Political Economy of Intergovernmental Transfers in Nepal: How Politics Shapes the Distribution of Grants and Special Funds

The 2015 Constitution established a complex fiscal-tiers framework to distribute resources among the three tiers of government in Nepal. This paper aims to assess the allocation of grants and special funds to local levels based on political considerations. The study uses secondary data from the National Natural Resources and Fiscal Commission, the Ministry of Finance, the Office of the Auditor General, the Supreme Court. Civil society. The research discovers that despite the constitutional rules and regulations, there are informal understandings among ruling party leaders about allocating grants and special funds to selected municipalities and provinces based on political considerations.The National Natural Resources and Fiscal Commission Act 2017 recommend providing equalization grants to the local governments through a transparent and scientific mechanism. The equalization was supposed to be based on population (70%), area (15%), Human Development Index (5%), and the level of underdevelopment areas (10%). However, the special grant and complementary grants have been distributed according to political considerations of the ruling party. For instance, the Constituency Development Fund has been distributed to the provincial assemblies based on the constituency of the Member of Parliament (MP). In the fiscal year 2026/27, the Sudurpashchim province got Rs 2.23 billion from the constituency development fund, while Bagmati province received over Rs 4 billion from the fund. Despite the Supreme Court ruling in 2023/24 that the unfettered allocation of the constituency development fund was unconstitutional, the unconstitutional funding culture persists in Nepal’s federalism.The paper finds that the number of people living in a local administrative division is negatively related to the amount of money allocated to it. For instance, the metropolitan cities had fewer wards, wider areas, and higher population density than the other cities. However, the metropolitan cities received 3.4% less per capita than other municipalities with the same number of wards, area, and population. The study concludes that despite the constitutional provisions, there are informal political considerations in allocating special funds and grants to municipal and provincial levels.