Main Findings 

The assessment provides a detailed and nuanced perspective on the effectiveness of various PFM processes in addressing climate change challenges. While some PFM processes have excelled in integrating and mainstreaming climate change issues, others have been less effective. Nevertheless, the government has made significant progress in addressing climate change issues through the development of comprehensive regulatory frameworks, policies, and plans. However, when assessed using the CRPFM framework, PFM’s responsiveness shows only a basic level of performance. Among the 14 indicators, two were rated as B, one as C+, four as C, and six received a D score. One indicator was deemed not applicable. 

The CRPFM Assessment results are presented in this section to synopsize the key PFM tools and processes that have been put in place to support the effective implementation of climate change policies, and how these processes play a significant role in achieving the three budgetary outcomes while implementing climate change policies. 

Aggregate Fiscal Discipline 

The GoN has implemented a system to budget and track climate change-related expenditures. The medium-term budgets demonstrate a fair degree of alignment with the climate change strategies. However, the outturn of climate change-related expenditures, including provincial and local level expenditures, is at a basic level; the expenditure outturn only for the federal level is below the basic level of performance. 

The control of climate-related transactions and related audits follow the same processes as all other transactions. However, the prescribed internal control framework does not specify any controls for the climate conditionalities of the transactions. The coverage of audit is comprehensive and covers climate-related transactions, along with all other categories and types of transactions. However, there is a lack of sufficient evidence to substantiate the percentage of climate-related transactions covered during audits. 

The management of climate-related fiscal risks, debts, guarantees, and non-financial assets is currently weak. Despite strong regulatory framework, the management of debts and guarantees do not consider climate change mitigation or adaptation. Moreover, climate-related liabilities are yet to be recorded and incorporated into the government’s financial reports. 

Strategic Allocation of Resources 

The budget circular and formulation guidelines serve as a valuable source of guidance for tracking climate change-related expenditures and factoring in climate change mitigation and adaptation in budget proposals, as per the national climate change policies. The Climate Change Policy has played a crucial role in aligning strategies and sectoral plans with climate goals and providing budgetary allocations, including conditional transfers. However, the climate budget tagging exercise occurs late in the budget cycle and does not prioritize programs based on climate criteria. Although climate change expenditure are monitored, there is no tagging system for programs that negatively impact the climate. Moreover, the focus on climate change during legislative scrutiny of budgets and audit reports exhibit less than basic level of performance. 

The regulatory framework for public investment management, as applied to the sampled projects, did not encompass provisions related to climate change. Despite the identification of environmental risks, including climate risks, during the appraisal of large projects, there is a lack of national guidelines for assessing the climate change impacts of new investment projects. However, it is worth noting that the government is taking steps to address this issue through the implementation of a National Project Bank and the notification of new regulations that include climate-related provisions. Efforts are underway to incorporate a climate lens into project identification, screening, appraisal, and prioritization procedures, as well as information systems. However, there is a need for a standard climate taxonomy for all relevant sectors, which can help enable climate tagging at the activity level across all levels of government. 

The legal framework defines the mandates of Provincial and Local Governments (PLGs) in relation to climate change, and they follow the central government’s climate policy. Climate-related conditional transfers are aligned with climate policy goals, and there is a mechanism to track financial progress. However, an effective mechanism is needed for the sectoral federal ministers to report physical and financial progress of climate-related fiscal transfers to the PLGs. 

Efficient Service Delivery 

The mandates of federal, provincial, and local governments encompass services that are specifically designed to contend with the impact of climate change. The budget circular provides clear guidelines for considering climate change as an integral component of expenditure frameworks and lays the foundation for the establishment of coordination committees and operational bodies for climate change plans and strategies. The National Climate Change Policy, in turn, provides further direction to entities in coping with the impacts of climate change. 

Nepal employs extensive expenditure control systems, which naturally benefits climate- related expenditures. Budget performance plans and reports produced by the GoN include climate outputs. However, EBUs and public corporations do not report on climate- related matters. The OAG audits government expenditures, including those relating to climate programs, which are reviewed by the legislature. However, the legislative security for climate change, as assessed through the CRPFM lens, demonstrates a performance below basic.

Public procurement in Nepal does not yet include a specific provision for climate responsiveness. Standard bidding documents do not yet take into consideration climate- responsive standards. There is no concept of estimating life cycle costs, nor is there any management of climate considerations in terms of asset procurement, maintenance, and disposal. Nonetheless, the current procurement system does allow for the expediting of processes in the event of natural disasters, some of which can be attributed to climate change.

Climate considerations are incorporated into the Intergovernmental Fiscal Transfer System, specifically for equalization grants and revenue-sharing of some revenues. Nevertheless, there is a need to promote performance-based grants to the PLGs to incentivize climate performance.

*Kindly note that in the text of this assessment report document the descriptive dimensions 5.2 and 5.3 will appear swapped, as this assessment was prepared before the final version of the PEFA Climate Supplementary Framework.