World Bank Cautions Nepal on Its Federal Government System

Nepal will need a transparent fiscal architecture to achieve development goals through its new federal system of government, said the World Bank in its latest release.

“As Nepal prepares for an ambitious shift from a unitary to a federal system of government, closer attention to sequencing political, financial and administrative decentralization will be key,” stated the World Bank in its latest report titled ‘Nepal Development Update’, released on September 17, 2017.

It further said that the country’s new fiscal federalism system is suggesting marked asymmetry between stronger decentralization of spending responsibilities and relatively unchanged low decentralization of tax collection powers. “Similar imbalances hold true between regions across the country,” it added.

According to the World Bank, a large proportion of Nepal’s federal spending would likely be passed on to subnational governments starting from FY 2018. It says such a move would lead to increased public spending in the country.

Commenting on the case, Takuya Kamata, the World Bank’s Country Manager for Nepal said, “The subnational governments will play an increasingly critical role in Nepal’s public expenditures. A system of fiscal transfers that is designed for transparency and predictability and supported by a small set of simple rules could go a long way in helping meet the development objectives of federal Nepal.”

On the other side, the World Bank also cautions that unaddressed issues in the new federal system might challenge the budget execution, especially in the coming fiscal year.

According to the report, recent floods in mid-August have largely impacted the rebounding economic growth of Nepal.

Budget Expenditure, a Perennial Problem in Nepal: World Bank

The latest update pointed at the issues related to Nepal Government’s budget planning.

“More than 60 percent of the capital budget was spent in the last quarter of the fiscal year, while expenditure remained significantly below the planned budget, a perennial problem in Nepal. The era of balanced budgets has ended with the fiscal deficit reaching an estimated 3.3 percent of GDP in FY 2017 and expected to increase going forward as well,” the Nepal Development Update said.

With regard to trade, the report noted that the country’s import growth remains strong, while exports and remittances are expected to remain sluggish.

The World Bank releases the Nepal Development Update twice in a year with a prime focus on the country’s economic development over the preceding months, placing them in a longer-term and global perspective.

This report is for the business community, policymakers, analysts and professionals engaging in economic debates related to the country and the public.