Budgeting 12/5/2018 Trilochan Poudyal

Table of Contents Budget Concept Main Objectives Budget Types Budget Classification Principles of Budgeting Budgeting Framework: Policy, Program, Legal Budget Cycle: Formulation, Execution, Evaluation Budgeting in Nepal’s Context Recent Trends: Gender, Pro-poor, Climate Change, Nutrition Sensitive Budgeting. Challenges and Way Forward Major features of financial bill 2074 12/5/2018

1. Budget Concept Introduced in England in 1773 from a French word ‘bougette’ that means a leather bag, while opening it by the Chancellor of Exchequer in the Parliament to present government’s financial plan for approval. A financial plan and a major policy instrument to establish macro economic stability, allocative efficiency and fair distribution of income/resources. A policy making tool used to translate strategic objectives into programs and services to meet the socio-economic needs of the people. Contains overview of the economy; annual revenue and expenditure plan; information on assets and liabilities; and appropriations. 12/5/2018

2. Main objectives of budget enhance economic growth; establish a sustainable fiscal framework; allocate resources to programs on the basis of governmental priorities and program effectiveness; operate and deliver public services efficiently; ensure that the budget reflects citizens’ preferences; ensure that spending units are well equipped and are accountable for their actions; maintain balance between socio-economic and spatial (geographic) development; and make socio-economic transformation of the country. 12/5/2018

3. Budget Types 12/5/2018

Line item budget or ‘incremental’, where certain amount is added to the last year’s figures, a traditional way of estimating the expenditures. Zero-base budget calls for an activity to be started from scratch i.e., zero-base. A thorough analysis, re-examination, review & justification needed. Program budget is a result-oriented budgeting system that specifies the programs/activities and seeks to relate costs to outputs. Performance budget focuses to improve the efficiency of programs and functions. It quantifies the entire result-based chain as inputs, outputs, outcomes, and impacts to the common people. Voted and non-voted: Non-voted expenditures reflect the salaries of the heads of State, Government, judiciary, interest payment etc. All expenses need to be voted in the Parliament except the non-voted ones. 12/5/2018

Capital and operating/recurrent; Development and ordinary; Discretionary and non-discretionary: used in one’s own discretion in a more flexible manner is called discretionary and opposite is non-discretionary; Capital and operating/recurrent; Development and ordinary; Participatory and non-participatory: If the beneficiaries are involved in the process of budgeting it is participatory and opposite is non-participatory. Core and external: Core budget is the expense to be made by the government treasury. The donors execute different programs directly through their budget is external one. Central, provincial and local budget: Central budget is allocated to and spent by the central government institutions. Provincial budget is the budget of the sub-national entities allocated to and spent by the local governments within their territorial jurisdictions. 12/5/2018

4. Budget Classification 12/5/2018

Classification by Examples Government expenditure needs to be classified for budgeting, accounting and financial reporting. Bases of classification: Classification by Examples Organizational Ministry of Finance, Ministry of Agriculture, Ministry of Education Objective Wages and salaries, Travel Allowances, purchases of materials and equipment Economic Expenditure on goods and services, transfer payments, subsidies, interest payment, social security benefits. Functional Defence, education, health, irrigation, public Health, social services, economic services etc. Line Item Compensation of staff, subsidies, grants etc. Program Vocational Education, Malaria eradication, Agricultural extension. Location Central, Provincial, District, Municipal. 12/5/2018

5. Principles of Budgeting 12/5/2018

A sound budgeting and financial management system is needed for maintaining macro economic stability (maintaining fiscal discipline; ensuring efficiency of public resources; maintaining monetary stability; strengthening financial system; and enhancing private sector in economic activities). a) Annuality: the budget is prepared for and executed over one year. Unutilized grants lapse at the end of the fiscal year. b) Universality: all the resources should be directed to a common pool or fund to be allocated and used for expenditures according to the priorities. c) Accuracy and timeliness: formulation, approval, execution, accounting, monitoring, reporting and auditing. d) Comprehensiveness: covering several years and all the fiscal operations (revenues/expenditures & the full accounting of transactions). 12/5/2018

e) Fiscal discipline coupled with economy implies that the budget absorbs only the resources required to implement the policies/ programs. f) Legitimacy calls for the greater involvement of the stakeholders in the budgetary processes. Wider participation deepens debate and makes greater social consensus possible even on difficult trade-offs. g) Flexibility intends to provide authority to the managers over the managerial decisions accompanied by transparency and accountability. h) Predictability ensures the timely flow of funds to programs/ projects formulated and approved. i) Contestability is the quid pro quo (agreement) for greater predictability in policy development and service provision. It ensures that existing policy is subject to review and evaluation and that line ministries’ performance is subject to continuous improvement. 12/5/2018

j) Information underpins honesty, sound decision-making, and accurate and timely information of costs, outputs and outcomes. k) Honesty denotes a budget derived from technically & politically unbiased projections. Optimistic projections soften the budget constraint on setting strategic priorities. l) Transparency and accountability entail that the decisions, together with their basis and the results and the costs, should be accessible, clear and communicated to the wider community. Decision makers need information on all issues before making decisions and would be held responsible for the exercise of their authority thereafter. 12/5/2018

m) Fine processes and methods imply outward looking fiscal framework, focus on service outputs/ outcomes, and a classification linking the expenses to spending units/ purposes. n) Allocative efficiency calls for the allocation of resources and consequently the expenditures based on established priorities and program effectiveness. o) Operational and managerial efficiency means delivery of public goods and services should be cost efficient and of high quality. It should be supported by accountability for service levels and outputs and discretion in the relative use of inputs. p) Accountability/ control calls for reinforcements by comprehensiveness, prioritization and systematic budget and expenditure reviews, execution controls and post execution reporting and auditing. 12/5/2018

Budgeting Framework 6.1 Policy framework: Meeting the goals and targets such as of the SDGs, MDGs, SAARCDGs, LDC Graduation strategies, Plan Objectives, Medium Term Expenditure Framework; Meeting Sectoral Policies and Targets; Reducing poverty; Better Public Service Delivery etc. 6.2 Legal framework: The Constitution; Public Finance and Expenditure Management Law; Public Procurement Law; Int’l Monetary Fund’s guidelines. 6.3 Other documents of legal importance such as multilateral and bilateral agreements, commitments. 12/5/2018

7. Budget Cycle 12/5/2018

Budget Cycle Formulation and Approval Budget Execution Evaluation: Control and External Audit 12/5/2018

8. Budgetary Process in Nepal’s Context 12/5/2018

8. 1 Resource Estimation by the Resource Committee at NPC; 8 8.1 Resource Estimation by the Resource Committee at NPC; 8.2 Budget Ceiling and Guidelines by NPC (by Sector and the District); 8.3 Budget Formulation: Top-down, Bottom-up, Lateral ; 8.4 Budget Discussion at the Ministry/NPC/MOF; 8.5 Program-budget approval by NPC & the Cabinet to submit to the Parliament; 8.6 Budget Approval followed by Spending authorization with guidelines by MOF; 8.7 Budget disbursement and execution by spending Units; 8.8 Treasury Single Account (TSA) and Internal audit; 8.9 External/Final audit and reporting to Head of the State; 8.10 Discussion on the Parliament- Public Accounts Committee and action to be taken up thereafter. 12/5/2018

9. Recent Trends 9.1 Gender Budgeting: Male and female distinct from actual biological sex while gender is a social construct. Attributing to their reproductive power, women play multiple roles in the households and thus deeply entangle in domestic chorus. Men predominantly grabbed the opportunities in the society lagging women far behind. With the growing human consciousness, gender equality has been largely advocated and gender budgeting is a part of it. Main thrust of gender budgeting is to transform financial and budgetary policies towards achieving gender equality. Gender responsive budget was first introduced in Australia in 1984 as the gender mainstreaming strategy and later expanded to other countries including South Asia. http://www.mof.gov.np/en/gender-responsive-budget-76.html 12/5/2018

12/5/2018

9.2 Pro-poor Budgeting: budget that focuses on reducing poverty to the targeted level. 9.3 Climate Change Budgeting: addressing the concerns of climate change across the sectors 9.4 LDC graduation consistent budgeting: a thrust for graduating Nepal from the LDC category to DC status by 2022. Also, Vision 2030 in progress. 9.5 Post-disaster Rehabilitation and Reconstruction : Rs 146 Billion. 9.6 Projects of National Pride: 21 (irrigation 4, roads 7, power 3, airports 3, culture 2, drinking water 1, forestry 1=21) 9.7 Priority-wise allocation: Budget for prioritized project 12/5/2018

10. Challenges and Way Forward Maintaining macro-economic stability (maintaining fiscal discipline; ensuring efficiency of public resources; maintaining monetary stability; strengthening financial system; and enhancing private sector in economic activities) and allocative efficiency; (scattered resources, issues of common virement) Balancing allocation between capital and recurrent expenditure Streamlining resources to post-MDGs/SDGs, SAARCDGs, 13th Plan/LDC graduation strategies/ programs, ad hoc/political project demands; Balancing spatial distribution(ecological zones, development regions; rural/urban): physical connectivity and Electrification; 12/5/2018

5. Balancing allocation across targeted areas (targeted districts, social groups); 6. Ensuring budget for the projects of national pride 7. Dependency on external sources (22.5%); 8. Low level of spending (surplus budget!); 9. Distribution oriented (social security, growth in salary and facilities, constituency development programs, relief package for conflict affected people, redressing the concerns of the people affected by natural disasters; and to the farmers in terms of loan and subsidies); 12/5/2018

10. Imbalance of payment in foreign trade (1:12. 47. ); 11 10. Imbalance of payment in foreign trade (1:12.47*); 11. Remittance oriented economy often unsustainable; 12. Ignoring industrial sector development (overlooking the issues of sick industries); 13. Unsustainable social security allocation (pension, security benefit age); 14. New generation economic reforms in doldrums (stagnation); 15. Addressing the consumerist behavior of the ever ambitious public sentiments’! and 16. Post Earthquake Rehabilitation & Reconstruction. 12/5/2018

11. Major Highlights of Finance Bill 2074 Allocation of budget to Local level Rs. 225.05 Billion. Earthquake Rehabilitation Budget Rs 146 Billion. Programs for Energy sector got the budget of Rs. 62.47 billion. Budhigandaki Hydropower Project got the budget of Rs 5.33 Billion. Nijghad,Gautam Buddha and Pokhara International airports jointly got Rs. 13.72 billion. Hulaki Rajmarga got the Budget of Rs 4.27 Billion. Kathamandu-Nijghad Fast Track garnered Rs 10.14 Billion. 12/5/2018

Residential Budget Rs 2.44 Billion Under Janata Aabas program. Melamchi water project got the budget of Rs. 6.57 billion and is targeted to be completed within this year. Residential Budget Rs 2.44 Billion Under Janata Aabas program. Prime Minister Agricultural fund Rs 5 Billion. National trading, food organization, agricultural equipment center etc to be merged and national suppliers is to be created. Health Insurance to all people with in 3 years. 12/5/2018

Both Life and General Insurance Company shall now re-Insure a portion of their risk with Nepal Reinsurance Company Ltd. At least one branch of commercial bank at each of the Village Municipality and municipality needs to be established and the banking operation of each local level needs to be done through commercial bank only. Individual going abroad needs to open bank account compulsorily for remittance purpose. Newly appointed government employee from 1st Shrawan, 2074 shall have to contribute towards retirement while drawing salary for each month. Government shall also contribute for the same fund. 12/5/2018

Financial summary of Budget 2017 Heading Allocation(Billion) Percentage Re-Current Expenditure 803 62.83% Capital Expenditure 335 26.21% Financial Management 140 10.97% Total Budget Allocated 1279 100.00% 12/5/2018

Heading Amount(Billion) Revenue 730.05 Repayment of debt principal 15.00 Foreign Grant 72.17 Foreign Loan 214.04 Cash reserve of fiscal year 2016-17 102.73 Internal Loan 145.00 Total 1,278.99 12/5/2018

How may I help you? 12/5/2018

Thank You 12/5/2018