4.4 Financial Management & Social Accountability

Financial Management and Social Accountability in Nepal

Financial Management

Financial management refers to the effective operation, regulation, and management of a nation’s financial system to make its economy dynamic and vibrant. It encompasses the management of corporate finance and public finance.

Financial System

The financial system is the comprehensive network of financial institutions, markets, instruments, and services involved in the creation and exchange of funds in a country.

Regulatory Bodies of the Financial System

To ensure effective financial system management, the government establishes regulatory bodies responsible for the establishment, regulation, supervision, monitoring, evaluation, and dissolution of financial institutions. These include:

1. Nepal Rastra Bank (NRB): The central bank of Nepal.
2. Nepal Insurance Authority: Regulates the insurance sector.
3. Securities Board of Nepal (SEBON): Oversees securities markets.
4. Department of Cooperatives: Manages cooperative institutions.

Components of the Financial System

The financial system comprises elements that ensure efficiency, reliability, transparency, and stability to support economic development:

1. Financial Institutions:
   • Nepal Rastra Bank: Established on Baisakh 14, 2013 BS (1956 CE), it is responsible for issuing currency, maintaining monetary balance, formulating monetary and foreign exchange policies, enhancing financial access, ensuring banking stability, and developing secure payment systems.
   • Other Banks and Financial Institutions: Facilitate savings collection and loan disbursement.
   • Savings and Credit Cooperatives: Support community-based financial services.
   • Other Financial Entities: Nepal Stock Exchange (NEPSE), life and non-life insurance companies, Nepal Reinsurance Company, Employees Provident Fund, Citizen Investment Trust, and Deposit and Credit Guarantee Corporation.
2. Financial Instruments: Tools used to create, trade, transfer ownership, or settle financial transactions, such as cash, checks, bills, pay orders, shares, securities, debentures, bonds, treasury bills, and commercial bills.
3. Financial Services: All economic services provided by financial institutions in the financial market.
4. Financial Markets: Markets where financial instruments like shares, debentures, bonds, treasury bills, and commercial bills are traded. These include:
   • Money Market: Short-term (less than one year) securities trading, including treasury bills, commercial papers, and certificates of deposit.
   • Capital Market: Long-term securities trading, including common stocks, preference shares, debentures, treasury notes, and municipal bonds.

Public Financial Management

Public financial management (PFM) involves the comprehensive management of government revenue, expenditure, budgeting, investment, and loans, including recording, auditing, and reporting. It is a key mechanism for resource mobilization, rapid economic growth, sustainable development, macroeconomic stability, social justice, government operations, and effective policy implementation.

PFM includes identifying, collecting, efficiently mobilizing, recording, reporting, and ensuring public accountability for resources required for state operations.

Legal Framework for Public Financial Management

Constitutional Provisions

1. Economic Objectives (Article 50):
   • Maximize resource mobilization through public, private, and cooperative sectors for rapid and sustainable economic growth.
   • Ensure equitable distribution of benefits to eliminate economic inequality.
   • Develop a self-reliant, independent, and progressive socialist-oriented economy.
2. Exercise of Economic Rights (Article 59): All three tiers of government can enact laws, prepare budgets, make decisions, and implement policies and plans.
3. Financial Procedures (Parts 10, 16, 19):
   • No taxes, loans, or guarantees without legal provisions.
   • Regulations for consolidated funds, expenditure estimates, advances, and loans.
   • Independent auditing by constitutional bodies.

Legal Provisions

• Financial Procedures and Fiscal Accountability Act, 2076 BS (2019 CE).
• National Natural Resources and Fiscal Commission Act, 2074 BS (2017 CE).
• Income Tax Act, 2058 BS (2002 CE).
• Excise Duty Act, 2058 BS (2002 CE).
• Nepal Rastra Bank Act, 2058 BS (2002 CE).
• Value Added Tax Act, 2052 BS (1996 CE).
• Customs Act, 2064 BS (2007 CE).
• Public Procurement Act, 2063 BS (2007 CE).
• Securities Act, 2063 BS (2007 CE).
• Bank and Financial Institutions Act, 2073 BS (2017 CE).
• Inter-Governmental Fiscal Management Act, 2074 BS (2017 CE).
• Audit Act, 2075 BS (2019 CE).
• Local Government Operation Act, 2074 BS (2017 CE).

Efforts to Improve Financial Management in Nepal

• Budget System: Medium-Term Expenditure Framework (MTEF), Medium-Term Budgeting Framework (MTBF), Line Ministry Budget Information System (LMBIS).
• Public Procurement: e-Government Procurement (e-GP), e-Bidding, e-Contract Management System (e-CMS), Public Procurement Management Information System (PPMIS), Public Assets Management System (PAMS).
• Planning System: Results-based management, multi-year planning, project prioritization.
• Treasury System: Treasury Single Account (TSA), Electronic Fund Transfer (EFT).
• Accounting System: Nepal Public Sector Accounting Standards (NPSAS), Computerized Government Accounting System (CGAS), Sub-National Treasury Regulatory Application (SuTRA).
• Revenue System: VAT, Automated System for Customs Data (ASYCUDA), Revenue Management Information System (RMIS), Vehicle Consignment Tracking System (VCTS).
• IT Integration: Financial Management Information System (FMIS), online tax and service systems.
• Risk-Based Auditing.
• Public Expenditure and Financial Accountability (PEFA): Comprehensive implementation framework.

Key Stakeholders in Nepal’s Financial Management

• Parliament/Committees: Authorize revenue and expenditure, ensure government accountability.
• National Planning Commission (NPC): Coordinate economic planning and programs.
• Ministry of Finance and Departments: Formulate budgets and financial policies, monitor implementation, collect revenue.
• Other Agencies: Implement budgets.
• Financial Comptroller General Office (FCGO): Manage consolidated funds, accounting, and reporting.
• Public Debt Management Office: Manage public debt.
• District Treasury Controller Offices: Handle budget disbursements, internal audits, and reporting.
• Nepal Rastra Bank: Regulate banking and formulate monetary policies.
• Banks and Financial Institutions: Operate government accounts and transactions.
• Auditor General: Audit and report on government revenue and expenditure.
• Commission for Investigation of Abuse of Authority (CIAA): Investigate and prosecute corruption.
• Donor Community: Provide financial and technical assistance.
• Securities Board of Nepal: Regulate securities markets.
• Civil Society: Advocate for transparent economic governance.
• Nepal Insurance Authority: Regulate the insurance market.
• Department of Cooperatives: Register and regulate cooperatives.
• Private and Corporate Sector: Contribute to economic transactions and tax revenue.

Challenges in Financial Management in Nepal

• Weak implementation of legal provisions.
• Lack of clear policy vision (capitalism, socialism, or mixed economy).
• Absence of practical monetary policies.
• Weak and ineffective regulation.
• Lack of professionalism, corporate culture, and institutional governance in the financial sector.
• Excessive number of banks and financial institutions.
• Low capital expenditure.
• Gap between legal provisions and practice.
• Insufficient investment in human resource capacity building.
• Opaque expenditure of foreign aid outside the budget.
• Poor prioritization of plans and programs, leading to resource scattering.
• Revenue leakages, increasing financial irregularities, and rising audit irregularities (beruju).
• Weak results and processes at the local level, increasing irregularities.

Solutions for Effective Financial Management

• Effective implementation of legal provisions.
• Adoption and execution of practical monetary policies.
• Emphasis on transparency, integrity, and ethics.
• Increased investment in human resources.
• Development of institutional structures and culture.
• Focus on result-oriented practices.
• Transparency in foreign aid, inclusion in budgets, and cost-benefit analysis.
• Strengthening internal capacity.
• Expanding the internal revenue base (reducing rates, broadening scope).
• Collaboration with private and corporate sectors.
• Enhancing the proactive role of parliament.
• Prioritization of plans and programs.

Social Accountability

Social accountability is a critical tool for making state institutions accountable to citizens, promoting transparency, and ensuring citizens’ access and ownership in governance processes. It includes public institutions’ accountability to society and corporate social responsibility (CSR).

Public Accountability vs. Answerability

Aspect	Accountability	Answerability
Scope	Includes responsibility, answerability, and responsiveness.	Readiness to respond regarding work and outcomes.
Origin	Arises from duties or responsibilities.	Arises after task completion.
Activity	Active before and after task completion.	Active only after task completion.
Transferability	Cannot be shared.	Can be transferred with responsibility.
Implication	Being accountable implies being answerable.	Being answerable does not always imply accountability.

Need and Importance of Social Accountability

• Ensure accountability of public officials to society.
• Prevent misuse of power, authority, and resources.
• Promote rule of law, transparency, integrity, and accountability.
• Foster an open, transparent, and accountable society.
• Ensure efficient, economical, and effective resource use.
• Enhance performance effectiveness.
• Reduce corruption and irregularities.
• Increase citizen and stakeholder participation.
• Build trust and ownership in governance systems.
• Promote democratic values.
• Enhance service delivery efficiency.
• Support poverty alleviation.
• Address citizens’ voice, choice, and rights.
• Promote social capital.
• Ensure effective use of public funds.
• Establish government legitimacy.
• Strengthen democratic systems.

Prerequisites for Social Accountability

• Legally defined accountability.
• Transparency alongside accountability.
• Objective and clear standards.
• Effective grievance redress mechanisms.
• Clear delineation of rights and responsibilities.
• Measurable performance indicators.
• Transparent processes and culture.
• Easy access to information.
• Effective evaluation and reward systems.
• Regular monitoring and evaluation.

Mechanisms and Tools for Social Accountability

The World Bank’s Program for Accountability in Nepal (PRAN) categorizes social accountability tools into three groups:

1. Information Tools:
   • Citizen Charter.
   • Checklists of entitlements.
   • Local government budgets.
   • Right to Information Law.
   • Checklists of laws, policies, and regulations affecting citizens.
2. Accountability and Integrity Tools:
   • Civic education.
   • Public expenditure tracking.
   • Standards and indicators checklists.
   • Community scorecards.
   • Citizen report cards.
   • Public hearings.
   • Public audits.
   • Public revenue monitoring.
   • Citizen complaint structures.
3. Participatory Development Tools:
   • Multi-stakeholder groups.
   • Participatory planning.
   • Participatory budgeting.
   • Community-led procurement.
   • Asset declaration.
   • Understanding conflict of interest.
   • Integrity pacts.

Public and Social Accountability Arrangements in Nepal

Nepal has implemented various measures to ensure public and social accountability, including ministers answering to parliament, appointing spokespersons and information officers, quarterly progress reports, press conferences, public hearings, citizen charters, and monitoring and evaluation. Additional arrangements include:

Constitutional Provisions

• Ministers are collectively accountable to the federal parliament, and individually to the Prime Minister and parliament (Article 76(10)).
• Mandatory parliamentary approval for public resource acquisition, expenditure, and outcomes.
• Independent auditing by the Auditor General for regularity, economy, efficiency, effectiveness, and propriety.
• Commission for Investigation of Abuse of Authority to prevent misuse of power and corruption.
• Public Service Commission for accountable appointments and promotions.
• National Human Rights Commission for human rights protection.
• Judicial bodies for addressing rights violations.
• Parliamentary committees and submission of constitutional body reports to the President and parliament.

Legal Provisions

• Good Governance (Management and Operation) Act, 2064 BS (2008 CE) and Rules, 2065 BS (2009 CE).
• Right to Information Act, 2064 BS (2008 CE) and Rules, 2065 BS (2009 CE).
• Civil Service Act, 2049 BS (1993 CE) and Rules, 2050 BS (1994 CE).
• Public Procurement Act, 2063 BS (2007 CE) and Rules, 2064 BS (2008 CE).
• Financial Procedures and Fiscal Accountability Act, 2076 BS (2019 CE).
• Audit Act, 2075 BS (2019 CE).
• Consumer protection and rights-related laws.

Institutional Arrangements

• Parliament and parliamentary committees.
• Council of Ministers and its committees.
• Constitutional and judicial bodies.
• Public media.
• Civil society, NGOs, and interest groups.
• International development partners.
• Corporate sector.

Public Financial Management and Public Accountability

Public financial management encompasses identifying, acquiring, mobilizing, utilizing, recording, reporting, and ensuring accountability for financial resources. Public accountability requires public officials to justify their decisions, actions, processes, and outcomes to stakeholders.

According to the Principal-Agent Theory, citizens are the principals, and public officials are agents accountable to them. Transparency and accountability in PFM ensure effective outcomes, establishing governance legitimacy and public trust.

Current State of Public Accountability in Nepal

Despite legal and institutional frameworks, public accountability in Nepal remains weak, with rising corruption and poor governance, as evidenced by various reports. Key issues include:

• Limited citizen access to policymaking.
• Low education and awareness levels, making accountability challenging.
• Ethical challenges in implementing accountability.
• Low citizen representation in policymaking.
• Influence of globalization.
• Lack of a culture demanding accountability.
• Weak bureaucratic professionalism and unclear responsibilities.
• Emphasis on process compliance over accountability.
• Lack of political commitment.
• Politics viewed as personal gain rather than public service.
• Lack of professionalism in the private sector.
• Weak investigative journalism.
• Limited civil society oversight.
• Absence of indicator-based monitoring and evaluation.

Reasons for Weak Accountability

• Poor enforcement of laws.
• Political interests overriding constitutional and federal implementation.
• Tendency to evade accountability.
• Culture of secrecy over transparency.
• Lack of clear accountability indicators and measurable standards.
• Weak citizen awareness and demand for accountability.
• Lack of democratic culture in political parties.
• Weak investigative journalism.
• Limited civil society engagement.
• Lack of indicator-based monitoring.
• Absence of corporate culture in the private sector.

Measures to Enhance Public Accountability

According to scholar Michael E. Lowe, measures to enhance accountability include:

• Political will and commitment.
• Clearly defined responsibilities.
• Transparent and efficient procurement processes.
• Modern accounting, auditing, and financial planning systems.
• Investigation and anti-corruption mechanisms.
• Open information systems.
• Effective investigative journalism.
• Decentralization of authority and resources.
• Live broadcasting of parliamentary proceedings.
• Independent ombudsman.

In the Nepali context, additional measures include:

• Increasing citizen and stakeholder participation in governance.
• Legally defining official accountability.
• Establishing objective performance standards and effective monitoring.
• Using tools for performance measurement.
• Developing outcome and result indicators.
• Measuring citizen satisfaction.
• Enhancing the proactive role of parliament and committees.
• Strengthening active accountability institutions.
• Ensuring effective information dissemination channels.

Conclusion

Social accountability significantly enhances service delivery and governance. Effective implementation requires clear standards, investigations, accountability, and enforcement. As citizens are the sovereign principals, public officials must provide satisfactory responses and earn public trust regarding resource use and benefits. This demands active stakeholder participation, coordination, timely policies, ethical conduct, integrity, and citizen vigilance.