Natural Resources Commission Caps Internal Borrowing Ahead of Budget, Stresses Fiscal Discipline

As preparations for the fiscal year 2083–84 budget gather pace, the National Natural Resources and Fiscal Commission has recommended a ceiling on internal borrowing for all three tiers of government. The proposed limits, based on macroeconomic conditions, revenue-expenditure projections, and market capacity, aim to maintain fiscal stability while allowing room for necessary public investment.

According to the Commission’s recommendation, the federal government will be allowed to raise internal debt up to a maximum of 5.5 percent of the country’s gross domestic product (GDP). At the subnational level, provincial and local governments will be permitted to borrow up to 12 percent of their respective internal revenues. However, loans channeled through specialized institutions established by the federal government for local infrastructure development will remain outside this ceiling.

The Commission estimates Nepal’s GDP for the current fiscal year at approximately Rs 7.15 trillion. Based on this projection, the federal government could mobilize around Rs 393 billion in internal borrowing. Similarly, provincial governments are expected to have a borrowing capacity of about Rs 14.75 billion, while local governments may collectively raise up to Rs 17.62 billion. The limits for provinces and local levels have been determined by factoring in their revenue growth trends, with an average borrowing capacity of around Rs 210 million for provinces and approximately Rs 23.4 million per local unit.

In setting these thresholds, the Commission has taken into account key macroeconomic indicators such as the revenue-to-debt ratio, debt servicing capacity, interest rate trends, inflation, and the overall structure of public debt. Officials emphasize that internal borrowing should be viewed as an advance use of future income, and therefore must be managed with caution to ensure the government’s ability to meet principal and interest obligations over time.

The recommendations also come with strict conditions on the utilization of borrowed funds. The Commission has advised that internal loans should not be used to finance recurrent or administrative expenses. Instead, borrowing must be directed towards productive and revenue-generating projects, with clear cost-benefit analysis guiding project selection. Priority is to be given to initiatives that contribute to employment generation, increased production, and capital formation.

In addition, the Commission has called for greater transparency and coordination in debt management. It has recommended that all levels of government clearly disclose sources of internal borrowing in their budgets and move towards developing an integrated digital system to track and manage public debt. Such measures, it argues, will enhance accountability and reduce the risk of fiscal mismanagement.

The legal basis for these recommendations stems from Article 251 of the Constitution of Nepal, which mandates the Commission to determine borrowing limits for federal, provincial, and local governments. The framework is further guided by the Intergovernmental Fiscal Arrangement Act, 2017, and the Public Debt Management Act, 2022.

Interpretation and Fiscal Implications

The proposed borrowing ceiling signals a cautious approach to fiscal policy at a time when public spending pressures remain high. By linking federal borrowing to GDP and subnational borrowing to revenue capacity, the Commission has attempted to align debt limits with economic fundamentals. This reflects an effort to prevent excessive borrowing that could strain public finances in the future.

At the same time, the emphasis on productive investment indicates a shift towards quality of spending rather than quantity. In recent years, concerns have been raised over the effectiveness of public expenditure, particularly in infrastructure projects with low returns. By mandating cost-benefit analysis and prioritizing output-driven sectors, the Commission is pushing for more efficient allocation of borrowed resources.

However, the relatively tight borrowing limits for provinces and local governments may also pose challenges. With increasing responsibilities under federalism, subnational governments often face resource constraints in executing development projects. The 12 percent cap, while fiscally prudent, could limit their ability to accelerate infrastructure expansion unless accompanied by stronger revenue mobilization efforts.

The recommendation to exclude loans from specialized infrastructure financing institutions from the ceiling appears to be a strategic move. It allows the government to continue funding critical local projects without breaching fiscal limits, thereby balancing discipline with development needs.

Overall, the Commission’s recommendations reflect a broader attempt to institutionalize fiscal discipline in Nepal’s evolving federal structure. The effectiveness of this framework will depend on how strictly the guidelines are implemented and whether governments at all levels adhere to the principle of borrowing for productive, sustainable growth rather than short-term expenditure needs.