[{"bbox": [97, 153, 1160, 365], "category": "Text", "text": "In January 2022, the IMF approved a 38-month USD 396 million Extended Credit Facility arrangement for Nepal with key policy actions including measures to boost revenues and public spending efficiency, strengthen financial sector regulation and supervision and support fiscal transparency, as well as measures to enhance governance and combat corruption. The program effectively validates the authorities' Memorandum of Economic and Financial Policies developed in support of their request for IMF support, and notably a comprehensive fiscal structural reform agenda, with both revenue mobilization and public financial management reforms to address the public investment efficiency gaps, strengthen fiscal risk management, improve public debt and cash management, and help advance fiscal federalism in a fiscally prudent manner."}, {"bbox": [97, 391, 1160, 441], "category": "Text", "text": "In conclusion, the authorities are pursuing a stability-oriented macroeconomic policy and the eligibility criterion is met."}, {"bbox": [86, 458, 437, 485], "category": "Section-header", "text": "### 2.3.3. Public Financial Management"}, {"bbox": [97, 512, 1163, 670], "category": "Text", "text": "The Government has been implementing its PFM reform agenda under the Public Financial Management Reform Programme Phase II (PFMRP-II), which covers the period 2016-2026. The PFMRP has a detailed action plan to address weaknesses in the PFM system, and it is currently being updated to better reflect the needs created by fiscal federalism. Whereas improving PFM systems at the federal level remains an important objective, putting in place PFM systems at the subnational level has taken precedence as the Government implemented the federalisation agenda introduced with the 2015 Constitution, and fiscal decentralisation which started in 2017."}, {"bbox": [97, 683, 1163, 897], "category": "Text", "text": "With fiscal federalism creating an opportunity to set the basic PFM systems right, implementation of strategic budgeting reforms introduced by the new Financial Procedures and Fiscal Responsibility (FPFR) Act (2019) at all three tiers of government are becoming a focus of attention, aiming at enhanced integration of recurrent and capital investment budgets, medium term and policy-based budgeting. Fiscal decentralisation makes policy-based budgeting more complex, in particular as ensuring a link between national and subnational strategies, and between the 5-year national Periodic Plan, the MTEF and the annual budget appears to be particularly challenging. The authorities have started to address these challenges in a more systemic manner since 2019, with the development of the 15th Periodic Plan and enhanced integration between MTEF and the annual budget."}, {"bbox": [97, 909, 1163, 1174], "category": "Text", "text": "Good progress has been achieved since 2016 in completing the legal framework for PFM and putting in place the institutional and regulatory framework for fiscal decentralisation, a key requirement to mitigate the high fiduciary risks inherently associated to a substantial part of the budget being transferred to newly formed local governments in need of equipment and trained staff. The federal constitution defines four types of federal transfers or grants to provincial and local governments: (i) federal equalization grants, (ii) conditional grants, (iii) complementary (matching) grants, and (iv) special grants. The Intergovernmental Fiscal Arrangements Act approved in November 2017 further introduced a tax-sharing system between all levels of government. In the meantime, IT systems have been rolled to provincial and local governments out to facilitate and standardize financial management and accountability, such as the Subnational Treasury Regulatory Application (SuTRA), Provincial Computerized Government Accounting System (P-CGAS) and the electronic government procurement (e-GP) system."}, {"bbox": [97, 1187, 1163, 1373], "category": "Text", "text": "The authorities have also achieved good progress at enhancing domestic revenue mobilisation through tax and customs policy and administration reforms enshrined in the successive five-year Inland Revenue Management Second Strategic Plans. Nepal's tax policy seeks to accelerate revenue growth without increasing tax rates, which would have adverse impact on economic expansion. The challenges include the reduction of the informal sector (notably through larger taxpayer registration), mitigating tax evasion, broadening the tax net, reducing tax exemptions and reporting on tax expenditures, managing VAT refunds, collecting tax arrears and strengthening the audit programme. Domestic revenue soared from 15.9% in 2013/14 to 20.9% in 2020/21. The target is to reach 26.2% by 2025/26."}, {"bbox": [97, 1385, 804, 1411], "category": "Text", "text": "The main outstanding challenges faced by the PFM system are the following:"}, {"bbox": [142, 1425, 1163, 1531], "category": "List-item", "text": "* Continue building human and institutional capacity in financial management, in particular at the local level, through the implementation of a comprehensive PFM Capacity Development Plan, the provision of model laws and guidelines, and by ensuring a more effective operationalisation of IT financial management systems deployed at local levels of government"}, {"bbox": [142, 1540, 1163, 1619], "category": "List-item", "text": "* Improve strategic allocation of resources through: enhanced link between the planning framework (national, sector and provincial 5-year Periodic Plans), MTEF and annual budget (including Gender Responsive Budgeting) at provincial and local governments level."}, {"bbox": [1027, 1681, 1144, 1706], "category": "Page-footer", "text": "Page 10 of 26"}]