Reforms to enhance fiscal federalism are emphasized in a World Bank report.


The Bank’s Public Expenditure Review (PER) Report on Fiscal Policy for Sustainable Development, which was released on Monday, notes that Nepal has significant progress in implementing fiscal federalism, but that key reforms are required to support fiscal sustainability and Nepal’s transition towards green, resilient, and inclusive development.



As a result of the country’s transition to federalism, expenditure duties have been devolved to subnational administrations, which are primarily funded through intergovernmental transfers and revenue sharing arrangements. These currently account for between 8 and 9 percent of the nation’s GDP on an annual basis (or close to 30 percent of the annual budget). According to the research, while federalism has aided in bringing policymaking closer to the people, it has also boosted fiscal spending, which has [exacerbated by the Covid-19 pandemic] resulted in a rapid increase in fiscal deficits and public debt.

In the words of Madhu Kumar Marasini, Finance Secretary, “This research provides an analytical basis to assist our reform efforts to enhance federalism and generate budgetary room to support our new focus on a green, resilient, and inclusive development (GRID) model.” Our ongoing efforts to streamline the fiscal transfer system and put in place the for monitoring and reporting will be complemented by this, which will allow us to deliver local services that are more results-oriented and accountable.”

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The identifies essential changes that will assist Nepal in strengthening fiscal sustainability and kicking off the transition to a GRID economy. It identifies the following five top-priority reforms as being the important: The intergovernmental grants system can be used to encourage the of subnational spending responsibilities; reforms to import duties can be used to encourage the expansion of exports and the creation of new job opportunities; domestic revenue can be strengthened by reviewing VAT exemptions; the National Project Bank can be used to increase public capital spending; and fiscal incentives can be used to encourage the transition to a green economy.

Report recommendations, Faris Hadad-Zervos, Bank Country Director for the Maldives, Nepal, and Sri Lanka, stated that the World Bank will continue to support government reforms to improve fiscal sustainability and fiscal federalism implementation, based on the recommendations of the Report. “This study complements our human development progress report, both of which will be used to shape the design of World Bank assistance to Nepal, including our continued assistance under our different Development Policy Credits,” the report said.

As well as pointing out how important it is to strengthen investment processes and fiscal policies for green growth, the report calls for fiscal policy reforms that will allow Nepal to use its green electricity surplus to mitigate air pollution, thereby protecting both people and the country’s economy.

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