Provinces and local governments can raise a combined internal loans up to Rs18.33 billion in the next fiscal year 2019-20 under the ceiling fixed by the National Natural Resources and Fiscal Commission.

On May 20, the commission recommended the ceiling for internal loans which allows the provinces and local governments raise up to 10 percent of their internal revenue and resources received through revenue sharing among three tiers of government.

According to the commission, the cumulative revenue of seven  provinces is projected at 87.65 billion, including Rs64.36 billion through the revenue sharing mechanism. So, the  provinces can raise Rs 8.76 billion in internal loans based on 10 percent of their combined revenue.

As far as the local governments are concerned, 754 local units—municipalities and rural municipalities—are projected to generate internal revenue of Rs24.94 billion in the next fiscal and receive an additional Rs70.83 billion under the revenue sharing mechanism.

The local governments will have a combined revenue of Rs95.78 billion, allowing them to raise a maximum of Rs9.57 billion in internal loans.

Article 251 of the constitution allows all three tiers of government to raise internal loans as per the limit recommended by the commission. Internal loan is one of the important sources for the local governments to fill the resources gap to implement the planned projects.

“We had also set a 10 percent limit on the revenue base for the provinces and local governments for the current fiscal year, we have relaxed some provisions for the next fiscal,” said Gopi Krishna Khanal, spokesperson for the commission.

“For example, loans that the local governments receive through the Town Development Committees in order to invest in particular projects do not come under the limit set by the commission.”

According to the commission, debts raised within the country can only be used for the projects that helps in capital formation, employment generation and ensure long-term benefits to the people. But they cannot be used for administrative expenditure.

Although the federal government can raise domestic debt on the basis of the projected gross domestic product (GDP) of the country, the revenue base has been made the basis for setting the limit for the provinces and local governments.

“As we don’t have actual data about provinces, we cannot set limits for them based on GDP,” said Khanal.

For the centre, the commission has set a maximum limit of domestic debt at 5 percent of projected GDP for the fiscal year 2019-20. As for the third quarter of the current fiscal, the total domestic debt of the federal government stands at Rs383.5 billion, according to Financial Comptroller General Office, a govt body which keeps government’s accounts.

Despite the formation of elected governments at provincial and local levels since three tiers of elections in 2017, the provincial and local governments are yet to raise domestic debt.

In the current fiscal year, the governments of Province 2, Gandaki and Karnali provinces had presented their respective budgets with a provision of raising internal loans. But none of them have implemented it so far.

“They have failed to spend available resources due to the lack of necessary laws regarding domestic debt and lack of financial instruments for the purpose,” the commission stated.

Officials at the provinces and local governments are, however, keen to raise the domestic debt in the next fiscal year to bridge the resource gap.

For example, the Province 5 government, which remained silent on internal loans this fiscal year, is considering to raise the debt in the next fiscal.

“Obviously, we plan to raise the domestic debt in the next fiscal year,” said Kishor Joshi, secretary at Economic Affairs and Planning of the Province 5 government. “We are currently in the consultation process. We present our budget only after the federal government presents its annual financial statement.”

Once the federal government presents the budget on May 29, the provincial governments should present their budget by June 16 and the local governments by June 25 as per the Intergovernmental Fiscal Management Act