Nepal Prepares Rs 1.9 Trillion Budget for Upcoming Fiscal Year Amid Economic Challenges

The Government of Nepal is gearing up to present a Rs 1.9 trillion budget for the upcoming fiscal year, marking a 12% increase over the revised budget of the current fiscal year. This ambitious fiscal plan comes at a time when the country faces shrinking resources, mounting debt, and a slowing economy, prompting calls for bold reforms to steer Nepal toward sustainable growth.

Budgetary Ambitions and Legislative Moves

The government has already amended some laws through ordinances to foster a private sector-friendly environment, signaling its intent to boost economic activity. However, critics argue that these changes are superficial, addressing minor legal provisions while shying away from tackling more entrenched structural barriers. Observers remain cautiously optimistic that more substantial reforms could emerge by the time the budget is finalized.

The Struggles of National Pride Projects

Introduced in the fiscal year 2011/12 (2068/69 BS), the concept of "National Pride Projects" aimed to transform Nepal’s economy through large-scale, multi-year initiatives benefiting vast populations. The idea was to prioritize resource allocation for these strategic projects, reducing the traditional scattershot approach to budgeting that has long plagued development efforts. By focusing funds on transformative long-term projects, the government hoped to curb wasteful spending and ensure predictable budget cycles, fostering economic growth and improving development indicators.

However, the execution has faltered. What began with 17 projects has ballooned to 24 by 2019/20 (2076/77 BS), with political pressures leading to the inclusion of less critical initiatives under the "pride" banner. Completing these projects at a reasonable pace would require an annual allocation of Rs 500 billion, far exceeding the government’s current capital expenditure capacity of Rs 300 billion per year. Meanwhile, thousands of smaller, fragmented, and politically motivated projects continue to compete for funds, leaving the National Pride Projects underfunded and diluting their impact. Experts warn that without a drastic shift in approach, these flagship initiatives risk becoming mere symbolic gestures.

A Coalition Government’s Opportunity

With a coalition government led by the Nepali Congress and CPN-UML commanding nearly two-thirds of parliamentary support, Nepal has a rare chance for decisive action. The timing is critical: the United States has scaled back or suspended aid, and internal resource management faces mounting challenges. Analysts urge the government to eschew populist measures in favor of tough, potentially unpopular decisions to lay the groundwork for lasting economic reform.

Shrinking Resources and Rising Debt

The government projects revenue of approximately Rs 1.1 trillion for the next fiscal year. However, with administrative costs estimated at Rs 1.1 trillion and debt servicing (principal and interest) at Rs 400 billion, totaling Rs 1.5 trillion, little remains for development spending. Foreign grants are declining, a trend expected to worsen as Nepal graduates from least-developed to developing country status in 2026, further reducing aid eligibility. Borrowing—both domestic and foreign—remains the only viable option, but it comes with risks. Excessive domestic borrowing could crowd out private sector credit, while foreign loans, increasingly expensive due to rising interest rates, add to the debt burden.

Credit Boom, Stagnant Growth

Over the past decade, private sector credit grew at an average annual rate of 20%, with Rs 5.5 trillion in loans currently outstanding—equivalent to nearly 90% of Nepal’s GDP. Including credit from entities like the Employees’ Provident Fund and Citizen Investment Trust, this figure exceeds 100% of GDP. Yet, economic growth has averaged a mere 4%, raising questions about where this capital is going. If invested productively or spent on domestic goods, GDP should have risen; if spent on imports, revenue and trade figures should reflect it. Neither has occurred, suggesting inefficiencies or leakages, possibly through informal channels or practices like "evergreening"—where new loans repay old ones without generating real economic value.

The Nepal Rastra Bank has responded by tightening credit growth, while government revenue, once growing at 20% annually, has slumped below 10% in recent years, further strained by unproductive spending.

Declining Demand and Economic Signals

Aggregate demand is faltering. Construction has ground to a halt, with contractors owed billions in back payments, dragging the sector into negative growth. Consumption of goods like medicine, clothing, and footwear has dropped, despite programs like government health insurance inflating service use. The 2021 census pegged Nepal’s population at 29.1 million—lower than the expected 30 million—reflecting a declining birth rate and rising emigration. Fewer people mean less demand, a trend borne out by economic data.

Yet, supply capacity remains underutilized. Industries like cement and steel operate at 25-30% capacity, banks hold Rs 700 billion in excess liquidity, and foreign exchange reserves can cover 14 months of imports. Inflation hovers around 5%, wages are paid outside construction, and savings (Rs 6.8 trillion) dwarf the Rs 200 billion tied up in troubled cooperatives. On paper, the economy seems stable—but beneath the surface, structural issues loom.

Interpretation: A Call for Reform

Nepal’s economy is at a crossroads. The Rs 1.9 trillion budget reflects ambition, but without addressing inefficiencies—overlapping social programs, bloated bureaucracy, and unproductive spending—it risks becoming another exercise in futility. The National Pride Projects, meant to be game-changers, are hamstrung by political interference and inadequate funding. Meanwhile, declining demand and a shrinking resource base signal a need for strategic recalibration.

The coalition government has a unique opportunity to act. Privatizing state enterprises, slashing redundant agencies, and shifting infrastructure to public-private partnerships could free up resources. Boosting exports, rather than forcing domestic demand, could balance the economy. However, these steps require political courage—a willingness to prioritize long-term stability over short-term popularity. As Nepal approaches its 2026 graduation, the clock is ticking to turn fiscal promises into tangible progress.