Kathmandu: Federal government has reduced fiscal equalization grants to provincial and local governments after revenue collection fell significantly below target in the first half of the current fiscal year 2025/26.
In a circular issued on February 9, the Office of the Financial Comptroller General instructed all Treasury and Comptroller Offices to scale down the third installment of fiscal equalization transfers. The decision follows a directive from the Ministry of Finance after revenue collection reached only 81.75 percent of the mid-year target by mid-January.
According to the circular, while the third quarterly installment is normally set at 25 percent of the annual allocation, only 20.43 percent will now be released. This means that by the end of the third installment, transfers to provincial and local governments will not exceed 70.43 percent of the total approved annual budget.
The Ministry of Finance had earlier issued a 95-point budget implementation guideline at the start of the fiscal year, stating that the first and second installments of equalization grants would be disbursed as initially projected, but the third installment would be adjusted based on revenue performance by mid-January. The fourth installment, due at the end of the third quarter, would also be recalibrated according to revenue collection by mid-April.
The government had set a total revenue target of Rs 1.53 trillion for the fiscal year. However, by mid-January it had collected only Rs 588.51 billion, or 38.38 percent of the annual target, prompting the cut in transfers.
A similar situation unfolded last fiscal year. Provincial and local governments had strongly protested after the federal government reduced grants despite many projects already being contracted and under implementation. Initially, the third installment had been limited to 13.24 percent of the annual budget, capping transfers at 63.24 percent by that stage. Following backlash from subnational governments, the decision was revised, raising the third installment to 21.08 percent and allowing transfers up to 71.08 percent of the annual allocation.
Even so, the final installment was also reduced last year. In April, the Ministry of Finance directed the Comptroller General’s Office to trim the fourth installment, and only 20.68 percent was eventually released. As a result, provincial and local governments received just 91.76 percent of their total approved annual budget by the end of the fiscal year.
The latest cut signals continued fiscal strain at the federal level, with revenue shortfalls once again cascading down to subnational governments and potentially affecting ongoing development programmes.
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