ADB Approves $100M Loan to Strengthen Nepal’s Fiscal Governance and Local Services

The loan represents a critical step in Nepal’s ongoing transition to a full federal governance system, in which local institutions play an increasingly vital role in shaping development outcomes.

The Asian Development Bank (ADB) has approved a $100 million policy-based loan to support far-reaching public financial management (PFM) reforms in Nepal. The initiative aims to strengthen fiscal sustainability at the national level while empowering provincial and local governments with improved planning, revenue mobilization, and service delivery capacities.

The loan represents a critical step in Nepal’s ongoing transition to a full federal governance system, in which local institutions play an increasingly vital role in shaping development outcomes.

Strengthening Nepal’s Fiscal Governance and Federal System

According to ADB Country Director for Nepal Arnaud Cauchois, the program will catalyze structural reforms needed to reinforce Nepal’s fiscal foundations:

“The program will catalyze reforms which will strengthen fiscal sustainability, improve governance, and empower local governments. By enabling local governments to plan and raise revenues more effectively, it will reduce dependency on central transfers, advance Nepal’s federal governance framework, and build long-term resilience.”

The initiative is closely aligned with the Government of Nepal’s Five-Year Plan and complements ADB’s ongoing support toward modernizing fiscal administration, decentralizing public services, and creating a more predictable and transparent budgeting process.

Reforming National-Level Fiscal Management

At the national level, the program targets institutional weaknesses in fiscal planning, expenditure management, and monitoring of public enterprises. These reforms are expected to help Nepal expand fiscal space and reduce vulnerability to financial shocks.

Key components include:

1. Operationalizing Nepal’s First Fiscal Risk and Strategy Report

This landmark report will map and quantify fiscal risks—including from contingent liabilities, SOEs, and infrastructure financing gaps—allowing policymakers to make more informed decisions.

2. Assessing Contingent Liabilities of State-Owned Enterprises (SOEs)

SOEs remain central to Nepal’s economy but pose fiscal risks due to operational inefficiencies and weak governance. The reform introduces systematic assessment tools and strengthens oversight.

3. Institutionalizing Annual Borrowing Plans

These plans will align borrowing activities with Nepal’s medium-term debt strategy, helping to manage debt responsibly, reduce financing risks, and improve predictability for investors and development partners.

4. Upgrading Governance Rules for Public Enterprises

By implementing governance, management, and loan investment policies for SOEs, the government aims to increase transparency, reduce financial losses, and foster corporate discipline.

5. Enhancing Monitoring Through Digital Systems

The Public Enterprises Management Information System will be upgraded to allow real-time performance monitoring of SOEs, improving accountability.

6. Fully Operationalizing the Public Financial Management Reform Strategy

This includes integrating PFM systems across ministries to standardize financial reporting, reduce leakages, and ensure better public expenditure outcomes.

Overall, these national reforms are designed to reduce fiscal risks and improve the efficiency and effectiveness of public spending.

Mobilizing New Development Finance for Infrastructure

One of the most ambitious components is the establishment of an Alternative Development Financing Fund, which seeks to mobilize:

• Domestic capital (pension funds, insurance assets)

• International private investors

• Remittance-backed investment instruments

• Blended financing structures

This fund will support large-scale, climate-resilient, and economically strategic infrastructure projects, providing long-term financing options beyond traditional government borrowing.

Strengthening Provincial and Local Governments

The transition to federalism has placed new responsibilities on Nepal’s provinces and municipalities, making financial and administrative capacity-building essential. The ADB-supported reforms include:

1. Digitizing Taxpayer Registration Systems

Provincial governments will adopt digitized systems to streamline taxpayer identification, improve compliance, and reduce administrative burdens.

2. Operationalizing Local Revenue Administration Systems

Municipalities will move to fully digitized platforms for tax billing, collection, and accounting—helping them diversify revenue sources and reduce leakages.

3. Implementing Public Asset Management Systems

This will allow local governments to track, maintain, and leverage public assets, from land and buildings to infrastructure networks.

4. Developing Market-Based Property Valuation Criteria

This enables fairer and more predictable property taxation—a crucial revenue stream for municipalities.

5. Mapping Natural Resources for Revenue Potential

Local governments will assess natural resources—such as forests, minerals, water resources, and tourism sites—to enable sustainable and responsible revenue generation.

6. Creating Local Project Banks and Medium-Term Expenditure Frameworks

These tools will help local governments prepare gender-responsive and climate-responsive project pipelines and make strategic, evidence-based investment decisions.

Together, these reforms are expected to expand local revenue bases, improve service delivery, and strengthen financial autonomy.

Supporting Nepal’s Long-Term Development Vision

The ADB’s investment supports Nepal’s broader efforts to modernize its economy, achieve fiscal federalism, and build resilience amid economic shocks, climate change, and rising development needs.

By expanding fiscal space, enhancing public-sector governance, and empowering local institutions, the program aims to deliver:

• More predictable budgets

• Stronger public investment outcomes

• Improved debt sustainability

• Greater accountability across all tiers of government

• More responsive service delivery for citizens

As Nepal continues building its federal governance system, the reforms backed by this ADB loan represent a crucial foundation for long-term stability, inclusive growth, and sustainable development.