Nepal Fiscal Reforms DPC

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The proposed operation will support the Government of Nepal (GoN) in its efforts to establish a framework to move towards fiscal federalism and improve public financial management.Nepal is at a historic juncture where it is establishing a federal democratic republic based on the 2015 Constitution.This Development Policy Credit (DPC) series is a key component of the World Bank’s support to federalism.With a focus on the fiscal and PFM aspects, this DPC series lays down the foundation for the new federal state, and will help mitigate the country’s elevated risk of fragility and conflict.The current three-year 14th Periodic Plan and the Socio-Economic Development Strategy (2030) aim to achieve graduation from least developed country status by 2022 and transition to middle-income status by 2030. The periodic plan guides the annual budget, while the 2030 Strategy is a guide to achieving longer-term goals. Some of the key areas that these strategies prioritize include job creation, urban development, investment in connectivity and infrastructure, improvements in human capital, strengthening of public service delivery, and improved PFM. The proposed operation supports the government’s efforts in some of these areas, including strengthened public service delivery (through the move to a federal structure) and improvements in PFM.The proposed operation supports the government’s transition from a centralized to a federal structure and reforms that enhance PFM. The operation is fully consistent with the government’s three year periodic plan and the 2030 Strategy. It is the first in a programmatic series of two operations and is organized under two pillars: (i) establish a framework to move towards federalism, and (ii) improve the policy framework for PFM.First pillar is to implement fiscal federalism the Parliament has approved the Intergovernmental Fiscal Arrangement Act which provides the legal framework for resource allocation among the three tiers of government. Second pillar is to improve the policy framework for public financial management is to strengthen public financial management systems, the MoF has: (i) integrated all public financial management systems onto one platform - Public Financial Management Information System and (ii) provided access to the PFMIS to all federal ministries.Nepal was the first country in the South Asia region to implement Medium-term Expenditure Frameworks (MTEFs), which was then discontinued.addition, while the federal government’s annual budget is anchored in the national development plan, the same is not true for the local governments due to the absence of local plans.Finally, in addition to the above reforms to support better budget preparation, an overarching legislation to govern fiscal policy will be necessary to ensure fiscal prudence.