Fiscal Federalism and
Fiscal Decentralization
in Nepal
Mahesh Banskota
Fiscal decentralization
• Long history of decentralization measures
in Nepal
• Mainly from Centre to Districts and From
Districts to Village Development
Committees
• Local Self Governance Act 1999 – most
comprehensive measure to decentralize
both fiscal and administrative powers
Decentralization – Lip Service
• Centre line agencies too heavily
entrenched, unwilling to give up many
incumbent resources
• Much conflict in provision between Centre
and local government
• Post 2006 Political Change – main Issue
has been Federal Structure with all its
implications including fiscal dynamics
Post 2006 Political Change
• Strong move to Ethnic and Fiscal
Federalism
• Political movement founded on ethnic
tension, ethnic autonomy and ethnic
federation in Nepal
• Main Thrust of Maoist Party and eventually
Ethnic paradigm has dominated political
debate forcing all political parties to
accept ethnicity as a basis for federalism
How to manage ethnic tension ?
• Great deal of inter district and inter region
inequality !
• Poverty increases as one moves west
ward and northwards – although there are
exceptions here and there
Main arguments for making non-ethnic
based province/state
Demographic lens (migration and deconstruction of ethnic territory):
Cultural territory has been rapidly eroded by internal migration
1. There are only 12 districts having absolute majority of particular
caste/ethnic groups (Cheetri in 7, Gurung in 2, and each of Tamang,
Tharu and Newar in 1 district) in total population of respective
districts.
2. The people considering Nepali as their mother tongue constitute
majority or largest group in 54 out of 75 districts.
3. Non-Hindus are in the position of majority or as the largest
population group in only 5 (Kirat in Taplejung and Panchather, and
Buddhist in Rasuwa, Manag and Mustang) out of 75 districts of the
country.
Figure 1.2 National Road Distribution by Road Network
3677
4000
3500 National Highways
3000 Feeder Roads
Road Length (km)
District Roads
2500
1885
Urban Roads
2000
1257
1500
1090
935
727
1000
668
651
595
574
486
488
467
441
408
351
306
203
500
63
39
0
Eastern Central Western Mid Western Far Western
Administrative Regions
Partitioning Government revenue-
Vertical Fiscal Imbalance
• 2004/05 – 80 % of government revenue from
four areas – Kathmandu, Parsa, Morang and
Rupandehi
• Characteristics of these – most developed,
industrial concentration, large urban areas,
important custom points, well connected to rest
of the country
• 12 district make up 94 % of the revenue
• 63 districts only 6 % of revenue
• How to Balance? Where are the G potentials?
Local Development Expenditure
• LDE Share in GDP 1.15 % - 1.4 %
• LDE share in Government Budget - 8%
• Major sources of local revenue – natural
resources tax, sales tax, revenue sharing, 25 %
of land tax , DDC Grant, VDC Grant
• Most taxes on basic activities
• Terai districts generally richer than the hills and
mountain ones
• Richer areas as one moves east and south
Federalism Agenda
• Looks like we will end up with somewhere
between 10 and 15 states in a federal Nepal.
• all major parties have finally ditched the idea of
geographic north-south vertical states.
• All of Terai will likely not end up as one state,
• the only disagreement now is if the Terai will
have two or four or five states
Proposed
Recent CA Committee
Recommendations
• customs duty, value added tax (VAT), corporate
income tax and personal income tax will be under the
central government
• The provincial governments have been given the
power to collect transport tax, land revenue, property
tax and business
• Excise duty has been proposed to be shared between
the provincial and central government while service
charges, royalty from natural resources and penalties
are proposed to be shared among all three levels of
government
• entertainment tax and land and building registration
charges are to be shared between provincial and local
governments
Fiscal Federalism Issues
• Local government structure
• Expenditure responsibilities , capacities
• Revenue assignments, autonomy, sharing,
accountability
• Fiscal Transfers and bailouts
• Special Grants, Borrowing and Budgeting
• Donor relations
• Thank You For Your Attention