Budget Preparations Intensify Amid War Risks, Inflation Pressure, and Structural Economic Challenges

Nepal’s Ministry of Finance has entered a critical phase of budget preparation for the upcoming fiscal year, with senior leadership including the finance minister and top bureaucrats actively shaping policy priorities. As the constitutional deadline of mid-June (Jestha 15) approaches, the government has stepped up consultations with private sector representatives, economists, and other stakeholders in an effort to craft a responsive and realistic fiscal plan.

Unlike previous years, however, this budget is being formulated under a highly complex global and domestic backdrop. Escalating tensions in the Middle East have introduced a new layer of uncertainty into the global economy, with direct implications for energy markets and supply chains. For a country like Nepal, which relies heavily on imported petroleum products, even a moderate increase in global oil prices can quickly translate into higher transportation costs and widespread inflation. The early signs of such pressure are already visible in the rising cost of essential goods.

The risks extend beyond inflation. The Middle East serves as a major employment hub for Nepali migrant workers, making remittance inflows a critical pillar of the national economy. With an estimated 1.7 million Nepalis working in the region, any prolonged conflict could disrupt employment and trigger a decline in remittances. Such a scenario would not only weaken household incomes but also strain foreign exchange reserves, which are already under pressure due to a widening trade deficit.

At the same time, the government faces a significant domestic obligation in addressing the cooperative sector crisis. Political commitments to return the savings of affected depositors within a limited timeframe have raised expectations, but the scale of the problem appears far larger than initially anticipated. Estimates suggest that liabilities could run into hundreds of billions of rupees, making it extremely difficult to resolve without placing additional strain on public finances. This has effectively turned the issue into one of the central challenges for the upcoming budget.

Revenue performance has added another layer of concern. Sluggish economic activity, combined with Nepal’s structural dependence on imports, has limited the government’s ability to mobilize domestic resources. As a result, policymakers are being forced to make difficult choices between development spending and social obligations. The need to prioritize within a constrained fiscal space is likely to define the overall tone of the budget.

Broader macroeconomic indicators also point to underlying vulnerabilities. Rising global prices of fuel and food, disruptions in supply chains, and the depreciation of the Nepali currency against the US dollar have all contributed to mounting inflationary pressure. Meanwhile, the persistent gap between imports and exports has led to stress on foreign exchange reserves. Current account and balance of payments deficits have tightened liquidity within the banking system, pushing interest rates upward and potentially slowing private sector investment.

Despite these challenges, the government appears intent on maintaining a forward-looking agenda. Policy signals suggest a continued focus on structural transformation, including modernization of agriculture, expansion of hydropower generation, and revitalization of the tourism sector. Efforts to strengthen the capital market and attract both domestic and foreign investment are also expected to remain key priorities. Additionally, promoting innovation, entrepreneurship, and industrialization is seen as essential for reducing long-term dependence on imports.

Fiscal discipline is likely to play a central role in the upcoming budget. Improving the efficiency of capital expenditure, managing public debt more prudently, and strengthening financial governance mechanisms are expected to be major policy themes. Authorities are also under pressure to curb illegal financial activities such as informal money transfers (hundi), which continue to undermine formal financial channels.

In essence, Nepal’s upcoming budget is being shaped at the intersection of external shocks and internal structural weaknesses. The government’s ability to strike a balance between immediate economic stabilization and long-term growth priorities will be critical. A credible and well-calibrated fiscal strategy could help restore confidence and set the foundation for sustainable recovery, but the margin for policy error remains narrow.