Financial Stability Key To Federalism

Federalism in Nepal, introduced by the Constitution of Nepal (2015), aims to establish a decentralised governance system by distributing power among federal, provincial, and local levels. Despite legal provisions that facilitate intergovernmental cooperation, the implementation of federalism faces several challenges, including political instability, poor coordination, and financial interdependencies. This article explores the political economy of federalism in Nepal, focusing on intergovernmental relations, political stability, and stakeholder interests that shape its implementation at national and subnational levels.

The constitution provides a robust legal framework for inter-provincial collaboration through mechanisms such as Article 232, which allows provinces to enter into agreements for economic cooperation, and Article 234, which establishes the Inter-Provincial Council for coordination and dispute resolution. Furthermore, the Inter-Governmental Fiscal Arrangement Act (2017) enables revenue-sharing models among provinces, fostering economic integration. Despite these provisions, practical implementation remains hindered by unclear jurisdictional boundaries and bureaucratic inefficiencies.

Challenges 

One of the major challenges in Nepal’s federal structure is poor coordination at the provincial level. Provincial governance is marked by inconsistencies in training institutions and administrative coordination. Training centres such as the Karnali Provincial Training Academy (KPTA) and the Provincial Centre for Good Governance (PCGG) serve crucial roles in capacity development but face operational challenges due to political interference, lack of standardised training curricula, and insufficient resources. Frequent political and administrative reshuffling further disrupts their continuity and effectiveness.

Another major obstacle is the lack of legal clarity and the absence of a comprehensive Civil Service Law. The delay in enacting critical federal legislation, including the Federal Civil Service Act, has created confusion in administrative governance. There is also significant jurisdictional overlap in sectors such as infrastructure, education, and health, leading to inefficiencies and conflicts among different levels of government. Furthermore, administrative restructuring has not been adequately supported by institutional preparations, resulting in inefficient governance at the provincial and local levels.

Political instability is another factor impeding the success of federalism in Nepal. Frequent changes in provincial governments driven by political realignments disrupt governance and policy implementation. Revenue mobilisation remains a contentious issue, especially in resource-rich sectors such as mining, real estate, and vehicle taxation. The transition from a centralised system to federalism has not been accompanied by a corresponding shift in bureaucratic mindsets, which continues to hinder effective service delivery. Political disputes and governance conflicts have exacerbated these challenges, making the transition process more complicated.

Weak commitment to decentralisation is another pressing issue. Despite constitutional provisions, there is a lack of strong political commitment at both federal and provincial levels to fully implement decentralisation. Federal agencies continue to exert significant influence over provincial governance, undermining the autonomy of subnational governments. The failure to conduct comprehensive organisational and management surveys has led to inefficient resource allocation and administrative redundancy, further complicating efforts to institutionalise federalism.

Fiscal federalism plays a key role in Nepal’s governance model, with financial responsibilities shared among the federal, provincial, and local levels. However, provinces remain financially dependent on federal grants due to their limited revenue-generation capacities. The Intergovernmental Fiscal Management Act outlines four types of grants — fiscal equalisation, conditional, complementary, and special grants—but challenges persist in their efficient utilisation and distribution. The inability of provinces to generate independent revenues has resulted in a continued reliance on federal funding, limiting their financial autonomy. To enhance fiscal autonomy, provinces must conduct in-depth studies on potential revenue sources, develop revenue reform action plans, and implement improved budget planning and expenditure frameworks.

To make federalism more effective, Nepal must prioritise strengthening administrative federalism by formulating and implementing essential laws such as the Federal Civil Service Act, the Provincial Civil Service Act, and the Local Service Act. A clear policy framework for administrative management is necessary to ensure seamless coordination among different levels of government. Institutional capacity-building initiatives, such as strengthening provincial training centres and improving human resource development, are also crucial. Training programmes should be restructured to emphasise performance-based learning and problem-solving approaches, ensuring that government officials are well-equipped to handle governance challenges.

Bipartisan agreements 

Political stability and policy continuity must also be ensured through bipartisan agreements on key policy areas, reducing political interference in administrative functions and establishing institutional mechanisms to resolve intergovernmental conflicts. Decentralisation should be further strengthened by granting provinces greater financial autonomy, diversifying their revenue sources, and establishing a clear framework for revenue-sharing mechanisms. Improved financial oversight mechanisms will be essential in ensuring transparency and accountability in fiscal governance.

While federalism in Nepal has made significant progress, challenges remain in ensuring effective intergovernmental coordination, political stability, and financial sustainability. Addressing legal ambiguities, improving administrative efficiency, and strengthening fiscal autonomy are essential steps toward fully realising the potential of federal governance. By implementing these reforms, Nepal can enhance the effectiveness of its federal system, fostering sustainable development and improved public service delivery at all levels of government.

(The author is a former vice-chairman of Provincial Planning Commission of Lumbini.)