Public Expenditure Reforms in Nepal
Introduction
Institutional, technical, and managerial weaknesses in planning, budgeting, and implementation have long hindered Nepal’s economic transformation and prosperity. Resolving these issues is essential. In March 2018, the government, citing financial indiscipline by previous administrations, formed the Public Expenditure Review Commission under economist Dilliraj Khanal to study and recommend ways to make public expenditure efficient, frugal, and result-oriented. The commission submitted a 371-page report after five months, but the government has neither implemented its recommendations nor made it public. This report is particularly relevant post-COVID-19 for rigorous budget reforms.
Balancing Expenditure
Government expenditure has risen sharply relative to GDP, from 22.5% in 2011/12 to 36.1% in 2017/18, a 13.6% increase over five years. Recurrent expenditure grew from 17.3% to 23.2% of GDP, while capital expenditure only increased from 5.2% to 9.0%. Grants (58.7%), salaries and benefits (16%), and social security (13.7%) dominate total expenditure. Continuous increases in mandatory spending, new posts, office expansions, and more ministries have fueled a race to establish institutions across federal, provincial, and local levels.
Structural factors like new laws for constitutional rights, population growth, and migration have increased recurrent expenditure. The inability to project expenditure, lack of allocation standards, ineffective internal controls, and weak audits have failed to curb rising recurrent costs. Expenditure must prioritize utility, productivity, and service delivery quality, distinguishing operational and capital-supporting expenditure. Reforms in institutional, legal, and structural arrangements can keep recurrent expenditure within desired limits.
Abolition and Consolidation of Government Structures
The number of central departments should be reduced to 35 and ministries to 16, with 3-5 divisions per ministry and no more than one secretary based on workload. Unnecessary federal offices should be transferred to provincial and local levels. A detailed analysis of constitutional provisions, legal arrangements, and task delineation for organizational structures and project distribution is needed. Development committees, councils, commissions, and boards should be quantified, abolished if irrelevant, merged if redundant, or transferred to provincial and local levels. Restructuring of the Ministry of Finance, National Planning Commission, National Vigilance Centre, and Public Procurement Monitoring Office is essential, along with capacity enhancement of planning divisions.
Preventing Year-End Expenditure
Capital budget expenditure is significantly lower than projections, with 40-50% spent at fiscal year-end, reducing productivity and quality. Over seven years, actual capital expenditure averaged 73.3% of allocations. Public construction, building construction, land acquisition, machinery, and vehicles consume most capital expenditure. Budgets are included without preparation, and priorities are weak. Pre-budget activities, procurement schedules, and payment processes must be clarified. Monthly procurement and quarterly budget plans should be mandatory. Internal preparations should occur between May 15 and August 1, with procurement processes starting immediately after the fiscal year begins to finalize contracts within 70 days. Daily certified construction records and payments within 15 days of bill submission are needed, along with legal amendments and 3-5 year maintenance contracts.
Control Over Funds
Approximately 56 funds operate under 23 government entities, with a balance of NPR 92.82 billion as of 2016/17. The lack of a fund accounting system is a key issue. The Constitution allows withdrawals only from the Federal Consolidated Fund or other federal funds, prohibiting separate funds. Funds enable flexibility, bypassing parliamentary scrutiny. A fund accounting system based on public accounting standards is needed, with new funds recorded in national accounts. Internal controls, audits, and public procurement laws must apply to fund expenditures.
Restructuring Planning and Budget Agencies
Issues in federal budgeting, expenditure, and financial management persist due to mid-year program additions, weak linkages between sectoral strategies, periodic plans, and budgets, and lack of medium-term expenditure frameworks. Budgets prioritize existing projects, but multi-year project liabilities are not tracked. Budget reallocations exceed the 10% legal limit, reaching 30-50%. Coordination among monitoring agencies is lacking. A functional system requires focus on interrelationships.
Nine Measures for Balanced Expenditure
- Reform laws and structures per federalism, cap recurrent expenditure at a fixed GDP ratio, and institutionalize expenditure projections.
- Enact accountability laws and classify operational expenditure as variable or economic.
- Classify grants for capacity development, productivity, and welfare, and enact a Government Grant Distribution Act.
- Implement a contribution-based pension system for civil servants, police, army, and teachers.
- Adopt result-based and zero-based budgeting for public services like education and health.
- Implement a single treasury account system for provincial and local expenditure tracking.
- Develop an integrated social security policy ensuring subsistence funds, with beneficiary identification and effectiveness measurement.
- Establish objective standards for grants, monitor their impact, and transition annual programs to zero-based budgeting in 4-5 years.
- Increase private and cooperative sector involvement in agriculture, poverty alleviation, and climate change through contract farming.
Penalty and Reward System
Budget implementation can be enhanced through six pillars: expenditure management, public financial and procurement management, private/cooperative/consumer committee capacity development, an enabling implementation environment, and medium-term performance outcomes. Rewards for timely project completion and penalties for delays are needed. Internal audits, agency coordination, and the National Planning Commission’s leadership role are critical.
Accrual Accounting System
Transform the cash-based accounting system to an accrual system within three years. Update and fully implement the computerized government accounting system across all government levels. Establish an internal audit subgroup with a 10-year non-transfer policy. Introduce computer-assisted auditing, and coordinate between the Financial Comptroller General and Auditor General’s offices for IT-based accounting.
Sustainability of Foreign Aid
Prioritize foreign aid for projects enhancing production, productivity, and sustainability. Effective implementation plans, procurement, and progress reviews are needed. Revise financial transfers to avoid double counting, and prepare consolidated income/expenditure statements per IMF standards.
Essential Electronic System
An integrated electronic information system is essential for budget, revenue, expenditure, and fund data. Develop unified software for federal, provincial, and local levels, with donor support channeled through the Ministry of Finance. Regular economic trend monitoring via IT systems is needed.
Impact Assessment of Reforms
Systemic reforms can achieve 9% economic growth in five years and 10.5% in ten years, driven by investment expansion and productivity growth. A favorable environment exists for securing resources while maintaining fiscal stability.
