Government Reverses Decision, Releases Rs 16.99 Billion Fiscal Equalization Grant to Local Governments

KATHMANDU: The government has decided to provide local governments with a fiscal equalization grant worth Rs 16.99 billion for the fiscal year 2023/24. This decision, made during a Cabinet meeting on Monday, reverses an earlier decision to withhold the remaining grant funds due to a shortfall in revenue collection.

Initially, the government had pledged Rs 87.35 billion in fiscal equalization grants to the 753 local governments when announcing the annual budget for the current fiscal year. However, only Rs 64.24 billion had been disbursed under this heading until now.

With the latest decision, local governments will now receive a total of Rs 81.23 billion. Despite this allocation, the amount still falls short by Rs 6.12 billion of the originally promised grant.

Although the local governments will receive the released grant amounts, provincial governments will not benefit from this disbursement this year. The government had earlier announced a similar grant worth Rs 57.67 billion for the seven provinces.

The Ministry of Finance (MoF) explained that the federal government halted the disbursement of the grant amounts due to a significant shortfall in revenue collection. The appropriation bill mandates that fiscal equalization grants to sub-national governments be based on the central government’s revenue collection.

MoF officials estimated that the revenue collection would be 30 percent less than the targeted amount for the current fiscal year. As of last month, the federal government’s reserve fund stood at a negative Rs 208 billion, with an additional financial liability of around Rs 250 billion needing to be managed between mid-June and mid-July, the last month of the fiscal year.

The decision to withhold the remaining grants had put the government under significant pressure. Sub-national governments warned of protests, and lawmakers frequently raised this issue during House of Representatives sessions.

Fiscal equalization grants are one of four types of intergovernmental fiscal transfers provided by the federal government to sub-national governments. According to the constitution, these grants should be distributed based on expenditure needs and revenue capacity.