Nepal’s Budget: Translating Fiscal Ambition Into National Confidence

KATHMANDU: When Finance Minister, Bishnu Paudel, tabled the 2025/26 federal budget last month, it arrived with optimism and clarity of direction. Declaring an Information Technology Decade, launching a sovereign AI Center, earmarking capital for startup loans, and envisioning the export of green energy to Bangladesh are all laudable initiatives. The framing is progressive; the tone is developmental. But the work now begins- not in imagining, but in architecting, not in commitments, but in conversion. The outline is convincing – the empty spaces between its lines are where success or failure will reside.

While the greatest fault lines of this budget lies where the numbers disappear from the headlines: the Capital Market. It might feel that, without deep, liquid, rule-based markets the rest of the document is nothing more than an aspirational pro-forma. However, what this budget needs now is not a rewrite – it needs a playbook to translate this vision into velocity.

In fact, Nepal’s growth ambitions are not too big but our financial plumbing is too small. Therefore, until a budget implementation playbook opens with bond-market schedules and includes risk transfer mechanisms, every line-item in the budget will remain an IOU (I Owe You) to the future. These five pillars will be ingredients for Government of Nepal to move from aspirations to execution:

Fixed income maturity

The most critical input for implementation is not tax policy or departmental budget lines – it is cost of capital. This budget, like many before it, raises the deficit and leans on domestic borrowing to plug the gap. But with no reliable benchmark for medium to long term sovereign debt – market is forced to either guess the discount rate or solely rely on banks short term floaters for loan benchmarks.

To unlock capital formation, we need a robust yield curve architecture, so market can enforce expected cost certainty and discipline.

Every economy that cracked the middle-income trap – from Mexico in 1995 to Indonesia – post Asian crisis, first built a sovereign yield curve. Auction 3-, 5-, 10, and 20- year tenors of treasury instrument on a rolling calendar, serviced by licensed primary-dealer network. Once term risk is discoverable, it takes much volatility out of expected cost of capital- This allows a transparent pricing of risk.

Absence of this risk-based pricing and term structure uncertainty could be attributed to much of capital formation friction, and failures in raising capital via diaspora bonds, green bonds and similar project backed infrastructure debt from broader institutional pool. Furthermore, this architecture is not exotic at all. World has been doing it since decades. India implemented this two decades ago. Bangladesh is refining it now. So, we will find enough case studies to avail policy discussion on how Nepal should proceed.

Diaspora and institutional capital mobilization

The budget envisions major infrastructure investments in energy, logistics and digital public goods. These need financing mechanisms beyond Treasury bills. Nepal should look towards launching Diaspora Infrastructure Bonds, Green Bonds, Hydropower Bonds etc. and Sub Sovereign debt while making them Bankable. The keyword here is “Bankable”. Mere declaration without correct plumbing will simply spook the market, erode trust and result nothing more than un-subscribed bonds.

“Bankable” means, packaged with required legal scaffolding: a sovereign yield curve, a credit rating framework that also ties to country rating (that is accepted by external market), financial engineering (hedges, risk adjustments, sovereign or multilateral credit back-stops, remittance collateralization etc.) to make instruments palatable for international institutional capital and a secure issuance platform.

Kenya, Egypt and Ghana have all raised diaspora capital with similar instruments. Nepal has the diaspora sentiment – we now need the trust infrastructure and unlock procedural bottlenecks.

One could at-least imagine pilots in one of the declared focus areas. Example- A USD linked green bond issuance, which is trusted third party settled. Tax -deductible for migrant workers and KYC- light for overseas Nepalis. Escrowed proceeds would fund green infrastructures and EV corridors, audited via technology (not Bureaucracy). Rwanda’s Umuganda bonds and Nigeria’s diaspora notes are great case studies; Nepal only needs some courage, the right rails and clean execution.

Let’s now talk federalism, keeping aside if it has worked or not – the budget presents an opportunity to overhaul fiscal alignment. In Colombia, Medelin rebuilt its metro with EPM revenue bonds; in India, Pune finances 24 X7 water via municipal debentures. Cities like Biratnagar, Pokhara and Bharatpur could securitize wastewater tariffs, tourism levies and other future revenues. The correct scaffolding that government should work on is imagination of a “Municipal & Provincial Bonds Act” – allowing sub-sovereigns to participate while pricing risk off a sovereign yield curve along with a coupon cap (to safeguard against exuberant risk taking) – This would ease federal capex pressure and make space for local accountability. Brazil’s Debentures de Infraestrutura, Philippines’ LGU bonds and South Africa’s green municipal notes prove that sub-sovereign credit is bankable – after transparency rules are hard wired.

Use capital market tools to risk share and risk transfer

Our banks today sit on a ticking credit hotspot. Non-Performing Assets secured by real estate are inching beyond previous seen levels. Our Ministries hold brownfield industrial assets that generate zero return. And our pension funds seek stable yield with inflation protection. This is a classic alignment opportunity to reset the rhythm of the economy. We should revisit the regulations that envisions Banks’ lending only on-balance-sheet. This requires them to carry impaired real asset at steep haircuts, absorb full capital charges and wait for court-run auctions that seldom clear. The outcome: frozen credit, window dressing, delayed write-downs and starvation of working capital. The solution: revisit the regulation to allow bank’s role to be pure risk intermediation (and not complete risk retention).

A Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvIT) regime is the lowest-risk structural fix.

It would give banks a regulated financial warehouse facility where assets could be pooled, unitized and sold to long-term yield investors. The vehicle allows banks to decongest their balance sheet. This market self regulates where banks are automatically punished (via pricing) for low quality underwriting and permanent impairment but allows banks to engage in intermediation where risk (and thus yield) is transferred to long duration institutional capital that can hold the asset through credit cycles and thus whether temporary impairments (while earning attractive yield).

Banks receive cash plus liquidity, Risk-Weighted Assets (RWAs) fall and new lending head room opens without inflating the monetary base – public benefits from recycled capital. Bangladesh did this in 2023, Sri Lanka in 2020 and Kenya as well – interventions resulted in fall of Non-Performing Assets (NPAs), freeing regulatory capital and stabilizing valuations – all outcomes that Nepal would welcome right now. We must not let our financial system carry deadweight assets through the next decade.

Institutionalize Fintech and AI with real plumbing

The budget commendably introduces a national AI Center and hints at a Neo-bank framework – important signals, but ones that will remain symbolic unless embedded into a durable ecosystem. Globally, successful fintech ecosystems are not declared from podiums; they are built on interoperable infrastructure, regulatory clarity and trustable rails. Nepal now must institutionalize key enablers that together form the backbone of modern financial intermediation.

Open API licensing stack is a must. A Neo-Bank charter should require real-time data exchange with legacy banks via an open banking gateway that could be modelled on Brazil’s Open Finance (2020-23) and Singapore’s Payment Services Act (2019).

Both frameworks stipulate capital tiers, cyber resilience metrics and a shared consent dashboard. We must compel real time data sharing across banks, insurers, telcos and fintechs. Doing so will have biggest impact in access to credit.

As it will allow financial products to be priced not just on collateral and income statements, but on verified credit behavior data. In practice, this means a microfinance lender in province capital could underwrite a rural woman entrepreneur’s working capital needs using telecom usage, merchant QR code flows and utility bill payments – all holding signals about her credit worthiness, all accessed digitally through consented APIs.

Ability to drive down the cost of KYC will be a key determinant. National ID must evolve from a static identifier to a programmable trust layer. Estonia’s X-Road system processes over a billion API calls annually, allowing every government agency to interface in real time. India’s Aadhaar, when fused with UPI and Digilocker, has brought down onboarding costs for banks and insurers to under 50 cents. Nepal, already has a functioning national ID. We should use this latent digital identity asset – overlay it with mobile first consent infrastructure and digital locker standards.

As Nepal builds these deep plumbing we should keep an eye on the future. It will be crucial to ensure that the AI Center which Budget envisions does NOT be a think-tank behind bureaucracy and thus empowering AI enabled-exclusion. We should design it with spirit of Guardrails over Gatekeepers and Sandbox over Centers. All to say, policy should aim to drive bottoms up adoption and democratization of ideation. Countries like UK, UAE, Canada have championed playbooks that Nepal could adopt from.

This entire fintech ambition hinges on a real-time, low-cost payment rail. We must design and deploy an instant payment layer, much like India’s UPI or Brazil’s PIX.

The foundation already exists – NCHL infrastructure, QR code penetration and rising smart phone adoption. The missing piece is interoperability, ISO 20022 compliance and policy mandate.

If these four rails – Open APIs, digital ID layer, AI Sandboxes and Payment Rails are institutionalized – we can credibly host neo-banks, fintech lenders and AI native service providers. This would make budget’s “Digital Decade” framing completely implementable. Otherwise, the promise of AI and fintech will remain a well-meaning line in a well-intended document.

Plan to go from Pilot to Scale: We must weld vision to execution through an explicit, publicly monitored scaling framework. We must leverage the federal structure to our advantage. Every province should participate as pilot or sandbox for different ideas. For example, Koshi, Lumbini and Gandaki could be mandated as fiscal sandboxes where signature projects – a Birat Industrial REIT converting dormant jute-mill land into yield, a Border Logistics Bond securitizing dry-port fees, and an Agro-Factoring SPV financing farmers through fintech ledgers – are launched under tripartite agreements between municipal governments, regulated fintech and development finance institutions. Each pilot must publish ex-ante key execution parameters – land transfer data, tariff collection baselines, working capital turnaround times – and stream them to open-data dashboards. Once pilot meets a decided percent of target metrics, “a replicate and adapt” strategy should trigger rollout to the remaining provinces without procedural re-litigation.

Translating ideas into impact

Budget is merely an opening chapter, not the book and it should be judged precisely as that. The challenge is not the ambition – that has already been set, it is the architecture. Markets, instruments, legal infrastructure and sequencing: these are the hard edges of the transformation. The 2025/26 budget sketches a Nepal that trades electrons, exports megawatts, and prices risk in real time. Implementing that vision will test our institutional mettle, yet none of the prerequisites – Yield curve architecture and fixed income market maturity, diaspora and green bods, REIT legislation and efficient risk allocation, open-API rails and deep fintech plumbing – lies beyond reach.

It is for execution to now champion this belief that – we can build sovereign capacity not just through regulation, but through innovation. If cabinet, parliament, regulators and private capital choose to co-design and co-deliver, this fiscal year can become the hinge between aspiration and achievement. If we defer, the document will dissolve into recycled rhetoric. The choice is ours, and the time is NOW!

(The author is the Chief Data and AI Officer at the New York-based Cross River Bank. Views expressed in this article are his personal.)