The government has reduced grant allocations to provincial and local governments after revenue collection failed to meet targets during the first half of the current fiscal year.
In a circular issued last week, the Financial Comptroller General Office (FCGO) directed Treasury and Auditor Offices to trim the third instalment of fiscal equalisation grants. Under the revised arrangement, sub-national governments will receive only 20.43 percent of the originally allocated third instalment.
The decision follows a 95-point budget implementation guideline enforced by the Ministry of Finance (MoF) for the current fiscal year. As per the guideline, the third instalment of fiscal equalisation grants is tied to revenue performance in the first six months, while the fourth instalment will be released based on the ratio between the revenue target and actual collection by mid-April.
In the previous fiscal year, provincial and local governments received 91.76 percent of their approved annual budget by the fourth instalment. A year earlier, the government had slashed 50 percent of the third instalment of equalisation grants.
For several years, revenue mobilisation has consistently fallen short of targets, largely due to a prolonged economic slowdown. Between mid-July 2025 and mid-January 2026, the government collected Rs 581.41 billion in revenue—2.5 percent higher than during the same period last year. However, this figure was Rs 129.80 billion below the half-year target of Rs 711.21 billion.
The six-month revenue collection accounts for only 39 percent of the annual target. For FY 2025/26, the government aims to raise Rs 1.533 trillion in revenue.
Through the annual budget, the government has allocated Rs 417 billion to provincial and local governments under four categories of fiscal transfers: equalisation, conditional, special, and supplementary grants. Of this total, Rs 97.56 billion is designated for provincial governments, while Rs 320.26 billion has been set aside for local levels.
Based on recommendations from the National Natural Resources and Fiscal Commission, the MoF has earmarked Rs 60.66 billion in fiscal equalisation grants for provinces and Rs 88.97 billion for local governments in FY 2025/26.
