Nepal Misses Revenue and Spending Targets as Development Expenditure Falls Below Half

Kathmandu — Nepal ended the fiscal year 2025/26 with weak revenue collection, underused development allocations and a widening gap between government income and expenditure, exposing persistent problems in the country’s public financial management.

According to the final income and expenditure figures released by the Financial Comptroller General Office, the government spent Rs 1.582 trillion during the fiscal year against an original budget of Rs 1.964 trillion. This means only 80.55 percent of the annual budget was implemented, leaving nearly Rs 381.94 billion unspent.

The large amount of unspent money reflects more than simple fiscal savings. It indicates delays in project preparation, procurement, contract management and payments, particularly in development-related programmes.

The government had already lowered its annual expenditure estimate to Rs 1.696 trillion during the mid-year budget review. However, actual spending still fell short of the revised estimate by around Rs 114.15 billion.

This shows that expenditure forecasts remained overly optimistic even after the government revised its original target. The repeated gap between budget announcements and actual implementation has raised questions about the credibility of Nepal’s annual budgeting process.

Revenue performance was also weaker than expected. The government collected total revenue and other receipts of Rs 1.281 trillion during the fiscal year.

There is, however, an arithmetic inconsistency in the figures presented for the revenue target. If the revised target was Rs 1.480 trillion, the actual collection represents about 86.5 percent of the target, not 83.51 percent. The shortfall against the revised target would be approximately Rs 199.35 billion.

The reported achievement rate of 83.51 percent and the stated shortfall of Rs 252.79 billion appear to have been calculated against an earlier target of about Rs 1.533 trillion. The government will therefore need to clarify whether the comparison is being made with the original or revised revenue estimate.

Of the total government income, tax revenue accounted for Rs 1.121 trillion, while non-tax revenue stood at Rs 120.23 billion. Foreign grants contributed Rs 31.26 billion and other receipts amounted to Rs 8.07 billion.

Tax revenue increased by Rs 62.49 billion compared with the previous fiscal year. Based on the supplied figures, this represents growth of about 5.9 percent.

Although tax collection increased in absolute terms, the pace of growth slowed sharply. Revenue growth had stood at around 10.48 percent in the previous year and had averaged close to 17 percent over a longer period.

The slower growth indicates that economic transactions, corporate earnings, imports and taxable consumption did not expand sufficiently to support the government’s increasingly large expenditure plans.

Weak private investment, subdued business activity, slow growth in imports and weaknesses in tax administration appear to have limited revenue mobilisation. Persistent revenue leakage and the large informal economy may also be reducing the government’s collection capacity.

The decline in other government receipts was even more pronounced. Such receipts fell to Rs 8.07 billion from Rs 17.26 billion in the previous fiscal year, a reduction of Rs 9.19 billion.

Other receipts generally include the recovery of irregular expenditures, funds returned by provincial and local governments, and money transferred from different public agencies into the federal consolidated fund.

This category of income has been declining continuously. It had stood at around Rs 53 billion four years earlier before falling to Rs 23.58 billion, Rs 17.26 billion and finally Rs 8.07 billion.

The downward trend suggests that the government is finding it increasingly difficult to mobilise irregular, non-tax and administrative sources of income. It may also reflect weaker recovery of outstanding amounts and reduced transfers from public funds.

Foreign grants showed some improvement but remained far below the government’s expectation. Nepal received Rs 31.26 billion in grants against an annual target of Rs 53 billion.

Grant receipts increased from Rs 23.20 billion in the previous fiscal year, but the government still missed its target by Rs 21.74 billion.

Delays in project execution, difficulties in submitting reimbursement claims and failure to meet conditions attached by development partners often prevent committed foreign assistance from being converted into actual government income.

The most concerning part of the fiscal performance was capital expenditure. The government allocated Rs 407.88 billion for development spending but used only Rs 190.84 billion during the year.

Capital expenditure therefore reached just 46.79 percent of the annual allocation. More than Rs 217 billion earmarked for development activities remained unused.

The low spending rate means that less than half of the resources allocated for roads, bridges, irrigation, energy, public buildings and other infrastructure projects were converted into actual economic activity.

Capital expenditure was also Rs 31.84 billion lower than in the previous fiscal year. This suggests that development activity weakened not only in relation to the budget target but also in absolute terms.

Low capital spending affects the wider economy because government infrastructure projects create demand for construction materials, transport, engineering services and labour. Delayed spending therefore limits job creation and reduces the potential for private investment to follow public infrastructure.

Current expenditure moved in the opposite direction. It increased to Rs 1.044 trillion from around Rs 980 billion in the previous year, representing growth of approximately Rs 63.61 billion.

Current expenditure includes salaries, pensions, administrative expenses, grants, social security payments and the regular operating costs of public institutions.

The government spent about 88.4 percent of the current expenditure allocation while using less than half of the capital budget. This imbalance indicates that Nepal’s public resources are increasingly being absorbed by routine obligations rather than investments that expand future productive capacity.

Current expenditure accounted for nearly 66 percent of total government spending during the fiscal year. Capital expenditure represented only around 12 percent.

The government also spent Rs 347.33 billion under financial management, mainly for the repayment of principal and interest on domestic and foreign debt. This represented 92.56 percent of the amount allocated under the category.

Financial management spending was around Rs 156.49 billion higher than capital expenditure. In other words, the government spent substantially more on managing past borrowing than on creating new public infrastructure.

This is a significant warning for public finance. When debt-servicing obligations grow faster than development investment, the government has less fiscal space to fund health, education, infrastructure and economic development.

Excluding borrowing, the government earned around Rs 1.281 trillion but spent Rs 1.582 trillion. The resulting gap between income and expenditure was approximately Rs 301.52 billion.

The deficit had to be financed through domestic and foreign borrowing and available government cash balances.

By the end of Jestha, the government had reportedly mobilised Rs 79.46 billion in foreign loans and Rs 338 billion in domestic loans. Combined borrowing had already reached approximately Rs 417.46 billion before the final month of the fiscal year was included.

The borrowing figure should not be compared directly with the annual budget deficit without examining the timing of transactions, debt repayments and changes in government cash balances. Nevertheless, it demonstrates the growing importance of borrowing in financing public expenditure.

Domestic borrowing on a large scale can also affect the wider financial system. When the government borrows heavily from banks and investors, it may compete with businesses for available funds and influence market interest rates.

The weak fiscal outcome has come just as the government begins implementing a larger budget for the fiscal year 2026/27. The new budget totals Rs 2.124 trillion, an increase of about Rs 160.23 billion, or 8.2 percent, from the previous year’s original budget.

Of the new allocation, Rs 1.270 trillion has been set aside for current expenditure, Rs 431 billion for capital expenditure and around Rs 422 billion for financial management.

Current expenditure represents close to 60 percent of the new budget. Capital expenditure accounts for slightly more than 20 percent, while nearly another 20 percent has been allocated for debt repayment and financial obligations.

The structure means that almost as much money has been allocated for financial management as for development projects. This limits the flexibility available to the government if revenue once again falls below target.

The government aims to collect Rs 1.405 trillion in federal revenue during the current fiscal year. After including revenue shared with provincial and local governments, total collection requirements will exceed Rs 1.5 trillion.

Meeting the target will require a substantial improvement from the previous year. This could be difficult unless private investment, imports, consumption and business activity recover strongly.

The government has placed considerable hope on collecting outstanding tax liabilities. The new financial legislation allows taxpayers involved in pending disputes to withdraw their cases by paying the principal tax and an additional one percent.

In return, the government will waive related interest, penalties, additional charges and late fees. The Ministry of Finance expects the arrangement to generate more than Rs 100 billion in outstanding revenue.

The Inland Revenue Department reportedly has 1,311 tax-related cases involving total claims of around Rs 172.33 billion. However, a large part of this amount consists of interest, penalties and additional charges that would be waived under the settlement scheme.

As a result, the full outstanding amount cannot be treated as realistically collectible revenue. The actual amount received will depend on how many taxpayers accept the facility and whether they have the financial capacity to pay the principal tax.

The scheme may provide a one-time boost to revenue, but it cannot replace sustainable growth in regular tax collection. Frequent tax waivers may also encourage some taxpayers to delay payments in the expectation of similar concessions in the future.

The government’s larger challenge is structural. Increasing the size of the annual budget without improving implementation capacity is unlikely to produce stronger economic outcomes.

Better project selection, completed feasibility studies, timely procurement and stronger contract management will be necessary to increase capital spending. Projects that are not technically prepared should not receive large allocations simply to make the budget appear ambitious.

On the revenue side, the government needs to expand the tax base rather than repeatedly increasing tax rates. Bringing informal economic activity into the formal system, improving digital monitoring and controlling under-invoicing and revenue leakage could produce more sustainable results.

Controlling current expenditure will also be essential. Without reforming administrative structures, public institutions and recurring liabilities, a growing share of government income will continue to be consumed by routine costs.

The latest figures show that Nepal’s fiscal problem is not only a shortage of money. It is also an inability to collect revenue according to plan and use available resources effectively.

The government has begun another fiscal year with a larger budget, but the previous year’s results provide a clear warning. Unless revenue administration and development implementation improve, the new budget may again end with unfulfilled targets, rising debt and a large amount of unspent development money.