Fiscal Decentralization and Fiduciary Risks: A Case Study of Local Governance in Nepal

Abstract

This study analyzes the risks inherent in the existing fiscal transfer system to local bodies in Nepal, particularly those related to block grants. It argues that the nature and severity of these risks with respect to the government’s flagship Local Governance and Community Development Program are such that they need to be understood in the broader context of the general public financial management (PFM) system as well as the constraints inherent in local governance. The study concludes that mitigating risks in intergovernmental fiscal transfers should focus on, among others, continual and real-time review of performance benchmarks, upgrading the risk monitoring protocols, enhancing accountability mechanisms at local body level, and enhancing local body capability to manage PFM-related processes.