A Fiscal Paradox: Forex Gains Mask Nepal’s Escalating Debt Trap as Servicing Costs Outpace New Borrowing

KATHMANDU: At first glance, the opening month of the 2083/84 fiscal year offered a rare glimmer of hope for Nepal’s treasury: the national debt shrank. However, a deeper dive into the macroeconomic data reveals a highly concerning fiscal paradox. The nominal reduction is merely a byproduct of favorable foreign exchange fluctuations, masking a severe underlying crisis where the state is now hemorrhaging more money to service old debts than it is successfully raising in new credit.

According to the latest figures from the Public Debt Management Office, the country's total public debt contracted by Rs 5.03 billion in Shrawan, settling at Rs 2.976 trillion. While this pulled the debt-to-GDP ratio to a manageable 45.10 percent, the structural composition remains a heavy burden. External debt currently accounts for 53.72 percent (Rs 1.598 trillion), while domestic borrowing constitutes 46.28 percent (Rs 1.377 trillion). Yet, independent economists warn that celebrating this Rs 5 billion dip is a dangerous illusion, as it stems entirely from exchange rate variations rather than robust fiscal consolidation or proactive loan repayment.

The most alarming indicator from the Shrawan data is the emergence of a negative debt cash flow, signaling that Nepal is edging dangerously close to a classic debt trap. During the first month of the fiscal year, the government successfully mobilized Rs 23.29 billion in new loans. Simultaneously, however, it was forced to drain Rs 24.99 billion from the national coffers just to cover the principal and interest on existing liabilities. Consequently, the state experienced a net financial outflow, spending roughly Rs 1.7 billion more on debt amortization than it acquired in fresh capital.

This repayment crisis is disproportionately driven by internal borrowing. Of the nearly Rs 25 billion spent on debt servicing in Shrawan, a staggering Rs 22.34 billion was aggressively channeled toward clearing domestic liabilities (Rs 17 billion in principal and Rs 5.34 billion in interest). In stark contrast, external debt servicing required a comparatively modest Rs 2.65 billion. This heavy domestic servicing burden highlights the severe, long-term consequences of the government’s historical over-reliance on high-interest internal loans to cover revenue shortfalls.

Furthermore, the government’s borrowing strategy for the new fiscal year appears sluggish and structurally flawed. Despite setting an ambitious annual target of raising Rs 658.28 billion in public debt, the administration secured a paltry 3.54 percent of that goal in the first month. More worryingly, the government continues to lean heavily on the domestic market. A massive 85.84 percent of Shrawan’s new debt (Rs 20 billion) was sourced internally, while external loans—which generally carry longer maturity periods and lower interest rates—made up an abysmal 14.16 percent.

The broader macroeconomic implications of these Shrawan indicators are severe. The government has already been forced to allocate a colossal Rs 417.88 billion of this year’s budget exclusively for debt servicing, and nearly 6 percent of that was exhausted in the very first month. As a significant portion of national revenue continues to be swallowed by mandatory principal and interest payments, fiscal space is shrinking rapidly. If this trend persists, the government will face an agonizing squeeze on capital expenditure, stifling infrastructure development and ultimately paralyzing the very economic growth required to pay off the mounting Rs 3 trillion debt mountain.