By A Staff Reporter
Kathmandu, Dec. 7: Although Nepal has made significant progress in implementing fiscal federalism, a study by the World Bank has said that efforts are still needed for financial stability.
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 said the World Bank’s Public Expenditure Review (PER) Report on Fiscal Policy for Sustainable Development published on Monday.

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 per cent of GDP per year (or close to 30 per cent 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, said 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,” said 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 result-oriented and accountable delivery of local services.”
The report identified key reforms to help Nepal strengthen fiscal sustainability and initiate a shift to a GRID pathway.

The report identified five top priority reforms, including encouraging the update of subnational spending responsibilities through the intergovernmental grants system, supporting exports and job creation through reforms to import duties and strengthening domestic revenue for example by reviewing VAT exemptions.
It also suggested for enhancing public capital spending by rolling out the National Project Bank and 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 stressed on 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.