How do you see the current financial state of Nepal?

After the implementation of the constitution, we have now three tires of government and we have three tired fiscal system now. We have been operating Federal Consolidated Fund or Federal Government Fund: as per the the constitution of Nepal. In article 18, there are state Reserve Fund and in article 19, there is Local Level Reserve Fund. In the process of implementation of fiscal federalism, we have the same system of internal and external check and balance. Although we have one fiscal system we have three different types of government structures. Federal government allocates resources to state on the basis of constitution. Under this central allocation and its own resources, each state presents its budget. Similarly, local levels prepare their annual budget under the resources allocated by federal and state governments and with their own local resources. As per the constitution, they present their budgets.

What is the budget presentation?

According to the constitution, the federal Parliament presents budget on Jestha 15, states present their budget on Ashadh 1, looking at the budget of the center and local level presents the budget on Ashadh 10 looking at the budget of center and province. As per the 232 article of Nepal constitution, which says the relations between the Federation, States, and Local level shall be based on the principles of cooperation, co-existence and coordination, all three tires of the government need to work in that spirit. This article clarifies the right and responsibility of all three tires of government. Although all three governments have concurrent rights, the article stresses the need to have cooperative relations. Despite autonomy, the article urges work in harmony in financial system, administrative and account system. The constitution perceived that all other functions go in humanizations and and cooperation. All the states have reserved rights, special rights and concurrent rights. The constitution lays down the cooperative principles.

What is your experience of the first two years?

The first two and half years of our implementation of federalism have some bitter experiences. Local governments are the government of people due to their reach. As they have direct reach to the people, the constitution has given enormous rights to local level for the expenditure of the budget. Even the constitution has provisions for distribution of revenue among three tires of government. As per the constitution, there is a provision to constitute state level Financial Comptroller General Office. At the central level, we have Financial Comptroller General Office with right to operate federal Reserve Fund. What modality the federal Financial Comptroller General Office follow will be automatically applicable to operate state and local level Reserve Funds. This is what decentralized fiscal system is like. All fiscal and account related models including firms, account systems, fiscal systems are like that of center. Within the three months of completion of each fiscal year, financial reports of whole government and the first report of internal audit go to Finance Minister. Financial Comptroller General Office needs to collect and present final report of annual expenditure of whole of the governments and internal auditing report to Auditor General Office by last day of Paush. This is a constitutional provision.

What are other difficulties?

All three tires of government have separate employees in account. In the past, there used to be over 5000 employees in account. Following the restructuring, the employees working in the account sections were divided in three governments. In some local levels, they have recruited the employees at the account section on their own. This system seldom encroaches the fiscal system. What we are facing now is the problem of breaking the order in financial expenditure system between state and local level. To streamline and connect the financial and accounting systems of all the three tires, we have developed a portal to know the real state of budget and expenditure. We have provided training to to state and local level accountants to upload their financial transactions in the portal. We have uploaded data of all three tires of government in the portal. As per the decision of cabinet, we are now implementing sub national treasury regulatory application from this fiscal year. This system will help regularize budgeting, accounting and reporting. Once state and local levels make entry of their expenditure, it will be accessible to all. For the complement of this system, we have implemented Computer Based Accounting System. Through these two systems, we are working to make a better account system at local level. The state levels have been implementing the account system as per the central level.

What is the expenditure of the last year?

Last year, our revised budget was Rs 13 trillion 15 billion 16 core 17 lakh. However, 11 trillion 77 billion was revised budget. Out of this, Rs.10 trillion 2 billion and 340 million for center and state and one trillion 35 billion was allocated to the local level in grant. We have already developed volumes of integrated report including internal audit report. We have already submitted the report to Auditor General.

How do you see the budget?

Out of 183 billion budget grant from center, they spend 110 billion 46 crore. These grants include conditional, special and mandatory provisions. Provinces have generated 68 billion internal revenues. Most of the budgets are coming as a grant. Similarly, out of 382 billion 60 crore fund of 715 local governments, 16 billion grant was from state 32 billion grant from center. They generated 111 billion as local revenue. Federal government is providing about 80-85 percent grant by state and local level. The local resources mobilized by them included royalty and such issues.

What is the state of internal revenue?

They have been mobilizing very few amounts of money. Not only this, they are unable to spend Rs.40 billion. State and local level refunded this amount to us. Out of two tires, states are unable to spend this. What this shows is that there is the need to have a strong accounting system. There is the need to have laws at local and state levels, institutions and institutional capability.

How do you support the capacity building?

To institutionalize the system and build their capacity, we have been launching various programs with the support from USAID, Asian Development Bank and Norwegian Government. We have been providing training to 2100 Account officers from province and local level by the end of this month. In this training, we are teaching them how the account system of federal government works and how can it be implemented at two tires.

The government has revised accounting chart and Auditor General Office revised 11 various forms. Thus, there is a new situation. We have already provided them Master Tat training. On this basis, we will complete training at local level. Except Kathmandu Metropolitan City, we will complete it in all local levels. I have yet to discuss this matter with the mayor of Kathmandu Metropolitan City. However, I have already discussed the issues with others. For ownership, we are pushing to conduct the program in the presence of mayor. Now only 612 local levels have been using this model. Within this fiscal year, we will implement this model to all local level as the decision of the cabinet. There is the need of Act, regulations and policies to make unified account system.

How do you see the fiscal discipline?

Fiscal discipline is also a part of internal control system. For this system, our office is taking initiative. We have already conducted training on how to work and maintain fiscal discipline to chiefs of account and told them of their responsibility. Financial Regulation and Biitiya Karyabidhi Act has been passed. We are formulating the regulations. This act has provisions for responsibility and so Nepal government has already directed for internal audit. International control is a key to fiscal discipline. With the initiative of our office, we have been launching various programs targeting head of account offices of province and local levels so that they can understand their roles and responsibilities. There used to be only one act -- Financial act in the past. However, the parliament passed this year financial act and Arthik Karyabidhi Tatha Bittiya Utterdayitwa Law. Now we have been preparing regulations which we will finalize at the end of Chaitra. This act has made minister accountable responsible in the process and programs. For the chief of office, there is a provision to fine up to Rs.50,000 for failing to spend allocated resources. There is also a provision to act against contractors. This will also be need to ensure responsibility, ownership and accountability.

What are there in the regulation?

This regulation is going to be a guideline for all of us. We are working to replicate the document up to state and local level. At a time when many other states have already formulated Financial Procedural Act, if the states and local levels endorse Economic Procedural and Financial Responsibility Act and Regulations followed by center, it will help to ensure financial discipline at all levels. As per the article 56(6) and (7) of Constitution of Nepal, there are limitations for sub national entities on financial issues. The Constitution says any law to be made by the State Assembly, Village Assembly or Municipal Assembly pursuant to clause (3) or (5) shall be so made as not to be inconsistent with the Federal law, and any law made by the State Assembly, Village Assembly or Municipal Assembly which is inconsistent with the Federal law shall be invalid to the extent of such inconsistency.

It says any law to be made by the Village Assembly or Municipal Assembly pursuant to clause (5) shall be so made as not to be inconsistent with the State law, and any law made by the Village Assembly or Municipal Assembly which is inconsistent with the State law shall be invalid to the extent of such inconsistency. State and local level can prepare the law consistent with federal laws.

During the unitary form of government, this office used to provide revenue collection and expenditure on day to day basis. Shall you provide same data following the restructuring of the state?

Although there were certain lapses in the first year, now we are in a position to give raw data, subject to revision, as in the past. We can provide target of central government. In the last seven months, we have already met the 47 percent revenue target. In expenditure, we have spent around 30 percent. In the state level and local level, we also give data. However, we are not in a position to say in which areas state and local level spent the money.

How do you see the function?

In collaboration and partnership with Federal Affairs Ministry, we are making Provincial and Local Level Government Support Program (PLSGP).This will capture the activities and results and our system will capture the expenditure. We are working to make these two entities function side by side. We are developing Integrated Financial Management System (IFMIS).This will help to synchronize all 761 governments at three levels. There will be whole data in single portal with real time. With the support from multi-donor trust fund, we are developing a system with a single portal of whole data in real time. After this, our financial system will be strong. Although we have just two and half years of experience of implementation of federalism, we have made a great progress. If we are able to make financial system disciplined in initial stage, we would not have to face any difficulties in future. It will be very difficult to bring it on track. CIAA's head and Auditor General have been visiting different local levels directing them to maintain fiscal discipline and accountability.

What are the weaknesses there?

There is a weakness of financial system at the local level. At the center and state, there are parliaments and Public Account Committee, but at local levels executives prepare and table budgets at the assembly headed by executive. Once the assembly pass the bill, the executives implement it. Local levels themselves do internal control and internal audit. Auditor General's Office conducts final auditing and hands over its report to executives. Finally, local level municipalities adjust and readjust issues raised by auditor. To prevent the misuse and make local level accountable, we are introducing Civic Engagement in Public Finance Management. We shall expect that local levels should start public hearing on their budget with the institution which includes civil society members for hearing on social forum. We are now stressing on this. Auditor General's Office and IBP, together with us, are working in the area. Freedom forum and other public NGOs have been supporting us. Local levels conduct internal audit and internal control by themselves. The constitution does not allow local level to present supplementary budget.

Do you have to do that for grant?

They make budget on the basis of grant. We will provide portal. Federal government cannot ask local levels whether they want to. They will send us sources of budgets. There is the need to have accountable mechanism. 19 local levels are yet to pass budget however they have to pass budget by Ashadh 10. There is no provision in constitution for additional budget. They are yet to use grant of federal level.

Even after federalism, the federal government has been launching the programs as per the National Natural Resources and Fiscal Commission's modality for the distribution of revenues between the Federal, State and Local Governments out of the Federal Consolidated Fund in accordance with the Constitution and law.

Frankly speaking, even central government has weakness in allocating the grant to local levels. There were certain duplications in the programs. Even after the implementation of federalism, the central government is still running programs at the local level through Ministry of Home Affairs and Education. This is not as per the spirit of constitution. There are various grants federal government provides to local level and state.