USAID Public Financial Management Quarterly Report (FY23 Q2)

Agency for International Development (USAID) awarded a contract to Deloitte Consulting LLP on October 11, 2022, to manage USAID Public Financial Management, a five-year activity that will operate until October 10, 2027. The Activity aims to strengthen Public Financial Management (PFM) functions, performance, and accountability at the federal, provincial, and local levels of government, and strengthen PFM institutions and systems at the national level. The FY 2023 Quarter 2 report presents the team's accomplishments from January 1, 2023, through March 31, 2023. This was a break-out quarter for the Activity: the Government of Nepal (GON) accepted PFM's Implementation Letter (IL) in February; the Activity successfully established the priorities of counterparts by means of the co-creation workshop, which was well-attended by decision-makers; institutional arrangements were established through the coordination committees at the national and sub-national levels; and the Activity reached agreement with counterparts on the activities for Year 1 through the endorsement of the National Steering Committee. The quarter also saw the launch of the Activity in Madhesh Province, where the Chief Minister, key provincial ministers, and secretaries of key agencies attended, along with the US Ambassador to Nepal and the Mission Director of USAID/Nepal. By the end of the quarter, the Activity was poised to initiate technical assistance and capacity building, with a very high level of buy-in and engagement from national and sub-national counterparts. The Government of Nepal formed after the November 2022 elections made progress in the quarter in reorganizing some Ministries and appointing Ministers, including the Minister of Finance. However, the coalition government's tenure was short-lived after the Communist Party of Nepal (United Marxist Leninist) withdrew its support to PM Pushpa Kamal Dahal-led government, citing changes in the political equation, dealing yet another jolt to the already fragile, two-month-old ruling coalition in the country, and further worsening the political instability. The major political parties that quit the Prime Minister's CPN Maoist Center coalition government are the Communist Party of Nepal UML, Rashtriya Swatantra Party, and Rashtriya Prajatantra Party. Rashtriya Janamorcha Party joined this coalition afterwards. The new coalition government has the following parties: Communist Party of Nepal (Maoist Centre), Nepali Congress, Communist Party of Nepal-Unified Socialist, Janamat Party, People's Freedom Party - Nagarik Unmukti Party, People's Socialist Party, Nepal - Janata Samajbadi Party, Loktantrik Samajwadi Party, Rastriya Janamorcha, and Independent MPs. In March 2023, Prime Minister Dahal once again secured a vote of confidence out of the 262 members present in the 275-member lower house, with 172 votes in his favor with the support of the Nepali Congress and other parties. As of the end of March, however, key ministerial posts remained vacant given the ongoing negotiations for key positions/ministries within the political parties supporting the Prime Minister. The Minister of Finance was only appointed on April 8 with Dr. Prakash Saran Mahat from the Nepali Congress Party filling the spot. Revenue collections for the period of July 16, 2022, to March 31, 2023 (70.8% of the fiscal year) come to just 44% of the original budget, revealing poor performance against the plans in tax collections, primarily due to a drop in border trade following a hike in tariffs. This has pushed the government to put in reserve administrative budget appropriations and make cutbacks in capital spending, where only 25% of the appropriated amounts have been executed. Even recurrent spending comes to just 55% of the original budget, which means that many operating expenditures have been put off or related invoices are past due payment date. The government has recognized that the decisions to hike salaries of public officials by 15%, which impacts pensions for retired public officials as well, and to lower the eligibility age for elderly allowance from 70 years to 68 years, are contributing to the budget deficit. The impact on sub-national governments is reflected in these totals but is uneven across the provinces. Fiscal transfers to subnational governments have been impacted by the expenditure cuts across the board, falling from 7.9% to 6.8% of the GDP from the first half of FY22 to the first half of FY23. The greatest reduction was observed in revenue sharing, which fell by 0.8% of GDP between the two periods, reflecting the lower revenue collection by the federal government. Grant transfers were less affected in the first half of the year, with equalization grants reduced by 0.2 percentage points of the GDP and conditional grants reduced by 0.1 percentage points of the GDP.