KATHMANDU – Nepal has made significant strides in implementing fiscal federalism while key reforms are needed to support fiscal sustainability and Nepal’s transition towards green, resilient, and inclusive development states the World Bank’s Public Expenditure Review (PER) Report on Fiscal Policy for Sustainable Development launched.
With
the country’s transition to federalism, expenditure responsibilities have been
devolved to subnational governments that are predominantly financed through
intergovernmental transfers and revenue sharing. These now account for between
8 and 9 percent of GDP per year (or close to 30 percent of the annual budget).
While federalism is helping bring policymaking closer to the people, it has
also increased fiscal spending and (exacerbated by the COVID-19 pandemic) led
to a sharp rise in fiscal deficits and public debt, states the report.
“This report provides an analytical basis to inform
our reform efforts to strengthen federalism and create fiscal space to support
our new focus on a green, resilient, and inclusive development (GRID) model,” stated Mr. Madhu Kumar
Marasini, Finance Secretary. “This
complements our ongoing efforts to refine the fiscal transfer system put in
place the systems for monitoring and reporting for a more results oriented and
accountable delivery of local services.”
The
PER identifies key reforms to help Nepal strengthen fiscal sustainability and
initiate a shift to a GRID pathway. It identifies the following five top
priority reforms: (i) Encouraging the update of subnational spending responsibilities
through the intergovernmental grants system; (ii) supporting exports and job
creation through reforms to import duties; (iii) strengthening domestic
revenue, for example by reviewing VAT exemptions; (iv) enhancing public capital
spending by rolling out the National Project Bank; and (v) providing fiscal
incentives for a green growth transition.
“The World Bank will continue to support government
reforms to improve fiscal sustainability and the implementation of fiscal
federalism, drawing on the recommendations of the PER Report,” said Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and
Sri Lanka. “This report
complements our human development PER, both of which will help inform the
design of World Bank support to Nepal, including through our ongoing support
through our various Development Policy Credits.”
The
report also stresses the importance of strengthening investment processes and
fiscal policies for green growth, and fiscal policy reforms to enable Nepal to
use its green electricity surplus to mitigate air pollution to protect the
health of people and the economy.
