17 Local Governments Borrowed Without Federal Approval, Fiscal Commission Raises Concerns

17 Local Governments Borrowed Without Federal Approval

Nepal’s fiscal federalism framework has come under renewed scrutiny after the National Natural Resources and Fiscal Commission reported that 17 local governments mobilized internal loans without obtaining the required consent from the Government of Nepal.

According to the commission’s latest annual report, the 17 local governments collectively mobilized Rs. 33.87 million in loans from the Town Development Fund during fiscal year 2025/26.

More significantly, seven local governments had not included the borrowing in their annual budgets, raising concerns about fiscal discipline, budget transparency and compliance with Nepal’s legal framework.

The findings highlight the importance of stronger coordination between federal, provincial and local governments as Nepal continues to implement fiscal federalism.

Local Governments Required Federal Approval Before Borrowing

Nepal’s Intergovernmental Fiscal Arrangement Act, 2017 requires provincial and local governments to obtain the consent of the Government of Nepal before taking internal loans.

The law also requires borrowing proposals to provide details including:

• The project for which the loan is required
• Expected outputs and outcomes
• The repayment plan
• The lending institution
• Other relevant financial information

The objective is to ensure that subnational borrowing remains within sustainable limits and is directed toward economically viable projects.

The National Natural Resources and Fiscal Commission has also confirmed that provincial and local governments must obtain federal approval before mobilizing internal loans.

Rs. 33.87 Million in Loans Mobilized

The commission reported that 17 local governments borrowed Rs. 33,887,154.30 through the Town Development Fund during fiscal year 2025/26.

However, the Ministry of Finance reportedly had no record of any of those local governments seeking the required approval before borrowing.

This raises questions about whether proper institutional procedures were followed before the debt was incurred.

The issue is particularly important because local government borrowing ultimately affects public finances and the overall debt-management framework.

Seven Local Governments Did Not Include Loans in Their Budgets

Another major concern identified by the commission is that seven local governments mobilized loans without including the borrowing in their annual budgets.

Annual budgets are intended to provide a transparent picture of expected revenue, expenditure and financing requirements.

When borrowing occurs outside the approved budget framework, it can make it more difficult for elected representatives, citizens and oversight institutions to understand the government's actual financial position.

The commission has therefore repeatedly recommended that local governments estimate their borrowing requirements in their annual budgets and mobilize loans only within the approved limits.

Local Government Borrowing Limit

For fiscal year 2025/26, the commission had recommended that local governments could mobilize internal borrowing of up to 12% of the combined amount of revenue-sharing receipts and internally generated revenue, subject to the applicable framework.

Borrowing was intended to be directed toward projects aligned with national, provincial and local policies and plans.

The commission also emphasized the importance of conducting cost-benefit analysis before using internal borrowing for projects.

For larger projects, financial indicators such as Internal Rate of Return (IRR) and Net Present Value (NPV) can help determine whether borrowing is economically justified.

Two Municipalities Exceeded the Recommended Limit

The report also identified cases in Morang district where two local governments reportedly mobilized borrowing above the limit recommended by the commission.

Exceeding recommended borrowing ceilings can increase financial risks for local governments, particularly where repayment capacity is weak or borrowed funds are directed toward projects that do not generate sufficient economic returns.

Responsible local government borrowing should therefore consider both the immediate financing requirement and the long-term ability to service debt.

Borrowing Should Focus on Productive Investment

The commission has stressed that internal borrowing should not simply be used to finance routine expenditure.

Instead, borrowed funds should preferably support projects capable of generating long-term economic and social benefits.

Priority areas can include:

• Infrastructure development
• Capital formation
• Employment generation
• Local economic growth
• Revenue-generating projects
• Essential public infrastructure
• Projects with measurable long-term benefits

This approach can help ensure that debt contributes to productive investment rather than creating an additional burden on future budgets.

Questions Over Local Government Guarantees

The commission has also raised concerns about cases in which local governments acted as guarantors for loans taken by consumer organizations from the Town Development Fund.

According to the report, some local governments provided guarantees for loans connected with projects located within their jurisdictions.

However, the commission noted that existing laws governing local governments do not clearly provide authority for such guarantees.

This creates another area requiring legal and institutional clarification.

Nepal Needs Better Public Debt Information Systems

The commission has recommended developing an integrated electronic information, accounting and reporting system covering internal borrowing and public debt mobilized by the federal, provincial and local governments.

Such a system could improve:

• Public debt transparency
• Debt monitoring
• Budget accountability
• Loan repayment tracking
• Fiscal risk management
• Coordination between government levels

The commission has suggested that the system could be operated through the Public Debt Management Office while also providing access to the commission.

Why Local Government Borrowing Matters for Nepal’s Economy

Local government borrowing is an important part of Nepal’s evolving fiscal federalism.

Borrowing can help municipalities finance infrastructure and other productive projects when properly planned and managed. However, uncontrolled borrowing can create fiscal risks.

The key issue is therefore not simply whether local governments borrow, but how much they borrow, why they borrow, whether they can repay the debt and whether the borrowing follows the law.

Transparent borrowing within approved limits can support economic development, while borrowing outside the budget and approval framework can weaken fiscal accountability.

What This Means for Nepal’s Financial Sector

Developments in public finance can also influence Nepal’s broader economic environment, including interest rates, liquidity, government expenditure, investment confidence and the capital market.

Investors following the NEPSE, banking sector and infrastructure-related companies should pay attention to changes in government borrowing, fiscal policy and public investment.

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Conclusion

The latest fiscal report highlights important weaknesses in the management of local government borrowing in Nepal.

The mobilization of Rs. 33.87 million by 17 local governments without the required federal consent, along with the failure of seven local governments to include borrowing in their annual budgets, demonstrates the need for stronger compliance and monitoring.

Nepal’s fiscal federalism will become more sustainable when local governments combine greater financial autonomy with stronger accountability, transparent budgeting and disciplined debt management.

For investors and financial-market learners, understanding fiscal policy, government borrowing and public debt is also an important part of understanding Nepal’s wider economic and investment environment.

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FAQ: Local Government Borrowing in Nepal

1. Can local governments in Nepal take internal loans?

Yes. Local governments can obtain internal loans within limits recommended by the National Natural Resources and Fiscal Commission, but they must obtain the required consent of the Government of Nepal before borrowing.

2. How much did the 17 local governments borrow?

The 17 local governments reportedly mobilized a combined Rs. 33,887,154.30 in internal loans during fiscal year 2025/26.

3. Did all 17 local governments receive federal approval?

The commission reported that it had not received evidence that any of the 17 local governments had sought the required consent from the Ministry of Finance before mobilizing the loans.

4. How many local governments failed to include borrowing in their budgets?

According to the report, seven local governments mobilized loans without including the borrowing in their annual budgets.

5. What is the purpose of the National Natural Resources and Fiscal Commission?

The commission plays an important role in Nepal's fiscal federalism, including recommending revenue-sharing arrangements, fiscal transfers and internal borrowing limits for different levels of government.

6. What should local government loans be used for?

Internal borrowing should preferably finance productive projects involving capital formation, infrastructure development, employment generation, increased income and long-term economic benefits.

7. Why is local government debt important?

Local government debt affects public finances and future repayment obligations. Proper borrowing can finance productive infrastructure, while excessive or poorly managed borrowing can create fiscal risks.

8. What is fiscal federalism in Nepal?

Fiscal federalism refers to the distribution of financial responsibilities, revenues, expenditure responsibilities and fiscal resources among Nepal's federal, provincial and local governments.

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