Easy fiscal transfers are likely to increase the dependency of the local governments on the centre instead of trying to raise revenue to finance their expenditure
As Nepal transits rapidly from a unitary state to a federal democratic republic, in line with the constitution of 2015, the World Bank has questioned the country’s capacity to sustain service delivery and establish fiscal discipline, especially at the local levels. The new federal structure comprises the federal, provincial and local governments, with the local levels largely responsible for such basic services as education, health, local transportation, and water and sanitation. The South Asia Economic Focus, released by the World Bank on Monday, notes that the under spending of the budget by the local governments remains a challenge, although they received fiscal transfers of 8 per cent of GDP in 2018. This points to the limited implementation capacity of the local governments to fully utilise their resources. Devolving spending responsibilities to the local governments allows them to plan the expenditure as per the needs of the locals, but for this, the local governments will need to improve their spending capacity and administrative skills.
The past two budgets since the implementation of the new constitution show that sizeable funds were transferred from the centre to the provinces and local levels through different types of grants. The local governments enjoy four types of fiscal transfers. The equalisation grants are transfers of resources to the provincial and local governments based on population and development status. The conditional grants are funds meant for implementing projects related to national policies and standards. Matching funds are transfer of funds to complement the resources of the local level for a project while special grants support a special project related to the supply of services, emergency needs and activities of national priority. Add to these VAT and internal excise tax revenues as well as royalty that are shared among the federal, provincial, and local governments. On top of these, the local governments will also collect local taxes on property and rent, and vehicle registration fees. Such easy fiscal transfers and shared revenue are, however, likely to increase the dependency of the local governments on the centre instead of trying to raise revenue to finance their expenditure. This could also lead to extravagant spending, low revenue collection and poor fiscal discipline, among others.
Federalism is new to Nepal, and there are bound to be hiccups as the country struggles to implement it. Even the transfer of civil servants and professionals from the centre to the local levels is facing big opposition, with the provinces and local levels facing a shortage of human resource to plan and execute their projects and programmes. The local governments have been greatly empowered to develop their units, and it is in their interest to strengthen public financial management and enhance the capacity to implement policy through training and technology. A proper accounting and reporting system should also be developed. Over a period of time, they should be in a position to create capital of their own through investment and progressive taxation, and gradually reduce their dependency on the centre for resources.
Support local levels
There are 753 local governments, which also provide justice on minor disputes not associated with criminal offences. According to the Local Governance Operation Act, each of the local levels has a provision of a judicial committee, headed by the deputy-mayor of an urban municipality and vice-chairperson of a rural municipality. Ninety-one per cent of the deputies are women, who lack adequate understanding of legal issues.
A report from Lamjung reveals a common problem faced by all deputies at all the eight local levels when it comes to delivering justice due to lack of knowledge about legal issues and procedures. The deputies have demanded extensive training on the new civil code that came into force in August last year. Most of the minor disputes are settled through reconciliation between the two conflicting parties. However, all of the minor disputes that come under the judicial committee’s jurisdiction must be settled as per the given law. For this, the government must arrange regular training to the deputies so that they can deliver justice legally to the satisfaction of the people. The local levels cannot become strong unless they get support from the federal government.