Decentralisation should match federal system of government

 Kathmandu, Sept. 17: The World Bank Sunday said that as Nepal prepared for an ambitious shift from a unitary to a federal system of government, closer attention should be given to sequencing political, financial and administrative decentralisation.

“Starting in FY 2017/18, a large proportion of federal spending is expected to be passed on to sub-national governments, ultimately increasing public spending,” said the WB’s latest report ‘Nepal Development Update’.

However, it cautioned that unresolved issues surrounding the implementation of the new federal architecture could challenge budget execution, particularly during the next year. 

The government, in the budget of current FY allocated 17.6 per cent of the total budget of Rs. 1.27 trillion for the 744 local units in the country. 

According to Senior Economist at the World Bank Damir Cosic, Nepal’s new fiscal federalism system suggests a marked asymmetry between stronger decentralisation of spending responsibilities and relatively unchanged low decentralisation of tax collection powers. 

“Similar imbalances hold true between regions across the country,” he said. 

The report observed that many functional assignments are ‘shared’ among the three levels of government. A negotiated delineation of devolved responsibilities is critical first steps.

Revenue collection and tax administration remain relatively unchanged and highly centralised, with limited existing tax bases for subnational governments, reads the report. 

“The resulting mismatch between revenue collection and service provision could be corrected through inter-governmental transfers. Having a transparent, evidence-based formula for equilisation among provinces is critical to design an effective depoliticised process,” the report suggested. 

World Bank’s Country Manager for Nepal Takuya Kamata said that the subnational governments would play an increasingly critical role in Nepal’s public expenditures. 

According to him, 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. 

The multilateral development partner appreciated Nepal’s constitution for making adequate provisions for prudent debt management in a decentralised system but maintained that there should be detailed provisions for clear simple yet flexible rules for behaviour of different levels of the government. 

It also said that the creation and deployment of accounting and debt reporting systems should remain critical short-term priorities. 

The World Bank, in its semi-annual assessment of economic performance of the country, said that the economic activities in the country were impacted by severe floods in the Terai. 

“Damaging floods in mid-August are likely to affect agriculture, economic activity and poverty reduction efforts even up to FY 2017/18,” said the report. 

The floods have affected over 5 per cent of the total population, with several districts recording the heaviest rainfall in 60 years and over 80 per cent of land in the Terai was affected. 

“While the estimates of damage remain preliminary, the growth for FY 2017/18 expected to be lower than earlier forecast, averaging 4.5 per cent,” said Sudyumna Dahal, an Economist at the World Bank. 

The WB is hopeful of increased government spending because of the implementation of federalism. 

According to it, with increased government spending due to a transition to new federal structure and earthquake and flood-related spending, the fiscal deficit is expected to widen in the current fiscal to 4.3 per cent of the Gross Domestic Product (GDP). 

It also maintained that the financing was not expected to be a problem given ample fiscal space with a low debt-to-GDP ratio and a large cash balance at hand. 

Nepal’s government debt was 27.40 per cent of the country’s GDP in the FY 2016/17.