Institutional Economic Capacity and Decentralization Outcomes in Nepal

This case study explores the linkage between institutional capacity and decentralization outcomes in Nepal. After the 2015 Constitution, Nepal became a federal country with three levels of government: federal, provincial, and local. The Constitution assigned considerable powers to 753 local governments and seven provincial governments. But the transfer of responsibilities has not been followed by the transfer of adequate institutional capacity. We look at institutional capacity, human resources, financial management systems, technical expertise, and governance structures as one of the factors that influence the outcomes of decentralization in this paper. The analysis, based on publicly available data from the Ministry of Federal Affairs and General Administration, National Natural Resources and Fiscal Commission, World Bank, Asian Development Bank, and International Monetary Fund, shows that institutional capacity is far from uniform across local governments. Larger urban municipalities have more capacity than the smaller rural municipalities, which have difficulty in carrying out basic functions. The data indicate that many local governments lack trained personnel, especially in financial management, engineering, and planning. Budget execution rates are poor; for example, several local governments spent less than 60 percent of their capital budgets. There is little own-source revenue mobilization, with the majority of local governments depending on federal transfers for more than 80 percent of their budgets. The paper argues that Nepal's decentralization challenge is essentially one of the gaps between responsibility and capacity. It offers a capacity-building framework comprising specific investments in human resources, financial management systems, technical support, and governance strengthening. The paper ends with recommendations for the federal government, provincial governments, development partners, and local governments themselves.