The Inter-Governmental Fiscal Arrangement(IGFA) Act 2017, makes it mandatory for all three orders of government to prepare a Mid-Term Expenditure Framework (MTEF) to align developmental projects and budget formulation. The practice of a 3-year expenditure plan had been intact at sub-central levels until the introduction of All Party Mechanism in 2007/08 following the Comprehensive Peace accord. But between 2007 and 2016 the practice remained dormant. The MTEF is a necessary component; a linkage to a country’s annual budget, and its periodic plan.
It is standard global practice for a government to present MTEF as an instrument to detail expenditure priorities and sectoral plan and establish linkages with the overall periodic development outlook of the country. In Nepal, the IGFA Act maintains that an MTEF must provide a rationale of feasibility for a project, its outputs & outcomes, estimated expenditure for the upcoming 2 fiscal years as well as key indicators to denote the progress of the project. There is a consensus among public finance experts and bureaucrats that the exercise is worth the time and effort. However, it is unfortunate that even 3 years after establishing a functional tier of local government, the practice has been almost non-existent.
The National Planning Commission (NPC), de facto, has been leading the adoption of the MTEF approach, at least for the Federal agencies. The MTEF aids the NPC in gearing its project completion rate as it has to carry out the development of projects relating to national importance. The NPC, well resourced with the technical as well as financial capabilities, has published the MTEF for FY 2021-23 and is vying to set precedence for others to follow. But the same is not true about the agencies and governments at the provincial & local level. The Auditor General’s report expresses grave concerns over the almost non-existent practice of preparing MTEF at the local level.
The state NPCs do not have a blueprint for instilling this practice among local governments who requrie handholding of a significant degree during the process. At the same time, agencies at the local level are finding the task too tedious, and they lack the technical know-how, an impediment given their current human resource capacity. A special agreement had granted a grace period to the local governments until 2019. The second and third tier of governments were expected to enhance their capacity during this grace period. However, even after all these months, significant enhancement of local government capacity has not been made. Failure to submit an MTEF from the fiscal year 2020/21 can have implications for the local and provincial governments. Governments may lose special grant privileges, see a reduction of federal-complimentary grants, cope fines or face disciplinary action (against their administrative staff).
The gains of adapting an MTEF have more upside for the Local and provincial governments including predictability in their budgets, enhanced capacity to formulate estimations more accurately, preparing feasibility criteria and performance indicators. More importantly, given that the exercise is carried out diligently, it has the potential to shape a culture of objective assessment among the two tiers of governments and to create ownership up to the block levels.