Financing Local Governance: Insights From Neelakantha Municipality

Abstract

This study explores the financing of local governance in Nepal, focusing on Neelakantha Municipality to evaluate fiscal federalism under the country’s three-tier governance system. Analyzing revenue and expenditure data from FY 2077/78 to 2079/80, the research reveals a significant dependence on intergovernmental transfers, which comprised over 55% of total revenue, while internal revenue generation declined to as low as 2.8%. Despite consistent budget surpluses, the municipality struggled with capital expenditure execution, achieving as little as 61% in some years. Using indicators such as the Fiscal Autonomy Ratio (FAR), Local Fiscal Dependency Ratio (LFDR), and Financial Autonomy Index (FAI), the study identifies weak fiscal autonomy and increasing external dependence, with FAR values ranging from 4.0% to 38.5%, FAI declining to 18.0% by FY 2079/80, and LFDR trending upward. These trends reflect administrative inefficiencies in revenue collection and budget implementation. Although Nepal’s legal provisions for fiscal federalism are robust, the study concludes that implementation gaps—such as vertical and horizontal fiscal imbalances, overlapping tax structures, and limited local capacity—continue to undermine effectiveness. It recommends enhancing local revenue administration, improving expenditure management, and strengthening performance monitoring. The case of Neelakantha Municipality underscores the need for governance reforms to support institutional design and realize the goals of meaningful fiscal decentralization.