Nepal Faces Growing Budget Deficit as Government Prepares for FY 2082/83

Nepal’s government is gearing up to present yet another deficit budget for the upcoming fiscal year (FY) 2082/83, with an estimated shortfall of approximately NPR 700 billion (7 kharba). The National Planning Commission (NPC) has set a budget ceiling of NPR 1.906 trillion (19 kharba 6 arba 50 crore), but revenue projections and grants fall significantly short, forcing the government to rely heavily on internal and external borrowing to bridge the gap. This persistent trend of deficit budgeting, a practice spanning the last 15 years, underscores the country’s struggle to expand its revenue base and manage escalating debt obligations.

Budget Projections and Revenue Shortfalls

For FY 2082/83, the government aims to generate NPR 1.25 trillion (12 kharba 50 crore) through revenue and a small portion from grants, including the currently stalled Millennium Challenge Corporation (MCC) aid. However, this leaves a substantial deficit of around NPR 700 billion when compared to the projected expenditure of NPR 1.906 trillion. In the current fiscal year (2081/82), the NPC had set a budget ceiling of NPR 1.8 trillion, with revenue targets of NPR 1.245 trillion and NPR 50 billion in grants. Yet, actual revenue collection has lagged, exacerbating the reliance on loans.

According to the latest data, Nepal’s annual revenue hovers around NPR 1.2 trillion, a figure insufficient to meet the growing expenditure needs. Dr. Shiva Raj Adhikari, Vice-Chairperson of the NPC, noted that revenue is primarily consumed by recurrent expenses such as salaries and allowances, leaving little for development projects. “Revenue alone isn’t enough even for recurrent costs, forcing us to borrow just to keep the system running,” he admitted.

Mounting Debt Burden

Nepal’s public debt has soared in recent years, with the government’s liability for principal and interest payments now exceeding NPR 400 billion annually. For FY 2082/83, internal borrowing is capped at 5% of the country’s GDP, which stands at NPR 5.704 trillion (57 kharba 4 arba 84 crore 40 lakh), according to the National Statistics Office. This translates to a maximum of NPR 285.24 billion (2 kharba 85 arba 24 crore 22 lakh) in domestic loans. However, with revenue falling short, the remaining deficit will likely be financed through external borrowing.

Dr. Adhikari highlighted the vicious cycle: “We’re borrowing to repay existing loans, which increases our liabilities further.” This year, the government has allocated over NPR 402 billion to service its debt, a stark contrast to the NPR 350 billion earmarked for development spending—a situation former NPC senior member Dr. Ram Kumar Phuyal described as “unfortunate.”

Revenue Targets and Grant Uncertainty

The NPC’s Resource Committee, chaired by Dr. Adhikari, has projected next year’s revenue target by adding a 10% increase to this year’s estimated collections. For FY 2081/82, the government aimed to collect NPR 672.80 billion (6 kharba 72 arba 80 crore 97 lakh) in the first six months but managed only NPR 567.39 billion (5 kharba 67 arba 39 crore 73 lakh)—a mere 84.33% of the target. Extrapolating this pace, annual revenue is expected to reach NPR 1.134 trillion (11 kharba 34 arba 79 crore 34 lakh). With the additional 10%, the revenue goal for FY 2082/83 is set at approximately NPR 1.25 trillion—still far below the budget ceiling.

Grants, a traditional supplement to revenue, have been dwindling. While the MCC grant is anticipated to provide some relief, its suspension has created uncertainty. “We’re not expecting significant grants beyond MCC,” Dr. Adhikari said, noting that external loans will be critical to cover the shortfall. Potential lenders like the World Bank and the Asian Development Bank (ADB) have expressed willingness to provide funds, though interest rates are a concern. Historically, these institutions offered loans at 2%, but some are now proposing rates as high as 4%, adding to Nepal’s repayment challenges.

Economic Growth and Development Goals

Amid these fiscal constraints, the NPC has set an ambitious economic growth target of 6.6% for FY 2082/83. Dr. Adhikari emphasized ongoing efforts to analyze projects and coordinate with provinces to achieve this goal. However, Nepal’s average growth rate over the past decade has been 4.16%, with agriculture at 2.75% and non-agriculture at 4.45%, suggesting that significant structural reforms are needed to hit the target.

Expert Perspectives and Solutions

Former Finance Secretary Lal Shankar Ghimire downplayed the alarm over deficit budgets, arguing that they are a global norm. “Deficit budgets are standard practice, except in rare cases. States borrow to meet excess expenditure—it’s not unusual,” he said, cautioning against exaggerated narratives that fuel public panic.

Conversely, former Nepal Rastra Bank Governor Dr. Chiranjivi Nepal stressed the need for fiscal discipline. “We borrow because internal resources aren’t enough, but if we can’t spend effectively, the capital doesn’t circulate,” he warned. He urged the government to prioritize projects with tangible returns and avoid overambitious budgets that require mid-year cuts, a recurring practice that saw this year’s budget reduced by 10% to NPR 1.692 trillion.

Dr. Phuyal echoed this sentiment, advocating for loans to be channeled into capital formation rather than recurrent costs. “Borrowing isn’t inherently bad, but it must fund large-scale projects that create jobs and boost productivity,” he said, lamenting the current trend of “borrowing to eat ghee,” a metaphor for unsustainable spending.

Path Forward

To reduce the deficit, experts suggest broadening the revenue base beyond traditional taxes. Dr. Phuyal pointed to untapped natural and human resources—land, minerals, and tourism potential—as viable income sources. “Even plugging revenue leakages could increase collections by 50%,” he estimated, calling for stronger enforcement mechanisms.

As Nepal prepares its FY 2082/83 budget, the government faces a delicate balancing act: stimulating growth while managing a ballooning debt burden. With revenue growth stagnant and grants uncertain, borrowing remains the default solution. However, without strategic investments and fiscal reforms, Nepal risks sinking deeper into a debt trap, a concern that looms large as policymakers finalize the budget in the coming months.

Nepal’s fiscal situation reflects a chronic challenge faced by many developing nations: a mismatch between ambitious development goals and limited resources. The reliance on deficit budgets, while not unique globally, is particularly pronounced here due to stagnant revenue growth and a narrow tax base. The government’s strategy of borrowing—both domestically within the 5% GDP cap and externally—has kept the economy afloat but at the cost of escalating debt, with annual repayments now consuming a significant portion of the budget.

The projected NPR 700 billion deficit for FY 2082/83 highlights a structural issue: revenue and grants cover only about two-thirds of planned expenditure. This gap, coupled with the fact that recurrent costs (e.g., salaries) devour most revenue, leaves little for development—a point of frustration for experts like Dr. Phuyal. The government’s optimism about a 6.6% growth rate seems ambitious given historical trends and current fiscal constraints, suggesting a need for more realistic planning.

The debate among experts reveals a tension between pragmatism and reform. Ghimire’s view normalizes deficits as a tool for growth, while Nepal and Phuyal push for efficiency and long-term investments. The latter’s call to leverage natural resources and curb leakages offers a potential lifeline, but implementation remains a hurdle in a system strained by political and bureaucratic inertia.

For Nepal, the path ahead requires not just fiscal discipline but also creative revenue strategies and a shift away from debt-driven recurrent spending. Without these changes, the cycle of borrowing to repay loans will persist, threatening economic stability in the years to come.