Nepal's planning and budgeting processes are rooted in constitutional and legal frameworks designed to empower federal, provincial and local governments to operate within their respective jurisdictions. Article 59(1) of the Constitution grants these governments the authority to draft laws, prepare annual budgets and formulate and implement plans and policies. This constitutional provision is operationalised through various laws, including the Financial Procedures and Fiscal Accountability Act, 2076 (2019).

These steps form the foundation for preparing the medium-term expenditure framework (MTEF) and the annual budget. The MTEF provision, among other fiscal rules, is also reflected in the Intergovernmental Fiscal Arrangement Act, 2074 (2017). This law serves as a powerful policy tool for institutionalising fiscal federalism.

The National Planning Commission plays a critical role in the budgeting process. The national resource estimate committee, chaired by the vice-chairperson of the NPC and including high-level officials such as the finance secretary and the governor of the Nepal Rastra Bank, is tasked with estimating national resources available for the federal, provincial and local governments over the next three fiscal years. This estimation is based on projected investments and financial needs outlined in periodic plans, considering national and international commitments, priorities and goals such as poverty reduction and job creation.

Within the approved resource and expenditure limits, the NPC provides budget ceilings and the MTEF framework to ministries and agencies by the end of Magh (mid-February). These frameworks include guidelines and formats for drafting budgets for the next three fiscal years. Ministries and agencies must align their budget proposals with the objectives and policies outlined in periodic plans and adhere to the criteria specified in the Act. Proposals failing to meet these standards may face rejection by the NPC or the Ministry of Finance. After evaluating these proposals, the ministry prepares the final budget for the upcoming fiscal year.

However, oversight and compliance within the budgeting process present notable challenges. A review of plans and programmes of various ministries, such as the Ministry of Physical Infrastructure and the Ministry of Urban Development, reveals frequent non-compliance with the Government of Nepal's Allocation of Business Rules. These lapses highlight the shared responsibility of the ministries, the Ministry of Finance and the NPC in ensuring adherence to established rules and procedures.

Once the budget proposal is finalised, the finance minister presents the principles, priorities and details of proposed programmes and projects to the Federal Parliament two months before the budget is formally tabled. After incorporating parliamentary feedback, the budget is presented at a joint session of the Federal Parliament on Jestha 15 (late May). Following parliamentary approval, the Ministry of Finance authorises relevant ministries or agencies to implement the approved programmes and projects.

Fiscal transfers and project classifications are integral to planning and budgeting, particularly for provincial and local governments. Revenue sharing and fiscal equalisation grants for subnational governments are directly managed by the Ministry of Finance, guided by the National Natural Resources and Fiscal Commission (NNRFC) recommendations.

Fiscal transfers come in four forms: fiscal equalisation, conditional, special and matching grants. These transfers aim to address the significant fiscal dependency of subnational governments on the federal government, which controls over 80 percent of public revenues. The conditional grants are channelled to the subnational units through the line ministries, while the special and matching grants are managed through the NPC.

Subnational units benefit from revenue-sharing mechanisms, receiving 15 percent each from nationwide collections of value-added taxes and excise duties on domestic products. Additionally, they retain 25 percent of the royalties generated within their jurisdictions. The NNRFC ensures equitable distribution of these revenues by considering population, geography and the Human Development Index. Still, equity issues remain across the provinces and local levels.

Budget allocation misaligned

An analysis of the budgets of the 18 federal ministries from FY 2022-23 to FY 2024-25 reveals that allocation patterns are unscientific and marked by disparities. Notably, the budget of the Ministry of Urban Development increased significantly—by 20.3 percent in FY 2023-24 and 40 percent in FY 2024-25—exceeding the limits set by the Resource Estimate Committee, which the vice-chairperson of the NPC leads. The OPMCM, bypassing standard procedures, directly influenced this increase.

Additionally, the allocations included "pocket projects" chosen by the members of the House of Representatives under the constituency development programme. These projects, introduced covertly, had been declared unconstitutional by the Supreme Court.

The distribution of budgets across ministries appears inequitable and influenced by varying levels of political clout. While influential ministries secure larger budgets, others receive minimal increases. For example, the budgets for the Ministry of Education, Science and Technology and the Ministry of Health and Population—both crucial social ministries—grew by only 3.2 percent and 2.7 percent, respectively, in FY 2024-25. Similarly, several ministries, including the Ministry of Labour, Employment and Social Security and the Ministry of Agriculture and Livestock Development, witnessed budget reductions this fiscal year.

Resource allocation undermines constitutional principles of federalisation. While federal ministries retain most resources, conditional grants to subnational governments remain restrictive. These grants are accompanied by rigid guidelines that limit the autonomy of subnational governments to adapt spending based on local needs. The Ministry of Urban Development allocated only 8 percent of its budget to provincial levels and 17 percent to local levels in FY 2024-25. Other ministries, such as Physical Infrastructure and Transport and Youth and Sports, allocated no resources to subnational levels in FY 2024-25.

An examination of budget allocations across federal, provincial and local levels further highlights the disparities. For instance, the Ministry of Health and Population increased its share to local levels from 27 percent in FY 2022-23 to 39 percent in FY 2024-25, while its allocations to provincial levels stagnated at around 7 percent. On the other hand, ministries like Labour, Employment and Social Security and Education, Science and Technology allocated significant shares to subnational functions, with the latter allocating 69 percent of its budget to local levels in FY 2024-25. In contrast, ministries responsible for subnational functions, such as Agriculture and Livestock Development and Water Supply, allocated minimal resources to local levels.

Programmes and budgets that should have been fully devolved remain under federal control, contradicting the constitutional mandate to empower subnational units. The principle of gradually reducing conditional grants has not been effectively realised.

Conclusion

Planning and budgeting frameworks rooted in constitutional provisions hold immense potential to strengthen federalism. However, addressing persistent challenges like non-compliance and fiscal dependency is paramount to reforming the budget system and enhancing subnational autonomy. A robust framework emphasising effective coordination, equitable resource distribution and adherence to revised fiscal standards can foster transparency and accountability.

Disparities in resource allocation across sectoral ministries reveal an urgent need for reform. Political influence continues to skew budget allocations, leaving essential ministries underfunded and undermining the principles of federalisation. A scientific approach to budget allocation must be adopted to rectify these issues, guided by equitable and needs-based criteria. Ensuring compliance with constitutional provisions and gradually reducing dependency on conditional grants are critical steps toward empowering subnational units. These reforms will not only promote balanced resource distribution but also strengthen governance at federal, provincial and local levels, enabling subnational governments to meet their responsibilities and drive sustainable development effectively.