Fiscal federalism

An analysis of its initial implementation in Nepal – Federalism in Nepal Vol. 6

This report analyses the initial implementation of fiscal federalism in Nepal, including the trends, direction and gaps in the implementation at the provincial and local levels.

It reveals that, while there has been substantial progress with regard to fiscal equalisation among provincial and local governments, these governments still suffer from a shortfall of sustainable and self-sufficient revenues for both recurrent and development expenditure – an issue that is not likely to be solved soon.

The federal government is efficient in economic stabilisation functions and has made major strides in enhancing efficiency in the distribution of funds and in reducing fiscal disparities among the provincial and local governments.

While the local governments are efficient in their allocation function, the allocated funds are not used effectively and efficiently to address the marginalised communities’ needs.

The provincial governments, on the other hand, are inefficient in their allocation function but are relatively efficient in their distribution functions to the local governments.

Moreover, the report finds that there are significant areas of weakness, such as lack of plans and strategic thinking to use public resources in the development of an inclusive economy, job creation, providing better healthcare and education, and combating poverty.

The study also finds that corruption, conflicts of interest and ‘private gains at public costs’ are ‘unintended consequences’ of the federal restructuring.

Remedial actions are required to address these issues inherent in provincial and local governments.

This is the fifth report in our series on federalism in Nepal produced as part of the Sundar Santa Nepal project. You can find the other reports in the series here.