Nepal’s post-2015 transition to federalism tests whether decentralised public finance can deliver inclusive subnational growth. Drawing on the Nepal Competitiveness Index (NCI 2026), this paper argues that while federalism has institutionalised a rules-based system of fiscal transfers, it has shifted the binding constraint on subnational performance from fiscal availability to execution capacity. As a result, despite equitable vertical fiscal transfers, provincial performance has diverged sharply.
The analysis highlights three structural pathologies undermining the federal experiment. First, an efficiency gap: persistent under-absorption of capital budgets, especially in infrastructure-poor provinces such as Karnali and Sudurpashchim, leaves development fund idle. Second, an accountability deficit: weak own-source revenue mobilisation and rising audit irregularities, particularly in Madhesh and Koshi, signal growing fiduciary risk and the erosion of the state-citizen compact. Third, a volatility trap: over-reliance on conditional and special grants undermines multi-year planning and produces a flypaper effect, with spending driven by federal mandates rather than local priorities.
In the post–Gen Z protest environment, where public expectations of transparency and results have intensified, we contend that the status quo is no longer sustainable. This paper argues for a shift from a transfer-centric approach to a performance-oriented fiscal architecture. Without clearer links between fiscal transfers, institutional quality, and audit compliance, fiscal federalism in Nepal risks existing in form rather than in function, with limited developmental impact.
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