Wednesday, June 19, 2019

Brief overview of the provincial budgets for FY2020

Finance ministers of the seven provinces presented FY2020 budget to their respective provincial assemblies on June 16. This is the second full budget of the provinces. 

The provinces have relied on federal transfers (in the form of fiscal equalization, conditional, matching and special grants), VAT and internal excise duty collections shared by the federal government, and cash savings from FY2019 (which basically is the unspent resources from last year) to finance a combined Rs259.6 billion budget of the seven provinces. 

The internal revenue mobilization target is too small compared to the expenditure needs as the provinces are still struggling with adequate human resources and a systematic mechanism to collect taxes that fall under their jurisdiction. Total budget envelop of federal and provincial governments for FY2020 is Rs1792.6 billion (about 44.8% of GDP), of which about 30% is for capital spending.

One the defining features of the budget is that the provincial finance ministers have imitated the distributive nature of federal budget, especially in trying to cover everything with limited resources and at times without ascertaining funding sources. This has spread the budget too thin across too many sectors and programs. In fact, the provinces still do not even have the institutional structure required to execute the budget fully. It would have been prudent if the provincial finance ministers had focused on following through on signature programs of the federal government that are implemented through them and local governments, and establishing an institutional mechanism across the provincial ministries to execute budget effectively. Furthermore, they could have focused on preparing feasibility studies of strategic provincial infrastructure projects (energy, roads, urban development, drinking water supply, ICT, public institutions, industrial corridors, etc), and drafting laws and regulations to promote private sector investment, especially provincial version of the federal level laws and regulations. That said, compared to the first provincial budget, this one is much more coherent in presentation and accounting methodology. This sort of coherency in budget preparation across the three tiers of government is essential for budget accounting as well as informed analysis. 


Province 1 has earmarked Rs42.4 billion for FY2020—of which about 55.6% is capital expenditure—, which is more than double the amount it is planning to spending in FY2019. It is planning to meet 75% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 15.7% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue. 

It has allocated Rs25 million for each constituency (56) and Rs5 million for all assembly members (93). As a share of estimated provincial GDP, the size of province 1’s FY2020 budget is 7.2%, up from 4.1% in FY2019.

Key focus: agricultural mechanization, tourism (even giving 6 days paid leave and Rs25,000 allowance to public sector employees for tourism promotion), transportation, bridges, irrigation, industrial park, SEZ, education, healthcare, etc


Province 2 has earmarked Rs37.4 billion for FY2020—of which about half is capital expenditure—, which is more than three times the amount it is planning to spending in FY2019. It is planning to meet 69% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 19.9% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue and borrowing about Rs 1.3 billion from the internal market.

It has allocated Rs20 million for each constituency (64) and Rs10 million for all assembly members (107). As a share of estimated provincial GDP, the size of province 2’s FY2020 budget is 7.5%, up from 2.8% in FY2019.

Key focus: healthcare, housing, transport, education, industrial corridor, vocational training


Province 3 has earmarked Rs47.6 billion for FY2020—of which about 48% is capital expenditure—, which is 37.5% increase over the amount it is planning to spending in FY2019. It is planning to meet 66.1% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 14.2% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue.

It has allocated Rs1.98 billion for the assembly members to spend in the projects of their choosing. As a share of estimated provincial GDP, the size of province 3’s FY2020 budget is 2.9%, up from 2.4% in FY2019.

Key focus: industrial area, transport, education, health, agriculture, tourism (2020-2030), etc


Gandaki province has earmarked Rs32.1 billion for FY2020—of which about 61.8% is capital expenditure—, which is almost double the amount it is planning to spending in FY2019. It is planning to meet 68.7% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 14.9% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue and borrowing about Rs 2 billion from the internal market and federal government.

It has allocated Rs72 million for the assembly members to spend in the projects of their choosing. As a share of estimated provincial GDP, the size of Gandaki province’s FY2020 budget is 9.7%, up from 5.6% in FY2019.

Key focus: transport, drinking water, irrigation, energy, urban development, tourism, agriculture, industrial area, education, health, etc


Province 5 has earmarked Rs36.4 billion for FY2020—of which about 51% is capital expenditure—, which is 57.9% increase over the amount it is planning to spending in FY2019. It is planning to meet 73.7% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 13.7% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue.

It has allocated Rs312 million for the assembly members to spend in the projects of their choosing. As a share of estimated provincial GDP, the size of province 5’s FY2020 budget is 7.0%, up from 5.1% in FY2019.

Key focus: agriculture (interest subsidy), tourism, industrial area, education, health, transport, etc 


Karnali province has earmarked Rs34.4 billion for FY2020—of which about 62% is capital expenditure. It is planning to meet 71% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 26% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue and borrowing about Rs800 million from the internal market.

It has allocated Rs870 million for the assembly members to spend in the projects of their choosing. As a share of Karnali province’s GDP, the size of Karnali province’s FY2020 budget is 25%.

Key focus: infrastructure, transport, tourism, project preparation, engineering company, energy, irrigation, housing, education, healthcare, etc 


Sudur Paschim province has earmarked Rs28.2 billion for FY2020—of which about 62% is capital expenditure—, which is 54.1% increase over the amount it is planning to spending in FY2019. It is planning to meet 81.6% of the expenditure need by relying on fiscal transfers and revenue shared by federal government, 17% using last year’s savings (unspent budget), and the rest by mobilizing internal revenue.

It has allocated Rs30 million for each constituency (32). As a share of estimated provincial GDP, the size of Sudur Paschim province’s FY2020 budget is 11%, up from 8.3% in FY2019.

Key focus: agriculture, tourism, industrial area, education, infrastructure, etc 

Few preliminary thoughts on FY2020 budget of the seven provinces.

First, the practice to make provincial budget documents consistent with the federal budget format is a good initiative. It will help in informed budget analysis and policy discourse.  However, there is no need to make provincial budget making processes and practices an exact copy of the federal budget, especially the tendency to distribute meager budget across sectors and in projects that are not ready for implementation. 

We had federal and local government budgets before as well, but provincial budgets are new. The budget allocations and the long-term vision embedded in it should provide answers to people who are questioning the relevance of provinces given the substantial autonomy of local governments. Provincial governments should ideally focus on priorities that are unique to the provinces, create institutional mechanism to link and cooperate on projects and programs with local governments and federal governments, and compete with each other to attract private sector investment by offering the best investment regime. This is the whole essence of cooperative and competitive federalism. However, this characteristic is missing in the provincial budgets. The provincial finance ministers are preoccupied with distributing small amount of budget across sectors and pet programs using the funds given to them by the federal government. Most of the small, populist projects have traditionally been carried out through the local governments. There is a high possibility of duplication of projects and misuse of funds. 

Second, provincial finance ministers have copied the federal government’s unpopular program to distribute money to parliamentarians to fund projects of their choosing. These are wasteful spending riddled with malpractices and corruption. Except in the case of provinces 5 and Gandaki, the money allocated to fund pet projects of assembly members accounts for more than 20% of their internal revenue. For instance, such spending account for almost half of the projected internal revenue of province 1. It is 78.4% of projected internal revenue in the case of province 2, 21.1% in province 3, 342.4% in Karnali province, and 282.3% in Sudur Paschim province. The provincial finance ministers have copied a very bad aspect of the federal budget. Cumulatively, federal and provincial constituency development fund amounts to about 0.7% of GDP. Finance Minister Dr. Yuba Raj Khatiwada increased constituency development fund to Rs60 million from Rs40 million in FY2020 federal budget. Gradually, even the 753 local governments will follow the same practice when they present their budgets. Furthermore, giving taxpayer’s money to parliamentarians to fund small pet project of their choosing, without much oversight, is essentially a way to restrict competition from new candidates in the next election as it could be used to keep core voter base intact and happy. 

Third, provinces 2, Gandaki and Karnali are planning to borrow money to meet expenditure needs. Although the federal government has published guidelines for internal borrowing by provincial and local governments, they haven’t actively borrowed money from the internal market so far. It remains to be seen how they will price their bills and bonds and at what interest rates. Most of the budget allocation is for capital projects because some of the federal grants are either conditional or have special provisions that the provinces have to comply with. The borrowed money from internal market and federal government should not be used to expand recurrent budget, especially non-targeted and duplicate subsidies and pet programs.  

Fourth, as in the case with the federal budget, none of the provincial finance ministers presented a viable plan for effective budget implementation. They have hardly used half of the allocated budget for this fiscal year. They still lack the required institutional set up and human resources to plan and implement projects. The tussle between federal and provincial governments over staff recruitment is not over yet. Eventually, the provinces will exhaust recurrent budget, but fall short on spending capital budget. This budget savings will then be used to inflate recurrent budget in the subsequent years. Capital spending will be affected by lack of coordination between federal and provincial governments (especially timely delegation of projects and authority to use funds), human resources and institutional set up, and required provincial laws and regulations. 

Sixth, the size of provincial budgets will get larger in the coming years as they mobilize more revenue and introduce new programs tailored to their voter base. However, we will continue to observe under-execution of budget because of the missing sub-national laws, policies, regulations and institutional framework that govern public spending. 

Seventh, the provincial finance ministers did not include provincial GDP growth targets. The Central Bureau of Statistics earlier provided real GDP growth estimates for FY2020 for the seven provinces and nominal GDP figures too. The data limitation makes it hard to do any reasonable forecast for provincial GDP. However, the provincial planning commissions could have at least looked at the main proxies or lead indicators (such as agricultural production, number of industries registered, capacity utilization of firms, IIP, credit growth, internal revenue mobilization, mining and quarrying activities, vehicles registration, energy generation, public expenditure, internal tourism including domestic airline flights, sale of petroleum fuel, etc) to get a sense of provincial growth path. A budget speech without growth target is somewhat aimless. 

[Note: Here I estimated provincial nominal GDP based on their FY2019 share in national nominal GDP. See this for national level nominal GDP. ]

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