The capital budget, a fundamental aspect of economic growth, often goes largely unspent even as Nepal has been planning to graduate from a league of least developed countries to a developing country in about eight years from now. The low level of expenditure of the capital budget has slackened the pace of development. This under-spending has instead augmented the rate of poverty, unemployment and illiteracy.
Among the many reasons for the situation, a centralized authorization process, cumbersome procurement procedures, flexible virement rules and absence of accountability are the glaring ones.
The fiscal budget is broadly segregated into recurrent and development expenses. Various analyses have shown that implementation of the recurrent expenditure is happens as allotted but the capital budget execution lags far behind.
The budget execution commences with the endorsement of Appropriation Bills in the Parliament. As an ideal budget spending time, the budget should have been approved and implemented from the start of the fiscal year. However, the budgetary actors have failed to adhere to this time period of budget implementation for clash of interest between political parties.
The budget in Nepal remains unspent with a majority of the expenses skewed towards the end of the fiscal year. The authorization procedure is complex with numerous bodies involved. Even after the project gets through this authorization process, project implementation takes an additional 3-4 months owing to intricate procurement procedures.
The Finance Comptroller General Office (FCGO) oversees the government expenditure and consolidates annual financial statement. It tracks the revenue, computes the income collection and releases fund through District Treasury Comptroller’s Office. Despite the presence of defined roles, there have been authorization delays to the DTCO. The DTCO has to release the budget in receipt of three to four official sanction letters further delaying the budget disbursement. The elaborate red tape should be contained to minimize the phases in the authorization procedure. The procedure could be re-designed in a way that accountability, transparency and efficiency are coherent.
Each political party wants to expand its presence, hence each one comes up with different development plans and addressing each of their concerns leads the budget nowhere. According to a study by Ministry of Finance, the allocation of capital budget in itself is ineffective. The prioritized projects that were to get monetary preference are as high as 80% out of the proposed projects. This clubbing of all projects into one category implies that all projects are of equal priority. As a result, limited budget gets scattered over hundreds of project.
A research by World Bank has indicated the easily adjustable virement rules as a problem in budgeting here. These rules allow budgetary transfers from one head to another and have, no doubt, made the budgeting flexible but they have also caused a large amount of re-budgeting throughout the year. This high level of flexibility has in fact weakened the credibility of budget formulation process.
In this context, the public procurement process in Nepal is complicated with numerous authorization actors involved. In a country where corruption and money laundering is rampant, a profound and complex procurement procedure is understandable. But the problem here is non-compliance to the standards and methods set specifically due to unaware actors involved in the procurement framework.
The Public Procurement Monitoring Office, established and mandated under the Procurement Act has not been able to operationalize a conducive procurement procedure. Although it is bridging the gap between the government and procurement entities, much needs to be done. The Public Procurement Strategic Framework Phase I has revealed that an absence of a clear organizational structure, weak linkage with PEFA and non-implementation to the public act regulation are pressing problems. The Public Procurement has been unable to form a linkage with public financial reform management. Glitches like these have failed to connect with the budgetary reforms, ultimately hindering budget execution. Nevertheless, with plans to operationalize electronic government procurement (e-GP), things could be expected to change.
In many cases, especially for construction works, the pre- requisites are not fulfilled prior to budgeting. The land acquisition and detailed designing that are the basics of construction are delayed. As a result, these issues consume a plenty of time, obstructing the execution of capital budgets. Feasibility studies, work plans and procurement plans are finalized in subsequent phases, adding on to the problem.
Institutionalization of capital budget is a key to improve the Public Finance Management in Nepal. First, the basics of any plans such as work schedule, procurement methods and viability studies are to be approved before the project enters the budget. Second, the monitoring capacity of the government officials needs to be refined through technical and institutional support. Third, the government can improve procurement practice by training the staffs at PPMO and re-designing the procurement framework in enhancing efficiency in capital budget execution. The government has to bring the much awaited budget management and fiscal accountability law to control and improve the budget implementation structure in the country.