Nepal has taken a step toward strengthening its federal financial system, with the Intergovernmental Fiscal Council deciding to increase financial equalisation grants in line with the growth of the federal budget.
The decision, made during a meeting at the Ministry of Finance, aims to improve the balance of resources between federal, provincial, and local governments. At the same time, authorities plan to gradually reduce conditional grants, signalling a shift toward giving subnational governments more flexibility in spending.
Officials also agreed to tighten how budgets are allocated. Smaller, fragmented projects and duplication across levels of government will be discouraged by setting minimum thresholds for development spending. The introduction of a “project bank” system will require all three levels of government to prioritise and manage projects more systematically, with coordination led by the National Planning Commission.
The meeting also focused on improving efficiency and accountability. Plans include phasing out unallocated budgets, clearing stalled or underperforming projects, and reducing unnecessary recurrent spending through stricter austerity measures. Governments at all levels have committed to addressing outstanding arrears with time-bound plans.
Efforts to boost internal revenue were also discussed, including removing legal and procedural barriers to the use of natural resources such as forests and river-based materials. A new formula is expected to increase the share of royalties received by local governments.
Authorities say the reforms are designed to make fiscal transfers more transparent and predictable while reducing long-term dependence on federal grants and improving overall service delivery.