Regional: Strengthening Institutional Capacity for Fiscal Management

Public sector management / Public expenditure and fiscal management

The economies have been affected by a series of natural disasters and economic downturns, including the coronavirus disease (COVID-19) pandemic which resulted in a contraction of the gross domestic product (GDP). The macroeconomic framework before the pandemic was satisfactory in Nepal, but its GDP growth contracted in 2020 and will remain below its potential while the debt-to-GDP ratio continues to rise. Kiribati and Samoa's GDP growth has also contracted. Prior to the pandemic, they used to present lower growth performance than the regional average of Pacific countries.

The COVID-19 inflicted a large shock to the fiscal space. Excluding grants from development partners, Samoa's fiscal balance dropped to -3.2% in 2020. Kiribati's fiscal deficit was projected at anywhere between 10.8% to 16.5% during 2021 to 2026. A large increase in public spending has increased total government spending since 2016 in Nepal. Public expenditure increased from 14.2% of GDP in 2016 to 20% of GDP in 2021, and this trend will result in widened fiscal deficit. Regarding debt sustainability, the debt-to-GDP ratio of Samoa was higher than the regional average by 12.3% in 2021. Meanwhile, Kiribati's debt-to-GDP ratio is projected to rise by 32.6% during 2021 to 2026, and that of Nepal will increase more rapidly compared to regional average in South Asia. This demonstrates how weak fiscal sustainability and inappropriate responses increases vulnerability to exogenous shocks and risks.

The public financial management (PFM) reforms of Pacific Islands Countries were implemented prior to and consistent with the PFM roadmaps during 2011 to 2017. The PFM roadmaps have contributed to enhancing the fiscal management but there have been low performances in some reform areas. For example, Samoa's reforms have improved accounting, reporting, and fiscal risk analysis. However, some indicators such as budget reliability, fiscal strategy and budgeting, and transparency of public finances remain lower than the average of low-income developing countries and Pacific Islands Countries during 2015 to 2019 in the public expenditure and financial accountability assessments (PEFA). Nepal has made efforts to improve fiscal efficiency, transparency, and accountability through the PFM reform programs. Nevertheless, the reform program needs to be assessed to identify remaining gaps and draft an effective reform action plan for sound fiscal sustainability.

The governments of Kiribati, Nepal, and Samoa have improved strategic and efficient use of resources for services delivery through the MTEF. Despite the efforts, weak fiscal management was demonstrated in the budgetary outcomes. The large increase in expenditure amidst revenue stagnation and COVID-19 has widened the fiscal deficit and identified the necessity of reforms focused on the MTEF. Enforcing fiscal rules is crucial to mitigate fiscal risks and improve fiscal soundness under the medium-term fiscal management. The weak linkage between fiscal rules and MTEF and fiscal rules not explicitly linked to PFM legislation may result in poor budget delivery over the short term and worsen debt sustainability over the medium term. Kiribati, Nepal, and Samoa have used FMIS for efficient governments operations in PFM and fiscal transparency and accountability. Despite the FMIS, the information on public resources provided to service delivery units remains insufficient. Public access to fiscal information is also limited in annual executive budget proposal documentation and enacted budget. There are existing reform efforts to strengthen the capacity building of fiscal management in the three DMC's, but additional capacity is needed to set strategy and programs to improve fiscal consolidation and institutional capacity to respond to fiscal risks.

Governance and institutional capacity strengthened (Strategy 2030 Operational Priority 6)

Institutional capacity of MOF (MFED) for fiscal management strengthened

Strategic fiscal framework and fiscal risk management improved

Links between fiscal rules and MTEF improved and legislation for fiscal rules promoted

Use of IFMIS and accessibility of fiscal information improved