National Natural Resources and Fiscal Commission Recommends Fiscal Equalization Grants for FY 2083/84

Kathmandu. The National Natural Resources and Fiscal Commission has submitted three separate recommendations to the government outlining the criteria for fiscal equalization grants, the limit for domestic borrowing, and conditional grants to be transferred from the federal government to the provinces and local levels for the fiscal year 2083/84.

Further systematizing and performance-based making the fiscal transfer process, which is a crucial link in the implementation of federalism, the Commission has recommended a total equalization grant of NPR 151.70 billion for the upcoming year.

According to the Commission's recommendation, the seven provinces will receive NPR 61.50 billion and the 753 local levels will receive NPR 90.20 billion as fiscal equalization grants. The share for local levels and provinces is 59.46 percent and 40.54 percent, respectively.

The Commission allocated the grant amount based on expenditure needs and revenue capacity. The Commission has also set strict conditions for conditional grants and clear limits for mobilizing domestic loans.

Who Receives How Much Equalization Grant?

According to the Commission's recommendation, Karnali Province will receive the largest grant among the provinces. Among these, Koshi Province will receive NPR 9.1186 billion, Madhesh NPR 7.8445 billion, Bagmati NPR 8.4297 billion, and Gandaki NPR 7.8482 billion.

Likewise, Lumbini Province is recommended to receive NPR 8.5626 billion, Karnali NPR 10.6323 billion, and Sudurpaschim NPR 9.0633 billion in internal loans.

The NPR 90.2046 billion allocated for local levels will be distributed to all 753 levels based on population, area, Human Development Index, infrastructure status, and revenue mobilization capacity. Among these, Kathmandu Metropolitan City is recommended to receive NPR 687 million, and the least, Dudhpokhari Rural Municipality of Lamjung, NPR 73.7 million in grants.

Three Bases for Grants

The Commission has also divided the grants distributed through the budget into three parts: minimum, formula-based, and performance-based. For minimum and formula-based grants, population, area, and fiscal need are considered as the basis.

Eleven indicators for provinces and seventeen indicators for local levels have been determined for performance evaluation. These bases consider the status of arrears, budget execution, revenue collection, and the mandatory entry of local levels' income and expenditure details into the system.

According to the recommendation, provinces performing well in performance will receive an additional 4 percent grant. This amounts to NPR 2.4602 billion. For local levels, NPR 3.6069 billion will be distributed based on performance.

New Conditions for Conditional Grants

The Commission has also recommended improvements in the distribution of conditional grants for the upcoming year. Whereas in the past, small and fragmented schemes were sent in the name of conditional grants, this time the Commission has stated that national standards and long-term returns must be the basis.

According to the recommendation, federal conditional grants can no longer be provided for small and fragmented projects falling under the exclusive jurisdiction of provinces and local levels. Furthermore, the grant should be focused only on areas where national policies, standards, and international commitments set by the federal government are to be fulfilled.

It has also been recommended to the government to clearly specify the outcome indicators to be achieved when allocating grant amounts. It has been advised to completely stop the situation where the budget is allocated by two or more levels for the same project.

When selecting conditional grant projects, the needs and demands of the concerned province or local level must be considered. The Commission's Acting Chairman, Juddha Bahadur Gurung, states that the government has been advised to define conditional grants as a 'responsibility' rather than a 'gift' and link it to performance. He mentioned that strictness has been applied after it was found that the federal government recommended projects contrary to local needs.

“When we inquired at the local level, we found that grants were being given to establish potato zones in places where there was no land for farming, or grants for goat farming,” he says. “Our recommendation is that they should be allowed to determine local needs themselves. For this, instead of specifying certain projects, we have told them to send the budget based on outcome indicators in the form of a 'block grant'.”

Internal Debt Ceiling for All Three Tiers

The Commission's recommendation also sets the ceiling for internal debt that can be raised by the federal, provincial, and local levels.

Among these, the limit for the federal government remains at 5.5 percent of the estimated Gross Domestic Product (GDP). Based on the current economy of NPR 61.07 trillion, this amounts to NPR 3.35 trillion.

On the other hand, the limit for internal debt that provinces and local levels can take for their development construction has been set at 12 percent of their internal income. The recommendation allows for raising debt equivalent to 12 percent of the total amount derived by combining the income and revenue sharing received by provinces and local levels.

However, loans cannot be taken based on these criteria alone. Cost-benefit analysis and assurance of return must also be ensured. Before taking such loans, the arrangement requires permission from the federal government for provinces and from both the federal and provincial governments for local levels. Commission Chairman Gurung states that due to this arrangement, most provinces and local levels are unable to take loans.

“Even though the debt limit is set at 12 percent, no one has taken it yet. The main reason is the non-existence of a legal structure and the low willpower of the federal government,” he says. “The federal government does not seem to be encouraging this much either; there seems to be apprehension about what the municipalities will do by taking too much debt.”

Furthermore, loans taken in this manner are prohibited from being spent on non-productive sectors such as the purchase of vehicles and the construction of administrative buildings.