NPC prepares formula for fund distribution

May 22, 2017

The Kathmandu Post, Rupak D Sharma, 21st May 2017, Kathmandu

The National Planning Commission (NPC) has devised a formula for distribution of financial resources among local bodies, which, if approved, could end the confusion over allocation of funds for authorities at the grassroots and expedite the process of formulating budget for the next fiscal year.

The apex body that frames the country’s development plans and policies took the initiative to devise the formula in the absence of the National Natural Resources and Fiscal Commission.

The formula, which is “scientific”, was discussed during NPC’s informal meeting held on Saturday, according to NPC Member Swarnim Wagle. The meeting was attended by the top brass of the commission, including its vice chairman Min Bahadur Shrestha.

“The formula will now be shared with the Ministry of Finance and other concerned ministries to get their feedback,” said Wagle.

The formula has used indicators such as population, geographical area, access to electricity, illiteracy rate and cost of service delivery for allocation of financial resources to metropolitan and sub-metropolitan cities, municipalities and village councils. 

Of these indicators, a weight of 70 percent has been allotted to population, while cost of service delivery and geographical area have received a weight of 15 percent. Another 15 percent of the weight has been allotted to development indicators, such as access to electricity and illiteracy rate.

“If this formula is used, funds can be distributed in an equitable manner without penalising local bodies that are backward in terms of development,” Wagle said.

As per the formula, even the smallest village council will get at least 0.05 percent of the total fund allocated for local bodies, while smallest municipality will be entitled to at least 0.15 percent of the fund.

Similarly, metropolitan cities, like Kathmandu, can get up to 2 percent of the total fund earmarked for local bodies, Wagle said, without elaborating.

Although the NPC has come up with a clear guideline on distribution of funds in an equitable manner among local bodies, the government is yet to decide on the portion of total budget that needs to be transferred to the local level. This delay has created confusion among officials at the Ministry of Finance and slowed down the process of formulating the budget for the fiscal year 2017-18.

“Because of this, we still have not been able to finalise budget for local bodies,” Madhu Kumar Marasini, head of the Budget and Programme Division at the Ministry of Finance, said.

Earlier, the NPC had asked the government to cap the budget for the next fiscal year at Rs1,156 billion. 

Of this amount, Rs708.8 billion was earmarked for recurrent expenditure, Rs330.6 for capital expenditure and Rs116.6 for financing provision. 

These budget ceilings were extended based on government’s revenue collection projection of around Rs692 billion for the next fiscal year.

A portion of this revenue now has to go directly to the local bodies, as the government has decided to devolve the entire responsibility of budget formulation for the local level to local bodies. This is a major shift from current practice where the central government has been playing a bigger role in finalising annual budgetary programmes for local bodies. The move is aimed at empowering newly-formed local bodies following adoption of the federal system of governance. 

The country 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 at the local level and district coordination committees at the district level.

Deputy Prime Minister and Finance Minister Krishna Bahadur Mahara has already directed that bank accounts be immediately opened for 744 local bodies, so that they can start receiving block grants from the central government.

Yet 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 devise formula for distribution of revenue 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. Another law required for smooth implementation of the budget in a federal system is the Intergovernmental Fiscal Transfer Act, which basically promotes fiscal discipline and good governance, and ensures resources are distributed in a fair and equitable manner.

The drafts of these bills have already been prepared by the Ministry of Finance and have been forwarded to the Ministry of Law for review. They will soon be tabled in the Cabinet before they are forwarded to Parliament