Nepal has been experiencing a federal republic system of governance for the last nine years. According to the Inter-Governmental Fiscal Arrangement Act, 2074, the Government of Nepal is responsible for providing four types of grants, namely equalization, conditional, special, and complementary grants to the Province and Local Government to meet their expenditure needs and minimize the vertical and horizontal fiscal gap.

Provincial and local governments’ reliance on the four types of intergovernmental fiscal transfers (IGFTs) is still high. The overall trend of IGFTs has remained unchanged, with the largest proportion of resources for the province and local governments being transferred through the federal Government.

It is important to update the IGFT system and criteria, specifically making the criteria for allocation of special and complementary grants more evidence-based, transparent, and timely, as well as increasingly performance-based. It is also essential to revise the criteria for allocating fiscal equalization grants, reduce earmarking in conditional grants to support the shift toward sectoral block grants, and enhance intergovernmental coordination among key fiscal institutions, including the Ministry of Finance (MoF), the National Natural Resource and Fiscal Commission (NNRFC), and the National Planning Commission (NPC).

The National Planning Commission (NPC) recently updated the criteria and indicators for formula-based allocation of subnational grants and revised the guidelines for complementary and special grants. To support the effective implementation of these changes and raise awareness about the new guidelines, the NPC, in collaboration with the Office of the Chief Minister and Council of Ministers (OCMCM) of Karnali Province, organized a province-level dissemination event. Held on February 20–21, 2025, the event targeted provincial and local government representatives and focused on the newly adopted provisions.

This event also covered broader messages on shifting priorities of different policy frameworks and mechanisms such as the 16th Periodic Plan, the Medium-term Expenditure Framework (MTEF), localization of the Sustainable Development Goals (SDGs), and the Project Bank. The Asia Foundation provided technical assistance to the NPC to organize such an intergovernmental platform among the federal government, Karnali Province, and all the local government representatives within the province. Of the total 138 participants from LGs, 56 (41%) were Chief Administrative Officers (CAO), 28 (20%) were Chairpersons, and 16 (12%) were Vice-Chairpersons of Rural Municipalities. 13 (9%) were Mayors, 8 (6%) were Deputy Mayors, and 17 (12%) were from Karnali Province Government and federal agencies, including NPC.

Some notable observations from the event included the NPC’s emphasis on interactive engagement, with active participation and strong commitment from senior leadership. At the provincial level, the Chief Minister and senior officials of the Provincial Planning Commission also demonstrated ownership and support for the program. The event showcased effective coordination and collaboration between federal ministries and provincial governments. It also fostered a sense of ownership at the local level by involving local government associations in meaningful roles. Local governments expressed appreciation for the NPC’s timely revision of the criteria for allocating complementary and special grants, particularly the prioritization of evidence-based and GEDSI-targeted development programs.

During the event, participants from all levels of government emphasized the urgent need to strengthen coordination and cooperation among federal, provincial, and local governments. Several critical challenges were highlighted, particularly in relation to planning, capacity, and policy implementation at the subnational level. Key observations included:

• Capacity Gaps: Due to limited technical capacity, local governments face significant challenges in preparing Medium-Term Expenditure Frameworks (MTEFs) and establishing Project Banks.
• Policy Constraints: Participants called for a dedicated development policy for Karnali Province, noting that current requirements—such as Initial Environmental Examinations (IEEs) and Environmental Impact Assessments (EIAs) to access complementary grants—are often impractical for local governments.
• Human Resource Shortages: There is a shortage of qualified personnel needed to implement local government policies and programs effectively.
• Need for Regular Dialogue: Regular and structured interaction among the three tiers of government is essential for the effective implementation of national policies and development programs.
• Support for Planning and Budgeting: Subnational representatives expressed the need for greater facilitation and capacity-building support from the National Planning Commission (NPC) to help translate the visions of periodic plans into actionable annual programs and budgets.

These insights underscore the importance of targeted institutional support and policy reform to enable more effective and inclusive governance, particularly in geographically and economically challenged regions like Karnali.

The active participation of Deputy Mayors and Vice Chairpersons in the event was particularly noteworthy. As coordinators of the budget and program formulation committees within local governments, their engagement is crucial to ensuring effective planning and resource allocation. Participants emphasized that orientation programs specifically designed for these committee members, conducted prior to the annual planning and budgeting cycle, would be highly beneficial. Such initiatives could help minimize duplication of efforts and resources across the three tiers of government, fostering more coordinated and efficient development planning.