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Budget Cycle

The budget is designed, implemented and audited in stages, commonly known as "the budget cycle".
The stages may be subdivided into steps according to the legal and institutional framework of each
country. To provide for responsible government, budgeting is geared to a cycle. The cycle allows the
system to absorb and respond to new information and, therefore allows government to be held
accountable for its actions. Budget cycle can be said to be period between one budget and the next. The
budget cycle describes the activities and processes behind developing budget for a single fiscal period.
The length of the fiscal period is generally one year. The function of budget cycle is to define the steps
from the beginning to the end of the process. However, a budget or budget cycle is actually a
continuous process. The stages in the budget cycle may overlap and actions taken at one stage of the
budget cycle often have an impact on the later stages.

The Budget Cycle includes Budget Formulation, Budget Approval, Budget Execution or Implementation
and Budget Auditing or Evaluation.

Budget Formulation in Nepal

Budget formulation consists of all steps, actions, and documentation in the budget process that are
required or that properly should be taken in advance before enactment by the parliament for bill.
Budget formulation implicitly includes program performance analysis that is conducted to determine
where an activity stands at present, where it is going (ie., what can we reasonably expect to happen with
meeting stated goals and objectives) and what alternative approaches could be taken that could better
achieve objectives

The basic objectives of the formulation process are:

 to provide a satisfactory information basis for use by program managers, the Secretary, the
President and the Congress in making decisions about the allocation of the Nation's resources
toward fulfilment of the Nation's goals and needs, an
 to ensure that each responsible party in the process has a satisfactory opportunity to analyse
the information needed to make decisions

In Nepal, during the formulation stage, the executive, through the ministry of finance, coordinates
elaboration of the budget plan by requesting information from other line ministries. The ministry
elaborates a draft budget after an analysis of the macroeconomic context, which includes government
revenue, proposed budget ceilings and the priorities of all line ministries. As per Financial Procedure and
Fiscal Accountability Act, 2076, Budget Formulation Process of Nepal is as prescribed as follows:

MR CPA PET

1. Preparation of Mid-Term Expenditure Framework: National Planning Commission (NPC) should

prepare Mid-Term Expenditure Framework (MTEF) every year for upcoming three years in accordance
with Periodic Planning. Every Ministry should prepare its Mid- Term Expenditure Framework for
upcoming three years with expenditure forecast in accordance with sectorial policies and periodic
Planning and submit to NPC and Ministry of Finance (MoF). (Section 6)

2. Resource Estimation and Expenditure Ceiling: National Planning Commission (NPC) in coordination
with MoF makes should prepare Mid-Term Expenditure Framework the expense ceiling and resource
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allocation estimate within Magh 15 for which a Resource Committee is formulated under the
chairmanship of NPC. The Resource Committee should estimate net national resource on the basis of
national economic indicators, revenue projection, national and international debt and other funds that
can be earned in consolidated fund. As per national resource projection, the committee projects Budget
Ceiling and submit the report to Finance Minister.(Section 7)

3. Budget Ceiling and Guideline: NPC in accordance with Resource Estimation and Expenditure Estimate
projected by Resource Committee sends Budget Ceiling, Framework of MTEF and Budget Formulation
Guidelines to Line Ministries and other entities within month end of Magh. (Section 8)

4. Budget Proposal and Discussion: Account Responsible Officer as per budget ceiling and guideline
prepares budget proposal for upcoming year including plans, programs and policies in prescribed
manner and sends to MoF and NPC within stipulated time. NPC holds discussion on sectorial goals,
achievements, feasibility study, IEE. EIA, detail drawing design, Procurement Plan and Procurement
Master Plan of Budget Proposal and presents report to Finance Minister.

MoF holds discussion on budget proposal with ARO (Account Responsible Officer) or Designated Officer
about additional cash flow, basis for revenue target, time of revenue earning, sectorial expenses,
functional expenses etc. (Section 9)

5.Budget Appropriation: As per discussion held, MoF makes budget proposal for next Fiscal Year. Capital
and Current expenditure are prepared as per policies, agreement, expenditure procedure,
organizational goals etc. New project is proposed as per DPR and expenditure projection for next year.
Ongoing projects are proposed as per procurement plan and master plan. Projects are proposed as per
high social benefits. (Section 10)

6.Principles and Priorities of Budget and Programs: Finance Minister tables Principles and Priorities of
budget and programs before 15 days of Presenting Appropriation Bill in Both House of Parliament.
(Section 11)

7.Estimation of Revenue and Expense: MoF prepares the estimation of revenue and expenses including
previous year review of revenue earning and expenses, MTEF. Programs funded by GON or donors,
information about public loan, investment and payables, tax exemption etc. (Section 13)

8.The estimation of Revenue and Expense should be tabled: Finance Bill and Appropriation Bill including
revenue and expense estimation is presented in the Federal Parliament before Jestha 15th. (Section 14)

Budget Execution or Implementation

Budget execution is the phase where resources are used to implement policies incorporated in the
budget. It is possible to implement a well formulated budget, it is not possible to implement well a badly
formulated budget. Good budget preparation comes first, logically as well as chronologically. However,
budget execution processes do not come down simply to mechanisms for ensuring compliance with the
initial programming. Even with good forecasts, unexpected changes in the macroeconomic environment
will occur during the year, and need to be reflected in the budget. The changes should be
accommodated in a way that is consistent with the initial policy objectives to avoid disrupting the
activities of agencies and project management. Successful budget execution depends on numerous
other factors as well, such as the ability to deal with changes in the macroeconomic environment, and
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the implementation capacities of agencies Budget execution involves a greater number of players than
budget preparation, and calls both for assuring that the "signals" given in the budget are transmitted,
and for taking into account feedback from actual experience in implementing the budget. A budget
execution system should meet the three major objectives.

 ensuring that the budget will be implemented in conformity with the authorizations granted in
the law, both in the financial and policy aspects:
 adapting the execution of the budget to significant changes in the macroeconomic environment;
 resolving problems arising during implementation; and,
 Managing the purchase and use of resources efficiently and effectively.

A budget execution system should ensure compliance with budgetary authorizations and should have
adequate monitoring and reporting capabilities to be able to identify budget implementation problems
promptly while giving flexibility to managers. Budget execution starts when the government spends
financial resources according to the approved budget. During the fiscal year, the executive may modify
the budget to meet unexpected situations. The extent to which the executive can change the budget
should also be described in the legal framework. As per Financial Procedure and Fiscal Accountability
Act, 2076, Budget Execution or Implementation Process of Nepal is as prescribed as follows:

1. Budget Sanction: The budget expenditure or execution can be made as per the amount appropriated
in Appropriation Act Ministry or Departments should provide authorization letter to departments or
sub-ordinate offices within 7 days after enactment of appropriation act and its information should be
portrayed to MoF, FCGO and TCO. FCGO should made the payment from Federal Consolidated Fund
through TSA after receiving payment order from concerned office as per allocated budget. Office chief is
responsible for execution accounting, reporting, auditing, settlement of irregularities as per prevailing
laws and procedures. (Section 18)

2. Execution of approved budget and programs: ARO is responsible for execution of budget as per
targeted objectives by subordinate offices. ARO or Responsible Officer of subordinate office should
execute the budget as per directives of MOF. Departmental head with Secretary and Office Chief with
Department Head should make performance contract with indicators for budget execution function.
(Section 19)

Budgetary Control

Budgetary control is a system of procedures used to ensure that an organization's actual revenues and
expenditures adhere closely to its financial plan. The system typically involves setting goals for ministries
that are based on the budget. In addition, budget versus actual reports are routinely issued to anyone
having responsibility for a line item in the financial statements; they are then expected to take action to
correct any unfavourable variances. Budgetary control is the process by which budgets are prepared for
the future period and are compared with the actual performance for finding out variances, if any. This is
important budgeting function carried in order to facilitate budget execution process.
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According to Brown and Howard. Budgetary control is a system of controlling costs which includes the
preparation of budgets, coordinating the departments and establishing responsibilities. comparing
actual performance with the budgeted and acting upon results to achieve maximum profitability."
Budgetary control is the process of determining various actual results with budgeted figures for the
enterprise for the future period and standards set then comparing the budgeted figures with the actual
performance for calculating variances, if any. The main objectives of budgetary control are the follows:

 To ensure planning for future by setting up various budgets, the requirements and expected
performance of the enterprise are anticipated.
 To operate various cost centres and departments with efficiency and economy. Elimination of
wastes and increase in profitability.
 To anticipate capital expenditure for future.
 To centralize the control system.
 Correction of deviations from the established standards.

The advantages of budgetary control are Maximization of Profit, Proper co-ordination, provides specific
objectives, acts as tool for measuring performance, Economy, Corrective Action and measures, creates
budget consensus, reduced costs, determine weakness etc. The major imitation of budgetary control are
uncertain future, revision required, discourage efficient persons, problem of co-ordination, conflict
among different departments and depends upon support of top management. As per Financial
Procedure and Fiscal Accountability Act, 2076, Budgetary Control process of Nepal is as prescribed as
follows:

1. Power to withhold or control budget and Budget Surrender: Ministry of Finance may, in view of the
economic condition of the country and the funds available in the consolidated fund, fully or partly
withhold or control the appropriated funds/amounts, as required, other than the amounts chargeable
on the consolidated fund. The amount that should be divided by ARO, as per Appropriation Act, if not
divided among different offices within first quarter can be withheld by MOF. ARO should surrender
Budget to MoF within Chaitra 15 for the program or budget provisioned by Appropriation Act, which
could not be executed within Second quarter and has no possibility of execution of such budget.
(Section 21)

2 Monitoring and Evaluation of Budget and Programs: Concerned Ministers and Secretary should
monitor the projects, programs and budget execution of sub-ordinates monthly, quarterly and present
report to MoF with detail analysis. The monitoring and evaluation should include physical and financial
progress with cause and impact on the basis of program, framework, procurement plan and cash flow.
MoF on the basis of Monitoring and Evaluation Report, should prepare Integrated Evaluation Report
which should include revenue, Foreign aid. Debt acquisition and Mobilization status, overall economic
and financial status of Government of Nepal, implementation status of policies and Budget and other.
(Section 23)

3. Guideline and Procedures of Budget Execution: Concerned Official should order for the budget
execution as per approved budget, program and available resources. Budget Expenditure should be
made in an efficient and economic manner with high value return within budgetary ceiling as per
prescribed laws, procedures and guidelines. The payment should be made within 15 days of payment
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order. MoF can issue Procedure for budget expenditure to maintain uniformity and efficiency in public
expenditure.( Section 24)

Auditing

In the last stage, auditing, an independent agency or body reviews execution of the budget to determine
whether the resources were used effectively and efficiently. Auditing also addresses the performance of
line ministries in executing the budget. Generally, an autonomous audit auditing process. The results of
auditing represent a valuable input for designing the budget for institution (supreme audit institution) is
charged with this duty, or the legislature may undertake the next year.

As per Financial Procedure and Fiscal Accountability Act, 2076 auditing is categorized as internal audit
and final audit in case of government audit. Internal auditing of budgetary expenses is to be done by
Treasury Controller Office (Section 33) and Final Audit conducted by Auditor General (Section 35).

Province and Local levels have similar ways of budget formulation and implementation practices based
on respective Financial Procedure Acts and other related laws. The Budgeting system t subnational
levels is carried through following steps:

 Budget Formulation as per Financial Procedures Act

 Budget Tabulation and Approval in the Legislation or Assembly
 Budget Execution and Budgetary Control
 Monitoring and Evaluation
 Internal and Final Audit of Discussion in Public Account Committee
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Public Financial Management

PFM refers to the set of laws, rules, systems and processes used by sovereign nations (and sub national
governments), to mobilize revenue, allocate public funds, undertake public spending account for funds
and audit results.

It encompasses a broader set of functions than financial management and is commonly conceived as a
cycle of six phases, beginning with policy design and ending with external audit and evaluation . A large
number of actors engage this "PFM cycle" to ensure it operates effectively and transparently, whilst
preserving accountability.

Cycle of Public Financial management

 Policy Planning Stage

 Budget Formulation
 Budget Approval
 Budget Execution
 Accounting
 External Audit and Oversight

Objectives of Public Financial Management

There are principle , constitutional and managerial objectives of public financial management . On a
principle basis, it should be confirmed that the means of the people are being utilized in the areas of
highest need. According to the constitution, the work related to income and expenditure is subject to
parliamentary approval and monitoring. Managerially, all the dimensions of financial transactions should
be performed in such a way that the management can become accountable due to this. To achieve
these goals, there are four objectives of public financial management: DA OA

 Maintain aggregate fiscal discipline

 revenue collection goal
 Spending goals
 Fiscal deficit mobilization
 Public debt
 Allocation in strategic priority
 Allocation Basis and Policies
 Allocation Criteria and Objective Indicators
 Achieve operational efficiency
 Implementing action plan
 Determining job responsibilities
 Economical
 Efficiency
 Efficiency
 Results indicator
 Financial accountability
 Transparency (Access to information to stakeholders)
 Beneficiary Considerations
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 Checks and balances (Internal and external)

Public Financial management Future course of action

Financial management, which is at the centre of public sector reform, should be continuously made
dynamic and timely. A financial management system that can address the challenges brought by the
environment and can be self-dynamic becomes lively.

Some policy and operational aspects that must be followed in the future in this are presented here,
which are policy issues of financial management reform.

A LAP II BMM CAT

Realistic Annual development plan, Plan logically link, financial transactions to full automation,
procurement Activities information capture, institutionalizing interrelationship of IT in accounting, IFMIS
to GFS, Extra Budgetary entities, monitoring of activities ,mechanism of control and balance at local
level, CAAT

The starting point of financial management reform is the budget. After making the budget real
(annual development program), the difference between policy and results (as expected and as
executed) can be found. This is the basis of overall fiscal discipline. To make the budget a real policy
mechanism, the policy base for mobilizing actors outside the government, the information and
analysis base for realizing the assessment of government resources (model based approach) and the
bases for resource allocation should be established. Because the budget is a mechanism that gives
(vibration) in the macro economy, not just a government fund management.

Second, periodic planning, medium-term expenditure framework and project banks should be
logically linked. This is an important aspect of budgetary discipline. The project bank must be
integrated with the regional strategic perspective plan. A project that implements the spirit of the
regional strategic goals and plans should be developed and entered into LMBIS through the project
bank. An integration system should be established between Project Bank/LMBIS. Only then is the
technical basis for specifying the resource priority is established.

Thirdly, it is necessary to move all activities of financial transaction to full automation. It is very
important to develop a system where the party can present the bill, its verification, payment of
expenses through a single digital platform. It simultaneously addresses the accuracy, speed and
transparency of the process which is not seen now.

Fourth, to improve public procurement management an international level public procurement laws are
on implementation phase and e-bidding system has also been developed to expand the competition and
access of stakeholders. But to reach the aggregated qualification requirement , there is a need to
improve the procurement system by including information (capture). If this can be done, all the
details such as where and what the particular construction contractor supplier is doing, how much
work is left by him, when he/she will complete the remaining work, etc. There will be no criticism of
the government on this basis.
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The fifth issue is in institutionalizing the interrelationship between the information technology
established in the accounting system. Emphasis is placed on the use of information technology to
strengthen public financial management. Previously, the use of information technology was a theoretical
agenda. In Section 62 of the financial Procedures and Fiscal accountability Act, 2076,

 information technology will be used to manage budget and accounting related work,
 (b) the Office of the Controller General of Accounts will develop and implement a system based
on information technology,
 (c ) Require approval for which is not included in the system developed by the financial
Comptroller General's Office or which requires the approval of the financial Comptroller
General's Office to develop any system,
 (d) electronic signature can be used for authentication of information received from the
information system
 and (e) development of interconnected systems and interrelationship between systems.

There will be risks if the information systems established between the government and government
departments are not closely inter-connected. Also, various financial technologies (Fintech) are being
used in the global monetary market, which Nepal is also introducing. Managing it also requires proper
integration between systems.

Sixth, It is necessary to implement the Integrated Financial Management Information System (IFMIS)
to improve the financial reporting system so that it can be in line with the international standard (GFS
Guideline). For this, infrastructure such as Treasury Single Account (TSA), computer Based Accounting
System (CGAS) and Subnational Treasury Regulatory (Application, SuTRA) have been developed by the
Comptroller General's Office and interfacing is also done. But since the quality of the Ministry Budget
Information System (LMBIS) is poor, it is not possible to prepare operational reports. At present, almost
seven lakh activities are entered in LMBIS. This is because LMBIS is taken surfacely. After making it
standard and modifying the project number at the actual level, all activities of all levels can come in
the software. A report can be prepared based on all the activities of the government at the each level
and the overlapping and duplication of government projects can also be controlled.

An area of improvement is whole of the Government reporting. Public bodies outside the budget
(Extra-Budgetary Entities) have not been included in the reporting and discharge of responsibilities in
accordance with the financial Procedures and Fiscal accountability Act, 2076. For example, the
universities receive a grant of Rs. 1 crore per year, and they themselves collect crores of service fees, but
there is no procedure for taking an integrated report and reviewing the accountability. It is necessary to
develop a system of work manuals and reports covering such extra-budgetary entities in their financial
accountabilities and integrate them with IFMIS. Otherwise, neither the parliamentary sentiments will be
implemented, nor financial statements can be prepared according to the concept of Whole of the
Government.
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The eighth topic is the effective monitoring of activities. Regular monitoring of the effectiveness of the
systems put into practice for financial management reform, internal control system, asset management
and financial discipline by the accountable officials. In the context of making all the systems based on
online, System audit, Power System audit, Business audit, Data Backup system reliability needs to be
regularly monitored.

Ninth issue, the mechanism of control and balance should be developed at the local level. Budget
Program in Municipalities Drafting, getting it approved by the Assembly, implementing the approved
budget and the implementation of the given suggestions by auditor general on irregularities settlement
is also done by the executive. It has demanded that the process of checks and balances be organized.
For this purpose, financial transactions can be made reliable and citizen-friendly by mobilizing informal
forums such as local expert groups which can be called Civic Engagement in Financial Management.

The last topic is audit. It is necessary to convert the present judgmental audit based on the auditor's
judgment into Computer Assisted Audit System (CAAT). For this, criteria should be developed and
system integration should be done so that the difference (Gap) of achievement activities can be
observed through the system. Auditing should be only slightly critical (judgmental). Due to this, the
reliability and quality of the audit will increase and the professionalism will also be developed. Now the
accounting system and other management systems are digital; But the audit has not been able to do so.

The objectives of the budget for the financial year 2080/81 are as follows:

a) To attain broad, sustainable, and inclusive growth by invigorating the economy.

b) To ensure qualitative social development, along with security and justice.

c) To boost the morale of the private sector by creating an investmentfriendly environment, and to
alleviate poverty by generating income and employment opportunities.

d) To maintain macroeconomic stability.

e) To fortify federalism and uphold good governance.

f) To augment the effectiveness of public expenditure through budgetary reforms.

The budget priorities are as follows

a) Development of agriculture, energy, and tourism.

b) Promotion of investment, industrial development, and trade balance.

c) Advancement of the social sector and enhancement of social security.

d) Construction of high-quality physical infrastructure.

e) Promotion of digital and green economy.

f) Protection of the environment, climate change mitigation, and disaster management.

g) Development of human resources and job creation.

h) Reform of the financial sector.

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i) Strengthening of fiscal federalism and enhancement of service delivery.

j) Reform in the public finance management system.

Basis of Budget formulation

 suggestions received from the honourable members during the discussion on the principles and
priorities of Nepal's constitution,
 periodical plan,
 Sustainable development goals,
 priorities and common minimum program of the United Government,
 policies and programs of the Government of Nepal and appropriation bill.
 suggestions received from the state and local levels, political parties, associations, academics,
ordinary citizens, civil society, private sector, media world and others.

Challenges in Budget Formulation in Nepal

Central Government

 Line item budget: weak focus on "Program Budgeting"

 Low level of revenue base (17 percent of GDP)
 Weak productivity(especially of Capital budget, as well recurrent) Calendars generally violated:
eleventh hour workout (now strict date practice)
 Weak internal control system
 Performance audit is lacking
 Parliamentary control (in practice) weak and sometimes biased

provincial level

 Information collection method for budget formulation in provincial level offices is traditional.
 Tendency of estimating budgetary requirement on the incremental basis instead of actual need
assessment of programs to be executed.
 Negligence towards using program budget formats by the province offices.
 Excessive dependence on untrained junior level staffs.
 Lack of trained and experienced accountants.

NPC and Ministerial level

 NPC and MOF often pretend as super agencies and often bypass the line ministries during plan
and program formulation decision of their respective sector.
 Inadequate coordination among ministries and NPC.
 MOF is still using traditional method of budget allocation, giving less, often cut back the budget
than requested, Line ministries often over estimate required resources.
 High political interferences, many programs and projects included in the budget directly and
existing projects' priorities often changed when political leadership change, ignored rule of
linking budget with the periodic plan and MTEF.
 Budget presented to parliament only few days before the beginning of the fiscal year that
encourage government to misuse fund because parliament has to authorize the government to
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spend immediately one sixth of the total expenditure budget presented in budget bill that has
not yet scrutinized.

Local government

 Local government has relatively less experience, inadequate human capacity to formula and
execute plan, program and projects.
 Local government has very limited scope to prepare budget due to limited income source so
federalism and power devolution is only in words not in practice.
 Central government holds power so that local governments are not able to enhance its capacity
and income resources by itself and often are ready to follow and beg central government.
 Weak coordination between central government and local government causing duplication in
programs and projects

Medium term expenditures framework

The Medium Term Expenditure Framework (MTEF) sets out three-year spending plans of the
government. It aims to ensure that budgets reflect Government's social and economic priorities and give
substance to Government's reconstruction and development commitments.

The MTEF is one of the most important reforms of the budgetary process.

The objectives of the medium-term expenditure structure are as follows: DBR IP TREB

 To maintain financial discipline in the public expenditure system and to maintain

macroeconomic stability, formulate a macroeconomic blueprint and budget blueprint based on
realistic estimates of the government's medium-term internal and external resources.
 To ensure investment in the priority areas of the development plan, restructure the resource
allocation process and allocate the budget to the priority thematic areas.
 Ensuring targeted results by making public spending more effective and efficient.
 Making the budget estimates of the relevant ministries and agencies realistic and effective.

Characteristics of medium-term expenditure structure MRBP

The medium-term expenditure structure generally has the following characteristics.

Macroeconomic framework (Medium-term Fiscal Framework): This framework includes the

macroeconomic situation and the forecast for the next 3 fiscal years and the public finance.

Result Framework (Medium-term Result Framework): The result indicators determined by the periodic
plan and its current situation and the target for the next 3 years are included in this framework.

Budget and Program Framework (Medium-term Budgetary Framework): In this framework, the three-
year budget or expenditure estimate and projection is included. Total Budget Draft in Paragraph 2 and
Subject Area Budget Draft Paragraphs 4 to 9, also includes the details of the programs and projects to be
implemented during this period.
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Interrelationship with periodic planning: Expenditure structure helps to include result indicators and
targets, resource estimates and corresponding programs and projects in the annual budget for the
implementation of the periodic plan. For this Vision, Goals and strategies are included in the relevant
subject area sections of the spending structure. In addition, the plan includes a three-year result plan
based on the set goals and indicators.

Development program and project prioritization plan:

Maximum mobilization of available resources in order to achieve the goals specified by plans.
Prioritization and re-prioritization is done especially based on the results achieved from the
development program or project and its contribution to economic and social development.

Unit cost estimation

To estimate the cost of the activities to be carried out for the implementation of the program or project,
it is calculated on the basis of the return or benefited population.

Process for Formulation of Medium Term Expenditure Structure BET LAT DRIP

1. Determining Macroeconomic Blueprint and Three-Year Resource Estimates

2. Thematic Sectorial Budget Limits and Resource Allocation
3. Formulating the medium-term expenditure structure by Theme
4. Review of coordination between expenditure demands and resources
5. Interrelationship between Medium Term Expenditure Structure and
6. Approval and publication of the draft Medium Term Expenditure Structure

Practice of Medium Term Expenditure Structure in Nepal

There are structural and procedural problems in effective management of public expenditure in Nepal.

In particular, there is no consistency between

 the periodic plan and the annual budget and program,

 there is no necessary budget allocation in certain program/project,
 But more budget is allocated than necessary in other program/project,
 there is continuous budget allocation in unsustainable projects,
 there is no assurance of budget,
 The project is in operation more than the implementation capacity and
 Budget allocation for programs and projects that are not fully prepared is a major problem.

Keeping in mind the mentioned problems, in the Tenth Plan (2059-65), the medium-term expenditure
structure was designed and implemented in harmony with the plan.

The medium term expenditure structure was formulated for the first time in the fiscal year 2059/60.

Initially, it was started in the main areas like education, health, agriculture, irrigation, electricity, roads
and water resources.
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It aimed to maintain consistency between the periodic plan and the annual budget, to prioritize
development projects/programs, to utilize resources in order to achieve the objectives and goals of the
periodic plan, and to ensure that resources are allocated to the first priority projects.

This was expected to maintain fiscal discipline and economic stability.

Efforts were made to institutionalize the medium-term expenditure structure for the first seven fiscal
years, and as a result, its objectives were particularly supported in financial discipline and strategic
allocation of expenditure. However, it could not be continued in the intervening years. This document
has been prepared every year since the fiscal year 2074/75 after the Intergovernmental Fiscal
Management Act, 2074 made it mandatory.

Intergovernmental Fiscal Management Act, 2074

17. Mid-term Expenditures Framework to be Prepared: BOOK 2

(1) The Government of Nepal, State and Local Level shall, while preparing Statement of public
expenditures pursuant to Section 16, develop a mid-term expenditures framework along with expenditures
projection of next three Fiscal Years.
(2) The following details shall be set out in the mid-term expenditures framework to be prepared pursuant
to Sub-Section (1): - OJ IEP SO
(a) Objective of the proposed plan,
(b) Justification of the need to conduct feasibility study or allocate expenditures for the proposed plan,
(c) Outputs and outcomes likely to be achieved in the Fiscal Year and in successive two Fiscal Years of
the implementation of the proposed plan,
(d) Details of expenditures required for the implementation of the proposed plan,
(e) Source of expenditures and the projection of outputs and outcomes likely to be achieved made from
the expenditures,
(f) Mid-term expenditures strategy of the proposed plan and its relation with annual expenditures,
(g) In case of operating plan, actual details whether or not the goal was achieved in conformance with
the expenditures allocated in the last Fiscal Year.
(3) Notwithstanding anything contained in Sub-Section (1), the State and Local Level may, on the basis
of their priorities and needs, prepare mid-term expenditures framework as pursuant to the same Sub-
Section for three years from the date of commencement of this Act.
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Gopinath Mainali Sir notes

Financial management

 Financial management is the act of effectively mobilizing and allocating resources and means.
 Science and art of money management
 Financial management is also a method of financial planning and control.
 Financial planning seeks to quantify various financial resources available and plan the size and
timing of expenditure. Financial control refers to monitoring cash flow (inflow+outflow)
 It is about planning income and expenditure, and making decisions that will enable an institution
to survive financially.
Components of FM

 Financial Planning & Budgeting

 Expenditure Management
 Financial Accounting
 Financial Analysis
 Financial Decision-Making
 Evaluation & Auditing
How does a budget manage finances?

 Plans the necessary means and resources

 Estimates financial resources
 Allocates financial resources
 Uses or spends financial resources
 Maintains financial discipline in the expenditure of resources
 Prepares financial statements
 Audits and evaluates
 It provides a basis for financial decisions.

Meaning and definition of budget

 The budget is the financial master plan of the government in which the activities to be done based
on the estimated income, proposed expenses and the necessary means and resources are arranged
(Philip Taylor).
 Budgets are beyond the dollars, they are choices, policies and philosophy of the govt. -Nicholas
Henry
 Budget is a financial mirror of society's economic and social choices. ADB
 Series of goal with price tag attached – Wildavsky
The function of the budget

 Revenue Mobilization
 Allocation of means
 Income transfer/distributive justice
 Economic Growth
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 Economic Stabilization
 Parliamentary Control over the Government (for accountability and effectiveness of service
delivery

Qualities of budgeting or principles of budgeting

 Principle of Comprehensiveness
 Principle of Legitimacy
 Principle of Flexibility
 Principle of Predictability
 Principle of Contestability
 Principle of Honesty
 Principle of Implementability
 Principle of Information
 Principle of Check & Balance
 Accountability & Transparency
Our practice: Budget formulation and implementation

 Legal and policy basis

 Constitution
 Long term vision planning
 Intergovernmental Fiscal Arrangements related Act
 Sustainable Development Goals, Nepal's international commitments
 Periodic planning
 Regional planning
 Government of Nepal policies
 Sectorial policies, plans and laws
Legal Basis of Budget Formulation (Part 10 Financial Procedures)

 Cannot levy taxes and take loans except in accordance with law (115)
 Provision of Federal consolidated Fund (Article 116)
 Arrangements for Expenditure from the Federal consolidated Fund (Article 117)
 Expenditure on Federal consolidated Fund (Article 118)
 Estimate of Revenue and Expenditure (Article 119)
 Provisions of Appropriation Act (Section 120)
 Provisions relating to financial procedures (Section 125)
 Financial Procedure and Fiscal Accountability Act, 2076
 Part 16 Provincial and Part 19 Local financial procedures
Budget Committee (Resources Committee)

 Assessment of the international economic situation

 Macro-economic analysis of the country
 Status analysis of foreign resource mobilization
 Operational status analysis of internal means
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 Analysis of economic conditions (production, employment, investment, prices)

 Analysis of spending trends
 Determining the size of income and expenditure
 Determining the ceiling of the budget
 Setting guidelines for budget formulation
Process

 Budget size determination

 Income size (Revenue +Foreign Grant + Foreign Loan + Internal Loan)
 Determine the estimate of expenditure (Expenditure size (Committed cost + Loan repayment +
overhead cost + Capital Investment)
 Guidance preparation
 Pre budget discussion

Entry in LMBIS of budget proposals

 Entry is done in the Line Ministry Budget Information System (LMBIS) to finalize the
proposed activities based on the budget guidance and limits received from the NPC.
 Operational expenditure charged to LMBIS is the final form of the budget.
 The budget formulation working group and the revenue consultation committee in each
ministry help to finalize the budget.
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Budget Code and Ranking

 Strategic Code
 Pro-poor code
 Gender code
 Climate expenditure code
 Program ranking (p1, p2)
 Sustainable development strategy (which of the 17 goals?)

Monitoring

 Tools & Techniques

 Program supervision
 Monitoring of expenses
 Inspection
 Periodic reports
 Program review

Evaluation

 Financial evaluation: Based on income or expenses

 Physical Achievement Review: based on Actual Results achieved
 On receipt basis- Monthly, quarterly, semi-annually and annually.
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Budgetary control

 Control from management

 Ministry of finance
 NPC
 FCGO
 Thematic ministries
 Control from autonomous bodies
 Control from auditing

Problem

• Setting unrealistic budget limits

• Problems with limits distribution

• Superficial budget discussion

• Problems with prioritization

• Late budget approval, late authorization and LMBIS control

• Excessive current costs

• Voluntary foreign aid

• Poor spending power

• Problem of receipt of expense reports

• Coordination problem (policy + program + operation level)

Budget 2080/2081

446. Budget have allocated a total expenditure of Rs. 1,751.31 billion for the upcoming fiscal year. Of the
total allocation, Rs. 1,141.78 billion (65.20 per cent) is assigned to current expenditure, Rs. 302.07 billion
(17.25 per cent) to capital expenditure, and Rs. 307.45 billion (17.55 per cent) to financing. This
expenditure estimate is 2.37 percent lower than the allocation for the current fiscal year, and 16.37
percent higher than the revised estimates. On total allocation, Rs. 4.08 billion is allocated for fiscal
transfers to provinces and local levels.

447. Of the total estimated financing sources for the upcoming fiscal year, Rs. 1,248.62 billion will be
financed through revenue mobilisation, and Rs. 49.94 billion will be received from foreign grants, which
will leave a deficit of Rs. 452.75 billion. To bridge this deficit, Rs. 212.75 billion will be arranged as a
foreign loan. The remaining net deficit of Rs. 240 billion, after considering revenue mobilisation and the
foreign grant, will be financed through domestic borrowing.

How does the plan manage financial management?

• Plans resources for periodic planning

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• Provides basis for revenue mobilization from various fields

• Forms the basis of budget formulation

• Maintains relationship between budget and plan

• Makes the budget program result-oriented

1. Planning process in Nepal

 In the middle of the running periodical plan, the concept paper is prepared.
 Approach paper is drafted by discussing the concept with various parties.
 The conclusion is to be approved by the NPC.
 Discussed in the Development Council and approved by the Government of Nepal.
 NPC prepares the Detail Plan Document.
 It is approved by the Council of Ministers and implemented.
 The periodic plan is implemented through the annual development program.
 Determining activities, goals and expected achievements for one year.
 Publication of Annual Development Program (Part 1 and 2).

2. Implementation Phase: Creating the appropriate environment and procedural actions

 Arrangement of Organizational Structure,

 HR capacity, resource and resource arrangement and mobilization
 Determination of procedures, guidelines and business plans
 Defining responsibility
 Process for inclusion in the annual program
 Determination of action plan
 Conduct of activities
 Cooperation and coordination with other bodies and agencies
 Mobilizing socio-political cooperation
 Reporting, monitoring and periodic evaluation
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3. Monitoring and evaluation process

 M & E is defined as a tools & process to input what works, what does not and the reason why
 Common purpose of M&E
 Effectiveness in decision making
 Promote accountability
 facilitation and education, and
 Capacity development

3. (a) Meaning of monitoring

Facilitation in these aspects to improve the implementation process of the project or program:

 Inputs
 Activities
 Outputs
 External Factors

3. (b) Meaning of evaluation

A process of accounting for these aspects for the purpose of learning about the effectiveness of the
program or project

 Relevance
 Effectiveness
 Efficiency
 Impact
 Sustainability

Types of monitoring

 Process Monitoring
 Input Monitoring
 Sustainability Monitoring

Monitoring prerequisites

 Baseline data
 Indicators of result
 Mechanism & Procedures

Topics that are considered in monitoring of planning in Nepal

 Linkage between periodic plan and annual plan

 Linkage between activities and cost
 Linkage between activities and performance
 Linkage between activities delivered and time
 Quality of the performance

Monitoring Mechanisms: Tools and Techniques

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 Work Plan
 Field visit/inspection
 Monitoring Plan
 Discussion with stakeholders (Stakeholders meeting)
 Joint Review
 Systematic Reporting
 Terminal report

Evaluation: Type (Time Based)

 Mid-term evaluation
 Institutional structure and level of management efficiency /Institutional interrelationship.
 The level of service/goods acquisition process.

 Procedures adopted to deliver the service/goods to the target group

 Quality of service and goods.
 Feedback received from customers and stakeholders.
 An early sign of achievement.
 The state of environmental change.

 Terminal evaluation): measuring the results

 Ex-post evaluation: standard of living, income, economic equality, employment, elimination of
gender discrimination, socioeconomic inclusion, institutional change, change in behaviour and
lifestyle, environmental impact, etc.

Institutional arrangements for monitoring and evaluation

 National Development Problem Solving Committee

 Ministry level development problem solving committee
 Monitoring and Evaluation Division
 Regional Divisions and Branches
 Monitoring and Evaluation Division of Ministries -section:
 Monitoring and Evaluation Supervisory Committee
 Prime Minister's Office and Cabinet Secretariat
 Third Party Monitoring Mechanisms
 National Vigilance Center
 Joint Missions
 Policy Advisory and Co-ordination Committee.......

Policy and macro level issues

 Vision setting
 Goal & objective
 Priority setting
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 Strategy setting
 Coordinating problems between different levels of government
 Set sectorial targets and activities
 Resource prediction
 Announcement of special program among periodic plans.
 Delay implementation
 Weak monitoring
 Unstable politics, stable administration and dynamic economy

Suggestions for improving the planning process

 Establishing a sound statistical base

 Creating a project bank and selecting candidate projects from it
 Establishing linkages between policies, plans, programs and budgets
 Expand stakeholder and public involvement in formulation
 To mobilize the potential of the private and cooperative sector
 Alignment and coordination between the plans of different levels of government
 Create an implementation schedule and hold implementation accountable
 Effective monitoring
 Learning through evaluation and process improvement.

Question No. 3: Explain the basis for establishing interrelation between national, provincial and local
budgets.

Answer:

Basis of budget interrelation:

 Liaison and coordination based on budget limits and guidance

 Interconnection based on medium term expenditure structure
 Coordination and interconnection based on project classification
 Interconnection based on priority
 Interconnection on the basis of grants and allotment funds
 Interconnection through intergovernmental financial authority
 Interconnection through capacity development and program review
 Interconnection through implementation partnerships
 Interconnection through accounting and reporting systems
 Interrelationship in constitutional principles (cooperation, coexistence and coordination)
 Interconnection through constitutional and legal mechanisms

Problems in budget and financial management

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 The problem of coordination and cooperation between different levels of government and
agencies
 The system has not been built in the government
 Local level budget not coming on time
 Growing fiscal indiscipline
 Project bank is not ready,
 The medium term expenditure structure is only formal
 Lack of appropriation standards
 Incompetence and lack of competence of the staff of the accounting group
 Weak auditing capabilities
 Problems with adoption of national systems
 Problem of system hacking
 Total government transactions are not included in the financial statements
 Lack of functional cooperation between agencies, weak system of checks and balances

Question No. 2: National plan, medium-term expenditure structure and budget have been put into
practice as important mechanisms of financial management in Nepal. Mention the interrelationship
between these three.

Answer:

Linkage between policy, plan and annual programme

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1. Budget is an important policy mechanism. Therefore, technical constraints are taken at all stages of
the budget cycle, giving great importance to budget formulation. The real authority for budget
formulation is the Ministry of Finance, but in Nepal, there is a practice of mobilizing administrative
bodies such as Planning Commission and Resource Committee to make the formulation stage realistic.

Mentioning the roles played by the Resource Committee, National Planning Commission, Ministry of
Finance and the relevant ministries and secretariats at the stage of budget formulation, how adequate
do you find those roles? Also suggest the expected role. 10

Answer:

 Emphasize the importance of the budget formulation process.

 Resource Committee Roles: Existing roles and expected roles are tabulated for ease of
reference.

What is being done? What should be done?

Effective rate approach Assessment of the international economic
situation
Elasticity approach Macro-economic analysis of the country
Model-based approach Situation analysis of foreign resource mobilization
Trend and auto- correlation Approach Operational status analysis of internal
instruments
But while assessing the source, trend analysis is Economic conditions (production, employment,
given prominence only. investment, price analysis)
Guidance fixed (but unclear) Analysis of expenditure trends
Ceilings distribution Determining the size of income and expenditure
Determining the ceiling of the budget (with air
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mark, current, capital)

Setting guidelines for budget formulation

Role of National Planning Commission

what is being done What should be done

Determining the size of the budget Focus on national priorities and achievement
Set guidelines for budget preparation Examination of the proposed project
Doesn’t base on budget ceilings Assessing the reality of goal achievement
Setting development priorities New Project on Resource Assurance
Budget discussion (but policy only) Analysis of implementation capacity
Does not look at the technical side of the project Institutionalizing budget coding
Gets stuck in small activities Inter-ministerial, level coordination (elimination
of duplication, prioritization of resources)
Coding the budget into a formality Learning from past experience
Adoption of project bank and MTEF for project
management

Role of the Ministry of Finance

What is being done what should be done

Discussion on line item expenses Analysis of expenditure trends.
Reduces budget constraints. Estimate the reliability of the source.
Keeps track of small projects and activities. Analysis of duplication of resources.
The amount is kept as अवण्डा Macro-economic analysis.
Gives conditional authority over certain activities. Analysis of budget theory and policy.
Control through LMBIS Considering MBIS as a facilitating tool
FCGO is not accepted as an independent entity Review of policy objectives
Use of FCGO role
Promotion of confidence in Ministries

Role of thematic ministries

What is being done What should be done

The budget limit is considered a lower limit Preparation of feasibility list of projects
Interrelated questions are not evaluated Preparation of action plans and achievement
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indicators
The project is excited by the proposal Adoption of the program
Does not look at performance indicators Building a sound statistical base
Presented with weak data Justification of the proposed program
Policy, plan and proposals are not linked Monitoring and performance review

Conclude by highlighting the effectiveness of the budget formulation process.

Types of budget:

Budget can be divided into different types on different basis.

Based on the relationship between income and expenditure

the budget can be divided into three types as follows:

(a) Balanced Budget: Budget where income and expenditure are equal.

(B) Deficit Budget: A budget in which expenditure is greater than income.

(c) Surplus Budget: A budget in which expenditure is less than income.

Only once in the history of Nepal, in the year 2033/34, the budget was presented using the principle of
surplus budget.

On the basis of sectorial expenditure:

Capital budget: generating capital goods e.g. construction of dams, roads & equipment.

Recurrent Budget: generally the administrative costs and costs on soft programs e.g. health service
extension , educational and others

Financial management: share and loan provided to PEs, Principal and interest paid by the government
(Nepal)

Based on the formulation method:

a) Line Item Budget

b) Program Budget

c) Zero Based Budget

d) P.P.B.S Budget

e) Global Budget

Other classification of Budget:

a) Gender responsible Budget b) Poverty oriented budget c) climate change budget etc.

Gendered Responsible Budget

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• It is a method of looking at the country's budget distribution from a gender perspective and making it
gender-friendly.

• The goal of this budget system is to achieve economic progress by maintaining gender equality and
empowerment through gender balanced budgeting.

• Nepal government has developed this concept in Nepal as a result of its commitment to CEDAW, MDG,
Beijing Platform. But this is not a budget for women. It does not recommend any programs. It only acts
as a moral pressure by comparing the government program with gender.

GRB aims to create a direct link between social and economic policies through the provision of gender
perspective from the formulation to implementation of government budgets. In the context of Nepal,
Ministry of Finance formally introduced Gender Responsive Budget system in the financial year 2007/08
AD to bring about a budget reform through the government efforts. The Gender Responsive Budgeting
Committee (GRBC), within MOF is an important body which frames a GRB system. MOF uses five
indicators to analyze the budget allocations from a gender perspective.

Budget 2080/81

 Direct:42.16
 Indirect:32.36
 Neutral:25.48

Following indicators are used to assess the percentage above.

SN Gendered Responsible Budget Percentage

1 Women Participation in formulation and implementation of Program 20
2 Women Capacity Development 20
3 Women's share in benefit 30
4 Support in employment and income generating to women 20
5 Quality reform in time consumption & minimization in of work to women 10
Total 100

Under GRB System, the sectorial ministries are required to segregate their program budgets according
to the extent to which they support gender equality, namely, directly gender responsive (50 percent or
more budget directly beneficial for women), indirectly gender responsive (20 or more and less than 50
percent of budget directly beneficial for women) or neutral (less than 20 percent of budget directly
beneficial for women). Lately, Ministry of Finance has focused on the importance of addressing gender
inequalities through the policies and track public expenditure from a gender perspective. Additionally,
monitoring of expenditures must be carried out sincerely to ensure that the gender responsive
initiatives are supported.

A pro-poor budget

A budget designed to target the poor and areas where poverty is high is called a pro-poor budget. Its
recognition is also putting pressure on the government to focus the budget on poverty alleviation. This
concept has been introduced to examine all the programs included in the budget of the Government of
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Nepal for poverty alleviation. According to which direct contribution and indirect contribution are
divided.

• Contribute directly to poverty reduction – Direct •

Contribute indirectly to poverty reduction – Indirect

Basics of creating a poverty-oriented budget

 Government budget to invest in rural areas,

 Programs to help in income generation in rural areas,
 Capacity building programs in rural areas,
 Government expenditures for social mobilization, funds to be invested in the social sector,
 Grants to local bodies,
 Government expenditure focused on poverty alleviation,
 Targeted programs for the upliftment and development of different sectors, classes, castes, etc.,

Climate change budget:

The Nepal Citizens Climate Budget describes the steps the government is taking to manage climate-
related financial resources and presents the climate budget. Introduction of climate change budget code
is an effort to track climate public expenditure and thereby facilitate prioritization of allocating
development investment on the most vulnerable areas and key sectors.

Budget 2080/81

• Direct:5.96

• Indirect:29.90

• Neutral:64.14

The concept of developing Climate Change Budget Code emerged when the National Planning
Commission (NPC), with support from UNDP/UNEP, conducted a Climate Public Expenditure and
Institutional Review (CPEIR) in August 2011. The Climate Change Budget Code has now been
implemented in the National Budget of the fiscal year 2012/2013 to facilitate tracking of climate
expenditure.

What is Line Item Budget?

A line item budget is a forecasted financial report that describes both different income sources and
expenses, grouping them according to their nature. Line-item budgeting is a system in which each
separate line item is represented in the budget. Line item budget is a budget initiated by government
entities in which budgeted financial statement elements are grouped by administrative entities and
object. These budget item groups are usually presented in an incremental fashion that is in comparison
to previous time periods. Line item budgets are also used in private industry for comparison and
budgeting of selected object groups and their previous and future expenditure levels within an
organization. Line Item Budgeting is arguably the simplest form of budgeting; this approach links the
inputs of the system to the system. These budgets typically appear in the form of accounting documents
that express minimal information regarding purpose or an explicit Advantages of Line Item Budget
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Ministry Budgeting Information system object within the system .According to Nepal's program budget
system, even the budget sent has been classified under the line item at the end.

Program budget

The budget prepared based on the detailed accounting of the program to be performed is called the
program budget. In the program budget system, the budget is prepared based on Function, Programme
Project and Activity. According to the recommendations of the Hoover Commission in 1949, this budget
system started in Britain. The second Hoover Commission in 1955 strengthened it further. A program
budget is prepared by finding out the minimum cost (benefit cost analysis) to achieve the set objectives.

Key Elements of Program Budgeting

a) Function

b) Program

c) Project

d) Activity

Program budget requirements

1. To depict the reality of the program.

2. To analyze the cost benefit of each action.

3. To facilitate priority setting.

4. To cut budget on unnecessary projects.

5. To facilitate control.

6. To achieve efficiency, frugality and effectiveness in work.

7. To make the program quality, timeliness, quantity oriented and cost effective.

8. To bring scientificity in the allocation process.

9. To establish a basis for decision.

10. To facilitate comparative studies.

11. To adopt a transparent and accountable system.

12. To facilitate long-term budget formulation.

Characteristics

• Results Oriented Budgeting System,

• System based on cost-benefit analysis,

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• A system where information, structure is the main basis,

• Budgeting based on system analysis,

• assumption of political pressure vacuum,

• Functional inter-relationships between plans, programs and budgets is trust to be maintained,

Strong sides

• Results oriented,

• Cost benefit analysis,

• Unnecessary expenditure control,

• Facilitate the promotion of financial transparency and accountability.

• Reduce political pressure,

• Ease of maintaining relationship between periodic plan and budget;

• Easy to prioritize,

• Helping to make a long-term budget etc. are its strengths.

weak side

• Central Control.

• Inability to deal with moment-to-moment changes;

• Restrictions on making independent and rational decisions,

• Increasing Paper Work,

• More expensive as experts are required,

• Takes a long time to compile,

• The political influence cannot be ignored but it has not been paid attention to.

Program budget formulation process in Nepal

Budget formulation is a continuous process. In Nepal, the budget formulation process usually starts
from the second week of kartik and the work schedule has been determined so that it will be passed by
the Parliament and the spending authority should be completed by Shrawan 15.

In summary, the budgeting process is completed through a cyclical system as follows.

1. Macro Economic Framework is prepared.

2. An initial estimate of resources and expenses is made.

3. Sectorial limits are determined.

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4. Proposals are requested from ministries.

5. The office budget is prepared.

6. Proposals are made to be submitted by ministries.

7. The draft budget is prepared by the Ministry of Finance in consultation with the National Planning
Commission.

8. Presented in Parliament.

9. It is approved and implemented.

The budget should be prepared for the coming year under the prescribed budget limit and direction and
circular.

Incremental budget

An incremental budget is a budget prepared using a previous period's budget or actual performance as a
basis with incremental amounts added for the new budget period from the previous period. The
allocation of resources is based upon allocations This approach is not recommended as it fails to take
into account changing circumstances. Moreover, it encourages "spending up to the budget" to ensure a
reasonable allocation in the next period. It leads to a "spend it or lose" mentality.

Zero-based budgeting

Zero-based budgeting is the process of budgeting, whether it has been formulated in the past and is
being implemented or all new projects are evaluated in the current situation. This does not mean adding
budget to the planning projects that have been operating in the past. If funds have to be allocated, the
remaining work is treated as new work and the budget is allocated after completing all the procedures
from the beginning. In America, this concept has been started since 1977.

In this,

• Before continuing a program, it is considered necessary to re-test it.

• Every year the program is reviewed and suitability is tested.

• Cost-benefit analysis of the work to be done is done.

• Costing is also prepared for the remaining part of the previous plan like new work.

• No basis of Incremental Budgetary system is taken in this.

Easy way:

Budget Formulation Process

(top-down process)

 Major responsibility of budget formulation rests on Ministry of Finance(FPA,1999)p

 Budget and Resource Committee at NPC set the following:
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-Macroeconomic Framework
-Medium Term Expenditure Framework
-Size of the budget
 Ministry of Finance set the budget ceiling
 Budget ceiling is circulated to the ministries, ministries to departments and departments to
spending units
 Budget Formulation Guidelines 2072 has set the formulation calendar(Start from November)

Budget formulation process...

(Bottom-Up Process)

Institution Role

Parliament Approves the budget

Ministry of Finance Consolidates the budget

National Planning Tripartite negotiation(Ministries, NPC

Commission and Ministry of Finance)

Ministries Ministry level consolidation and

refinement

Departments Compile and refine

Spending Units Prepare the programs and budget

Budget Implementation Process

 Once the Parliament approves the budget, Ministry of Finance Provides "Authorization " for
spending to the "Secretaries" of the Ministries
 Secretaries provide authorization letters to the "Department Heads"
 Department Heads provide authorizations to "Spending Unit Chiefs"
 Spending Units spend money based on the approved programs
 Revenue is collected by tax offices and other authorities
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 Spending Units spend the money and submit Payment Requests to the District Treasury
Offices(DTCOs)
 DTCOs verifies and entered the transactions into the TSA (Treasury Single Accounts) System
(which is online/web-based central system)
 DTCOs issue the Cheques against the payment requests and handover to the SUs
 Spending Units pays cheques to the concerned parties/vendors.

Budget review and audit process

Review Process:

 Budget review is made by Development Action Committees(trimester basis)

-National Development Action Committee: Chaired by the Prime Minister
-Ministry Level Development Action Committee: chaired by Ministers
 Ministry of Finance conducts Mid-term review
 Sometimes Parliamentary Committees conducts review/query budget implementation

Audit Process:

 DTO conduct "internal audit" on behalf of Financial Comptroller General Office

 The Auditor General conducts final/statutory audit of government transactions
 Public Accounts Committee of Parliament review the Report of the Auditor General

Strengths of Nepalese Budgetary process

 Multi-year forecasts (MTEF, 3 Years forecast practices)

 Budget Formulation Guidelines (2015) and implementation Guidelines
 Budget Calendar
 Spending based on the approved program
 Online submission of budget by ministries to the MOF
 Web- based Budget release system : the TSA system
 Annual Statutory audit
 Financial procedure and fiscal accountability act,2076 and Rules,2077

Weakness of Nepalese Budgetary process

 Line item budget : weak focus on "Program Budgeting"

 Low level of revenue base (17 percent of GDP)
 Weak productivity(especially of Capital budget, as well recurrent)
 Calendars generally violated: eleventh hour workout
 Weak internal control system
 Performance audit is lacking
 Parliamentary control (in practice) weak and sometimes biased

Way forward

 Perspective budgeting( Medium-Term Budgetary Framework)

 Focus on: productivity and 'programs'
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 Gear up capital budget (size and implementation)

 Enhance 'implementation capability', 'internal control system' and 'M&E'
 Performance audit
 Strengthen parliamentary control
 Follow the Calendar

More information on budget in Nepal

 In the first budget announced in 2008 B.S., Rs. 305 lakhs income and towards expenses Rs. 525
lakh was estimated.
 After the start of the planned development in 2013, From 2013/14 B.S for the first time, last
year's estimate, current year's revised estimate and next year's estimate details were presented
in the government budget.
 Since 2013 B.S., the budget has been classified into general budget and development budget.
 In 2016, Government Expenditure Rules was formulated.
 A new Shresta system was implemented from 2019/20 (which was implemented gradually
throughout Nepal till 2024/25).
 From 2020/21, a detailed classification of revenue has been introduced.
 In 2025, the government money collection and embezzlement act.
 The system of program budget was implemented from 2026/27.
 In 2038, government revenue and expenditure operating procedure regulations.
 In 2038, establishment of Treasury Comptroller Office in 75 districts.
 Provision of financial administration regulations in 2042.
 Provision of economic procedures in the 2047 constitution.
 Start of current fund disbursement system in 2051/052.
 In 2055, the financial Procedures Act was issued.
 In 2056, regulations related to financial administration came into effect.
 MTEF has been implemented from 2059/60 on the development budget side and from 2061/62
on both sides. (The construction of MTEF has been neglected for a few years, after the Inter-
Governmental fiscal Management Act, 2074 made it mandatory at all levels, and since then it
has been implemented at the federal, province and local levels.
 Divided into current, capital and financial management from 2061/062.
 Financial Procedure Rules 2064 were formulated and implemented.
 Gender responsive budget system has been implemented since 2064/65.
 From 2068/69 onwards, the Government of Nepal implemented economic indicators
classification as per the standards set by the International Monetary Fund.
 In the Constitution of Nepal (2072), the time for submitting the budget to the Parliament was
also fixed on Jestha 15th.
 To organize all the activities from budget estimation to evaluation, the direction of budget
planning has been created.
 Intergovernmental fiscal management act,2074
 National natural resource and fiscal commission act,2074
 Financial procedure and fiscal accountability act,2076 and Rules,2077.
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Efforts to harmonize budget and development planning in Nepal

1. Med-Term Expenditure Framework

2. Immediate Action Plan

3. Logical Framework

4. Results based withdrawal process

5. Prioritization of projects

6. Discussion with Planning Commission for final preparation of Capital Budget

7. Efforts to harmonize the annual budget and periodic plan through poverty monitoring etc.

As the periodical plan guides the development work to be done in 3/5 years and the budget acts as an
annual development plan, without a positive relationship between these two, the development work
cannot accelerate. In other words, since the budget is the document that implements the periodic plan,
the plan has no meaning until the budget does not have a clear direction. Therefore, the government
has prepared various bases to bring proper harmony between the budget and the plan.

Budget 2080/81

In summary,

Total Budget: Rs 1.751 trillion

Recurrent Expenditure: Rs. 1.141 trillion (65.20%)

Capital Expenditure: Rs. 302.07 billion (17.25%)

Debt Financing: Rs. 307.45 Billion (17.55%)

Transfer to provinces and local bodies: Rs. 4.08 Billion

Source of budget:

Revenues: Rs. 1.248 Trillion

Foreign Grant: Rs. 49.94 Billion

Budget deficit: 452.75 billion.

Foreign Loan: Rs. 212.75 Billion

Domestic Borrowing: Rs. 240.75 Billion

Expected Growth Rate: 6%

Expected Inflation Rate: 6.5

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According to the Constitution of Nepal 2072, the points to be included when presenting the budget to
the Federal Parliament by estimating revenue and expenditure:

Estimates of revenue and expenditure are mentioned in Article 119 of the Constitution of Nepal
2072. The following items shall be included in the submission of estimates of revenue and expenditure
to both Houses of the Federal Parliament:

(1) Estimate of revenue

(2) Amounts required to be expended on the Consolidated Fund

(3) Amounts required to be expended by appropriations act

(4) The amount of expenses allocated to each ministry in the previous financial year and the details of
the achievements according to those expenses are prepared under these points and the following
documents are prepared:

• Budget statement

• Appropriation Bill

• Finance Bill

• Advance spending bill

• Debt and Guarantee Bill

• National Debt Raising Bill

• Headline statement of expenditure estimates

• Institute progress review

• Ministerial Progress Statement

• Sourcebook etc.

Question: What are the bases to be taken while preparing the annual income and expenditure
statement?

Answer: Annual Income and Expenditure Statement i.e. Budget is the economic, social, political and
legal document of the country, so the following aspects are taken into consideration while preparing it.

• Macroeconomic status indicators of the country

• Long-term government policies and programs of the country

• Guiding Principles and Policies of the State

• Periodic planning goals and priorities

• Last year's actual figures

• State of internal revenue mobilization

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• Status of foreign aid

• Obligations to comply with international commitments and treaty agreements

• Aspects of economic growth, economic stability and social justice

• Budget objectives and policies

• Institutional capacity to implement the budget

• Annual tasks

• Ongoing projects or works

• Actions as mentioned in the foreign aid agreement

• Programs according to the three-year budget limit

• Future price changes

• Economic development of the country, balance of payments, export promotion, internal credit,
foreign aid etc.