Budget Formulation in Nepal:
Practices and Weaknesses
Bijaya Acharya Adhikari
MED 08003
Ministry of Finance,Nepal
10July, 2009
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Overview
• Introduction
• Background of budget and recent reform
• Budget formulation practices
• Weaknesses
• Conclusion and Recommendation
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1.Introduction
Total Area: 147,181 sq km
Population: 24 million approx
Capital: Kathmandu
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2.Background of budget and recent reform
 What is budget for Nepal?
 Annual breakdown of five year periodic plan
 Government annual plan and programs to accomplish national
goals and objectives defined by periodic plan that consists :

Projection of next fiscal year revenue collection.

Projection of next fiscal year government expenditure.

Actual progress report up to tenth month of current fiscal year on
revenue collection and expenditure.
 Objective : poverty reduction and socio-economic development
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Background…………….
 Budget history in Nepal:
 Budget formulation started since 1956 with first five year
plan(1956-61) and presented to parliament annually:

Objectives: realistic, development oriented and informed people about government
annual programs and projects.
 Before 1990 (absolute monarchy under the executive control of the King):
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King- Chairman of National Development Council (NDC).
People’s participation during budget formulation and implementation almost none
Parliament accountable for the King.
Up to the seven periodic plans- budgets were centrally planned and unclear
development objectives
Features: unsustainable one sided development, centrally guided, lack peoples need
Results: poverty almost 50%, high regional disparity, development concentrated in
district headquarters.
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Background………..
 After 1991,
 Multiparty democratic system.
 People’s participation encouraged in development plan formulation and
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

implementation.
Parliament – accountable for people
NDC- chaired by the Prime Minister (council consists of various
development stakeholders from all the regions, class and communities)
Features: people’s participation on development activities, government
plan and budget are more consistent with people’s aspiration and local
need, objectives are rural infrastructure development and poverty
reduction.
Result: sustainable overall development, lessened regional disparity,
rural development, poverty declined to 31% from 50% in 15 years.
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Background ………….
(Democratic government tried to make consistency on periodic plan and annual
budget formulation, so many reforms has been carried out to improve linkage between
them).
Budget reform after democracy:
1.In 2002, Medium Term Expenditure Framework (MTEF) :

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Three year rolling budget, link the periodic plan objectives to annual budget’s
programs and activities
Clearly defines priority of proposed programs and projects of the five year plan
that contribute the poverty reduction most.
Help to formulate development budget, predict government future expenditure
Updated annually by NPC and MOF
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Background………...
2. 2003/04- the new budget classification system:
 Classifying recurrent and capital expenditure instead of
regular and development expenditure.
 Help development budget formulation more realistic.
3. 2003/04- Immediate Action Plan:
 Helps to prioritize the development activities into priority
1(P1), priority 2 (P2) and priority 3(P3) listed in the annual
budget during budget formulation.
 Improve budget effectiveness at a given resource constraints.
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3. Budget formulation practices...
 Present budget formulation approach:
(Before 1991 mostly top down approach, after democracy both top down and bottom up)
 Top down approach (for central government):
National Planning
Commission (NPC)
Line Ministries
Departments
District offices
Ministry of
Finance (MOF)
 Bottom up approach (for local government):
Ward offices/ Consumer
committee/ Political parties
VDC/
Municipality
NGOs
District Council
District
development
Committee
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Budget Formulation Cycle
NDC
(Prime Minister)
Legislative
(Parliament)
Finance Minister
(Budget Approval)
Policy directives – plan
NPC
(Call circular with guidelines +
ceiling, discussion)
MOF
(Resource committee, budget
committee, MTEF, budget
Discussion, finalize budget,)
MOF
Cabinet
(For policy approval)
Line Ministries
(Sectoral budget)
Departments
Local Government
(Policy guidelines –NPC,
Formulate and approved, informed to NPC and
Line Ministries
District Level offices
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Annual Budget Calendar for central government (October- July)
Month
Agency
Activities
October /
November
NPC + MOF,
Cabinet, Line
ministries
MTEF preparation and adjustment
Macro economic frame work prepared (Budget deficit, growth)
Development plan and programs decision for next year budget
Defined project priorities
Revenue mobilization
Aligning with periodic plan and goals
November
NPC, Cabinet
Ceiling are determined by sectors; cabinet approves overall plan
December
NPC
Budget circular released with budget guidelines, sector wise ceilings and budget
request format
March last
week
Line
Ministries
Submit budget to NPC and MOF
April/ May
NPC, MOF,
Line ministries
Budget Discussion:
NPC- objectives, plan, programs, strategies, target, indicators on
development budget .
MOF- line item budget allocation for recurrent and capital expenditure.
(Budget request are reviewed and negotiated between MOF, NPC and
line ministries reached the consensus; and NPC gives policy approval for
ministerial budget and MOF finalize funding part).
June
MOF
Finalize budget and submit to cabinet for approval
Latest July 14
MOF
Finance minister present budget proposal in the parliament for approval
Latest
September 14
Parliament
Approves budget
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Role of different agencies in top down approach
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Bottom up approach………….
 Procedure:
 NPC send guidelines about district level national plans and programs to
District Development committee (DDC).
 DDC send circular to each Village Development Committees (VDCs)
and Municipality to prepare their budget and programs for next fiscal
year.
 VDCs and Municipality invite assembly of Village/ Town council to
discuss and prepare the sector wise development programs and projects
through ward offices, NGOs/ consumer committee and send it to
district development council.
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Bottom up approach……….
Consumer Committees
Ward offices
Village/ Town council
VDC/ Municipality
District Council
District level development offices
Concerned ministries
NGOs/ Political leaders
Discussion
Accumulation
Discussion
District Development Committee
National Planning Commission
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Bottom up approach………..
 DDC organize meeting at district consolidated plan formulation
committee with district council and district level offices.
 District Development committee finalize and approved district
budget and priorities based on participatory approach
 Send final budget to NPC and respective ministries to avoid
duplication on centrally formulated plan and programs.
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4. Weaknesses
 Central Government:
District level :
 Information collection method for budget formulation in
district 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
district offices.
 Excessive dependence on untrained junior level staffs.
 Lack of trained and experienced accountants.
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Weaknesses………..
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 spend immediately one sixth of the total
expenditure budget presented in budget bill that has not yet scrutinized.
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Weaknesses………..
 Local government
 Local government has relatively less experience, inadequate human
capacity to formulate and execute plan, program and projects.
 Local government has very limited scope to prepare budget due to
limited income source, so decentralization and power devolution is only
in words not in practice.
 Central government use to hold power, on the other hand local
government cannot enhance its capacity and income resources by itself
and often ready to follow central government.
 Weak coordination between central government and local government
causing duplication in programs and projects.
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Impact of weaknesses on poverty reduction
Plan
Target
Achievement
Eight five year plan (1992-97)
50%
40%
42%
Nine five year plan (1997-2002)
42%
32%
38%
Tenth five year plan (2002-07)
38%
30%
31%
Source: National Planning Commission, publications, 2009
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5. Conclusion and Recommendation
 Horizontal and vertical coordination and information circulation system
should be developed within central and local government.
 Practical training and seminars should be organized for capacity building
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of junior staff and senior staffs.
More revenue source should be decentralized to local government so that
they can address the local development issues on their own capacity.
Inter ministerial committees are needed to deal with common issues and
to make proper coordination and flow of communication.
Strengthening the line ministries and departments to take their sectoral
responsibility and accountability in budget planning and formulation
process to avoid traditional arbitrary budget cut back system.
Budget should prepare to present in the parliament at least 2 months
before the next fiscal year starts.
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Thank you for your attention
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