Nepal’s federal journey began with the promulgation of the Constitution in 2015. It was envisioned as a transformative step to bring governance closer to the people by distributing power among the federal, provincial and local tiers, thereby enabling effective public service delivery grounded in the principle of subsidiarity. Over the past decade, however, the implementation of fiscal federalism—the fiscal backbone of any federal system—has remained incomplete. While functional responsibilities have been constitutionally decentralised to the provinces and local levels, the fiscal powers required to carry them out remain largely concentrated at the federal level. This imbalance has frustrated subnational authorities and created an unsustainable gap between functional responsibilities and fiscal resources, undermining the essence of federal governance. Similar challenges persist in human resource management, natural resource mobilisation, lawmaking, coordination and capacity development.

Against this backdrop, the finance ministers of all provinces gathered in Hetauda, the capital of Bagmati Province, on November 1, 2025, and issued a historic joint statement—the Hetauda Declaration. The conference brought together provincial finance ministers in the presence of Bagmati Chief Minister Indra Bahadur Baniya. The conference was organised by Prabhat Kumar Tamang, Minister for Economic Affairs and Planning of Bagmati Province, and was technically supported by the Federalism and Localisation Centre (FLC).

The Declaration is not merely a list of complaints; it is a policy roadmap that identifies the deep structural problems in fiscal federalism and proposes a collaborative mechanism to address them. The ministers formally agreed to establish a Council of Provincial Finance Ministers, which will coordinate inter-provincial fiscal policies, prepare joint fiscal agendas, harmonise laws and engage directly with the federal government.

This institutional innovation mirrors global federal practices—such as Switzerland’s Conference of Cantonal finance directors and Germany’s Conference of finance ministers, both of which transformed federal–province relations by institutionalising cooperation and negotiation, where subnational units work together to ensure fairness, fiscal stability and coherence across levels of government.

The grievances underlying the Declaration are numerous and well-documented. In a federal arrangement, responsibilities and workloads have been decentralised, but fiscal authority remains largely centralised. The Constitution assigns major functions—such as health, education, agriculture and local infrastructure—to provincial and local governments. Yet, the revenue rights and tax powers needed to fund these responsibilities remain monopolised by the federal government. Provinces have limited capacity to generate internal revenue, and their fiscal autonomy is further constrained by a transfer system that is opaque, conditional and misaligned with their actual expenditure needs.

Equalisation grants, intended to reduce disparities and ensure fair resource distribution, have been shrinking or delayed. Meanwhile, conditional grants—tied to specific projects and federal priorities—are increasing, limiting the provinces’ discretion to plan and implement context-specific programmes. The proportion of conditional grants has grown disproportionately, undermining the constitutional spirit of fiscal autonomy. At the same time, the process of determining and distributing federal fiscal resources remains non-transparent and often politically influenced.

Equally troubling is the federal government’s encroachment into provincial and local jurisdictions. Despite constitutional clarity, federal ministries continue to implement projects directly at the subnational level, bypassing provincial governments. This “vertical intrusion” blurs accountability, duplicates functions and weakens institutional coherence. Provinces, on the other hand, often find themselves competing with local governments for the same revenue sources—especially in natural resource-based taxes such as sand, gravel and stone royalties. These disputes not only create administrative friction but also erode intergovernmental trust.

The fiscal imbalance is worsened by weak institutions. The National Natural Resources and Fiscal Commission, constitutionally mandated to recommend revenue sharing and fiscal transfers, remains legally constrained, under-resourced and often ignored. The Fiscal Council, another crucial coordinating body, is inactive, allowing ad hoc decisions to replace predictable fiscal governance. Provincial frustration is therefore justified. For instance, last year, the federal government reduced equalisation grants and restored them only for local governments after strong lobbying, leaving provinces excluded. This reinforced the perception that provinces are being systematically sidelined. The Declaration thus calls on the federal government to treat provinces and local governments equitably, ensure predictable and timely fiscal transfers, and adopt a transparent, formula-based system that upholds the principles of fiscal federalism and strengthens institutional accountability.

The Declaration also recognises the provinces’ own responsibilities. It acknowledges that internal revenue mobilisation remains weak and that capital expenditure has not grown as expected. Provincial and local governments have struggled to align policies, programmes and budgets, and monitoring mechanisms are often inadequate. The Declaration, therefore, emphasises institutional strengthening, improved coordination among all three tiers, and the modernisation of subnational tax systems. By committing to developing integrated revenue databases and harmonising provincial tax laws, the provinces aim to expand their fiscal base while improving efficiency and transparency.

Yet the broader message of the Declaration goes beyond technical reforms. It is a call to rebalance power within the federal structure—to make fiscal federalism a living reality rather than a constitutional slogan. True decentralisation requires not only political devolution but also financial autonomy. Without resources, authority becomes symbolic. Provinces cannot function as genuine governments if they depend entirely on federal transfers for their survival. Fiscal centralisation breeds dependency, weakens accountability and stifles innovation. Conversely, empowered provinces—capable of raising, managing and spending their own revenues—can tailor policies to local needs, invest in infrastructure and deliver services more efficiently.

The unity demonstrated by the provinces in Hetauda is thus a critical step forward. By creating a common platform, the provincial finance ministers have transformed scattered grievances into collective bargaining power. They now have an institutional voice to negotiate with the federal government and advocate for constitutional amendments, legal reforms and fair fiscal arrangements. The Declaration, if implemented, could become a watershed moment in federal evolution—similar to how inter-provincial coordination mechanisms in mature federations transformed fiscal relations over time.

The path ahead, however, will not be easy. Federal ministries may resist sharing revenue authority, fearing loss of control. Political leaders at the centre may view provincial unity as a challenge rather than an opportunity for partnership. Bureaucratic inertia may also slow down institutional reforms. To overcome these obstacles, provinces must maintain solidarity beyond declarations. The new council must develop a common technical secretariat, produce evidence-based policy proposals and engage constructively with federal agencies. They should also collaborate with academic and research institutions to produce data-driven analyses of fiscal transfers, expenditure patterns and revenue potentials.

For development partners and the policy community, this is a moment to support—not resist—subnational empowerment. International experiences show that strong federations are built not on uniformity but on cooperation and mutual respect among tiers of government. Fiscal federalism, when practised effectively, enhances both efficiency and equity by allowing decisions to be made closest to the people while maintaining solidarity through fair redistribution.

The success of the Hetauda Declaration will ultimately depend on sustained political will, institutional innovation and constructive federal–provincial and local dialogue. The challenge now is to translate intent into implementation—turning the declaration into a blueprint for reform and shared prosperity.

Provinces must act collectively yet responsibly, ensuring that their pursuit of autonomy is accompanied by transparency, fiscal discipline and accountability. The federal government, in turn, must recognise that fiscal devolution strengthens—rather than weakens—national unity. A federation where provinces and local governments are empowered, coordinated and fiscally self-reliant will be more stable, resilient and responsive to citizens’ needs.