Bijaya Nath Bhattarai

Former Governor, Nepal Rastra Bank

The policy to distribute central taxes according to an agreed formula should be adopted. This will be the most complicated negotiation among the states and the centre. Based on the policy of distribution, taxes mobilised by the central government would be divided among the states. It must be noted that in Nepal, 60 to 65 per cent of economic activities are centred in the Kathmandu Valley.

 

What would be the monetary aspect of federal Nepal?

Nepal Rastra Bank (NRB) is the authority for all monetary issues in Nepal. NRB has its branches and sub branches spread all over the country. It not only works as a fiscal agent but also facilitates commercial banks through operating currency chests. It regulates the money supply, flow of liquidity and supervises and regulates banks and financial institutions. In the federal structure too, the currency in use will be the same and there will be a solitary central bank which will be responsible for providing all central banking functions to every state in the country. There won’t be separate currencies for individual states. But all monetary issues should be controlled by a central regulator i.e. Nepal Rastra Bank.

 

In a federal structure, the state revenue, expenditure and debts will have to be shared between central and local governments. How practically feasible will this be for Nepal?

As far as I know, the countries with federal structure have different forms of taxation. Some are levied by the central government while some others are at the states and municipal levels. There are three types of taxation. The municipal taxes would be the income of the particular municipality. Similarly, state taxes would be the revenue of the states. The policy to distribute central taxes according to an agreed formula should be adopted. This will be the most complicated negotiation among the states and the centre. Based on the policy of distribution, taxes mobilised by the central government would be divided among the states. It must be noted that in Nepal, 60 to 65 per cent of economic activities are centred in the Kathmandu Valley. Then come the Terai hubs namely Bhairahawa, Biratnagar, Birgunj and Nepalgunj followed by towns like Pokhara and Hetauda. The economic activities in other areas are minimal. Therefore, resource mobilisation and sharing will be difficult proposition for federal Nepal. On the question of debt management, there needs to be an agreement on issuance of debt, use of debt and final repayment of debt. Most of the country’s debt issuance and repayment is at the central government level.

 

The rising recurrent cost is already eating up the country’s revenue generation capacity. With governments at the provincial levels, the overall administrative and recurrent public expenditure is likely to shoot up with no commensurate growth in revenue. Wouldn’t this be an alarming situation?

Resources remaining after fulfilling the recurrent expenditure are used in development activities. This is supplemented by the resources and means obtained from foreign aid and loans for development activities. The resources thus mobilised would be further divided in the federal system. Then there would be chances for even less resources and means left for development projects. The revenue grows along with the economic development of the country. If the country under federal system moves ahead and develops economically, the national income will grow. We can take Switzerland as an example where the per capita income is around US$ 34,000. But our country’s situation is such that federal structure can actually lead to resource crunch. The far western region, especially Karnali, is least developed. There are other under developed regions too where the conflict had escalated due to unequal distribution of income and resources. In such areas, the resources injected have to be comparatively higher. This would leave very little resources at the centre’s disposal. It would be ideal to have a small number of states and small state structures. Only then will we be able to mobilise resources effectively. At present, I see a faint possibility of introducing new forms of taxation for increasing resources. During the past decade or so, there have been very few new investments. Even now, the investment environment is gloomy for domestic as well as foreign investors. Foreign aid and internal resources mobilised by the state have not been effectively utilised. As a result, there is a liquidity crisis in the financial sector. The government has not been able to address budgetary issues well. There is fiscal imprudence which is reflected by large non-budgetary expense at the central level. It will be necessary to maintain strict fiscal discipline in a federal system. The non-budgetary expense has to be lowered to a minimum. If we can do that and utilise resources effectively for development, the situation may improve over the years as the economy will then grow. However, the current resource distribution pattern could invite complications.

 

How can we decrease current expenses so that more resources can be allocated in development activities?

We have very limited resources. So, when we want to divide them among the centre and the states, there could be complications. While making a transition to the federal structure, we should make sure that the structure envisioned by the constitution is small and dynamic. For example, there are more than 600 representatives in our existing Constituent Assembly. This number is massive given the size of our country. Compare this figure with our neighbouring country India which has 552 members in its lower house of parliament. It is said that our federal parliament will follow a bicameral system, for greater representation of every region. The number of representatives should be brought down significantly from the present one to ensure low governance costs. Also the size of the provincial government must be small and effective. If this is not ensured, very little resources would be left for development activities after dividing them among central and regional governments.

 

There has been no real debate on the economics of Nepal’s federal structure. Given this, how can we be definite about the direction we are heading?

I agree that there must be a serious debate on this issue. The statesmen and the CA too have not discussed fiscal federalism seriously. Major issues such as the availability of resources and means and the model of federal structure must be discussed now. I personally feel that without serious debates, going for federalism might backfire on the country in the long run. Nepal has limited resources. Therefore, the demarcation of states based on ethnicity could prove to be a dangerous proposition. It will definitely promote ethnic conflict among our own people. And we definitely don’t want Nepal to follow the example of Yugoslavia. The states must be divided based on economic reality.

 

What reforms do you think are required once we go federal?

Well, there are a lot of things that need to be reformed. Our GDP and tax ratio are lower compared to many countries. We can look at increasing tax compliance. In the recent past, media has reported tax evasion by big business houses. All citizens must feel that paying taxes is their duty and it should not be evaded. Greater tax generation will enable the state to mobilise adequate resources for development and social causes. Nepal has started providing social security allowances for elderly people. In the coming days, the state can offer free medicines and health services to the economically deprived people. For that, a sense of responsibility in people must develop to ensure tax compliance. If the government can take the role of a facilitator and focus its investment in infrastructure, Nepal can experience a prosperous economic development. The problems that we face today are that of infrastructure, labour relations and power. As per reports, around 200 small industries have closed shop owing to power shortage. Similarly, many industries have experienced decline in output due to labour unrest. The political parties must unite for national and development issues irrespective of their ideological differences.

 

Being one of the poorest countries in the world where there is little revenue left for development after incurring current expenditures, can we afford a federal form of government?