Mounting Debts, Shrinking Prospects: Nepal at a Fiscal Crossroads

KATHMANDU: Nepal’s public debt has surged to alarming levels, climbing to Rs 2.676 trillion by mid-March 2025, an increase of Rs 241.93 billion within just the first eight months of the fiscal year. This rapid escalation is a result of unchecked government spending, sluggish revenue collection, and a failure to implement effective fiscal policies. A significant portion of the debt is allocated to non-productive expenditures, particularly debt servicing, which further exacerbates the financial strain. Experts have raised concerns that unless corrective measures are taken, the country could face a severe debt crisis that may hinder its long-term economic stability.

How much has Nepal’s public debt increased in the first eight months of the current fiscal year?
Nepal’s public debt has risen by Rs 241.93 billion in the first eight months of FY 2024/25, bringing the total debt to Rs 2.676 trillion by mid-March 2025. This increase marks a substantial growth compared to the Rs 2.434 trillion in public debt recorded at the beginning of the fiscal year in mid-July 2024. The government’s borrowing trajectory shows a worrying trend of increased dependency on loans, driven largely by a significant gap between government expenditures and revenue collection.

Public debt has more than doubled in the last five years, which has led to concerns over the sustainability of the country’s fiscal policy. While borrowing is a common tool for financing development, Nepal’s case highlights the risks associated with excessive borrowing without a corresponding increase in productive investments or revenue generation. As the country’s debt continues to swell, the long-term implications for the economy and future generations become increasingly troubling.

What was the government’s spending pattern in the first eight months of FY 2024/25?
In the first eight months of the fiscal year, the government of Nepal spent a total of Rs 841.14 billion. Of this amount, Rs 758.58 billion was used for regular expenditure and debt servicing, which includes payments on both the interest and principal amounts of previously borrowed funds. The remaining Rs 82.56 billion was allocated for capital expenditure, which is intended for productive investments, such as infrastructure development and social programs.

The fact that such a large proportion of government spending is directed toward debt servicing and non-productive expenditure underscores a critical issue in Nepal’s fiscal management. These expenditures are essential to meet the country’s debt obligations, but they come at the cost of investments that could foster economic growth and development. Furthermore, capital expenditure has remained stagnant, further hindering Nepal’s progress toward building a more diversified and resilient economy. Without a substantial increase in productive investment, the country may struggle to generate the economic returns necessary to repay its growing debt in the future.

How much revenue did the government collect during the same period?
During the first eight months of FY 2024/25, the government collected a total of Rs 739.30 billion in receipts. Of this amount, Rs 720.83 billion was generated through domestic revenue collection, including taxes, fees, and other governmental charges. Despite the significant sum collected, it was not enough to cover the government’s overall expenditure. As a result, Nepal faced a revenue shortfall of Rs 101.84 billion. This shortfall reflects a broader issue with revenue generation in Nepal, which is hampered by a combination of factors, including inefficient tax collection systems, a large informal economy, and weak enforcement of tax laws.

The government’s reliance on external borrowing to make up for the gap between revenue and expenditure has further inflated public debt. Moreover, the failure to address the structural challenges in the revenue system means that Nepal is caught in a vicious cycle of borrowing to cover deficits, which only exacerbates the long-term fiscal sustainability challenges. Without substantial improvements in revenue collection, the government will continue to struggle with a widening fiscal gap, increasing the burden of debt on future generations.

What are the non-budgetary expenditures and their impact?
In addition to regular budgetary expenditures, the government of Nepal has been spending a significant amount under non-budgetary headings, totaling Rs 140.09 billion in the first eight months of FY 2024/25. Non-budgetary expenditures are those that are not included in the formally approved budget but are still essential to the functioning of the government. These expenditures often involve urgent or unplanned financial outlays that cannot be deferred, such as emergency spending or unapproved transfers. However, the lack of transparency and oversight in these expenditures can lead to inefficiencies and misuse of funds.

The diversion of substantial resources to non-budgetary areas further deepens the fiscal deficit and contributes to the overall increase in public debt. This spending mechanism raises questions about accountability, as the funds are used without the rigorous scrutiny that accompanies budgeted expenditures. The lack of effective tracking of these off-budget expenditures hampers the government’s ability to manage its finances in a sustainable manner and increases the financial burden on the country.

How has the government’s borrowing behavior contributed to the rising debt?
Nepal’s escalating public debt is largely attributed to the government’s borrowing behavior, which has been marked by a lack of prudent fiscal planning and excessive reliance on external loans. The government’s approach to borrowing has been one of the primary factors in the rapid increase in public debt. The government has been taking loans without adequately considering the long-term economic implications. Rather than borrowing for productive investments that could generate returns, much of the borrowed funds have been directed toward meeting operational and debt-servicing costs.

Additionally, the lack of fiscal discipline in borrowing has made it difficult for the government to repay loans on time, resulting in higher debt servicing costs and an ever-growing debt burden. As the government continues to borrow without a clear strategy for generating revenue or reducing debt, Nepal risks becoming trapped in a cycle of borrowing to pay off previous loans, which could eventually lead to a financial crisis. Effective debt management and a strategic focus on generating economic returns from borrowing are urgently needed to reverse this trend.

What do experts say about the debt situation?
Experts have expressed grave concerns about the government’s handling of public debt. They argue that the government has spent billions of rupees on non-productive sectors, which has only increased the country’s debt without fostering significant economic growth. The excessive borrowing has been largely directed toward covering budget deficits, with little investment in projects that could generate long-term benefits for the economy. Experts believe that this misallocation of resources has compounded the fiscal challenges faced by Nepal.

They further point out that Nepal’s reliance on external debt, combined with the lack of substantial revenue generation, has placed the country on a precarious fiscal path. Without focusing on productive investments and reducing unnecessary expenditure, Nepal’s debt situation will only worsen, and the government will continue to face an unsustainable debt burden. Experts are calling for a more disciplined approach to fiscal management, which prioritizes investments that stimulate economic growth and reduce reliance on borrowing.

How has the value of the Nepali rupee affected public debt?
The value of the Nepali rupee against the US dollar has had a significant impact on Nepal’s public debt. As the value of the rupee has depreciated, the cost of servicing external debt has increased. According to the Public Debt Management Office (PDMO), the depreciation of the Nepali rupee has added an additional Rs 66.29 billion to the country’s public debt. This fluctuation in the exchange rate underscores the risks associated with external borrowing, as the cost of repaying loans in foreign currencies rises when the local currency weakens.

The additional debt burden due to currency depreciation compounds the already severe financial strain on Nepal’s economy. Moreover, as the value of the rupee continues to fluctuate, the government’s debt servicing obligations will continue to increase, further straining the national budget. This highlights the need for Nepal to diversify its borrowing sources and take steps to stabilize its currency in order to mitigate the impact of exchange rate volatility on public debt.

What is the current proportion of external versus internal debt?
As of mid-March 2025, Nepal’s public debt consists of both external and internal loans. External debt amounts to Rs 1.360 trillion, which accounts for 50.83% of the total debt, while internal debt stands at Rs 1.315 trillion, or 49.16%. The relatively equal distribution of external and internal debt reflects Nepal’s dependence on both domestic and foreign borrowing to finance its fiscal deficits. While external debt is often sourced from international financial institutions or foreign governments, internal debt is typically raised through the issuance of government bonds and loans from domestic banks and financial institutions.

Each type of debt comes with its own set of challenges. External debt exposes Nepal to currency exchange risks, while internal debt increases the financial obligations to domestic creditors. The growing reliance on both forms of debt has raised concerns about the sustainability of Nepal’s fiscal policies, particularly as the country’s debt burden increases without a corresponding rise in productive investments.

What does the rising debt-to-GDP ratio signify for Nepal?
Nepal’s rising debt-to-GDP ratio is a cause for concern, signaling that a larger portion of the country’s economic output is being diverted to debt servicing. As of mid-March 2025, the debt-to-GDP ratio stood at 46.91%, up from 42.65% in mid-July 2024. This means that nearly half of Nepal’s annual GDP is now used to service public debt, leaving less room for investment in key sectors like infrastructure, health, and education.

A higher debt-to-GDP ratio can negatively impact investor confidence and increase borrowing costs for the government. As the ratio climbs, it suggests that Nepal is becoming increasingly indebted relative to its economic output, which could limit its ability to borrow in the future. Additionally, an increasing debt-to-GDP ratio could lead to a downgrade in Nepal’s credit rating, making it more expensive for the country to borrow funds. To avoid this, the government must focus on reducing debt, increasing revenue, and stimulating economic growth.

What role do government expenditures play in the debt crisis?
Government expenditures are at the core of Nepal’s debt crisis. A large portion of public spending is directed toward debt servicing, which leaves little room for productive investment. Of the Rs 841.14 billion spent in the first eight months of FY 2024/25, Rs 758.58 billion was used to meet debt obligations and cover regular expenditure. The imbalance between spending on debt and capital investment means that the country is not investing enough in areas that would promote long-term growth.

While debt servicing is necessary to maintain fiscal stability, an over-reliance on it leads to diminished economic returns. The lack of investment in productive sectors such as infrastructure, education, and health means that Nepal is not laying the foundation for future economic development. As the debt continues to grow, the government faces a difficult choice: either increase borrowing to meet current needs or cut spending on essential services to avoid further fiscal instability.

What strategies are experts recommending to control the public debt?
Experts have called for a more disciplined approach to managing Nepal’s public debt. One of the key recommendations is to limit borrowing to productive sectors that will generate returns in the long run. This could involve investing in infrastructure projects, industrial development, and social programs that enhance human capital and productivity. Furthermore, the government needs to adopt stricter fiscal discipline and reduce non-essential expenditures.

Austerity measures, such as controlling administrative costs and curbing unnecessary spending, could also help reduce the fiscal deficit. Strengthening the revenue collection system is another vital recommendation. By expanding the tax base, improving tax compliance, and formalizing the informal economy, the government can increase its revenue and reduce its reliance on borrowing. Experts also suggest that Nepal diversify its sources of borrowing, reducing dependency on external debt and focusing more on domestic financing options that carry lower risks.

How has government borrowing affected future generations?
The increasing public debt is placing a heavy financial burden on future generations of Nepalis. As debt levels rise, more of the country’s future economic output will be required to service past loans. This limits the ability of future governments to invest in critical areas such as education, healthcare, and infrastructure. In the worst-case scenario, if the debt burden becomes unsustainable, future generations may face higher taxes, reduced public services, or even austerity measures to meet debt obligations.

The failure to adopt prudent borrowing practices today may leave future policymakers with limited options and force them to make difficult trade-offs between servicing debt and meeting the needs of the population. If the government continues to borrow excessively without generating economic returns from its spending, it will be the next generation that bears the cost of today’s fiscal irresponsibility.

What are the potential long-term consequences of this rising public debt?
If the trend of rising public debt continues, Nepal could face severe long-term consequences. The most immediate concern is the strain on the national budget, as an increasing portion of government spending will be directed toward debt servicing rather than productive investments. This could lead to a slowdown in economic growth, as there will be fewer resources available for key sectors like education, infrastructure, and health. Over time, the country’s credit rating may be downgraded, which would increase the cost of borrowing and further strain the budget.

In extreme cases, Nepal could face a sovereign debt crisis, where the government is unable to meet its obligations. This could lead to economic instability, inflation, and reduced investor confidence. Therefore, it is critical that the government takes immediate action to address the rising debt and put in place strategies that promote fiscal sustainability.

How does Nepal’s public debt compare to that of other countries in the region?
When compared to other countries in South Asia, Nepal’s public debt remains a concern, especially given the rate at which it is increasing. Many neighboring countries, such as India and Bangladesh, also face challenges with public debt, but their economies are much larger, giving them more fiscal room to manage debt. Nepal’s relatively smaller economy means that the debt burden is more burdensome.

As Nepal’s debt-to-GDP ratio climbs, it could eventually surpass the threshold that makes borrowing more expensive and limits fiscal flexibility. Although other countries in the region also grapple with debt issues, Nepal’s increasing reliance on borrowing without corresponding economic growth puts it at greater risk of a fiscal crisis. To avoid becoming overburdened by debt, Nepal must implement sound fiscal policies and focus on economic development to support sustainable debt management.

What steps should the government take to prevent a debt crisis?
To prevent a looming debt crisis, the government must undertake a series of urgent and strategic actions. First and foremost, it must adopt a far more disciplined approach to borrowing. This means that loans should only be secured for projects and investments that have a clear and demonstrable potential to boost long-term economic growth. Priority must be given to infrastructure, education, health, and industries that can generate employment, stimulate exports, or contribute to technological advancement. Reckless borrowing for populist programs, unproductive sectors, or administrative expenses must be strictly avoided.

Second, the government needs to focus on significantly improving revenue collection. One of the major reasons for increasing debt dependency is weak domestic revenue. To address this, the tax base must be expanded to include sectors and individuals who have remained outside the formal taxation system. Efforts should be made to bring more businesses, especially small and medium enterprises, into formal registration and taxation processes. Additionally, enhancing tax compliance is critical—this involves improving tax administration, investing in digital systems for monitoring transactions, and reducing corruption within revenue agencies. Simplifying tax procedures can also encourage greater voluntary compliance among citizens and businesses.

Moreover, formalization of the informal economy is crucial. A large portion of economic activities often goes unrecorded and untaxed, creating a heavy burden on the formal sector. Through incentives, awareness campaigns, and better enforcement, the government can encourage more businesses and workers to enter the formal sector, thereby increasing the taxable pool.

In parallel, prudent expenditure management is necessary. The government must prioritize efficient spending, cut down on waste, and reallocate resources toward sectors that offer the highest economic returns. By combining disciplined borrowing, better revenue mobilization, and careful spending, the government can steer the economy away from a debt trap and build a foundation for sustainable growth.