Strengthening Fiscal Decentralization in Nepal’s Transition to Federalism

STRENGTHENING FISCAL DECENTRALIZATION IN NEPAL’S TRANSITION TO FEDERALISM

JULY 2022

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Publication Stock No. TCS220280

DOI: http://dx.doi.org/10.22617/TCS220280

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On the cover: A sound fiscal federalism framework empowers subnational governments and supports efficient and effective delivery of public services, which contribute to local economic and human capital development. (All photos by ADB).

CONTENTS

TABLES, FIGURES, AND BOXES

ACKNOWLEDGMENTS

This report was prepared with technical and financial support under the regional technical assistance project RETA: 9387 Strengthening Institutions for Localizing Agenda 2030 for Sustainable Development of the Asian Development Bank (ADB).

Overall coordination and advisory support was provided by Hiranya Mukhopadhyay, chief of the Governance Thematic Group, and Rachana Shrestha, public management specialist, Sustainable Development and Climate Change Department, ADB.

The review involved Cigdem Akin, principal public management economist, Central and West Asia Department, ADB; Hans van Rijn, principal public management specialist, East Asia Department, ADB; Krishna Pathak, senior public management officer, South Asia Department, ADB; Samuel Hill, senior economist, Economic Research and Regional Cooperation Department, ADB; Vidyadhar Mallik, former finance secretary and minister of federal affairs and local governments in Nepal; and Roy Kelly, professor, Sanford School of Public Policy, Duke University.

ABBREVIATIONS

CURRENCY EQUIVALENTS

(as of 8 June 2022)

Currency unit – Nepalese rupees (NRs)

NR1.00 = $0.0080427229

$1.00 = NRs124.336000

The fiscal year (FY) of the Government of Nepal ends on 15 July. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2020 ends on 15 July 2020.

EXECUTIVE SUMMARY

I. Introduction

This report updates and synthesizes studies of policy and advisory technical assistance (PATA 9150) funded by the Asian Development Bank (ADB) and conducted in support of Nepal’s transition to federalism. It notes the progress of regulatory and policy reforms that seek to operationalize an ambitious restructuring of the state, one that embodies a deep commitment to fiscal decentralization. Lessons offered in the report could help the Government of Nepal to adopt and refine a robust fiscal federalism framework. The lessons learned could also be useful to stakeholders contemplating a similar state transition in other countries.

II. Nepal’s Fiscal Federalism Framework

Nepal’s shift to a federal state structure helped to end a long internal conflict by establishing a unifying and equitable political system. The 2015 Constitution restructures the overall governance structure of the country creating three levels of government: federal, provincial, and local. The Constitution aims