Implementing Federalism: The Case of Nepal

The new constitution of Nepal established a federal system of governance in 2015. Local elections were held in 2017 and implementation began in 2018. The new system is composed of seven provinces and 753 local governments structured in a decentralized form of fiscal federalism. The Constitution assigns important functional responsibilities to provincial and local governments, and mandates that they have significant autonomy in deciding how services will be delivered. Sub-national governments will account for about one-third of (budgeted) total government expenditures in FY 2019, financed primarily by intergovernmental transfers. This paper describes the new federal system (now in its third year of operation), discusses the early implementation successes and challenges, and draws some lessons from Nepal’s experience.