Federalism in jeopardy

Two years after Nepal’s 2015 Constitution established federalism, the country is now challenged with how to operationalise the federal structure. The latest fault line is the way in which revenue will be shared among local, provincial and central governments.

In Nepal’s federal structure, power is assigned to three governments — local, provincial and central — each of which has autonomy to raise and spend revenue. However, the legislative framework for the assignment of revenue was not put in place prior to local government elections, which has resulted in a confusing mixture of claims and counterclaims emanating from old and emergent power centres. Consequently, continued progress in successful implementation of the federal provisions of the 2015 Constitution is in jeopardy.

The Natural Resources and Fiscal Commission Bill and the Inter-Governmental Fiscal Transfer Bill were tabled in parliament on 7 July. These are crucial for the management of public finance in the federal structure, overseeing revenue distribution among the three governments. However, the bills give the central government an increased share of the proceeds of national revenue collection, at the expense of local governments.

After strong public criticism, lawmakers are now trying to amend the Inter-Governmental Fiscal Transfer Bill, which will regulate the distribution of resources between local, provincial and central governments. Reducing local government’s share of the revenue generated from hydropower and natural resources may seem insignificant in the context of the nation’s total income but in 2016-2017 royalties from mining, hydropower and forestry accounted for less than 0.5% of central revenue collections. In the grand scheme of things, these royalties may not prove to be significant for local budgets, which can be subsidised by central grants. What is significant is the way in which these latest developments demonstrate yet another barrier put up by centrist forces to maintain the status quo and derail attempts to share power beyond Kathmandu.

With successful local elections after two decades in six of the country’s seven provinces, hopes are high that local governments will deliver on their mandates.However to do this, local governments must not only be politically empowered but also be sufficiently resourced. Autonomy only comes when local governments are able to raise their own revenue and set their own budgets.

Under the Constitution, the central government retains all major revenue sources such as income taxes and VAT. Provincial and local governments are assigned comparatively low-yielding revenue sources such as property and vehicle taxes. Where subnational governance systems are required to be built from the ground up, and revenue-raising potential vary greatly from province to province, this design is appropriate. Local governments should not be expected to raise most of their own revenue. Gaps will need to be filled by intergovernmental fiscal transfers. This in itself is not a cause for alarm, but what should concern us is that political forces in Kathmandu once again are manipulating legislation to prevent the sharing of power.

Iain Payne is a Colombo Plan Nepal Fellow and Binayak Basnyat is a program associate at The Asia Foundation in Kathmandu.

A longer version of this piece is in the In Asia blog:

www.asiafoundation.org

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