Last week, the Office of the Auditor General released its 60th annual report, which analyses the financial situation of Nepal's federal units, including the provinces. According to the report, in Fiscal Year (FY) 2021-22, the total income of the provinces was Rs237 billion, and the expenditure was Rs187 billion (about 89 percent). The average expenditure of the provinces for the past five years was 65 percent. These statistics are enough for those who say the provinces are not spending their fiscal resources. In this piece, I discuss the provinces' fiscal resources (purse), taking the provincial budgets as the basis for the analysis.

The early years

The provincial governments were formed in November/December 2017 after the Government of Nepal (GoN) allocated a fiscal equalisation grant of Rs1.2 billion to each province. The provinces carried out their budgets for FY 2017/18 by estimating the same grant as the total fiscal resource. The total budget of the seven provinces at that time was Rs7.14 billion. But then, there were very few human resources in the provinces, and the institutional structures were yet to be formed at the time. Moreover, the provinces had not created spending procedures until then. When the provinces brought a total budget of Rs7.14 billion, the expenditure was only Rs2.52 billion (35.29 percent). The provinces presented their first full budgets, totalling Rs208 billion, for FY 2018-19. Koshi Province had the highest budget, at Rs35.93 billion, while Sudhurpaschim had the lowest, at Rs25.60 billion.

The operational structures were not ready even after the provinces brought their full budgets. Working hands and structures were created only around November 2018, after the employees' adjustment. Although an estimated 22,000 employees were said to be needed in the provinces, only 13,000 were adjusted. Some of the adjusted employees did not take charge, while some returned after filing court cases. What's more, there is no stability for employees yet as they are, among other things, being transferred now and then. Add to that the delay in adjusting security forces, not least the police, it is clear that the provinces have yet to realise their full potential to govern.

Desperate condition

Starting from Rs7 billion, the budget size of the provinces has reached Rs305 billion in the current FY 2022-23. If we review the budget of all seven provinces from 2018-19 to 2022-23, the total figure reaches Rs1299 billion. But unfortunately, the five-year budgets of the seven provinces are lower than the budget of the federal government for the base year period (FY 2018-19). In the year 2018-19, GoN’s budget was Rs1,315 billion. The provincial budgets are even lower than the GoN's Rs1,793 billion budget for the ongoing fiscal year. This is how desperate the condition of the provinces is.

The fact that the five-year budget of all seven provinces is lower than the base year budget of the GoN shows how undervalued the provinces are in Nepal. The government does not seem to be serious about the financial resources and means of the provinces. There is a need for a serious review at the political level of the weak financial situation of the provinces. Political parties should be serious about issues, including the low revenue base of the provinces.

Disappointing internal share

Although the constitution recognises the provinces as the centre of development, the scope of internal resources is weak as the revenue is centralised. To minimise the fiscal gap, the constitution allows the provinces to raise resources through fiscal transfers. However, the provinces have been devalued not only in tax revenue but also in fiscal transfers. In the current fiscal year 2022-23, the provinces have received Rs129 billion through fiscal transfer, which is 7.22 percent of the GoN’s budget. The share of fiscal equalisation grants in the fiscal transfers is only 3.42 percent. A simple principle of grant distribution is that the ratio of fiscal equalisation grants should be larger. However, the ratio is declining each year.

In terms of the contribution of various sectors to the total fiscal resources (budget) of the provinces, the share of grants in the current FY 2022-23 budget is 42.90 percent. This figure includes fiscal equalisation, conditional, special, and matching grants. The portion of revenue sharing is 24.5 percent. Provinces and local levels each receive 15-15 percent of the resources collected from the value-added taxes and excise duties from domestic production. If this figure is added to the fiscal transfer, the share of fiscal transfers is 67 percent.

Madhes, Gandaki, and Lumbini Provinces face a budget deficit. Madhes has a budget deficit of Rs1.82 billion, Gandaki Rs2.0 billion, and Lumbini Rs1.0 billion. Overall, the share of this figure in the total budget is Rs1.6 percent. The share of cash balance in the total budget is 15.6 percent. The cash balance is the amount left over from the previous fiscal year. Bagmati has the highest cash balance of Rs15.62 billion, which is 22 percent of its total budget.

The share of internal tax revenue in the total budget is only 15.5 percent. Certainly, the areas to increase the internal tax revenue of the provinces are limited, and this requires serious reconsideration. However, the reality is that the provinces have not paid much attention to mobilising internal resources. Within the provinces, Bagmati is in a better position as the share of tax revenue in its budget is around 32 percent. Karnali has a lower tax revenue projection of only Rs730 million in FY 2022-23.

The share of tax revenue in its budget is 2.24 percent. Notably, vehicle tax and house land registration fees share a greater portion of provinces' internal revenue.

Provinces can generate internal resources from areas such as entertainment and advertising tax, fines, income from the sale of services and goods, tourism fees, sale of agricultural materials, etc. There is some duplication in the jurisdiction of provinces and local levels when it comes to tax revenues. In such situations, it is essential to maintain a good relationship between these two constituent units.

The financial situation of the provinces is, to tell frankly, pretty disappointing. The basic infrastructure, such as laws, staff, and institutions, among others, should also be reviewed seriously. The provinces also need to pay special attention to the mobilisation of available resources. There are many functional responsibilities to be carried out by the provinces, but the scope of their revenue collection is limited. To fill the gap between the revenue and expenditure needs of the provinces, the GoN should coordinate properly for the collection of revenue under concurrent rights, in addition to encouraging an increase in the scope of revenue. Similarly, it is necessary to pay special attention to increasing the fiscal scope of the provinces by amending the constitution itself.