Fiscal Federalism: Opportunities and Challenges for Nepal

There has been a furious debate by political parties and intellectuals alike in Nepal on making the transition to federal system of governance. The attempt to evolve a federal constitution has stumbled in the first step of adopting acceptable criteria for restructuring the country in terms of the number of states. While some consider economic viability as a principle, there are others who believe that federalism is the solution for historical neglect and exploitation of various ethnic groups. Given the poor growth performance, large and persisting interregional and interpersonal disparities and the feeling of being excluded by certain groups, there is a strong feeling that adoption of a federal governance structure would be the solution to ensure growth and stability. It is important to reflect and understand on what federalism can do and what it cannot. Furthermore, in revolving a federal system it is important to get the fundamentals right. This paper discusses the challenges faced by the Constituent Assembly (CA), the tasks at hand in setting up the multilevel fiscal system and fundamental principles that the CA should take into account in drafting the Constitution.