Centre tightens purse strings on local units, boosts provincial grants

Nepal's federal budget for the upcoming fiscal year 2026-27 signals a shift in financial allocations, increasing grants to provinces while reducing those directed to local units. This adjustment, compared to the current fiscal year, has prompted concerns among federalism experts regarding the effective implementation of devolved governance rights.

The Constitution of Nepal outlines the federal government's role in allocating budgets to provinces through various grants, including equalisation, conditional, complementary, and special grants. These transfers are guided by recommendations from the National Natural Resources and Fiscal Commission. For the upcoming fiscal year, the federal government projects mobilizing over Rs 600 billion for provincial and local governments, a slight increase from the previous year. Specifically, conditional grants to provinces have seen an increase of nearly Rs 9.5 billion, while conditional grants to local governments have been reduced by Rs 1.38 billion.

Federal affairs expert Khimlal Devkota expressed disappointment, stating that the budget does not encourage the implementation of provincial and local government rights. He observed that the budget's structure still reflects a centralist approach, where the federal government appears to retain control over most initiatives, failing to fully embrace the spirit of fiscal federalism.

While equalisation grants to local governments have seen an increase, all other local-level grants have been reduced. This comes despite ongoing demands from local governments for annual increases in equalisation grants, which have not materialized significantly. Devkota highlighted a declining trend in the proportion of the budget allocated to provinces and local governments through equalisation grants, falling from 7.62 percent in the current fiscal year to 7.14 percent in the new budget. Complementary grants for infrastructure development projects also show a mixed picture, with increases for provinces but decreases for local governments compared to the current year.

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the budget still reflects a structure in which the federal government intends to carry out all work itself. He remarked that no budget so far has truly understood the spirit of fiscal federalism.