Practices and Challenges of Fiscal Decentralization at the Local Government in Nepal

Abstract

Introduction: This study explores the practices and challenges of fiscal decentralization at the local government level in Nepal. Fiscal decentralization primarily focuses on the transfer of fiscal powers, taxation, and spending to subnational governments.  Methods: Qualitative content analysis was adopted to examine fiscal decentralization at the local government level through key informant interviews. The elected leaders from two local governments were the key informants who discussed financial resources, spending, and challenges. Additionally, an observation was conducted to examine the operation of local government. Similarly, a systematic review of the constitution, laws, and literature related to local government's power and authority was performed. Descriptive statistics using Excel were used for numerical summaries of responses. Results: The findings indicate that local governments in Nepal are struggling to effectively manage their financial resources, as they receive 78 percent of their total budget from the central government. The current spending situation is also not very satisfactory, emphasizing the necessity of institutional capacity building to sustainably generate tax revenue. Key challenges include limited grants, a low spending situation, imbalances in the allocation of resource responsibilities between subnational governments, poor coordination, weak fiscal discipline, and the politicization of budgets. Conclusion: Fiscal matters are crucial for implementing local development and ensuring effective service delivery. The current constitution assigns taxation powers, along with autonomy in revenue generation and spending, to local governments. Nevertheless, local authorities have encountered numerous challenges, making capacity building essential.