1.8. Provincial government revenue and grants plummeted in FY23 ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϱ ϰ ϯ Ϯ &ŝŐϭ͘ϴ ϭ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Sources: Provincial Budget Speeches, National Statistics Office, and World Bank staff calculations The decline in revenue and grants impacted all Local government revenue and grants fell by 1 provinces, but the severity varied (Annex 3, Figures percentage point of GDP, reaching 8 percent of GDP A1–7A). Karnali witnessed the sharpest drop, while in FY23 (Figure 1.9). This decline was driven by lower Madhesh and Bagmati experienced the smallest intergovernmental revenue, the largest source of revenue for decreases in revenue and grants. This largely reflects local governments. Intergovernmental revenue contributed the differences in economic size (GDP) between the 0.8 percentage points to the overall decline in FY23, while provinces. For example, in FY23, Bagmati’s nominal GDP local government own-source revenue accounted for the was over five times larger than that of Karnali, yet its remaining. However, within intergovernmental revenue, intergovernmental revenue in nominal terms was only grants from provincial governments to local governments 16 percent higher than Karnali’s. remained unchanged. Property taxes and local government service fees remained the main sources of own-source revenue for local governments in FY23, constituting over 70 percent of this category. Figure 1.9. Local government revenue and grants also plummeted in FY23 ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐͲ&ĞĚĞƌĂů /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐͲWƌŽǀŝŶĐĞƐ dŽƚĂůƌĞǀĞŶƵĞ ϭϬ ϴ ϲ ϰ Ϯ &ŝŐϭ͘ϵ Ϭ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Sources: Financial Comptroller General Office, National Statistics Office, and World Bank staff calculations ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ 8 tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ The decline in revenue and grant transfers was decline for metropolitan cities. This is partly due to broad-based, across all local government types, but metropolitan cities relying less on fiscal transfers and the severity of impact was uneven (Annex 3b, Figures revenue sharing, as they generate a relatively large A8–A11). Urban and rural municipalities experienced share of their own revenue. In FY23, their own-source the sharpest drop in revenue and grant transfers, revenue accounted for 40.6 percent of overall revenue. ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ leading to a decline in total of local government Metropolitan cities experienced a decline in revenue KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ revenue and grants. For example, revenue and and grants, primarily due to reduced revenue sharing, /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐͲ&ĞĚĞƌĂů /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐͲWƌŽǀŝŶĐĞƐ grants for urban municipalities fell by 0.5 percentage while other municipality types saw a decline due to dŽƚĂůƌĞǀĞŶƵĞ points of GDP in FY23, compared to FY22, which is lower own-source revenue, intergovernmental grants, ϭϬ significantly higher than the 0.05 percentage point and revenue sharing. ϴ ϲ ϰ 1.5ϮProvincial and local government spending edged up &ŝŐϭ͘ϵ marginally Ϭ in FY23 &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure 1.10. Provincial government spending increased marginally in FY23 ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ϱ ϰ ϯ Ϯ ϭ &ŝŐϭ͘ϭϬ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Note: Current transfers include government grants, subsidies, social benefits (like pensions or unemployment benefits), and transfers between different levels of government. Source: Provincial Budget Speeches, National Statistics Office, and World Bank staff calculations ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ Provincial government spending went up slightly by Nevertheless, there were significant differences ϭϬ 0.1 percentage point to 3.8 percent of GDP in FY23 in spending variations across provinces (Annex 3, (Figure 1.10). This increase was driven by a rise in capital Figures A1–A7). For instance, Koshi, Karnali, and Lumbini ϴ spending, particularly for roads, bridges, and other public witnessed a decline in overall spending, with recurrent construction ϲ projects. However, a decrease in recurrent spending driving the decrease in Koshi, capital spending spending (spending on salaries, goods and services, and in Karnali, and both in Lumbini. Conversely, other fiscalϰtransfers to local governments, typically around 40 provinces experienced an increase in overall spending, percent of aggregate spending) partially offset the rise in primarily led by capital spending, except for Gandaki, capital Ϯ expenditure. where recurrent spending fueled the increase. &ŝŐϭ͘ϭϭ Ϭ Nepal Fiscal Federalism Update, May 2024 | 9 &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϯ ϭ &ŝŐϭ͘ϭϬ n C hapter 1  n   Macro-Fiscal Update on Provincial and Local Governments Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure 1.11. Local government spending decreased marginally in FY23 ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ϭϬ ϴ ϲ ϰ Ϯ &ŝŐϭ͘ϭϭ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Note: Current transfers include government grants, subsidies, social benefits (like pensions or unemployment benefits), and transfers between different levels of government. Source: Financial Comptroller General Office, National Statistics Office, and World Bank staff calculations In FY23, local government spending experienced tends to be rationalized in the short term due to revenue a marginal decrease, reaching 8.4 percent of GDP, shortfalls. In contrast, metropolitan cities experienced representing a 0.2 percentage point decline compared an increase in spending, driven by both recurrent and to FY22 (Figure 1.11). This decline was due to a decrease capital expenditure, partially offsetting the decrease in in capital spending, notably in public construction spending observed in other municipality types. activities, which accounted for over 25 percent of total expenditure. However, the decline was tempered by Mirroring the federal government, sub-national an uptick in recurrent spending, which accounted for governments continued the practice of bunching an average of 63 percent of total local government’s spending, particularly in relation to capital spending. expenditure. In FY23, a significant portion (34.4 percent) of the total capital spending by five provinces13 was concentrated Across municipality types, rural and urban in the last month of the fiscal year. This trend is also municipalities experienced a significant decrease in evident at the local government level. In FY22, 531 out total spending, reflecting a shortfall in their revenue of 753 local governments spent 35.6 percent of their and grants (Annex 3b, Figures A8–A11). Together, rural capital expenditure in the final month, reflecting a and urban municipalities accounted for a 0.2 percentage slight improvement from FY21, when 547 out of 753 point decline in overall spending as a share of GDP, local governments spent 44.9 percent of their capital primarily attributed to reduced capital spending, which expenditure in the last month. 13 Koshi, Gandaki, Lumbini, Karnali, and Sudurpashchim 10 1.6 A large gap remains between sub-national governments’ own expenditure and own revenue Only 8 percent of own spending by provinces was received), VFG stayed at 92.5 percent, close to the historic financed by own revenue, and this vertical fiscal gap average of 93 percent (Figure 1.12). However, VFG varies (VFG) increased marginally in FY23. Defined as the gap across provinces, ranging from 85 percent in Bagmati to between own spending (total spending minus transfers 99 percent in Sudurpashchim, reflecting differences in paid) and own revenue (total revenue minus transfers own-source revenue (Annex 3, Figures A1–A7). Figure 1.12. Vertical fiscal gap remained higher for local governments than for provincial governments in FY23 ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ >ŽĐĂůŐŽǀĞƌŶŵĞŶƚƐ WƌŽǀŝŶĐŝĂůŐŽǀĞƌŶŵĞŶƚƐ ϭϬϬ ϴϬ ϲϬ ϰϬ ϮϬ &ŝŐϭ͘ϭϮ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Source: Provincial Budget Speeches, Financial Comptroller General Office, National Statistics Office, and World Bank staff calculations ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ The VFG for local governments widened by 3 dispersion among municipality types, ranging from percentage points to 94 percent in FY23, surpassing 60 percent for metropolitan cities to 99 percent for ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů that of provincial governments. The higher VFG rural municipalities, reflecting primarily differences ϭϬϬ increased dependence on transfers from suggests in own-source revenue (Annex 3b, Figures A8–A11). higher levels of government, rather than generating Additionally, apart from sub-metropolitan cities, all types ϴϬ own-source revenue. However, there is considerable of municipalities experienced an increase in the VFG in FY23. ϲϬ ϰϬ ϮϬ &ŝŐϭ͘ϭϯ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Nepal Fiscal Federalism Update, May 2024 | 11 ϭϬϬ n C hapter 1  n   Macro-Fiscal Update on Provincial and Local Governments 1.7 Budget credibility is undermined by lack of alignment between periodic development plans, medium-term expenditure frameworks (MTEF), and budgets, as well as significant allocation to the category of ‘Economic Miscellaneous’ spending Provincial governments underspent their budgets (c) allocations are typically smaller for annual budgets by 34 percent in FY23, up from 28.9 percent in FY22. compared to periodic plan; and (d) the differences (Figure 1.13). This was driven primarily by underspending across MTEFs and between MTEFs and periodic plans ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ on program expenses (recurrent component), public are more pronounced >ŽĐĂůŐŽǀĞƌŶŵĞŶƚƐ for capital spending relative to WƌŽǀŝŶĐŝĂůŐŽǀĞƌŶŵĞŶƚƐ ϭϬϬ construction (capital component), and contingencies recurrent spending. As such, alignment between periodic ϴϬ (recurrent and capital components). Provinces such as development plans, MTEFs, and annual budgets needs ϲϬ Madhesh witnessed relatively higher underspending of to be strengthened to improve budget credibility. ϰϬ 43 percent in FY23 compared to other provinces, where ϮϬ underspending was between 23–33 percent, driven Figure &ŝŐϭ͘ϭϮ Ϭ 1.13. Provincial government underspending ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ by recurrent underspending. Capital underspending &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ increased in FY23 >ŽĐĂůŐŽǀĞƌŶŵĞŶƚƐ WƌŽǀŝŶĐŝĂůŐŽǀĞƌŶŵĞŶƚƐ primarily led to the overall underspending in five of the ϭϬϬ seven provinces (Bagmati, Gandaki, Lumbini, Karnali, ϴϬ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ and Sudurpashchim, Annex 3a, Figures A1–A7). ϲϬ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϭϬϬ ϰϬ Local governments also underspent their budgets ϴϬ ϮϬ significantly by 24.4 percent in FY23, but this &ŝŐϭ͘ϭϮ ϲϬϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ represented a marginal improvement from 25 ϰϬ percent in FY22 (Figure 1.14). This was attributed ϮϬ to underspending on program expenses (recurrent), &ŝŐϭ͘ϭϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ Ϭ ZĞĐƵƌƌĞŶƚ&zϮϬ ĂƉŝƚĂů &zϭϵ &zϮϭ &zϮϮ dŽƚĂů &zϮϯ employee salaries (recurrent), and public construction ϭϬϬ (capital). Across municipality types, the underspending ϴϬ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ Source: Provincial Budget National Statistics Speeches, ĂƉŝƚĂů Office, and was the lowest for metropolitan cities, averaging 47.4 ϲϬ World ZĞĐƵƌƌĞŶƚ ϭϬϬBank staff calculations dŽƚĂů percent over FY20 to FY23, compared to 23.1 percent for ϰϬ ϴϬ rural municipalities (Annex 3b, Figures A8–A11). Figure ϮϬ ϲϬ 1.14. Local government underspending &ŝŐϭ͘ϭϯ decreased Ϭ marginally in FY23 Lack of alignment between periodic development ϰϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ plans, MTEFs, and annual budgets are key drivers &ŝŐϭ͘ϭϰ ϮϬ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ of underspending relative to the budget (Figures Ϭ &zϮϬ ZĞĐƵƌƌĞŶƚ &zϮϭ ĂƉŝƚĂů &zϮϮ dŽƚĂů &zϮϯ ϭϬϬ 1.15a and 1.15b). Data from two provinces (Koshi and ϴϬ Lumbini) for which MTEFs, annual budgets, and five-year ϲϬ development plans were available for FY22 to FY23 ϰϬ suggest that: (a) spending allocations are generally lower ϮϬ in MTEFs prepared for the current fiscal year compared to &ŝŐϭ͘ϭϰ Ϭ those covering the same year, but prepared in earlier years &zϮϬ &zϮϭ &zϮϮ &zϮϯ (e.g., MTEF prepared in FY23 and MTEF prepared in FY22 and FY21 for FY23); (b) comparing MTEFs and periodic Source: Financial Comptroller General Office, National Statistics plans, allocations are typically larger in periodic plans; Office, and World Bank staff calculations 12 Figure 1.15a. Recurrent spending allocation under budgets, MTEFs, and periodic plans ;ƌĞĐƵƌƌĞŶƚƐƉĞŶĚŝŶŐĂůůŽĐĂƚŝŽŶ͕EWZďŝůůŝŽŶͿ ;ƌĞĐƵƌƌĞŶƚƐƉĞŶĚŝŶŐĂůůŽĐĂƚŝŽŶ͕EWZďŝůůŝŽŶͿ ϲϬ ϲϬ ϱϬ ϱϬ ϰϬ ϰϬ ϯϬ ϯϬ ϮϬ ϮϬ ϭϬ ϭϬ &ŝŐϭ͘ϭϱĂ Ϭ &ŝŐϭ͘ϭϱĂ Ϭ ƵĚŐĞƚ Dd&ϮϬ Dd&Ϯϭ Dd&ϮϮ WůĂŶ ƵĚŐĞƚ Dd&Ϯϭ Dd&ϮϮ Dd&Ϯϯ WůĂŶ ƵĚŐĞƚ Dd&ϮϬ Dd&Ϯϭ Dd&ϮϮ WůĂŶ ƵĚŐĞƚ Dd&Ϯϭ Dd&ϮϮ Dd&Ϯϯ WůĂŶ &zϮϬϮϮ &zϮϬϮϯ &zϮϬϮϮ &zϮϬϮϯ Source: Provincial Budget Speeches, METF, Periodic Plans, National Statistics Office, and World Bank staff calculations Figure 1.15b. Capital spending allocation under budgets, MTEFs, and periodic plans ;ĐĂƉŝƚĂůƐƉĞŶĚŝŶŐĂůůŽĐĂƚŝŽŶ͕EWZďŝůůŝŽŶͿ ;ĐĂƉŝƚĂůƐƉĞŶĚŝŶŐĂůůŽĐĂƚŝŽŶ͕EWZďŝůůŝŽŶͿ ϭϲϬ ϭϲϬ ϭϰϬ ϭϰϬ ϭϮϬ ϭϮϬ ϭϬϬ ϭϬϬ ϴϬ ϴϬ ϲϬ ϲϬ ϰϬ ϰϬ ϮϬ ϮϬ Ϭ &ŝŐϭ͘ϭϱď Ϭ &ŝŐϭ͘ϭϱď ƵĚŐĞƚ Dd&ϮϬ Dd&Ϯϭ Dd&ϮϮ WůĂŶ ƵĚŐĞƚ Dd&Ϯϭ Dd&ϮϮ Dd&Ϯϯ WůĂŶ ƵĚŐĞƚ Dd&ϮϬ Dd&Ϯϭ Dd&ϮϮ WůĂŶ ƵĚŐĞƚ Dd&Ϯϭ Dd&ϮϮ Dd&Ϯϯ WůĂŶ &zϮϬϮϮ &zϮϬϮϯ &zϮϬϮϮ &zϮϬϮϯ Source: Provincial Budget Speeches, METF, Periodic Plans, National Statistics Office, and World Bank staff calculations Despite some progress, the allocation of a significant ;EWZďŝůůŝŽŶͿ reallocated to other sub-headings, either midway ;EWZďŝůůŝŽŶͿ portion of the budget category of&zϮϬ &zϭϴ to the &zϭϵ ‘Economic &zϮϭthrough &zϮϮthe fiscal year its end, including new or towards&zϮϰ &zϮϯ ϯϬϬ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Miscellaneous,’ ϯϬϬ along with the subsequent transfer budget items, thereby bypassing established budgetary funds to other budget items, continues to of ϮϱϬ controls. The Provincial Appropriation Act set limits ϮϱϬ undermine ϮϬϬ budget credibility. For example, in FY23, on transfers from other budget items, but not for this ϮϬϬ provincial governments earmarked a significant specific heading. Consequently, underspending on this ϭϱϬ portion, ϭϱϬ 7.9 percent, of total budgeted expenditure for budget sub-heading accounted for more than one-third ϭϬϬ ‘Economic Miscellaneous,’ down from 8.8 percent in of all provincial underspending. Therefore, the Provincial ϭϬϬ FY22. ϱϬ However, this allocation varies among provinces, 14 Appropriations Act could be reviewed and the virement ϱϬ from 3.3 percent in Bagmati to 11.8 percent in ranging rules amended to restrict extensive administrative Ϭ Madhesh.Ϭ Funds allocated to this category are often reallocations and improve budget credibility. ƋƵĂůŝnjĂƚŝŽŶ ƋƵĂůŝnjĂƚŝŽŶ ƋƵĂůŝnjĂƚŝŽŶ ^ƉĞĐŝĂů ^ƉĞĐŝĂů ŽŵƉůĞŵĞŶƚĂƌLJ ŽŵƉůĞŵĞŶƚĂƌLJ ŽŵƉůĞŵĞŶƚĂƌLJ ^ƉĞĐŝĂů ŽŶĚŝƚŝŽŶĂů ŽŶĚŝƚŝŽŶĂů ŽŶĚŝƚŝŽŶĂů ƋƵĂůŝnjĂƚŝŽŶ ƋƵĂůŝnjĂƚŝŽŶ ƋƵĂůŝnjĂƚŝŽŶ ^ƉĞĐŝĂů ^ƉĞĐŝĂů ŽŵƉůĞŵĞŶƚĂƌLJ ŽŵƉůĞŵĞŶƚĂƌLJ ŽŵƉůĞŵĞŶƚĂƌLJ ^ƉĞĐŝĂů ŽŶĚŝƚŝŽŶĂů ŽŶĚŝƚŝŽŶĂů ŽŶĚŝƚŝŽŶĂů 14 This practice is also prevalent at the local level. In FY22, 273 local governments earmarked NPR 6.8 billion as unallocated budget. Additionally, 156 local governments &ŝŐϮ͘ϭ conducted a virement of NPR 8.4 billion in excess of the limit specified in the Local Government Operations Act. &ŝŐϮ͘ϭ dŽƚĂů WƌŽǀŝŶĐĞ >ŽĐĂů dŽƚĂů WƌŽǀŝŶĐĞ >ŽĐĂů Nepal Fiscal Federalism Update, May 2024 | 13 n C hapter 1  n   Macro-Fiscal Update on Provincial and Local Governments 14 CHAPTER 2 Enabling Legal, Policy, and Institutional Frameworks, with Emphasis on Provincial Governments Nepal Fiscal Federalism Update, May 2024 | 15 n Chapter 2  n  Enabling Legal, Policy, and Institutional Frameworks, with Emphasis on Provincial Governments This chapter presents recent updates on the are working on finalizing their second periodic plan. progress of the enabling environment for fiscal Furthermore, a review of the Unbundling Report16 is federalism and assesses both its functionality and currently being undertaken to further clarify the division implementation status. Considering their important of revenue and expenditure assignments among the role in fiscal federalism and the recent growth of public three tiers of government. debate on the role of the provincial governments, this edition places special emphasis on the provincial level The regulatory framework for fiscal federalism has of government. also seen progress during the last year. As noted in Table 2.1, the Local Government Operations Act Since the publication of the first edition of the (2017) and the Inter-governmental Fiscal Arrangement Nepal Fiscal Federalism Update (NFFU) in 2023,15 Act (2017) are being reviewed under the leadership of the enabling environment for fiscal federalism has the Ministry of Federal Affairs and General Administration moderately evolved. For example, at the institutional (MoFAGA) and MoF, respectively. Following the adoption and strategic levels, in November 2023, the Fiscal of the Public Debt Management Act (PDMA) in 2022, the Federalism Coordination Division (FFCD) at the Ministry Act’s implementing regulation, the Public Debt of Finance (MoF) was designated as the unit responsible Management Regulation, was published in the Nepal for coordinating public financial management (PFM) Gazette on March 14, 2024. Also, as an additional point as well as fiscal federalism strategies. Also, as an of progress on the pillar of borrowing, an Act geared to overarching national-level strategy, the National reforming the Town Development Fund (TDF) is under Planning Commission (NPC) has been preparing the preparation. Finally, the preparation of a regulatory 16th National Periodic Plan, which is expected to include framework on natural resource management is underway, provisions on the different pillars of fiscal federalism in including the submission of the Construction Material Nepal (see Table 2.1). In addition, most of the provinces Management and Regulation Bill 2023 to the Parliament. Table 2.1. Snapshot of the five key pillars17 of fiscal federalism in Nepal Relevant Government Pillars Key Regulatory Framework Outcomes Agencies and Bodies Pillar 1. Constitution of Nepal, Article 60 and Schedules MoF, Inland Revenue Revenue 5–9 Department, Department These five pillars determine the sources (which and what amount) Assignment and of Customs, MoFAGA, Local Government Operations Act 2017 (review Administration and provincial and local underway at MoFAGA) governments (PLGs) available to PLGs to effectively fulfill their assigned Pillar 2. Constitution of Nepal, Schedules 5–9 OPMCM, PLGs, MoF, Public Expenditure Federal Procurement Act 2007 Procurement Monitoring Assignment and Office (PPMO), MoFAGA, and Administration line ministries expenditure functions. Pillar 3. Constitution of Nepal, Article 60 National Natural Resources Inter-Governmental and Fiscal Commission NNRFC Act 2017 Fiscal Transfers (NNRFC), MoF, NPC, Inter-governmental Fiscal Arrangement Act 2017 concerned line ministries, (review underway at MoF) and PLGs Pillar 4. Constitution of Nepal, Article 59 Public Debt Management Borrowing and Public Debt Management Act (PDMA) 2022, Office, NNRFC, MoF, Nepal Capital Finance Regulation passed in 2024 Rastra Bank, TDF and PLGs Town Development Fund (TDF) Reform Act under preparation Pillar 5. Constitution of Nepal, Articles 51, 59, 60, 250, 251 NNRFC, MoF and concerned Fiscal Revenue and Schedules 5–9 line ministries such as MoFE from Natural Construction Material Management and Resources Regulation Bill 2023 (registered at the Parliament in November 2023) Source: World Bank analysis, based on Government of Nepal websites and relevant regulatory framework 15 Data collection was done by March 2023. 16 An Unbundling Report was prepared by the Office of the Prime Minister and Council of Ministers in 2017 to clarify Schedules 5–9 of the Constitution of Nepal 2015. The second review of the Unbundling Report is ongoing. 17 While international literature refers to fiscal federalism consisting of four key pillars (as articulated by Pillars 1–4 in Table 2.1), in Nepal the NNRFC conceptualizes fiscal federalism as five pillars (see Pillar 5 in Table 2.1). 16 2.1 Legal and institutional setup for fiscal federalism in the provinces has evolved As the middle tier of government, the provinces are considering that it is brand new in the governance a critical part of fiscal federalism management in structure of the country – there has been progress in the Nepal. This is not only for reasons of coordination with setting up of some of the key provincial institutions for federal and local governments, but also because of the fiscal federalism and PFM for last few years.18 Table 2.2 mandate bestowed upon them by the Constitution. Even shows a snapshot of the key institutions responsible for though there is still a long way to go in strengthening fiscal federalism and PFM at the provincial level and their this intermediate level of government – especially status. Table 2.2. Key provincial-level institutions for the implementation of fiscal federalism and PFM Institution Brief Description of Responsibilities Regulatory Framework Institutions responsible for fiscal federalism and PFM at the provincial level Provincial Planning Responsible for the provincial periodic PPC (Formation & Operation Commission (PPC) development plan and MTEF of provincial Order – passed by all provinces) governments Provincial Ministry of Provincial equivalent of the MoF; provides vertical and Provincial Government (Allocation Finance and Economic horizontal coordination on finance and economic of Business) Regulation (passed by Affairs (PMoFEA) affairs all provinces) Provincial Treasury Oversees PFM functions, including budget Federal Financial Procedures Controller Office (PTCO) implementation, treasury administration, internal and Fiscal Accountability Act audit, cash and budget management, expenditure and revenue accounting, and the preparation of consolidated financial statements Institutions related to human resource capacity-building at the provincial level Provincial Center for Provides capacity-building support for provincial PCGGs established in all Good Governance and local government staff within each province by provinces (four provinces19 have (PCGG) organizing training programs and technical support passed provincial acts regulating PCGGs functions) Provincial Public Mainly responsible for provincial and local-level Provincial Civil Service Acts Service Commission human resources management and recruitment, (passed by all provinces) (PPSC) takes care of civil servant position postings as well as exams, in coordination with the Office of the Chief Minister and Council of the Ministers (OCMCM), local governments and line ministries Source: World Bank analysis based on the relevant provincial acts and regulations There has been no progress made in preparing Procedures and Financial Accountability Act to align with Provincial Fiscal Procedures and Financial the corresponding federal level framework passed in Accountability Acts, in line with the federal 2019. The other five provinces should also update and overarching act, since the last NFFU report. Two20 prepare their Provincial Fiscal Procedures and Financial out of seven provinces have updated their Provincial Fiscal Accountability Acts in line with the corresponding federal Act. 18 While the main intention of this report is to update the progress of the subject area from the March 2023, since the last NFFU did not adequately cover the provincial development of the fiscal federalism, it is presented here. 19 Gandaki (2019), Lumbini (2020), Koshi (2022), Karnali (2022) 20 Koshi and Gandaki both prepared them in 2022. Nepal Fiscal Federalism Update, May 2024 | 17 n Chapter 2  n  Enabling Legal, Policy, and Institutional Frameworks, with Emphasis on Provincial Governments The revenue divisions of the Provincial Ministries Most PPC staff are seconded by the federal government of Finance and Economic Affairs (PMoFEAs) need and rotate every two years, sometimes more frequently. to be strengthened to effectively perform revenue These rotations, which may take place both vertically and management roles. According to interviews with staff at horizontally in Nepal, impede the formation of a solid PMoFEAs in Lumbini and Gandaki provinces),21 there is a group with cumulative capacity, institutional memory, need to enhance the capacity of the division responsible and stability to produce and follow up on policies that for revenue policy and administration. Currently, these are critical for the provinces. While this is the feedback divisions are not properly staffed and empowered to from informants that the team met during field visits, it is coordinate with the agencies managing tax collection. a general problem for all provincial agencies that rely on For example, vehicle taxes,22 which constitute 6.2 percent staff deputed by the federal government. of total provincial revenue in FY23, are collected by the Vehicle Tax Office under the Provincial Ministry of Physical As of FY23, all seven provinces have enacted their Infrastructure and Transport. The same situation applies Provincial Civil Service Act (PSCA), paving the way to the house and land registration fees23 (5.6 percent of for recruiting sub-national civil servants, but total provincial revenue in FY23) and driving license and recruitment still lags behind approved positions. registration fees24 (2.4 percent of total provincial revenue All seven provinces have advanced on their enabling in FY23). The provincial governments could benefit environment for recruiting their own and local from enhancing the capacity of their revenue divisions government civil servants. The latest human resource in the PMoFEAs to effectively coordinate, monitor, gaps are shown in Table 2.3 below and, in most and lead policy development to increase sources of provinces, the percent of positions filled has improved provincial-level revenue. from FY21 to FY22.25 Staff recruitment for the approved positions ranges from the lowest rate of 47.48 percent (in Provincial-level recruitment of staff for Provincial Lumbini) to the highest of 72.22 percent (in Gandaki) in Planning Commissions would enhance policy FY22. While waiting for the enactment of the Federal Civil development. The PPCs provide provincial-level Service Bill, provincial recruitment has been taking place guidance on development planning, including on the basis of the existing federal regulatory framework provincial-level MTEF and annual planning guidelines. and the recently adopted PCSAs.26 Table 2.3. Status of enactment of Provincial Civil Service Acts and civil service recruitment Number of Percent of Number of Percent of Enactment of Provincial Positions Positions Positions Positions Province Civil Service Acts to be Filled Filled to be Filled Filled (Registration Date on Gazette) (FY21) (FY21) (FY22) (FY22) Koshi December 22, 2022 3,882 57.8 4,441 53.2 Madhesh February 10, 2021 3,133 65.0 3,121 65.7 Bagmati March 2, 2023 3,901 59.8 3,764 66.8 Gandaki March 2, 2023 3,178 72.2 3,178 72.2 Lumbini December 7, 2023 4,436 58.2 4,944 47.5 Karnali October 16, 2023 2,848 61.8 2,848 68.7 Sudurpashchim September 16, 2022 2,699 59.6 2,685 59.6 Source: Provincial government websites and Office of the Auditor General (OAG) reports 2022 and 2023 21 Interviews were conducted with civil servants in Lumbini and Gandaki Provinces in January 2024. 22 As per the NNRFC, none of the provincial governments deposited the mandated 40 percent of vehicle taxes collected into the local consolidated fund on monthly basis in FY22. This issue also persisted in FY23. 23 The Local Government Operations Act (2017) stipulates that provincial governments determine the tax rates for house and land registration fees annually through their Provincial Financial Acts, and local governments collect house and land registration fees. 24 The Provincial Ministry of Physical Infrastructure and Transport is responsible for collecting driving license and registration fees. 25 Even though Koshi and Lumbini provinces appear to have a lower percentage of positions filled in FY21/22 compared to the previous year, this is driven by the creation of new positions. 26 According to informants from PSCs in Lumbini and Gandaki, even before the Provincial Civil Service Acts were enacted, provincial and local civil service recruitment had advanced based on the old Federal Civil Service Act (1993) and Federal Employ Adjustment Act (2017). After passing their Provincial Civil Service Acts, provincial governments have been guided by these acts in their recruitment of provincial and local civil servants. 18 Box 2.1. Does the federal Civil Service bill reinforce fiscal federalism? The federal Civil Service Bill was registered in Parliament on March 4, 2024. It acknowledges the right of provinces and local governments to manage their civil service through provincial civil service laws, recognizing the diverse needs of different tiers of government. The bill ensures transition for staff deputed from the federal government to the provinces under the Employee Adjustment Act of 2017 and manages the administrative inter-relationship between the federal, province, and local governments by establishing an Administration Reform Committee. The new bill introduces significant changes in the deputation of Chief Administrative Officers (CAOs) by granting provinces authority to depute CAOs, if the federal government has not deployed them, empowering the provinces to depute officers from the Provincial Civil Service as CAOs if needed. The bill includes accountability mechanisms for CAOs, such as evaluation responsibility entrusted to the Province Secretary and Principal Secretary of the respective Office of the Chief Minister of Council of Ministers, steps towards effective governance. However, the bill proposes that the appointment of the CAOs and Provincial Secretaries remains at the federal level for a period of 10 years. Given that the Constitution bestows provincial governments with exclusive responsibility for provincial civil service management (Schedule 6), this role should be devolved to the provinces. 2.2 Own-source revenue collection has stagnated, reflecting moderate improvement in policy on revenue assignment and weakness in revenue administration There is significant scope for improvement to Nepal is undertaking a proactive review of enhance revenue generation by PLGs. Own-source the regulatory framework for shared revenue revenue of local governments declined as a share of responsibilities, mostly between PLGs. This total local government revenue from 8.5 percent in review includes the Unbundling Report 2.0, which is FY22 to 6.5 percent in FY23. According to the Financial currently being discussed by the National Coordination Comptroller General Office (FCGO), metropolitan cities Council, the Local Government Operations Act (2017), and sub-metropolitan cities generated 40.6 percent which is being reviewed by the MoFAGA, and the and 15.2 percent of their revenue from own-source Inter-governmental Fiscal Arrangement Act (2017), which revenue, respectively, in FY23. On the other hand, is under review by the MoF. It is critical that the shared urban municipalities and rural municipalities generated revenue items be clarified as soon as possible to give only 6.5 percent and 0.6 percent, respectively, from PLGs more predictability. own-source revenue in FY23. This confirms the need to support both urban and rural municipalities in The review of the regulatory framework is critical increasing their own-source revenue, as current revenue to address inconsistencies, such as between for these municipalities remains mainly dependent on federal-level and provincial-level frameworks for Inter-Governmental Fiscal Transfers (IGFTs) (Annex 3, house and land registration fees. Schedules 6 and Figures A10 and A11). 8 of the Constitution define house and land registration Nepal Fiscal Federalism Update, May 2024 | 19 n Chapter 2  n  Enabling Legal, Policy, and Institutional Frameworks, with Emphasis on Provincial Governments fees as exclusive revenue rights of both provincial and and the fact that they might have become an exercise local governments.27 The Local Government Operations done more for compliance with requirements than an Act (2017) further clarifies that provincial governments actual technical process that becomes operational to determine the tax rates for house and land registration improve revenue levels. PLGs ought to be encouraged fees annually through their Provincial Financial Acts, to prepare Revenue Improvement Action Plans, but, and the local governments collect house and land more importantly, the MoFAGA/PCGGs and development registration fees. However, in the case of Gandaki, the partners should support the improvement of the quality Provincial Finance Act of 2022/23 indicates that the of the Plans, so that they properly consider institutional Land Revenue Office, under the Federal Department of arrangements (appropriate agency/division), use of Land Management28, is responsible for collecting and technology, mapping of revenue potential, updating tax distributing the fees from house and land registration bases, etc., as well as their effective implementation. fees in a 40:60 ratio between the provincial and local government. It is important to address this inconsistency Raising the awareness of local government staff between the Local Government Operations Act and the and leaders about tax and non-tax regulations and Provincial Finance Acts (as documented in the Gandaki revenue-sharing arrangements is also important. case) to ensure consistency between the federal and Recent field visits in Gandaki and Lumbini provinces provincial regulatory frameworks. (in January 2024) confirmed the need to raise the awareness of local leaders and government staff on Revenue Improvement Action Plans need to be the current regulatory framework for own source and prepared and implemented at the PLG level in order revenue sharing. Some informants expressed that local to improve the own-source revenue of provincial and political leaders do not have a solid understanding of local governments. With support from the MoFAGA, the the revenue sharing formula, such as advertisement and Provincial Centers for Good Governance (PCGGs), and entertainment tax, especially those who have recently several development partners, 3 provinces and 375 local been elected as first-term representatives. While PCGGs governments had developed their Revenue Improvement have already been providing some training modules on Action Plans by March 2024,29 supporting their strategic PFM rules, further training is required to increase local efforts to increase their own-source revenue at the government staff and political leaders’ knowledge of sub-national level. There have also been concerns revenue administration and other PFM rules. expressed by multiple actors on the quality of these plans 2.3 Expenditure assignment is advancing, but is not supported by effective procurement management Progress has been made in passing or preparing and Rules (2024) and the Education Bill (submitted the updated sectoral acts in consideration of the to the Federal Parliament in September 2023), which expenditure assignment for the three tiers of provide further clarification on expenditure assignments government. Since the last NFFU, which was published (Box 2.2). These sectoral bills need to be passed and in 2023, some progress has been made on expenditure any inconsistencies with other regulations reconciled assignments, that is, establishing the spending as soon as possible, while paying special attention to responsibilities for each level of government. This aligning their provisions with the federalism framework includes the Water Supply and Sanitation Act (2022) established by the Constitution. 27 While house and land registration fees are an exclusive right of provincial governments (Schedule 6 of the Constitution), house rent tax and land registration fees are defined as exclusive rights of local governments (Schedule 8 of the Constitution). 28 The Department of Land Management is part of the Federal Ministry of Land Management, Cooperatives, and Poverty Alleviation. 29 This is according to the Provincial and Local Government Support Programme annual report, which is available at https://plgsp.gov.np/sites/default/files/2024-02/ PLGSP%20APR%2022-23.pdf. 20 Box 2.2. Expenditure assignment implications of the WaterSupply and Sanitation Act (2022) and draft Regulations (as of March 2024) The Water Supply and Sanitation Act (2022) and draft Regulations (2024) intend to clarify shared responsibilities for expenditure assignments in the water supply sector among the three tiers of government. For example, the draft Water Supply and Sanitation Regulations (2024) includes the following (Clause 3): Federal government manages projects with a cost of more than twenty million rupees or benefiting a population of more than 15,000 in the Terai or 5,000 in Hill or 1,000 in the Mountain Regions in the design year. Similarly, Provincial governments are given responsibilities for projects with a cost of ten million to twenty million rupees or benefiting a population of 5,000 to 15,000 in the Terai or 3,000 to 5,000 in the Hill or 500 to 1,000 in the Mountain Regions in the design year. Local governments manage up to ten million rupees or benefiting a population of up to 5,000 in the Terai or 3,000 in the Hill or 500 in the Mountain Regions in the design year. This clarifies expenditure responsibilities in the water sector, as ‘water supply’ (among other things) is one of the concurrent responsibilities of the three tiers of government. However, some stakeholders, such as local government associations (Municipal Association of Nepal [MuAN] and National Association of Rural Municipalities in Nepal [NARMIN]) have expressed concern about potential contradictions between the provisions contained in the Local Government Operations Act and the Water Supply and Sanitation Act/draft regulations. For instance, the functions assigned to the local government by the Act are significantly less than those under the Local Government Operations Act. The Water Supply and Sanitation Act provides many functions to the federal government and less to the local government, whereas the Local Government Operations Act has allocated many functions to the local level. The functional assignment of water supply to the three tiers of government by these two laws and draft regulations needs to be reconciled. Despite the need for comprehensive reform, there are challenges undermining procurement performance has been no significant progress made in relation in Nepal. At the same time, in reviewing institutional to the regulatory framework and systems for arrangements, the MAPS can also recommend needed procurement since Nepal shifted to federalism. legal and institutional strengthening of the Public No national-level procurement assessment has been Procurement Management Office (PPMO). conducted since 2002. The current regulatory framework on procurement was enacted in 2007, and it still The e-Government Procurement (e-GP) system underpins the country’s procurement rules. This implies needs to be enhanced to monitor and evaluate all that, even though Nepal adopted federalism in 2015, the procurements in Nepal. While the e-GP system was procurement regulatory framework has been unchanged developed to perform as an integrated system for all for more than a decade and a half. Nepal could consider public procurement in 2011, the procuring agencies applying the Methodology for Assessing Procurement are currently using the portal only to prepare the Systems (MAPS)30 to obtain a complete picture of the procurement plan, advertise procurement opportunities, current conditions (legal and operational) of the Nepali and receive electronic bids. However, the procurement procurement system at the three levels of government, as database maintained by the PPMO through the e-GP compared with recommended international standards. system is incomplete,31 indicating that there is ample The results of the MAPS assessment can then inform the room for improvement when comparing international need for reforms in the procurement system, including to good practices. Upgrading the e-GP system to enable the regulatory framework and institutional setup, as well the PPMO to access comprehensive procurement related as the required human resource capacity, all of which data is recommended. 30 MAPS is an international standard and universal tool for evaluating public procurement systems anywhere in the world. This harmonized tool is developed by the Organisation for Economic Cooperation and Development (OECD). 31 Information about contract awards and implementation is either not available or partially available on the portal. Procuring agencies maintain contract records in the form of manual files, which include information on what was procured, the value of the procurement, and who was awarded the contract, so when information is required for procurement monitoring, data has to be compiled manually due to the lack of a comprehensive database. Nepal Fiscal Federalism Update, May 2024 | 21 n Chapter 2  n  Enabling Legal, Policy, and Institutional Frameworks, with Emphasis on Provincial Governments ;ĐĂƉŝƚĂůƐƉĞŶĚŝŶŐĂůůŽĐĂƚŝŽŶ͕EWZďŝůůŝŽŶͿ ϭϲϬ 2.4 The Inter-Governmental Fiscal Transfers System ϭϰϬ ϭϮϬ requires upgraded institutional arrangements for ϭϬϬ ϴϬ effective management ϲϬ ϰϬ ϮϬ Since FY19, the overall trend of IGFTs has remained share of total revenue decreased marginally from 19.6 Ϭ unchanged, &ŝŐϭ͘ϭϱď with the largest proportion of the percent in FY22 to 17.3 percent in FY23. The reliance of ƵĚŐĞƚ Dd&ϮϬ Dd&Ϯϭ Dd&ϮϮ WůĂŶ ƵĚŐĞƚ Dd&Ϯϭ Dd&ϮϮ Dd&Ϯϯ WůĂŶ resources for local governments being transferred local governments on CGs also decreased slightly, from &zϮϬϮϮ through conditional grants (CGs). (Figure 2.1) The &zϮϬϮϯ 46.8 percent to 43.5 percent over the same period. dependence of provincial governments on CGs as a Figure 2.1. Budget allocations for the four types of grants from the federal government to PLGs ;EWZďŝůůŝŽŶͿ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ ϯϬϬ ϮϱϬ ϮϬϬ ϭϱϬ ϭϬϬ ϱϬ Ϭ ƋƵĂůŝnjĂƚŝŽŶ ƋƵĂůŝnjĂƚŝŽŶ ƋƵĂůŝnjĂƚŝŽŶ ^ƉĞĐŝĂů ^ƉĞĐŝĂů ŽŵƉůĞŵĞŶƚĂƌLJ ŽŵƉůĞŵĞŶƚĂƌLJ ŽŵƉůĞŵĞŶƚĂƌLJ ^ƉĞĐŝĂů ŽŶĚŝƚŝŽŶĂů ŽŶĚŝƚŝŽŶĂů ŽŶĚŝƚŝŽŶĂů &ŝŐϮ͘ϭ dŽƚĂů WƌŽǀŝŶĐĞ >ŽĐĂů Source: World Bank staff calculation based on MoF data Establishing a transparent, consultative process and be adhered to in the MTEF and annual budgeting process. technical methodology for determining the divisible This could help ensure better fiscal planning at the federal pool for IGFTs will help increase the predictability level, as a designated share of the budget would be of the financial resources. At present, there is no legal allocated to PLGs, and would also allow for better planning provision/procedure for how the NPC-led Resource at the PLG level, as the sub-national governments would Committee determines the pool of funds to be transferred be able to better predict resource availability. through IGFTs.32 Moving forward, Nepal could consider The fiscal equalization grant formula is under review, establishing a transparent and consultative process and a so that it can better fill the fiscal gaps remaining after technical methodology for how the Resource Committee all other resources available to PLGs are accounted determines the divisible pool of IGFTs. This could also for. The FEG is defined based on the need for expenditure include a legal requirement that the recommendations and revenue capacity of PLGs. Around 70 percent of provided by the Committee on the size of the divisible pool 32 In India and Pakistan, the Finance Commission provides recommendations every five years on the share of the tax revenue to be allocated to the center and the state/provinces. 22 the FEG is determined by a formula33 developed by the MoF. Key issues and recommendations to be considered National Natural Resources and Fiscal Commission are: (NNRFC). Created in 2019, the current formula has been n The weight of FEGs within the pool of resources used for the last five years with the same methodology and indicators. The NNRFC is currently undertaking a review for IGFTs should increase in relation to CGs, of the formula to make it simpler, clearly understandable to strengthen PLG planning and decision- by all stakeholders, and better able to reduce the fiscal making according to bottom-up needs. The gaps across PLGs. For example, the formula review is Intergovernmental Fiscal Arrangement (IGFA) Act looking at including all available sources of funding for (2017), Article 9, establishes that CGs are allocated for PLGs (including conditional grants and revenue sharing) the implementation of PLG projects. As the PLGs, which and to update the indices and data used to measure are closer to citizens, are more familiar with the needs expenditure needs and revenue capacity. of citizens than the federal government, it would be advisable to fund service delivery functions at the PLGs The NNRFC is attempting to expand the increasingly through FEGs rather than CGs. The focus performance elements to not only FEGs, but also of CGs could be mainly for (a) federal responsibilities other mechanisms, such as revenue sharing. that the federal government requires support from Performance incentives can bring positive changes if PLGs in fulfilling, and (b) incentives to encourage PLGs potential risks are managed well. Some key issues and to act on areas that have been devolved to them, but associated recommendations informed by international where Nepal as a nation has acquired international good practices are articulated in Box 2.3. commitments (e.g., Sustainable Development Goal [SDG] indicators or the eradication of certain diseases). There is ample room for improvement in designing and implementing conditional grants. While the NNRFC n CGs transferred as ‘block grants’ can be considered determines the parameters of CGs, the allocation across to drive national priorities. CGs can be transformed PLGs is determined by federal sector ministries and the into sectoral CGs transferred as block grants with Box 2.3. Guidance criteria to incorporate performance elements in IGFTs in Nepal Firstly, it is advisable to use a limited number of accessible and verifiable indicators when assessing performance-related aspects. Per international practice, performance indicators are more effective if they are limited in number, such that achievement has an impact on the allocation of money, which incentivises performance, and available through verified sources to avoid the risk of misrepresentation. At present, the NNRFC is using 11 performance indicators for provinces and 17 for local governments, which implies that the impact of each indicator on allocation is low. Moreover, data for 7 out of 11 indicators for the provinces and for 8 out of 17 indicators for local governments are not accessible or verifiable. Secondly, performance indicators could be considered in association with conditional grants. As mentioned before, Nepal’s conditional grants are instrumentally allocated and controlled through earmarking. Performance-determined conditional grants transferred as block grants would be more effective in fostering progress in the achievement of sectoral targets. Third, when designing performance elements, it is important to consider capacity building for weak PLGs. Whenever performance elements are included in revenue-sharing, equalization or conditional grants, and they are associated with fiscal efforts, care should be taken to implement them hand-in-hand with capacity-building, so that the unintended result does not broaden the gap between strong and weak PLGs. 33 According to the NNRFC Act, Article 16.1, the current formula includes the following indicators: (a) Human Development Index indicators like education, health, drinking water within province and at local level, (b) situation of balanced development within province and at local level, (c) situation of economic, social or any other discrimination prevalent within other province and at local level, (d) situation and necessity of infrastructure development within province and at local level, (e) services to be provided by the province and at local level to citizens, (f) situation of revenue of the province and local level and their capacity to collect it, and (g) necessity of expenditure by the province and local level. Nepal Fiscal Federalism Update, May 2024 | 23 n Chapter 2  n  Enabling Legal, Policy, and Institutional Frameworks, with Emphasis on Provincial Governments no detailed earmarking as a way to retain certainty level of expenditure headings of PLGs recorded in the of expenditure on the functions that each sector Line Ministry Budget Information System (LMBIS) – needs to perform. Some of the resources of sector the problem of earmarking persists, since the specific CGs transferred as block grants could be allocated instructions37 provided to PLGs for the implementation to national priorities, as mentioned above, and the of CGs are defined at a level of granularity that takes rest to the general functions that correspond with away the increased autonomy provided by the the sector. CGs transferred as block grants could be reduced number of expenditure headings. Hence, linked with indicators associated with targets and efforts to provide greater flexibility over CGs to PLGs objectives. are needed in these two mechanisms. n Clear and transparent criteria are needed in n Vertical coordination can be enhanced to better the allocation of CGs. A recent federal PEFA report reflect PLG needs in CGs. Regarding capital (April, 2024) highlights that there is no clear and expenditure, there are recurrent complaints that the transparent procedure for the federal line ministries funds received through CGs do not match the priority to determine and distribute conditional funding. investments of PLGs, often resulting in these grants Clear and transparent procedures are recommended not being disbursed. Improved vertical coordination to increase sectoral budget planning and expenditure would ensure that PLG capital expenditure needs are capacity. Compounding this concern, NNRFC’s annual being met when determining the allocation of CGs. report (2023)34 reveals that there is no established The Inter-Governmental Fiscal Council (IGFC)38 could monitoring mechanism to assess whether the four play a leading role in enhancing vertical coordination criteria35 determined by the NNRFC were adhered to on CGs among the three tiers of government. or not when distributing conditional grants to local n The amount of CGs could be determined/published governments. Consequently, NNRFC has urged the earlier to facilitate planning and more efficient MoF to develop an automated system to monitor execution. As can be seen in Table 2.4, the program compliance with their recommendations regarding and project allocation of the CGs is determined in the the allocation of conditional grants. fiscal year, and communications that are dependent n Decrease earmarking of CGs. The number of on these grants are also informed late (by the end of earmarked items in CGs has increased since the last May every year). Earlier publication would empower NFFU – from 80,916 in FY22 to 96,619 in FY23. There PLGs to plan ahead of time and be prepared for was some progress in the health sector in FY24, execution at the beginning of the fiscal year. It would with the number of the earmarked items decreasing also give more clarity on the actual amount of the from 22,483 in FY23 to 15,898 in FY24 for local IGFT divisible pool for the fiscal year (including governments, and from 7,396 in FY23 to 6,299 in FY24 the amounts of CGs), giving the NNRFC better for provincial governments over the same period.36 information with which to estimate and recommend Despite this progress in the health sector – at the the distribution of FEGs. 34 Available at: https://nnrfc.gov.np/uploads/resources/2023-04-10/annual_report_2078_79_for_website_.pdf 35 The four criteria recommended by the NNRFC are: (a) when a thematic area or program/project falling under the list of (exclusive) rights of province governments needs to be implemented by the local level, (b) when a provincial policy or program needs to be implemented through the local level, (c) when provincial standards need to be established or implemented at the local level, and (d) when strategically important projects necessary for balanced development within the province need to be adhered to. 36 See: https://projects.worldbank.org/en/projects-operations/project-detail/P176498 37 Provided through the Program Implementation Manual: Related to Conditional Grants implemented programs by the Local and Provincial Levels. 38 The Inter-Governmental Fiscal Council is created by the Intergovernmental Fiscal Arrangement Act, 2017 to conduct necessary consultations and coordinate between the three tiers of government on fiscal management. It is a federal statutory body that deals with revenue powers, revenue sharing, IGFTs, loans, budgetary arrangements, public expenditure, and fiscal discipline for all three tiers of government. The Council is, thus, entitled to hold and maintain necessary consultation and coordination among different tiers of government on intergovernmental fiscal arrangements. 24 Table 2.4. Schedule for allocation grants Responsible Date Activity Agency Federal level Mid-December NPC Project call notice for matching and special grants among provincial and local governments End of January Resource Budget estimation – based on the past FY macro-economic status and Committee current 6 months FY– MTEF next two FY estimation Mid-February Resource Total federal resources FEG pool is communicated to NNRFC Committee Mid-February Resource Total ceiling for conditional grants from federal government to provinces Committee and federal government to local governments is determined Mid-February NPC Project call submission deadlines for matching and special grants among provincial and local governments December to March NNRFC Start calculating the recommendations FEG for the next fiscal year Rounds of discussion at the joint secretary and secretary level Discussion and approval at Commission level 2 week of March nd NNRFC Recommendations of the FEG amount and communicate with MoF 2 week of March nd MoF Federal government informs province and local levels about FEG allocation Mid-April NPC Project selection for matching and special grants among provincial and local government End of May Line ministries Programs and projects under CG determined during budget negotiations Every Month MoF Share of revenue from value added tax (VAT) and excise duty received by province and local governments is provided monthly by depositing it in the concerned provincial government divisible fund and local government divisible fund Provincial level Third week of March Province Total provincial resources FEG pool is communicated to NNRFC Resource Committee Mid-April NNRFC FEG recommendations provided to the province 3 week of April rd Province Province informs the local level of FEG allocation Source: World Bank staff calculations based on Government of Nepal websites and guidelines There is a need to enhance the capacity of the NPC to which is comprised of six members from the MoFAGA, manage special and matching grants. Informants at the Office of the Prime Minister and Council of Ministers NPC highlighted the weak management capacity39 of the (OPMCM), and the concerned line ministries. This NPC in relation to special and matching grants. This weak Committee selects from a large volume of applications capacity results in a lack of a monitoring and evaluation (around 4,000 plus applications received last fiscal year). system for the results and impact associated with It is necessary to increase the capacity of the core team projects funded through grants. Of the total allocation at the NPC (in terms of number and skills) to evaluate of IGFTs for FY23, matching and special grants consisted grant proposals and to establish a sub-technical team of only 6.4 percent. Currently, the project selection has to conduct monitoring, which will expedite and improve been led mainly by the Project Selection Committee, the quality of selection and implementation. 39 As at March 2024, the core team responsible for verifying the applications by PLGs for special and matching grants and recommending their approval to the MoF consisted of only six staff. Nepal Fiscal Federalism Update, May 2024 | 25 n Chapter 2  n  Enabling Legal, Policy, and Institutional Frameworks, with Emphasis on Provincial Governments 2.5 The regulatory framework on borrowing and capital finance is evolving Nepal has made progress in establishing an enabling Reform of the Town Development Fund is in progress. environment for internal borrowing and capital At the local level of capital finance, no PLGs have financing. Based on the Public Debt Management Act embarked on any borrowing activity. In order to lay the (2022), four institutions – the Public Debt Management ground for local government capital financing, the Town Office (PDMO), Ministry of Finance, Nepal Rasta Bank Development Fund Act40 is being restructured to mobilize (NRB), and NNRFC – advanced the dialogue regarding financial sources for infrastructure development growth a concrete regulatory framework and institutional at the sub-national level. The Cabinet approved the TDF arrangements for internal borrowing by PLGs, which Strategy Paper in FY23, and the relevant bill is expected resulted in the enactment of the Public Debt Management to be presented by the Ministry of Urban Development Regulation on March 14, 2024. The regulation stipulates to Parliament soon. While the TDF was limited to urban the key roles of the four institutions (Table 2.5). municipalities before, the ongoing reform aims to enable all PLGs to access the borrowing mechanism from the TDF. Table 2.5. Key roles of the four institutions on borrowing and capital financing Institution Role PDMO To formulate debt policies and strategies MoF To provide oversight roles on internal debt for three tiers of government in coordination with PDMO (including monitoring debt information) NRB To manage monetary policy and coordinate with PDMO to ensure consistency between internal debt and monetary policy NNRFC To recommend the ceilings for domestic borrowing of PLGs (current ceiling is 12 percent) Source: Public Debt Management Act (2022) and Regulation (2024) 2.6 There has been limited progress made in the sustainable and equitable mobilization and distribution of natural resources revenue Increasing fiscal fund flows from natural resources 20 GDP). While natural resources are diverse, Nepal through sustainable mobilization can have an has categorized them into five categories for royalty impact on fostering development in PLGs. Natural generation and distribution purposes: mountaineering, resource-related revenue is estimated to have the electricity, forests, mines and minerals, and water and potential to produce 4.56 billion NPR (1.2 % of FY other natural resources (IGFA Act 2017, Schedule 4).41 40 TDF was established to provide essential financial, technical, and institutional support to the institutions relating to the town development for the construction, development, and expansion of the town in 1989. 41 The NNRFC has not produced recommendations for the distribution of water and other natural resources, as per legal and constitutional provisions, except recently in relation to the distribution of royalties from the use of radio frequencies. A study commissioned by the NNRFC on royalty potential from water and other sources has identified inter basin drinking water, inter basin irrigation, water for bottling, industrial uses of water, underground water resources, water transportation, water- related entertainment, and water for hydrogen energy, etc. as potential water-related sources. Solar energy, wind energy, geothermal energy, thermal energy, fossil based energy (including coal and petrol), nuclear energy, waste to energy, telecommunications and so forth were identified as ‘other’ potential sources of energy for royalty generation (see: https://nnrfc.gov.np/uploads/resources/2024-01-19/Study_of_Royalty_Potential_from_Water_Related_and_Other_Natural_Resources_ Sector_in_Nepal1.pdf). 26 However, the sectoral acts for collecting and Equity concerns in the distribution of royalties from managing natural resources revenue have not natural resources between PLGs also need to be been updated significantly since the introduction addressed. The current formula for the distribution of of federalism. Nepal moved to a federal structure in royalties from natural resources is stipulated in the IGFA 2015, and the Constitution defines royalties from natural Act (2017), which applies a derivation-based approach by resources as an area of concurrent power at the federal, which core, affected, and adjoining areas of the natural provincial, and local levels (Schedule 9). However, royalty resource base receive a share of the royalties based on and revenue generation and collection mechanisms indicators of population and geography. This approach for various natural resources are still governed by respects the priority and preferential rights of local sector-specific laws, many of which were enacted before communities as related to the benefits of the distribution federalism, such as the Tourism Act (1979), Electricity of natural resources, as accorded by the Constitution. Act (1993), Forest Act (2020), and Mines and Mineral However, this approach also has the potential to Act (1986). This has created some issues related to the increase inequalities between areas with and without concurrency of rights of the three levels of government natural resource bases. For example, only 120 local in governing natural resources revenue and royalty levels received a share of royalties from electricity, which collection and administration.42 There are also issues constitutes the largest share of royalties from all natural with the centralized collection of the revenue originating resources, and furthermore there are great variations from different sources into a federal divisible fund and in the distribution of the royalties between local levels. distribution among the three tiers (IGFA Act 2017, Clause While one local government received only NPR 7,759, 7), with some sectors not depositing royalties collected another municipality received NPR 89 million as the in the said fund, impacting the fiscal resources available largest recipient in FY21 (see Table 2.6). The equity to PLGs.43 These sectoral acts ought to be updated to concerns can be partly addressed through other transfers, align with the current federal structure of Nepal and for example, by ensuring that those municipalities clarify who does what in terms of revenue generation receiving less natural resource royalties receive slightly from natural resources. higher fiscal equalization grants. Table 2.6. Natural resource royalty distribution to PLGs by source FY21 Province Local Level PLG Royalty Number Minimum and Number Minimum and Total Amount Source Receiving Maximum Amount Receiving Maximum Received by Each Royalties* (NPR) Royalties Amount (NPR) Level (NPR)** Mountaineering 5 9,000–121 million 86 31–90 million 140 million Electricity 6 781,000–350 million 120 7,759–89 million 706 million Forest 7 8.8–34.5 million 728 17–3.8 million 173 million Mines & Minerals 6 224,000–148 million 63 625–45 million 211 million Source: Adapted from Table 4.8 and 4.9 in NNRFC Third Annual Report (NNRFC 2022, p. 373) *Madhesh and Lumbini provinces did not receive any royalties from mountaineering. Madhesh also did not receive any royalties from electricity or mining. Karnali and Sudurpashchim provinces received the lowest shares of royalties from all except forests, although Karnali was the lowest receiving province even in the latter. **While the federal government receives 50 percent of the royalties, both provinces and local governments affected by the mobilization of natural resources receive an equal share of 25 percent each. 42 An example of this includes a case brought before the Constitutional Bench regarding the levying of royalties and taxes on community forest user groups by all three tiers of governments in 2023. Issues related to royalty and revenue from extraction for sand and stone, etc. for construction has also been an area of contestation between the three levels, although a bill related to Construction Material (Management and Regulation) was presented to Parliament on March 22, 2024, to address this. 43 For example, the Forest Development Fund, which was formed under the Forest Act, which collects revenue from the sale of forest products, environmental services, and other things, and the National Nature Conservation Fund, which was formed under the National Nature Conservation Act (1983) to collect revenue from protected areas, do not transfer their collected revenue into the federal divisible fund for distribution among the three tiers (see Third Annual Report of NNRFC, 2022, p. 381). Nepal Fiscal Federalism Update, May 2024 | 27 n Chapter 2  n  Enabling Legal, Policy, and Institutional Frameworks, with Emphasis on Provincial Governments 28 CHAPTER 3 Progress on Public Financial Management by Provincial and Local Governments Nepal Fiscal Federalism Update, May 2024 | 29 n Chapter 3  n  Progress on Public Financial Management by Provincial and Local Governments This chapter examines the latest trends and the status of PFM implementation at the sub-national level. The analysis was developed based on: the annual report of the Office of the Auditor General (OAG) for FY22; the Local Government Institutional Self-Assessment (LISA)44 of 444 local governments for which data is available for the period FY20–FY23; Budget Speeches of a sample of 115 local governments for FY23 and FY24; NNRFC performance indicators for 753 local governments for FY22 and FY23; and consultations with key stakeholders.45 3.1 While most local governments adhered to legal requirements for annual budgets and budget spending delegation, progress in preparing periodic development plans and MTEFs remains limited In FY23, there was an increase in the number of with data available from FY20 to FY23, those preparing local governments preparing periodic development spatial-based development plans decreased from 26.1 plans, MTEFs, and annual development programs. percent in FY22 to 24.3 percent in FY23 (Figure 3.2). Specifically, the percentage of local governments However, the percentage of local governments preparing preparing periodic development plans increased from and implementing MTEFs and annual development 42 percent in FY22 to 46.2 percent in FY23 (NNRFC programs based on the spatial-based development data on 753 local governments). This increase was plan rose significantly, from 25.7 in FY22 to 43.9 in FY23 observed across various municipality types, with (Figure 3.3). This increase was particularly ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϳ pronounced ϳϬ metropolitan cities, urban municipalities, and rural in metropolitan ϲϬ cities (by 33.3 percentage points), urban ϰϴ ϱϬ ϰϲ ϰϱ municipalities experiencing increases of 33.3, 9.1, municipalities ϰϬ ϯϯ (by 18.3 ϯϲ percentage points), and rural Ϯϳ and 1.7 percentage points, respectively (Figure 3.1). municipalities ϯϬ ϮϬ (by 19 percentage points). Although there However, sub-metropolitan cities saw a decrease of 27.3 are concerns about the variable quality ϭϬ Ϭ of these plans Ϭ percentage points. LISA data from the MoFAGA reveals and programs, the fact that they are increasingly being DĞƚƌŽ hƌďĂŶ ZƵƌĂů DĞƚƌŽ hƌďĂŶ ^ƵďͲŵĞƚƌŽ ZƵƌĂů ^ƵďͲŵĞƚƌŽ further insights. Among the 444 local governments46 prepared is a step in the right direction. &ŝŐϯ͘ϭ &zϮϬϮϮ &zϮϬϮϯ Figure 3.1. Percentage of local governments Figure 3.2. Percentage of local governments preparing periodic development plans preparing only spatial-based development plans ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϳ ϲϳ ϳϬ ϳϬ ϲϬ ϲϬ ϰϲ ϰϱ ϰϴ ϱϬ ϱϬ ϰϬ ϯϯ ϯϲ ϰϬ ϯϯ ϯϯ Ϯϳ ϯϭ Ϯϴ ϯϬ ϯϬ Ϯϱ ϮϮ Ϯϳ Ϯϱ Ϯϳ ϭϴ ϮϬ ϮϬ ϮϬ ϭϯ ϭϬ Ϭ ϭϬ Ϭ Ϭ Ϭ Ϭ Ϭ DĞƚƌŽ hƌďĂŶ ^ƵďͲŵĞƚƌŽ ZƵƌĂů DĞƚƌŽ hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ hƌďĂŶ hƌďĂŶ hƌďĂŶ hƌďĂŶ DĞƚƌŽ DĞƚƌŽ ZƵƌĂů DĞƚƌŽ ZƵƌĂů DĞƚƌŽ ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘Ϯ &ŝŐϯ͘ϭ &zϮϬϮϮ &zϮϬϮϯ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ Note: Percentage based on the total of local governments under Note: Percentage based on the total of local governments under each type each type ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϬ Source: ϳϬ NNRFC and World Bank staff calculations ϲϳ Source: MoFAGA and World Bank staff calculations ϱϬ ϰϲ ϱϬ ϰϯ ϲϬ ϯϴ ϱϬ ϰϬ ϯϯ Ϯϴ ϰϬ ϯϯ ϯϯ ϯϭ ϯϬ Ϯϰ Ϯϱ ϮϮ Ϯϳ Ϯϱ Ϯϳ Ϯϴ ϭϴ ϯϬ ϭϴ ϮϬ ϮϬ ϭϯ ϭϯ ϮϬ ϭϯ ϴ ϭϬ ϱ ϭϬ Ϭ Ϭ Ϭ Ϭ Ϭ Ϭ Ϭ Ϭ Ϭ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů DĞƚƌŽ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ hƌďĂŶ hƌďĂŶ hƌďĂŶ DĞƚƌŽ DĞƚƌŽ ZƵƌĂů DĞƚƌŽ ZƵƌĂů DĞƚƌŽ ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ 44 LISA is a tool managed by MoFAGA and used to assess PLG capacity using 120 indicators. In this chapter, we assessed some of the PFM related indicators to analyze the latest trends. The list of 444 local governments is provided in Annex 2b. &ŝŐϯ͘Ϯ 45 The list of stakeholders consulted can be found in Annex 1. &ŝŐϯ͘ϯ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ 46 This sample includes 3 metropolitan cities, 8 sub-metropolitan cities, 164 urban municipalities, and 269 rural municipalities. 30;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϬ ϱϬ ϱϬ ϰϲ ϰϯ ϯϴ ϰϬ ϯϯ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϳ ϳϬ ϲϬ ϱϬ ϰϬ ϯϯ ϯϯ ϯϭ Ϯϱ ϮϮ Ϯϳ Ϯϱ Ϯϳ Ϯϴ ϯϬ ϭϴ ϮϬ ϮϬ ϭϯ ϭϬ Ϭ Ϭ Ϭ Ϭ hƌďĂŶ hƌďĂŶ hƌďĂŶ hƌďĂŶ DĞƚƌŽ DĞƚƌŽ ZƵƌĂů DĞƚƌŽ ZƵƌĂů DĞƚƌŽ ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ Figure 3.3. Percentage of local governments Figure 3.4. Percentage of local governments preparing and implementing MTEFs and annual preparing annual budget and program based &ŝŐϯ͘Ϯ &zϮϬϮϬ programs development based on &zϮϬϮϭ spatial-based &zϮϬϮϮ &zϮϬϮϯ on recommendations of the three committees development plans ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϬ ϭϬϬ ϭϬϬ ϭϬϬ ϵϱ ϭϬϬ ϵϲ ϱϬ ϵϭ ϵϯ ϱϬ ϰϲ ϭϬϬ ϴϴ ϴϴ ϴϯ ϰϯ ϯϴ ϴϬ ϳϰ ϳϰ ϰϬ ϯϯ ϲϳ ϲϳ ϲϳ Ϯϴ ϲϬ ϯϬ Ϯϰ ϭϴ ϰϬ ϮϬ ϭϯ ϭϯ ϴ ϱ ϮϬ ϭϬ Ϭ Ϭ Ϭ Ϭ Ϭ Ϭ DĞƚƌŽ hƌďĂŶ ZƵƌĂů DĞƚƌŽ hƌďĂŶ ZƵƌĂů DĞƚƌŽ hƌďĂŶ ZƵƌĂů DĞƚƌŽ hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů DĞƚƌŽ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ DĞƚƌŽ &ŝŐϯ͘ϰ &ŝŐϯ͘ϯ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ Note: Percentage based on the total of local governments under Note: Percentage based on the total of local governments under each type each type ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ Source: NNRFC and World Bank staff calculations Source: MoFAGA ϭϬϬ and World Bank staff calculations ϭϬϬ ϭϬϬ ϭϬϬ ϵϱ ϵϱ ϵϰ ϵϯ ϵϭ ϵϮ Capacity building and technical assistance are ϵϬ Out of the 438 local governments where these 3.4). required to prepare MTEFs and other planning ϴϱ committees have been established, 95.4 percent three documents. The aforementioned analysis showed had ϴϬ prepared their annual budget and program DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ that almost two-thirds of the 444 local governments &ŝŐϯ͘ϱ based on the recommendations of these committees. still need to prepare and implement MTEFs and Additionally, 91.4 percent of the 444 local government annual development programs based on the spatial- Resource Estimation &zϮϬϮϮ and Budget Ceiling Determination &zϮϬϮϯ based development plan. This indicates a need to provide Committees also determined the thematic budget targeted capacity-building and technical assistance ceiling for FY24 budget in line with the Local Government ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ to local governments to strengthen their capacity to Operations Act, up from 89.2 percent for the same for ϭϬϬ ϵϲ ϭϬϬ ϵϰ ϵϮ prepare all these strategic and operational documents ϭϬϬ budget. FY23 ϴϯ ϵϭ ϴϬ ϲϳ with an adequate level of quality. While various capacity building efforts are made by the PCGGs, the NASC, PFM There ϲϬ was a slight decrease in the submission of ϰϬ training academy, and development partners, there is budgets ϮϬ within the stipulated timeline by local a need to harmonize these efforts in order to avoid the governments Ϭ in the last year. In FY24, over 90 percent DĞƚƌŽ DĞƚƌŽ of local governments (698 out of 753) submitted their hƌďĂŶ ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ hƌďĂŶ ^ƵďͲŵĞƚƌŽ duplication of efforts. annual budgets to the local assembly by the deadline The Local Government Operations Act mandates &ŝŐϯ͘ϲ of June 25, 2023. decrease from &zϮϬϮϮThis reflects a slight&zϮϬϮϯ 47 the establishment of three committees in local the 94.5 percent of submissions in FY23 (Figure 3.5). governments for preparing and approving annual Local governments in Madhesh continued to have the budgets and programs, which has been done by highest number of late submissions, with 3.2 percent most local governments. These are the Local Revenue of local governments missing the deadline. Across Advisory Committee, Resources Estimation and Budget municipality types, sub-metropolitan cities were the only Ceiling Determination Committee, and Budget and ones that saw an increase. Additionally, the law requires Program Formulation Committee. Among the 444 local local assemblies to endorse the annual program and governments analyzed, the vast majority (98.6 percent) budget by mid-July of the calendar year. For the FY24 had established these committees by FY23, reflecting budget, 93.1 percent of 753 local governments fulfilled an increase of 1 percentage points from FY22 (Figure this requirement, down from 94.6 percent for FY23 (Figure 3.6). 47 Data from NNRFC website Nepal Fiscal Federalism Update, May 2024 | 31 ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϭϬϬ ϭϬϬ ϭϬϬ ϵϱ ϭϬϬ ϵϲ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϴϴ ϴϴ ϴϯ ϵϭ ϵϯ ϭϬϬ ϳϰ ϳϰ ϵϱ ϴϬ ϲϳ ϲϳ ϲϳ ϵϱ ϵϰ ϵϯ ϵϭ ϵϮ ϲϬ n Chapter 3  n  Progress on Public Financial Management by Provincial ϵϬ and Local Governments ϰϬ ϮϬ ϴϱ Ϭ ϴϬ DĞƚƌŽ hƌďĂŶ ZƵƌĂů DĞƚƌŽ hƌďĂŶ ZƵƌĂů DĞƚƌŽ hƌďĂŶ ZƵƌĂů DĞƚƌŽ hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ &ŝŐϯ͘ϱ &ŝŐϯ͘ϰ Figure 3.5. Percentage of local governments Figure 3.6. Percentage of local governments with &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ submitting annual budget to their local &zϮϬϮϮ endorsing submitted their local assembly &zϮϬϮϯbudget assembly within legally stipulated timeline ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϵϲ ϭϬϬ ϭϬϬ ϭϬϬ ϵϮ ϵϭ ϵϰ ϴϯ ϵϱ ϵϱ ϵϰ ϵϯ ϴϬ ϲϳ ϵϭ ϵϮ ϲϬ ϵϬ ϰϬ ϴϱ ϮϬ ϴϬ Ϭ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ &ŝŐϯ͘ϱ &zϮϬϮϮ &zϮϬϮϯ &ŝŐϯ͘ϲ &zϮϬϮϮ &zϮϬϮϯ Note: Percentage based on the total of local governments under Note: Percentage based on the total of local governments under each type ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ each type Source: MoFAGA and ϭϬϬWorld Bank staff ϵϮ ϵϲ calculations ϭϬϬ ϵϭ ϵϰ Source: NNRFC and World Bank staff calculations ϭϬϬ ϴϯ ϴϬ ϲϳ ϲϬ MostϰϬ local governments followed the legal Figure 3.7. Percentage of local governments requirement ϮϬ for budget spending delegation. LISA complying with legal provisions on budget spending data Ϭ reveals that 97.3 precent out of 444 local delegation DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ governments adhered to this provision of the Local ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ &ŝŐϯ͘ϲ Government Operation Act in FY23, up from 95.4 percent ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ &zϮϬϮϮ &zϮϬϮϯ ϭϬϬ ϵϴ in FY22 (Figure 3.7). This law mandates that the mayor ϵϲ ϵϱ ϵϲ ϵϱ ϵϯ ϵϮ or municipal chair delegate spending authority to the ϵϬ ϵϬ ϴϴ ϴϴ ϴϴ chief administrative officer within seven days of budget ϴϱ approval by the local assembly. ϴϬ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϳ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ Note: Percentage based on the total of local governments under each type ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ Source: MoFAGA and World Bank staff calculations ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϵϵ ϵϳ ϵϳ ϵϰ ϵϱ ϵϮ ϵϭ ϵϯ ϵϯ 3.2 Although local governments seem to be compliant ϵϬ ϴϴ ϴϱ with legal provisions on maintaining accounts ϴϬ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ according to national accounting standards, the budget &ŝŐϯ͘ϴ transparency of local governments remains low &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ Most local governments complied with legal ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ the However, budget transparency of local provisions on maintaining accounts in line with governments remained low, with only 33.9 percent ϭϬϬ ϴϬ ϳϯ national accounting standards. The Intergovernmental out ϲϬ of 115 local governments ϱϬ in the sample having ϰϭ ϰϱ Fiscal Arrangement Act (2017) requires local governments a budget ϰϬ speech publicly Ϯϱ available both FY23 ϯϮ in ϯϭ ϭϳ ϮϬ to prepare periodic statements of income and and FY24 (Figure 3.9a). Across municipality types, Ϭ expenditure in line with Nepal Public Sector Accounting &ŝŐϯ͘ϵĂ budget transparency improved for rural municipalities DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ^ƵďͲŵĞƚƌŽ ZƵƌĂů ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů Standards. The LISA data for 444 local governments and metropolitan cities, but decreased for others (Figure shows that 98 percent of local governments compiled 3.9a). In particular, &zϮϬϮϯ the percentage &zϮϬϮϰ of metropolitan this with provision in FY23, up from 95.3 percent in FY22 (Figure 3.8). 32 ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϭϬϬ ϵϴ ϵϲ ϵϲ ϵϱ ϵϱ ϭϬϬ ϭϬϬ ϵϯ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϵϮ ϵϴ ϵϬ ϵϲ ϵϲ ϵϬ ϴϴ ϴϴ ϴϴ ϵϱ ϵϱ ϵϯ ϴϱ ϵϮ ϵϬ ϵϬ ϴϴ ϴϴ ϴϴ ϴϬ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ DĞƚƌŽ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ZƵƌĂů^ƵďͲŵĞƚƌŽ ϴϱ &ŝŐϯ͘ϳ ϴϬ Figure 3.8. Percentage of local governments cities and rural municipalities making the budget DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ complying with legal provisions on maintaining speeches publicly available increased from 17 percent &ŝŐϯ͘ϳ accounts in line with national accounting standards and 25 percent in FY23 to 50 percent and 31 percent, &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ respectively, in FY24. However, that of sub-metropolitan ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ cities and urban municipalities decreased considerably ϭϬϬ ϵϵ ϵϳ ϵϰ ϵϳ from 73 percent and 41 percent in FY23 to 45 percent and ϵϱ ϵϮ ϵϭ ϵϯ ϵϯ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ 32 percent, respectively, in FY24. ϵϬ ϴϴ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϭϬϬ ϴϱ ϵϵ ϭϬϬ ϵϳ ϵϳ Despite widespread use of the Sub-National Treasury ϴϬ ϵϰ ϵϱ ϵϮ ϵϭ ϵϯ ϵϯ Regulatory Application (SuTRA) system, problems ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ ϵϬ ϴϴ with comparability and transparency remain in &ŝŐϯ͘ϴ ϴϱ budget documents, particularly budget speeches, &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ ϴϬ across local governments. Sub-national Government ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ Note: Percentage based on the total of local governments under Public Expenditure and Financial Accountability (SNG each type PEFA) assessment guidelines emphasize the importance &ŝŐϯ͘ϴ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ Source: MoFAGA and World Bank staff calculations &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ of consistent documentation based on administrative, ϭϬϬ ϴϬ ϳϯ economic, and functional classifications aligned with Figure 3.9a. Percentage of local governments ϲϬ ϰϭ ϱϬ ϰϱ Government Finance Statistics (GFS) and Classification making ϰϬ publicly available budget speechϮϱ ϯϮ ϯϭ ϮϬ ϭϳ of the Functions of Government (COFOG)48 standards. Ϭ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ According to the standards, budget documents should DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ^ƵďͲŵĞƚƌŽ ZƵƌĂů ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů &ŝŐϯ͘ϵĂ ϭϬϬ present three sets of figures for each classification: ϴϬ ϳϯ estimates for the upcoming year, revised estimates for ϲϬ ϱϬ ϰϱ &zϮϬϮϯ ϰϭ &zϮϬϮϰ ϯϮ ϯϭ the current year, and actual figures from the previous ϰϬ Ϯϱ ϮϬ ϭϳ year. This approach, adopted by federal and provincial Ϭ governments in their annual budget statements, DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϵĂ enhances comparability. However, at the local level, only 9.6 percent of a sample of 115 local governments ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ &zϮϬϮϯ &zϮϬϮϰ included all three figures in both their FY24 and FY23 budget speeches, with economic codes provided for an Note: Percentage based on the total of local governments under even lower percentage (7.8 percent) (Figure 3.9b). each type Source: MoFAGA and World Bank staff calculations The availability of revenue and spending estimates for the budget year, however, showed improvement. For instance, the availability of revenue estimates Figure 3.9b. Percentage of local governments with ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ increased from 49.3 percent in FY23 to 52.8 percent three sets of figures available in budget speech in FY24 (Figure 3.9c). Similarly, spending estimates ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ categorized by function rose from 26.4 percent Ϯϱ to 33.4 percent (Figure 3.9e). However, there was ϭϴ ϮϬ ϭϳ a marginal decline in the percentage of local ϭϱ ϭϭ ϴ ϭϬ ϵ governments providing spending estimates by ϭϬ ϱ ϱ economic classification (Figure 3.9d). Additionally, Ϭ Ϭ the proportion of local governments providing both the amount and the corresponding economic codes DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ is lower for both revenue estimates and spending &ŝŐϯ͘ϵď &zϮϬϮϯ &zϮϬϮϰ estimates by economic classification. Note: Percentage based on the total of local governments under ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ each type ϭϬϬ ϵϭ World Bank staff calculations ϭϬϬ MoFAGA and Source: ϴϬ ϳϯ ϳϬ ϲϮ ϱϳ ϱϵ ϲϬ ϱϬ ϰϬ 48 ϮϬ The Classification of the Functions of Government classifies government expenditure data from the System of National Accounts by the purpose for which the funds Ϭ used (see https://www.imf.org/external/pubs/ft/gfs/manual/aboutgfs.htm). are DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů hƌďĂŶ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϵĐ Nepal Fiscal Federalism Update, May 2024 | 33 &zϮϬϮϯ &zϮϬϮϰ Ϯϱ ϭϬ ϵ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϭϬ ϴ ϭϴ ϱ ϭϬϬ ϮϬ ϭϳ ϭϬϬ ϵϭ ϱ ϭϱ Ϭ ϳϯ ϳϬ Ϭ ϭϭ ϴϬ ϲϮ ϭϬ ϵ ϱϳ ϱϵ ϴ ϱϬ ϭϬ by Provincial ϲϬ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ^ƵďͲŵĞƚƌŽ n Chapter 3  n  Progress on Public Financial Management ϱ and Local Governments ϱ ϰϬ Ϭ Ϭ ϮϬ Ϭ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ZƵƌĂů &ŝŐϯ͘ϵď &zϮϬϮϯ &zϮϬϮϰ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů hƌďĂŶ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ Figure 3.9c. Percentage of local governments Figure 3.9d. Percentage of local governments with &ŝŐϯ͘ϵď &ŝŐϯ͘ϵĐ with revenue estimate &zϮϬϮϯ available for budget &zϮϬϮϰ spending estimate based on economic classification ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ &zϮϬϮϯ &zϮϬϮϰ year ϵϭ ϭϬϬ available for budget year ϭϬϬ ϴϬ ϳϯ ϳϬ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϮ ϱϳ ϱϵ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϬ ϱϬ ϭϬϬ ϭϬϬ ϭϬϬ ϰϬ ϵϭ ϴϬ ϳϯ ϳϯ ϳϬ ϲϳ ϴϬ ϮϬ ϲϮ ϱϳ ϱϵ ϲϬ ϰϵ ϰϵ ϲϬ Ϭ ϱϬ ϰϰ ϰϰ ϯϯ ϯϲ ϰϬ ϰϬ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů hƌďĂŶ ^ƵďͲŵĞƚƌŽ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ^ƵďͲŵĞƚƌŽ ϮϬ ϮϬ Ϭ Ϭ &ŝŐϯ͘ϵĐ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů hƌďĂŶ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &zϮϬϮϯ &zϮϬϮϰ &ŝŐϯ͘ϵĚ &ŝŐϯ͘ϵĐ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ &zϮϬϮϯ &zϮϬϮϰ &zϮϬϮϯ &zϮϬϮϰ ϭϬϬ ϴϬ ϳϯ ϲϳ Note: Percentage based on the total of local governments under ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ Note: Percentage based on the total of local governments under ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϬ ϰϵ ϰϰ ϰϵ ϰϰ each ϭϬϬtype ϯϯ ϯϲ ϭϬϬtype each ϰϬ Source: ϳϯ World Bank staff calculations ϴϬ MoFAGA and ϴϬ MoFAGA and World Bank staff calculations Source: ϲϳ ϲϰ ϲϳ ϮϬ ϱϬ ϲϬ ϰϵ ϰϵ ϲϬ Ϭ ϰϰ ϰϰ ϯϱ ϯϱ ϯϵ ϯϯ ϯϲ ϰϬ Ϯϳ ϯϭ ϰϬ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ^ƵďͲŵĞƚƌŽ Figure ϮϬ 3.9e. Percentage of local governments with ϮϬ Budget speeches of local governments still need to &ŝŐϯ͘ϵĚ Ϭ Ϭ spending estimate based on functional classification be standardized. This involves developing guidelines DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů hƌďĂŶ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ZƵƌĂů available for budget &zϮϬϮϯ year &zϮϬϮϰ or templates for consistent content and format across &ŝŐϯ͘ϵĚ &ŝŐϯ͘ϵĞ all local governments. These guidelines should specify ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ &zϮϬϮϯ such as budget estimates, required information, &zϮϬϮϰ revised &zϮϬϮϯ &zϮϬϮϰ ϭϬϬ ϴϬ estimates, and actual, aligned with national accounting ϲϳ ϲϰ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϬ ϱϬ standards and SuTRA data availability. Providing training ϭϬϬ ϯϱ ϯϱ ϯϵ ϰϬ Ϯϳ ϯϭ and capacity-building programs for local government ϴϬ ϲϳ ϲϰ ϮϬ ϱϬ officials responsible for preparing budget speeches ϲϬ Ϭ ϯϱ ϯϱ ϯϵ can support this effort. Standardizing budget speeches ϰϬ Ϯϳ ϯϭ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů hƌďĂŶ ^ƵďͲŵĞƚƌŽ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ^ƵďͲŵĞƚƌŽ ϮϬ will enhance transparency, comparability of local &ŝŐϯ͘ϵĞ Ϭ government finances, and public understanding of local DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů hƌďĂŶ &zϮϬϮϯ &zϮϬϮϰ government budgets. &ŝŐϯ͘ϵĞ Note: Percentage based on the total of local governments &zϮϬϮϯ &zϮϬϮϰ under each type Source: MoFAGA and World Bank staff calculations 3.3 Although there has been an improvement in the number of local governments preparing procurement plans, close to half of local governments have still not prepared them There was a significant increase in the number of local and fully implemented these plans in FY23, marking governments preparing and fully implementing master a considerable increase from 29.1 percent of local and annual procurement plans in FY23. According to governments in FY22 (Figure 3.10). Additionally, the data LISA data, 44.1 percent of 444 local governments prepared shows that 7.7 percent of local governments prepared 34 Figure 3.10. Percentage of local governments and implemented them partially, while the remaining preparing and fully implementing master and annual 48.2 percent of local governments did not prepare any procurement plans plan. Across municipality types, there was an increase of 10 percentage points of total urban municipalities and 12 ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ percentage points of total rural municipalities in FY23 in ϳϬ ϲϯ ϲϬ ϱϬ ϱϬ terms of fully implementing plans. ϱϬ ϰϮ ϰϱ ϯϴ ϯϯ ϯϯ ϯϯ ϰϬ Ϯϳ ϯϮ Ϯϳ ϯϬ Ϯϭ ϭϰ ϮϮ Supporting the procurement capacity of PLGs ϮϬ ϭϬ Ϭ Ϭ remains a priority. Although LISA data showed an improvement in procurement capacity at the DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ ^ƵďͲŵĞƚƌŽ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϭϬ local government level, close to half of these local &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ governments did not prepare any procurement-related plan. Therefore, it would be beneficial for and relevant Note: Percentage based on the total of local governments under capacity-building agencies, such as Provincial Centers for each type ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ Good Governance and development partner-supported Source: ϲϬ MoFAGA and World Bank staff calculations PFM programs, to provide hands-on technical support to ϱϬ ϱϬ ϰϬ ϯϴ ϯϴ ϯϴ local governments to help increase their procurement, ϯϬ Ϯϲ ϮϮ ϭϵ ϮϬ ϭϯ ϭϱ ϭϯ ϭϮ project management, and capital spending capacity. ϳ ϭϬ Ϭ Ϭ Ϭ Ϭ Ϭ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ hƌďĂŶ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϭϭ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ 3.4 Internal control systems are improving in PLGs, ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϳϬ ϲϯ but the coverage of this key oversight mechanism ϱϬ ϰϬ ϯϲ ϯϳ ϲϬ ϱϬ ϰϬ ϯϴ ϯϯ Ϯϳ ϯϯ ϱϬ ϯϮ Ϯϳ ϯϯ ϱϬ ϰϮ ϰϱ remains limited ϯϬ Ϯϭ ϮϮ ϯϬ ϯϬ Ϯϴ ϮϬ ϭϰ ϯϬ Ϯϳ ϭϬ Ϭ Ϭ ϮϬ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϭϮ ϭϬ ϴ ϱ &ŝŐϯ͘ϭϬ In ϬFY23, there was a significant increase in the increase of 12.5 percentage points for sub-metropolitan WĞƌĨŽƌŵĞĚ WĂƌƚŝĂůůLJ EŽƚ ĂƚĂŶŽƚ WĞƌĨŽƌŵĞĚ WĂƌƚŝĂůůLJ EŽƚ ĂƚĂŶŽƚ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ number of ƉĞƌĨŽƌŵĞĚ governments local ƉĞƌĨŽƌŵĞĚ ĂǀĂŝůĂďůĞ that ƉĞƌĨŽƌŵĞĚ fully prepared, ƉĞƌĨŽƌŵĞĚ ĂǀĂŝůĂďůĞ cities, 6.7 percentage points for urban municipalities, ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ implemented, &zϮϬϮϭ and regularly monitored &zϮϬϮϮ internal and 9.7 percentage points for rural municipalities. In ϳϬ ϲϯ control systems. According to LISA ϲϬ ϱϬ data, 23.4ϱϬ percent of addition, the percentage of local governments that ϱϬ ϰϮ ϰϱ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϯϴ 444 ϰϬlocal governments ϯϯ prepared Ϯϳ ϯϯ and ϯϮfully ϯϯ Ϯϳ implemented prepared ϲϬ the internal control system in FY23,ϱϬ but without ϯϬ Ϯϭ ϮϮ ϱϬ ϯϴ ϯϴ ϯϴ theseϮϬ systems in ϭϰ FY23, up from 14.9 percent in FY22 fullyϰϬimplementing it, stood close to 30 percent, Ϯϲ ϮϮ similar ϭϬ Ϭ ϯϬ ϭϵ (Figure Ϭ 3.11). Across municipality types, there was an to the percentage ϮϬ ϭϯ ϳ in FY22. ϭϱ ϭϯ ϭϮ ϭϬ Ϭ Ϭ Ϭ Ϭ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ Ϭ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ hƌďĂŶ hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϭϬ Figure 3.11. Percentage of local governments &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ &ŝŐϯ͘ϭϭ preparing and fully implementing internal control Figure 3.12. Percentage &zϮϬϮϬ &zϮϬϮϭ of local governments &zϮϬϮϮ &zϮϬϮϯ systems performing and not-performing internal audit ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϬ ϱϬ ϱϬ ϱϬ ϯϳ ϯϴ ϯϴ ϯϴ ϰϬ ϯϲ ϰϬ Ϯϲ ϮϮ ϯϬ ϯϬ Ϯϴ ϯϬ ϭϵ ϯϬ Ϯϳ ϮϬ ϭϯ ϭϱ ϭϯ ϭϮ ϳ ϮϬ ϭϬ Ϭ Ϭ Ϭ Ϭ Ϭ &ŝŐϯ͘ϭϮ ϴ ϭϬ ϱ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ hƌďĂŶ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ Ϭ &ŝŐϯ͘ϭϭ WĞƌĨŽƌŵĞĚ WĂƌƚŝĂůůLJ EŽƚ ĂƚĂŶŽƚ WĞƌĨŽƌŵĞĚ WĂƌƚŝĂůůLJ EŽƚ ĂƚĂŶŽƚ ƉĞƌĨŽƌŵĞĚ ƉĞƌĨŽƌŵĞĚ ĂǀĂŝůĂďůĞ ƉĞƌĨŽƌŵĞĚ ƉĞƌĨŽƌŵĞĚ ĂǀĂŝůĂďůĞ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ &zϮϬϮϭ &zϮϬϮϮ Note: Percentage based on the total of local governments under Note: Percentage based on the total of local governments under ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ each type each type ϱϬ Source: MoFAGA and World Bank staff calculations Source: MoFAGA and World Bank staff calculations ϰϬ ϯϲ ϯϳ ϯϬ ϯϬ Ϯϴ ϯϬ Ϯϳ ϮϬ Nepal Fiscal Federalism Update, May 2024 | 35 &ŝŐϯ͘ϭϮ ϭϬ ϴ ϱ Ϭ n Chapter 3  n  Progress on Public Financial Management by Provincial and Local Governments There were slight improvements in the internal audit the fifth OAG report (2023) highlighted that the PAC status among the 115 sampled local governments, in Sudurpashchim was formulated to discuss the key but there is still ample room for improvement in this issues highlighted in the OAG report. Similarly, the PAC area. According to Clause 77(2) of the Local Government in Karnali met and discussed the second and third OAG Operation Act, an internal audit is required after the reports (2021 and 2022). The irregularities mentioned in completion of every quarter. Similarly, Clause 33(4) of the the first OAG report (2018) were addressed by the PAC of federal Fiscal Procedures and Financial Accountability Madhesh. However, according to the OAG reports from Act states that an internal audit is to be undertaken 2018 to 2023, no active implementation of Provincial quarterly. Of the 115 local governments sampled, 37 PACs was reported for Bagmati, Gandaki, Koshi, and percent performed an internal audit in FY22, a marginal Lumbini provinces. increase from 36 percent in FY21 (Figure 3.12). Similarly, the percentage of local governments that partially While some progress has been made, internal audit performed internal audits increased from 5 percent and oversight mechanisms at the PLG level need in FY21 to 8 percent in FY22, while the percentage of significant improvement. While there was a slight local governments that did not perform an internal improvement reported in the internal audit at the local audit decreased marginally by 1 percentage point to 28 level in the sampled 115 municipalities, more than 50 percent of local governments still have not conducted percent in FY22. Data was not available for 27 percent of an internal audit or the status was not available. local governments in FY22. Furthermore, the status of oversight mechanisms, such The performance of Provincial Public Accounts as the Accounts Committees, was unknown; the status Committees (PACs) remains uneven across different update obtained from the OAG reports of the provincial provinces. The audit reports issued by the Office of the PACs in 2022 and 2023 indicated the need for further Auditor General are submitted to provincial chiefs, PLG support to enhance their functionality. It is recommended legislatures (Assemblies), and their respective Accounts that concerned federal government agencies, such as the Committees. While all provinces have established MoFAGA, MoF, and PCGG at the provincial level, as well PACs, there are variations in the functionality of these as development partners, provide further support to committees across the seven provinces. For instance, enhance this mechanism. 3.5 Audit irregularities at both provincial and local levels decreased Audit irregularities of all provincial governments Audit irregularities of local governments as a share decreased in FY22. The Office of the Auditor General of the audit amount also decreased marginally in reports a decrease in provincial government audit FY22. Audit irregularities of local governments dropped irregularities to 2.3 percent of the audited amount in from 4.1 percent of the audit amount in FY21 to 3.9 in FY22, a 0.4 percentage point improvement from 2.7 FY22 (Figure 3.14). Audit irregularities decreased for all percent in FY21 (Figure 3.13). Notably, all provinces, municipality types, except rural municipalities, in FY22. except Lumbini and Sudurpashchim, saw a decline in Metropolitan cities experienced the largest decrease of irregularities. Among the provinces, Karnali had the 1.8 percentage points in FY22. highest audit irregularities of 3.9 percent in FY22. 36 ϲ ϱ͘ϰ ϱ͘Ϯ ϱ ϯ͘ϵ ϯ͘ϲ ϯ͘ϰ ϰ Ϯ͘ϳ ϯ Ϯ͘Ϯ Ϯ͘ϱ Ϯ͘ϱ Ϯ͘ϯ ϭ͘ϲ ϭ͘ϯ ϭ͘Ϯ Ϯ͘Ϭ Ϯ ϭ͘ϰ ϭ͘Ϯ ϭ Ϭ 'ĂŶĚĂŬŝ <ĂƌŶĂůŝ 'ĂŶĚĂŬŝ <ĂƌŶĂůŝ ĂŐŵĂƚŝ ĂŐŵĂƚŝ >ƵŵďŝŶŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ >ƵŵďŝŶŝ ůů ^ƵĚƵƌƉĂƐŚĐŚŝŵ <ŽƐŚŝ ůů <ŽƐŚŝ DĂĚŚĞƐŚ DĂĚŚĞƐŚ Figure 3.13. Audit irregularities as share of audited Figure 3.14. Audit &ŝŐϯ͘ϭϯ irregularities as share &zϮϬϮϭ of audited &zϮϬϮϮ amount for provinces amount for all local governments by municipality type ;ƉĞƌĐĞŶƚͿ ;ŝƌƌĞŐƵůĂƌŝƚŝĞƐĂƐĂƐŚĂƌĞŽĨĂƵĚŝƚĞĚĂŵŽƵŶƚ͕ƉĞƌĐĞŶƚͿ ϲ ϱ͘ϰ ϱ͘Ϯ ϳ ϲ͘ϭ ϱ ϯ͘ϵ ϲ ϯ͘ϲ ϯ͘ϰ ϰ Ϯ͘ϳ ϱ ϰ͘Ϯ ϰ͘ϯ ϰ͘ϯ ϯ Ϯ͘Ϯ Ϯ͘ϱ Ϯ͘ϱ Ϯ͘ϯ ϯ͘ϳ ϯ͘ϴ ϰ͘Ϭ ϭ͘ϲ ϭ͘ϯ ϭ͘Ϯ Ϯ͘Ϭ ϰ Ϯ ϭ͘ϰ ϭ͘Ϯ ϯ͘ϭ ϭ ϯ Ϭ Ϯ ϭ 'ĂŶĚĂŬŝ <ĂƌŶĂůŝ 'ĂŶĚĂŬŝ <ĂƌŶĂůŝ ĂŐŵĂƚŝ ĂŐŵĂƚŝ >ƵŵďŝŶŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ >ƵŵďŝŶŝ ůů ^ƵĚƵƌƉĂƐŚĐŚŝŵ <ŽƐŚŝ ůů <ŽƐŚŝ DĂĚŚĞƐŚ DĂĚŚĞƐŚ Ϭ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϭϰ ;ƉĞƌĐĞŶƚͿ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϭ &zϮϬϮϮ &ŝŐϯ͘ϭϯ ϲ ϱ͘ϰ ϱ͘Ϯ ϱ ϯ͘ϵ ϯ͘ϲ ϯ͘ϰ ϰ Ϯ͘ϳ Source: NNRFC, OAG, and World Bank staff calculations Ϯ͘Ϯ Ϯ͘ϱ Ϯ͘ϱ Ϯ͘ϯ Source: NNRFC, ϯ OAG, and World Bank staff calculations ϭ͘ϲ Ϯ͘Ϭ ϭ͘ϰ ϭ͘Ϯ Ϯ ϭ͘ϯ ϭ͘Ϯ ;ŝƌƌĞŐƵůĂƌŝƚŝĞƐĂƐĂƐŚĂƌĞŽĨĂƵĚŝƚĞĚĂŵŽƵŶƚ͕ƉĞƌĐĞŶƚͿ ϭ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϳ ϲ͘ϭ Ϭ ϲϬ ϱϱ ϲ ϱϬ 'ĂŶĚĂŬŝ <ĂƌŶĂůŝ 'ĂŶĚĂŬŝ <ĂƌŶĂůŝ ĂŐŵĂƚŝ ĂŐŵĂƚŝ >ƵŵďŝŶŝ ^ƵĚƵƌƉĂƐŚĐŚŝŵ >ƵŵďŝŶŝ ůů ^ƵĚƵƌƉĂƐŚĐŚŝŵ <ŽƐŚŝ <ŽƐŚŝ ůů DĂĚŚĞƐŚ DĂĚŚĞƐŚ ϰ͘ϯ ϰ͘ϯ ϱϬ ϱ ϰ͘Ϯ ϰ͘Ϭ ϯ͘ϳ ϯ͘ϴ ϰϬ ϯϯ ϰ ϯ͘ϭ Ϯϴ ϯ ϯϬ ϮϬ ϮϮ ϭϳ ϭϴ Ϯ ϮϬ ϭ ϭϬ Ϭ &zϮϬϮϭ &zϮϬϮϮ &ŝŐϯ͘ϭϯ Ϭ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ^ƵďͲŵĞƚƌŽ ZƵƌĂů ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϭϰ 3.6 Compliance with preparing and publishing the &zϮϬϮϭ &zϮϬϮϮ &ŝŐϯ͘ϭϱ ;ŝƌƌĞŐƵůĂƌŝƚŝĞƐĂƐĂƐŚĂƌĞŽĨĂƵĚŝƚĞĚĂŵŽƵŶƚ͕ƉĞƌĐĞŶƚͿ ϳ ϲ͘ϭ &zϮϬϮϮ &zϮϬϮϯ annual budget execution report deteriorated for local ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲ ϱ ϰ ϰ͘Ϯ ϰ͘ϯ ϯ͘ϳ ϰ͘ϯ ϯ͘ϭ ϯ͘ϴ ϰ͘Ϭ governments, while public hearings improved ϲϬ ϱϬ ϱϬ ϱϱ ϯ Ϯ ϭ ϰϬ ϯϯ Ϭ Ϯϴ ϯϬ ϮϮ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ϭϳ ϭϴ ϮϬ ϮϬ ϭϬ At the provincial level, there was improvement in &ŝŐϯ͘ϭϰFigure 3.15. Percentage of local governments Ϭ terms of preparing and making the annual budget preparing and making &zϮϬϮϭ the annual budget execution &zϮϬϮϮ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ^ƵďͲŵĞƚƌŽ ZƵƌĂů ^ƵďͲŵĞƚƌŽ execution report public within the legally stipulated report public within the legally stipulated timeline &ŝŐϯ͘ϭϱ timeline. Provinces &zϮϬϮϮ make the report are required to&zϮϬϮϯ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ public within three months of the end of the fiscal year. ϲϬ ϱϬ ϱϱ According to NNRFC data, the number of provinces that ϱϬ ϰϬ ϯϯ Ϯϴ complied with this provision increased from five in FY22 ϯϬ ϭϴ ϮϬ ϮϮ ϮϬ ϭϳ to six in FY23. In addition, of the seven provinces, four ϭϬ (Koshi, Madhesh, Bagmati, and Lumbini) were unable Ϭ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ ZƵƌĂů hƌďĂŶ ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ to submit the consolidated Annual Financial Statement by the stipulated date. Data were not available for other &ŝŐϯ͘ϭϱ three provinces. Madhesh continued to be the only &zϮϬϮϮ &zϮϬϮϯ province that did not comply with this requirement in both FY22 and FY23. Source: NNRFC, OAG, and World Bank staff calculations However, there was a deterioration in compliance by Public hearings have improved at the local level, local governments with the same provision. NNRFC as mandated by the Inter-Governmental Fiscal data shows that only 20.8 percent out of 753 local Arrangement Act (2017). According to this Act, project governments complied with this requirement, which is income and expenditure details, implementation down significantly from 30.5 percent in FY22 (Figure 3.15). progress, targets, achievements, performance status, The decline is broad-based across municipality types, and the contributions of beneficiaries must be presented with decreases of 33.3, 36.4, 12.7, and 7 percentage points during public hearings, at which relevant stakeholders for metropolitan cities, sub-metropolitan cities, urban are present. The LISA indicator related to public hearings municipalities, and rural municipalities, respectively. at the local level shows that 53.8 percent of 444 local Nepal Fiscal Federalism Update, May 2024 | 37 n Chapter 3  n  Progress on Public Financial Management by Provincial and Local Governments governments conducted at least one public hearing To improve transparency on the PFM performance every four months in FY23, a significant increase from 36 of PLGs, the relevant regulatory framework needs percent in FY22 (Figure 3.16a). Furthermore, 13.5 percent to be amended to authorize the federal government of local governments conducted two public hearings to make the disaggregated PFM related data of PLGs during the evaluation period (Figure 3.16b), while the publicly available. PFM-related data, currently collected remaining 32.7 percent of local governments conducted through systems like SuTRA and the Provincial Financial only one public hearing during the same period. In Management Information System, allows for the analysis terms of the variation across the municipality types, of the country’s overall PFM situation. However, concerns while Figure 3.16a shows that rural municipalities that about PLG autonomy have prevented its disaggregated performed public hearings had improved trends from public disclosure. Amending the Fiscal Procedure and ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϳ FY20 to FY23, Figure 3.16b highlights that metropolitan Financial ϳϬ Accountability Act is recommended ϲϯ to enable ϱϱ ϲϬ ϱϬ ϱϬ ϱϯ municipalities saw the greatest increase. theϱϬ federal government to make the ϯϴ ϯϱdisaggregated ϰϬ Ϯϵ Ϯϴ PLGϯϬ PFM data ϭϴ ϮϬpublicly available. This is crucial for ϮϬ ϭϯ increased ϭϬ Ϭ transparency, Ϭ oversight, management Ϭ and Ϭ &ŝŐϯ͘ϭϲĂmonitoring of the IGFT system, and to enhance informed DĞƚƌŽ hƌďĂŶ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ decision-making regarding the fiscal situation of PLGs. &zϮϬϮϬ &zϮϬϮϭ Figure 3.16a. Percentage of local governments Figure 3.16b. Percentage of local&zϮϬϮϮ &zϮϬϮϯ governments conducting at least one public hearing every four with two public hearings during the evaluation months period ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϳ ϲϳ ϳϬ ϲϯ ϳϬ ϱϱ ϲϬ ϱϬ ϱϬ ϱϯ ϲϬ ϱϬ ϯϴ ϯϱ ϱϬ ϰϬ Ϯϵ Ϯϴ ϰϬ ϯϯ ϯϯ ϯϴ ϯϬ ϭϴ ϮϬ ϯϬ ϮϬ ϭϯ ϮϬ ϭϯ ϭϲ ϭϰ ϭϬ ϭϲ ϭϭ ϭϯ ϭϲ ϭϭ ϭϬ Ϭ Ϭ Ϭ ϭϬ Ϭ Ϭ Ϭ Ϭ &ŝŐϯ͘ϭϲĂ Ϭ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ DĞƚƌŽ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ hƌďĂŶ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϭϲď &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ Note: Percentage based on the total of local governments under Note: Percentage based on the total of local governments under each type EEy each type ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ Source: MoFAGA and World Bank staff calculations Source: MoFAGA and World Bank staff calculations ϲϳ ϳϬ ϲϬ &ŝŐϭĂ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ϱϬ ϰϬ ϯϯ ϯϯ ϯϴ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϯϬ ϲ ϮϬ ϭϯ ϭϲ ϭϰ ϭϬ ϭϲ ϭϭ ϭϯ ϭϲ ϭϭ ϭϬ Ϭ Ϭ Ϭ ϰ Ϭ Ϯ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ hƌďĂŶ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ &ŝŐϯ͘ϭϲď Ϭ ͲϮ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ Ͳϰ &zϮϬ &zϮϭ &zϮϮ &zϮϯ EEy &ŝŐϭĂ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϲ ϰ Ϯ Ϭ ͲϮ Ͳϰ &zϮϬ &zϮϭ &zϮϮ &zϮϯ 38 CHAPTER 4 Key Recommendations from the NFFU 2024 Nepal Fiscal Federalism Update, May 2024 | 39 n Chapter 4  n  Key Recommendations from the NFFU 2024 The key recommendations of this report build on system, strengthening PFM and procurement capacity, the progress achieved since the last NFFU and the and reinforcement of PLGs’ budget credibility. The remaining gaps. They refer to reforms or amendments recommendations are summarized in Table 4.1, in the legal framework, reinforcement of the IGFT along with a proposed level of priority (short and system, facilitating economic and PFM-related data medium term) based on their feasibility, impact, and production and access, reform of the procurement sequencing. Table 4.1. Progress on implementation of recommendations in NFFU 2023, and summary of key recommendations in NFFU 2024 Recommendations Recent Developments Recommendations in NFFU 2024 Responsible in NFFU 2023 Since March 2023 Institutions Short term Fiscal federalism and PFM reform national strategies Develop a fiscal The MoF FFCD was Develop, validate, and implement MoF (lead agency) federalism roadmap designated to coordinate the fiscal federalism roadmap. in coordination based on relevant preparation of the While the FFCD is committed to with the National government strategies, update of the PFM developing the roadmap, this Natural Resources such as the Public reform strategy. The NFFU reiterates the importance of and Fiscal Financial Management FFCD has the mandate preparing it through a consultative Commission strategy (2017) and to prepare the Fiscal process that involves provincial (NNRFC), Capacity Development Federalism Roadmap. and local governments and swiftly National Planning Action Plan on Fiscal The FFCD is advancing advancing its implementation. Commission Federalism (2022). these commitments. (NPC) and PLGs Legal framework amendments Pass updated Fiscal Procedures Provincial and Financial Accountability Acts, Ministries of aligned with the corresponding Finance and federal-level framework, in the five Economic Affairs remaining provinces. (PMoFEA) IGFT System Reinforce the IGFT a. The NNRFC has Upgrade institutional a. MoF (lead System to make been reviewing arrangements for IGFTs to make agency) in transfers more flexible, the FEG formula, the transfers more needs-based, coordination clear, and timely, as aiming to have a clear, and timely, and increase with NNRFC, well as increasingly more transparent the fiscal autonomy of PLGs. In NPC, line performance-based. and user-friendly addition to the recommendations ministries and More specifically, do the methodology that in NFFU 2023, this report PLGs following: better reflects the recommends the following: b. NNRFC (lead a. Update the evolution of the a. Establish a transparent, agency) methodology for situation of PLGs. consultative process and c. MoF (lead calculating FEGs. b. No significant technical methodology for agency) in b. Limit earmarking in progress has been determining the divisible pool coordination conditional grants as made on the for IGFTs to help increase the with NNRFC, part of the transition flexibilization of predictability of the financial NPC, line towards the principle conditional grants. resources. ministries and of sectoral block b. Conclude and implement the PLGs grants. review of the FEG formula. 40 Recommendations Recent Developments Recommendations in NFFU 2024 Responsible in NFFU 2023 Since March 2023 Institutions c. Strengthen the c. While the NPC c. Improve the design and inter-governmental and NNRFC have implementation of conditional coordination emphasized the grants by: mechanism among the need to enhance ¾¾ Reducing CGs and increasing key fiscal institutions coordination FEGs to enable PLG planning of the MoF, NNRFC, and regarding these four and decision-making NPC. types of grants, no according to bottom-up significant measures needs have been taken to address this point ¾¾ Maintaining CGs only for federal responsibilities implemented through PLGs and for areas of PLG responsibilities where international commitments exist ¾¾ Allocating CGs based on clear criteria and transparent procedures, including aligning allocations with PLGs’ needs by improving vertical coordination ¾¾ Determining and publishing the amount of CGs earlier in the fiscal year to facilitate planning and more efficient execution Access to PFM-related data Establish a consolidated The NNRFC’s In addition to establishing a MoF (lead agency) PFM performance performance indicators consolidated PFM performance in coordination database to enhance and the Ministry of database (NFFU 2023 with FCGO, monitoring and Federal Affairs and recommendation), enable the NNRFC, and evaluation of the overall General Administration’s PFM data of PLGs to be published National Statistics performance of PLGs in (MoFAGA’s) Local by the federal government Office (NSO) relation to public financial Government Institutional by amending the federal Fiscal management. Capacity Self-Assessment Procedures and Financial (LISA) data are publicly Accountability Act to authorize the available. The LISA data federal government to disclose also includes some PFM disaggregated PFM data collected performance information by PLGs through their centrally at the local level. managed information management However, more needs systems. to be done in terms of creating a consolidated PFM database. Nepal Fiscal Federalism Update, May 2024 | 41 n Chapter 4  n  Key Recommendations from the NFFU 2024 Recommendations Recent Developments Recommendations in NFFU 2024 Responsible in NFFU 2023 Since March 2023 Institutions Procurement related reforms Conduct a comprehensive Public MAPS49 assessment of public Procurement procurement. This will help in Monitoring Office making informed decisions and introducing necessary procurement reforms involving eGovernment procurement and institutional and regulatory frameworks in the context of federalism. Medium term Clarification of concurrent responsibilities Amend the legal The OPMCM has Approve and implement the Office of Prime framework to clarify the been reviewing the reviewed Unbundling Report and Minister and concurrent and shared Unbundling Report. pass the sectoral acts to clarify Council of responsibilities among Several sectoral acts the concurrent responsibilities Ministers (lead three tiers of government. and policies are under among the three tiers of agency) in review, such as the government related to expenditure coordination with Education Bill and assignments and revenue from line ministries the Water Supply, and natural resources. and Federal Sanitation Regulation. Parliament PFM and procurement capacity Strengthen the capacity Various capacity-building Strengthen internal audit MoFAGA of PLGs’ PFM human efforts are being and oversight mechanisms of (coordinating resources to carry out the undertaken by the provincial and local governments agency) in required functions. government and by providing training on these coordination development partners. areas, increasing human resources, with PCGGs and While concerned federal and establishing institutional the Office of the agencies and training oversight mechanisms such Auditor General institutes, are actively as the Account Committees of (OAG) providing training to PLGs. In addition, strengthen the PLG staff to bolster procurement capacity of PLGs. PFM-related technical expertise, there is a need to harmonize capacity building efforts among the key institutions such as PCGGs, Nepal Administrative Staff College (NASC), and PFM training academy. 49 Methodology for Assessing Procurement Systems 42 Recommendations Recent Developments Recommendations in NFFU 2024 Responsible in NFFU 2023 Since March 2023 Institutions Strengthen the revenue divisions PMoFEAs of Provincial Ministries of Finance and Economic Affairs (PMoFEAs) to effectively perform revenue management roles and increase provincial level own-source revenue. Budget credibility Reinforce systems No significant progress In addition to the NFFU 2023 Provincial line to improve budget has been made on this recommendations on this topic, ministries, PCGGs, credibility and service recommendation. improve budget credibility by: and Provincial delivery of PLGs by a) Reviewing the Provincial Planning strengthening: Appropriations Acts and Commissions a) The alignment of amending virement rules to periodic development restrict extensive administrative plans, MTEFs, and reallocations annual budgets b) Enhancing the capacity of local b) Cash management governments to adhere to systems the Intergovernmental Fiscal c) Provincial Arrangement Act 2017 and Local Appropriations Acts by Government Operations Act setting limits on the 2017, particularly concerning amount for budget the formulation of periodic sub-heading ‘Economic development plans, MTEFs, and Miscellaneous’ annual development programs c) Standardizing budget speeches by developing guidelines or templates for consistent content and format to allow comparability across all local governments Developing local-level GDP data Develop and implement a system NSO for generating local-level GDP data. Nepal Fiscal Federalism Update, May 2024 | 43 References 44 References Andrew Young School of Public Policy. 2019. Nepal: Capacity Needs Assessment for the Transition to Federalism. Government of Nepal, MoFAGA, World Bank and United Nations Development Programme. https://www.mofaga. gov.np/uploads/notices/Notices-20200506153437737.pdf FCGO. 2022. Consolidated Financial Statement for FY 2020/21. Kathmandu: Financial Comptroller General Office. https://fcgo.gov.np/storage/uploads/publications/20210523121905_CFS_2019_20%20final.pdf FCGO. 2023. Consolidated Financial Statement for FY 2021/22. Kathmandu. Financial Comptroller General Office. https://fcgo.gov.np/storage/uploads/publications/20220705103141_For%20Website.pdf Gibson, J., Olivia, S., and Boe-Gibson, G. 2020. “Night Lights in Economics: Sources and Uses. Journal of Economic Surveys, 34(5), 955–980. https://doi.org/10.1111/joes.12387 Gibson, J., Olivia, S., Boe-Gibson, G., and Li, C. 2021. “Which Night Lights Data Should We Use in Economics, and Where?” Journal of Development Economics, 149, 102602. https://www.researchgate.net/ publication/348156094_Which_night_lights_data_should_we_use_in_economics_and_where HoR. 2023. Federalism Implementation and Monitoring Parliamentary Committee Study (in Nepali). Kathmandu: House of Representatives. https://hr.parliament.gov.np/np/publication/1674024283 Martinez, L. R. 2022. “How Much Should We Trust the Dictator’s GDP Growth Estimates?” Journal of Political Economy, 130(10), 2731–2769. https://doi.org/10.1086/720458 MoF. 2018–2024. Budget Speeches for FY 2018/19–2023/24. Kathmandu: Ministry of Finance. MoF. 2024. Public Expenditure and Financial Accountability Assessment: Performance Assessment Report -III. Kathmandu: Ministry of Finance. NNRFC. 2022. Third Annual Report of the NNRFC (in Nepali). Kathmandu: National Natural Resources and Fiscal Commission. NNRFC. 2023. Fourth Annual Report of the NNRFC (in Nepali). Kathmandu: National Natural Resources and Fiscal Commission. NPC. 2020. Unified National Project Bank Guidelines. Kathmandu: National Planning Commission. https://npc.gov.np/ images/category/National_Project_Bank_Guidelines.pdf NPC. 2023. Project Preparation, Selection and Prioritization Unified Standards (in Nepali). Kathmandu: National Planning Commission. OAG. 2019. Nepal Government Financial Forms (in Nepali). Kathmandu: Office of Auditor General OAG. 2022. Annual Report of Office of Auditor General − 59th Annual Report (in Nepali). Kathmandu: Office of the Auditor General. OAG. 2023. Annual Report of Office of Auditor General −60th Annual Report (in Nepali). Kathmandu: Office of the Auditor General. OPMCM. 2017. Report on the Unbundling of List of Exclusive and Concurrent Powers of the Federation, Province, and the Local Level. Kathmandu: Office of the Prime Minister and Council of Ministers. https://www.opmcm.gov.np/ wp-content/uploads/2017/07/Unbundling-Final-English.docx Provincial MoFs. 2019–2024. Budget Speeches for FY 2019/20 to FY 2023/24. Kathmandu: Provincial Ministry of Finance. Román, M.O., Wang, Z., Shrestha, R., Yao, T., and Kalb, V. 2020. Black Marble User Guide Version 1.1. Goddard Space Flight Center: NASA. https://viirsland.gsfc.nasa.gov/PDF/VIIRS_BlackMarbleUserGuide_V1.1.pdf World Bank. 2023a. Nepal Development Update: Restoring Export Competitiveness. October 2023. Washington, D.C.: World Bank. https://thedocs.worldbank.org/en/doc/f7cacc93bf594ebe0f649fe785809676-0310012023/original/ Nepal-Development-Update-2023-October-Final.pdf World Bank. 2023b. Nepal Fiscal Federalism Update. June 2023. Washington, D.C.: World Bank. https://openknowledge.worldbank.org/entities/publication/a7f759d6-10ae-4768-9cea-610e18149efe Nepal Fiscal Federalism Update, May 2024 | 45 References Acts and Guidelines FCGO. 2017. Internal Audit Procedure Guidelines. Kathmandu: Financial Comptroller General Office. FCGO. 2019. Financial Procedures and Fiscal Responsibility Act. Kathmandu: Financial Comptroller General Office. FCGO. 2021. Nepal Public Account Standards. Kathmandu: Financial Comptroller General Office. Gandaki MoF. 2023. Gandaki Province Fiscal Responsibility and Financial Procedures Act. Gandaki Province Ministry of Finance. Law Commission. 2017. Employee Adjustment Act. Kathmandu: Nepal Law Commission. Law Commission. 2019. The Audit Act. Kathmandu: Nepal Law Commission. Law Commission. 2020. Federation, Province, and Local Level Act (Coordination and Inter-Relation). Kathmandu: Nepal Law Commission. MoF. 2023a. Appropriation Act. Kathmandu: Ministry of Finance. MoF. 2023b. Intergovernmental Fiscal Transfer Management and Guidelines for Provincial and Local Governments. Kathmandu: Ministry of Finance. MoFAGA. 2017a. Local Government Operation Act. Kathmandu: Ministry of Federal Affairs and General Administration. MoFAGA. 2017b. Local Level Plan and Budget Formulation Guidelines. Kathmandu: Ministry of Federal Affairs and General Administration. MoFAGA. 2021. Directives for Local Government on Internal Control System Design. Kathmandu: Ministry of Federal Affairs and General Administration. MoLCPA. 2022. Provincial Financial Procedures and Fiscal Responsibility Act. Government of Gandaki Province: Ministry of Law, Communication and Provincial Assembly Affairs. National Statistics Office. 2022. National Accounts. Accessed December 10, 2022 at: https://cbs.gov.np/national- accounts/ NNRFC. 2017. National Natural Resources Fiscal Commission Act. Kathmandu: National Natural Resources Fiscal Commission. NPC. 2020. The Fifteenth Plan (2019/20–2023/24). Kathmandu: National Planning Commission. NPC. 2022. Medium Term Expenditure Framework and Annual Development Program (2079/2080). Kathmandu: National Planning Commission OCCM. 2023. Finance Act. Government of Gandaki Province: Office of the Chief Minister and Council of Ministers. PDMO. 2022. Public Debt Management Act. Kathmandu: Public Debt Management Office. 46 Annexes Nepal Fiscal Federalism Update, May 2024 | 47 Annexes Annex 1. List of Key Stakeholders Consulted Civil Society Organizations, Government Agencies Development Partners Academia, and Think Tanks Bhaktapur Municipality Accountability Lab Nepal Asian Development Bank Suddhodhan Rural Municipality, Lumbini Province Centre for Social Change (CSC) European Union Pariwartan Municipality, Lumbini Province Centre for Innovative Embassy of Switzerland Governance Practices (CIGP) Modi Municipality, Gandaki Province Freedom Forum Norwegian Embassy Mahashila Municipality, Gandaki Province International Institute for United Nations Democracy and Electoral Development Program Assistance (IDEA) Financial Comptroller General Office Kathmandu University Deloitte Touche Tohmatsu Nepal (Delegated by United States Agency for International Development) Lalitpur Metropolitan City, Bagmati Province Nepal Institute for Urban and Regional Studies Lumbini Provincial Government: Ministry of Finance Society of Economic and Economic Affairs, PTCO, Provincial Service Journalists-Nepal (SEJON) Commission, Provincial Planning Commission Gandaki Provincial Government: Ministry of Finance South Asia Watch on Trade, and Economic Affairs, PTCO, Provincial Service Economics and Environment Commission, Gandaki Province Training Academy (SAWTEE) Ministry of Finance The Asia Foundation Ministry of Federal Affairs and General Administration Tribhuvan University Nepal Rastra Bank National Planning Commission Office of the Auditor General Office of the Prime Minister and Council of Ministers Public Accounts Committee Public Procurement Monitoring Office PEFA Secretariat Public Debt Management Office State and Good Governance Committee National Natural Resources and Fiscal Commission Bhaktapur Municipality, Bagmati Province Suddhodhan Rural Municipality, Lumbini Province Pariwartan Municipality, Lumbini Province 48 Annex 2a. List of 115 Municipalities Sampled in OAG Analysis S.N. Province Local Governments 1. Koshi Bhojpur UM; Chhathar Jorpati RM; Shahidbhumi RM; Chathar RM; Mangsebung RM; Jhapa UM; Buddhashanti UM; Kapilasgadhi RM; Pathari Shanischare; UM;, Rangeli UM; Biratnagar Metro; Molung RM; Kummayak RM; Phidim UM; Chichila RM; Inaruwa UM; Itahari SM; Dharan SM; Mikwakhola RM; Sidingba RM; Triyuga UM (21) 2. Madhesh Pachrauta UM; Kalaiya SM; Jeetpur Simara SM; Laxminiya RM; Janakpur SM; Matihani UM; Sakhuwa Parsauni RM; Paterwa Sugauli RM; Pokhariya UM; Birgunj Metro; Durga Bhagawati RM; Maulapur UM; Gujara UM; Gaur UM; Agnisair Krishna Savaran RM; Rajgadha RM; Kaudena RM; Brahmapuri RM; Kabilasi UM; Nawarajpur RM; Sukhipur UM; Karjanha UM (22) 3. Bagmati Kalika UM; Bharatpur Metro; Benighat Rorang RM; Siddhalek RM; Nilakantha UM; Kalinchok RM; Jiri UM; Temal RM; Dhulikhel UM; Budhanilkantha UM; Kathmandu Metro; Lalitpur Metro; Bhimphedi UM; Hetauda UM; Shivapuri RM; Likhu RM; Sunapati RM; Tripurasundari RM; Helambu RM; Barhabise UM (20) 4. Gandaki Kanthe Khola RM; Tara Khola RM; Jaimini UM; Pokhara Lekhnath Metro; Bulingtar RM; Gaidakot UM; Kawasoti UM; Magashila RM; Modi RM; Anbukhairani RM; Rishing RM; Bandipur RM (12) 5. Lumbini Chhatradev RM; Narainapur RM; Nepalgunj SM; Badhaiyatal RM; Bansgadhi UM; Thakurbaba UM; Ghorahi SM; Tulsipur SM; Ruru RM; Dhurkot RM; Suddhodan RM; Butwal SM; Krishnanagar UM; Mathagadhi RM; Tansen UM; Madavi RM; Pariwartan RM; & Bhume RM (18) 6. Karnali Chharka Tangsong RM; Dolpo Buddha RM; Tripurasundari UM; Tajakot RM; Patarasi RM; Pachalijharana RM; Tilagufa UM; Khatyad RM; Chaurjahari UM; Chaukune RM (10) 7. Sudurpashchim Dhakari RM; Bannigadhi Jayagadh RM; Sunarya RM; Patan UM; Bungal UM; Himali RM; Jagannath RM; Bogtan RM; Chure RM; Lamkichuha UM; Dhanagadhi SM; Krishnapur UM (12) Note: RM = Rural Municipality; UM = Urban Municipality; SM = Sub-Metropolitan; Metro = Metropolitan City Nepal Fiscal Federalism Update, May 2024 | 49 Annexes Annex 2b. List of 444 Municipalities Sampled in LISA Analysis S.N. Province Local Governments 1. Koshi Mauwakhola RM; Pathibhara Yangwarak RM; Silichong RM; Chainpur UM; Soludhudkunda UM; Chinssugadi RM; Siddhi Charan UM; Manebhangyang RM; Aaiselukharka RM; Rawa Besi RM; Halasituwangchung UM; Diktel Rupakot Majhuwagadhi UM; Tyamkemaiyum RM; Arun RM; Pauwadungma RM; Ramprasadrai RM; Hatuwagadi RM; Aamchok RM; Mahalaxmi UM; Pakriwas UM; Dhankuta UM; Khalcha Chintang Sahidbhumi RM; Sagurigadi RM; Yangwarak RM; Hilihang RM; Phidim UM; Phalgunanad RM; Kummayak RM; Tumwewa RM; Maigokmai RM; Sandakpur RM; Illam UM; Deumai UM; Phakphokthum RM; Mangsebung RM; Chulachuli RM; Mai UM; Shuryodaya UM; Rong RM; Buddhashanti RM; Aarjundahara UM; Kankai UM; Kamal RM; Damak UM; Gaurigunj UM; Gauradaha RM; Jhapa RM; Baradarshi RM; Biratamod UM; Haldibaari RM; Bhadrapur UM; Kachankawal RM; Letang UM; Kerabari RM; Kanepokhari RM; Shanischhare UM; Urlabari UM; Ratuwamai UM; Gramthan RM; Budiganga RM; Biratnagar Metro; Dharan SM; Baraha UM; Koshi RM; Harinagar RM; Ramdhuni UM; Itahari SM; Duhawi UM; Gadhi RM; Inarwa UM; Bhokraha RM; Dewangunj RM; Barju RM; Belka UM; Chaudandigadhi UM; Triyuga UM; Rautaami RM; Sunkoshi RM; Udayourgadi RM (79) 2. Madhesh Saptakoshi UM; Kanchanrup UM; Agnisair Krishnasabaran RM; Rupeni RM; Surunga UM; Bodebarsign UM; Dakneshwori UM; Hanumaannagar Kaankalini UM; Dhangadhimaai UM; Mechaiya UM; Karnjhaa UM; Naraha RM; Bishnupur RM; Arnama RM; Sukhipur UM; Ganeshman Charnath UM; Dhanusadham UM; Mithila Bihari UM; Bateshwor RM; Laxminiya RM; Mithila UM; Sahidnagar UM; Janaknandini RM; Hariban UM; Bagmati UM; Barhathawa UM; Haripur UM; Brahmapuri RM; Kabilashi UM; Basbariya RM; Dhankaul RM; Godaita UM; Madhavnarayan UM; Karaiyamai RM; Thori RM; Jirabhawani RM; Birjung Metro; Bahudarmai UM (38) 3. Bagmati Baiteshwor RM; Tamakoshi RM; Melung RM; Shailung RM; Bhimeshwor UM; Bhotekoshi RM; Jugal RM; Panchpokhari RM; Melumchi UM; Barabise UM; Lishankhu RM; Sunkoshi RM; Uttargaya RM; Jagannath RM; Naukunda RM; Khaniyabas RM; Netrawati Dabajong RM; Nilakantha UM; Jawalamukhi RM; Shidlekh RM; Benighat Rorang RM; Galchhi RM; Thakre RM; Dhunibesi UM; Dupcheshwor RM; Tadi RM; Surya Gadhi RM; Bidur UM; Kispang RM; Belkot Gadhi UM; Likhu RM; Panchakanya RM; Shibhapuri RM; Kakani RM; Shankarapur UM; Budhanilkantha UM; Tokha UM; Kirtipur UM; Chandragiri UM; Dakshinkali UM; Changunarayan UM; Bhaktapur UM; Suryabinayak UM; Mahalaxmi UM; Konjyosom RM; Mahankal RM; Bagmati RM; Chauridaurali RM; Bhumlu RM; Madandeupur UM; Bnepa UM; Dhulikhel UM; Panchakhal UM; Temal RM; Nomabuddha UM; Panauti UM; Bethanchwok RM; Rosi RM; Mahabharat RM; Gokulganga RM; Manthali UM; Dudhauli UM; Phikal RM; Tinpatan RM; Golanjor RM; Kamalmai UM; Sunkoshi RM; Ghyanglekh RM;Marin RM; Hariharpurgadi RM; Indrasarowar RM; Hetauda SM; Bhimphedi RM; Bagmati RM; Kalika UM; Ichhaykamana RM; Bharatpur Metro; Ratannagar UM; Khaireni UM; Maadi UM (80) 50 4. Gandaki Chumanubri RM; Ajirkot RM; Barpak Suliko RM; Darche RM; Aarughat RM; Bhimsenthapa RM; Shiranichwok RM; Palungtar UM; Gorkha UM; Shahid Lakhan RM; Gandaki RM; Manang Ngisyang RM; Chame RM; Nashong RM; Lo-Ghekar Damodarkund RM; Gharpjhon RM; Baragung Muktichhetra RM; Lomthang RM; Thasang RM; Annapurna RM; Mangala RM; Beni UM; Machhapuchre RM; Annapurna RM; Rupa RM; Sundar Bazar UM; Bhanu UM; Shuklagandaki UM; Bhimad UM; Rishing RM; Devghat RM; Aabukhaireni RM; Gaidakot UM; Bulingtar RM; Hupasekot RM; Devchuli UM; Kawasoti UM; Madhyabindu UM; Binayi Tribeni RM; Putalibazar UM; Fedikhola RM; Aadhikhola RM; Arjunchaupari RM; Bhirkot UM; Biruwa RM; Harinas RM; Waling UM; Galyang UM; Kaligandaki RM; Modi RM; Jaljala RM; Falebas UM; Mahasilaa RM; Paiyeu RM; Baglung UM; Kathekhola RM; Tarakhola RM; Tamankhola RM; Dhorpatan UM; Nishikhola RM; Badigaad RM; Galkot UM; Bareng RM; Jaimani UM (64) 5. Lumbini Sisne RM; Bhume RM; Sunchhahari RM; Paribartan RM; Maadi RM; Triveni RM; Rolpa UM; Runtigadhi RM; Sunilsmiriti RM; Lungri RM; Gaumukhi RM; Naubahini RM; Sworgadwari UM; Mandawi RM; Mallarani RM; Airawati RM; Sarumarani RM; Kaligandaki RM; Satyawati RM; Chandrakot RM; Musikot UM; Ishma RM; Malika RM; Madane RM; Dhurkot RM; Resunga UM; Gulmidurbar RM; Chatrakot RM; Ruru RM; Chatradev RM; Malarani RM; Bhumikasthan UM; Sandhikharka UM; Panini RM; Shitganga UM; Rampur UM; Purbakhola RM; Rambha RM; Bagnaskali RM; Tansen UM; Ribdikot RM; Rainadevi Chhahara RM; Tinau RM; Mathagadi RM; Nimdi RM; Bardaghat UM; Sunwal UM; Ramgram UM; Palinandan RM; Sarawol RM; Pratapur RM; Susta RM; Bevdaha UM; Butwal SM; Sainnamainna UM; Kanchan RM; Gaidahawa RM; Suddhodhan RM; Siyari RM; Tilotama UM; Omsatiya RM; Rohini RM; Siddharthanagar UM; Mayadevi RM; Lumbini Sanskritik UM; Bannganga UM; Buddhabhumi UM; Shivaraj UM; Bijayanagar RM; Krishnanagar UM; Maharajganj UM; Yashodhara RM; Shuddhodhan RM; Bangalachuli RM; Ghorahi SM; Tulsipur SM; Shantinagar RM; Babai RM; Dangisharan RM; Lamahi UM; Rapti RM; Kohalpur UM; Baijnath RM; Khajura RM; Janaki RM; Nepaljung SM; Duduwa RM; Thakurbaba UM; Geruwa RM; Badhaiyatal RM (90) 6. Karnali Soru RM; Patarasi RM; Kankasundari RM; Sinja RM; Guthichaur RM; Hima RM; Narharinath RM; Khadachakra UM; Tilagufa UM; Mahabai RM; Shubh Kalika RM; Narayan UM; Dungeswor RM; Sanibheri RM; Baafikot RM; Musikot UM; Triveni RM; Chaurjahari UM; Chingad RM; Lekbesi UM; Gurbhakot UM; Bheriganga UM (22) 7. Sudurpashchim Himali RM; Gaumul RM; Budhinanda UM; Swamikartik Kaapar RM; Jagannath RM; Badimalika UM; Kjapada Chededaha RM; Budiganga UM; Tribeni UM; Kanda RM; Shurma RM; Talakot RM; Masta RM; Jataprithvi UM; Chhabispathibheri RM; Durgathali RM; Kedarsiu RM; Bithdachir RM; Thalara RM; Kaptadchhatra RM; Mahakali UM; Naugaad RM; Apihimal RM; Marma RM; Shailyashikhar UM; Dogadakedar RM; Purchaudi UM; Sunarya RM; Dasarathchand UM; Shivanath RM; Melauli UM; Patan UM; Sigaas RM; Navadurga RM; Amargadi UM; Ajaymeru RM; Bhageshwor RM; Parshuram UM; Aalitaal RM; Ganyapadhura RM; Purbachauki RM; Sayal RM; Shikhar UM; Dipayal Silgadi UM; KIC RM; Bogatan Phudsil RM; Badikedar RM; Jorayal RM; Panchadewal Binayak UM; Melakh RM; Safebagar UM; Chaurpati RM; Mangalsen UM; Bannigadi Jayagud RM; Kamalbazzar UM; Dhurmakhand RM; Gauriganga UM; Ghodaghodi UM; Bardgoria RM; Lamikchuha UM; Janaki RM; Joshipur RM; Tikapur UM; Kailari RM; Dhangadi SM; Shuklaphat UM; Bedhkot UM; Bhimdatta UM; Punarbas UM; Belauri UM; Beldadai RM (71) Note: RM = Rural Municipality; UM = Urban Municipality; SM = Sub-Metropolitan; Metro = Metropolitan City Nepal Fiscal Federalism Update, May 2024 | 51 &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ Annexes ;ƉĞƌĐĞŶƚŽĨ>'ƐͿ ϲϳ ϳϬ ϲϬ ϱϬ ϰϬ ϯϯ ϯϯ ϯϴ Annex 3a. ϯϬ ϮϬ Macro-Fiscal ϭϯ ϭϲ ϭϰ ϭϬ Statistics ϭϲ ϭϭ for ϭϯ ϭϲ ϭϭ Provinces (Figures A1–A7) ϭϬ Ϭ Ϭ Ϭ Ϭ Figure A1. Macro-fiscal statistics for Koshi DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ DĞƚƌŽ hƌďĂŶ hƌďĂŶ hƌďĂŶ ZƵƌĂů hƌďĂŶ ZƵƌĂů ZƵƌĂů ZƵƌĂů ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ^ƵďͲŵĞƚƌŽ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &ŝŐϯ͘ϭϲď ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϲ &zϮϬϮϬ &zϮϬϮϭ &zϮϬϮϮ &zϮϬϮϯ ϱ Figure A1.a. Contribution of components to overall Figure ϰ A1.b. Fiscal balance and opening and cash ϯ EEy real GDP growth bank balance Ϯ &ŝŐϭď ϭ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &ŝŐϭĂ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ Ϭ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ Ͳϭ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϲ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ϲ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ ϲ ϱ ϰ Ϯ ϱ ϰ ϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ Ϯ ϯ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ͲϮ Ϯ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ &ŝŐϭď ϭ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϲ Ϭ &ŝŐϭď Ͳϰ ϭ ϱ ϱ Ͳϭ Ϭ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ ϰ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ͳϭ ϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϯ Ϯ Ϯ Source: National Statistics Office and World Bank staff calculations Source: Provincial Budget Speeches and World Bank staff calculations ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &ŝŐϭď ϭ &ŝŐϭĐ ϭ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ Ϭ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ Ͳϭ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϱ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ Figure A1.c. &zϭϵ Components &zϮϬ revenue of&zϮϭ and grants &zϮϮ &zϮϯ Figure ϰ A1.d. Components of expenditure ϱ ϰ ϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϯ ϯ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ &ŝŐϭĐ Ϯ ϭ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ &ŝŐϭĐ ϲ Ϭ ϭ ϱ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϭ ϱ ϰ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ ϯ ϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϯ Ϯ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &ŝŐϭĚ &ŝŐϭĐ ϭ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ ϭ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ Ϭ Ϭϲ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϱ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϲ ϰ ϱ ϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ϰ Source: Source: Provincial Budget Speeches and World Bank staff calculations ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϯ Provincial Budget Speeches and ZĞĐƵƌƌĞŶƚ World Bank staff ĂƉŝƚĂů dŽƚĂů calculations &ŝŐϭĚ ϯ ϭϬϬϭ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ Ϯ &ŝŐϭĚ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ Ϭ ϭ ϴϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϲ Figure ϱ Ϭ A1.e. Budget execution Figure ϲϬ A1.f. Vertical fiscal gap &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ϰ ϰϬ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϭϬϬ Ϯ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϮϬϵϳ &ŝŐϭĚ &ŝŐϭĞ ϴϬ ϭϬϬ ϭ ϵϲ Ϭ ϬϴϬ ϵϱ ϲϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϰ ϲϬ ϰϬ ϵϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ϵϮ ϰϬ &ŝŐϭĞ ϮϬ ϵϭ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϭϬϬ ϮϬ ϵϬ Ϭ &ŝŐϭĞ ϴϵ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &ŝŐϭĨ ϴϬϬ ϴϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϲϬ ϰϬ Source: Provincial Budget Speeches and World Bank staff calculations Source: Provincial Budget Speeches and World Bank staff calculations ϮϬ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ &ŝŐϭĞ Ϭ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϲ ϰ Ϯ Ϭ ͲϮ &ŝŐϮĂ Ͳϰ 52 Ͳϲ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Koshi experienced its lowest GDP growth since FY20 decline in intergovernmental revenue, which includes in FY23. The GDP growth (at basic prices) in Koshi slowed intergovernmental grants and revenue sharing. Although from 5.1 percent in FY22 to 2.4 percent in FY23 (Figure expenditure also declined, primarily due to lower capital A1a). This slowdown reflects a decline in wholesale and and recurrent expenditure (Figure A1d), it was less than trade, manufacturing, and construction activities. In FY23, the decrease in revenue. The deficit was financed by the service and agriculture sectors each contributed 43.6 opening cash and bank balances from the previous fiscal and 28.9 percent, respectively, to the province’s GDP. The year (Figure A1b), primarily reflecting unspent revenue province’s share of GDP in the overall national GDP was sharing and fiscal equalization grants. 15.8 percent in FY23, making it the second-largest share The vertical fiscal gap continued to remain large at among all seven provinces. 95 percent. In FY23, close to 5 percent of own spending In FY23, Koshi also experienced its first fiscal deficit (excluding fiscal transfers to local governments) was since FY20. The fiscal deficit stood at 0.2 percent of financed solely by own-source revenue (Figure A1f), the province’s GDP, a decrease from the surplus of 0.4 as intergovernmental revenue constituted close to 95 percent of GDP in FY22 (Figure A1b). This deficit was percent of overall revenue and grants. Capital spending primarily driven by a record low in revenue and grants represented close to two-thirds of Koshi’s own spending (Figure A1c), amounting to 3.4 percent of GDP, due to a and 59 percent of its overall spending. Nepal Fiscal Federalism Update, May 2024 | 53 ϴϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Annexes ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϵϳ ϲ ϵϲ ϵϱ ϰ Figure A2. Macro-fiscal statistics for Madhesh ϵϰ ϵϯ Ϯ ϵϮ Ϭ ϵϭ ͲϮ ϵϬ &ŝŐϮĂ &ŝŐϭĨ ϴϵ Ͳϰ ϴϴ Figure A2.a. &zϭϵ Contribution &zϮϬ of components &zϮϭ &zϮϮ to overall &zϮϯ Figure Ͳϲ A2.b. Fiscal balance and opening and cash &zϮϬ &zϮϭ &zϮϮ &zϮϯ real GDP growth bank balance ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϲ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϱ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϰ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϰ Ϯ ϱ ϯ Ϭ ϰ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϯ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ͲϮ ϯ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ &ŝŐϮĂ Ͳϰ &ŝŐϮď Ϯϭ &ŝŐϮĐ ϱ Ͳϲ ϭϬ ϰ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϭ ϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϯ Provincial Budget Speeches and World Bank staff calculations Source: Source: National Statistics Office and World Bank staff calculations &ŝŐϮĐ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ džƉĞŶĚŝƚƵƌĞ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ Ϭ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ &zϭϵ &zϮϬ &zϮϭ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ &zϮϮ &zϮϯ Figure A2.c. Components of revenue and grants ϱ Figure A2.d. Components of expenditure ϱ ϱ ϰ ϰ ϰ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϯ ϯ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ϮϮ Ϯ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ &ŝŐϮĐ ϭ ϱ ϭ &ŝŐϮď ϱϭ &ŝŐϮĚ Ϭ ϰ Ϭ ϰϬ &zϭϵ &zϭϵ &zϮϬ &zϮϬ &zϮϭ &zϮϭ &zϮϮ &zϮϮ &zϮϯ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϯ ϯ Ϯ Ϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ &ŝŐϮĐ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭ &ŝŐϮĚ ϭ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ϭϬϬ Ϭ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ Ϭ ϱ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϴϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ ϲϬ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϯ Provincial Budget Speeches and World Bank staff calculations Source: Source: ϰϬ Provincial Budget Speeches and World Bank staff calculations ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ Ϯ ϭϬϬ ϮϬ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ ϱϭ &ŝŐϮĞ ϴϬ &ŝŐϮĚ Ϭ ϰϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure A2.e. &zϭϵ Budget execution &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure ϲϬ A2.f. Vertical fiscal gap ϯ ϰϬ Ϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϮϬ &ŝŐϮĚ ϭ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϵϱ ϭϬϬ &ŝŐϮĞ Ϭ Ϭ ϵϰ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϴϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϯ ϲϬ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϵϮ ϰϬ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϭϬϬ ϵϱ ϮϬ ϵϭ ϴϬ &ŝŐϮĨ &ŝŐϮĞ Ϭ ϵϰ ϵϬ ϲϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϯ ϰϬ ϵϮ Source: ϮϬ Provincial Budget Speeches and World Bank staff calculations ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ Source: Provincial Budget Speeches and World Bank staff calculations &ŝŐϮĞ Ϭ ϵϱ ϵϭ &ŝŐϮĨ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϰ ϵϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϯ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϵϱϵϮ ϵϰϵϭ &ŝŐϮĨ ϵϯϵϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϮ 54 ϵϭ &ŝŐϮĨ ϵϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ In FY23, Madhesh witnessed its weakest GDP growth equally contributed to the narrowing of fiscal surplus. since FY20, with its GDP growth rate declining from Revenue and grants declined owing to the lower 4.2 percent in FY22 to 1.9 percent (Figure A2a). This intergovernmental grants and revenue sharing (Figure deceleration is attributed to a downturn in wholesale A2c). In contrast, expenditure increased, driven by higher and trade, manufacturing, and construction activities. capital expenditure (Figure A2d). The service and agriculture sectors contributed 46.4 and The vertical fiscal gap persisted at a significant 92 30.6 percent, respectively, to the province’s GDP in FY23. percent. In FY23, nearly 8 percent of Madhesh’s own Moreover, Madhesh accounted for 13.1 percent of the spending (excluding fiscal transfers to local governments) national GDP, securing the fourth-largest share among relied solely on own-source revenue (Figure A2f), with the seven provinces. intergovernmental revenue making up over 90 percent In contrast to the other six provinces, Madhesh saw of total revenue and grants. Capital spending accounted a fiscal surplus in FY23. However, the surplus was the for over 70 percent of Madhesh’s own spending and 60 lowest since FY19, at 0.2 percent of GDP (Figure A2b). percent of its total expenditure. Lower revenue and grants and higher expenditure Nepal Fiscal Federalism Update, May 2024 | 55 ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ Annexes ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϴ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ϲ ϰ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϴ Ϯ Figure ϲ A3. Macro-fiscal statistics for Bagmati Ϭ ϰ ͲϮ Ϯ &ŝŐϯĂ Ͳϰ Ϭ Ͳϲ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure ͲϮ A3.a. Contribution of components to overall Figure A3.b. Fiscal balance and opening and cash Ͳϰ &ŝŐϯĂ real GDP growth bank balance Ͳϲ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϴ ϯ͘Ϭ ϲ Ϯ͘ϱ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϰ Ϯ͘Ϭ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ Ϯ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϭ͘ϱ ϯ͘Ϭ Ϭ ϭ͘Ϭ Ϯ͘ϱ Ϭ͘ϱ ͲϮ Ϯ͘Ϭ Ϭ͘Ϭ &ŝŐϯĂ Ͳϰ &ŝŐϯď ϭ͘ϱ ͲϬ͘ϱ Ͳϲ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭ͘Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϬ &zϮϭ &zϮϮ &zϮϯ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ Ϭ͘ϱ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ Ϭ͘Ϭ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ &ŝŐϯď Source: ͲϬ͘ϱ National Statistics Office and World Bank staff calculations Source: Provincial Budget Speeches and World Bank staff calculations Ϯ͘ϱ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϯ͘Ϭ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭ͘ϱ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ Figure A3.c. Components of revenue &ŝƐĐĂůďĂůĂŶĐĞ and grants KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ Fgiure A3.d. Components of expenditure ϭ͘Ϭ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϯ͘Ϭ ϯ͘Ϭ Ϭ͘ϱ Ϯ͘ϱ &ŝŐϯĚ Ϯ͘ϱ Ϭ͘Ϭ Ϯ͘Ϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭ͘ϱ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ Ϯ͘Ϭ &zϭϵ &zϮϬ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ &zϮϭ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ &zϮϮ &zϮϯ ϭ͘Ϭ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϭ͘ϱ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ ϯ͘Ϭ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ Ϭ͘ϱ ϭ͘Ϭ Ϯ͘ϱ Ϯ͘ϱ Ϭ͘Ϭ Ϭ͘ϱ &ŝŐϯď &ŝŐϯĐ Ϯ͘Ϭ Ϯ͘Ϭ ͲϬ͘ϱ Ϭ͘Ϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ϭ͘ϱ ϭ͘ϱ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϬ &zϭϵ ZĞĐƵƌƌĞŶƚ &zϮϭ &zϮϮ dŽƚĂů &zϮϯ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ĂƉŝƚĂů ϭ͘Ϭ ϭϬϬ ϭ͘Ϭ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ Ϭ͘ϱ Ϭ͘ϱ Ϯ͘ϱ &ŝŐϯĚ ϴϬ &ŝŐϯĐ Ϭ͘Ϭ Ϭ͘Ϭ Ϯ͘Ϭ ϲϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭ͘ϱ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϰϬ ϭ͘Ϭ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Source: Provincial Budget Speeches and World Bank staff calculations Source: ϮϬ Provincial Budget Speeches and World Bank staff calculations ϯ͘Ϭ Ϭ͘ϱ &ŝŐϯĞ &ŝŐϯĚ Ϯ͘ϱ Ϭ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ Ϭ͘Ϭ Ϯ͘Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵZĞĐƵƌƌĞŶƚ&zϮϬ &zϮϭ ĂƉŝƚĂů &zϮϮdŽƚĂů &zϮϯ ϭ͘ϱ ϭϬϬ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭ͘Ϭ A3.e. Budget execution Figure Figure ϴϬ A3.f. Vertical fiscal gap Ϭ͘ϱ &ŝŐϯĐ ϲϬ Ϭ͘Ϭ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰϬ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϭϬϬ ϭϬϬ ϮϬ ϵϱ &ŝŐϯĞ ϵϬ ϴϬ Ϭ ϴϱ ϴϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϲϬ ϳϱ ϰϬ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϳϬ ϲϱ ϮϬ ϲϬ &ŝŐϯĞ &ŝŐϯĨ ϱϱ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ Ϭ ϱϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϭϬϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϱ ϵϬ Source: Provincial Budget Speeches and World Bank staff calculations ϴϱ Provincial Budget Speeches and World Bank staff calculations Source: ϴϬ ϳϱ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϳϬ ϲϱ ϭϬϬ ϲϬ ϵϱ &ŝŐϯĨ ϱϱ ϵϬ ϱϬ ϴϱ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϴϬ ϳϱ ϳϬ ϲϱ ϲϬ &ŝŐϯĨ ϱϱ ϱϬ 56 &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Similar to other provinces, in FY23, Bagmati also by a decline in revenue and grants resulting from lower experienced its lowest growth since FY20 (Figure A3a). intergovernmental revenue (Figure A3c). However, Real GDP growth declined by 4.2 percentage points to expenditure increased, mainly due to a rise in capital 1.8 percent in FY23, marking the largest decline among expenditure (Figure A3d). The deficit was financed by all provinces. The slowdown in wholesale and trade, opening cash and bank balances from the previous fiscal manufacturing, and construction activities primarily year. contributed to this lower pace of growth. Services The vertical fiscal gap of Bagmati remained the lowest constituted more than two-thirds of the province’s GDP among all of the provinces. In FY23, nearly 15 percent in FY23, with close to one-fourth of the nation’s services of Bagmati’s own spending (excluding fiscal transfers GDP. Consequently, Bagmati’s GDP accounted for close to local governments) relied solely on own-source to 37 percent of the national GDP, establishing it as the revenue (Figure A3f), with intergovernmental revenue province with the largest share of national GDP. constituting over 86 percent of total revenue and grants, Bagmati’s fiscal balance shifted into deficit for the the lowest proportion among all provinces. Capital first time since FY19. The deficit amounted to 0.3 spending accounted for over 70 percent of Bagmati’s percent of GDP in FY23 (Figure A3b), primarily driven own spending and 61 percent of its total expenditure. Nepal Fiscal Federalism Update, May 2024 | 57 ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ Annexes ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϴ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ϲ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϴ ϰ Figure ϲ A4. Macro-fiscal statistics for Gandaki Ϯ &ŝŐϰĂ Ϭ ϰ ͲϮ Ϯ Ͳϰ &ŝŐϰĂ Ϭ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure ͲϮ A4.a. Contribution of components to overall Figure A4.b. Fiscal balance and opening and cash real Ͳϰ GDP growth bank balance &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ϴ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϴ ϲ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϲ ϰ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ Ϯ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϰ ϴ &ŝŐϰĂ Ϭ Ϯ ϲ ͲϮ Ϭ ϰ &ŝŐϰď ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ͳϰ ͲϮ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϯ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ϳ Ϭ Source: National Statistics Office and World Bank staff calculations ϲ Provincial Budget Speeches and World Bank staff calculations Source: &ŝŐϰď ͲϮ ϱ &zϭϵ &zϮϬ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϮϭ &zϮϮ &zϮϯ ϰ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ϯ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ Figure ϴ A4.c. Components of revenue and grants &ŝŐϰĚ Figure Ϯ ϴ A4.d. Components of expenditure ϭ ϲ Ϭϲ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϰ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ Ϯ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ϴ &ŝŐϰĐ ϳϮ Ϭ ϲ ϲ Ϭ &ŝŐϰď ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ϱ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ͲϮ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ &zϭϵ &zϮϬ &zϮϭ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ &zϮϮ &zϮϯ ϰ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϰ ϭϬϬ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ ϯ Ϯ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ &ŝŐϰĚ Ϯ &ŝŐϰĐ ϳ ϴϬ ϲ ϭ Ϭ ϲϬ Ϭ ϱ &zϭϵ &zϮϬ &zϮϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ ϰϬ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϯ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ &ŝŐϰĚ Ϯ ϴ ϮϬ Source: Provincial Budget Speeches and World Bank staff calculations &ŝŐϰĞ Source: Provincial Budget Speeches and World Bank staff calculations ϭ ϲ Ϭ Ϭ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϭϬϬ &ŝŐϰĐ Figure Ϯ A4.e. Budget execution Figure A4.f. Vertical fiscal gap ϴϬ Ϭ &zϭϵ &zϮϬ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ &zϮϭ &zϮϮ &zϮϯ ϲϬ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϰϬϵϳ ϭϬϬ ϵϲ ϴϬ ϮϬϵϱ &ŝŐϰĞ ϵϰ ϲϬ Ϭ ϵϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϮ ϰϬ ϵϭ ϮϬ ϵϬ &ŝŐϰĞ &ŝŐϰĨ ϴϵ Ϭ ϴϴ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϳ ϵϲ Source: Provincial Budget Speeches and World Bank staff calculations Source: ϵϱ Provincial Budget Speeches and World Bank staff calculations ϵϰ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϵϯ ϵϮ ϵϳ ϵϭ ϵϲ ϵϬ ϵϱ &ŝŐϰĨ ϴϵ ϵϰ ϴϴ ϵϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϮ ϵϭ ϵϬ &ŝŐϰĨ ϴϵ 58 ϴϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Gandaki’s real GDP growth decreased to 3.7 percent Intergovernmental revenue led to a decline in overall in FY23, from 6.1 percent in FY22. The wholesale and revenue and grants (Figure A4c). However, expenditure trade, manufacturing, and construction sub-sectors remained relatively unchanged at 4.9 percent of GDP in were the leading contributors to this pace of growth, FY23 (Figure A4d). The deficit was financed by opening the lowest since FY20 (Figure A4a). The services sector cash and bank balances from the previous fiscal year. contributed close to 50 percent of the province’s GDP, Lower own source revenue led to a continuous and its GDP accounted for less than 10 percent of the elevated vertical fiscal gap. In FY23, nearly 5 percent national GDP in FY23. of Gandaki’s own spending (excluding fiscal transfers to Gandaki registered its second fiscal deficit in less local governments) was covered by solely by own-source than 3 years in FY23. The deficit stood at 0.3 percent of revenue (Figure A4f), with intergovernmental revenue GDP, a shift from the surplus of 1.1 percent of its GDP in making up close to 94 percent of total revenue and grants. FY22 (Figure A4b), and is due to the decline in revenue Capital spending comprised over 70 percent of Gandaki’s and grants by more than 1.3 percentage points of its GDP. own spending and 65 percent of its total expenditure. Nepal Fiscal Federalism Update, May 2024 | 59 Annexes ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϲ ϰ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ Figure A5. Macro-fiscal ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ statistics ^ĞƌǀŝĐĞƐ for Lumbini 'WĂƚďĂƐŝĐƉƌŝĐĞƐ Ϯ ϲ Ϭ &ŝŐϱĂ ϰ ͲϮ Ϯ Ͳϰ Figure A5.a. Contribution of components to overall Figure A5.b. &zϮϬ Fiscal balance &zϮϭ and opening &zϮϮ cash and&zϮϯ Ϭ &ŝŐϱĂ real GDP growth bank balance ͲϮ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ͳϰ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ&zϮϮ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &zϮϬ &zϮϭ &zϮϯ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϲ ϲ ϰ ϱ ϰ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϯ ϯ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ Ϭ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ Ϯ &ŝŐϱĂ ϲ &ŝŐϱď ϭ ͲϮ ϱ Ϭ ϰ Ͳϰ Ͳϭ ϯ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϮϯ Ϯ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ &ŝŐϱď ϭ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ Source: National Statistics Office and World Bank staff calculations Source: Provincial Budget Speeches and World Bank staff calculations Ϭ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϲ Ͳϭ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ϱ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϭϵ &ŝƐĐĂůďĂůĂŶĐĞ &zϮϬ &zϮϮ &zϮϯ &zϮϭ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϰ ϲ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϯϲ Figure ϱ A5.c. Components of revenue and grants Figure Ϯ A5.d. Components of expenditure ϰ ϱ &ŝŐϱĚ ϭ ϯ ϰ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϯ ϯ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &ŝŐϱď ϭ Ϯ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϲ Ϭ &ŝŐϱĐ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ϭ Ͳϭ ϲ ϱ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϱ ϰ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ϯ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ ϯ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Ϯ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ϭϬϬϮ &ŝŐϱĐ ϲ ϭ &ŝŐϱĚ ϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϴϬ ϱ Ϭ Ϭ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϰ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϲϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϲϯ ϰϬ Ϯ ϱ &ŝŐϱĚ Source: ϭ Provincial Budget Speeches and World Bank staff calculations ϰ Source: ϮϬ Provincial Budget Speeches and World Bank staff calculations Ϭ ϯ &ŝŐϱĞ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϯ &zϭϵ ZĞĐƵƌƌĞŶƚ&zϮϬ ĂƉŝƚĂů &zϮϭ &zϮϮ dŽƚĂů &zϮϯ &ŝŐϱĐ ϭ ϭϬϬ Figure A5.e. Budget execution Figure A5.f. Vertical fiscal gap Ϭ ϴϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ϲϬ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϵϱ ϰϬ ϭϬϬ ϵϰ ϮϬ ϴϬ &ŝŐϱĞ ϵϯ Ϭ ϲϬ ϵϮ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰϬ ϵϭ ϮϬ ϵϬ &ŝŐϱĨ &ŝŐϱĞ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ Ϭ ϴϵ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϱ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϰ Source: Provincial Budget Speeches and World Bank staff calculations ϵϯProvincial Budget Speeches and World Bank staff calculations Source: ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϵϮ ϵϱ ϵϭ ϵϰ ϵϬ &ŝŐϱĨ ϵϯ ϴϵ ϵϮ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϭ ϵϬ &ŝŐϱĨ ϴϵ 60 &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Lumbini’s economy slowed down in FY23, decline. Government spending also decreased, albeit experiencing its weakest growth since FY20. Real less than revenue, owing to reductions in both recurrent GDP growth dropped from 4.6 percent in FY22 to 2.2 and capital expenditure (Figure A5d). The deficit was percent in FY23, reflecting a slowdown in wholesale and financed by opening cash and bank balances from the retail trade, manufacturing, and construction (Figure previous fiscal year. A5a). The service and agriculture sectors contributed Similar to other provinces, Lumbini’s vertical fiscal close to 42 and 32 percent of its GDP, and its share of gap remained high at more than 90 percent. In FY23, national GDP was 14.2 percent in FY23 – the third largest only about 5 percent of its own spending (excluding among all the provinces. transfers to local governments) came from its own Following a surplus in FY22, Lumbini experienced revenue sources (Figure A5f). Over 93 percent of its overall a fiscal deficit of 0.4 percent of GDP in FY23 (Figure revenue came from federal transfers and grants. Capital A5b). This shift was attributed to a decrease in revenue expenditure make up a significant portion of Lumbini’s and grants by more than 0.9 percentage points (Figure spending – nearly two-thirds of its own spending and 59 A5c), with intergovernmental revenue leading the percent of its total spending. Nepal Fiscal Federalism Update, May 2024 | 61 ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ Annexes ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϲ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ϱ ϰ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϲ ϯ Figure ϱ A6. Macro-fiscal statistics for Karnali Ϯ ϭ ϰ &ŝŐϲĂ Ϭ ϯ Ͳϭ Ϯ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure ϭ A6.a. Contribution of components to overall Figure A6.b. Fiscal balance and opening and cash &ŝŐϲĂ Ϭ real GDP growth bank balance Ͳϭ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϲ ϭϲ ϱ ϭϰ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭϮ ϰ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ϭϬ ϯ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϴ ϭϲ Ϯ ϲ ϭϰ ϰ ϭ ϭϮ Ϯ &ŝŐϲĂ Ϭ &ŝŐϲď Ϭ ϭϬ Ͳϭϴ ͲϮ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϲ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ϰ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ Ϯ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ Source: Ϭ National Statistics Office and World Bank staff calculations Source: ϭϰ Provincial Budget Speeches and World Bank staff calculations &ŝŐϲď ͲϮ ϭϮ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭϬ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ϴ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϲ Figure ϭϲ A6.c. Components of revenue and grants Figure A6.d. Components of expenditure ϮϬ ϭϰ ϰ ϭϮ Ϯ ϭϱ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭϬ &ŝŐϲĚ Ϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϴ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϭϬ &zϭϵ &zϮϬ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ &zϮϭ &zϮϮ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ&zϮϯ ϲ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ ϮϬϰ ϱ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ϭϰ Ϯ &ŝŐϲĐ ϭϮ Ϭ &ŝŐϲď ϭϱϬ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϭϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ͲϮ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ϭϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϴ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ϲ ϱϭϰ ϴϬ ϰ ϭϮ Ϯ &ŝŐϲĐ Ϭ ϲϬ ϭϬ &ŝŐϲĚ Ϭ &zϭϵ &zϮϬ &zϮϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϮϮ &zϮϯ ϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϰϬ ϲ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϮϬ ϰ Source:ϮProvincial Budget Speeches and World Bank staff calculations &ŝŐϲĞ Source: ϮϬ Provincial Budget Speeches and World Bank staff calculations &ŝŐϲĚ ϭϱ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ Ϭ ϭϬ &zϭϵ ZĞĐƵƌƌĞŶƚ&zϮϬ &zϮϭ ĂƉŝƚĂů &zϮϮ dŽƚĂů &zϮϯ Figure ϱ A6.e. Budget execution ϴϬ A6.f. Vertical fiscal gap Figure &ŝŐϲĐ Ϭ ϲϬ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϰϬ ϭϬϬ ϴϬ &ŝŐϲĞ ϵϵ ϮϬ ϲϬ ϵϴ Ϭ ϰϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϳ &ŝŐϲĞ ϮϬ ϵϲ &ŝŐϲĨ Ϭ ϵϱ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϭϬϬ ϵϵ Source: Provincial Budget Speeches and World Bank staff calculations Source: Provincial Budget Speeches and World Bank staff calculations ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϵϴ ϭϬϬ ϵϳ ϵϵ ϵϲ &ŝŐϲĨ ϵϴ ϵϱ ϵϳ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϲ &ŝŐϲĨ ϵϱ 62 &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Karnali, which avoided contraction during the decrease in expenditure of 1.8 percentage points of GDP COVID-19 pandemic in FY20, also experienced a (Figures A6c and A6d). The decrease in revenue and growth slowdown in FY23 (Figure A6a). Real GDP grants was attributed to lower fiscal transfers from the growth decreased to 2.2 percent in FY23 from 4.9 percent federal government, while the reduction in expenditure in FY22, primarily due to a slowdown in wholesale and was primarily due to lower capital spending. The deficit retail trade, construction, and agriculture. The service was financed by opening cash and bank balances from and agriculture sectors contributed close to 48 and the previous fiscal year. 28 percent, respectively, to its GDP. However, its share The lower own-source revenue resulted in the of national GDP was at 4.1 percent in FY23, the lowest second-highest vertical fiscal gap among all provinces among all of the provinces. in FY23 (Figure A6f). Own-source revenue financed just Karnali experienced a fiscal deficit of 0.5 percent of 3 percent of Karnali’s own spending. Over 97 percent GDP in FY23, a shift from the surplus of 0.6 percent of its overall revenue came from federal transfers and of GDP in FY22 (Figure A6b). The deficit was driven grants. Capital expenditure make up a significant portion by a decline in revenue and grants, amounting to 2.9 of Karnali’s spending – more than two-thirds of its own percentage points of GDP, which more than offset the spending and 57 percent of its total spending. Nepal Fiscal Federalism Update, May 2024 | 63 ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ Annexes ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ ϱ ϰ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ϯ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ Ϯ Figure ϱ A7. Macro-fiscal statistics for Sudurpashchim ϭ ϰ Ϭ ϯ Ͳϭ Ϯ &ŝŐϳĂ ͲϮ ϭ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure Ϭ A7.a. Contribution of components to overall Figure A7.b. Fiscal balance and opening and cash realͲϭGDP growth bank balance &ŝŐϳĂ ͲϮ &zϮϬ &zϮϭ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽ'WŐƌŽǁƚŚ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ &zϮϮ &zϮϯ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ 'WĂƚďĂƐŝĐƉƌŝĐĞƐ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϱ ϭϬ ϰ ϴ ϯ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϲ Ϯ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ϰ ϭ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϭϬ Ϯ Ϭ ϴ Ͳϭ Ϭ &ŝŐϳď &ŝŐϳĂ ϲ ͲϮ ͲϮ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ Ϯ Source: National Statistics Office and World Bank staff calculations Source: Provincial Budget Speeches and World Bank staff calculations Ϭ &ŝŐϳď ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ͲϮ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϭϵ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ &zϮϬ &zϮϭ džƉĞŶĚŝƚƵƌĞ &zϮϮ &zϮϯ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ dŽƚĂůƌĞǀĞŶƵĞ ϭϬ Figure A7.c. Components of revenue and grants Figure ϴϭϬ A7.d. Components of expenditure ϴ ϴ ϲ ϲ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϲ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϰ ϰ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϰ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ Ϯ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ Ϯ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ϭϬ Ϯ Ϭ &ŝŐϳĐ ϴ ϬϬ &ŝŐϳď ϴ &ŝŐϳĚ ͲϮ ϲ &zϭϵ &zϭϵ &zϮϬ &zϮϬ &zϮϭ &zϮϭ &zϮϮ &zϮϮ &zϮϯ &zϮϯ ϲ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϰ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ tĂŐĞƐĂŶĚĐŽŵƉĞŶƐĂƚŝŽŶ 'ŽŽĚƐĂŶĚƐĞƌǀŝĐĞƐ Ϯ Ϯ ƵƌƌĞŶƚƚƌĂŶƐĨĞƌƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů &ŝŐϳĐ ϴϬ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ Ϭ Ϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϴ &ŝŐϳĚ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ &zϮϮ &zϮϭ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ &zϮϯ ϲϬ ϲ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚƐ dŽƚĂůƌĞǀĞŶƵĞ ϭϬ ϰ Provincial Budget Speeches and World Bank staff calculations ϰϬ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ Source: Source: Provincial Budget Speeches and World Bank staff calculations ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϴ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Ϯ ϮϬ ϴϬ ϲ Ϭ ϰ &ŝŐϳĞ &ŝŐϳĚ Ϭ ϲϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Figure Ϯ A7.e. Budget execution Figure A7.f. &zϮϬ fiscal &zϮϭ gap &zϭϵ Vertical &zϮϮ &zϮϯ &ŝŐϳĐ Ϭ ϰϬ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϮϬ ϵϵ ϴϬ &ŝŐϳĞ Ϭ ϵϴ ϲϬ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϰϬ ϵϳ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϮϬ ϵϵ ϵϲ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &ŝŐϳĨ &ŝŐϳĞ ϵϴ ϵϱ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϵϳ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Source: Provincial Budget Speeches and World Bank staff calculations Source: ϵϲProvincial Budget Speeches and World Bank staff calculations ϵϵ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &ŝŐϳĨ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ Ϭ͘ϳϵϱ ϵϴ Ϭ͘ϲ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϭ͘ϱ ϵϳ Ϭ͘ϰ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ͘ϯ ϵϲ Ϭ͘Ϯ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &ŝŐϳĨ Ϭ͘ϭ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϵϱ Ϭ Ϭ͘ϳ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &ŝŐϴĂ ͲϬ͘ϭ Ϭ͘ϲ Ϭ͘ϱ &zϮϭ &zϮϮ &zϮϯ 64 Ϭ͘ϰ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ͘ϯ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ Ϭ͘Ϯ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ Ϭ͘ϭ Sudurpashchim witnessed a slowdown in real GDP GDP in FY23, attributed to reduced fiscal transfers (Figure growth from 4.3 percent in FY22 to a record low of A7c). Secondly, there was an increase in expenditure of 1.9 percent in FY23 (Figure A7a). Wholesale and retail 0.4 percentage points of GDP, driven by higher capital trade, construction, and manufacturing were the main expenditure (Figure A7d). The province’s deficit was drivers behind this deceleration in growth. The service financed by opening cash and bank balances from the and agriculture sectors contributed approximately previous fiscal year. 46.2 and 29.1 percent, respectively, to its GDP in FY23. Sudurpashchim relies more on federal government Nevertheless, its share of national GDP stood at 7 percent funding than any other province in Nepal (Figure A7f). in FY23, the second lowest among all of the provinces. In FY23, nearly all of its own spending came from federal The fiscal balance turned negative, reaching 0.8 transfers and grants, with almost no money coming from percent of GDP in FY23 primarily due to lower its own sources (only 1 percent). Capital expenditure revenue (Figure A7b). This deficit marked the largest make up a significant portion of Sudurpashchim’s among all of the provinces in FY23 and was influenced spending – more than two-thirds of its own spending and by two factors. Firstly, there was a decline in revenue and 66 percent of its total spending. grants from 7.3 percent of GDP in FY22 to 5.6 percent of Nepal Fiscal Federalism Update, May 2024 | 65 ϮϬ &ŝŐϳĞ Ϭ Annexes &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ Annex ϵϵ 3b. Fiscal Statistics for Four Types of Municipalities (Figures A8–A11) Figure ϵϴ A8. Fiscal statistics for metropolitan cities ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϵϳ dŽƚĂůƌĞǀĞŶƵĞ Ϭ͘ϳ ϵϲ Ϭ͘ϲ &ŝŐϳĨ Ϭ͘ϱ ϵϱ A8.a. Fiscal balance and opening and cash Figure Figure Ϭ͘ϰA8.b. Components of revenue and grants &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϭ͘ϯ &ŝŐϴď bank balance Ϭ͘Ϯ Ϭ͘ϭ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ &zϮϭ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů &zϮϮ &zϮϯ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ dŽƚĂůƌĞǀĞŶƵĞ Ϭ͘ϳ Ϭ͘ϳ Ϭ͘ϲ Ϭ͘ϲ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ͘ϱ Ϭ͘ϱ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ͘ϰ Ϭ͘ϰ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ Ϭ͘ϯ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Ϭ͘ϯ dŽƚĂůƌĞǀĞŶƵĞ &ŝŐϴď Ϭ͘Ϯ Ϭ͘ϲ Ϭ͘ϳ Ϭ͘Ϯ Ϭ͘ϭ Ϭ͘ϭ Ϭ͘ϲ Ϭ͘ϱ Ϭ Ϭ Ϭ͘ϱ &zϮϭ &zϮϮ &zϮϯ Ϭ͘ϰ &ŝŐϴĂ ͲϬ͘ϭ Ϭ͘ϰ &zϮϭ &zϮϮ &zϮϯ Ϭ͘ϯ Ϭ͘ϯ &ŝŐϴď Ϭ͘Ϯ Ϭ͘Ϯ &ŝŐϴĐ Ϭ͘ϭ Source: Ϭ͘ϭ Financial Comptroller General Office, National Statistics Source: Financial Comptroller General Office, National Statistics ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Office, Ϭand World Bank staff calculations and World Office,Ϭ͘Ϭ Bank staff calculations ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů &zϮϭ &zϮϮ &zϮϯ Ϭ͘ϲ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϭ͘ϱ Figure A8.c. Components of expenditure Figure Ϭ͘ϰ A8.d. Vertical fiscal gap Ϭ͘ϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ͘Ϯ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ &ŝŐϴĐ Ϭ͘ϭ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Ϭ͘Ϭ ϴϬ Ϭ͘ϲ ϳϬ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϭ͘ϱ ϲϬ Ϭ͘ϰ ϱϬ ϰϬ Ϭ͘ϯ ϯϬ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ Ϭ͘Ϯ ϮϬ &ŝŐϴĐ Ϭ͘ϭ &ŝŐϴĚ ϴϬ ϭϬ ϳϬ Ϭ Ϭ͘Ϭ ϲϬ &zϮϭ &zϮϮ &zϮϯ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϱϬ ϰϬ ϯϬ Source: Financial Comptroller General Office, National Statistics Source: Financial Comptroller General Office, National Statistics ϮϬ Office, and World Bank staff calculations &ŝŐϴĚ Office, and World Bank staff calculations ϭϬ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ Ϭ &zϮϭ &zϮϮ &zϮϯ ϴϬ Metropolitan municipalities’ fiscal surplus narrowed expenditure expanded due to increases in both recurrent ϳϬ and ϲϬ remained close to zero percent of GDP in FY23 and capital expenditure. Intergovernmental revenue ϱϬ A8). This was driven by an increase in expenditure (Figure constituted 59.4 percent of overall revenue and grants ϰϬ of 0.08 percentage points of GDP and a decrease in in FY23, leading to the lowest vertical fiscal gap of 60.3 ϯϬ revenue ϮϬ and grants of 0.05 percentage points of GDP. percent among all municipality types. Capital spending &ŝŐϴĚ Revenue ϭϬ declined due to lower revenue sharing, while contributed to 44.4 percent of overall spending. Ϭ &zϮϭ &zϮϮ &zϮϯ 66 ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ Ϭ͘ϱ Ϭ͘ϰ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Figure A9. Fiscal statistics ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ &ŝƐĐĂůďĂůĂŶĐĞ for sub-metropolitan džƉĞŶĚŝƚƵƌĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ Ϭ͘ϯ cities Ϭ͘Ϯ Ϭ͘ϱ &ŝŐϵĂ Ϭ͘ϭ Ϭ͘ϰ Ϭ Figure Ϭ͘ϯ A9.a. Fiscal balance and opening and cash Figure ͲϬ͘ϭ A9.b. of revenue and&zϮϯ Components &zϮϮ &zϮϭ grants Ϭ͘Ϯ balance bank &ŝŐϵĂ Ϭ͘ϭ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů &zϮϭ &ŝƐĐĂůďĂůĂŶĐĞ &zϮϯ &zϮϮ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ͲϬ͘ϭ dŽƚĂůƌĞǀĞŶƵĞ Ϭ͘ϱ Ϭ͘ϱ Ϭ͘ϰ Ϭ͘ϰ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ͘ϯ Ϭ͘ϯ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů Ϭ͘Ϯ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ Ϭ͘Ϯ dŽƚĂůƌĞǀĞŶƵĞ &ŝŐϵĂ Ϭ͘ϭ Ϭ͘ϭ Ϭ͘ϱ Ϭ &/Őϵď Ϭ͘ϰ Ϭ &zϮϭ &zϮϮ &zϮϯ &zϮϭ &zϮϮ &zϮϯ ͲϬ͘ϭ Ϭ͘ϯ Ϭ͘Ϯ Source: Financial Comptroller General Office, National Statistics Source: Financial Comptroller General Office, National Statistics ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ͘ϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Office, and World Bank staff calculations Office, and World Bank staff calculations &/Őϵď /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Ϭ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ Ϭ͘ϰ dŽƚĂůƌĞǀĞŶƵĞ &zϮϭ &zϮϮ &zϮϯ Ϭ͘ϱ Figure A9.c. Components of expenditure Figure Ϭ͘ϯ A9.d. Vertical fiscal gap Ϭ͘ϰ Ϭ͘Ϯ Ϭ͘ϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ Ϭ͘Ϯ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Ϭ͘ϭ Ϭ͘ϰ ϴϳ Ϭ͘ϭ &ŝŐϵĐ ϴϲ Ϭ͘Ϭ &/Őϵď Ϭ͘ϯ Ϭ &zϮϬ &zϮϭ &zϮϮ &zϮϯ ϴϱ &zϮϭ &zϮϮ &zϮϯ Ϭ͘Ϯ ϴϰ ϴϯ Ϭ͘ϭ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϴϮ &ŝŐϵĐ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů &ŝŐϵĚ Ϭ͘Ϭ ϴϭ Ϭ͘ϰ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϭ &zϮϮ &zϮϯ Ϭ͘ϯ Source: Financial Comptroller General Office, National Statistics Source: Financial Comptroller General Office, National Statistics Ϭ͘Ϯ and World Bank staff calculations Office, Office, and World Bank staff calculations ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ͘ϭ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &ŝŐϵĐ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ Ϭ͘Ϭ ϱ Sub-metropolitan &zϮϬ municipalities’ &zϮϭ &zϮϮ fiscal&zϮϯbalance relied ϰ heavily on transfers and grants from federal remained unchanged, at close to zero percent of andϯ provincial governments, with intergovernmental GDP in FY23 (Figure A9). This stability was attributed revenue Ϯ constituting 84.8 percent of overall revenue to the decrease in revenue and grants being offset by andϭ grants in FY23. This dependence on fiscal transfers the decrease in expenditure. Revenue fell due to lower &ŝŐϭϬĂ contributed Ϭ to a significant vertical fiscal gap of 85.9 &zϮϭ &zϮϮ &zϮϯ revenue sharing, while expenditure contracted due to percent. Ͳϭ Capital spending contributed to 45.3 percent a decline in capital spending. Sub-metropolitan cities of overall spending. ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ dŽƚĂůƌĞǀĞŶƵĞ ϱ ϰ ϯ Ϯ ϭ &ŝŐϭϬď Ϭ &zϮϭ &zϮϮ &zϮϯ Nepal Fiscal Federalism Update, May 2024 | 67 ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϴϳ Annexes ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϴϲ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϴϱ ϱ ϴϰ ϰ Figure ϴϯ A10. Fiscal statistics for urban municipalities ϯ ϴϮ Ϯ &ŝŐϵĚ ϴϭ ϭ &zϮϭ &zϮϮ &zϮϯ &ŝŐϭϬĂ Ϭ Figure A10.a. Fiscal balance and opening and cash Figure A10.b. &zϮϮof revenue and &zϮϭ Components &zϮϯ grants Ͳϭ bank balance ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ dŽƚĂůƌĞǀĞŶƵĞ ϱ ϱ ϰ ϰ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϯ ϯ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Ϯ Ϯϱ ϭ ϭϰ &ŝŐϭϬĂ Ϭ &ŝŐϭϬď Ϭ &zϮϭ &zϮϮ &zϮϯ ϯ &zϮϭ &zϮϮ &zϮϯ Ͳϭ &ŝŐϭϬĐ Ϯ Source: Financial Comptroller General Office, National Statistics ϭ Financial Comptroller General Office, National Statistics Source: ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Office, and World Bank staff calculations Office, Ϭ and World Bank staff calculations /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ &zϮϬ &zϮϭ &zϮϮ &zϮϯ dŽƚĂůƌĞǀĞŶƵĞ Figure ϱ A10.c. Components of expenditure Figure A10.d. Vertical fiscal gap ϰ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϯ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Ϯ ϱ ϵϱ ϭ ϵϰ ϰ ϵϯ &ŝŐϭϬď Ϭ ϵϮ ϯ &zϮϭ &zϮϮ &zϮϯ ϵϭ Ϯ ϵϬ &ŝŐϭϬĐ &ŝŐϭϬĚ ϴϵ ϭ ϴϴ ϴϳ Ϭ ϴϲ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϭ &zϮϮ &zϮϯ Source: Financial Comptroller General Office, National Statistics Office, and World Bank staff calculations Source: Financial Comptroller General Office, National Statistics ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ Office, and World Bank staff calculations ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ ϵϱ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϵϰ ϱ ϵϯ ϵϮ ϰ ϵϭ municipalities experienced a fiscal deficit Urban lessϯ than revenue, resulting in a deficit of 0.2 percent of ϵϬ &ŝŐϭϬĚin FY23, ϴϵ primarily due to lower revenue and grants GDP Ϯ in FY23, compared to a surplus of 0.15 percent of (Figure ϴϴ A10). Revenue and grants decreased by 0.49 &ŝŐϭϭĂ GDP ϭ in FY22. Intergovernmental revenue contributed ϴϳ percentage ϴϲ points of GDP to 3.54 percent of GDP in FY23. to 93.5 Ϭ percent of overall revenue and grants in FY23, &zϮϭ &zϮϮ &zϮϯ This decline &zϮϭ was widespread, &zϮϮ with revenue&zϮϯ sharing, leading Ͳϭ to a vertical fiscal gap of more than 90 percent. intergovernmental grants, and own-source revenue all Capital spending accounted for 37.9 percent of overall decreasing by 0.2, 0.2, and 0.1 percentage points of GDP, spending in FY23. ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ respectively. Although expenditure ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ also decreased, it was džƉĞŶĚŝƚƵƌĞ &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ ϱ ϰ ϯ Ϯ ϭ &ŝŐϭϭĂ Ϭ &zϮϭ &zϮϮ &zϮϯ Ͳϭ 68 ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϵϱ ϵϰ ϵϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϵϮ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů ϵϭ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ dŽƚĂůƌĞǀĞŶƵĞ &ŝŐϭϬĚ Figure A11. Fiscal statistics for rural municipalities ϵϬ ϴϵ ϱ ϴϴ ϰ ϴϳ ϯ ϴϲ &zϮϭ &zϮϮ &zϮϯ Ϯ Figure A11.a. Fiscal balance and opening and cash &ŝŐϭϭď Figure ϭ A11.b. Components of revenue and grants bank balance Ϭ &zϮϭ &zϮϮ &zϮϯ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ džƉĞŶĚŝƚƵƌĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů &ŝƐĐĂůďĂůĂŶĐĞ KƉĞŶŝŶŐĐĂƐŚĂŶĚďĂŶŬďĂůĂŶĐĞ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ ϱ dŽƚĂůƌĞǀĞŶƵĞ ;ĐŽŵƉŽŶĞŶƚƐŽĨƌĞǀĞŶƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϱ ϰ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲƉƌŽǀŝŶĐĞ /ŶƚĞƌŐŽǀĞƌŶŵĞŶƚĂůŐƌĂŶƚͲĨĞĚĞƌĂů ϰ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϯ KǁŶƐŽƵƌĐĞƌĞǀĞŶƵĞ ZĞǀĞŶƵĞƐŚĂƌŝŶŐ dŽƚĂůƌĞǀĞŶƵĞ ϯ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů Ϯϱ ϱ Ϯ ϭϰ &ŝŐϭϭď ϰ &ŝŐϭϭĂ ϭ Ϭϯ Ϭϯ &zϮϭ &zϮϮ &zϮϯ &zϮϭ &zϮϮ &zϮϯ Ͳϭ Ϯ Ϯ &ŝŐϭϭď ϭ &ŝŐϭϭĐ ϭ Source: Ϭ Financial Comptroller General Office, National Statistics Source: Ϭ Financial Comptroller General Office, National Statistics Office, and World&zϮϭ &zϮϮ Bank staff calculations &zϮϯ &zϮϬ Bank staff Office, and World calculations &zϮϭ &zϮϮ &zϮϯ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Figure A11.c. Components of expenditure Figure A11.d. Vertical fiscal ZĞĐƵƌƌĞŶƚ gap ĂƉŝƚĂů dŽƚĂů ϱ ϰ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨĞdžƉĞŶĚŝƚƵƌĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϯ ZĞĐƵƌƌĞŶƚ ĂƉŝƚĂů dŽƚĂů ϭϬϬ ϱ Ϯ ϵϵ ϰ &ŝŐϭϭĐ ϭ ϵϴ ϯ Ϭ ϵϳ ϵϲ &zϮϬ &zϮϭ &zϮϮ &zϮϯ Ϯ ϵϱ &ŝŐϭϭĐ ϭ &ŝŐϭϭĚ ϵϰ Ϭ ϵϯ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϭ &zϮϮ &zϮϯ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ Source: Financial Comptroller General Office, National Statistics ϭϬϬ Financial Comptroller General Office, National Statistics Source: Office, and World Bank staff calculations ϵϵ and World Bank staff calculations Office, ϵϴ ;ǀĞƌƚŝĐĂůĨŝƐĐĂůŐĂƉ͕ƉĞƌĐĞŶƚͿ ϵϳ ϭϬϬ ϵϲ ϵϵ ϵϱ Ruralϵϴ municipalities also encountered a fiscal deficit&ŝŐϭϭĚ decreased, ϵϰ it was insufficient to offset the drop in ϵϳ percent of GDP in FY23, marking a shift from of 0.18 revenue. ϵϯ Similar to sub-metropolitan cities and urban &zϮϭ &zϮϮ &zϮϯ a surplus ϵϲ in FY22 (Figure A11). This change is primarily municipalities, rural municipalities rely heavily on funding &ŝŐϭϭĚ attributed to a decrease in revenue and grants, which ϵϱ from provincial and federal governments, with over 99.4 ϵϰ declined by 0.41 percentage points to 3.61 percent percent of their total revenue and grants originating from ϵϯ of GDP. All sources &zϮϭ of income for these municipalities &zϮϮ &zϮϯ intergovernmental revenue in FY23. This dependence experienced a decline, with fiscal transfers from the contributed to a significant vertical fiscal gap of close to federal government and own-source revenue exhibiting 100 percent. Capital spending accounted for 35.3 percent the most significant decreases. While spending also of overall spending in FY23. Nepal Fiscal Federalism Update, May 2024 | 69 Annexes Annex 4. Complementary Studies on Fiscal Federalism in Nepal Complementary Studies Brief Description World Bank. 2023. Nepal Fiscal Federalism The first edition of the Nepal Fiscal Federalism Update aims Update. Washington, D.C.: World Bank. to provide an update on the progress of fiscal federalism since publication of the Federalism Capacity Needs Assessment (FCNA) in 2019. World Bank. 2017. Nepal Development The Nepal Development Update is a semi-annual assessment of Update: Fiscal Architecture for Federal Nepal. economic performance in Nepal. This edition of the update takes a Washington, D.C.: World Bank. close look at the emerging issues and potential risks in the design of the fiscal architecture for the new federal Nepal. Georgia State University. 2019. Nepal: This report, which is known as the Nepal Federalism Capacity Capacity Needs Assessment for the Need Assessment (FCNA), explores the capacity needs for the Transition to Federalism. Report adoption of federalism covering the federal government, the 7 commissioned by the World Bank and the provinces, and 115 local governments. The assessment focuses United Nations Development Program on organizational, institutional and regulatory capacity, as well as (UNDP). physical infrastructure. World Bank. 2019. Policy Note for the This policy note was prepared based on the findings, analyses, and Federalism Transition in Nepal. Kathmandu: recommendations of the FCNA study. It provides a synthesis of the World Bank. FCNA findings, as well as its forward-looking recommendations in terms of the immediate, medium, and long-term actions that the government could take to fully realize the benefits of implementing federalism in Nepal. World Bank. 2021. Federalism and Public This report provides a comprehensive review of the challenges Expenditure for Human Development in facing Nepal’s human development sectors in the federal context. Nepal. Washington, D.C.: World Bank. World Bank. 2021. Nepal Public Expenditure This review provides an analytical basis to inform reform efforts Review – Fiscal Policy for Sustainable to strengthen federalism and create fiscal space to support the Development. Washington, D.C.: World Bank. new focus on a green, resilient, and inclusive development (GRID) model for Nepal’s development. Ministry of Finance. 2022. Nepal Knowledge This report was prepared based on the learnings from six Exchange Program on Fiscal Federalism: country studies under the World Bank Knowledge Exchange Lessons and Reforms. Kathmandu: Ministry Programme from 2019 to 2022, which identified lessons of Finance. from international experience and the early experiences of implementing fiscal federalism in Nepal. The report covers the four topics of intergovernmental fiscal transfers, provincial and local government performance management and appraisal, public finance management, and taxation. 70 Nepal Fiscal Federalism Update, May 2024 | 71 n C hapter 1  n   Macro-Fiscal Update on Provincial and Local Governments The World Bank Nepal Country Office, P.O. Box 798 Yak and Yeti Hotel Complex Durbar Marg, Kathmandu, Nepal Tel.: 4236000 Email: infonepal@worldbank.org www.worldbank.org/np www.twitter.com/WorldBankNepal www.facebook.com/WorldBankNepal 72