NNRFC decides about grants, debts to be given to governments: Dr. Aryal

Amrit Raj Kaphle

August 20, 2019

Reading Time: 10 minutes

NNRFC decides about grants, debts to be given to governments: Dr. Aryal
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It is going to be almost two years since Nepal began to practice federalism at the grass-root level. After the adoption of the new constitution of Nepal, the government is functioning as per the constitutional provisions of Nepal at all the three levels federal, provincial and local.

National Natural Resources and Fiscal Commission (NNRFC), as a constitutional autonomous body, is also operational for one and half year. Based on the recommendations made by this NNRFC, the Federal Government of Nepal has worked out the limits of the budgetary fund to be given to the governments functioning at lower levels such as provinces and local bodies.

However, some of the local bodies seem to be dissatisfied with the amount of the budgetary allocations given out to them and have serious reservations regarding the distribution of natural resources among them. This is the reason Gandaki Pradesh and Province number-5 have locked horns over form and modality of Kali Gandaki – Tinaun diversion.

Similarly, the dispute has arisen between Karnali Pradesh and Province Number- 5 over Bheri-Babai diversion.  In situations like this, it is timely for Khabarhub to talk to Dr. Baikuntha Aryal, Secretary of National Natural Resources and Fiscal Commission. Excerpts of the interview:

What are the achievements of the National Natural Resources and Fiscal Commission (NNRFC) in last one and half year?

It is only after the appointment of chairperson on March 21, 2019, the NNRFC became fully functional. Before that, the commission was being run by the staff. After I was appointed in the NNRFC, it was the time to send recommendations to the federal government about fiscal management and allocation of the budgetary funds in and among the 7 provinces of Nepal for the financial year 2075/076 BS.

As per the injunctions placed by Articles 60 and 251 of the Constitution of Nepal, National Natural Resources and Fiscal Commission weighs the foreseeable expenditure of each province along with its potential to earn revenue annually before recommending commensurate grants to be given by the federal government with a view to striking parity between them. The differentials of grants to be distributed among the provinces are worked out by applying suitable formula so that the principle of parity is not called into question.

It means that before federal government grants money to provincial and local governments, it is mandatory for National Natural Resources and Fiscal Commission (NNRFC) to make recommendations in this regard. Isn’t it so?

Yes, very much so. The Constitution of Nepal has made a provision by instructing the NNFC to devise a suitable formula to be applied indiscriminately without fear and favor to arrive at figures of grants for doling out to different provinces and local bodies of Nepal.

The federal government accepted our recommendations for making grants to lower-level governments (provinces and local bodies) and hence disbursed the grants accordingly.

Besides, the Intergovernmental Fiscal Management Act has been put into place according to which as high as 70% of the revenue collected from renegotiating higher prices on goods  and services by manufacturers and service-providers and Value Added Tax (VAT) during the course of movement of goods and services across the country are to be kept by the federal government.

It is just 15% each which is given out to the provincial and local government. However, this 15% is to be treated as 100% for the purpose of distributing among the 7 provinces of Nepal while recommending for grants.

In the same way, the 15% is to be treated as 100% for distributing the amount among all the local bodies 753 in numbers all across the 77 districts of Nepal for disbursement of grants. Modality of disbursement of grants has been explained in the Act but to arrive at exact figures of grants for each province and local body, we need details of full financial data (a sheet of credits and debits) which have not been provided to us till now from all the 7 provinces and 753 local bodies.

This is why ‘National Natural Resources and Fiscal Commission’ chose to omit some of the headings not available with it and focused only on those headings of revenue and expenditure which were provided by the lower-level governments in order to devise a formula to work out the amount of grants for disbursement at local and provincial level on the basis of principle of parity. The federal government accepted our recommendations for making grants to lower-level governments (provinces and local bodies) and hence disbursed the grants accordingly.

What is about issuing debts as a part of internal management for financing different governments which are short of money to launch development projects within their power? What roles does the present commission play in managing and providing debts all internally procured?  

Article 251 of the Constitution of Nepal empowers the commission to recommend how much internal grants are to be given to Governments functioning at all the three levels: Federal, Provincial and Local. Article 59, though not explicit in its wordings, has provisioned for presenting a budget whose expenditure far exceeds the source of revenue by any government operational at three levels under the structure of federalism.

It further means that presenting a budget with huge fiscal deficit warrants the management of fiscal budget at all the levels by making an arrangement of the flow of grants and debts at an internal level. And, this is where and why we require National Natural Resources and Fiscal Commission (NNRFC) to decide upon the criteria according to which grants and debts will be issued to the needy government in a federated structure of governance.

Nothing in the provision of Article 251 has barred the approval of debts to the concerned government (be it federal, provincial or local) if the huge fiscal deficit has come on the way to run the government efficiently and effectively.

We, in the commission, were looking for indicators related to infrastructural developments and you know that infrastructure is of various kinds.

However, the limit of the internal debt as to how much of it to be given to which government and for how long is to be decided by the National Natural Resources and Fiscal Commission. Issues like these keep on coming and this is true for this current fiscal year also. The commission cannot recommend for the internally managed debt among the Governments all across the country unless some indicators are taken into account for limiting the quantum of the debt.

In case correct indicators for working out on fixing the limit of internal debt didn’t lay in our hands, we devised feasible indicators on our own to calculate the volume of internal debt to be managed for governments operating at the provincial and local level and recommended the same to the federal government.

I will give you one instance here regarding making a choice for the right indicators to be used while making calculations for arriving at the limit of internal debt. We, in the commission, were looking for indicators related to infrastructural developments and you know that infrastructure is of various kinds.

There was a confusion in the beginning as to which indicator of infrastructure we need to take and at the end we decided to pick up the indicator of connectivity – electricity, transport, and communication. And, we have been using this indicator of connectivity as a baseline in the current fiscal year to decide upon the volume of internal debt to be disbursed to different governments at the lower level.

However, laws in our hands also ask us to consider other indicators too such as education, health, drinking water among HDI (Human Development Index).

Very interesting indeed. What makes you choose the only criterion of connectivity – electricity, transportation, and communication? Why didn’t you go for universally acclaimed HDI as an infrastructural indicator while making calculations for disbursement of debts?

Looking at all the criteria available before us, we zeroed in on HDI which was in fact devised by UNDP (United Nations Development Program). Even NPC (National Planning Commission) has published the HDI report of Nepal in 2014 AD. But, we encountered a problem while accepting the HDI as reliable criteria for National Natural Resources and Fiscal Commission.

Now, there are 77 districts in Nepal and the HDI report earlier covered only 75 districts in the old format. This is why we couldn’t adopt HDI as our universal criteria for all across the country. But, hold on; we used the NPC report of HDI to our advantage and extrapolated the findings of the report at all the districts, villages/towns, ecological region and other geographical units of Nepal.

We also adopted the same formula and criteria used in the HDI report already published by the NPC to get the findings for all the 7 provinces and 753 local bodies. There is a poverty index only which uses, among other factors, access to pure drinking water which is a vital requirement for healthy long life for humans inhabiting in a region.

As you have asked about the criterion of population, we already had the population census report of 2068 BS and we used the same criteria for our calculation.

This criterion was also there in the HDI report which we took help of and used it to find out ‘Human Poverty Index’ for all the 753 local bodies. We didn’t use same ‘Poverty Index’ at the provincial level as we did for the local body; we used the Multidimensional Poverty Index (MPI) for provinces as NPC (Nepal Planning Commission) during that period had published the report to assess the prevalence of poverty in Nepal by using MPI.

We, too, decided to use MPI to arrive at the figure for grants and debts to be given to each provincial government. The MPI identifies multiple deprivations at the household and individual level in health, education, and standard of living. It uses microdata from household surveys, and all the indicators required for calculating the extent of poverty in a region.

How did you manage to decide about an area of a region and population inhabiting there during the course of taking different criteria into consideration when boundaries of provinces and local bodies were still evolving then?

Yes, you have asked a technical question and I must answer it technically. All the details of geography of a region together with the exact measurement of the area at district and provincial level were available with ‘Restructuring Commission’ and local bodies. We used those details. There were local bodies which had lodged complaints with ‘Ministry of Federal Affairs’ regarding change of their geographical area in those days and the Ministry was in the thick of changing and modifying the geographical boundary of the district, municipality and even provinces.

To deal with this scenario, we constituted 3-members committee taking one member from each of the three stakeholders i.e. finance commission, ministry of federal affairs and land measurement department. As you have asked about the criterion of population, we already had the population census report of 2068 BS and we used the same criteria for our calculation.

I appreciate the mathematical, statistical and technical work National Natural Resources and Fiscal Commission (NNRFC) did before recommending the amount of debts for different governments working under present federated structure of political governance. Will you, please, share with Khabarhub if debt-limits were fixed for the only federal government or for all the governments functioning at three levels?

The federal government receives the debt of a certain percentage of total GDP (Gross Domestic Product) and this keeps on changing because GDP is never static calculated every year. We have a trend here to decide upon the extent and volume of internal debt only after analyzing the integrated economic indicators and indices of the domestic economy. I have worked in the Ministry of Finance; I have also given my services in the departments of economic affairs and economic policy analysis.

Now they have been restructured into departments of finance management and policy analysis. Earlier, these departments were tasked with the responsibility of recommending the extent of debt a government can procure.  In those days, vice-chairman of the ‘Nepal Planning Commission’ used to lead the economic policy recommendations committee and deputy-secretary of the Ministry of Finance would act as member-secretary of that committee.

The economic policy recommendations committee used to fix the limit of internal debt before. I was there for 2 years and played an important role in fixing the limit of internal debts. It was 2-3 percentage limit of the internal debt limitation then not the 5 percent. Now, it can be below 5% or may even exceed to go up to 7% of the internal debt.

The limit of the internal debt is fixed based upon the reading of the integrated economic indices of that particular year. The limitation of internal debt for local and provincial governments is not being fixed with reference to GDP as is the case with the federal government.

It must be born in mind that GDP is just the small fraction of all the criteria which are taken into consideration while determining the limit of internal debt to be disbursed to a government. For example, the prospective income of the government always plays an important role in determining the limit of internal debt and income of a government is nothing but the different sources of revenue collection to the treasury.

This is how internal debt as mentioned in the budget of the federal government cannot be given more than 10% of the total revenue collection by the government. Since I am heading the National Natural Resources and Fiscal Commission (NNRFC), it is not just debts and internal debts but I also devise the ways to distribute the natural resources across the provinces and local bodies.

The constitution of Nepal has vested powers within this commission to devise the method to distribute royalty earned by natural resources across all the Governments functioning at the provincial and local level. We all know that how natural resources benefit the region and its people and these benefits derived out of natural resources must percolate down to the local level in course of distributing them among the governments at the federal, provincial and local level.

Distribution of royalty is undertaken in accordance with the provisions laid down in ‘Inter-governmental Financial Management Act following which 50% goes to center, 25% to concerned province and rest 25% is given out to the local body. Since royalty is collected from all the provinces at one point, its distribution is not that difficult. In case of benefits derived from the natural resources, it is distributed to that province and other local governments under it.

The act regulating the National Natural Resources and Fiscal Commission for distributing the natural resources has provisioned for dispute resolution mechanism between two or more provinces or local bodies. How many such disputes have arisen until now in one and a half year?

The Constitution of Nepal has given the power to NNRFC to recommend the probable solutions for all the disputes which arise between the provinces and local bodies. It is not only recommendatory power we enjoy in NNRFC but also analyze the nature and magnitude of disputes which come before us.

It is not that no disputes come to us. Disputes, though not large in number, concerning provinces and other local bodies over the use and exploitation of natural resources do come before us. For example, an embankment is built over a river for generating electricity and the low-lying areas naturally get adversely affected.

In cases like this, royalty is doled out to such region. We don’t give royalty to the area only for generating electricity by building embankment (or dam); we have sent our recommendations to the Government of Nepal to all including those who are affected by building embankment and power-house.

No major dispute has come to us yet. I have come to hear that Province Number – 2 has threatened to sue the federal government of Nepal. However, it is all together with a separate issue, not strictly under the domain of National Natural Resources and Fiscal Commission.

We are educating ourselves regarding the distribution of natural resources at provincial and local level together with probable disputes which may arise in the near future. We are examining the past and present experiences of other countries too to develop insight into it.

Gandaki Pradesh and Province Number- 5 have been in a dispute over a diversion of Kaligandaki River into a Tinau River of Rupandehi district. Leaders of the two provinces are in talk exchanging arguments with evidence. Even ruling party Nepal Communist Party has picked up the issue for broader discussion within the party meeting. Do such disputes reach your commission?

Such disputes have not reached us yet. There is a reason behind it. The dispute that you have referred to is yet to be a dispute – the said project is in the preliminary stage just in the phase of discussion; nothing has happened on the ground.

Next, the distribution of natural resources across the provinces and local bodies is one thing while the distribution of benefits derived out of natural resources is entirely another. Our commission is concerned with the latter part.

Let us take the example of Bheri-Babai diversion. These two rivers of Karnali Pradesh accrue benefits to districts of Province Number- 5. This is why citizens of Karnali are unhappy. Similarly, Province Number-5 is getting more benefits from the river of Province Number-4 due to the diversion of Kaligandaki River. Thus, our commission does not enter into a case where the distribution of benefits derived out of natural resources is not involved. We also look into the cases of compensation if any province or a local body is unduly deprived of it despite sharing its natural resources with others. We are continuing our study and we shall come out with better solutions which are acceptable to all the stakeholders in days to come.

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