Fiscal federalism progressing at a moderate pace, further reforms needed to strengthen outcomes

Nepal’s legal and institutional reforms under fiscal federalism and public financial management at the provincial and local levels have continued but at a moderate pace, says the World Bank’s Nepal Fiscal Federalism Update 2024.

A reduction of available financial resources in fiscal year 2023 for provincial and local governments, mainly due to a decrease in federal revenue, led to the first fiscal deficit at the subnational level since the outset of fiscal federalism in 2017, it says, adding that to enhance the outcomes of fiscal federalism and public financial management including improved revenue generation for all three tiers of government, the Fiscal Federalism Coordination Division at the Finance Ministry was designated to coordinate public financial management reform efforts and the preparation and implementation of a Fiscal Federalism Roadmap.

The report provides a comprehensive review of the progress of fiscal federalism in Nepal. The recommendations are well aligned with our national-level vision on smoothing the fiscal transfers to help subnational governments carry out their responsibilities effectively. "The report also informs and supports our ongoing efforts to clarify responsibilities among the three tiers of government and advance fiscal federalism,” said Chief Secretary Dr Baikuntha Aryal.

Building on the first edition of the Nepal Fiscal Federalism Update, the 2024 edition explores in-depth the key pillars of fiscal federalism in Nepal: Revenue Assignment and Administration; Expenditure Assignment and Administration; Inter-Governmental Fiscal Transfers; Borrowing and Capital Finance; and Fiscal Revenue from Natural Resources.

It recommends specific measures to upgrade the Inter-Governmental Fiscal Transfer system and establish a consolidated public financial management performance database that includes data from the subnational levels to enhance evidence-based decision making and transparency.

“The report highlights the need to upgrade institutional arrangements for the Intergovernmental Fiscal Transfers system to make the transfers more needs-based and timely, and to increase the fiscal autonomy of provincial and local governments, in order to improve fiscal federalism outcomes,” said  chairman of the National Natural Resources and Fiscal Commission Balananda Paudel, on the occasion.

The report also recommends strengthening provincial and local-level institutional arrangements for fiscal federalism and public financial management operations, including actions to improve budget credibility to improve delivery of services by subnational governments.

“Fiscal Federalism is a foundation for sustained service delivery by provincial and local governments," World Bank country director for Maldives, Nepal, and Sri Lanka Faris Hadad-Zervos said, adding that they need adequate financial resources and the ability to make spending decisions at the subnational level, in the spirit of federalism and the Constitution. "The World Bank is committed to supporting the Government of Nepal, in close collaboration with other development partners, to further solidify fiscal federalism in Nepal."

Nepal's banking industry leads the region in female representation but significant barriers remain in having more women in leadership roles: IFC Report

With 46 per cent female representation in its entry-level workforce, the banking industry in Nepal is ahead of other countries in South Asia in achieving gender parity. However, only 23 per cent of senior management roles are held by women, according to a new IFC report that examines gender diversity at six leading banks in Nepal.

The study—among the first of its kind in the region— identifies opportunities that can enable more women to advance to senior roles in the banking industry in South Asia.

This multi-country study, Women’s Advancement in Banking in Emerging South Asian Countries, focuses on commercial banks in Bangladesh, Nepal, and Sri Lanka, where women constitute 30 per cent of the banking sector’s workforce compared to the global average of 52 per cent, the report reads, underlining how several barriers—inequitable hiring, inadequate professional development, lack of fair evaluations, sociocultural constraints, and others—curtail women’s career growth prospects across the region.

“Diversity, equity, and inclusion are central to IFC’s work values," IFC country manager for Nepal, Bangladesh, and Bhutan Martin Holtmann said, adding that through nuanced, data-driven insights emerging from this new report, it is hoped to deepen the industry discourse around steps that need to be taken to improve the status of women in the banking workforce across South Asia.

In Nepal, women hold 42 per cent of all positions in surveyed commercial banks. Comparable figures for  Sri Lanka and Bangladesh are at 38 per cent and 18 per cent respectively. In senior management roles, women hold 23 per cent of executive positions in Nepali banks, compared to 20 per cent in Sri Lanka and 12 per cent in Bangladesh, the report adds.

Past studies have shown that commercial banks that have 15 per cent or more women in senior manager or higher roles, command up to 33 per cent higher return on equity than banks that do not. A growing body of evidence further links an increase in women’s representation in organizations to better performance on business metrics.

Accordingly, IFC's key findings and recommendations intended to help industry actors—executive managers in commercial banks, policymakers, industry bodies, and investors—direct their efforts to boost women’s representation in leadership in the banking industry.

The report recommends targeted efforts in four areas by banks and industry actors. These include establishing clear organisational commitments for gender diversity, the support system for women to reach leadership positions, policy changes to ensure workplace safety, and initiatives to support women's professional development and work-life balance.

“Nepal has a strong legal framework to promote women’s economic participation in the country. And these provisions are more comprehensive than other countries in South Asia,” said Holtmann. “While these progressive policies have allowed Nepal to be a leader in the region, more needs to be done to increase the number of women in leadership positions and to reach gender parity.”

IFC’s $56 million loan to Global IME Bank in February 2024 earmarked 25 per cent towards supporting women-owned small and medium enterprises (SMEs). Additionally, IFC investment in various banking and financial sector clients such as NMB Bank, Sanima Bank, and Siddhartha Bank  have been able to provide economic opportunities, and financial services to SMEs including those led by women.

MCA-Nepal signs contract to construct 400 kV New Butwal Substation at Nawalparasi

Though it took a long, Millennium Challenge Account-Nepal (MCA-Nepal) has awarded and signed a contract with Linxon India Pvt Ltd for the construction of the 400 kV New Butwal Substation in Nawalparasi (Bardaghat Susta West) district in Lumbini Province.

In a milestone achievement, the 400 kV Gas Insulated Switchgear (GIS) substation will be constructed within the contract duration of 39 months, according to a press note issued by the MCA Nepal.

Nepal Electricity Authority (NEA) managing director (MD) Kul Man Ghising and the US ambassador to Nepal Dean R Thompson, local authorities and elected representatives were also present at the signing ceremony in Bhumahi, Nawalparasi (Bardaghat Susta West) today.

"The US government is committed to working with the government of Nepal to ensure that the compact delivers on Nepal’s energy needs," ambassador Thompson said, addressing the event. "The 400 kV New Butwal Substation will improve Nepal’s transmission capacity contributing to reliable and affordable electricity for household consumption, expanded commercial and industrial enterprises and cross-border electricity trading."

“The 400 kV substation has been a priority for NEA and will supplement the existing 220 kV substation to significantly increase cross-border energy trade in the region,” NEA managing director Kulman Ghising said, on the occasion.

During the event, MCA-Nepal executive director Khadga Bahadur Bisht highlighted the overall progress being made in the implementation of the MCC Nepal Compact. "MCA-Nepal is expediting all works for the construction of the transmission lines and substations under the Electricity Transmission Project," he said, adding that the MCA-Nepal is at the final stages of the procurement process to sign the contract for the construction of the remaining two substations as well.

Along with this substation, MCA-Nepal is constructing two other substations in Ratmate, Nuwakot district and Damauli, Tanahun district under the Electricity Transmission Project funded by the US government’s Millennium Challenge Corporation (MCC) and the government of Nepal. The contractors for the remaining two substations are being selected.

The MCA-Nepal Board, chaired by the finance secretary, decided in its March board meeting to advance the 18-km Nepal portion of the New Butwal-Gorakhpur power transmission line to facilitate timely initiation of cross-border power trade as outlined in the agreement with India.

However, it took a long time due to technical problem in contract, and also tug-of-war between the NEA and MCA-Nepal. The tug of war has, according to the sources, created doubt on the successful completion of the MCC project within 5-year timeline, which is a fixed time period of the project.

World Bank approves $80 million to strengthen financial sector, increase access to financial services

May 6

The World Bank’s Board of Executive Directors today approved an $80 million development policy credit for Nepal to strengthen the stability of the financial sector, diversify financial solutions, and increase access to financial services.

The third Finance for Growth Development Policy Credit aims to improve the functioning of the financial sector to support private sector-led growth. The operation will strengthen the supervision of the banking and insurance sectors in Nepal and foster financial product innovations in capital, insurance, and disaster risk markets, claims a press note issued by the World Bank.

The operation will also increase financial inclusion through digitalisation, enhanced credit infrastructure and improved financial literacy, with a focus on women entrepreneurs, it adds.

“This project supports Nepal’s green, resilient, and inclusive development and will help create an enabling environment for private investment to contribute to Nepal’s economic growth, particularly benefiting the poor and vulnerable,” said World Bank country director for Maldives, Nepal, and Sri Lanka Faris Hadad-Zervos.

The operation also supports Nepal's climate agenda by, for example, enhancing supervision of climate risks by requiring disclosures of climate-related risks and impacts of the banking sector portfolio; introducing risk-informed pricing for insurance products, including climate risks; establishing a framework for the issuance of green bonds; and integrating climate-related mitigation and adaptation commitments into credit guarantee products.

"This operation supports the government’s transformative financial sector reform agenda to promote private sector-led growth," World Bank task team leader for the project Tatsiana Kliatskova said, adding that the reforms in banking, insurance, and capital markets are instrumental for the sector’s resilience and the critical role it plays to enable private capital mobilisation.