Disaster Resilience and Local Fiscal Capacity in Nepal

Nepal is highly vulnerable to earthquakes, floods, landslides and other natural hazards. The federal constitution of 2015 vested legal responsibility for disaster risk reduction in 753 local governments. However, it is difficult to fulfil responsibility without adequate financial resources. This case study looks at whether local governments in the most disaster-prone parts of Nepal have enough fiscal space budgetary headroom to invest in risk reduction before disaster strikes. Based on government budget documents and reports of the National Natural Resources and Fiscal Commission and international studies, the paper reveals a very narrow fiscal space of local governments for disaster risk reduction. Most local governments collect only a fraction of their own revenue, depend on federal transfers for 90 percent or more of their budgets, and spend about 1 percent of their budgets on disaster risk reduction. The fiscal transfer formula does not explicitly include disaster risk. That means municipalities in high-hazard areas often have far less money than they need to spend on prevention measures like river embankments, retaining walls, and earthquake retrofitting. The paper concludes with recommendations on making fiscal transfers risk sensitive, establishing a specific conditional grant for disaster risk reduction, strengthening local own-source revenue, building technical capacity and improving transparency.