Transition to Fiscal Federalism in Nepal: Western Insights in the Definition of Intergovernmental Transfers

Abstract

In 2008, Nepal was declared a “federal democratic republic”. However, since then, political differences have been curbing the establishment of a federal model in the country. While studies generally focus on the political aspects of this issue, this paper is based on an economic approach. Using the fiscal federalism literature and the practices of western federal countries, the article studies the funding systems that could be put in place to support the various regions of Nepal. Seven criteria for the distribution of funding between provinces are assessed. A principle of pure “fair return” seems difficult to implement due to the lack of revenue of some areas. Strong equalization transfers will be needed in order to ensure, at least, a status quo for everyone. By any criterion, the province including Kathmandu district has to face a gap between revenue and expenditure. This can be explained by the high level of expenditure needed in Kathmandu. The topic of this research has been little explored to date, despite its importance for ensuring an efficient federal model in Nepal.