World Bank report questioned by Nepal’s Fiscal Commission, Concerns raised over reliability and local relevance

KATHMANDU: A senior government authority has publicly questioned the credibility of a recent study by the World Bank, triggering a broader debate on the relevance of international policy frameworks in Nepal’s fiscal federalism and natural resource management.

Acting Chairperson of the National Natural Resources and Fiscal Commission, Judha Bahadur Gurung, stated that the World Bank’s reports assessing expenditure needs of local governments lack reliability and fail to align with Nepal’s socio-cultural and geographical realities.

Speaking at a joint meeting of the Inter-Governmental Fiscal Council, Gurung said the global lender had submitted two separate reports estimating how much funding each local unit requires. However, he expressed skepticism over their applicability.

“Although the World Bank conducted studies and provided reports on expenditure requirements for local governments, we did not find them fully reliable. They do not align with Nepal’s culture and geography,” Gurung said. “Since the findings differ from our own planning frameworks, the reports are still under review, and further improvements are being studied.”

Disconnect Between Global Models and Local Realities

Gurung’s remarks highlight a recurring policy tension in Nepal’s economic governance—whether externally developed models can effectively capture the complexities of federal fiscal systems in a geographically diverse country.

He emphasized that despite frequent claims that Nepal is rich in natural resources, many elected representatives lack sufficient understanding of the country’s ecological assets and their economic potential.

He stated that Nepal is home to approximately 13,000 species of plants, of which 819 are medicinal (herbal) species.Gurung noted that certain plant species, including “Tecoma,” have the potential to be used in cancer-related pharmaceuticals, indicating untapped high-value sectors within Nepal’s bioeconomy.

Massive Revenue Loss from Untapped Natural Capital

According to Gurung, Nepal is losing significant revenue due to the underutilization of natural resources. He pointed out that approximately 900 million kilograms of leaves fall annually across the country. With a market value of up to NPR 140 per kilogram and potential royalty collection of NPR 50 per kilogram, the economic opportunity is substantial.

“This shows the urgent need to develop mechanisms that can convert natural capital into financial capital,” he said, calling for institutional and policy innovation to harness these resources efficiently.

Legal Framework Under Scrutiny

Gurung also raised concerns about the effectiveness of the Intergovernmental Fiscal Management Act, 2019 (2076 BS), stating that it requires amendment to ensure alignment with constitutional provisions.

Referring to Article 60 of the Constitution, he argued that Nepal’s grant distribution system should operate through a single-channel mechanism. However, inconsistencies in existing laws have led to fragmentation and inefficiencies.

“The Constitution envisions a unified system where all types of grants—equalization, special, complementary, and conditional—are recommended through a single mechanism. But the current legal framework does not fully support this, leading to distortions,” he said.

Field Insights and Reform Proposals

Over the past three years, Gurung reported visiting 219 local governments to assess issues related to fiscal transfers, federalism, and state capacity. During these engagements, local representatives raised demands to include carbon trading revenues within fiscal transfers and to ensure local ownership in VAT refund processes.

He clarified that revenue distribution currently relies on seven criteria defined in the law, with weightage determined through empirical studies rather than arbitrary decisions. A recent review—mandated every five years—showed that while revenue allocations decreased for a small number of local units, the majority saw increases.

Changes in Grant Distribution Model

In the equalization grant system, three indicators are used: minimum baseline, formula-based allocation, and performance-based metrics. Previously, population was the sole determinant under the minimum criterion; however, geographical area has now been incorporated with a 50 percent weight.

As a result, grants decreased in six local units, including Kathmandu Metropolitan City and Lalitpur Metropolitan City, while approximately 99.2 percent of local governments saw increased allocations.

Data Gaps and Governance Challenges

Gurung acknowledged that the absence of national standards has forced authorities to rely on estimates when determining expenditure needs for local governments. He said further studies are underway to make these assessments more evidence-based.

He also flagged governance issues, noting that some local governments delay spending grants and later report them as internal revenue in subsequent fiscal years—a practice he urged authorities to discourage.

Additionally, the Commission is reviewing performance indicators due to gaps in forest-related metrics, air pollution measurement, and inefficiencies in grant allocation. Plans are underway to increase the number of indicators for local governments from 17 to around 22, with similar revisions for provincial benchmarks.

The criticism of the World Bank report comes at a time when Nepal is intensifying efforts to refine its federal fiscal architecture and improve public financial management, raising key questions about the role of international institutions in shaping domestic economic policy frameworks.

Here are his views:

According to the vision set out in Article 60 of the Constitution, all types of grants—equalization grants, special grants, complementary grants, and conditional grants—should be recommended through a single channel by a single authority. The Constitution envisages that only through such implementation can all forms of distortions be eliminated. However, due to the absence of corresponding laws aligned with this provision, the Intergovernmental Fiscal Management Act, 2019 (2076 BS) has effectively distorted this arrangement. As a result, various problems have emerged. Since the current government has the capacity to amend this law, it should be revised.

Over the past three years, I have visited around 219 local governments to discuss fiscal transfers, federalism, and state capacity. In many places, the issue of carbon trading was raised. There have been suggestions to include carbon trading within fiscal transfers and treat it as a source of royalty. Additionally, concerns have been raised about ensuring ownership of local governments in the VAT refund process.

In revenue distribution, seven criteria specified in the Intergovernmental Fiscal Management framework are used. Determining the weight of these criteria is our responsibility. However, this has not been done arbitrarily; the weights have been assigned based on studies that indicate the contribution of each criterion. Last year, adjustments were made to the weights in the revenue sector in accordance with the legal provision requiring review after five years. As a result, revenue shares decreased for some local governments while increasing for many others. In distributing equalization grants, three bases are used: minimum, formula-based, and performance-based.

Previously, only population was considered under the minimum criterion. However, since last year, geographical area has been given 50 percent weight and population 50 percent. According to the study, grants decreased for six local governments, while 99.2 percent of local units saw increases. Those experiencing decreases include Konjyosom Rural Municipality and Lalitpur Metropolitan City in Lalitpur, Biratnagar Metropolitan City, Menchhayem Rural Municipality in Terhathum, Mahashila Rural Municipality, and Kathmandu Metropolitan City.

The internal borrowing limits for grants transferred from the federal and provincial governments to local levels have already been determined. In addition, the World Bank has provided two reports to assess how much expenditure each local government requires. However, these reports were not found to be fully reliable. They do not align with Nepal’s cultural and geographical context. Since their findings differ from our own planning framework, they are still under review, and further studies are being conducted to improve them.

Due to the lack of national standards, determining the expenditure needs of local governments has inevitably required some degree of estimation. We are working to make this more realistic. Further analysis of the two reports is underway to develop methods for determining real-time expenditure needs more accurately. It has also been observed that many local governments do not spend their equalization grants within the current fiscal year but instead report them as internal revenue in the following year. Relevant authorities need to take necessary steps to discourage this practice. Our institution has incorporated this issue into performance evaluation, but our efforts alone are not sufficient, and support from other agencies is required.

There is insufficient awareness about natural resources. While we often claim that Nepal is rich in natural resources, many people do not have clear knowledge about how many plant species exist in the country or how many of them are useful. Nepal has approximately 13,000 plant species, of which 819 are medicinal. Among them, a plant called “Tecoma” can be used to produce cancer medicine. Annually, around 900 million kilograms of leaves fall in Nepal. One kilogram of leaves can be sold for up to NPR 140, and up to NPR 50 in royalties can be collected from it. There are many such examples. Therefore, mechanisms need to be developed to convert natural capital into financial capital. However, there appears to be a lack of institutions focusing on this area.

There is also a lack of indicators related to the forest sector. Complaints have been raised that grants are not adequately linked to air pollution control and forest-based criteria. In this context, we have provided 100 percent grants. Although we determine the process, it is not entirely within our control. Since pollution can also be caused by external factors, we are currently reviewing this issue. The performance evaluation report is also under revision and will be available on the website within a month. Currently, there are 17 indicators for local governments, which are being increased to around 22, while provincial indicators are expected to reach about 14. We are still in the process of study.

There are also issues where inconsistencies exist among local, provincial, and forest laws. Stakeholders in the forest sector have raised concerns about having to pay taxes to all three tiers of government, which needs to be addressed. Similarly, under the Mines Act 1985 (2042 BS) and Regulations 1999 (2056 BS), there is a provision to allocate 10 percent of revenue to District Development Committees. However, the implementing authority is unclear. Since these committees do not have consolidated funds, implementation has been difficult. Therefore, it is not feasible to allocate funds where no such fund exists. This provision does not appear appropriate under current legal arrangements and needs amendment by the relevant authorities.

There have also been demands to allocate fixed funds to local governments that serve as provincial capitals. Establishing clear criteria for this would be appropriate. Due to the ‘Gen Z movement,’ 85 local governments have suffered damages. In this context, the Commission has already recommended allocating budget through conditional grants for the reconstruction of damaged structures, and the recommendation has been forwarded to the Ministry of Finance.