स्थानीय तहको वित्त व्यवस्थापन

How Local Government Can Use Available Resources to Improve the Local Economy

Local governments in Nepal (rural municipalities and municipalities) have constitutional rights over local resources under Schedule 8. They can use these resources to strengthen the local economy in the following ways:

1. Utilisation of local natural resources. Local governments can identify and mobilise local forests, rivers, stone, sand and mineral deposits. By issuing permits for community forestry products, sand and stone extraction, and by running small hydro and drinking water projects, they generate internal revenue and create local employment instead of letting outsiders take the benefit.

2. Development of agriculture and livestock. Since most local people depend on farming, the local government can supply improved seeds, fertilisers, irrigation, veterinary services and agricultural extension. Support for cooperatives in milk collection, vegetable farming and cash crops raises farm income and makes the local economy self-reliant.

3. Promotion of local tourism and cottage industries. Local governments can identify tourist sites, religious places and natural attractions, and develop roads, homestays and publicity for them. Similarly, they can promote handicrafts, weaving, carpentry and food processing based on local raw materials, which increases local production and income.

4. Skill development and employment generation. By running vocational and technical training (plumbing, driving, tailoring, computer, masonry) in coordination with CTEVT and the private sector, the local government prepares local youth for self-employment. Local labour can then be used in local infrastructure works through the "local labour first" policy, keeping money circulating within the local area.

5. Mobilisation of local capital and cooperatives. Local governments can encourage savings and credit cooperatives, self-help groups and local investment in small enterprises. By collecting local taxes, service fees and grants and spending them on productive sectors, they create a revolving local fund that finances small businesses and reduces dependence on the central government.

Conclusion: When local governments plan according to local needs, use local resources wisely and involve local people in decision-making, employment, income and the overall local economy improve in a sustainable way.

Yes, I agree that spending the budget alone is not enough to show financial success. In rural development, financial success means achieving the intended outcomes — better schools, accessible health care and usable infrastructure — with efficient, transparent and accountable use of public money. Mere expenditure only proves the local government's absorption capacity, not its performance.

Arguments:

1. Expenditure is an input, not an outcome. A palika may spend 100% of its education budget, but if learning achievement, enrolment retention or teacher attendance does not improve, the spending has failed. Success must be judged by outcomes (outcome-based budgeting), not by the amount disbursed.

2. Poor quality and rushed spending. To avoid lapse of budget, local governments often release funds in the last months (Jestha–Ashad). This causes low-quality construction, incomplete roads, buildings without toilets or drinking water, and "white elephant" projects. Money is spent, but service quality does not improve.

3. Leakage and corruption. Commission-taking, fake bills, weak procurement and collusion with contractors mean a large share of the budget never reaches the citizen. High expenditure figures then coexist with poor services — a clear case where spending is not success.

4. Weak governance and accountability. Without public hearing, social audit, citizen charter, transparent procurement notices and functional ward-level monitoring committees, there is no pressure to convert money into services. The Local Government Operation Act, 2074 expects these tools precisely because spending alone is not sufficient.

5. Weak capacity and coordination. Many palikas lack technical staff (engineers, planners), so projects are poorly designed and supervised. Duplication of schemes across wards and among palikas, and lack of coordination with provincial/federal agencies, further dilute the effect of the budget.

6. No people's participation or ownership. Supply-driven projects that ignore local needs are not used or maintained. Without maintenance funds and community ownership, even a well-funded school or health post deteriorates within a few years.

Conclusion: Budget spending is a necessary but not sufficient condition for financial success. True financial success requires value for money — economy, efficiency, effectiveness, equity and sustainability — supported by need-based planning, output/outcome-based budgeting, performance-based grants, strong monitoring and evaluation, and active citizen participation. Only then does expenditure translate into real improvement in rural services.

Major types of grants received by local governments in Nepal

Under the Constitution of Nepal (Articles 60 and 251), the Intergovernmental Fiscal Arrangement Act, 2074 and the Local Government Operation Act, 2074, local governments receive the following grants on the recommendation of the National Natural Resources and Fiscal Commission.

Overall assessment: Grants make up most of the income of local governments, so they are essential for service delivery and equity. However, heavy dependence on grants weakens own-source revenue effort, late release causes low capital spending, and conditional grants reduce local discretion. Predictable, formula-based, timely transfers with greater unconditional share would improve rural development.

Five best sources of finance at the local level are:

1. Local Revenue Collection (Internal Source) The local government itself collects taxes, service fees, and other charges within its area. These include property tax, land revenue, business tax, vehicle tax, registration fees, and fees for services like drinking water, sanitation, and building permits. This is the most reliable and independent source because the local body has full control over it and does not depend on outsiders.

2. Grants from Provincial and Federal Government (Inter-Governmental Transfer) Higher levels of government provide grants to local bodies. These include:

• Conditional grants – given for specific projects such as education, health, or roads, and must be spent only for that purpose.
• Unconditional (equalization) grants – given to reduce imbalance between rich and poor local units, and can be used at the local body's own discretion.
• Special grants – given for special projects or emergencies.

This is a major source because local bodies in Nepal cannot meet all their needs from their own revenue.

3. Revenue Sharing Under the constitution and Local Government Operation Act, a fixed portion of certain taxes collected by the federal and provincial governments (such as value added tax, royalty on natural resources, and vehicle tax) is shared with local levels. This gives local bodies a regular and predictable flow of funds without having to collect the tax themselves.

4. Loans and Borrowings Local bodies can take loans from banks, financial institutions, or donor agencies for development projects. They may also issue local bonds. However, loans must be taken only for projects that can generate income to repay the loan, and only with the approval of the higher level of government. This source is useful for large infrastructure projects.

5. Local Savings, Cooperatives, and Community Participation Money can be raised locally through savings groups, cooperatives, user committees, and voluntary labour or cash contributions from local people. Under the "users' committee" approach, local people contribute cash, labour, and local materials to development works. This reduces the cost of projects and creates a sense of ownership among the people.

Other supporting sources: foreign aid and donor assistance, income from local body property and enterprises, and public-private partnership.

Among these, local revenue collection and inter-governmental grants are the two most important sources, because they are regular and reliable. Loans and community contributions should be used only as supplementary sources.

Provision of Financial Management at Local Level: An Evaluation

The Constitution of Nepal (2015) and the Local Government Operation Act (LGOA), 2074 give local levels a legal framework for financial management. The Constitution provides for a Local Consolidated Fund (Article 229), allows local levels to levy taxes and service charges within Schedule 8 and 9 powers, and provides for sharing of revenue and grants through the National Natural Resources and Fiscal Commission (Article 60). The LGOA, 2074 lays down procedures for budget formulation and approval by the local assembly, expenditure and accounts, internal control, audit, revenue collection and financial discipline, and requires public hearing of the budget and audit report.

Strengths

1. Fiscal autonomy is constitutionally recognised: local levels can levy property tax, house and land registration fee, business tax, vehicle tax, advertisement tax and service fees and operate their own consolidated fund.
2. A clear legal framework exists for budgeting, accounting and auditing, with the budget passed by the local assembly.
3. Accountability tools exist: internal audit, final audit by the Office of the Auditor General, public hearing and social audit.
4. A formula-based transfer system (equalisation, conditional, matching and special grants) reduces arbitrariness in resource allocation.

Weaknesses

1. Heavy dependence on grants; own-source revenue is only a small share of total resources.
2. Weak revenue mobilisation due to a narrow tax base, outdated records and poor enforcement.
3. Shortage of trained accounting and planning staff.
4. Weak internal control and audit follow-up; the same irregularities repeat each year.
5. Late budget release and low capital expenditure, with spending rushed at the end of the fiscal year.
6. Political interference in budget allocation and formalistic public hearings.

Conclusion: The provisions are progressive and sound on paper, but their effectiveness is limited by grant dependence, weak revenue effort, capacity gaps and weak accountability. Stronger revenue mobilisation, capacity building, strict audit follow-up and meaningful public hearings are needed.

Measures for raising funds for rural development:

1. Local taxes and fees — property, land, business, vehicle and service charges collected by local governments.
2. Mobilising savings and credit — through cooperatives, microfinance institutions and banks.
3. Grants and transfers from federal and provincial governments.
4. Loans and grants from donors — foreign aid, development partners and NGOs.
5. Community contribution — labour, cash and materials from users' groups, plus remittance mobilisation and public-private partnership.

It provides the rural poor with access to credit and other financial services at affordable cost.

Two benefits of rural finance for rural poor people:

1. Access to credit at reasonable interest — the poor can obtain loans from formal rural financial institutions (banks, cooperatives, microfinance) instead of falling into the trap of local moneylenders who charge very high interest rates.
2. Generation of self-employment and income — the credit so obtained can be invested in small enterprises, agriculture, livestock, or petty trade, which raises their income and improves their standard of living.

Budget Formulation Process [5 marks]

Definition: Budget formulation is the process of preparing a plan of estimated income and expenditure for the coming fiscal year. At the local level, it is the process by which a rural municipality or municipality prepares its annual budget (estimated revenue and expenditure) in accordance with the Local Government Operation Act, 2074 and the constitutional provisions on fiscal federalism.

Process of budget formulation at the local level:

1. Preparation of budget calendar: The local level prepares a budget calendar (बजेट क्यालेन्डर) fixing the dates for each step of budget formulation.
2. Estimation of resources: The finance section estimates internal revenue, revenue sharing from federal and provincial governments, grants, and loans.
3. Formulation of budget ceiling: Based on estimated resources, a budget ceiling is fixed for each ward and department.
4. Consultation with stakeholders: Ward-level meetings, public hearings and discussions with community organisations, user groups and citizens are held to collect needs and priorities.
5. Preparation of draft budget: The finance section prepares the draft budget on the basis of needs, priorities and the ceiling.
6. Approval by the executive: The draft budget is discussed and approved by the local executive (कार्यपालिका).
7. Presentation in the council: The budget is presented in the local assembly (गाउँ/नगर सभा) and passed by a majority.
8. Authentication and implementation: The approved budget is authenticated and sent to the concerned bodies for implementation from the new fiscal year.

Good practices in formulating the annual budget:

1. Participatory approach: Involve citizens, women, Dalits, indigenous groups and marginalized communities through ward meetings and public hearings so that the budget reflects real needs.
2. Realistic estimation: Base revenue estimates on actual past collection and reliable data; avoid over-estimation that leads to unspent budget.
3. Priority to productive and capital expenditure: Give priority to income-generating, employment-creating and infrastructure projects rather than unproductive recurrent spending.
4. Gender and social inclusion budgeting: Allocate resources in a way that reduces gender and social inequality.
5. Transparency and accountability: Publish the budget and budget calendar publicly; ensure proper auditing and monitoring.
6. Link with periodic plan: Prepare the budget in line with the local periodic plan and national priorities.
7. Coordination among levels of government: Avoid duplication of projects with federal and provincial governments.
8. Adequate allocation for operation and maintenance: Ensure funds for the maintenance of completed projects so that they remain usable.

Major Sources of Revenue of Local Government in Nepal

Under the Constitution of Nepal (Schedule 8 and 9) and the Local Government Operation Act, 2074, local governments (rural municipalities and municipalities) raise and receive revenue from the following major sources.

1. Own-source (internal) revenue. Property tax, house and land registration fee, business tax, vehicle tax, advertisement tax, entertainment tax, rent, service fees, permit and building-map fees, and market fees. This is the most autonomous source, but it is under-exploited because of a narrow tax base and weak administration.

2. Revenue sharing. Local governments receive a share of VAT and excise duty collected by the federal government and of royalties from natural resources such as mountaineering, forests, mines and hydropower. It is predictable but depends on federal collection.

3. Intergovernmental fiscal transfers (grants). Fiscal equalisation grant, conditional grant, complementary (matching) grant and special grant from the federal and provincial governments, recommended by the National Natural Resources and Fiscal Commission. This is the largest source for most palikas.

4. Loans, donor support and other income. Borrowing within legal limits and with approval, support from donors, NGOs and community contributions, interest income and sale of assets.

Analysis: Grants and shared revenue provide most of the resources of rural palikas, while own-source revenue covers only a small share of expenditure. This dependence weakens fiscal autonomy and accountability. To improve, local governments should widen the tax base, update property records, digitise collection, and encourage local economic activity.

The main sources of rural funds are:

1. Government sources — fiscal transfers and grants from federal and provincial governments and revenue (taxes, fees, royalties) raised by local governments.
2. Financial institutions — commercial banks, development banks, cooperatives and microfinance institutions giving loans and accepting savings.
3. External sources — grants and loans from foreign governments, UN agencies, the World Bank, ADB and INGOs.
4. Community and private sources — people's own savings, labour and cash contributions, remittances, NGOs and private-sector investment.