GOVERNMENT BUDGETING IN NEPAL (CENTRAL GOVERNMENT): CONCEPTUAL ANALYSIS WITH IT’S STRENGTH AND WEAKNESS

Background:

The budget is an instrument through which the government controls the entire economy where as budgeting is the process of preparing, negotiating and agreeing a quantifier and specific plan for an organization, normally for a year. The budget has been defined by different writers in various ways. Some of writers are in the view that budget is a statement forecasting revenue and expenditure during a certain period of time. The word 'budget' is derived from French word "Baguette" which means small leather bag of pouch. It was used first in England to describe the white leather bag, which held the seal of medieval Court of Exchequer. Later known 'Budget' contained proposals of financial plan of government expenditure. But word budget has now been used in all countries and in many languages. The term budget is now commonly understood as a government document. In pact it is a proposal of proposed means of financing them for the approval of legislature (Bhandari, 2014).

Budget is also a financial resource that plays a pivotal role in the functioning of the state. Whether a budget is balanced, in surplus or in deficient, directly influences the state's operation. A budget dose not only establishes a linkage with the existing policies but also addresses the demands of citizens. The local level organization, local representatives and parliamentarians have a vital role in advocating for certain programs or projects that meet the needs of their constituencies. Therefore, a budget represents an allocation of resources based on the demands and needs of the citizens (Sigdel, 2014).

Budgeting is important because Market mechanism only cannot perform the functions of the economy. Public policy is needed to guide and supplement to the economic function as a whole. The budget plays vital role to solve the problems like, to secure the condition government interfere is essential, to solve problems of externalities. Support to government policies through market operation, problems of discounting in future, price stability, high unemployment, distribution of income and wealth etc. (Khanal,2013).

Nepal is not new to the concept of budgeting with detailed guidelines, policies and law as in place. Nepal, government plays an important role for the socio-economic development of the country. The issue of significant proportion of the capital expenditure being unspent is indicative of the underutilization of the resources in the country. Budget expenditure has always been a problem with majority of the spending taking place towards the end of the fiscal year. In the developing country like ours private sectors in weak to participate in the economic development. Due to lack of capital and private sectors is not encouraging. By budgetary policy with the means of tax, exercise, customs etc. government can motivate private sector to cope (manage successful) with development activities in developing countries due to very immature stage of private sectors, government has to motivate and give suitable infrastructure for making private sectors active. Then only control and direction becomes the secondary phase of the government to deal with private sector. The budgeting plays a vital role in the mode of economic development of a country. As the world environmental is becoming more and more complex, budgeting has become very important and technical as well (Dahal, 2008).

The origin of the budget is said to have from the French word ?Bougget?which refers a small leather bag or pouch. It was first used in England to describe the white leather bag, which held the seal of Medieval Court of Exchequer. Later known budget contained proposal of financial plan of government expenditure. But word budget has now been used in all countries and in many languages. The term budget is now commonly understood as a government document. In fact, it is a proposal of proposed expenditure for a given period of time and means of financing them for the approval of legislature (Lekhi, 2008).

In general, the background of budget in Nepal defines as “the government annual plan and programs to accomplish national goals and objectives defined by periodic plan that consist: projection of next fiscal revenue collection, projection of next fiscal year government expenditure and actual progress report up to the tenth month of current fiscal year on revenue collection and expenditure” (Acharya, 2009).

National budget is the forecast of annual revenues and expenditures and is reflective of the existing policies and plans of the government. It also represents an allocation of resources based on the demands and needs of citizens. It is therefore prudent to understand the process that is followed to prepare the budget.

What is budget for Nepal?

? Annual breakdown of five-year periodic plan

? Government annual plan and programs to accomplish national goals and objectives defined by periodic plan that consists:

? Projection of next fiscal year revenue collection.

? Projection of next fiscal year government expenditure.

? Actual progress reports up to tenth month of current fiscal year on revenue collection and expenditure.

? Objective: poverty reduction and socio-economic development

In a nutshell, Budget is:

 ü Expenditure plan of an organization or a person (Traditionally, estimates of revenue and expenditure)

ü Future orientation

ü Defined objective

ü Pinpointed in monetary terms

ü The Major objective of the government budget is to maximize “public interest” (of   the people at large)

ü A major tool of fiscal policy

Objectives: realistic, development oriented and informed people about government annual programs and projects.

Historical Background:

Nepal?s has not very old story to tell about the intuition of systematic budgetary system in the country. It has been only six decades after the Rana regime was overthrown in 1951 the first budget was formulated. For convenience, the historical background of budget of Nepal has been divided in three different phases:

Since 1956 Budget formulation started with first five-year plan (1956-61) and presented to parliament annually:

Before 1990 (absolute monarchy under the executive control of the King):

? King- Chairman of National Development Council (NDC).

? People’s participation during budget formulation and implementation almost none

? Parliament accountable for the King.

? Up to the seven periodic plans- budgets were centrally planned and unclear development objectives

? Features: unsustainable one sided development, centrally guided, lack peoples need

? Results: poverty almost 50%, high regional disparity, development concentrated in district headquarters.

After 1991,

? Multiparty democratic system.

? People’s participation encouraged in development plan formulation and implementation.

? Parliament – accountable for people

? NDC- chaired by the Prime Minister (council consists of various development stakeholders from all the regions, class and communities)

? Features: people’s participation on development activities, government plan and budget are more consistent with people’s aspiration and local need, objectives are rural infrastructure development and poverty reduction.

Result: sustainable overall development, lessened regional disparity, rural development, poverty declined to 31% from 50% in 15 years.

(Democratic government tried to make consistency on periodic plan and annual budget formulation, so many reforms have been carried out to improve linkage between them).

Budget reform after democracy:

1.In 2002, Medium Term Expenditure Framework (MTEF):

? Three year rolling budget, link the periodic plan objectives to annual budget’s programs and activities

? Clearly defines priority of proposed programs and projects of the five-year plan that contribute the poverty reduction most.

? Help to formulate development budget, predict government future expenditure

? Updated annually by NPC and MOF

2. 2003/04- the new budget classification system:            

? Classifying recurrent and capital expenditure instead of regular and development expenditure.

? Help development budget formulation more realistic.

3. 2003/04- Immediate Action Plan:

?  Helps to prioritize the development activities into priority 1(P1), priority 2 (P2) and priority 3(P3) listed in the annual budget during budget formulation.

? Improve budget effectiveness at a given resource constraint.

Budget Formulation Process:

Normally, during the past years, the process of budget formulation in Nepal would begin in January and end in July, when the fiscal year starts. However, in line with the provision of the Constitution of Nepal 2015, the new budget cycle has been moved forward and it will now be presented on constitutionally mandated date of 15th Jestha (May 28). This is expected to provide enough time to disburse funds to the implementing agencies, which has for long been a major cause of delay in conducting planned activities.

The first step in formulation of the budget is forecasting, wherein the sources of revenues and tentative areas of expenditures are identified. The process of forecasting is led by a Resource Committee, which is chaired by the Vice Chairperson of National Planning Commission (NPC), and includes other members from NPC, members from the Ministry of Finance (MoF), Central Bank of Nepal, and the Financial Comptroller General’s Office (FCGO). Once the forecast has been prepared, it is presented to the budget committee comprising of the members of the NPC and the MoF. The committee, after thorough discussion sets the budget ceiling, which limits the budget expenditure based on sectors and availability of resources. For instance, initially the budget ceiling set for fiscal year 2074/75 (2017/18) was NRs 909.96 billion rupees (USD 8.52 billion). However, it was after thorough discussion shared that the new ceiling would be around NRs 1 trillion and was so approved. The committee also prepares the working guidelines for budget formulation. Thereafter, each of the line ministries is asked to submit their programs and budget estimates (both capital and recurrent) in accordance to the guidelines and sectoral budget ceilings. The line ministries then forward the guideline along with the budget ceiling and priorities to respective departments and agencies functioning under it, either at the district level or at the central level. Based on the guidelines, these agencies prepare the forthcoming year’s programs and budget and send it back to the concerned departments. The departments compile the programs and budget of all agencies under them and submit it to the respective line Ministries. Some negotiations can take place between the Ministries and the departments before it is vetted and consolidated by the Ministries and forwarded to the MoF and NPC for finalization.

It is also important to look at the process of budget formulation for devolved programs, which are financed by the center but falls under the administrative purview of the District Coordination Committees (DCC). The NPC sends guidelines to DCCs for district level plans and programs. The guideline is passed down to the Village and Town Municipalities, who hold village/town council meetings to discuss and prepare sector-wise development programs and projects. Interest groups such as the consumer committees, NGOs, political leaders, and citizens are included in these discussions. Their plans are then forwarded to the village municipality/municipality where it gets accumulated. Once the village municipality/municipality scrutinizes and gives a green signal to the plan, it moves up to the District Council which re-examines the budget and forwards it to the DCC. The DCCs then hold meetings with district offices and finalizes district budget and priorities, which is then sent to the NPC and the Ministries. While this is the process that should be theoretically followed, it is not necessarily fully operated because of absence of popularly elected officials. As departments are not given a sectoral budget ceiling, they generally do not take expenditure limitations into account; instead they look at project-specific targets as a guide for the budget.

Once the MoF receives the budget from all line ministries, inter-ministerial meetings are held to vet and finalize the national budget. Similarly, the NPC discusses all the programs submitted by the Ministries, and finalizes those programs in consideration of the relevancy, budget allocation, and budget handling capacity of the Ministry. Before the budget is presented in the parliament, the parliamentarians are presented with a draft budget document for them to discuss the sector-wise specifics. The comments and queries that arise during the ministry-specific discussions are discussed in detail until the relevant ministry and parliamentarians are satisfied with the clarifications provided to their queries. The budget is presented by the government only after the ministry level budget discussion ends. If the majority agrees with the budget then it is approved and is presented to the national Parliament in the form of a Budget Speech by the Minister of Finance.

As you can see, the formulation of the national budget is a combination of the top-down and bottom-up approach, which brings about a synergy between the national level plans and local level needs; and ensures that the budget fulfills the demands of both the state and the locals.

The Constitution of Nepal guides the budgetary process (Part 10) that-          

 Finance Minister shall present the estimate of the revenue and expenditure for every fiscal year before the joint meeting of the houses(parliament) (Article 119):

? Estimates of Revenue

? Expenditure (Non –votable amounts): above consolidated fund

? Expenditures from consolidated fund

? Progress of the past year

? Date fixed for budget presentation (Jestha 15)

The budget formulation consists of the four steps or phases, which are also known as budget cycle: -phase

1) Preparation, phase

2) Enactment/Legislation, phase

3) Execution, Phase

4) Auditing

Budget Formulation Process

       (top-down process)

ü Major responsibility of budget formulation  rests on Ministry of Finance(FPA,1999)

ü Budget and Resource Committee at NPC set the following:

ü Macroeconomic Framework

ü Medium Term Expenditure Framework

ü Size of the budget

ü Ministry of Finance set the budget ceiling 

ü Budget ceiling is circulated to the ministries, ministries to departments and departments to spending units

ü Budget Formulation Guidelines 2072 has set the formulation calendar (Starting from November)

Present budget formulation approach:

(Before 1991 mostly top down approach, after democracy both top down and bottom up)

 Top down approach (for central and provincial government):

Role of Different Agencies in Top down Approach:

Budget Formulation Cycle

Bottom up approach (for local government)

Budget Formulation Cycle for Local Government (Bottom up Approach): -

Procedure:

? NPC send guidelines about district level national plans and programs to District Coordination Committee (DCC).

? DCC send circular to each Rural and Town Municipality to prepare their budget and programs for next fiscal year

? Village Municipality and Municipality invite assembly of Village/ Municipal council to discuss and prepare the sector wise development programs and projects through ward offices, NGOs/ consumer committee and send it to district development council.

? DCC organize meeting at district consolidated plan formulation committee with district council and district level offices.

? District Coordination Committee (DCC) finalize and approved district budget and priorities based on participatory approach

? Send final budget to NPC and respective ministries to avoid duplication on centrally formulated plan and programs

Bottom up Process:

Types of Budget:

ü Capital budget: generating capital goods e.g. construction of dams, roads & equipments

ü Recurrent Budget: generally, the administrative costs and costs on soft programs e.g. health service extension, educational and others

ü Financing: share and loan provided to PEs, Principal and interest paid by the government (Nepal) 

Annual Budget Calendar for Central Government:

Budget Implementation Process:

? Once the Parliament approves the budget, Ministry of Finance Provides "Authorization " for spending to the "Secretaries" of the Ministries

? Secretaries provide authorization letters to the "Department Heads"

? Department Heads provide authorizations to "Spending Unit Chiefs"

? Spending Units spend money based on the approved programs

 Revenue is collected by tax offices and other authorities 

Budget Release Process:

? Spending Units spend the money and submit Payment Requests to the District Treasury Offices (DTCOs)

? DTCOs verifies and entered the transactions into the TSA (Treasury Single Accounts) System (which is online/web-based central system) 

? DTCOs issue the Cheques against the payment requests and handover to the SUs

? Spending Units pays cheques to the concerned parties/vendors

Budget Review and Audit Process:

       Review Process:

ü Budget review is made by Development Action Committees (trimester basis)

§ -National Development Action Committee: Chaired by the Prime Minister

§ -Ministry Level Development Action Committee: chaired by Ministers

ü Ministry of Finance Conducts Mid-term review

ü Sometimes Parliamentary Committees conducts review/query budget implementation

Audit Process:

ü DTCO conduct "internal audit" on behalf of Financial Comptroller General Office

ü  The Auditor General conducts final/statutory audit of government transactions

ü Public Accounts Committee of Parliament review the Report of the Auditor General

Strengths of Nepalese Budgetary Process:

? Multi-year forecasts (MTEF, 3 Years forecast practices)

? Budget Formulation Guidelines (2015) and implementation Guidelines

? Budget Calendar 

? Spending based on the approved program

? Online submission of budget by ministries to the MOF

? Web- based Budget release system: the TSA system

? Annual Statutory audit

Weakness of Nepalese Budgetary Process:

? Central Government:

District level:

? Information collection method for budget formulation in district level offices is traditional.

? Tendency of estimating budgetary requirement on the incremental basis instead of actual need assessment of programs to be executed.

? Negligence towards using program budget formats by the district offices.

? Excessive dependence on untrained junior level staffs.

? Lack of trained and experienced accountants

NPC and Ministerial level:

? NPC and MOF often pretend as super agencies and often bypass the line ministries during plan and program formulation decision of their respective sector.

? Inadequate coordination among ministries and NPC.

? MOF is still using traditional method of budget allocation, giving less, often cut back the budget than requested, Line ministries often over estimate required resources.

? High political interferences, many programs and projects included in the budget directly and existing projects' priorities often changed when political leadership change, ignored rule of linking budget with the periodic plan and MTEF .

? Budget presented to parliament only few days before the beginning of the fiscal year that encourage government to misuse fund because parliament has to authorize the government to spend immediately one sixth of the total expenditure budget presented in budget bill that has not yet scrutinized.

Local government

? Local government has relatively less experience, inadequate human capacity to formulate and execute plan, program and projects.

? Local government has very limited scope to prepare budget due to limited income source, so decentralization and power devolution is only in words not in practice.

? Central government use to hold power, on the other hand local government cannot enhance its capacity and income resources by itself and often ready to follow central government.

? Weak coordination between central government and local government causing duplication in programs and projects.

In a nutshell, the weakness of Nepalese Budgetary System could be categorized as:

? Line item budget: weak focus on "Program Budgeting"

? Low level of revenue base (17 percent of GDP)

? Weak productivity (especially of Capital budget, as well recurrent)

? Calendars generally violated: eleventh hour workout

? Weak internal control system

? Performance audit is lacking

? Parliamentary control (in practice) weak and sometimes biased

Concise Outlook of the Non-performance of Budgetary Process in Nepal:

1.     Unrealistic Budgeting Process

 Nepal?s budgeting process has been highly unrealistic in recent years. In almost all the years in the review period, the budget targets have been set at unduly high levels, particularly for development revenue and foreign aid. This cover estimation of resources in turn has led the government to set similar unrealistic targets for the development budget and to accommodate too many new projects. However, the actual budget outcome had fallen significantly short of these optimistic expectations every year. And, since there is little scope for cutting back regular expenditures, the brunt of fiscal adjustment has been made through cutbacks in development spending.

 2.     Development budget is heavily over-programmed

 The budget, particularly its development component is heavily over-programmed. Because of political pressures to accommodate new projects, there are unmanageable projects for development budget. There is a concrete lack of cost-benefit analysis and prioritization of development projects.

3. Declining but Still High Deficit

 Despite a series of fiscal reform, both in revenue and expenditure fronts, the budget deficits still remained above the six percent of GDP. This may be partly due to ascendant impact of development expenditure which was dominated by a few but popular and even costly entitlements like social services, rural infrastructure, and power generation, generally tied with demographic and economic factors. In order to finance these entitlements revenue policy has been skewed, making it more difficult to meet resource gap through increased taxes.

 4. Increasing Burden of Debt Servicing Charges

 There has been a increasing trend towards loans rather than grants in the composition of the foreign aid in Nepal. This has imposed the growing burden of debt servicing charges and interest payment. Debt servicing burden in Nepal, though not acute and alarming as yet is increasing fast. Unless the government takes certain measures to alleviate the situation, it will not only bring instability in the economy but will also slow down the pace of development and will thus produce consequences economically.

 5. Lack of Co-ordination between Regular and Development Budget Formulation

 The budget document presented to the parliament appears to be a unified one. But in reality theregular budget and the development budget are normally prepared different procedures. The MoF prepares regular budget on the basis of past experience and historical accounting whereas NPC prepares the development budget targeting to fulfill the development need of the nation. In such cases, difficulties are frequently encountered in meeting macro objectives where the two budgets are prepared without full co-ordination, or on different economic assumptions.

 6. Over Reliance on Foreign Aid and lack of Proper Foreign aid Policy

 There is no concrete foreign aid policy. However, the government has made draft for this in2002.Lack of proper foreign aid policy has resulted in haphazard flow and uses of foreign aid. Such a situation has been creating aid dependency syndromes in the Nepalese economy. Overreliance on foreign aid has been creating the situation of lose in self-dignity.

7. Lack of Monitoring Mechanism

 There is a lack of monitoring mechanism during the budget execution. That?s why there is a wide spread leakage of resources and tardy pace of project implementation. There is also lack of co-ordination between government organizations.

 8. Lack of Multi Year Planning

 There is severe lack of multiyear planning in Nepal. As such, there is a lack of coordination between necessary budget required and budget allocation for the many development projects. Because of lacking such a planning, many development programs are in under-finished conditions and their implementation condition is gloomy.

 9. Lack of Commitment

 There is also a lack of commitment from the government as well as civil staff. There is no any effective reward and punishment System. Therefore, there is an excessive leakage of the government resources and weak performance. No one takes the responsibility of the project failure. In this way, there is lack of public responsibility and accountability. In other words, there is an absence of good governance that is resulting in the weak fiscal management of the government.

 10. Inconsistencies between Tax Policies and Programmers

 To fill the resources gap from domestic front, government has introduced various tax policies with multiple objectives. In substance, the revenue related objectives of government stated in annual budget speech are hardily achieved to increase the share of direct tax for reducing economic inequality in the society, to reform the tax administration in order to increase the domestic resources mobilization, to reduce the tax rate which contributes for liberalization and provides relief to the people at large, to provide long term direction to revenue policy by making tax composition appropriate to consolidate tax revenue with economic activities and to make it elastic.

Conclusion:

Budget is guideline of annual programmed and policy of a government. Moreover, it isthe main instrument of economic policy, incorporates policies, programs and activities related to government expenditure, revenue and financing of deficit. Tax and non-tax revenue plays avital role in collection of revenue for meeting the requirement of government expenditure. Foreign grants are also included in the sourced financing. Any difference between government expenditure and government receipts is financed through external (foreign loan) and internal sources (banking, non-banking and cash surplus/deficit). As government activities and obligations are increasing, deficit financing is the common phenomenon of every Fiscal Year's Budget.

After re-establishing democracy in 1990/91 and even after announcing Nepal as a Federal Democratic Republic in FY 2005/06, Governments of Nepal has attempted to increase the amount of expenditure and revenue which is clearly seen in its annual budget. The present study entitled on "An Analysis of the trends of Budgetary Components of the Government Budget in Nepal after Restoration of Democracy" covers actual figures of the period of 10years (2005/06-2014/15). This study has tried to show the trend of government expenditure revenue, and foreign aid, deficit financing and public debt in Nepal as well. The budgetary policy measure taken by the coalition government during the period of transition adopted the policy towards, liberalization along with providing peace and security to the people of the nation. But these policies are quite inadequate in terms of desired results due to instability caused by Maoists insurgency.

In Nepal, it has been found that the government expenditure is increasing fast compared to revenue. Among the expenditure, regular expenditure probably has been increasing readily due to growing burden of debt service payments, maintaining law and order and providing salary to civil servants. Growing regular expenditure has become major concern to policy makers because it has been reducing the revenue surplus necessary to finance development expenditure. There is, on the other hand, decreasing the developing expenditure. It is because of numerous in project implementation resulted from frequent change in government. During the recent years, because of political instability, the development expenditure stood even below the regular expenditure. Obviously, such decaling situation of development expenditure would erode the productive capacities of economy through lack of basic socio economic infrastructure.

For the proper adherence between the planned and the executed one, the following factors need to be taken into account:

? Horizontal and vertical coordination and information circulation system should be developed within central, provincial and local government.

? Practical training and seminars should be organized for capacity building of junior staff and senior staffs.

? More revenue source should be decentralized to local government so that they can address the local development issues on their own capacity.

? Inter-ministerial committees are needed to deal with common issues and to make proper coordination and flow of communication.

? Strengthening the line ministries and departments to take their sectoral responsibility and accountability in budget planning and formulation process to avoid traditional arbitrary budget cut back system.

?  Budget should be prepared to be presented in the parliament at least 2 months before the next fiscal year starts.

The Ways Forward:

ü Perspective budgeting (Medium-Term Budgetary Framework)

ü Focus on: productivity and 'programs'

ü Gear up capital budget (size and implementation)

ü Enhance 'implementation capability', 'internal control system' and 'M&E'

ü Performance audit 

ü Strengthen parliamentary control

ü Follow the Calendar

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