Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Asia-PacificDecember 1 2017

Nepal leaves itself with a federal mountain to climb

Nepal faces parliamentary and inaugural provincial elections at the end of 2017 while being tasked with setting up a new federal system. Ministry of finance officials tell Stefania Palma how the government is coping.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Udaya Shumsher Rana

Udaya Shumsher Rana, finance state minister of Nepal, does not really have time for an interview. He often picks up his phone to coordinate his electoral campaign in Lalitpur district, for which, at the time of writing, he is member of parliament.

Parliamentary and provincial elections, the country's first ever, start on November 26, and see Mr Rana’s party, the Nepali Congress, struggling after the Communist Party of Nepal (CPN)-Maoist Centre and the CPN-Unified Marxist-Leninist party formed an electoral alliance with the promise of merging after the end of elections on December 7. Several Nepali Congress MPs risk losing their seats.

All change

In the midst of this pre-election frenzy, Nepal is also trying to establish a new federal government that will come into full operation after the elections. This system will split Nepal into seven provinces, adding a layer of government between the centre and local administrations. Provincial and local governments will each have their own parliaments and budgets.

It will cost Nepal as much as NRs1000bn ($9.75bn) in the next three years to set up this federal system. The Ministry of Finance is still finalising a payment schedule. But for now, NRs225bn of the NRs1278.99bn budget for fiscal year 2017/18 have been allocated to provincial and local governments. Two-thirds of the NRs225bn have already been transferred to these administrations, and the final NRs75bn tranche will be paid out in March 2018.

But beyond this sum of NRs225bn, it remains unclear how Nepal will meet the system's remaining upfront costs. In 2017/18, the country is already running a NRs461.77bn budget deficit. “Internal revenue will be a major source of financing,” says Baikuntha Aryal, joint secretary of the Ministry of Finance’s international economic cooperation coordination division. But the government will also need external donors’ support.

“The World Bank is willing to coordinate [the] development partners,” adds Mr Aryal. A World Bank delegation travelled to Kathmandu in early November to discuss support for Nepal’s federal system. Other external partners might include the Swiss and Norwegian governments, the UK’s Department for International Development and various UN agencies.

A complex task

Setting up this system will not be easy. “First and foremost, it is the financial resources. It is very difficult for us to manage,” says Mr Aryal of the NRs1000bn estimated cost. Institutional and human resource capacity is a further issue. Provincial governments and most local administrations will need to be created from scratch. Government buildings will need to be built and government officials will need to be recruited or transferred from the centre. But some trade unions have strongly opposed these staff moves. “There is some resistance,” says Mr Aryal.

What is more, there is a risk the central government might be averse to delegating activities to, and sharing resources and tax revenue with, lower levels of government. While the government has set up four types of fund transfer from the centre to lower tier governments, Nepal has yet to finalise a standardised mechanism for these payments. This is crucial, since provincial and local administrations will rely on these transfers, as well as external donors, to generate revenue. Mr Rana says: “What we have to realise [however] is that the province itself also has to generate resources. So this is just a starting [point].” 

A five-member National Natural Resource and Fiscal Commission will assess the provinces’ financial needs and the size of each fund transfer from the centre. But at the time of publication, just two weeks ahead of elections, the commission had still not been set up.

Monitoring expenditure

Nepal also lacks a reporting system to monitor expenditure at the local level. “There is a high risk of fiscal mismanagement so we are trying to tighten the knots. We need to systematise the thing. We should finalise the system [as soon as possible],” says Mr Aryal.

These delays are somewhat indicative of the slow pace and inefficiency associated with Nepalese politics. “There are too many things happening at the same time. If we don’t have elections by [the December constitutional deadline] then the whole process goes kaput. It would move things along if there were a stable government at the centre,” says Mr Rana, who will have been minister for just four months when elections kick off.

Time is up. He quickly excuses himself. He needs to finalise the design for his campaign posters.

Was this article helpful?

Thank you for your feedback!