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Reforming Public Finances in Nepal

Written by Philipp Krause

​Complicated and fast-changing politics. Political parties distributed across the left–right spectrum; ethnic and regional interests; fault lines old and new, all changing regularly. The development challenges are great, but there are also some important successes towards the MDGs in some areas, notably maternal health.

There is great pressure on the Government to perform better and deliver more. The public sector seems quite capable in some areas, but very weak in others. Donors complain about corruption and leakage of funds. The potential for growth and poverty reduction is great, if only key investments in infrastructure could be made swiftly and effectively. Yet the public financial management system is struggling to deliver. Behind it all is the memory of the recent conflict, the political reconciliation, and the efforts by the major political movers to agree on a framework to settle the main differences and move towards a better future. This is Nepal, a tricky environment for public financial management reform, and a complicated place for external advisors to add value without dealing with issues beyond their technical expertise.

Nepal is a polity in transition. Since 2006, the main parties have been working on a negotiated settlement that would result in a new constitution. In the meantime, much of the government is working in a mode where improvisation verges on permanence. The constitution is ‘interim’, elected local bodies have been suspended for years, and key accountability mechanisms are shaky. For the last year, there has not been an elected legislature, and the budget process is in disarray. Yet at the same time, the Government managed to introduce a Treasury Single Account – a unified system to handle government cash expenses – covering the entire country, which not only required overcoming entrenched interests but also maintaining steady internet connections to Government offices in remote Himalayan valleys.

It isn’t easy to chart a course for future reforms when so much is in flux. For the past year, ODI has been working with the Government and a group of interested donors led by the World Bank to develop reform options that are feasible to do, important to the actors involved and likely to contribute to better development outcomes. Our brief was to deliver an analysis that was operational and practical. Instead of producing a purely technical public financial management analysis, we also considered those elusive ‘non-technical’ factors, without forgetting that the work would ultimately have to make sense to technicalstakeholders who don’t have time to read up on their North, Fukuyama and Booth.

After research in Kathmandu and other parts of the country, and extensive conversations with current and former ministers and senior civil servants, academics, local government representatives, private-sector and civil-society stakeholders, we took a problem-centric approach. Instead of looking at the gaps between Nepal’s public financial management architecture and a rich-country ideal, we only looked at issues that really bothered people. We settled on four priority areas for reform: (1) oversight and scrutiny, (2) the budget process, (3) implementation of capital spending, and (4) central finance institutions. Our report, Operational risk assessment of public financial management reform in Nepal: a review of challenges and opportunities, which was formally launched in Nepal last week, identifies next steps for each of these areas, divided into quick wins, reforms needing sustained engagement, and long-term reforms. The launch event saw the government sharing the diagnosis and taking the lead on the emerging agenda. There was considerable media echo, with articles in in the Kathmandu Post,República,Nepal News, andPeople’s Review.

This is a good opportunity to take stock of what we’ve learned from this engagement. Two lessons stand out:

1.       It’s actually not always the politics… We deliberately avoided the label ‘political economy’, for which in any case every 3 social scientists have 5 different definitions. One of the more striking findings of our work was that many issues are ultimately self-contained: public financial management challenges amenable to technical solutions. For instance, the budget process suffers from procedural delays in preparation and execution that make it more difficult to implement the investment plans of the country. There is nothing particular to Nepal’s political legacy, its history of conflict, or indeed its income level needed to understand this problem, and it could just as easily be found in many other places as well. The challenge is often much more institutional than ‘capital-P’ political. It comes down to different ministries working together, or not, procedural bottlenecks and having right people in the right places.

2.       … except when it is. That said, the nature of the political system throws up some very solid constraints, and external advisors would do well to take them seriously. For instance, Nepal’s politics is characterised by a fragmented party system and unstable, short-lived coalition governments. We know from political-science research into fiscal institutions that solutions that rely on centralised budget authority based on a unified government delegating power to a strong minister of finance – think Medium-Term Expenditure Frameworks – are bound to fail in such contexts. It’s hard to generalise these things across countries too much, because there are so many unobservable factors, but an analysis of the institutional setting can give at least a few pointers.

There has been a lot of debate recently about the limits of institutional reform, and how reforms could be done differently. There is a lot of work still left to be done and it would be a stretch to say that the policy community has a good understanding of how these things work. But a lot of the building blocks for successful tinkering are already known, and there probably won’t be a silver bullet. If external advisors want to be relevant in what is ultimately a domestic reform debate, then they’ll have to bring both the technical skills and the political knowledge.