Issues and Challenges of Implementing Fiscal Federalism Faced Under the Reform of A Federal State in Nepal

Uttam Khanal


After entering the federalism of Nepal, there was a debate about how the budget transfer would be state and local governance for the development of works. In the early days, although the central government would manage the budget, more problems started to appear in the financial transfer process, according to the policy of gradually leaving the responsibility of all the work including infrastructure development and physical construction to the central government. It seems challenging to establish political commitment in the distribution of resources according to the division of powers in the federal system. Instead of transferring resources, the tendency to centralize resources and manage the work of other levels of government by themselves has not gone away. In the top leadership, the tendency to understand federalism as decentralization rather than division of state power between the levels of government prevails. The second challenge of fiscal federalism is the balance, clarity and inter-level cooperation between the levels of government in matters of taxation and revenue. The revenue source at the state level is very low. All levels of government have distributive allocations, high expansion of current expenditure and weak public fiscal accountability. It seems that the allocated efficiency and productivity of public expenditure should be improved. There is no hesitation to rationalize public expenditure by cutting unnecessary expenditure that does not contribute to public services and financial contribution. A balance is needed between the distribution of responsibilities and financial power. For the successful implementation of financial federalism, it is appropriate to give work responsibilities along with spending arrangements. Based on job responsibilities, it is necessary to arrange resources and develop the ability to perform accordingly. A healthy financial system is the backbone for the successful and proper implementation of federalism in any country. There is no choice but to emulate the federalism of Nepal, which is still a milk child, and move forward with the economic, social and cultural development of the country through a transparent, balanced and predictable financial federalism. For that, we should consider the national interest as the motto to prepare a suitable or implementable action plan and move forward.

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