Nepal Faces Fiscal Deficit as Spending Outstrips Revenue in FY 2081/82 Second Quarter

Nepal’s government is grappling with a significant fiscal imbalance in the ongoing fiscal year 2081/82 (2024/25), with expenditure surpassing revenue by NPR 153.47 billion by the end of the second quarter, according to the Financial Comptroller General Office (FCGO). Data up to Falgun (mid-March 2025) reveals that while the government collected NPR 738.82 billion in revenue, it spent NPR 839.35 billion, highlighting a worrying trend of overspending amid sluggish revenue growth and poor capital expenditure performance.

Revenue Performance: Falling Short of Expectations

The government set an ambitious revenue target of NPR 1,471.62 billion for the fiscal year, comprising NPR 1,284.20 billion in tax revenue and NPR 135.09 billion in non-tax revenue. By Falgun’s end, total revenue stood at NPR 738.82 billion—50.2% of the annual target. Tax revenue reached NPR 638.79 billion (49.74% of its goal), while non-tax revenue performed slightly better at NPR 81.54 billion (60.36% of its target). Additionally, foreign grants, budgeted at NPR 52.32 billion, amounted to just NPR 9.16 billion (17.51%), reflecting a severe shortfall in external assistance.

This revenue performance, while crossing the halfway mark in percentage terms, raises concerns about the government’s ability to meet its full-year target. The shortfall in tax collection could stem from economic slowdown, inefficiencies in tax administration, or reliance on imports rather than domestic production—a persistent issue in Nepal’s economy. The relatively stronger non-tax revenue collection (e.g., fees, fines, and dividends) suggests some resilience in administrative income streams, but it’s insufficient to offset the broader revenue gap.

Expenditure: Recurrent Costs Overshadow Development

The government’s total budget for FY 2081/82 is NPR 1,860.30 billion, allocated across three key categories: recurrent expenditure (NPR 1,140.66 billion), capital expenditure (NPR 352.35 billion), and financial management (NPR 367.28 billion). By the end of the second quarter, spending reached NPR 839.35 billion—45.12% of the annual budget.

• Recurrent Expenditure: Of the NPR 1,140.66 billion allocated for operational costs like salaries, subsidies, and administrative expenses, NPR 584.12 billion (51.21%) was spent. This high utilization rate indicates that day-to-day governance costs are consuming a disproportionate share of resources.

• Capital Expenditure: Development spending remains a weak link, with only NPR 82.33 billion (23.37%) of the NPR 352.35 billion budget utilized. This sluggish pace threatens infrastructure and economic growth targets.

• Financial Management: Debt servicing and fiscal obligations under this category saw NPR 172.89 billion (47.07%) of the NPR 367.28 billion spent, reflecting the burden of Nepal’s growing debt.

The dominance of recurrent spending—over 51% of its allocation exhausted in eight months—contrasts sharply with the paltry 23.37% spent on capital projects. This imbalance suggests a government more focused on maintaining operations than investing in long-term growth.

Deficit and Debt Concerns

The NPR 153.47 billion deficit by Falgun’s end underscores a structural fiscal challenge: expenditure commitments exceed revenue inflows. With only 45.12% of the budget spent so far, this gap could widen as the year progresses, particularly if capital spending accelerates in the remaining quarters—a pattern seen in past years when spending spikes toward the fiscal year-end.

To bridge this deficit, the government may turn to borrowing, both domestic and external. However, with foreign grants at just 17.51% of the target, reliance on loans could increase Nepal’s debt-to-GDP ratio, already a concern at over 40% in recent years. The low capital expenditure further compounds this issue, as borrowed funds are not translating into productive assets that could generate future revenue.

Interpretation: A Fiscal Wake-Up Call

The second-quarter data reveals a government caught between ambitious goals and operational realities. The budget speech for 2081/82 promised 6% economic growth, inflation control at 5.5%, and sectoral boosts in agriculture, energy, and IT. Yet, the current trajectory suggests these targets are at risk. The 23.37% capital expenditure rate—far below the 50% mark expected by mid-year—mirrors historical trends of underutilization. For instance, in FY 2080/81, only 41.67% of the capital budget was spent by May 2024, per Nepal Economic Forum reports, indicating systemic bottlenecks in project implementation.

The heavy tilt toward recurrent spending (51.21%) reflects a prioritization of short-term stability over long-term development. Salaries and administrative costs, while necessary, offer little economic multiplier effect compared to infrastructure investments. The NPR 82.33 billion spent on capital projects—less than a quarter of the allocation—signals delays in roads, hydropower, and other critical sectors, undermining job creation and GDP growth.

The revenue shortfall, particularly in tax (49.74%) and foreign grants (17.51%), points to broader economic weaknesses. Nepal’s import-heavy economy limits domestic tax bases, while geopolitical shifts may be reducing foreign aid inflows. Social media discussions on X highlight public frustration, with users blaming “import dependency” and “bureaucratic inefficiency” while urging tax base expansion and spending reforms.

Economic and Policy Implications

If unchecked, this fiscal imbalance could jeopardize Nepal’s economic stability. The deficit, coupled with low capital spending, risks a vicious cycle: insufficient infrastructure stifles growth, reducing revenue potential and necessitating more borrowing. With financial management costs at 47.07% of allocation, debt servicing is already a significant burden, and further loans could push Nepal toward a debt trap.

The government’s 50.2% revenue achievement is not disastrous mid-year, but the composition—leaning on non-tax sources—suggests tax reforms are overdue. Similarly, the abysmal foreign grant performance (17.51%) calls for diplomatic efforts to secure pledged aid or diversify funding sources.

Path Forward

To salvage FY 2081/82, the government must act decisively. Accelerating capital expenditure requires streamlining procurement, reducing red tape, and ensuring project readiness. Revenue enhancement could involve broadening the tax net, targeting informal sectors, and boosting domestic production to cut import reliance. Foreign grant inflows need urgent attention—whether through negotiations or alternative financing like public-private partnerships.

For now, the second-quarter figures are a stark warning. With four months remaining, Nepal’s fiscal managers face a critical test: reverse these trends or risk derailing the year’s economic promises. The NPR 1.86 trillion budget holds potential for transformation, but only if spending aligns with growth priorities and revenue keeps pace.