Evolution of Federalism in Nepal
Well begun but half done may be an apt verdict on Nepal’s federalism project.
Nepal’s transition from a unitary governance system to a federal one was more than just about creating new political structures. It was a commitment to bringing governance closer to the people, guaranteeing equitable distribution of state resources, and ensuring fair participation of marginalized communities in the state machinery. A decade later, the journey has been fruitful in some aspects, even as pessimism lingers in others.
In terms of political federalism, the results have been encouraging. The state has been crafted into three tiers of governance, timely periodic elections have been conducted, and all 761—one federal, seven provincial, and 753 local units—are functional. Yet, even after 10 years, many essential laws remain unpromulgated. Provinces and local bodies continue to denounce the federal government’s centralized mindset, while criticism is rife that the participation of the marginalized is more numerical in nature than truly meaningful.
The 2015 Constitution has set coexistence and cooperation as the pillars of federalism. It allows each tier of government autonomy for self-rule but expects them to collaborate to achieve common goals and implement shared policies. However, the central government is faulted for treating the other two tiers of government as subordinates and for favoring imposition over cooperation.
Setting aside such stray observations, let us now examine in detail Nepal’s decade-long association with federalism, through the following prisms: policymaking; intergovernmental relations; fiscal federalism; gender equality, disability and social inclusion (GEDSI); and environmental protection and climate change.
Policymaking
One of the most important aspects of fully implementing federalism is making laws in accordance with the spirit of a country’s Constitution. The Nepal Constituent Assembly’s promulgation of different pieces of legislation, such as the Employees Integration Act, Intergovernmental Fiscal Arrangement Act, and the Local Government Operation Act, set the legal foundations for executing federalism in the country.
Later, the first federal Parliament, which was formed at the end of 2017 and began functioning in March 2018, made remarkable achievements in promulgating the necessary laws. In addition to acts relating to 31 fundamental rights, it enacted laws concerning political parties, environment protection, safe motherhood and gender reproductive rights, and the Public Service Commission, among others.
However, overall progress on the lawmaking front has been far from satisfactory. Even today, the devolution of several powers from the center to the other two tiers of government, as enshrined in the Constitution, remains unfulfilled due to the lack of certain crucial laws. The center has yet to enact over one-fourth—39 out of 151—of the laws that are necessary for the full-fledged implementation of the Constitution which institutionalizes federalism, republicanism, and secularism. Some of these unenacted laws pertain to federal civil service, school education, and the Nepal Police. A study by the Legislation Management Committee of the National Assembly found that successive governments could not even draft bills for several of these 39 laws, and the federal executive does not seem to have any concrete plan to carry out such legislation. Meanwhile, the constitutional deadline of March 5, 2008, set for the revision of laws that contradict the Constitution, has long since passed.
On the other hand, the provincial and local levels have largely enacted the necessary laws in tune with the constitutional mandate. Like laws on education, and most of the provinces promulgating legislation on the police and the civil service.
Then there are laws that have courted controversy since the provinces objected to them, claiming that they encroach upon their constitutional jurisdiction. The Bagmati Province has lodged a writ petition challenging the Urban Area Public Transport (Management) Authority Act, 2022, which authorizes the federal government to manage the Kathmandu Valley’s transportation. Besides, the Nepal Police and Provincial Police (Operation, Coordination and Supervision) Act, 2020, met with criticism from the provincial governments, which argue that the act attempts to retain the federal government’s supremacy, thereby going against the principle of parallel government that the Constitution envisions. The amendment to the Citizenship Act, too, has not gone down well since it has discriminatory provisions against women.
Thus, in the area of lawmaking in a decade of federal governance in Nepal, it is rather clear that the full-fledged implementation of federalism has not been possible due to the absence of certain necessary legal instruments.
Intergovernmental relations
Before the advent of federalism, Nepal had a central government and elected local bodies as subordinate governments. Since the enactment of the 2015 Constitution, the provinces too have the right to elect their own governments. The Constitution envisions different mechanisms to form a bridge between the different parallel governments and maintain intergovernmental relations. These mechanisms are both mediums for dialogue and platforms to resolve outstanding political and financial matters.
One such platform is the statutory Inter-Provincial Council (IPC), which has the prime minister as its chairman and provincial chief ministers as its members; one of its mandates is to resolve political and administrative disputes between the federal and provincial levels. There is also a National Coordination Council (NCC) which works on achieving alignment among federal, provincial, and local governments. Further, there is an Intergovernmental Fiscal Council to facilitate coordination and cooperation on fiscal matters between the different tiers of government.
These mechanisms have a legal compulsion to hold meetings at least once a year. Usually, these meetings are dominated by complaints from the provinces and local bodies against the federal government; these grievances are largely about delaying power devolution, lack of necessary laws, non-deputation of civil servants, unfair revenue distribution, and indifference in integrating the Nepal Police into the provinces.
Given this atmosphere of disaffection with the federal government, it doesn’t seem inclined to hold the stipulated meetings of these intergovernmental agencies. For instance, the IPC has met only thrice, and the NCC four times. Furthermore, the decisions taken at these meetings are often unimplemented. For instance, the IPC meeting in July 2023 had decided to complete the process of separation of powers between the center, provinces, and the local bodies, as well as spelled out the subjects that should be in the concurrent list. However, that decision is gathering dust.
Amid such a scenario of seeming inertia, the one body that has been doing its job is the National Natural Resources and Fiscal Commission (NNRFC), which is responsible for coordinating fiscal matters among the federal, provincial, and local governments. It has been making recommendations on matters such as the distribution of revenue, financial equalization grants, conditional grants, internal loans, and the allocation of natural resources among the three layers of governance, and the federal government has acted upon them.
While the intergovernmental agencies are the ones that are primarily responsible for dispute resolution, a Constitutional Bench has also been set up to hear disputes relating to jurisdiction between the federation and provinces, between provinces and provinces, between local units and provinces, and between local units. The bench has received several petitions relating to jurisdiction rows and has settled several of them. For instance, on a petition filed by the Biratnagar Municipality against the federal government, the bench ruled that rental tax falls under the exclusive authority of the local governments.
However, it has not rendered a verdict on any of the seven petitions filed by the provinces against the federal government. All these petitions which claim that the federal government has encroached upon provincial authority—in areas such as forest management, irrigation projects, transport regulation, and security arrangements—remain pending, some for nearly eight years. The Supreme Court record shows that 216 petitions are sub judice under this bench. Thus, it could be inferred that the judiciary, too, has belied expectations in carrying out its role to secure the smooth application of the federal Constitution.
Fiscal federalism
A centralized system of resource mobilization was one of the prime factors that had fueled the successful fight for federalism in the country. That said, the federal government still holds most of the financial power despite the Constitution outlining that resources should be shared with the provincial and local governments.
Provincial and local governments get their funds from several sources: revenue sharing; fiscal equalization grants; conditional grants; their own revenue sources; unspent funds; reserves; and internal borrowing.
The revenue collected from value-added tax (VAT) and internal excise duties is divided among all three levels of government. The federal government keeps 70 per cent, while the provincial and local governments each receive 15 per cent. The NNRFC decides on the distribution of these funds based on factors such as population, area, development needs, and infrastructure.
One key method of transferring funds is through unconditional fiscal equalization grants, which aim to reduce differences in revenue-generating capacity and spending needs among the provinces and local governments. These are calculated using factors like poverty levels and infrastructure gaps, and are recommended by the NNRFC.
Additionally, the federal government gives conditional grants to be spent on specific projects or sectors. These include matching funds, special grants, and supplementary grants.
Provinces and local governments also raise their own revenue through taxes on property, rent, land registration, vehicle registration, services, entertainment, advertisements, and businesses, as well as through royalties from natural resources.
To manage their budgets, provinces also use leftover funds from previous years, take internal loans, or use their cash reserves. Internal borrowing is another option, though it is used less often.
Of the total NPR 1.86 trillion budgetary allocation for the fiscal year 2025 to 2026, only 31 percent—NPR 582.83 billion—has been allotted jointly for the provincial and local levels. The provinces will be receiving NPR 180.06 billion by the end of the current fiscal year, while the 753 local units will get NPR 402.47 billion
For the provinces, 33.92 percent of their total budget comes from federal grants, including both equalization and conditional grants. Revenue sharing is their second-largest income source, making up 27.71 percent of the budget. Internal revenue generation has improved significantly, with tax income now contributing 20.41 percent to the provincial budget—up from 11.24 percent in 2019 to 2020. Internal borrowing makes up only about 1.30 percent of their budget.
For the local units, 52.61 percent of their budget is made up of conditional grant from the federal government. The equalization grant and revenue sharing constitute 22 per cent and 20 percent, respectively. Internal revenue is low, though it varies across local units, with metropolises and those with plenty of natural resources generating good internal revenue. Others have no option but to rely on the center entirely.
Largely, provincial and local governments are dissatisfied with the current system of resource distribution. They argue that the federal government maintains excessive control over financial resources, which limits their fiscal autonomy. One of their key concerns is the delay and unpredictability in receiving grants and revenue shares, which hinders effective budgeting and disrupts service delivery. Additionally, conditional grants often come with strict guidelines, thus allowing for little flexibility to address local needs. Many local and provincial leaders feel that under the guise of conditional funding, the federal government is merely using them to implement centrally designed programs, which effectively reduce them to being subordinate bodies rather than being equal partners in governance.
Another major issue is the unequal capacity to generate revenue at the local level. Remote and economically weaker areas face greater challenges in raising sufficient funds through taxes and fees. Although the federal system includes an equalization formula to address these imbalances, local and provincial governments often view it as insufficient to close the development gap and ensure fair resource distribution.
Gender equality, disability and social inclusion
Despite being a diverse nation, it was the Khas Arya community that predominantly controlled Nepal’s governance system for centuries. Thus, in the run-up to the formation of the federal Constitution, there emerged strong movements calling for fair representation of all groups and communities in the political, administrative, and judicial systems of the country. As a result, the 2015 Constitution has placed GEDSI at the core of federalism in order to redress the wrongs of historical marginalization and alienation experienced by groups like the Dalits, Madhesis, Janajatis, women, and people with disabilities.
Earlier, in 2007, before the establishment of political and fiscal federalism, a reservation quota had come into play through an amendment to the Civil Service Act. It allotted 45 percent reservation in the civil service to the excluded groups. This constituted 33 percent for women, 27 percent for Janajatis, 22 percent for Madheshis, 9 percent for Dalits, 5 per cent for disabled people, and 4 percent for people from backward areas. The security forces, too, started adopting the inclusivity principle in their recruitment process.
However, even today, the Khas Arya continue to dominate Nepal’s civil service, holding 63.5 percent of positions as of 2024. In comparison, the Janajatis make up 19.5 percent, Madhesis account for 15.4 percent, Dalits hold just 2.5 percent, Muslims occupy only 0.6 percent, and persons with disabilities comprise a mere 0.8 percent. These figures reflect a significant imbalance in representation among Nepal’s diverse social groups.
However, over the years of federalism, Nepal has made significant strides toward inclusivity across all tiers of elected office. In the House of Representatives, the 2022 general elections brought 91 women into the 275-member House—roughly one in three. In the National Assembly, women hold 22 (37 percent) of the 59 seats. The assembly also has reservations for Dalits and people with disabilities. Across the seven provincial assemblies, women occupy 200 (36 percent) of the 550 seats. Local governments stand out even more: women make up around 41 percent of all representatives (14,778 of nearly 36,000 members), with half of them coming from Dalit communities.
On a different note, however, women remain underrepresented in security institutions, forming roughly 10 to 12 percent of the Nepal Police, Armed Police Force, and the Army.
Clearly, there have been some gains in terms of numerical representation of the marginalized. In this regard, the statistics on elected officials, laws and policies, and budgetary quotas, too, show some gains. But even today, leadership across the state mechanisms is overwhelmingly male, of “high-caste” hill origin, Nepali speaking, and non-disabled.
Environmental protection and climate change
The shift to federalism has transformed the way Nepal approaches environmental management. The Constitution enshrines the right of every citizen to live in a clean and healthy environment, and divides responsibilities for the same among the three tiers of government. Broadly, the federal level handles national-scale resources such as protected areas and large hydropower projects; the provinces are in charge of forests, rivers, and pollution control within their boundaries; while the local governments oversee day-to-day issues involving community forests, waste management, sanitation, and small-scale water resources. This framework has placed environmental stewardship closer to the people, thereby giving communities a stronger sense of ownership.
Encouragingly, both provinces and municipalities have begun experimenting with climate-friendly initiatives. Bagmati and Gandaki provinces, for instance, have advanced measures in place for plastic reduction, waste management, and renewable energy promotion. At the grassroots, municipalities are weaving climate resilience and disaster preparedness into their planning processes, often mapping disaster-prone areas or integrating adaptation strategies with the help of civil society and international partners. These efforts show how decentralization can mobilize local action on pressing environmental and climate issues.
Still, the road ahead is complex. Overlapping mandates frequently spark disputes—for example, over who has the final say on hydropower licenses, forest land use, or riverbed extraction. Many subnational governments also lack technical staff, reliable data, and financial resources, making it challenging to translate environmental laws into practice. As a result, problems such as uncontrolled urban expansion, deforestation, sand mining, and rising air and water pollution continue largely unabated.
Coordination across jurisdictions adds another layer of difficulty. Environmental problems such as air quality management and river basin conservation cut across local and provincial borders, but mechanisms for joint action are weak. Moreover, while some provinces have drafted their own laws, many remain dependent on federal legislation like the Environment Protection Act, 2019; this leads to duplication and legal confusion.
Federalism has opened new doors for inclusive and localized environmental governance in Nepal, but its promise has yet to be fully realized. Local ownership and provincial activism provide encouraging signs. Yet, large-scale environmental and climate challenges will remain unresolved without stronger cooperation among the three tiers of government, more precise legal boundaries, and greater investment in institutional capacity. The future effectiveness of Nepal’s environmental federalism depends on bridging these gaps and ensuring that adequate resources and national cooperation back community-led initiatives.
Unfinished business
Nepal is one of the newest entrants to the world of federalism. As political histories go, it is difficult to find a country that has moved quickly and smoothly from a unitary form of government to a federal one—even some countries that embraced federalism decades ago struggle to fully embrace it. Therefore, it is not surprising that Nepal has several unfinished tasks at hand. However, that cannot be an excuse to continue to delay the implementation of certain crucial aspects of federalism. For Nepal to attain the goals of prosperity and an inclusive future through federalism, the onus lies on the central leaders to act in the spirit of the Constitution, while the provincial and local leaders, too, have their parts to play.
(The following personalities were interviewed for this article: Khim Lal Devkota, former member of the National Assembly and chairperson of the Federalism & Localisation Centre; Balananda Poudel, former chairperson of the National Natural Resources and Fiscal Commission; Seira Tamang, political scientist; Preeti Thapa, deputy country representative at The Asia Foundation Nepal; Parshuram Upadhyay, The Asia Foundation’s senior policy and governance advisor; and Sumina Karki, lead for Inclusive and Collaborative Governance at The Asia Foundation Nepal.)