KATHMANDU: Despite the implementation of federalism to extend significant rights to the local levels, the federal government has been allocating the annual budget in a manner that contradicts this purpose. Instead of following the Natural Resources and Finance Commission's recommendation to grant autonomy to provinces and local levels for selecting and implementing development plans, the federal government increasingly dictates programs and allocates budgets, resulting in a growing share of conditional grants in provincial and local budgets.

On Tuesday, Finance Minister Barshaman Pun allocated grants of Rs 417 billion for the provinces and local levels. This includes equalization grants, conditional grants, special grants, and supplementary grants. Of this amount, Rs 148 billion has been allocated to the provinces and Rs 88 billion to the local levels as equalization grants for the upcoming fiscal year. Additionally, Rs 234.73 billion have been allocated to the provinces and Rs 2.88 billion to local levels as conditional grants.

In the current fiscal year, a total of Rs 146 billion was allocated to the provinces, including Rs 58.67 billion as equalization grants and Rs 87.35 billion to the local levels. Under the conditional grants, Rs 35.72 billion has been allocated to the provinces and Rs 191 billion to the local levels, totaling Rs 227 billion. For the upcoming fiscal year, the share of equalization grants is 35.48 percent and conditional grants is 58.25 percent against 6.55 percent for equalization grants and 56.82 percent for conditional grants in the current year.

The Finance Commission recommended reducing the portion of conditional grants and increasing equalization grants. Chairman Balananda Paudel noted that the government has ignored these recommendations. "We have been suggesting not to increase the conditional grant," he said, "But the government doesn’t seem to have implemented it in the budget."

The government provides equalization grants based on the expenditure needs and revenue capacity of the state and local levels. Supplementary grants are for specific projects or development works, conditional grants are to be spent in areas designated by the center, and special grants are for conducting special programs.

Rajendra Pyakurel, the executive director of the National Association of Rural Municipalities in Nepal, criticized the government for allocating the budget against the spirit of federalism and the recommendations of the Finance Commission.

"It is against the spirit of federalism to reduce the equalization grants and increase conditional grants," he said, adding, "It does not strengthen federalism."

A recent World Bank report on financial federalism in Nepal highlights the need to reduce dependence of provincial and local levels on conditional grants to increase grassroots participation in planning and decision-making processes. The report suggests that increasing equalization subsidies while reducing conditional grants will ensure stronger grassroots participation in planning and decision-making.

According to the Nepal Fiscal Federalism Update 2024 published by the World Bank, a reduction of available financial resources in fiscal year 2023 for provincial and local governments, mainly due to a decrease in federal revenue, led to the first fiscal deficit at the subnational level since the outset of fiscal federalism in 2017.