Fiscal Discipline At Local Level


A news item disclosed, the other day, that nearly 200 local governments are yet to duly endorse  their annual budget by their respective assemblies for the ongoing fiscal year due to one or the other reasons. According to the news report, out of the 753 local governments, around 550 have unveiled and endorsed their budget for the current fiscal year. Generally, the local budgeting and authorisation process hits a snag when there are disagreements among the mayors, deputy mayors and local assembly members over the budget priorities and allocations. Moreover, partisan politics also gives rise to conflicts as mayors, deputy mayors and local assembly members have their mutually exclusive partisan interests and individual stakes on budgetary allocations. 

In some cases, conflicts are also rooted to the partisan grounds when mayors and deputy mayors fight turf wars and assembly members are arrayed against each other along their partisan affiliation and alignment. As a result, they tend to block the passage of the budget as the bargaining chip. The case of Tilottama Municipality in Rupendehi, among others, can be cited in this context.  A municipality that was known for its good planning and service delivery during the previous term and had also stolen the limelight due to high profile investment summit has now been afflicted with partisan-oriented interests and conflicts. However, thanks to Tilottama municipality assembly members, they have somehow agreed to endorse the budget despite their disagreements on several issues, the other day. 

Functional mandates

It is expected that the local levels (municipalities and rural municipalities) that are yet to secure their respective annual budget endorsed and authorised by the local assembly will do it promptly for ensuring compliance with the mandatory provision of the law and implement the budgetary provisions. Moreover, it is necessary that the own source revenue and grants  allotted by both the federal and provincial governments are utilised effectively to deliver the promise of the democratic governance and prompt service delivery envisaged in the constitution and the Local Government Operation Act, 2074, among others. Needless to say, local governments have been vested with important functional mandates for which both expenditure and revenue assignments have been provisioned in the relevant laws. 

According to the Intergovernmental Fiscal Arrangement Act, 2074, the local governments can levy and raise tax and non-tax revenues and collect chargeable penalty and fines falling under their domain without contravention to national economic policies. Local governments are also empowered to determine the rate of non-tax revenues by taking the cost of goods or services and operation and maintenance cost into account. 

This Act, which is a key legislative instrument in laying down the provisions regarding fiscal federalism, sets forth grounds and scope in regard to raising royalty as one of the non-taxable revenue sources. It stipulates the basis for distribution of royalty to the local government obtained from using and harnessing natural resources including the hydropower, mountaineering and so on. In order to distribute the royalty proceeds to the sub-national governments obtained from the utilisation of natural resources, the federal government creates the federal divisible fund to deposit such amount in accordance with the sharing basis provided in the law.

Furthermore, it will be worthwhile to take note of the major grants spelt out in the aforesaid Act provided by the federal government annually to the local government as prescribed by the Fiscal Commission based on some formulaic standards. Of the grants, the most crucial is the equalisation grant (Samanikaran Anudan).The federal government provides fiscal equalisation grants known as untied equity grant to the local government - which form the major chunk of the local budgeting. The federal government distributes fiscal equalisation grants to the local governments on the recommendation of the Natural Resources and Fiscal Commission especially on the basis of their need for expenditures and revenue capacity. 

Moreover, the provincial governments also distribute fiscal equalisation grants to the local governments falling under their respective domains from the grants obtained from the federal government at the center. Likewise, the federal government provides conditional grants to local governments to implement projects selected and prioritised by the governments irrespective of the levels. Accordingly, the provincial governments provide conditional grants to the local level while complementary grants  (Sampurak Anudan) are allocated  to implement projects related to infrastructure development at the local level.


However, while providing the complementary grants the criteria such as feasibility cost, benefits to be achieved from the project, financial and physical capacity or human resources for the implementation of the project, needs and priorities of the project have been the major considerations for assessment. Likewise, the federal government provides special grants to the local government for any specific project to develop and deliver basic services like education, health and drinking water, to achieve balanced development of inter-province or inter-local level, to uplift or develop the class or community discriminated economically, socially or in any other forms.  The provincial governments also provide special grants to the local municipalities in accordance with the provincial law which fall under their domains.

This explains that the local governments in Nepal like in any other federal countries receive grants, share in royalties and a host of aid and supports from the federal government as part of vertical revenue sharing arrangement. However, it is disconcerting to note that some local governments have not able to abide by their fiscal responsibility to utilise the resources as prescribed by law. The law even requires and has fixed the schedules for budget presentation and endorsement by the local assemblies but the violation of the legal arrangement is an act of fiscal indiscipline and impropriety. Local government leaders and assembly members should rise above the partisan and self-centric interests and work together to achieve full and proper   utilisation of the resources made available to them.

(The author is presently associated with Policy Research Institute (PRI) as a senior research fellow.


Mukti Rijal
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