World Bank highlights resource gap to maintain federalism

The World Bank (WB) has concluded resource gap to maintain the three-tier government. Releasing a report, 'Public Expenditure Review (PER) Report on Fiscal Policy for Sustainable Development', the multilateral development partner also said the government should also introduce five key reform measures to support fiscal sustainability and its transition towards green, resilient, and inclusive development.

The World Bank, in its report, has also identified five top priority reform measures. It has suggested on encouraging the update of sub-national spending responsibilities through the intergovernmental grants system.

Supporting exports and job creation through reforms to import duties, strengthening domestic revenue including a review in VAT exemptions, enhancing public capital spending by rolling out the National Project Bank and providing fiscal incentives for a green growth transition are among measures that World Bank has recommended to achieve the goal.

The World Bank has also stated that Nepal has made significant strides in implementing fiscal federalism but excessive dependency of the sub-national governments on the intergovernmental transfers and revenue sharing, which accounts for around 30 per cent of the annual budget, to fulfill their financial demands.

“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,” the report reads, stressing 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.

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 per cent and 9 per cent of GDP per year (or close to 30 per cent of the annual budget). 

“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,” finance secretary Madhu Kumar Marasini said, adding that it complements our ongoing efforts to refine the fiscal transfer system put in place the systems for monitoring and reporting for a more results oriented and accountable delivery of local services.”

Likewise, World Bank country director for Maldives, Nepal, and Sri Lanka Faris Hadad-Zervosthis said that the 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."