Nepal’s federal transition has devolved into one of the most expensive and socially divisive political projects in the nation’s history, characterized not only by staggering fiscal waste including billions in infrastructure losses and over 17,000 conflict-related deaths but also by profound human costs manifested through systemic violence, mass displacement, and institutional abandonment. While President Ramchandra Paudel’s 11-point policy agenda for FY 2025-26 demonstrates conceptual viability, its potential remains neutered by three decades of institutional paralysis and implementation failure, reflecting a fundamental disconnect between policy formulation and execution.
The current wave of social unrest of encompassing victims of financial fraud, debt-ridden microfinance clients, disenfranchised educators and disillusioned healthcare providers reveals the paradoxical reality of Nepal’s federal experiment: a thinly-veiled centralization of power perpetuated by the recycled political elite that has dominated Nepal’s governance structures for decades. These entrenched actors have weaponized federal rhetoric while maintaining extractive governance patterns, transforming what should be a devolutionary framework into an institutional facade that legitimizes traditional patronage networks. The central crisis lies not in federalism’s design, but in its strategic subversion by a political class that has perfected the art of state institutional capture.
The political economy
Federalism, in theory, represents a dual imperative: preserving autonomy of subnational politics while ensuring coordinated governance under a constitutional compact. Esteemed political economists like JE Chubb and Wallace E Oates, etc argue that successful federations require institutional alignment between political structures and economic policies to enhance resource and power allocative efficiency and equitable growth. Nepal’s 2015 Constitution beautifully sought to operationalize these principles through power delineations (Annexes 6–9), among subnational politics envisioning a shift from unitary centralism to cooperative federalism.
The Ministry of Finance reveals concerning fiscal trends, marked by rising expenditures, inefficient debt management, and persistent structural imbalances. In FY 2022/23, consolidated government spending surged by 11.1 percent (Rs 11,656.07bn), with current expenditures (56.3 percent of total spending) far outpacing capital investments (31.85 percent). While net current expenditure grew by 8.5 percent (Rs 932.39bn), capital expenditure saw only a 7.6 percent increase (Rs 527.45bn), a troubling indicator of misaligned fiscal priorities that favor recurrent costs over productive investment. More alarming is the 38.9 percent spike in debt servicing (Rs 196.23bn), reflecting deepening fiscal stress and potential governance inefficiencies in public financial management. The federal government dominated expenditures (61.8 percent), while provinces and local governments key subnational politics in Nepal’s federal structure remained fiscally constrained (10.8 percent and 27.4 percent, respectively). Despite Rs 397.36bn in intergovernmental transfers, the limited fiscal autonomy of subnational governments raises concerns about decentralization in practice.
Revenue collection (Rs 1,042.64bn) narrowly exceeded current expenditures, yet the federal deficit ballooned to 9.33 percent of GDP (up from 5.95 percent in FY 2021/22), signaling unsustainable fiscal practices. This deterioration suggests structural weaknesses in revenue mobilization, compounded by over-reliance on intergovernmental transfers rather than endogenous revenue generation. The Department of Customs (FY 2023-24) data underscore Nepal’s chronic trade imbalance, with imports (Rs 1,611.73bn) dwarfing exports (Rs 152.38bn) with an import-to-export ratio of 10.45:1. With 91.97 percent of trade value tied to imports, Nepal’s economy remains critically dependent on foreign goods, exposing vulnerabilities to external shocks. Export composition remains undiversified, dominated by low-value-added goods (soybean oil, sunflower oil, synthetic yarn), reflecting a failure to industrialize or move up the value chain. Meanwhile, remittance inflows
(Rs 1,051.77bn, up 9.4 percent) provide temporary stability but mask deeper structural flaws—Nepal’s economy is consumption-driven rather than production-oriented, perpetuating dependency rather than development. Without structural reforms, tax base expansion, export diversification and genuine fiscal decentralization, Nepal risks entrenching a low-growth, high-debt trajectory, where federalism becomes a facade for centralized inefficiency rather than a driver of equitable development.
Public goods and services
Key governance institutions spanning education, healthcare, social protection, disaster resilience, agriculture, security, courts services, public administration services and natural resource governance have regressed into systemic wickedness, marking a profound failure of the state’s foundational obligations. This institutional disintegration has precipitated a near-total breakdown in service delivery, rendering even the most basic public goods and services inaccessible to ordinary citizens. The education and health system, theoretically a mechanism for equitable advancement, now functions as a hollowed-out structure, marred by dilapidated facilities, chronic teacher deficits and catastrophic learning deficiencies. Private schools are out of control in many ways. Parallel decay plagues healthcare, which has bifurcated into a privatized escape for the affluent and a crumbling public sector plagued by staffing crises, medication scarcities and exploitative costs. The rural development languishes due to technocratic neglect and incoherent policy, and natural resource governance has devolved into institutionalized predation by political elites. This comprehensive institutional failure underscores a broader neoliberal devolution: the state has abdicated its role as a welfare guarantor, instead morphing into an extractive apparatus servicing elite patronage networks. The outcome is a pure privatization of basic rights: education, healthcare and security; transforming constitutional entitlements into exclusionary commodities. Nepal thus exemplifies a state in which governance failure is not incidental but engineered, sustaining hierarchies of access while eroding the very notion of public sovereignty.
Socioeconomic implications
These structural deficiencies have precipitated severe trade imbalances and accelerated youth outmigration, as domestic economic opportunities remain stifled. The inability to channel revenues into productive capital investments perpetuates a cycle of underdevelopment, exacerbating dependency on remittances and foreign credits. Unless Nepal addresses these institutional and governance failures, its fiscal policies will continue to fall short of generating sustainable, inclusive growth. Nepal’s political class has weaponized federalism to consolidate power rather than decentralize it.
Conclusion: Revolt or renewal?
Nepal’s federal experiment has collapsed not from constitutional flaws but through calculated sabotage by an entrenched oligarchy that has converted governance into patrimonial rule, hollowing out the 2015 Constitution’s devolutionary vision through pseudo-federal institutions maintaining feudal power structures. The political theater of recycled leaders staging mass spectacles merely legitimizes an extractive regime where federalism serves as institutional camouflage for centralized kleptocracy, with parties operating as patronage cartels prioritizing graft over governance, systematically eroding meritocracy and converting state apparatus into private wealth engines. This deliberate institutional subversion leaves Nepal facing existential alternatives: either radical democratic restructuring through constitutional and political overhaul or revolutionary breakdown when governance systems implode, with survival contingent on dismantling the recycled elite's stranglehold and creating authentic accountability mechanisms. The Nepali paradox offers a seminal case of how constitutional progressivism fails when implemented without disrupting entrenched power cultures and incentive structures.
The author is former chairperson of NEPSE
