The High-Level Economic Reform Advisory Commission has called for sweeping reforms to Nepal’s political financing system, warning that the current model, dominated by opaque private donations, has entrenched corruption and undermined democratic values. These donations, the commission argues, have facilitated undue influence over public institutions and distorted policy decisions.

In its report, the commission states that political leaders and parties rely on private contributions, which, in turn, shape their policy decisions to benefit vested interests rather than the broader public. “This practice has led to the capture of public institutions and the erosion of democratic values,” the commission said in its report.

To address these issues, the commission has recommended introducing a new Political Finance Act or amending existing laws such as Sections 37 and 38 of the Political Parties Act, 2017 and Section 72 of the House of Representatives Election Act, 2017. These reforms aim to establish a legal basis for public financing of political parties. The commission has recommended that the government provide annual grants to nationally recognized political parties based on performance-based criteria, with all disbursements subject to auditing by the Office of the Auditor General.

The commission has also proposed shifting the responsibility for campaign financing from individual candidates to political parties, with the Election Commission enforcing spending limits To curb undue influence, the commission has called for a complete ban on direct donations to candidates, citing the high cost of campaigns as a major driver of corruption. “The financial burden on candidates forces them to engage in unethical practices simply to recoup campaign expenses,” the report stated.

Additionally, the commission has recommended that all donations to political parties be channeled through the banking system, within set limits and under full transparency. Although parties are currently required to submit audited financial reports to the Election Commission, these documents often underreport actual expenditures. Major political parties typically cite membership fees as their primary source of income, while donation figures are suspiciously low even though election spending far exceeds their declared income.

A 2017 study by the Election Observation Committee Nepal, an independent poll monitoring body, revealed that winning federal parliamentary candidates under the first-past-the-post (FPTP) system spent an average of Rs 21.3 million—over six times the limit set by the Election Commission. Runners-up spent an average of Rs 14.9 million, and other candidates about Rs 8.5 million. The situation was similar in provincial elections, where winners spent an average of Rs 12.5 million—nearly 11 times the Rs 1.5 million cap. At present, political parties are required to disclose their financial details only after audits have been completed. Section 25(5) of the Political Parties Act, 2017 bars donations made in exchange for benefits, while Section 41(1 requires audits to be conducted within six months of the fiscal year’s end and submitted to the Election Commission within one month. However, many parties routinely fail to comply with these requirements.

Critics argue that the commission’s recommendations may not go far enough. “Even if donations are routed through banks, what stops parties from accepting unreported funds through other means?” questioned Surya Nath Upadhyay, former chief commissioner of CIAA. “Without mandatory donor disclosure and stronger enforcement, a major loophole will persist.”

Gauri Bahadur Karki, former chair of the Special Court, agreed with Upadhyay. He proposed either criminalizing private donations altogether or limiting party financing strictly to public funds. Karki also criticized the idea of reserving government support for only nationally-recognized parties, warning that it would disadvantage smaller parties and independent candidates. “If candidates can’t raise funds while only established parties receive state grants , independent candidates won’t stand a fair chance,” he said.

Nevertheless, Karki acknowledged the commission’s intention to restore credibility to the political process. “The system clearly needs reform, but it must be fair and inclusive,” he added. The Election Commission has expressed support for many of the proposed reforms and has already drafted legislation closely aligned with the Khanal commission’s recommendations. “Political parties are integral to the state structure. Like other public institutions, they must function with full transparency and accountability,” said outgoing Chief Election Commissioner Dinesh Thapaliya.

As traditional sources of political financing—such as membership fees, contributions from party activists and voluntary donations from well-wishers—proved insufficient, parties resorted to alternative, often unethical means. These included extracting profits from government procurement contracts, engaging in financial transactions tied to appointments in public institutions and forming questionable alliances with business interests. “Such practices either constitute corruption or create fertile ground for it,” the Khanal commission warned.

This is not the first time that state funding for political parties has been proposed. As early as the 1990s, efforts were made to establish a legal framework for public subsidies to political parties. In 2003/04, then-Finance Minister Dr Prakash Chandra Lohani put forward a model linking state funding to electoral performance. However, the initiative failed to gain political consensus and was eventually shelved.

Lohani’s proposal envisioned government grants to nationally recognized parties two months ahead of parliamentary elections, calculated at Rs 20 per vote received in the previous election. It also included tax incentives for business donations to political parties, on the condition that such contributions be publicly disclosed. Beneficiary parties would be required to publish audited annual income and expenditure reports, verified by a chartered accountant from the Nepal Chartered Accountants Association. The Khanal commission’s recommendation has reignited this long-standing debate with renewed urgency. Amid declining public trust in political institutions and escalating election costs, the commission has presented a compelling case for a comprehensive overhaul of Nepal’s political financing laws. Its central objective is to reduce corruption and restore confidence in the country’s democratic process.

(This news report was originally published in   May 2025   issue of New Business Age Magazine.)