World Bank suggests legal, institutional reforms to boost fiscal federalism in Nepal

The World Bank (WB) has suggested to Nepal that it ensured legal and institutional reforms for effective enforcement of fiscal federalism.

Releasing a report on ‘Nepal Fiscal Federalism Update, 2023′ in the capital city on Thursday, the WB said the existing structure of concurrent responsibilities on expenditure and service delivery among the three tiers of government provides overlapping mandates to different tiers of government and hinders responsiveness to citizens’ demands.

According to the report, the unclear division of tax responsibilities undermines the materialization of provincial and local governments’ own-source revenue potential. Simplifying the division of tax responsibilities among the three tiers of government would help increase the effectiveness of tax administration, it stressed, adding that there is a need to strengthen institutional capacity and the coordination arrangements between the key federal institutions responsible for fiscal federalism; and of them with the provinces and local governments.

“The intergovernmental fiscal transfer (IGFT) mechanisms need to be revised to make them more effective and introduce more flexibility,” the report stated.

The WB observed that considerable progress was made on sub-national PFM performance. The government has been further suggested to reinforce systems to improve the budget credibility and delivery of services by province and local government (PLGs) by strengthening the alignment of periodic development plans, MTEFs, and annual budgets.

Development of a fiscal federalism roadmap based on relevant government strategies such as the Public Financial Management Strategy (2017) and the Capacity Development Action Plan on Fiscal Federalism (2022); reinforcement of the Intergovernmental Fiscal Transfer system; establishment of consolidated PFM performance database at the federal level to enhance the monitoring and evaluation of the overall performance of public financial management at province and local levels and strengthening of the capacity of PFM human resource to carry out PFM-related functions are other suggestions.

The WB has made a comprehensive review of progress in fiscal federalism in Nepal.

Releasing the report, World Bank Country Director Faris-Hadad Zervos mentioned that provincial and local governments are significant foundations to sustainable service delivery. Both province and local levels must have adequate financial resources and spending capacity, he stressed.