Revenue Shortfall Forces Cut in Fiscal Equalization Grants to Provinces and Local Levels

The federal government has reduced the fiscal equalization grants allocated to provincial and local governments after revenue collection fell significantly short of the annual target in the first half of the current fiscal year 2082/83. The decision follows a mid-year review that revealed slower-than-expected income generation, putting pressure on the federal treasury and compelling adjustments in intergovernmental fiscal transfers.

In a circular issued on Magh 27, the Office of the Financial Comptroller General instructed all Treasury and Accounts Controller Offices to limit the disbursement of the third installment of fiscal equalization grants. According to the directive, revenue collection until the end of Poush stood at only 81.75 percent of the targeted amount for the review period. Based on this proportion, the Ministry of Finance directed that transfers to provinces and local bodies be adjusted accordingly.

As per the revised formula, of the 25 percent allocated for the third quarterly installment, only 20.43 percent will be released. This effectively caps total transfers up to the third installment at 70.43 percent of the approved annual budget. The adjustment mechanism had already been outlined in the Ministry of Finance’s 95-point budget implementation guideline issued in Shrawan, which stated that while the first and second installments would be released as per initial estimates, the third and fourth installments would be recalculated based on actual revenue performance.

The revenue data paints a concerning picture. The government had set an ambitious target of Rs 1.53 trillion (Rs 15 kharba 33 arba 44 crore 69 lakh) in total revenue for the fiscal year. However, by the end of Poush, only Rs 588.51 billion (Rs 5 kharba 88 arba 51 crore 42 lakh) had been collected—equivalent to just 38.38 percent of the annual target. This substantial gap between projection and realization has directly affected fiscal space, prompting the reduction in grants.

The move has revived memories of last fiscal year, when similar cuts triggered strong dissatisfaction among provincial and local governments. In 2081, the Financial Comptroller General had initially limited the third installment to 13.24 percent of the annual allocation, capping total transfers at 63.24 percent up to that stage. Following widespread criticism and protests from subnational governments—many of which had already awarded contracts and initiated development projects—the decision was revised. A subsequent circular issued on Falgun 13 increased the third installment to 21.08 percent, allowing total transfers to reach 71.08 percent of the annual budget.

Despite the revision, last fiscal year also witnessed reductions in the fourth and final installment. On Baisakh 16, 2082, the Ministry of Finance directed another cut in the final tranche, resulting in only 20.68 percent being disbursed for the fourth installment. Ultimately, provinces and local levels received only 91.76 percent of their approved annual budget by the end of the fiscal year.

The repeated pattern of mid-year cuts underscores the structural challenges in revenue mobilization and fiscal planning. While the federal government has adopted a rule-based approach—linking grant disbursement to actual revenue performance—the volatility has created uncertainty for subnational governments. Development projects that depend heavily on fiscal equalization grants face risks of delays, budget revisions, and contractual complications.

From a fiscal policy perspective, the government appears to be prioritizing macroeconomic stability and deficit management over unconditional transfers. However, critics argue that overestimation of revenue targets during budget formulation continues to strain intergovernmental fiscal coordination. Unless revenue projections are aligned more realistically with economic conditions and tax administration capacity, similar adjustments may become a recurring feature of Nepal’s federal fiscal framework.

With the fourth installment also subject to recalibration based on revenue collection until the end of Chaitra, provincial and local governments now face heightened uncertainty. The coming months will be critical—not only for revenue mobilization efforts but also for sustaining development momentum at the grassroots level.