2.7 Budget Cycle: Budget formulation, Implementation & Evaluation

Understanding Nepal’s Budget Cycle: Formulation, Implementation, and Evaluation

Concept of Budget

A budget is a comprehensive document projecting the government’s annual revenue and expenditure. It is an estimated financial plan based on a review of past economic conditions, an assessment of the current situation, and future programs and policy directions. Through the budget, the government presents its fiscal policy, which guides economic management.

Globally, the concept of a formal budget was introduced in 1733 when British Prime Minister Robert Walpole presented a budget to parliament. In Nepal, the budget system was formally established on February 4, 1952 (Magh 21, 2008 BS), when Finance Minister Subarna Shamsher presented the first budget. Currently, Nepal’s 761 governments across three tiers (federal, provincial, and local) prepare and implement budgets annually as mandated by law.

Features of Nepal’s Budget

A detailed economic and financial master plan of the government.
Authority to collect revenue and incur public expenditure.
Presented annually, typically on fixed dates (e.g., Jestha 15, Asar 1, or Asar 10).
Formulated by the executive, approved by the legislature, and implemented by the executive.
Includes a review of the previous fiscal year, revised estimates for the current year, and projections for the upcoming year’s revenue and expenditure.
A politico-economic document reflecting government priorities.
An instrument to implement government policies and programs.
A tool for ensuring social justice, protection, and security.
Mobilizes resources to enhance income, production, and employment.
Promotes economic discipline and financial accountability.
Serves as a regulator of the national economy and a reflection of the state’s economic health.

The Budget Cycle

The budget cycle encompasses the phased activities from formulation to implementation and evaluation for each fiscal year. It includes budget preparation, approval, implementation, accounting, reporting, auditing, monitoring, evaluation, and review.

1. Budget Formulation

Budget formulation involves all activities leading to the preparation and approval of the budget by the executive and legislature. As per Article 119 of the Constitution of Nepal, the Finance Minister presents annual estimates to the joint session of parliament, detailing:

Revenue projections.
Expenditure from the consolidated fund.
Expenditure under the Appropriation Act.
Previous fiscal year’s expenditure and target achievement details for each ministry.

Once approved by parliament and authenticated by the President, the budget is implemented.

2. Implementation

Budget implementation begins with the enactment of the Appropriation Act or Advance Expenditure Act. Key steps include:

The Finance Secretary issues implementation guidelines to accountable officers.
Agencies execute spending based on approved budgets and annual programs.
Preparation of annual procurement plans, cash flow statements, performance indicators, and schedules.
Performance contracts between departmental heads and secretaries or office heads, specifying deliverables.
Payments are processed through a single treasury system or designated mechanisms.
Office heads are responsible for lawful expenditure, accounting, reporting, auditing, and clearing irregularities.
Accountable officers ensure spending aligns with approved targets.

3. Monitoring and Evaluation

Monitoring and evaluation ensure accountability and effectiveness:

Ministers and secretaries conduct quarterly and monthly reviews of projects and budgets.
Reviews assess physical and financial progress, procurement plans, and cash flow.
Quarterly progress reports, including expenditure, revenue, and foreign aid mobilization, are submitted to the Ministry of Finance.
The Ministry of Finance publishes mid-term (by Magh end) and annual evaluation reports (by Kartik end).

The budget serves as a bridge between the government and citizens, requiring meaningful public participation at all stages to ensure transparency and accountability.

Challenges and Solutions in Nepal’s Budget System

The budget system faces several challenges, with corresponding solutions to enhance efficiency:

Challenge	Solution
Political influence in budget formulation	Align budgets with periodic plans, Medium-Term Expenditure Framework (MTEF), and prioritize resource-based expenditure.
Lack of expenditure allocation criteria	Create a project bank with feasibility studies and prioritize approved projects.
Unreliable foreign aid and loan data	Strengthen the Aid Management Information System (AMIS) to align aid with national priorities.
Inability to expand revenue alongside expenditure	Focus budgets on increasing internal revenue, production, and employment.
Delayed budget proposals from ministries	Simplify and time-bound all stages of budget formulation, implementation, and evaluation.
Inadequate contingency planning	Ensure resources for mandatory and contingency liabilities before allocation.
Lack of stakeholder participation	Ensure transparent, realistic, and participatory budget processes.
Absence of clear implementation plans	Develop time-bound implementation plans with clear schedules.
Inefficient public procurement	Make procurement time-bound, transparent, and result-oriented.
Weak aid absorption capacity	Strengthen economic diplomacy to align aid with national needs.
Lack of accountability for delays	Establish reward-punishment mechanisms for responsible parties.
Ineffective monitoring and evaluation	Incorporate measurable indicators during planning and integrate into systems.
Poor inter-tier coordination	Ensure coordination across all government tiers.

Basis for Budget Formulation in Nepal

Nepal’s budget formulation is guided by:

Constitutional provisions (fundamental rights, directive principles, and policies).
16th Periodic Plan and Medium-Term Expenditure Framework (MTEF).
Government policies and programs.
Common minimum programs of the government.
Directives from national leaders and parliamentary committees.
Sustainable Development Goals (SDGs).
Transition from least developed to developing country status.
Sectoral policies, strategies, and master plans.
Decisions of the National Development Action Committee (NDAC) and Ministry Development Action Committees (MDACs).
Financial Procedures and Fiscal Accountability Act, 2019, and related regulations.
Intergovernmental Fiscal Management Act, 2017.
Criteria for classifying and distributing development programs across federal, provincial, and local levels.
Guidelines for complementary and special grants.

Budget Formulation Process

The process is structured as follows:

Macroeconomic Framework determination (Ministry of Finance).
Initial resource estimation (Ministry of Finance).
Sectoral ceiling determination (Ministry of Finance).
Issuance of budget ceilings and guidelines to ministries (Ministry of Finance).
Ministry circulars to departments.
Department circulars to offices.
Unit/office-level budget proposals.
Departmental budget proposals.
Ministry budget proposals submitted to the Ministry of Finance.
Pre-budget discussions on principles and priorities (Parliament and committees).
Policy discussions (National Planning Commission).
Program and title-based discussions (Ministry of Finance).
Final draft preparation (Ministry of Finance).
Presentation, discussion, and approval in parliament (Finance Minister).
Authentication by the President.

Local-Level Budget Formulation

Local governments follow constitutional, policy, and legal frameworks for budget formulation, including:

Constitution of Nepal (fundamental rights, directive principles, economic powers).
16th Periodic Plan, provincial, and local plans.
Federal, provincial, and local policies, strategies, and master plans.
MTEF for local levels.
SDGs, disaster risk reduction, climate change adaptation, and gender equality.
Legal frameworks like the Intergovernmental Fiscal Management Act, 2017, and Local Government Operation Act, 2017.

Seven Steps of Local Budget Formulation

As per the Local Planning Guidelines, 2078 BS, local budget formulation involves seven steps and 24 activities:

Pre-preparation: Update situational profiles, categorize sectors (economic, social, infrastructure, etc.), and submit revenue-expenditure projections.
Resource Estimation and Ceiling Setting: Receive budget ceilings from federal/provincial governments, conduct pre-budget discussions, and set priorities.
Settlement-Level Plan Selection: Schedule community meetings and select plans for ward committees.
Ward-Level Prioritization: Categorize and prioritize plans from settlements at the ward level.
Budget and Program Formulation: Develop sectoral programs, integrate NGO/partner plans, and prepare financial and appropriation bills.
Executive Approval: Approve budget statements, financial bills, and programs at the executive level.
Local Assembly Approval: Pass budget statements, financial and appropriation bills, and publish in the gazette.

Monitoring and Evaluation Challenges

Non-compliance with monitoring stages.
Inadequate assessment of policy and program impacts.
Lack of priority for monitoring plans during formulation.
Absence of mandatory feedback implementation.
Weak linkage of project outcomes to official performance evaluations.
Insufficient capacity and resources for monitoring.
Irregular NDAC and MDAC meetings.
Delayed or incomplete progress reports.
Lack of feedback integration into planning.
Low motivation among monitoring staff.
Frequent staff transfers affecting efficiency.

Steps to Strengthen Monitoring and Evaluation

Adopt result-oriented monitoring systems for governance improvement.
Strengthen measurable indicator-based evaluation systems.
Institutionalize monitoring across all government tiers.
Enhance legal and policy frameworks for systematic monitoring.
Use modern, participatory monitoring methods.
Develop codes and standards for quality monitoring.
Foster inter-agency and intergovernmental coordination.
Create annual monitoring plans for all tiers.
Conduct mid-term evaluations to refine strategies.
Integrate measurable indicators during project planning.
Develop unified monitoring systems across tiers.
Conduct joint monitoring of priority projects.
Enhance capacity of monitoring personnel.
Collaborate with national/international institutions for capacity building.
Establish mechanisms for timely issue resolution.
Integrate SDGs into monitoring and reporting.
Create empowered mechanisms for resolving issues in priority projects.
Form joint monitoring teams with stakeholders.
Define institutional and procedural monitoring frameworks.
Link project outcomes to performance evaluations.
Involve third parties and beneficiaries in monitoring for transparency.
Maintain updated project data for feedback integration.
Regularize NDAC and MDAC meetings.
Issue clear monitoring guidelines.
Continuously monitor high-priority projects.

Need for Deficit Budgeting

In developing countries like Nepal with weak revenue mobilization, deficit budgeting is essential to:

Bridge the gap between public expenditure and revenue.
Maximize resource utilization for optimal returns.
Mitigate negative economic impacts.
Fund disaster response and recovery.
Address economic impacts of conflicts or external threats.
Support social welfare, protection, and justice programs.
Create an investment-friendly environment.
Promote income, production, and employment.
Achieve high, sustainable, and inclusive economic growth.
Ensure equitable distribution and poverty reduction.
Improve citizens’ living standards.
Build a self-reliant, equitable, and socialism-oriented economy.

Making Deficit Budgeting Effective

Control recurrent expenditure and prioritize capital expenditure.
Deploy public debt in a time-bound manner.
Ensure internal borrowing does not discourage private investment.
Keep inflation within limits during debt mobilization.
Focus debt on high-return, priority projects.
Prioritize soft loans over commercial loans.
Avoid negative impacts on income, production, and employment.
Analyze repayment capacity before borrowing.
Avoid stringent conditions in foreign loans.
Maintain fiscal balance through coordination.
Align debt with national economic goals.
Ensure internal borrowing supports liquidity and savings.
Base borrowing on economic indicators and fiscal balance.
Ensure returns on investments exceed borrowing costs.
Conduct detailed analyses for internal borrowing.
Strengthen institutional mechanisms for loan monitoring.
Coordinate monetary policy and public debt management.
Use concessional foreign loans for productive sectors and infrastructure.
Enhance negotiation capacity for aid agreements.
Integrate all foreign aid into the national budget system.
Implement Paris Declaration and Accra Agenda effectively.
Regularize the Aid Management Information System (AMIS).

FY 2082/83 Budget Overview

The budget for FY 2082/83 (2025/26) totals NPR 1,964.11 billion, with the following breakdown:

Category	Amount (NPR Billion)	Percentage
Recurrent Expenditure	1,180.98	60.1%
Capital Expenditure	407.89	20.8%
Financial Arrangements	375.24	19.1%
Total Revenue	1,315.00	-
Foreign Grants	53.45	-
Foreign Loans	233.66	-
Internal Loans	362.00	-

Revenue Sharing: NPR 165 billion
Intergovernmental Fiscal Transfers: NPR 417.83 billion (as per Article 60 of the Constitution)

Grant Type	Province (NPR Crore)	Local Level (NPR Crore)
Fiscal Equalization	6066	8897
Complementary	328	1006
Conditional	3035	21146
Special	327	978

Objectives of FY 2082/83 Budget

Achieve high, sustainable, and inclusive economic growth for poverty reduction.
Promote entrepreneurship and public-private investment for job creation.
Enhance economic efficiency through modern technology.
Ensure social justice through social protection and development.
Promote quality public services and good governance.

Priorities of FY 2082/83 Budget

Enhance entrepreneurship, employment, production, and productivity.
Expand investment in high-return infrastructure.
Improve social sector quality.
Ensure balanced development and social security.
Promote citizen-friendly services, corruption control, and governance reforms.

Medium-Term Expenditure Framework (MTEF)

The MTEF is a three-year budget framework that aligns periodic plans with annual budgets, ensuring efficient resource allocation. It projects revenue, grants, loans, and expenditure, refining estimates annually based on past performance.

MTEF Details (Intergovernmental Fiscal Management Act, 2017):

Objectives of proposed plans.
Justification for feasibility studies and expenditure needs.
Expected outcomes over three years.
Detailed expenditure requirements.
Projected returns and resource sources.
Alignment with annual expenditure strategies.
Performance review of previous fiscal year’s expenditure.

Importance of MTEF:

Ensures alignment between periodic plans and budgets.
Secures funding for priority projects.
Prevents resource shortages for high-performing projects.
Avoids over-allocation to projects.
Prioritizes cost-effective, long-term projects.
Reduces funding for unsustainable projects.
Ensures budget certainty for multi-year projects.
Cuts unproductive recurrent expenditure.
Prevents allocation to fragmented projects.
Bases allocations on feasibility and capacity.

Conclusion

Nepal’s budget cycle is a critical tool for economic planning, ensuring transparency, accountability, and public participation. By addressing challenges through systematic reforms, leveraging digital tools like AMIS, and aligning with national and international goals, Nepal can optimize resource use for sustainable development.

References

Constitution of Nepal, 2015.
Intergovernmental Fiscal Management Act, 2017.
Financial Procedures and Fiscal Accountability Act, 2019.
Local Planning Guidelines, 2078 BS.
Ministry of Finance, Government of Nepal, FY 2082/83 Budget.