New World Bank Report Highlights Reforms to Support Fiscal Federalism and Green Growth in Nepal

KATMANDOU, December 6, 2021 – Nepal has made significant progress in implementing fiscal federalism as key reforms are needed to support fiscal sustainability and Nepal’s transition to green, resilient and inclusive development. Public Expenditure Review (PER) Report on Fiscal Policy for Sustainable Development launched today.

With the country’s transition to federalism, spending responsibilities have been delegated to subnational governments which are primarily funded through intergovernmental transfers and revenue sharing. These now represent between 8 and 9% of the GDP per year (or nearly 30% of the annual budget). While federalism is helping to bring policymaking closer to the people, it has also increased budget spending and (exacerbated by the COVID-19 pandemic) has led to a sharp increase in budget deficits and public debt, the report says. .

“This report provides an analytical basis to inform our reform efforts to strengthen federalism and create fiscal space to support our new focus on a green, resilient and inclusive (GRID) development model”, declared Mr. Madhu Kumar Marasini, Financial Secretary. “This complements our ongoing efforts to refine the tax transfer system and put in place monitoring and reporting systems for more results-oriented and accountable local service delivery. “

The PER identifies key reforms to help Nepal strengthen fiscal sustainability and initiate a transition to a GRID path. It identifies the following five priority reforms: (i) Encourage updating of sub-national spending responsibilities through the system of intergovernmental grants; (ii) support exports and job creation through import rights reforms; (iii) strengthening domestic revenue, for example by revising VAT exemptions; (iv) improvement of public investment spending through the deployment of the National Bank of Projects; and (v) provide fiscal incentives for a transition to green growth.

“The World Bank will continue to support government reforms aimed at improving fiscal sustainability and the implementation of fiscal federalism, building on the recommendations of the PER report” noted Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal and Sri Lanka. “This report complements our PER on Human Development, both of which will help inform the design of World Bank support to Nepal, notably through our continued support through our various development policy credits. “

The report also highlights the importance of strengthening investment processes and fiscal policies for green growth, and fiscal policy reforms to enable Nepal to use its surplus green electricity to alleviate pollution from the environment. air to protect human health and the economy.

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