Education finance in Nepal has undergone significant change since its democratisation in the 1990s, especially following the transition to a federal system with the establishment of the new constitution in 2015.[1] Along with the shift to a federal system, authority for educational administration has been transferred to 753 local governments,[2] but on the ground, confusion has arisen over the prioritisation of budget distribution. Many local governments tend to prioritise budget allocation to visible 'hard' infrastructure development, such as road construction, rather than investment in 'soft' elements, such as improving education quality.[3] In addition, local governments lack sufficient human resources to manage the education budget professionally, and their uncertain financial management, which relies solely on subsidies from the central government, even widens the educational gap among regions.[1][3]

The Nepali education fund is supported by three major sources of funding: government expenditure, household contributions, and aid from international development partners.[1] The Nepali government spends about 10-15% of its national budget on the education sector, which is equivalent to about 4% of its GDP.[4][1] However, it is also noted as a cause of educational inequality that the proportion of household private expenditure remains high, particularly because it relies on private schools.[5] The reason household spending remains high is a structural problem that forces Nepali people to choose private schools due to concerns about the quality of public schools. In Nepal, there is a remarkable tendency for particularly highly educated and wealthy households in urban areas to send their children to private schools and spend additional money to hire private tutors.[6] On the other hand, low-income or low-caste households in rural areas are forced to depend solely on public schools, even though they face a lack of teachers and ageing infrastructure.[7][6] This dual structure of education directly links households' economic status to the gap in educational opportunities, and expanding household spending even stabilises social inequalities.

Prioritising the educational budget within the limited financial space is the main debate.[1] On the one hand, it is argued that the burden of external debt repayment is pressing down on public investment in education.[8] On the other hand, international institutions emphasise the efficient allocation of funding and the improvement of governance through education sector plans, including the School Sector Development Plan (SSDP).[9] Organisations, such as the Tax Justice Network, estimate that the loss of tax revenue from illicit capital outflows directly causes the loss of educational opportunities, and there are several perspectives on these estimates and methods.[10]

Total country spending on education: government, household, aid and private sector

Education expenditure in Nepal is funded by three major sources: government spending, household spending, and international development aid.[1] According to analyses by UNESCO, the Nepali education fund heavily relies on household contributions.[11]

In the early 2020s, household spending accounts for about 3.2% of GDP, nearly half of total education spending.[11][7] Especially, in upper secondary education, there is also an estimation that the proportion of households spending will increase to 71%, which supports the lack of public spending.[4][7]

International aid has played a significant role in the Nepali education budget, and over the last 10 years, about 34% of the central government's education budget has been funded by external sources, such as loans and subsidies.[7][4] The private sector mainly contributes through the operation of private schools, and households' burden is increasing as the attendance rate in private schools rises, driven by concerns about the quality of public schools.[12] In recent years, the number of low-cost private schools targeting the poor has rapidly increased. Under this tendency, parents are disappointed by the high teacher absence rate and facility deficiencies in public schools and send their children to private schools despite the economic pressure on their daily lives. However, such an expansion of private schools, on the one hand, allows households with significant economic power to access high-quality education, but, on the other hand, accelerates the polarisation of education, leaving households in the lower class behind in low-quality public schools. This is a significant concern that could perpetuate not only the current gap but also wage gaps and social class divisions in the future labour market.[12]

Government spending on education

The Nepali government's educational spending has been gradually increasing over the last 20 years.[13] According to analyses by UNESCO and the World Bank, the Nepali government has consistently allocated about 10-15% of its national budget to the education sector, comparable to the average level in low- and lower-middle-income countries.[4][13][1]

With the transition to the federal system through the establishment of a new constitution, the executive authority over the educational budget has been largely transferred from the central government to the local governments.[1] However, this transfer of authority does not progress smoothly. The World Bank (2019) points out the lack of financial management capabilities to ensure proper execution of the education budget and the lack of planning expertise in many local governments.[14] As a result, even though the budget is allocated, low budget execution rates (under-spending), in which the budget is not fully used by the end of the year, have become the norm, which causes educational service stagnation. Furthermore, there is a tendency for the distribution of operating expenses (materials fees and facility maintenance fees), except for teacher salaries, to be less prioritised at the local level, thereby hindering the improvement of educational quality.[1] According to the World Bank (2019), during this transition period, although total education spending was maintained, the budget management at the local level and the effectiveness of distributing operating expenses other than teacher salaries are criticised as issues.[14] There was also a temporal increase in infrastructure aimed at the reconstruction of schooling facilities during the recovery period from the April 2015 Nepal earthquake.[15]

Compared with GDP, the proportion of educational spending has increased from about 3% in the early 2000s to about 4% in recent years.[4][16] However, the analysis by UNESCO suggests that Nepal should spend 5 to 6% of its GDP, or 15 to 20% of the government's total spending, on education so that it can achieve SDG4, an international educational goal, which means that there is still room for improvement in its current spending level.[4]

Education aid

The Nepali education sector historically has largely depended on international development aid.[17] Its major donors include multinational development banks, such as the World Bank and the Asian Development Bank (ADB), and bilateral aid countries, such as the European Union (EU), Japan (through JICA), the UK, Norway, and the USA (through USAID).[18] Especially in the School Sector Reform Plan (SSRP) and following the School Sector Development Plan (SSDP), which began after the 2000s, Sector-Wide Approaches (SWAps), in which multiple donors contribute funds to a common fund, have been adopted.[19]

According to OECD data, although educational aid to Nepal temporarily increased rapidly in the recovery period after the 2015 earthquake, it then flattened or even declined due to a shift in donors' priorities.[20][21] The form of aid has also shifted from grant aid to low-interest loans from institutions like the World Bank, which has opened the debate over their impact on future debt burdens.[22]

Another analysis examines the proportion of funds provided that actually reaches Nepal's domestic educational fields.[23] Based on OECD statistics, part of the provided aid is recorded as scholarships for international students or research costs within donor countries; therefore, these funds are not directly integrated into the Nepali domestic budget, the recipient country.[24] This shift in the proportion of aid that stays within donor countries is a significant indicator of aid efficiency.[25]

Debt servicing and education

The Nepali external debt burden has been increasing due to borrowing for recent infrastructure development and disaster recovery.[26] According to data from Debt Justice (formerly the Jubilee Debt Campaign), the proportion of the Nepali government's revenue dedicated to debt repayment, including principal and interest, is cited as one of the factors constraining spending on social services, such as education and health care.[27] The majority of Nepal's debt is low-interest loans (concessional loans) from international institutions such as the International Development Association (IDA), but because of the impact of the rising interest rates and the currency depreciation, the transition of actual debt burden compared with other countries has been getting attention.[28]

There are several perspectives on the relationship between debt repayment and education spending. The UNICEF report (2021) notes that rising debt service costs put pressure on the government's fiscal space, making it difficult to expand the education budget further.[29] According to the IMF's Debt Sustainability Analysis (DSA), the amount of Nepal's external debt repayments is expected to increase further over the next few years. What is important here is the trade-off between debt repayment and social spending. Studies conducted by UNICEF suggest that a considerable proportion of the 1 dollar allocated to debt repayment may put pressure on the education budget.[30] Although the investment in education is an investment for the future, there is a strong criticism that the short-term financial requirements of the current debt repayment sacrifice the long-term national human resource development. Particularly, due to the financial deterioration after the COVID-19 pandemic, there are years in which the growth of the educational budget falls short of the growth in debt repayment, which has become a target of critical analysis, indicating a lower priority for investment in education.[31]

On the other hand, international institutions such as the World Bank emphasise that it is more important how funds raised through debt are efficiently utilised to improve educational infrastructure and its quality than debt repayment itself.[32] Likewise, it is discussed as the problem of priority in the overall allocation structure of the national budget, whether the debt repayment directly reduces education spending, rather than concluding a simple causal relationship.[33]

IMF and World Bank conditionalities and education

Nepal has received substantial financing from the International Monetary Fund (IMF) and the World Bank for many years. In recent years, the IMF has approved nearly $400 million in total loans in response to COVID-19 in 2020 and the Extended Credit Facility (ECF) in 2022.[34] These financings aim to stabilise Nepal's finances and support economic reform, but experts debate the impact of the conditions attached to these financings on public services, including education.[35]

One of the conditions that particularly catches the eye is the public wage bill containment for fiscal restoration. International programs, including those of the IMF, sometimes require restricting the growth of total civil servant salaries to ensure the sustainability of government debt.[36] The analysis by ActionAid (2021) criticises that these control measures of public spending lead to the freeze on new teacher hires and the stagnation in salary levels, and as a result, they contribute to the lack of teachers in public schools and the decline of the quality of education.[7]

On the other hand, the World Bank and the IMF state that such conditions are not intended to reduce the educational budget itself, but rather to reduce inefficient spending and redistribute limited resources to where they are truly needed, thereby strengthening governance.[37] For instance, in the aid provided by the World Bank for the SSDP, it is required not only to invest funds, but also to reform the structure, such as optimising teacher allocation and improving transparency in financial management.[32] Likewise, as for the impact that the intervention by international organisations has on education finance, different evaluations are listed together: from the perspectives of fiscal stabilisation and the quality of actual educational services.[38]

Illicit financial flows and education

Illicit financial flows (IFFs) refer to the funds that are illegally transferred across borders, which include tax avoidance by multi-national companies, commercial tax evasion, and the transfer of criminal proceeds.[39] Institutions like the Global Financial Integrity (GFI) report that the majority of these fund outflows from low-income countries to tax havens, where tax burdens are low, or to major economies in Europe and the U.S.[40]

The Tax Justice Network (TJN) provides a detailed estimate in its annual report, "The State of Tax Justice." According to TJN's data, a large amount of tax revenue is lost because of misappropriation every year in Nepal, and it is estimated to be comparable to a considerable proportion of its education budget.[10]

In the simulation by TJN, it is estimated that tens of thousands of new children could attend school if the lost tax revenue is allocated to educational spending by preventing such misappropriation.[10] In concrete terms, it estimates that if tax revenue is allocated to teacher salaries and the maintenance of basic educational infrastructure, it could be possible to largely expand the current supply of public education.[1]

These figures are estimates based on a certain hypothesis and are not proven facts. Organisations like the OECD point out that the definition and measurement methods for IFFs are highly uncertain[41], and some economists discuss the possibility that TJN's estimation method overestimates the amount of loss.[42] Likewise, there are several perspectives among experts on the direct causal effect of misappropriated funds and the resulting loss of educational opportunities, and on the estimation methods used.

Historical impacts of cuts to education funding

The structure of education spending in Nepal shifted markedly during the Structural Adjustment Program (SAP) conducted from the late 1980s to the 1990s.[43] The SAP was introduced under the condition that Nepal, in a debt crisis, receive loans from the IMF and the World Bank, and its major aim was to reduce the national budget deficit.[44] In this process, while the growth of the education budget was restricted, cost-sharing policy was promoted, including the introduction of tuition fees in public schools, a shift to self-pay for textbooks, and the collection of donations.[7]

The summary of the academic and policy literature shows that such budget cuts and user increases affected the weakest class in society disproportionately and significantly.[45][7] Several studies using the Nepal Living Standard Survey (NLSS) and the Difference-in-Differences approach identify the following impacts by attribute.[6]

By gender: When the economic burden increased, households prioritised education for boys, and the dropout rates of girls relatively increased.[46]

By income level: While those who were rich in urban areas could choose to move to private schools, those who were poor in rural areas were forced to give up education due to the qualitative decline of public schools and an increase in out-of-pocket expenses.

By region and tribe: In the areas where the gap due to the caste system or tribes strongly exists, the budget cuts became the factor that perpetuates and worsens the existing social division.

Due to the presence of disability: Since the investment in special support education was put off, the completion rates of children with disabilities significantly decreased.

The majority of measurement methods used in these analyses were estimation models based on Difference-in-Difference results, which compare data before and after the policy implementation, and large-scale NLSS.[47] These enable us to estimate not merely the relative relationship, but also the causal effect of the policy intervention, in the form of budget cuts, on children with specific attributes, depriving them of their schooling opportunities.[43]

Impact of climate change

The education finance in Nepal has been seriously affected, both directly and indirectly, by frequent climate disasters. Climate disasters, such as the Glacier Lake Outburst Flood (GLOF) in the Himalayas and landslides caused by heavy rain, not only cause the direct financial burden of the collapse of school buildings, but also become one of the factors that reduce tax revenue, which is the funding of the education budget, preventing national economic growth.[48] In addition, when disasters occur, school buildings are used as emergency shelters, which imposes a hidden cost on the education budget.[49] When school buildings become shelters, school lessons stop for a few months, and after that, the restoration of the school curriculum and the repair costs for facilities that are worn out or damaged by use as shelters are all managed to fund from the education budget. Particularly, landslides and floods due to heavy rains during the monsoon season damage hundreds of school buildings almost every year.[50] The additional costs to ensure alternative learning opportunities, such as online lessons and temporary classrooms, during the period when schools are used as shelters, are, in many cases, not included in the original budget.[51] Additionally, invisible costs, such as for mental care for disaster-affected children and for the redistribution of the lost textbooks and school supplies, also put pressure on educational finance.[52] The Nepali Ministry of Education, Science and Technology (MoEST) reports that these unexpected expenses due to disasters are the biggest uncertain factor preventing the stable supply of educational services and largely disrupting the original educational plan.[53]

In particular, the shift in the nature of climate finance (funding for climate change countermeasures) affects debt sustainability and, consequently, education spending in Nepal. According to the analysis specific to Nepal, the climate support, which had primarily been grants, has recently shifted to loans from international institutions. This increases the external debt to adjust and recover from climate change, and therefore, it is pointed out as a structural risk that the debt repayment burden, in the long run, will pressure the expansion of the education budget.[54]

Additionally, there are several cases in which, every time climate disasters occur, the reserve funds that should originally be allocated to education are diverted to emergency disaster recovery.[55] The reports from the MoEST emphasise that the uncertainty caused by climate change becomes a large barrier that makes the long-term educational plans and stable budget execution difficult.[53]

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