‘Finance Ministry will introduce project bank soon’

The Ministry of Finance has time and again sounded alarm bells over fragmentation of aid money. The latest Development Cooperation Report says each development partner operating in the country worked with eight government ministries or agencies on average in the fiscal year 2014-15, scattering financial resources in a number of projects and programmes. The Organisation for Economic Cooperation and Development says aid fragmentation pushes up transaction costs and erodes effectiveness of projects. Rupak D Sharma of The Himalayan Times caught up with Baikuntha Aryal, head of International Economic Cooperation Coordination Division at MoF, to discuss how aid fragmentation can be reduced, and international community’s response to the latest political developments. Budget has once again fallen prey to political wrangling in the country. What does the international community have to say about this? Budget, in fact, has not fallen prey to political wrangling because the Appropriation Bill has been ratified by the Parliament and signed into law by the President. So, the government won’t face any problem in implementing various budgetary programmes and making expenditure accordingly. Yet, many have expressed concerns about budget execution in the wake of latest political developments. The same concern was also expressed by the international community. But since the government won’t face any hurdle in budget implementation, development partners need not worry. Besides, they have always worked with us by keeping politics aside. However, three budget-related bills — namely, Financial Bill, Bill to Raise Public Debt and Loan and Guarantee Bill — have been rejected by a majority of parliamentarians. Won’t that affect budget implementation? I don’t want to comment on rejection of Financial Bill and Bill to Raise Public Debt, as I don’t look into those areas at present. However, lawmakers’ decision to turn down Loan and Guarantee Bill, (which enables the government to acquire loans from abroad), won’t affect the government for now. This is because the existing Loan and Guarantee Act has fixed foreign debt ceiling of Rs 500 billion, whereas our outstanding foreign debt, as per the latest Economic Survey, stands at Rs 374.3 billion. Since the Economic Survey was published we may have obtained more foreign loans, but we have also repaid part of the debt acquired in the past. So, the government still has a credit line of over Rs 100 billion. This credit line is definitely lower than this fiscal year’s foreign debt need estimate of Rs 195.7 billion. That’s why the new bill had proposed raising foreign debt ceiling to Rs 700 billion. However, rejection of the bill will not immediately affect the government because we can use the existing ceiling to acquire over Rs 100 billion in foreign loans. Also, we have proposed to pay back Rs 25.5 billion of foreign debt this fiscal year, which will expand the existing foreign debt ceiling. The government’s foreign aid mobilisation, including foreign grants and loans, is expected to top Rs 302.6 billion this fiscal. This amount is 29 per cent of annual budget. Such share stood at 25 per cent in 2015-16 and 20 per cent in 2014-15. Is Nepal’s reliance on foreign aid gradually going up once again? The share of foreign aid in annual budget had actually started falling. That share, however, started going up since the last fiscal year because of greater funding needs for post-earthquake reconstruction and rehabilitation works. This share will shrink once reconstruction works are over. But growth in share of foreign aid in budget comes at a time when the Ministry of Finance itself has sounded alarm bells over aid fragmentation. What is your take on this? The MoF has always tried to curb aid fragmentation. In fact, the Development Cooperation Policy introduced in 2014 has introduced various thresholds on aid disbursement to prevent aid from being scattered in a number of projects. Despite this, aid fragmentation has continued. To curb this, we are planning to observe projects from planning and designing phase. While inspecting projects during planning and designing phase, we’ll try to analyse results the projects are likely to generate and study whether best results can be obtained by consolidating financial resources. We have discussed this issue with our development partners. Initially, this strategy will be introduced in projects funded by multilateral donor agencies. Gradually, the strategy of resource consolidation will also be introduced in projects funded by bilateral donors. So, avoidance of aid fragmentation is our main agenda. Could you please tell us other measures the MoF is intending to introduce to control aid fragmentation? First of all, we need to identify projects that serve the country’s needs. In this regard, we are planning to create a project bank, which will work as a depository of various types of development projects that the country can build. We did float the plan of project bank a few years ago, but it wasn’t implemented. But, this time, we are serious about it. Once we have a list of projects, we will be in a better position to tell development partners where to divert their resources. Will this project bank incorporate projects selected randomly? If projects are included in the bank without conducting any feasibility study or preparing detailed project reports, then what’s the use of such a bank? The project bank may have ready-to-implement projects. It may also contain projects at very preliminary stage of planning. But even if projects incorporated in the bank are not mature for implementation, we can at least carry out their feasibility studies. And once they are mature enough for implementation, we can start mobilising funds to build them. How many projects will be added to the bank by the end of this fiscal year? We have not fixed a target yet. But initially we will create a wish list. We will then work together with the National Planning Commission and concerned line ministry to chart out our future course. Once projects are identified, we will upload them to our website. Once projects start piling up in the bank, will the MoF ask development partners to pool resources and channel them to projects the government wants to build? That may not always be possible. This is because donors extend funds for different purposes. In other words, donors may not always want to support construction of a physical infrastructure project. They may sometimes want to support a programme or policy formulation process. But again aid fragmentation is occurring because donors are identifying projects and programmes based on their own priority, isn’t it? This is why we are asking development partners to focus on results. The funding pledge made by development partners and number of projects they have supported may be trivial if the assistance they have extended fails to make a difference or create an impact. However, certain donors have worked in certain sectors for a long time and it would not be reasonable to ask them to immediately stop assistance to those areas and divert funds somewhere else. So, we have to encourage them to gradually divert their focus to other areas. Are these remarks aimed at bilateral donors, as they seem more inclined towards selecting projects and programmes of their interest rather than that of the nation? Yes, bilateral donors sometimes have their own priorities. However, we can always ask them to do certain things in a certain way, and they will definitely listen to us. Also, if funds pledged by a bilateral donor are not enough for a project or a programme, we can float the proposal of pooling resources from a number of bilateral donors to implement those projects and programmes. So, we can always scout for options. Lastly, development partners have always complained about government’s weak fund absorptive capacity, which has resulted in low disbursement of donor money. What is your take on this issue? We are planning to introduce project readiness filter to ensure projects are not executed unless all necessary groundwork is laid. In other words, we will start asking for funds from donors once projects are mature enough for implementation. Another reason for low disbursement is delay in the process of filing reimbursement claims. This means many government agencies initially spend their money in donor-funded projects, but do not initiate reimbursement process on time. So, even if money pledged by donors is spent, it does not get deducted from financial statements of donor agencies. We did ask some government agencies to file reimbursement claims on time in last fiscal year and disbursement rate actually went up. But that is a minor issue. The biggest problem is inefficient public financial management system because of which the country is facing chronic problem of low capital expenditure, isn’t it? Yes, that is a problem as well. But lately we have introduced legal reforms by amending Public Procurement Act. Very soon, Public Procurement Regulation will also be amended. So, we are working towards enhancing our fund absorptive capacity. Source: THT