Tilagufa Municipality in Kalikot district is implementing several projects related to health, road, drinking water and small hydropower this fiscal year.

One of them is building a 14-km road between Chhapre and Balichaur linking three villages in the rural municipality and a budget of Rs50 million has been allocated for it.

For the road project, the municipality expects Rs30 million from the federal government as part of the fiscal equalisation grant that provincial and local governments are legally entitled to.

But with the federal government struggling to raise revenue as expected, they may not get the promised fiscal transfer.

“We will have to reduce the fiscal equalisation grant to the provincial and local governments if the revenue decreases by more than 10 percent of the target,” said Dhaniram Sharma, chief of budget division at the Finance Ministry.

In the first month of the current fiscal year, revenue collection came down by 12 percent to Rs58 billion compared Rs67 billion collected in the same period last fiscal year, according to the Finance Ministry.

Under the fiscal equalisation grant, one of the five ways that the federal government transfers funds to provincial and local governments, the federal government transfers 15 percent of the value added tax and 15 percent of excise duty to provincial governments and to local governments, according to the Intergovernmental Fiscal Arrangement Act 2017.

The federal government’s biggest source of revenue is the value-added tax with 36 percent of the total revenue of the current fiscal year coming from it.

Provincial and local governments had prepared their plans and programmes for the fiscal year taking into account the grant that they would receive from the centre.

“It will be difficult for both provincial and local governments to implement their development programmes without receiving the promised budget,” said Indra Bahadur Angbo, minister for economic affairs and planning at Province 1.

But, according to the Appropriation Act 2020, the federal government can reduce the promised fiscal transfer if revenue collection remains lower than targeted.

It provides these funds in four instalments and with the first instalment already sent it can still adjust the amounts depending on future revenues.

“The existing ratio fiscal transfer allocated to provincial and local governments is already very low,” said Angbo, referring to the fixed proportion of 15 percent of value added tax and excise duty.

While the amounts received under the fiscal equalisation grant is fixed, the other three grants are not. Conditional grants are given to provincial and local governments to implement set programmes of the federal government including paying the centre’s liabilities such as salaries to the government staff, special grants are given for programmes which are of the provincial and local governments but are part of the federal government policies, and supplementary grants are based on proposals on infrastructure development. Revenue sharing is fixed and the source is the revenue from natural resources within the province or the municipality territory.

According to Angbo, in the fiscal year 2019-20, because of reduced revenue, the provincial governments received only 60 percent of the promised amount under the revenue sharing mechanism.

Provincial and local governments heavily rely on the federal government for much of their annual expenditure. For example, in the fiscal year 2018-19, the seven provincial governments received a total of Rs110.46 billion from the centre while they were able to generate only Rs68.72 billion, according to Financial Comptroller General Office, which keeps record of the income and expenditure of the three tiers of the government.

The local governments rely even more on fiscal transfer from federal and provincial governments. In the fiscal year 2018-19, local governments were dependent on nearly three quarters of their budgets from the federal and provincial governments, according to the Financial Comptroller General Office.

In total, from the federal government they received 55 percent of their resources. Of the total budget of Rs382.6 billion of the 753 local governments, the contribution of the federal government was Rs210.71 billion. The other 20 percent was received from respective provincial governments.

Due to the coronavirus pandemic, all three tiers of the government are struggling to collect the revenue as per the target. In previous years, the federal government usually met the revenue target.

In the last fiscal year, revenue collections remained far less than initially targeted due to the lockdown imposed to prevent the coronavirus spread. While the government’s target was to collect Rs1.11 trillion in the last fiscal year, it revised the collection target to Rs827 billion during the mid-term review in early 2020. At the end it collected revenue of merely Rs793 billion.

But total collection reached Rs841 billion with unutilised monies from various funds.

“As the COVID-19 pandemic is spreading, we cannot rule out reduced revenue collection,” said Sharma of the Finance Ministry.

Provincial governments can raise internal loans to meet the shortfall of resources to implement their programmes. As per guidelines issued by the National Natural Resources and Fiscal Commission, they can raise international debt as much as 12.5 percent of their last fiscal’s revenue collection.

But, Minister Angbo said that the federal government has failed to prepare federal law on how the provincial governments could raise debt and without it they are helpless in this regard.

“Provincial laws and rules are prepared based on federal laws and rules and the federal government has not yet prepared its own law to guide the provincial government,” said the minister.

Local governments which are heavily dependent on the centre for grant are also worried about possible reduction in funding.

‘We award contracts for various projects assuming that the central government will provide the promised budget,” said Ashok Byanju Shrestha, president of Municipal Association Nepal, a grouping of municipalities. “How can we pay the contractor without getting promised resources from the federal government?”

Not getting the promised funds would mean Tilagufa Municipality may not be able to finance a drinking water project in Baidhunga which would serve around 300 families.

It is relying on the federal government to provide Rs3 million for it.

“Without the central government’s funding, it will be difficult to implement the important project,” said Ratna Bahadur Shahi, mayor of the municipality.