Nepal: Selected Issues

Abstract

Nepal has been undergoing a swift transition to fiscal federalism in recent years. The new paradigm holds the promise of improved delivery of public services. However, the rapid transition to the new structure of government and government finances also carries pitfalls and complicates fiscal and macroeconomic management. Indeed, the introduction of fiscal federalism has been associated with a sharp deterioration of fiscal performance. The design of intergovernmental fiscal relations and the ambitious timetable to implement fiscal federalism have been shaped importantly by political-economy considerations that are outside the scope of this note. Instead, the focus is on analyzing Nepal’s newly-established fiscal federalism framework, highlight gaps in the current structure and the potential economic impact, and discuss policy recommendations. Managing effective fiscal federalism in Nepal will require strong efforts to strengthen public financial management and enhance the implementation capacity at all levels of government to mitigate risks to fiscal sustainability and achieve allocative efficiency gains.