Reforming Budget System

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Reforming Budget System

When questioned whether finance ministers should be held accountable for low capital expenditure during the Nepal Literature Festival in the first week of February, former finance ministers Surendra Pandey and Barsha Man Pun said in unison that the finance minister is not directly responsible. Pandey said that while finance ministers should take responsibility, they are not directly accountable for implementation as the task of budget execution rests with other ministries. Both former ministers concurred that the fundamental issues lie in the efficiency of the system.

Although what the finance ministers said is not incorrect, it is crucial to recognise that the root cause behind low spending stems from the budget drafting phase. Finance ministers often succumb to including populist programs without ensuring adequate resources for them. This has led to a trend of introducing an inflated budget and then making adjustments during the mid-term review. Factors like poor capital spending, inclusion of programs in the budget without ensuring resources, and dismal revenue collection necessitate this adjustment.

Efficient capital expenditure is a must for strong economic growth and its prudent allocation is vital for nurturing a strong economy. However, in Nepal, there is typically a sluggish pace of capital spending in the initial months, with a notable surge towards the fiscal year-end. This often raises questions about the quality of the work.

The finance ministry downsized the budget for the current fiscal year by 13% through the midterm review in the second week of February. This marks the fifth consecutive year that the budget has been downsized through midterm review. This means the budget size has come down by Rs 221 billion to Rs 1,530.26 billion. With the adjustment, the recurrent expenditure has now come down to Rs 1,007.45 million while the capital expenditure has been downsized to Rs 254.13 billion. Outgoing Finance Minister Dr Prakash Sharan Mahat said during the midterm review of the budget that allocations had to be reduced due to a lack of significant improvements despite the government's earnest efforts to increase revenue and control expenditures. The government has been able to mobilise only 40% of its revenue target over the first half of 2023/24, while progress in capital expenditure stands at a dismal 21% whereas recurrent expenditure has already reached 44%.

The recurring cycle of initially pursuing populism with inflated budgets, only to downsize it when spending targets are not met, has become a persistent issue in the country's budgetary system. Since it is widely recognised that the current governmental system cannot utilise the entire annual budget expenditure, there is a pressing need to bring substantial reforms to improve efficiency within the budget cycle. While reforming the system will undoubtedly require years, the recent government initiative to outline the principles and priorities of the federal budget three months before the Appropriation Bill is presented in the parliament is a positive beginning. Lawmakers will now get 30 days to provide their comments and feedback on the principles and priorities outlined in the government's budget and programs.

This alone, however, is not sufficient to address challenges in budget implementation. Finance ministry officials say the problem lies in insufficient preparation in terms of project design, lengthy contracting processes, and subsequent neglect by contractors after securing projects by different ministries and their subordinate agencies. The impact of the recent changes remains to be seen. One will have to wait until the end of the next fiscal year to assess the effectiveness of these changes. However, it is evident that the country will struggle to make progress unless political parties and the government acknowledge the gravity of inadequate budget spending. 

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