Towns at a crossroads
Municipalities in Nepal stand at a crossroads, facing complex challenges posed by the rapid urbanization the country is witnessing. New towns have emerged to accommodate the nation’s growing urban population while existing ones have expanded rapidly over the last decades. The rapid growth of towns has placed municipalities at the forefront of managing the country’s escalating urbanization challenges, the mismanagement of which can severely impact urban well-being. While the pressure on local governments to address the issues before them is mounting, they remain poorly financed and functionally restrained, risking the perils of haphazard urbanization, the consequences of which bear serious repercussions.
Local governments in Nepal were entrusted with key responsibilities after the adoption of federalism in 2015, and they now have local health, education, agriculture and several other functions under their remit. They are entitled to receive federal grants, provincial budget transfers and shares from tax collections to support their finances, and can even borrow if required. Uniquely, the country’s municipalities are assuming responsibilities at a time when local governments globally face mounting civic challenges amplified by climate change. This makes Nepal’s federalization process both crucial and delicate, but the agenda remains politically deprioritized and institutionally stalled, and several provisions surrounding federalism fail to be implemented.
While the dynamics of federalism in the country are in a state of flux, an argument that makes the case for fast-tracking the power transfer to local governments is that delaying this process has high costs. Research shows that countries urgently need to increase municipal investments to sustain civic well-being, and Nepal is no exception. Municipalities need to invest now in establishing planned colonies to curb informal settlements that cause urban congestion. They need to invest now in disaster management measures that wreak havoc in cities every monsoon. They need to commit resources now to urban mobility, pollution management and green infrastructure without which livability in towns will remain compromised and deteriorate over time. These investments need to be made at a speed that matches the rapid urbanization Nepal is witnessing. The World Bank reports that Nepal is the fastest urbanizing country in South Asia, giving the Himalayan nation only a small window to make these time-sensitive investments that will profoundly dictate the quality of life in the country.
Many cities in Nepal are already facing the fallout of failing to act on time, and Kathmandu stands as a prime example. The capital’s congested urban sprawl is the result of poor governance during the 2000s when rapid urbanization overwhelmed the government’s capacity to manage the city’s haphazard growth. Kathmandu’s inadequate road infrastructure, lack of open spaces and inefficient transport networks are direct consequences of years of flawed planning and neglect of municipal priorities. Besides the government’s poor policy foresight, this outcome exposes the general underestimation of municipalities as important actors in driving development, gravely ignoring their vital role in enhancing citizens’ quality of life. Birgunj, Biratnagar and Bhairahwa are other major cities that have struggled to manage their rapid urbanization and now face pressing urban issues like congestion, poor mobility and limited open spaces for recreation.
Despite the urgency of interventions, local governments are able to do little to address the issues before them. In addition to the federal government's reluctance to devolve key functions, municipalities face critical financing challenges that constrain their ability to act. The budgets of most local governments are already under strain from the extensive responsibilities they manage with limited resources, leaving little room for investment in high-cost urgent interventions. Most local units have limited self-generated revenue and lack the capacity to improve tax administration or diversify income sources. The Intergovernmental Fiscal Arrangement Act 2074, the legislation that outlines financial relationships between three levels of government, allows sub-national governments to secure domestic loans, but municipalities have failed to borrow due to their low creditworthiness.
International aid and urban climate finance that support municipal investments are in their early stages, and accessing these funds is challenging for Nepal where data on municipality-level financing needs are not robust. Internally, the municipal financing environment isn’t favorable either, with the Town Development Fund being the only specialized municipal lender. Despite receiving support from global development partners, the fund is able to cater to only a fraction of local governments and mostly engages in financing small to medium-scale projects. This combination of limited resources and a nascent borrowing environment creates a substantial funding shortfall for Nepal’s municipalities, leaving them helpless to act.
It is concerning to see the level of government closest to the citizens, and bearing prime functional responsibilities, face challenges of such magnitude. Even more concerning is the lack of recognition of local governments as powerful entities capable of improving lives at scale through the powers vested in them. While the role of the federal and provincial governments is important for driving national growth, municipalities overwhelmingly fulfill the more immediate needs of daily life that define our day-to-day well-being. Hence, empowering municipalities with resources to invest in pressing municipal needs is imperative.
The federal government, media, policy professionals, and most importantly, the public, need to view municipalities as important stakeholders whose performance greatly shapes the quality of lives we live. It is of critical importance that local governments are given their due means to perform their functions and make the interventions that are the need of the hour. Failing to do so will leave our cities vulnerable and depress the already poor quality of urban life in many parts of the country. Though reforms are underway, their pace is below the mark and stakeholders’ efforts lack the required enthusiasm. Municipalities are in a race against time, and we must act promptly to use the window of opportunity before the time runs out.
The author is research fellow at the Nepal Economic Forum
How queer inclusion can benefit Nepal’s businesses
The fight for LGBTIQA+ rights has taken root globally. A number of countries have witnessed major public movements for marriage equality and legal recognition of the queer community. While same-sex marriage and homosexuality still remain illegal in many nations, there is increasing pressure on governments to acknowledge the issues faced by LGBTIQA+ individuals.
Nepal has set itself apart in providing legal recognition to the community, thanks to progressive court rulings that have upheld the rights of queer individuals. While this has earned the country international recognition, the community still has a long way ahead of itself. As these challenges persist, new perspectives are emerging on how LGBTIQA+ rights are viewed. Queer rights are generally associated with human rights, but with increasing data on the economic impacts of LGBTIQA+ inclusion, there is a growing case for businesses to embrace inclusivity and reap the benefits it offers.
Monetary gains
Corporations around the world have supported the cause for LGBTIQA+ rights (excluding countries where homosexuality is illegal). In the West, small businesses and multinational companies have embraced the rainbow and have emerged as important advocates for the community. The fight for justice and equality has driven corporations to join this movement and build pressure on their respective governments. But beyond the ideals of social justice, there are tangible economic benefits that businesses stand to gain from inclusive policies in the workplace.
Research shows that LGBTIQA+ inclusive policies lead to enhanced productivity, higher innovation, and better financial performance of businesses. More inclusive firms report up to 35 percent higher profits compared to their non-inclusive counterparts. Inclusive workplaces also attract the top talents in the market given the increasing preference of workers for safer and diverse workplaces.
Zooming out to a macro level, LGBTIQA+ inclusion delivers benefits across the economic landscape. Inclusive policies not only boost economic growth and productivity levels but also positively impact human development indicators. The resulting benefits on human capital outcomes drive profitability for firms, as they can take advantage of better labor market conditions and attract diverse talents.
Performance gains
Besides monetary gains, firms also benefit in broader organizational metrics like employee engagement, motivation, and retention. When employees feel valued and respected, they are better able to deliver on their work. Feeling confident about one’s identity naturally increases the productivity and motivation levels of workers, allowing them to connect better with fellow colleagues.
It is no surprise that an inclusive workplace attracts the best talent and witnesses lower turnover rates. Everyone prefers a workplace where they can bring their full selves to work and don’t have to worry about their looks, preferences, and backgrounds. Fostering an inclusive workplace also has the advantage of the reduced legal burden of dealing with complaints of discrimination and harassment.
Research from McKinsey shows that companies embracing Diversity, Equity, and Inclusion are 21 percent more likely to outperform on profitability and face fewer legal issues related to discrimination. Hence, beyond the monetary gains that LGBTIQA+ inclusion offers, businesses stand to benefit from the wider impacts inclusive policies have on their organizational functioning.
Opportunities for businesses
The global corporate world has actively embraced queer inclusivity but Nepali businesses are yet to show the same level of enthusiasm. Nepal has a relatively strong legal recognition of the queer community, which puts domestic businesses in an advantageous position to leverage the talents of queer workers and bring fresh perspectives to their organization. They have the opportunity of hiring queer folks and bringing vibrancy to their firms, while also significantly increasing their problem-solving and innovative capacity. All of these potential benefits are supported by solid research. LGBTIQA+ inclusion, and by extension, all forms of inclusion, will be the competitive advantage that organizations can bank on for their future success.
Though Nepal’s corporate ecosystem is still in its infancy, the existing large businesses need to lead the way in prioritizing DEI and leveraging the benefits it offers. The banking industry can play an especially important role in this area given its impressive performance with female labor employment in the sector. Extending this achievement to other gender identities and sexual orientations can give the industry a further boost in its performance and profitability, not to mention the international recognition that will come with it.
With the legal rights of the queer community increasingly being recognized in Nepal, large domestic firms can take the lead in writing the next chapter of LGBTIQA+ equality. Beyond serving their own interests, LGBTIQA+ inclusion can change the lives of thousands of Nepalis, while also significantly contributing to the country’s economic and social development. Inclusion in the workplace is a win-win situation—for firms, for employees, and for the country—and it’s time the stakeholders gave the issue its due attention.
Metropolitan cities’ finances or local taxes for development
The fiscal year 2024/25 has commenced, and almost all local governments have presented their budgets. Municipalities are now busy preparing their procurement plans to ensure a smooth budget execution during the year. As budget sizes have grown, there is an expectation among the public for better service delivery and improved development outcomes. At the local government level, the country’s six metropolitan cities command the largest budgets. Given their larger land area and population size, they receive a higher share of grants from the federal government. Besides federal grants, metropolitan cities generate a significant amount of own-source revenue (revenue generated by levying local-level taxes).
Own-source revenues (OSR) have become a major source of financial resources for metropolitan cities and now comprise a large share of their budgets. For the ongoing fiscal year, Kathmandu Metropolitan City presented a budget of Rs 25.7bn, of which 75 percent came from OSR. Among the six metropolitan cities, Kathmandu and Lalitpur have the highest OSR capacity while Biratnagar and Birgunj have the least. The direct effect of this capacity is on the size of the budgets metropolitan cities present. In the current fiscal year, metropolitan cities with higher OSR have presented the largest budgets while those with weaker OSR have the smallest budget sizes. The resulting difference in budget sizes (which runs into billions) has led residents of Birgunj and Biratnagar to feel neglected by the federal government in budget allocation.
Locals of Birgunj, including the city’s chief, have alleged the federal government of allocating a smaller budget to the city despite the state collecting a large share of its customs revenue from the Birgunj Customs Point. They blame the federal government’s disregard for the city as the main reason behind its consistently small budget size. However, evidence suggests otherwise. Analysis of the last five years’ data on aggregate intergovernmental grant transfers (IGGT) to metropolitan cities suggests that Birgunj is the second-highest recipient of federal grants, sitting only behind Pokhara. The real reason why the budget size of Birgunj, and by extension Biratnagar, has not been able to take off like other metropolises is because of poor OSR capacity. It is easy for local government chiefs to shift the blame to the federal government, but it is difficult to boost taxation and bring more people under the tax ambit.
Other metropolitan cities like Bharatpur and Pokhara have robust and growing budget sizes, thanks to their success with effectively utilizing the taxation rights available to local governments. These cities command budgets more than double the size of Biratnagar and Birgunj, which have seen slower progress with OSR. For the ongoing fiscal year, the budget size of Pokhara and Bharatpur metropolises are Rs 7.5bn and Rs 7.4bn respectively, while the same figures for Biratnagar and Birgunj are Rs 3.5bn and Rs 2.9bn. Taken over the long term, such a large difference in budget sizes can result in significant disparities in development levels across metropolises. The resulting variations in local infrastructure, quality of life, and economic opportunities could affect migration trends, drawing people to better-performing metros while making other cities less desirable. Such migration patterns could induce inequity tendencies given that a growing population in more prosperous metros would lead to a wider tax base and higher OSR capacity; thus making them more developed.
The discussion about metropolitan cities’ budgets and their OSR is important because it has a direct bearing on the quality of life of the growing Nepali urban population. As cities expand and urban demands increase, the need for robust financial management becomes more critical. Providing for local infrastructure, creating planned urban settlements, and undertaking big-ticket projects like waste management require larger budget envelopes for the metropolises. With the adoption of federalism, local governments are now responsible for primary education, healthcare, and sanitation, meaning their finances also impact human development indicators. The large population residing in the metropolises lends further importance to this issue, as their budget performance directly affects the lives of a vast number of people.
To avoid potential inequities and to strengthen Nepal’s urban centers, metropolises need to take the issue of OSR more seriously. It is understandable that federalism is still taking root in Nepal and that local governments are still in the process of fully assuming their responsibilities, but the more they delay exploiting their taxation rights, the slower growth they will witness in the long term.
It is a well-established fact that local governments are not fully utilizing their taxation powers, particularly business tax and house rental tax. Poor tax administration, lack of proper databases, and insufficient institutional capacity drive the underutilization. In order to enhance their revenues, local governments must conduct detailed studies on the scope of their OSR potential. Collecting data and maintaining accurate records of taxpayers, businesses, and property owners is essential to improve tax management. A community engagement strategy that improves awareness among people about their tax duties can also enhance OSR capacity. Given there is ambiguity on taxation rights between provincial and local governments on certain taxes, the federal government needs to play a more active role in clarifying these rights. A few donor-funded programs capaciting sub-national governments on tax administration have been introduced, but their coverage remains limited.
Hence, local governments, and particularly laggard metropolises, need to pay more attention to their own-source revenues. While some problems arise from inadequate action on the part of the federal government, a lot can be done by local governments themselves, as some metropolises have shown. Going forward, the performance of Nepal’s metropolises, and by extension all local governments, will be greatly determined by how well they perform on this front. The emerging urban centers will be the driver of Nepal’s future growth and stakeholders must work collectively for their financial empowerment.
