An Overview of Intergovernmental Fiscal Relations in Nepal

The practice of decentralization in Nepal is almost four decades old. This makes it perhaps the oldest decentralization process in South Asia. The statutory local government institutions were created as early as 1962 immediately after the replacement of the multi-party democratic system with the so-called party-less Panchayat System in 1960 through a royal takeover. Since then, several intermittent efforts were made to strengthen these institutions in different ways and in different times, often sailing with political waves. With the popular movement of 1990 which restored multi-party democracy in Nepal,Nepal's decentralization policy was brought in the forefront of national agenda of reforms and continues to be the main means to translate democracy and development at the grass-roots level. Consequently, District Development Committee, Municipality, and Village Development Committee Acts were passed in 1992 reestablishing local government institutions at the district, town, and village levels. This paper gives an overview of intergovernmental fiscal relations in Nepal, and highlights the issues and direction of reforms for the effective fiscal decentralization in the country. The analysis presented here is based on extremely limited sub-national fiscal data. Nevertheless, it is hoped that the paper could serve as a basis for further exploration in the field of intergovernmental fiscal relations in Nepal.