Budget Formulation in Nepal Practices and Weaknesses Bijaya

Budget Formulation in Nepal: Practices and Weaknesses Bijaya Acharya Adhikari MED 08003 Ministry of Finance, Nepal 10 July, 2009 1

Overview • Introduction • Background of budget and recent reform • Budget formulation practices • Weaknesses • Conclusion and Recommendation 2

1. Introduction Total Area: 147, 181 sq km Population: 24 million approx Capital: Kathmandu 3

2. Background of budget and recent reform 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 report up to tenth month of current fiscal year on revenue collection and expenditure. Objective : poverty reduction and socio-economic development 4

Background……………. Budget history in Nepal: Budget formulation started since 1956 with first five year plan(1956 -61) and presented to parliament annually: Objectives: realistic, development oriented and informed people about government annual programs and projects. 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. 5

Background………. . 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. 6

Background …………. (Democratic government tried to make consistency on periodic plan and annual budget formulation, so many reforms has 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 7

Background………. . . 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(P 1), priority 2 (P 2) and priority 3(P 3) listed in the annual budget during budget formulation. Improve budget effectiveness at a given resource constraints. 8

3. Budget formulation practices. . . Present budget formulation approach: (Before 1991 mostly top down approach, after democracy both top down and bottom up) Top down approach (for central government): National Planning Commission (NPC) Line Ministries Departments District offices Ministry of Finance (MOF) Bottom up approach (for local government): Ward offices/ Consumer committee/ Political parties VDC/ Municipality NGOs District Council District development Committee 9

Budget Formulation Cycle NDC (Prime Minister) Legislative (Parliament) Finance Minister (Budget Approval) Policy directives – plan NPC (Call circular with guidelines + ceiling, discussion) MOF (Resource committee, budget committee, MTEF, budget Discussion, finalize budget, ) MOF Cabinet (For policy approval) Line Ministries (Sectoral budget) Departments Local Government (Policy guidelines –NPC, Formulate and approved, informed to NPC and Line Ministries District Level offices 10

Annual Budget Calendar for central government (October- July) Month Agency Activities October / November NPC + MOF, Cabinet, Line ministries MTEF preparation and adjustment Macro economic frame work prepared (Budget deficit, growth) Development plan and programs decision for next year budget Defined project priorities Revenue mobilization Aligning with periodic plan and goals November NPC, Cabinet Ceiling are determined by sectors; cabinet approves overall plan December NPC Budget circular released with budget guidelines, sector wise ceilings and budget request format March last week Line Ministries Submit budget to NPC and MOF April/ May NPC, MOF, Line ministries Budget Discussion: NPC- objectives, plan, programs, strategies, target, indicators on development budget. MOF- line item budget allocation for recurrent and capital expenditure. (Budget request are reviewed and negotiated between MOF, NPC and line ministries reached the consensus; and NPC gives policy approval for ministerial budget and MOF finalize funding part). June MOF Finalize budget and submit to cabinet for approval Latest July 14 MOF Finance minister present budget proposal in the parliament for approval Latest September 14 Parliament Approves budget 11

Role of different agencies in top down approach 12

Bottom up approach…………. Procedure: NPC send guidelines about district level national plans and programs to District Development committee (DDC). DDC send circular to each Village Development Committees (VDCs) and Municipality to prepare their budget and programs for next fiscal year. VDCs and Municipality invite assembly of Village/ Town 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. 13

Bottom up approach………. Consumer Committees Ward offices Village/ Town council VDC/ Municipality District Council District level development offices Concerned ministries NGOs/ Political leaders Discussion Accumulation Discussion District Development Committee National Planning Commission 14

Bottom up approach………. . DDC organize meeting at district consolidated plan formulation committee with district council and district level offices. District Development committee 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. 15

4. Weaknesses 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. 16

Weaknesses………. . 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. 17

Weaknesses………. . 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. 18

Impact of weaknesses on poverty reduction Plan Target Achievement Eight five year plan (1992 -97) 50% 42% Nine five year plan (1997 -2002) 42% 38% Tenth five year plan (2002 -07) 38% 30% 31% Source: National Planning Commission, publications, 2009 19

5. Conclusion and Recommendation Horizontal and vertical coordination and information circulation system should be developed within central 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 prepare to present in the parliament at least 2 months before the next fiscal year starts. 20

Thank you for your attention 21