Nepal's progression towards fiscal federalism and public financial management has been marked by a moderate pace, according to the World Bank’s Nepal Fiscal Federalism Update 2024. The country's legal and institutional reforms at provincial and local levels have continued, albeit not as swiftly as anticipated.
The fiscal year 2023 saw a decrease in available financial resources for provincial and local governments due to a drop in federal revenue. This resulted in the first fiscal deficit at the subnational level since the inception of fiscal federalism in 2017. To enhance the outcomes of these initiatives, including improved revenue generation for all three tiers of government, the Fiscal Federalism Coordination Division at the Ministry of Finance was tasked with coordinating public financial management reform efforts and implementing a Fiscal Federalism Roadmap.
"This report provides a comprehensive review of the progress of fiscal federalism in Nepal. The recommendations are well aligned with our national-level vision on smoothing the fiscal transfers to help subnational governments carry out their responsibilities effectively," said Dr. Baikuntha Aryal, Chief Secretary. He added that the report supports ongoing efforts to clarify responsibilities among the three tiers of government and advance fiscal federalism.
The 2024 edition builds upon its predecessor by delving into key pillars of fiscal federalism in Nepal: Revenue Assignment and Administration; Expenditure Assignment and Administration; Inter-Governmental Fiscal Transfers; Borrowing and Capital Finance; and Fiscal Revenue from Natural Resources. It proposes specific measures to improve the Inter-Governmental Fiscal Transfer system and establish a consolidated public financial management performance database that includes data from subnational levels.
Mr. Balananda Paudel, Chairman of the National Natural Resources and Fiscal Commission, noted that "the report highlights the need to upgrade institutional arrangements for the Intergovernmental Fiscal Transfers system to make transfers more needs-based and timely." He also emphasized increasing provincial and local governments' fiscal autonomy as crucial to improving fiscal federalism outcomes.
The report also recommends strengthening provincial and local-level institutional arrangements for fiscal federalism and public financial management operations. This includes actions to improve budget credibility to enhance service delivery by subnational governments.
"Fiscal Federalism is a foundation for sustained service delivery by provincial and local governments. They need adequate financial resources and the ability to make spending decisions at the subnational level, in the spirit of federalism and the Constitution," said Mr. Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka. He affirmed the World Bank's commitment to supporting the Government of Nepal in solidifying fiscal federalism.