Since the establishment of the provincial structure in Nepal, all the provinces have introduced seven budgets from the fiscal year 2018-19 through 2024-25. Despite this, many individuals, including foreign observers and researchers, remain unclear about how these provincial budgets are formulated. Questions often arise regarding the process, the legal frameworks that guide them, and the overall structure of provincial budget formulation. This article delves into the legal aspects of provincial budget formulation to offer insights into the processes and regulations that shape this crucial aspect of governance.

Budget, a formal statement of projected resources and expenditures for various programmes and projects, promotes socio-economic development, infrastructure growth, gender equality, information technology advancement and good governance within a fiscal year. It is a detailed plan that outlines the government's financial strategy for a specific period, including revenue generation and fund allocation. A well-structured budget incorporates planning elements such as setting objectives, defining strategies, estimating resources and establishing standards for monitoring and evaluation.

Provincial budget

Each province’s Minister of Economic Affairs and Planning is responsible for presenting the provincial budget to the legislature. This includes revenue estimates, expenditures from the consolidated fund and other financial details necessary for the transparent functioning of the provincial government. Provincial governments are tasked with formulating plans that enhance socioeconomic development and improve connectivity within their respective jurisdictions, as defined by the Constitution and various laws. The interdependence between planning and budgeting is crucial as it allows provinces to exercise their power to make laws, decisions and budgets and effectively implement plans and policies.

While the timing and key elements of the budget submission are consistent across provinces, the preparation process may vary slightly. However, the foundational legal frameworks, such as the Finance Procedure Act, 2074, and the Intergovernmental Fiscal Management Act, 2074, provide a consistent basis for budget formulation across the provinces.

The budget preparation process begins with the projection of revenue and expenditure. Under the Intergovernmental Finance Arrangement Act, 2074, provincial governments in Nepal must submit detailed financial statistics, including revenue and expenditure projections for the upcoming fiscal year, to the Federal Ministry of Finance by mid-January (Poush). This step is crucial as it sets the stage for the federal government to make the projected details of revenue distribution and fiscal equalisation grants available to the provincial governments by mid-March (Falgun). The coordination between federal and provincial governments at this stage ensures that resources are adequately distributed, allowing provinces to plan their budgets effectively.

Following this, the Finance Procedure Act, 2074, mandates the development of a Medium-Term Expenditure Framework (MTEF) in all seven provinces. The MTEF is an essential tool for budget formulation as it provides a functional overview of proposed plans and programmes, including expected costs, returns and duration. It also prioritises all plans and programmes, ensuring that resources are allocated efficiently and that the budget aligns with the long-term development goals of the province.

The Ministry of Economic Affairs and Planning (MoEAP) plays a pivotal role in forecasting the necessary resources and expenditures for the upcoming fiscal year, which must be completed by mid-February (Magh). To facilitate this process, a Resource Estimation Committee can be established, drawing on the expertise of various stakeholders. Provinces have a Policy and Planning Commission, with Resource Committees in Karnali and Sudurpaschim under the Economic Affairs Secretary's chairmanship, and in Koshi Province and Bagmati Province under the Minister of Economic Affairs' chairmanship. These committees are responsible for estimating the resources and expenditures based on the Medium-Term Expenditure Framework and presenting their findings to the Minister of Economic Affairs, ensuring that the budget is grounded in realistic financial projections.

Once the resource estimation is complete, the MoEAP must send budget ceilings, guidelines and other directives to the relevant ministries and line agencies by the second week of March (Falgun). These budget ceilings and guidelines must be entered into the Province Line Ministry Budget Information System (PLMBIS) and communicated to the concerned ministries and agencies. The ministries then prepare their budget proposals and policies for the upcoming fiscal year, adhering to the provided ceilings and guidelines, and submit them to the MoEAP within the stipulated time frame.

The provincial ministries and line agencies are crucial in the budget formulation process. They must submit detailed plans and budgets, adhering to the ceilings and guidelines provided by the MoEAP, within the required timeframe. According to the Finance Procedure Act, these plans must be based on the MTEF and include projections of revenue sources and expenditures for the upcoming fiscal year and the following two years. When proposing the budget, ministries must also submit the physical and financial progress reports for the previous fiscal year and the first six months of the current fiscal year. These budgets are then discussed at the MoEAP and the provincial Policy and Planning Commission, ensuring alignment with the province’s overall development goals.

Discussion and formulation

A critical component of the budget preparation process is the pre-budget discussion. At least two months before the budget submission, the MoEAP is required to present the budget’s principles, objectives, priorities and key policies to the Province Assembly for pre-budget discussions. This step allows for a thorough examination of the proposed budget, ensuring that it reflects the province’s development priorities and is aligned with the broader goals of the provincial government.

The final stage in the budget formulation process is submitting the budget to the Province Assembly. Each provincial Minister of Economic Affairs and Planning should submit the estimates of revenue and expenditure for the upcoming fiscal year to the Province Assembly by June 15 (Ashad 1). According to the Finance Procedure Act, this submission must include the expenditures to be incurred from the Provincial Consolidated Fund and those authorised by the Province Finance Act and the previous fiscal year’s actual revenue and expenditure, MTEF, grants, public debt and investments. This comprehensive presentation ensures transparency and allows for informed decision-making by the provincial legislature.

Once the budget is approved and the Appropriation Act or the Advance Expenditure Act is released, authorised agencies can begin utilising the allocated funds as outlined in the annexes or schedules of the Appropriation Act. The Finance Procedure Act provides clear guidelines for the distribution and expenditure of these funds to ensure effective and efficient use of resources. When multiple agencies are involved, the upper office must distribute the funds within seven days. If funds under one ministry are to be used by another, the receiving agency's secretary must authorise the expenditure. Payments are processed through the treasury single account system, with the agency head responsible for expenditure management, accounting, reporting and addressing any discrepancies.

If the expected funds specified in the Province Appropriation Act are not received, the MoEAP can reallocate the funds to other budget headings according to the rules. It also publishes semi-annual and annual evaluation reports on budget implementation. The Intergovernmental Finance Management Act, 2074, requires all government levels to conduct annual budget implementation reviews and make these reports public by mid-November (Kartik). To maintain consistency in financial reporting, provincial governments must use an accounting system aligned with the federal government's, which the Auditor General approves.

Finally, Nepal's provincial budgeting and planning process, grounded in a strong legal framework, ensures transparency, accountability and effective resource allocation. This approach enables provincial governments to align budgets with development goals, maintain financial discipline and address regional needs, contributing to overall socioeconomic growth and efficient resource utilisation.