Budget 2017-18: Govt to transfer funds to local bodies directly

April 12, 2017

The Kathmandu Post, Rupak D Sharma,12th April 2017, Kathmandu

Local bodies, from next fiscal year, will not have to make rounds of different state agencies to receive funds to cover various expenses and execute development works, as the government is all set to devolve the entire responsibility of budget formulation from the central to local level.

The move is aimed at empowering newly-formed local bodies to formulate annual budgetary programmes following adoption of federal system of government. 

The government formally embraced federal setup in March by dissolving different bodies in local, district, zonal and regional levels. These bodies were replaced by 744 new local units and district coordination committees.

Under the new system, the central government will transfer all the funds required by local bodies to bank accounts of village and municipal councils, offices of sub-metropolitan and metropolitan cities, and district coordination committees, according to Madhu Kumar Marasini, head of the Budget and Programme Division at the Ministry of Finance.

“The funds will be transferred based on programmes that are currently being operated at the local level,” Marasini said, adding, “This time we’re helping local bodies to identify programmes. They’ll have to perform this task on their own from next year.”

Funds to operate these programmes will be deposited in bank accounts by district treasury offices soon after the annual budget is presented in Parliament on May 29, Marasini informed.

Deputy Prime Minister and Finance Minister Krishna Bahadur Mahara on Tuesday directed that bank accounts be immediately opened for 744 local bodies. The Financial Sector Management Division of the Ministry of Finance is working in this regard.

With the introduction of the new policy on public finance management, local bodies, for instance, will not have to rely on the Ministry of Federal Affairs and Local Development to receive block grants. Till this fiscal year, each village development committee, which has been replaced by village council, was receiving block grant in the range of Rs1.95 million to Rs5.05 million per year. 

These local bodies also had to rely on different government agencies to acquire funds to execute various development works.

“This practice will end soon,” Marasini said.

While the government is ready to transfer funds to bank accounts of local bodies, it is yet to devise a mechanism based on which funds would be allocated. Currently, block grants, for instance, are extended to local bodies based on various indicators, such as population and human development index.

“We can devise a formula of that kind for fund allocation. We can also earmark funds based on other factors, such as contribution they make to the government’s revenue,” said Member Secretary of the National Planning Commission (NPC), Chandra Kumar Ghimire, who presented the draft of a guideline on budget formulation during a meeting chaired by DPM and Finance Minister Mahara on Tuesday. “We are still working on it.”

To streamline the fund allocation and transfer process, Mahara has directed all government secretaries to submit their recommendations within two days, according to Ghimire. The instruction was given during Tuesday’s meeting, which was attended by secretaries of all the ministries.

The NPC is expected to prepare the final draft of budget formulation guideline based on suggestions laid by various ministries.

The government is facing problems in allocating funds for local bodies because of absence of the National Natural Resources and Fiscal Commission. The commission, once established, will distribute revenues between the federal, state and local governments; set parameters for distribution of grants to state and local governments; and propose debt ceilings for federal, state and local governments.

But the commission can only be formed once the National Natural Resources and Fiscal Commission Act is enforced. Other sets of laws required for smooth implementation of the budget in a federal system are the Intergovernmental Fiscal Transfer Act the Intergovernmental Relations Act.

The Intergovernmental Fiscal Transfer Act basically promotes fiscal discipline and good governance, and ensures resources are distributed in a fair and equitable manner. The Intergovernmental Relations Act, on the other hand, defines relationship between government units at federal, state and local levels so that they could extend cooperation in a cordial manner.

The Finance Ministry and the Prime Minister’s Office are framing drafts of these legislations.

Further delay in formulation of these laws is likely to prevent the government from taking stringent measures to curb anomalies in fund utilisation at the local level.

“We are aware of this problem and are devising mechanisms to mitigate risks,” Ghimire said. “But again absence of laws does not mean we should prevent local bodies from exercising their rights enshrined in the constitution. However, we need to be careful and ensure fiscal discipline is maintained.”