Nepal’s federal experiment is an ambitious attempt to address the country’s governance challenges. Emerging from the Maoist insurgency and consequential political evolution, it has progressed at some pace in keeping with the 2015 Constitution. Despite significant challenges and political disputes, constitutional governance since the 2017 local elections has instituted 753 local governments across Nepal and laid the foundations for a constitutional third tier of government besides the provincial and federal government.

Despite these positive achievements and landmarks, many questions on institutional capacities and confusion over jurisdictions and governance of resources have emerged. Now, over a decade of federalism experiment, this ambitious restructuring, the system often demonstrates signs of lethargy and a state of coma, struggling to exhibit the dynamism it was meant to demonstrate. While constitutional responsibilities have been formally devolved to provincial and local governments, this transfer has not been armored with the necessary financial resources to execute those duties. This fiscal crippling asymmetry means subnational governments are rich in obligations but poor in funds, leaving them perpetually dependent on Kathmandu.

Furthermore, the promised political autonomy for these new units has been consistently marred by stringent conditionalities attached to the grants they receive. The very process of budget preparation has become deeply politicised. Consequently, the execution of development plans and public services has become a joke, with grand promises on paper rarely translating into tangible improvements in citizens’ lives. The federal budget has risen—from about Rs1,315 billion in FY2018-19 to about Rs1,860 billion in FY2024-25—but provincial fiscal space has been contracted. Yet the grant envelope for provinces fell from around Rs123 billion to about Rs96 billion over the same period, and the provincial grant share of the federal budget dropped from around 9.39 percent to 5.18 percent.

The shrinking of budgets renders provincial governments ceremonial. Provinces were meant to plan and invest in provincial roads, agriculture and industries, hospitals, disaster management and regional economic corridors. Instead, provincial budgets have become an annual exercise in managing dependence. One estimate notes that the combined total provincial budget was about Rs270 billion in FY2023-24, and roughly 65 percent of provincial budgets are sourced from fiscal transfers (grants and revenue sharing), with internal revenue contributing only about 16 percent. A province that cannot reliably mobilise its own revenue cannot behave like a government.

Although local governments are frequently portrayed as the success story of Nepal’s federal transformation, they are increasingly experiencing the same fiscal constraints that plague the provincial level. Financial transfers continue to flow to local governments, yet a growing proportion of these resources arrives with rigid strings attached, severely limiting the ability of local governments to address the actual priorities of their communities. In the 2023-24, conditional grants constituted approximately 65 percent of total grant transfers to local levels, with some estimates suggesting this share has risen even further in 2024-25. Even more concerning is the steady decline in fiscal equalisation grants, the core unconditional transfers designed to promote equity and local discretion, when measured against the total national budget. This erosion of flexible funding represents a quiet but effective reversal of decentralisation. The federal government consolidates control by tightening its grip on local purses through proliferating earmarks, leading to a state of coma.

Nepal’s federal system is also hindered by a crisis of execution, where allocated funds often go unspent or are released too late to be effective. According to the World Bank’s 2024 update on fiscal federalism in Nepal, provincial governments underspent 34 percent of their budgets in FY2022-23, while local governments underspent 24.4 percent. This means nearly one-third of provincial budgets and about a quarter of local budgets remain unutilised. Such persistent under execution undermines service delivery and reinforces the perception that subnational governments are ‘incapable,’ even though this inefficiency is partly engineered through understaffing, delayed fund transfers, complex procurement procedures, and overlapping mandates. As the table below illustrates, the consequences are tangible for citizens, visible in stalled roads, incomplete buildings and delayed public services. When lawmakers and powerful actors become beneficiaries of development funds, oversight collapses because critics become stakeholders. This logic is now spreading downward into provincial budgeting, where chief ministers and ministers face accusations of diverting disproportionate funds to their own constituencies.

The most telling indicator that weak implementation has become a systemic issue rather than an occasional one is the growing reliance on ‘cash balance’ or unspent funds carried over from previous years as a key component of provincial budgets. In FY2025-26, cash balances are projected to account for approximately 16.66 percent of total provincial revenue, amounting to around Rs47.9 billion. This means provinces are funding new plans using money that was never spent in the past. Relying on such balances is evidence that governments failed to turn allocated resources into tangible outcomes. When unspent funds become a routine source of revenue, accountability becomes blurred, and leaders can announce ambitious budgets while quietly carrying forward the evidence of underperformance.

Although these numbers sound technocratic, their consequences are deeply felt. Many provincial governments appear politically assertive but administratively fragile because they depend on federal funding, which is increasingly unreliable. When equalisation transfers are delayed or cut mid-year, as reportedly happened in FY2024-25 due to revenue shortfalls, the system falls into distress. Such moves provoke backlash from local governments and raise concerns that constitutionally guaranteed transfers are being treated as discretionary. Regardless of fiscal justification, the message is clear that subnational planning becomes impossible when the centre can pull the plug at will.

To revive federalism, Nepal must first ensure that equalisation grants grow in step with the national budget, especially for provinces with limited revenue bases. Second, it must rebalance its grant structure. Conditional grants have their place, but when they overshadow unconditional transfers, local autonomy becomes a myth. A stronger model would guarantee adequate untied funding, with conditional grants layered on top for specific outcomes.

Thirdly, the system must reward performance without penalising poorer provinces by embedding support mechanisms such as technical staffing and digital financial management that build capacity rather than impose unfunded expectations. Finally, equally critical is the depoliticisation of development budgets, as treating allocations as political rewards undermines accountable governance and transforms oversight into patronage. When lawmakers become direct beneficiaries of funds, they lose both the incentive and ability to hold the government accountable.

Federalism in Nepal is not failing due to public rejection, but because the state operates with a unitary fiscal mindset, centralising control while decentralising responsibility. This contradiction leads to shrinking provincial autonomy, excessive conditionality and growing public cynicism. Underspending and administrative paralysis have left citizens feeling that little has changed under the new system. The way forward is either to politically renegotiate and restructure federalism or to abandon it and complete it by restoring fiscal dignity and providing genuine discretion to provinces.