2.3 Concept of Public Income, Expenditure & Debt

Public Income

Public income refers to all forms of revenue received by the government. It is essential for meeting government expenditures. The sources of public income include revenues that do not create a direct repayment obligation, such as:

• Tax Revenue: Income tax, property tax, vehicle tax, value-added tax (VAT), excise duty, customs duty, etc.
• Non-Tax Revenue: Fees, charges, tariffs, fines and penalties, dividends, principal and interest receipts, gifts/donations, capital from asset sales, etc.
• Grants: Conditional and unconditional grants, foreign grants, and grants from higher federal entities, which count as income for the receiving body.
• Revenue Sharing: Distribution of revenue among federal, provincial, and local levels (e.g., VAT and excise - 70/15/15; royalty from natural resources - 50/25/25). Between provinces and local governments: vehicle tax, entertainment tax, advertisement tax, land registration fees, riverbed royalty - 60/40.

Intergovernmental fiscal transfers include grants (fiscal equalization, complementary, conditional, special) and revenue sharing.

Concepts of Public Income

1. Classical Concept: The government should minimize spending and thus collect minimal taxes. This view prevailed until the 1930s.
2. Keynesian Concept: Developed after the 1930s global economic depression. Advocates for deficit budgeting, increasing taxes to invest in public welfare, and appropriate government intervention in the economy.
3. Liberalization Concept: Gained global prominence since the 1980s. The government should act as a facilitator, promoter, and regulator (FMR), promoting the private sector. Market forces determine prices without government interference. Emphasizes reducing tax rates while expanding the tax base.

Necessity/Importance/Objectives of Public Income

• Ensuring peace and security.
• Implementing government policies and programs.
• Expanding social services.
• Increasing government investments.
• Promoting equality in wealth and income distribution.
• Maintaining balanced development.
• Developing physical infrastructure.
• Creating employment opportunities.
• Achieving economic stability and national prosperity.

Public income management should support regular, emergency, and developmental activities while promoting public interest, macroeconomic stability, and private sector growth. (Added for enhancement: Effective public income strategies can also mitigate economic inequalities and foster sustainable growth in emerging economies like Nepal.)

Concept of Public Expenditure

Public expenditure encompasses all spending by public entities to operate the state system. It is the aggregate form of expenditures in areas of public concern and a key tool in public finance management. This includes regular, emergency, and developmental expenditures in economic and social infrastructure, as well as national concerns.

Efficient mobilization of public expenditure is crucial for establishing a welfare state as envisioned by the constitution. Traditionally, public expenditure was limited to essentials. With Keynesian economics, investments in welfare increased. In modern economics, it is a vital aspect of public finance management.

Principles of Public Expenditure

• Principle of Maximum Social Benefit: Expenditures should benefit all classes, sectors, and aspects.
• Principle of Capacity: Expenditures should align with the government's revenue capacity.
• Principle of Economy: Achieve high performance at minimal cost.
• Principle of Approval: Must be approved by the designated legal body.
• Principle of Balanced Budget: Balanced in normal times, deficit during recession, surplus during inflation.
• Principle of Productivity: Expenditures should boost income, production, and employment.
• Principle of Flexibility: Adaptable to changing times and circumstances.
• Principle of Equality and Equity: Focus on maintaining equality and equity.
• Principle of Social Welfare: Benefit the disadvantaged and weak sections of society.
• Principle of Transparency and Accountability: Ensure economic discipline, transparency, and accountability.

Steps to Make Public Expenditure Effective

Improvements in structure, processes, systems, capacity, and ethics are needed:

• Reform organizational structure and procedures (adopt lean and thin management).
• Implement internal control systems.
• Establish internal audit bodies.
• Strengthen final audit processes.
• Ensure timely procurement, expenditure, and payments.
• Invest in projects with comparative advantage and quick returns.
• End the practice of scattering resources on small projects.
• Include all foreign aid in the budget; discourage conditional aid.
• Reduce dependency on foreign aid by boosting internal revenue, production, and employment.
• Invest only in areas that enhance efficiency and contribute to income distribution.
• Modify traditional procurement systems (e.g., Design-Bid-Build) to promote PPP, EPC, BOOT, etc. (Engineering, Procurement & Construction; Build-Own-Operate-Transfer).
• Implement project banks at all levels to improve project selection and budgeting.
• Prepare procurement plans after completing preparations; enter into LMBIS only after technical review; develop systems for budget allocation by the Ministry of Finance.
• Link all entities' annual procurement plans to PPMO's e-Procurement (eGP) system and enforce procurement schedules.
• Monitor public expenditure regularly based on targets and achievement indicators.
• Adopt performance-based budgeting and zero-based budgeting based on feasibility.
• Integrate IT systems for budgeting, expenditure, disbursement, accounting, and reporting across agencies.
• Mandate and enforce medium-term expenditure frameworks during budget presentation.
• Develop implementation capacity to keep current expenditures within desired limits and increase capital expenditures.
• Consider long-term fiscal capacity for macroeconomic stability in expenditures.
• Strengthen reward-punishment systems for economic discipline and fiscal responsibility.
• Make regulation, control, monitoring, evaluation, and supervision regular and effective.
• Ensure just and productive allocation of public expenditure.
• Direct expenditures toward economic and social infrastructure.
• Reduce current expenditures and increase capital expenditures.
• Make expenditures economical and transparent.
• Mobilize expenditures in economic, social, and infrastructure development.
• Invest in investor-friendly sectors for maximum benefits.
• Control corruption and irregularities.
• Efficiently mobilize internal resources.
• Make resource allocation processes efficient and effective.
• Make resource distribution among federal, provincial, and local levels scientific.
• Manage intergovernmental finances equitably to address needs at all levels.
• Modernize public expenditure systems with IT for greater scientific accuracy.

Measures for Expenditure Effectiveness

• Increase allocation efficiency and implementation effectiveness.
• Establish project banks.
• Mandate medium-term expenditure structures.
• Develop plans, programs, and projects based on policies and strategies for budgeting.
• Use outcome-oriented and performance-based budgeting.
• Apply zero-based budgeting for sick projects.
• Allocate only to programs/projects with data analysis, cost-benefit analysis, and completed preparations.

Enhancing Implementation Readiness

• Prepare necessary documents and procedures promptly after budget presentation in parliament.
• Create enabling environments and build capacities for implementation.

Making Implementation Effective

• Strictly comply with laws and standards.
• Bring budgets and reports on time.
• Fully comply with procurement laws.
• Engage contractors with lowest bids after evaluating capacity.
• Make procurement, expenditure, cash flow plans, and implementation schedules objective and feasible.
• Release additional budgets quarterly based on implementation progress.
• Link implementation progress to employee career development.
• Continuously improve through outcome-based monitoring, supervision, and evaluation.
• Avoid allocations to unallocated, freeze-proof, or miscellaneous headings; if necessary, allocate in the first quarter.
• Restrict fund transfers; use only for resolving bottlenecks.
• Enforce penalties with budget holds and surrenders.
• Empower NDAC and MDAC as task forces for immediate problem-solving.
• Modernize accounting and reporting systems; interconnect all levels.
• Implement audit reports promptly; prioritize irregularity settlements.
• Develop automated online expenditure tracking systems.
• Facilitate private sector capacity building.
• Promote inter-level, inter-agency, and functional coordination to avoid duplication.
• Simplify laws and procedures; classify user committees; enhance public construction quality testing.
• Ensure positive regulatory body performance.
• Study and analyze sick projects; adopt zero-based budgeting.
• Build employee capacity, integrity, and ethics.

Public expenditure requires regularity, economy, effectiveness, efficiency, justification, and legality. Multi-faceted reforms are needed to enhance allocation efficiency, implementation effectiveness, and financial discipline.

Prudent mobilization of public finance is essential for a welfare state. Expenditures should be transparent, reliable, and predictable for efficient resource use, achieving sustainable peace, good governance, and prosperity.

Characteristics of Public Expenditure

• Public nature.
• Related to the public purse.
• Tool to eliminate economic recession.
• Specific function of economic administration.
• Means to fulfill commitments to the people.
• Linked to planned systems.
• Strong foundation for fiscal policy.
• Relative to the state's tax structure capacity.
• Relative to economic administration's consumption capacity.
• Compliance with laws and procedures.
• Economic discipline and fiscal accountability.
• Tool for implementing government policies and programs.

Importance (Necessity/Justification/Objectives) of Public Expenditure

• Enhance economic and social welfare.
• Maintain peace and security.
• Redistribute resources and control market inefficiencies.
• Control economic fluctuations for macroeconomic stability.
• Maximize utilization of limited resources.
• Sustainably manage income, expenditure, and debt.
• Allocate public resources to strategic priorities.
• Increase state investments in social works.
• Provide financial support for regular government operations.
• Mobilize additional resources for crisis resolution.
• Fulfill the government's welfare role.
• Promote economic and social development.
• Address market failures and economic recessions to keep the economy dynamic.
• Develop infrastructure in the country.
• Increase employment and income opportunities.
• Address growing citizen expectations.
• Create an investment-friendly environment.
• Create employment opportunities to reduce poverty.
• Fulfill national and international obligations.

Public funds must be appropriately utilized with compliance to economic procedures and procurement laws, including accountability measures (audits, hearings).

Reasons for Increasing Public Expenditure

• Provincial, geographical, and regional imbalances, and population growth.
• Increase in state functions.
• New structures under federalism.
• Expansion of the public sector.
• Security challenges and management.
• Rising costs of public services and high price levels.
• War, rescue, defense, and security activities.
• Expansion in social services (education, health, etc.).
• Social security programs.
• Poverty and unemployment.
• Technological changes requiring investments in new productions.
• Problems in public expenditure (faulty financial/civil administration, lack of fiscal discipline).
• Political and social factors.
• Aspirations for economic development.
• Increased investments in physical infrastructure (transport, electricity, communication, etc.).
• International commitments, sustainable development goals, and global partnerships.
• Globalization and liberalization.
• Inflation/currency expansion and exchange rate fluctuations.
• Increase in national income.
• Lack of effectiveness in development expenditures (increased cost and time for national pride, priority, and transformative projects).
• Lack of coordination between policies, plans, and public expenditures.
• Faulty accounting methods (cash basis, recording advances as expenditures).

Arrangements in Nepal to Make Public Expenditure Effective

Constitutional Arrangements

• Economic procedures of all three levels of government (Parts 10, 16, and 19).
• Economic objectives in state directives (Article 50(3)).
• State policies (Article 51).
• Natural Resources and Fiscal Commission (Part 26).

Legal Arrangements

• Public Procurement Act, 2063 and Regulations, 2064.
• Intergovernmental Fiscal Management Act, 2074.
• Local Government Operation Act, 2074.
• Natural Resources and Fiscal Commission Act, 2074.
• Economic Procedures and Fiscal Responsibility Act, 2076 and Regulations, 2077.
• Travel Expense Regulations, 2064.

Institutional Arrangements

• Public Accounts Committee (House of Representatives).
• Constitutional Commissions: Natural Resources and Fiscal Commission, Auditor General.
• Ministry of Finance; Provincial Ministry of Economic Affairs and Planning; Local Executive.
• Office of the Comptroller General, Treasury and Accounts Control Office.
• Economic Administration Branches in all offices.

Program/Systemic and Other Arrangements

• Expenditure norms, approved expenditure formats from Auditor General.
• Periodic plans, annual budgets (targeting current expenditure reduction, capital expenditure increase).
• Medium-Term Expenditure Framework (MTEF) (prioritizing expenditures, cutting unnecessary ones).
• Project prioritization based on cost-benefit analysis.
• Disbursement system based on performance.
• Public hearings, social audits, public audits, third-party evaluations for fiscal discipline and responsibility.
• Internal control systems, internal and final audits.
• Regular reporting and quarterly review meetings.
• Systems like CGAS, SUTRA, TSA, EFT, PAMS.

Challenges in Public Expenditure in Nepal

• Manage expenditures to achieve sustainable development goals and the 16th Plan's targets.
• Efficiently manage growing expenditure demands while implementing fiscal federalism.
• Enhance allocation efficiency and implementation effectiveness.
• Keep current expenditures within limits and increase capital expenditures.
• Mobilize development aid in national priorities.
• Meet expenditure needs for economic and social infrastructure.
• Institutionalize public expenditure systems at provincial and local levels.
• Balance expenditure needs and available resources at provincial and local levels.
• Make public expenditures transparent and result-oriented.
• Ensure economical expenditures.
• Invest in investor-friendly sectors for maximum benefits.
• Control corruption and irregularities.
• Efficiently mobilize internal resources.
• Make resource allocation processes efficient and effective.
• Make resource distribution among levels scientific.
• Overall, make expenditures effective to maintain fiscal good governance.

Problems and Solutions in Public Expenditure Management in Nepal

Public expenditure management involves using resources with fiscal discipline, strategic priorities, and effective operations to direct the national economy. Complaints about suboptimal results persist. Problems and solutions are as follows:

Problem	Solution
Continuous increase in current expenditures and inability to increase capital expenditures.	Reform organizational structure and procedures (adopt lean and thin management).
Weak fiscal structure requiring reliance on external aid for capital budgets.	Strengthen internal fiscal structure and minimize dependency on external sources.
Weak allocation efficiency and implementation effectiveness.	Make budgeting more realistic and develop capacities of spending agencies.
Development aid not mobilized as committed.	Emphasize internal revenue, production, and employment to reduce foreign dependency.
Increase in non-budgetary foreign aid expenditures.	Implement foreign aid only through the national budget aligned with priorities.
Lack of facts and rationality weakening budget and planning systems.	Develop integrated data systems to base budgeting and planning on facts.
Lack of compliance with economic discipline.	Enforce laws and procedures with reward-punishment systems for fiscal accountability.
Weak institutional capacity of budget implementation mechanisms causing issues.	Develop skills, capacities, and technology to enhance institutional capacity.
Budget demands exceeding spending capacity.	Allocate budgets only to projects with technical feasibility, cost-benefit analysis, and completed preparations.
Lack of ownership causing issues in construction and maintenance of programs/projects.	Select demand-based programs/projects; make them participatory and transparent to build stakeholder ownership.
Weak inter-agency and inter-level coordination and cooperation.	Enact laws and institutional arrangements to make coordination mandatory.
Projects not completed on time, cost, quantity, and quality.	Solve emerging problems promptly; regular monitoring and evaluation with rewards and punishments.
High number of ongoing projects.	End the practice of extending contract periods; ensure timely completion.
Lack of economic good governance.	Ensure participation and transparency to maintain good governance.

Current Status of Public Income and Expenditure (FY 2081/82 Budget)

Total Allocated Budget: NPR 1,860.303 billion.

Expenditures:

• Current Expenditure: NPR 1,140.66 billion (61.31%).
• Capital Expenditure: NPR 352.35 billion (18.94%).
• Financial Arrangements: NPR 367.18 billion (19.74%).

Incomes:

• Revenue Collection Target: NPR 1,260.3 billion.
• Foreign Grants: NPR 52.33 billion.
• Foreign Loans: NPR 217.67 billion.
• Internal Loans: NPR 230 billion.

Intergovernmental Fiscal Transfers:

As per Article 60 of the Constitution of Nepal:

• Fiscal Equalization Grants: NPR 60 billion (provinces) + NPR 88 billion (local) = NPR 148 billion.
• Conditional Grants: NPR 25.84 billion (provinces) + NPR 208.88 billion (local) = NPR 234.73 billion.
• Complementary Grants: NPR 6.2 billion (provinces) + NPR 7 billion (local) = NPR 13.2 billion.
• Special Grants: NPR 4.4 billion (provinces) + NPR 8.5 billion (local) = NPR 12.9 billion.
• Revenue Sharing and Grants to Provinces and Local Levels: NPR 159 billion (revenue sharing) + NPR 408 billion (grants) = NPR 567 billion total.

Status of Public Expenditure

• Budget size increases annually, with rising current expenditures and widening gap between capital and current allocations.
• Capital expenditure is less than a quarter of the total budget; even allocated amounts see only about a quarter spent, raising questions about development administration capacity.
• Unable to keep current expenditures within limits and increase capital ones.
• Per Economic Survey 2080/81, integrated expenditures across levels: current 56.30%, capital 31.85%, financial 11.85%.
• Capital expenditures peak at fiscal year-end, leading to "Ashar development."
• Low capital expenditure due to unrealistic budgets or low government spending capacity.
• Issues like land acquisition, compensation disputes, cumbersome procurement, budget disbursement, expenditure, payments, material supply, technical preparations need clear provisions.
• Make budgets more participatory and realistic; enhance allocation efficiency, implementation effectiveness, and fiscal discipline.

The 16th Plan places effective fiscal management and capital expenditure capacity under Section 4.2 Public Finance Management: Nepal's Planning and Budget System.

Pillars of Effective Expenditure Management

Public resource mobilization involves accountability. Pillars include:

• Expenditure norms.
• Scientific budget classification.
• Robust accounting system.
• Performance management or budget reporting system: Link allocations, achievements, impacts, effects, and processes with regular reporting.
• Management controls: Supervision, monitoring, control, and facilitation.
• Quality procurement system: Procurement planning, process evaluation, technical testing, competition promotion.
• Monitoring and evaluation.
• Audits: Internal and final.
• Information technology.

With many issues in Nepal's public expenditure management, effective use and implementation of these pillars can improve accountability in resource mobilization.

Reasons for Low Capital Expenditure in Nepal

Capital expenditures create long-term capital, build infrastructure, and are non-recurring development budgets. Essential for LDC graduation, SDGs, and 16th Plan goals. However, low progress slows development, widening gaps between achievements and expectations. Reasons include policy, procedural, project-related, and managerial factors:

• Weak project preparation - DPR, EIA, site selection, local coordination lacking.
• Issues in budget prioritization.
• Complex public procurement system; delays in finalizing procurement.
• Bidding issues, collusion, delays, weak accountability.
• Weak technical and managerial manpower implementation capacity.
• Frequent employee transfers; lack of institutional memory and knowledge transfer.
• No linkage between performance evaluation and project progress.
• Irregular supply of raw materials and construction items.
• Weak contractor capacity and integrity.
• Corruption, fiscal discipline violations.
• Disasters like earthquakes, pandemics affecting physical activities.
• Inability to hold leadership and development partners jointly accountable for progress.

Suggestions for Improvement

• Adopt participatory and demand-based project selection.
• Focus on project preparation - ensure inter-agency coordination for land acquisition, forest use, compensation, EIA/IEE.
• Empower project chiefs with adequate authority, security, and accountability for expenditures and progress.
• Strengthen supply systems for raw materials and transportation.
• Invest in required infrastructure like electricity, water, communication, security, transport.
• Build capacities for foreign aid-dependent capital expenditures.
• Regularize audits, internal controls, progress reports.
• Adopt technology-friendly, outcome-based monitoring and evaluation.
• Increase use of public hearings, audits, third-party monitoring/evaluation.

Transformative reforms in public expenditure are needed for development infrastructure, employment, and poverty reduction. All levels should comply with project banks, develop technical manpower and contractors, outcome-based monitoring, and sectoral coordination for capital expenditure effectiveness.

Key Aspects to Focus on in Public Expenditure Management

• Validity and legality in expenditures.
• Value for money.
• Economic discipline and fiscal responsibility.
• Reliability, relevance, accountability, flexibility in expenditures.
• Transparent and open expenditure systems.
• Equitable equality and balance.
• Economy, effectiveness, and efficiency.
• Productivity enhancement.
• Priority sectors, capital formation, infrastructure, income, production, employment creation, sustainable development contributions.
• Expenditure limits and predictability.

Matters to Ensure When Spending Government Funds

In parliamentary systems, the executive spends with legislative approval. The Economic Procedures and Fiscal Responsibility Regulations, 2077 specify:

• Approved amounts for services/works within limits per Appropriation Act.
• Economic transactions per prevailing laws.
• Sufficient evidence for expenditures.
• Compliance with approved accounting standards.
• Records and reports in approved formats.
• Internal controls to prevent loss or misuse of cash, goods, or assets.
• Receipt of government loans, guarantees, deposits.
• No unnecessary duplication of work.
• Proper utilization of available resources/assets.
• Adequate protection and maintenance of government assets to prevent loss.
• Progress within specified time per program.
• Satisfactory quality and quantity of work.
• Programs operated within approved costs and limits.

Authorized persons must ensure these for budget discipline and fiscal good governance.

Concept of Public Debt

Public debt is borrowing by the government that requires future repayment for public management. It includes internal or foreign debt and associated financial liabilities. If revenues and other incomes are insufficient, the government borrows per law for deficit budgeting.

In developing nations, weak revenue bases and high needs for social, economic, and physical infrastructure necessitate public debt. Classical economists viewed it negatively. Keynesian theory emphasizes mobilizing idle resources for welfare via debt. Post-WWII, focus on reconstruction and meeting growing needs through debt management.

In inflationary times, use internal debt; in recessions, external debt to stimulate the economy. Nepal's budgeting started in BS 2008; all budgets except FY 2023/24 have been deficit budgets.

Recent Trends in Public Debt

As per Public Debt Management Office (PDMO), as of Ashad end 2081:

S.N.	Public Debt Liability	Outstanding Debt Amount	Percentage of GDP
1	Internal Debt	NPR 1,180.9 billion	20.70%
2	External Debt	NPR 1,253.13 billion	21.95%
3	Total Outstanding Debt	NPR 2,434.03 billion	42.65%

Nepal's GDP is approximately NPR 5,704 billion (Economic Survey 2080/81). Public debt is about 42.65% of GDP, exceeding the current fiscal year's total budget, with an increasing ratio.

Justification (Necessity, Importance) of Public Debt

• Expand public services and development.
• Direct investments for public welfare.
• Bridge development needs and weak revenue mobilization (deficit budgeting).
• Enhance private sector role in development.
• Use as a monetary policy tool (internal debt in inflation, external in recession).
• Protect the nation in wars or crises.
• Manage emergency expenditures and contingencies.
• Increase productivity of idle resources.
• Provide opportunities for investments exceeding savings.
• Redistribution programs and social protection for justice.
• Achieve national income, production, employment, high growth.
• Maintain stability in economy and financial markets.
• Accelerate economic, social, physical development through stable capital formation.
• Maximize utilization of natural and human resources.
• Reduce poverty, improve living standards, build self-reliant, prosperous, socialist-oriented national economy.

Problems, Opportunities, Challenges, and Ways to Make Public Debt Effective in Nepal

Major Problems

• Lack of public debt management strategy.
• Inadequate mobilization in national priorities.
• Lack of public awareness on internal debt instruments.
• Inability to mobilize in productive sectors.
• Failure to receive committed loans.
• Decreasing share of concessional loans.
• Weak mobilization and utilization capacity.
• High foreign exchange risks increasing costs.

Other Problems

• Conditional loans overshadowing national priorities.
• Increasing principal and interest repayment obligations.
• Decreasing grants and increasing loans.
• Non-reimbursement of reimbursable loans on time.
• Internal debt in low liquidity creating crises.
• Lack of clear bases for internal debt limits.
• High share of treasury bills in total internal debt.
• Outdated acts, rules, and policies.
• Not all foreign aid channeled through budget.

Opportunities (Benefits)

• Increased productivity of idle resources.
• Opportunities for investments exceeding savings.
• Support for redistribution and social justice.
• Useful for infrastructure construction.
• Helpful in managing emergency expenditures.

Major Challenges

• Mobilize in production and infrastructure for sustainable, high returns.
• Effectively manage risks.
• Mobilize internal debt without discouraging private investments.
• Increase internal capital mobilization to reduce foreign debt burden.
• Maintain macroeconomic stability.
• Increase investor attraction to short- and long-term internal debt instruments.
• Increase use of long-term bonds for capital market development.
• Coordinate debt mobilization across federal, provincial, and local levels.

Ways to Make Public Debt Effective

• Control current expenditures; direct debt toward increasing capital expenditures.
• Mobilize internal debt without discouraging private investments.
• Focus on high-return national priority projects.
• Prefer soft loans over commercial ones where possible.
• Mobilize to positively impact income, production, employment.
• Analyze repayment capacity before mobilization.
• Avoid unnecessary conditions in foreign loans.
• Analyze economic trends, potentials, forex risks.
• Coordinate provincial and local internal debt to maintain national fiscal balance.
• Mobilize toward building self-reliant, prosperous, modern socialist economy.
• Set internal debt limits without adverse macroeconomic effects; encourage liquidity savings.
• Ensure meaningful coordination between monetary policy and public debt management.
• Mandatorily include all foreign aid in national budget system.
• Effectively implement Paris Declaration and Accra Action Plan.
• Regularize and systematize Aid Management Information System (AMIS).

Public Debt in Intergovernmental Fiscal Management: Provincial and Local Level Debt and Process for Federal Provision

The Constitution and laws provide for revenue rights, grants, revenue sharing, and internal debt to meet provincial and local financial needs. The Intergovernmental Fiscal Management Act, 2074 guides this. The Public Debt Management Act, 2079 assigns management to PDMO. Provisions for provincial/local internal debt:

• Authority to raise internal debt within limits recommended by Natural Resources and Fiscal Commission to fill fiscal gaps.
• Debt mobilization with federal consent to avoid macroeconomic instability risks.
• Proposal to Ministry of Finance with project details, returns, repayment plan, lender details.
• Authority to issue debt securities for internal debt.
• Management by PDMO.

Process for Federal Government Providing Debt

Per Section 15 of Intergovernmental Fiscal Management Act, 2074:

• Province/local requests MoF with usage, repayment method, timeline.
• MoF studies and approves if reasonable.
• Sign agreement post-approval.
• Repay within agreed period.
• If not repaid, deduct from grants provided by federal government.

Internal debt relates to macroeconomic stability; not absolute right but controlled by constitutional/legal limits.

Constitutional and Legal Provisions for Local Level Internal Debt

Internal debt is raised from domestic markets to meet local deficits. Nepal provides this right, but methods, capacity, markets lack clarity.

Constitutional Provisions

• Natural Resources and Fiscal Commission recommends internal debt limits based on macroeconomic indicators.
• Federal law governs deficits and fiscal discipline.
• Local cannot borrow except per law.
• Debt deposited in local consolidated fund; spent per local law.
• For deficit budgets, propose sources per federal/provincial laws.

Local Government Operation Act Provisions

• Within Commission-recommended limits.
• Approved by assembly for productive, employment-generating, revenue-increasing, capital works; not exceeding 25 years.
• If not repaid, deduct from grants or repay by federal government.
• Other arrangements per federal law.

Intergovernmental Fiscal Management Act Provisions

• Within Commission-determined limits.
• Prior federal consent.
• Proposal to MoF with project, returns, repayment, lender details.

Internal debt is a last resort for local fiscal gaps. Federal government needs to clarify legal and procedural aspects for productive projects.

Reasons for Taking Public Debt

• Fill budget deficits.
• Manage expenditures in special circumstances.
• Address economic recessions and fill expenditure gaps.
• Raise sources for government expenditures and support development policies.
• Prevent financial crises.
• Provide bases for special sector expenditures.
• Fill tax and revenue gaps.
• Avoid adverse economic impacts.
• Invest in economic, social, infrastructure for employment creation.
• Prevent economic recessions and run welfare programs.
• Operate infrastructure programs to increase production and productivity.

Problems in Public Debt in Nepal

• Lack of clear legal/policy clarity and effective implementation in debt management.
• No strategy for public debt management.
• Not mobilized per national needs/priorities.
• Weak utilization and mobilization capacity; decreasing concessional share.
• Incorrect priority sector determination for debt investments.
• Necessity to borrow for growing expenditure needs.
• Increasing dependency on debt.
• External debt not received as committed; high forex risks increasing costs.
• Inability to maximize use for revenue-expenditure balance.

Solutions

• Improve legal, policy, structural aspects of debt management.
• Develop debt management strategy.
• Mobilize in national needs/priorities.
• Increase utilization/mobilization capacity.
• Increase concessional share.
• Correctly determine priority sectors for investments.
• Update debt mobilization bases timely.
• Make debt management office IT-friendly.
• Maximize use for revenue-expenditure balance.

Public debt is a source for government expenditures. For social/economic development and preventing recessions, mobilize capacity in productive sectors for long-term benefits, achieving sustainable peace, good governance, prosperity.

Problems in Public Debt Management

• 10-12% of total budget spent on financial arrangements, continuously increasing.
• Increasing debt burden risking debt trap.
• Lack of efficiency and effectiveness in utilization.
• Weak economic diplomacy; not receiving committed bilateral/multilateral concessional loans.
• High external debt percentage increasing forex risks; costly internal debt management due to interest rates.
• Long dependency on debt and grants without reduction.
• Corruption and weak public management reducing effectiveness.
• Inability to invest in priority areas for returns; relying on debt to pay debt and revenue.
• Inability to contribute concretely to internal production/productivity.
• Conditional debt not investable in national priorities.

Ways to Make Public Debt Management Effective

• Adopt measures to increase revenue and grants, gradually reduce debt dependency.
• Focus investments on increasing internal production/productivity for revenue mobilization.
• Emphasize revenue leakage control, asset purification, corruption control for revenue growth.
• Enhance economic diplomacy for concessional bilateral/multilateral loans.
• Invest public debt in productive, commercial sectors contributing to high growth.
• Ensure high economic discipline and good governance in debt and expenditure management.
• Control wasteful spending, irresponsibility, duplication to reduce expenditures and debt.
• Make project management efficient to avoid cost/time increases.
• Reduce current expenditures and increase managerial efficiency.
• Increase capital and productive expenditures relative to current.

For countries like Nepal with low revenue capacity and high development needs, public debt has no immediate alternative. As a key means for deficit budgeting, take wisely and enhance good governance, efficiency, effectiveness in management. Strong political will and administrative proactivity are essential.

Problems in Public Debt Mobilization in Nepal

• Lack of clear policy and strategy for debt management.
• Inability to determine mechanisms, methods, markets for provincial/local debt under federalism.
• Inadequate mobilization in national needs/priorities.
• Lack of public awareness on internal debt instruments.
• Inability to mobilize internal debt in productive sectors.
• Parliament uninformed on internal debt-funded projects/programs, failing to hold government accountable.
• External debt not received as committed.
• Inadequate preparation before external debt agreements.
• Lack of capable permanent mechanism for negotiations/agreements.
• High forex risks increasing external debt costs.
• Weak mobilization/utilization capacity.
• Weak debt records and reporting.
• Inability to promote private domestic/foreign investments via public debt.

Solutions

• Formulate and implement short-, medium-, long-term debt management strategies.
• Mobilize only in capital-forming, sustainable return projects with repayment capacity.
• Make additional legal, structural, procedural arrangements for federal debt mobilization.
• Promote financial literacy and incentives for government debt securities investments.
• Develop professionalism in manpower for external debt negotiations/agreements.
• Simplify procedures, build employee capacity, incentives to enhance public expenditure capacity.
• Prepare detailed expenditure estimates (source-wise, heading-wise) for programs/projects when mobilizing internal debt; present to parliament.
• Strengthen PDMO for better debt records and reporting.
• Mobilize internal debt without contracting private capital sources.
• Blend public debt with private investments in commercial projects to enhance efficiency.

Mobilizing public debt means using future revenues today. It's not wrong, but unproductive/distributive use is harmful long-term. Emphasize intergenerational equity.

Functions, Duties, and Powers of Public Debt Management Office

Per Public Debt Management Act, 2079:

Projections

• Project public debt annually within Commission-recommended limits, analyzing revenue-expenditure, banking liquidity, macroeconomic conditions; coordinate with MoF, provinces, NRB.
• Project budgets for debt repayments.

Policy/Recommendations to MoF

• Formulate short-, medium-, long-term debt management policies.
• Identify sectors for debt mobilization.
• Identify/analyze financial risks from government guarantees.

Information, Data Collection, Update, Publication

• Collect necessary info/data from relevant bodies.
• Conduct studies, research, monitoring; publish details.
• Record, repay, account external debt.
• Manage debt securities transactions, government guarantees records; collect guarantee fees; update agreements.

Internal Debt Management

• Manage internal debt across levels within Commission limits.
• Coordinate with NRB; get MoF approval for issuance and bidding schedules; implement.
• Issue government debt securities, conduct bids, receive amounts, deposit in respective internal debt accounts.

Other Functions

• Subsidiary loan agreements.
• Other debt management tasks.

For Nepal, public debt is a necessity, not a choice. Link to capital formation for increasing income, employment, production to make sustainable and effective.

Status of Public Debt Utilization in Nepal

Utilization Status

• Criticism for mobilization in unproductive areas, e.g., Prime Minister Employment Program.
• No cost-benefit analysis for projects, e.g., Pokhara Airport, Digital Nepal Program.
• High share of development bonds and treasury bills in internal debt; low mobilization of citizen savings bonds, foreign employment savings bonds, affecting private credit.
• Excessive/unpractical conditions in debt agreements, e.g., Pasang Lhamu Road upgrade with Indian Exim Bank requiring 50% materials/manpower from India.
• Projects not completed on time, increasing costs, e.g., Melamchi Project.
• Diversifying debt sources: EU Bank, Exim Bank, others.
• High forex rates increasing repayment burdens even for concessional loans.
• Increasing financial arrangement share in allocations; FY 2080/81: 17.5%, more than capital expenditure.
• Public debt ratio rising from FY 2073/74 to 41.6% of GDP in FY 2079/80.
• Increasing internal debt share.
• High multilateral debt.
• Decreasing concessional mobilization; commercial loans for Pokhara/Bhairahawa airports.
• Weak capacity, proactivity, coordination allowing development partners dominance.
• Multi-agency involvement reducing accountability in debt management.

Transformations Needed in Public Debt Management

• Build capacities of PDMO etc.: Accounting, data management, reporting systems.
• Improve project management: Time, capacity, info systems, documentation, coordination, linkages.
• Integrated public debt policy/law: Guide all levels; develop scientific debt estimation methods.
• Reduce current/administrative expenditures: Stop pork barreling; budget per capacity to avoid debt trap.
• Build Natural Resources and Fiscal Commission capacity: Macro analysis for debt limits.
• Cost-benefit, risk analysis, forex management; mobilize only in return-oriented projects.
• Specify monitoring, evaluation, methods, indicators, responsible bodies in budgeting.
• Develop strong economic diplomacy; reject aid with unnecessary conditions/interests.
• Emphasize multilateral aid and concessional loans.
• Use modern tools like blended financing, climate financing, green bonds.
• Mobilize in productive sectors contributing to income, production, employment, sustainable development.
• Promote integrity, ethics, discipline.

Internal Debt Instruments

Development Bonds

Oldest internal debt instrument. Per Public Debt Management Act, 2079: stocks, promissory notes, bearer bonds, prize bonds.

Treasury Bills

Short-term (less than 1 year): 28-day, 91-day, 182-day, 364-day.

Savings Bonds

For collecting savings: national savings bonds, citizen savings bonds, foreign employment savings bonds.

Other Instruments

Direct loans from individuals/institutions, treasury notes, green/carbon bonds, converting pending state payments to debt via agreements.

Status of Internal Debt

• Continuously increasing amount.
• Instruments increased but usage not diversified.
• More short-term than long-term instruments.
• Over 20% of GDP.
• Over 80% from development bonds and treasury bills.
• National savings bonds not in use.
• Very low foreign employment savings bonds mobilization.
• Increasing debt reducing investable capital in markets.
• FY 2080/81 target: NPR 240 billion.
• Provinces/locals not mobilizing internal debt.

Effects of Internal Debt

• Dynamism in government expenditure systems.
• Managed reimbursements in foreign aid.
• Sourced for capital expenditures.
• Some relief from revenue shortages and foreign aid dependency.
• Changed foreign perceptions toward Nepal via mobilization capacity.
• Contributed to liquidity management, interest rates, inflation, price control.
• Supported periodic plans, SDGs, policies/programs, national pride projects, fundamental rights implementation.

But:

• No studies on positive impacts like capital formation, production growth, employment.
• Liquidity shortages and investable capital shortages in markets.
• Risks of net losses over benefits if development works don't pace up.
• Inadequate mobilization from target communities (e.g., foreign employment bonds).

Effective internal debt mobilization for internal capital formation, income, production, employment, SDG contributions, long-term vision, periodic plan implementation to end foreign dependency.

Problems in Nepal's Public Expenditure Management

• Ambitious periodic plan visions, targets, expectations.
• Annual budgets/programs not following plans.
• Non-compliance with bases/standards for current/development allocations.
• Annual increase in current expenditures; inability to increase capital proportionally.
• Increasing distortions in fund transfers and source assurances.
• Inability to comply with standards for economy and effectiveness in expenditures.
• Ongoing projects not completed on time, cost, quality.
• Increasing numbers of ongoing, incomplete, sick projects due to lack of project discipline.
• Low capital expenditure vs. allocation; expenditures concentrated in last quarter/month, weakening quality.
• Foreign aid not received as committed; inability to reimburse timely.
• Inability to efficiently mobilize public debt.
• Inability to make employees/officials accountable for timely accounting/reporting.
• Inability to integrate reporting systems across levels.
• Inability to tighten internal controls/audits to control irregularities/leakages.
• Inability to settle auditor-pointed irregularities for fiscal responsibility; increasing indiscipline.
• Public officials weak in ethics, integrity, good conduct.

Ways to Manage Public Expenditure Efficiently and Outcome-Oriented

• Institutionalize MTEF across all government levels.
• Determine clear bases/standards for current/development allocations; strictly comply. Discuss widely in house; increase parliamentary oversight.
• Find practical ways to enhance economy, efficiency, effectiveness; comply.
• Minimize current expenditures; increase development allocations.
• Maintain project governance; allocate resources only to project bank-included projects.
• Reward/punish project chiefs and contractors based on performance.
• Coordinate with inter-governments, inter-agencies, development partners in implementation. Solve issues timely.
• Improve monitoring systems. Institutionalize outcome-based monitoring at all levels.
• Mobilize public debt for capital formation and sustainable returns. Minimize debt service costs.
• Increase IT use for strengthening expenditure accounting/reporting; build manpower capacity.
• Each public entity establish/implement internal control systems per work nature.
• Develop participatory expenditure management for transparency, accountability, fiscal discipline.
• Establish structures for good conduct culture in public entities. Develop systems to test responsible officials' ethics.

In conclusion, Nepal's public expenditure management has policy, managerial, practical issues in planning, resource allocation, spending, accounting, reporting, controls, audits. Efficient allocation, fund operations with economy and discipline can enhance effectiveness.

Additional Information

Crowding Out Effect

The situation where private sector is deprived of economic resources. Caution needed in internal debt mobilization to avoid this.

Internal Debt

Borrowing from domestic private sector, banks, financial institutions via treasury bills, development bonds, savings bonds, foreign employment savings bonds. Used when revenues, foreign grants/loans insufficient for expenditures. Also to balance monetary conditions.

Impact of Internal Debt on Inflation

1. In Dynamic Economy: If economy is active with progress in income/production/employment and sufficient money supply, internal debt within desired limits (5-7% of budget) has minimal inflation impact. (15th Plan targets limit to 4.3% of GDP.)
2. In High Liquidity: If excessive liquidity, high consumption, rapid price rises, increase internal debt for development to control liquidity positively. But long-term inflation may complicate as expenditures return to market.
3. In Low Liquidity: In recession with falling income/production/employment, low prices/inflation, avoid internal debt as it worsens negativity.

Reasons for Relatively Low Public Expenditures

• Weak allocation efficiency, implementation effectiveness, fiscal discipline.
• Allocations to unprepared projects (forest use, land acquisition, compensation).
• Non-implementation per budget action plans.
• Inability to prioritize sectoral ministry budgets.
• Low proposals or none for assured-source projects; increasing new projects creating payment liabilities.
• Lack of coordination across governments causing duplications in development, social security, grants.
• Delayed staff fulfillments, frequent transfers.
• Unwanted local demands, labor/material management issues delaying expenditures.
• Delayed formulation of procedures, directives, standards.
• Inability to simplify/streamline procurement, e-bidding.
• Low complementary fund allocations by Nepal government; allocations to unprepared foreign-source projects.
• Delays in agreements causing budgetary aid delays from partners.
• Non-fulfillment of donor procurement/accounting conditions delaying reimbursements.
• Delays in allocating/distributing unallocated funds.
• Problems identified by NDAC/MDAC not prioritized; delays in directive implementation.