Kathmandu. It has been eight years since the state government started showing the source of internal debt in its budget. The Karnali state had introduced the deficit budget for the first time in the fiscal year 2075/76 BS to raise internal debt. Since then, all the provinces except Bagmati and SudurPaschim have brought the budget in some fiscal year or the other by showing the source of debt.

For the current fiscal year 2082/83 BS, Gandaki and Madhes have mobilized resources to raise internal debt by bringing deficit budget. In the current fiscal year, Gandaki has set a target to raise Rs 1.75 billion while Madhes has set a target to raise Rs 2 billion internal debt. Although the state is legally allowed to raise internal debt, it has been found that they have violated the rules, procedures and discipline by showing the source of this title in the annual budget.

The weaknesses of the state in following the legal process and financial discipline are frequently revealed. It would be against the law to show internal debt as a budgetary source without completing the process, including prior approval of the federal government. However, the provinces are constantly showing internal debt as the budget source without the permission of the Federal Ministry of Finance and the coordination of the Public Debt Management Office.

Secretary at the Gandaki State Ministry of Economic Affairs, Rajendra Dev Pandey, said that although the sources have been shown to collect internal debt based on the recommendations of the National Natural Resources and Finance Commission and the Gandaki State Resource Estimation Committee, the consent of the Federal Ministry of Finance has not been taken.

“We have shown the internal debt as the budget source based on the limit given by the Finance Commission and the ceiling given by the Resource Estimation Committee.

Like Gandaki, madhes province has said that it will raise internal debt this year. But the Madhes province did not take the approval of the federal government. Secretary at the Madhes State Finance Ministry, Ram Kumar Mahato, said that although the budget has shown resources, there is no need to raise loans due to lack of spending capacity.

In the last fiscal year, Madhes had said that it would raise internal debt. However, such loans were not raised due to low budget expenditure, he said. “In the fiscal year 2081/82, we did not need a loan. Because the budget expenditure is very low compared to the allocation. As of the second week of June, the total budget expenditure of Madhes is only around 25 percent. We did not need to raise the loan as all the allocated budget is not spent,” he said.

According to the Constitution of Nepal, 2072 BS, only the federal government can raise external debt. However, the provincial and local levels have the constitutional right to take internal loans. According to Article 251 of the Constitution, there is a clear provision that the National Natural Resources and Finance Commission should recommend the limit of such loans.

Similarly, Section 14 of the Intergovernmental Finance Management Act, 2074 has empowered all the three tiers of government to raise internal debt within the recommendation of the Commission. According to the Act, before taking an internal loan, a proposal should be submitted to the Ministry of Finance along with the plan, possible return, blueprint of loan repayment and details of the lending body.

The federal government can consent to take the loan only if the proposal presented in this way is found to be feasible and implementable. However, in practice, these legal conditions are being ignored by the state government. Mahesh Baral, chief of the Financial Federalism Coordination Division under the Ministry of Finance, said that so far no state has sought consent to raise internal debt. According to him, the laws are being tightened after the provinces repeatedly started violating financial discipline by showing internal debt as a source without the permission of the federal government.

“It is a violation of budget discipline to show billions of rupees as the provinces will take internal loans without taking consent from the federal government. We are trying to make it strict through amending the law,” he said. Baral said that the central government’s permission is required not only for internal loans but also for loans and foreign grants given to the provinces.

With the implementation of federalism, the provinces and local levels have the right to formulate laws, formulate budgets, implement plans and audit, but they have still not shown interest in financial discipline, legal process and practical capacity building. Section 15 of the Economic Procedure and Fiscal Responsibility Act provides for bringing a deficit budget. However, the states have not fulfilled the condition of preparing a clear plan to mobilize resources to meet the deficit. Similarly, according to Section 6 of the Public Debt Management Act, 2079, bonds can be issued only with the consent of the federal government and on the recommendation of the Commission. Even for this, the state has not taken any initiative.

According to Gopi Krishna Koirala, chief of the Public Debt Management Office, so far no state has initiated the process to raise internal debt through the office. “The states also have to raise loans through the Public Debt Management Office. However, no initiative has been taken by any state so far. I don’t know if it has been approved by the Finance Ministry,” Koirala said.

In this way, the state government has neither complied with the law nor shown seriousness in practical planning and institutional coordination to exercise the rights related to internal debt. Experts say that such weaknesses are not only destabilizing the entire federal financial system but also playing a role in thwarting the concept of strong state governance. The tendency to show domestic debt as a source of resources without a clear plan but fails to mobilize them has raised questions not only on serious institutional negligence but also on financial transparency and accountability.

Federalism and planning expert Dr Khimlal Devkota said that although the provinces are able to raise internal debt, now they have a wrong tendency to show the source only to increase the size of the budget and manipulate the plan. “The way the states have increased the size of the budget by showing the source of internal debt, it is wrong. There is a tendency to show the size of the budget as big. This has been done to put in place a favourable plan,” Devkota said, adding, “The federal ministry should tell the province that it cannot take loans without permission.” ’

Which state has ever shown the source of debt?

In the last few years, comments have been made from various angles regarding the public debt of the Government of Nepal. The public debt has crossed Rs 2.65 trillion in the fiscal year 2081/82 BS. Rising public debt is also being seen as a possible factor in the country’s economic crisis. With the implementation of federalism, the state government should have embarked on the path of diversification of budget resources along with economic autonomy. However, the provincial and local levels are still failing to build the basic infrastructure of internal debt mobilization, follow the procedures and laws.

In the budget statement for the fiscal year 2077/78 BS of Koshi Province, it was mentioned that internal debt would be raised to meet the deficit. Point no. 180 of the budget states, “Since internal revenue and revenue sharing do not meet the expenditure requirements, the minimum finance will be met by taking a loan from the Government of Nepal as per the provisions of the Intergovernmental Finance Management Act 2074 BS.” However, Koshi province could not recover the loan.

Madhes province has set a target to raise internal debt equivalent to Rs 2 billion in three consecutive fiscal years 2080/81, 2081/82 and 2082/83. Madhes, which could not raise loans in the previous two fiscal years, has not even started the process to take loans in the current fiscal year.

It has been seven years since The Gandaki State started incorporating internal debt into the budget sources. In the budget for the fiscal year 2076/77 BS, Gandaki had announced to take rs 988.39 million internal loan and an additional Rs 1 billion from the Government of Nepal. In the next three fiscal years 2077/78, 2078/79 and 2079/80, the target was to raise the same loan of Rs 2 billion. It was said that rs 1 billion each would be adjusted from internal and federal sources. Similarly, the Gandaki government had set a target to raise rs 1.7 billion internal debt in fy 2080/81 and 208/82. The target has been increased to Rs 1.75 billion in the current fiscal year 2082/83 BS.

Lumbini Province had set a target to raise rs 1 billion internal debt in fiscal year 2079/80 and Rs 1.25 billion in 2080/81. But in both these years, the loan could not be raised.

Karnali province had included a plan to raise Rs 1 billion in the budget for 2075/76 and Rs 750 million in 2076/77. However, since then, loans have not been mentioned as a budgetary source in any financial year. While other provinces continue the practice of making fake loan plans, Bagmati and Sudurpaschim provinces have not yet mentioned internal debt as a budget source even in any financial year.

The National Natural Resources and Finance Commission has been recommending the limit of loans they can raise to the state and local governments from the fiscal year 2075/76 BS. The Commission had suggested the provincial and local levels to borrow up to 10 percent of the amount received from their internal revenue and revenue sharing in the fiscal year 2075/76 BS. The limit of loans that the state and local governments can raise has been increased to 12 percent after the fiscal year 2077/78 BS.

The Finance Commission has also recommended the same for the current fiscal year. But the Commission has also asked to show the source of the loan only after completing the process. “The provincial and local governments may raise internal debt without increasing the amount of revenue sharing received from the Government of Nepal and the sum of the revenue amount received from the state government to 12 per cent of the sum of the revenue amount received from its internal sources,” reads the commission’s recommendation. Internal loans can be raised with the approval of the Government of Nepal for the implementation of the project and project. ’