Nepal 2008

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In no more than out of one of the last three years has the actual expenditure deviated by an amount equivalent to more than 10% of budgeted expenditure. The ratio of actual expenditure to approved budget is as follows: FY 2003/04 = 94.12%; FY 2004/05 = 99.81%; FY 2005/06 = 94.44%. (p. 5-6)

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Variance in expenditure composition exceeded overall deviation in primary expenditure by 10 percentage points in no more than one of the last three years. Total variance in expenditure composition compared to overall deviation in primary expenditure is as follows: FY2003/04 = 6%, FY2004/05 = 13.5% and 2005/06 = 9.5% (p. 6-7)

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Actual domestic collection was below 97% of budgeted domestic revenue estimates in no more than one of the last three years. The ratio of actual revenue to budget is as follows: FY2003/04 = 107% (66.60/62.22), FY2004/05 = 102.3% (71.92/70.32) and FY2005/06 = 88.4% (72.28/81.81). (p. 7-8)

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Stock of arrears constitutes 2-10% of total expenditure; and there is no evidence of it being reduced significantly in the last two years. (p. 9)

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There is no reliable data on the stock of arrears. The system of recording arrears is weak. Much of this weakness stems from (a) weak enforcement (not everyone fills in Form Number 18 at the end of fiscal year); (b) weak coverage (many committees, boards and public enterprises do report arrears but not annually); (c) not included in reporting, special decisions of Government (related to emergencies, natural calamities and others); and, (d) weak accounting system for consolidating arrears that are reported. (p. 9)

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The budget formulation and execution is based on administrative and economic classification using GFS Standards or a standard that can produce consistent documentation according to those standards. The current classification and chart of accounts follows GFS coding formats and standards on the flow side but not the stock. Stock information, if so desired, as per GFS standards, can be tabulated accordingly. (p. 10)

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"Recent budget documentation fulfils 5-6 of the 9 information benchmarks. Benchmarks with complete information: - Macro-economic assumptions, including at least estimates of aggregate growth, inflation and exchange rate. This information is provided in the budget speech. - Fiscal deficit, defined according to GFS or other internationally recognized standard. This information is provided in the budget speech. - Prior year’s budget, presented in the same format as the budget proposal. Presented in the budget book—Red Book Annex. - Current year’s budget (either the revised budget or the estimated), presented in the same format as the budget proposal. Presented in the budget book—Red Book Annex. - Summarized budget data for the both revenue and expenditure according to the main heads of the classification used (ref. PI-5), including data for the current and previous year. Budget Speech Annex has the information. - Explanation of budget implications of new policy initiatives, with estimates of the budgetary impact of all major revenue policy changes and/or some major changes to the expenditure programs. The Budget Speech has the information. Benchmarks with incomplete information: - Deficit financing, describing anticipated composition. - Debt stock, including details at least for the beginning of the current year. - Financial Assets, including details at least for the beginning of the current year. (p. 11-12)"

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The level of unreported extra-budgetary expenditure (other than donor-funded projects) constitutes 5-10% of total expenditure. The levels of some extra-budgetary expenditure are also recorded in the “Weekly Treasury Report”. They added up to 2.31% of total expenditure in FY 2005/06. However, there are expenditures incurred from sources such as Army Welfare Fund, Police Welfare Fund and other development funds/boards, which escape total reporting in the budget and is estimated to range from 5% to 10% of total expenditure. (p. 12-13)

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Complete income/expenditure information for all loan-financed projects is included in fiscal reports. All loans are reported, recorded and audited but some grant-funded projects are not reflected in the budget. (p. 12-13)

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The horizontal allocation of only a small part of transfers from central Government (10- 50%) is determined by transparent and rules based systems. The Local Self Governance Act (LSGA) empowers the local government to implement development activities in accordance with local priorities and is funded through block grants—conditional and unconditional, own resources, loans and foreign aid. (p. 14)

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Reliable information to sub-national governments is issued before the start of the sub- national fiscal year but too late for significant budget changes to be made. (p. 14)

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Fiscal information (at least ex-post) that is consistent with central government fiscal reporting is collected for at the least 60% (by value) of sub-national government expenditure and consolidated into annual reports within 24 months of the end of the fiscal year. (p. 14)

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Most autonomous government agencies (AGAs)/Public enterprises (PEs) submit fiscal reports to central governments, at least annually, but a consolidated overview is missing or significantly incomplete. (p. 15)

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No annual monitoring of the fiscal position of sub-national government takes place or it is significantly incomplete. (p. 15)

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"The government makes available to the public 3-4 of the 6 listed types of information. Complete information: - Annual budget documentation: A complete set of documents can be obtained by public through appropriate means when it is submitted to the legislature. - In–year budget execution reports: Reports are routinely made available to the public through appropriate means within a month of completion. - Resources available to primary service units: Information is publicized through appropriate means at least annually or made available upon request for primary service units with national coverage in at least two sectors (such as elementary schools or primary health clinics). Incomplete information: - Year-end financial statements. - External audit reports. - Contract awards. (p. 17)"

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A clear annual budget calendar exists but some delays are often experienced in its implementation. The calendar allows MDAs reasonable time (at least four weeks from receipt of the budget circular) so that most of them are able to meaningfully complete their detailed estimates on time. (p. 18)

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A comprehensive and clear budget circular is issued to MDAs, which reflects ceilings approved by Cabinet (or equivalent). This approval takes place after the circular distribution to MDAs but before MDAs have completed their submission. (p. 18)

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The budget has been approved with more than two months delay in two of the last three years. Generally, the legislature approves the budget within 2 to 3 months of the start of the fiscal year. (p. 18-19)

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Forecasts of fiscal aggregates (on the basis of main categories of economic and functional/sector classifications) are prepared for at least two years on a rolling annual basis. Links between multi-year estimates and subsequent setting of annual budget ceilings are clear and differences are explained. (p. 19)

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A DSA for at least for external debt undertaken once during last three years. (p. 19)

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Statements of sector strategies exist for several major sectors but are only substantially costed for sectors representing up to 25% of primary expenditure or costed strategies cover more sectors but are inconsistent with aggregate fiscal forecasts. Only two sectors, education and health, have approved sector strategies with cost estimates and investments linked to forward estimates. The spending of the two sectors constitutes 22% of total expenditure or 68% of social sector spending. In view of the coverage and activities of these two sectors being primary by nature, this third dimension is rated as “C”. (p. 19-20)

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Many investment decisions have weak links to sector strategies and their recurrent cost implications are included in forward budget estimates only in a few (but major) cases. In the absence of coherent approved sector strategies, the periodic plan has loose cost estimates although some activities have estimates to the unit level. Except for education and health sector strategies, Nepal lacks sector strategies with cost estimates. Therefore, linkages between sector strategies, investment budget and forward expenditure estimates are, at best, weak and questionable. (p. 20)

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Legislation and procedures for some major taxes are comprehensive and clear but the fairness of the system is questioned due to substantial discretionary power of government entities involved. Legal provisions for major taxes are comprehensive and clear but the fairness of the system is questionable because of perceived discretionary power of government entities, especially on decisions related to liquor and excise. For all major tax streams—customs, Value-added Tax (VAT), Excise and Income Tax—there are rules and regulations for the individual taxes. But when it comes to arbitration, the tax officer’s judgmental decision is final for collection though there is space for legal redress at a later date. (p. 21)

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Taxpayers have access to some information on tax liabilities and administrative procedures but the usefulness of the information is limited due to coverage of selected taxes only, lack of comprehensiveness and/or not being up-to-date. Legal terms, understood mostly by lawyers only, remain as the main hurdles and therefore all tax liability procedures are not user-friendly from the taxpayers' perspective. (p. 21)

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A tax appeals system of transparent administrative procedures is completely set up and functional. But it is either too early to assess its effectiveness or some issues relating to access, efficiency, fairness or effective follow-up on its decisions, need to be addressed. There is a system for tax appeal but transparency, fairness and effectiveness are questionable when tax arbitration is slow and can take more than a year for resolution, resulting in substantial financial costs. The provision for administrative review exists for all major taxes: Excise, Income Tax, VAT and Customs (Valuation). Nepal also has a Judicial Tribunal. But questions have been raised on delays in decision making and implementation, resulting in low compliance. The tax appeal system needs strengthening. (p. 21-22)

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"Taxpayers are registered in database systems for individual taxes, which may not be fully and consistently linked. Linkages to other registration/licensing functions may be weak but are then supplemented by occasional surveys of potential taxpayers. Nepal launched the taxpayer identification (Permanent Account Number or PAN) scheme with the implementation of new income tax law in 2001. Compulsory VAT registration for all importers, exporters and retailers above the threshold, has been implemented. Necessary permissions are granted for transactions in liquor and excise- dutiable products upon request. As PAN was introduced for income tax, it has limited linkages with other taxes (excise, VAT and customs). Except for customs, efforts are underway to link all databases of Inland Revenue (excise, VAT and Income Tax) but full integration will take some time. (p. 23)"

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"There is a continuous program of tax audits and fraud investigations but audit programs are not based on clear risk assessment criteria. Tax audits are conducted—2% of total tax filed—and fraud is investigated on an ad hoc basis. This, however, applies only for income tax and VAT. (p. 23)"

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"Penalties for non-compliance generally exist but substantial changes to their structure; levels or administration are needed to give them a real impact on compliance. Penalties for non-compliance exist for most relevant taxes but are not always effective due to inconsistent administration. Heavy penalties are prescribed in the laws for income tax, excise, VAT and customs violations but compliance is low resulting in heavy leakages and non-collection. Non filers of income tax are penalized up to NRs.1,000 annually with 15% interest for defaulted payment. Similarly non-VAT filers are charged NRs.1,000 per month with 15% interest on defaulted payment. (p. 23)"

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The debt collection ratio in the most recent year was below 60% and the total amount of tax arrears is significant (i.e. more than 2% of total annual collection). (p. 24)

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Revenue collections are transferred to the Treasury daily. A weekly consolidated Treasury report is also prepared. (p. 24-25)

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Complete reconciliation of tax assessments, collections, arrears and transfers to Treasury takes place annually but it takes three months after the end of the year for reconciliation to be completed. (p. 25)

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MDAs are provided reliable information on commitment ceilings at least quarterly in advance. (p. 26)

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Significant in-year budget adjustments are frequent but undertaken with some transparency. There are transparent rules of adjustment and virement from one budget heading to another and one source of financing to the other. (p. 26)

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A cash flow forecast is prepared for the fiscal year but is not (or only partially and infrequently) updated. (p. 26)

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Domestic and foreign debt records are complete, updated and reconciled at least annually. Data quality is considered fair, but some gaps and reconciliation problems are recognized. Reports on debt stocks and service are produced only occasionally or with limited content. A dedicated unit at the Financial Comptroller General Office regularly updates both domestic and foreign debt. Although, it has software (CSDRMS) to help facilitate debt management, operational problems have resulted in recording debt manually. Debt, stock and flow are reported annually in the Economic Survey report. (p. 27)

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Most cash balances are calculated and consolidated at least weekly, but some extra- budgetary funds remain outside the arrangement. Major cash balances are calculated weekly and are reflected in the Weekly Treasury Report. Local government revenues are recorded but expenditures (not more than 8% of the total spending) are outside the recording systems. (p. 27)

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Central government's contracting of loans and issuance of guarantees are always approved by a single responsible entity, but are not decided on the basis of clear guidelines, criteria or overall ceilings. (p. 27)

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A personnel database may not be fully maintained but reconciliation of the payroll with personnel records takes place at least every six months. Electronic Personnel Information System of Government is complete—teachers (90% complete) and police (80% complete). Personnel records assist in linking the database and the payroll. This, at best, covers two thirds of total payroll subjected to budget appropriation. Although it is mandatory to pass the “salary report” by each office for budget appropriation for the fiscal year, discrepancies in linking posts to payroll exist mainly because of the aforesaid reasons. Personnel records and payroll data are reconciled at least once every six months, generally at the beginning of the fiscal year and at the time of audit. (p. 28)

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Up to three months delay occurs in updating of changes to the personnel records and payroll but affects only a minority of changes. Retroactive adjustments are made occasionally. (p. 28)

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Controls exist but are not adequate to ensure full integrity of data. (p. 28)

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A payroll audit covering all central Government entities has been conducted at least once in the last three years (whether in stages or as one single exercise). Internal payroll audits are conducted on a monthly basis by the District Treasury Controller Office (DTCO); they are audited on an annual basis by an external auditor—the Office of the Auditor General. (p. 28-29)

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"Available data shows that less than 50% of contracts above the threshold are awarded on an open competitive basis, but the data may not be accurate. Although, generally, open competition is mandatory for procurement, there is no system to maintain data. Data are generally available at the project or entity level for donor-financed projects, showing that more than 75% of contracts above the threshold are awarded on the basis of open competition. But this information is not tracked systematically. Volume of procurement undertaken through the Government’s own funds is proportionately large and hence, on aggregate, it is estimated that less than 50% of contracts above the threshold are awarded on an open competitive basis. However, there is no basis to confirm or ignore this estimate. (p. 29-30)"

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Justification for use of less competitive methods is weak or missing. The Public Procurement Act (Clause 9) requires the open competitive bidding to be the preferred and expected method. (p. 29-30)

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The Public Procurement Act has a formal complaints or appeals mechanism (Clauses 48 through 51). The law spells out the procedure for reviewing complaints with timeframe for appeals by the bidders and decision making by the Review Committee. Since the Act was approved only in January 2007, it has not yet been implemented effectively. How the formal complaint system will function thus remains to be seen. (p. 29-30)

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Expenditure commitment control procedures exist but are partially effective, but they may not comprehensively cover all expenditures, or they may be occasionally violated. Although there is a good procedure for expenditure commitment control, enforcement, especially, during the last trimester of the fiscal year is violated often in the name of crisis and emergency. (p. 31)

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Other internal control rules and procedures consist of a basic set of rules for processing and recording transactions, which are understood by those directly involved in their application. Some rules and procedures may be excessive, while controls may be deficient in areas of minor importance. In practice, internal control comprises check and balance from concerned authorities, inspection by senior authority and internal audits. Budget allocation, authorization and control, sanction from authorized officials, record keeping and reconciliation and financial reporting are the elements of the internal control system. (p. 31-32)

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Rules are complied with in a significant majority of transactions but use of simplified/emergency procedures in unjustified situations is an important concern. (p. 31)

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There is little or no internal audit focused on systems monitoring. (p. 33)

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Reports are issued regularly for most government entities but may not be submitted to MOF and the SAI. (p. 33)

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Internal audit recommendations are usually ignored (with few exceptions). (p. 33)

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Bank reconciliation of all Treasury-managed bank accounts of the expenditure budget and deposits are timely and are prepared each month, within a week from the end of the month as stipulated in the Financial Administration Regulations. (p. 35)

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Reconciliation and clearance of suspense accounts and advances take place annually in general—within two months of end of year, but a significant number of accounts have uncleared balances brought forward. (p. 35)

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Special surveys undertaken within the last three years have demonstrated the level of resources received in cash and in kind by either primary schools or primary health clinics covering a significant part of the country or by primary service delivery units at local community level in several other sectors. (p. 37)

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Comparison to budget is possible only for main administrative headings. Expenditure is captured either at commitment or at payment stage (not both). (p. 38)

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Reports are prepared quarterly or more frequently and issued within four weeks of end of period. (p. 38)

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There are some concerns about the accuracy of information, which may not always be highlighted in the reports but this does not fundamentally undermine their basic usefulness. (p. 38)

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A consolidated Government statement is prepared annually. Information on revenue, expenditure and bank account balances may not always be complete but the omissions are not significant. (p. 39)

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The statement is submitted for external audit within six months of the end of the fiscal year. (p. 39)

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Statements are presented in consistent format over time with some disclosure of accounting standards. (p. 39)

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Central Government entities representing at least 75% of total expenditures are audited annually, at least covering revenue and expenditure. A wide range of financial audits are performed and generally adhere to auditing standards, focusing on significant and systemic issues. Scope of audit includes extra-budgetary funds and autonomous agencies owned by Government. The Office of the Auditor General follows auditing standards that are based on the International Organization of Supreme Audit Institutions standards. (p. 41)

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Audit reports are submitted to the legislature more than 12 months from the end of the period covered (for audit of financial statements from their receipt by the auditors). Neither the Interim Constitution nor the audit law specifies the period within which the audit report is to be submitted to the legislature. The track record suggests that audit reports are generally submitted to the legislature after 12 months of the end of the period covered (it was submitted within 12 months only once). (p. 41-42)

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A formal response is made, though delayed or not very thorough, but there is little evidence of any follow-up. Follow-up on audit recommendations was generally weak owing partly to the political instability of the recent past. There is no established mechanism or system to follow-up on audit recommendations. (p. 41-42)

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The legislature’s review covers details of expenditure and revenue but only at a stage where detailed proposals have been finalized. (p. 43)

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Procedures for the legislature's review are non-existent or not respected. Nepal’s parliament remained dissolved since May 2002 owing to the political instability. It was a setback in the development of a good system for discussing budget proposals. (p. 43)

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The time allowed for the legislature's review is clearly insufficient for a meaningful debate (significantly less than one month). (p. 43)

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Clear rules exist for in-year budget amendments by the executive and are usually respected, but they allow extensive administrative reallocations. With respect to rules for in-year budget amendments without ex-ante approval by the legislature, the Finance Procedure Act has clearly defined the conditions under which the executive can amend the budget; it also specifies the limits on extent and nature of the amendments. (p. 43-44)

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Examination of audit reports by the legislature does not take place or usually takes more than 12 months to complete. After the dissolution of parliament there was no arrangement for public scrutiny of the Auditor General’s reports. (p. 44-45)

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In-depth hearings on key findings take place occasionally, cover only a few audited entities or may include with MOF officials only. (p. 44)

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Actions are recommended but are rarely acted upon by the executive. (p. 44)

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In at least two of the last three years did direct budget support outturn fell short of the forecast by more than 15% or no comprehensive and timely forecast for the year(s) was provided by the donor agencies. (p. 46)

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The requirements for Score C (or higher) are not met. In-year timeliness of donor disbursements (compliance with aggregate quarterly estimates) is very low and does not meet the criteria mentioned in rating. (p. 46-47)

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Not all major donors provide budget estimates for disbursement of project aid at least for the government's coming fiscal year and at least three months prior its start. (p. 47)

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With regard to reporting, except for a few loan-financing donors, most do not provide quarterly reports within two months of the end-of-quarter on the disbursements made for at least 50% of the externally-financed project estimates in the budget. (p. 48)

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Less than 50% of aid funds to central Government are managed through national procedures. The requirement that national authorities use different procedures for managing aid funds diverts capacity away from the national systems. This is compounded when different donors have different requirements. Since a large proportion of grant aid funds are provided directly by donors, the aid has to be managed in accordance with different donor procedures. (p. 48-49)