Nepal’s Debt Burden Deepens as Currency Pressure and Weak Revenues Strain Public Finances

Kathmandu — Nepal’s public debt trajectory in the first half of the current fiscal year signals growing fiscal stress, driven less by fresh borrowing alone and more by structural weaknesses in revenue collection and rising exposure to external shocks. Data from the Public Debt Management Office show that between mid-July and mid-January, the country’s total public debt increased by Rs132.34 billion, underscoring the government’s increasing dependence on borrowing to manage routine expenditure.

A key factor behind the swelling debt stock has been the steady depreciation of the Nepali rupee against the US dollar. Exchange rate movements alone added Rs70.68 billion to the debt burden by mid-January, highlighting Nepal’s vulnerability to currency fluctuations. As external loan principals are serviced in dollars, every weakening of the rupee translates directly into higher repayment obligations in domestic currency. According to Nepal Rastra Bank, the exchange rate stood at Rs145.76 per US dollar, amplifying the cost of external debt.

Debt Crosses Rs28 Trillion Mark

By mid-January, Nepal’s outstanding public debt reached Rs28.06 trillion, up from Rs26.74 trillion at the start of the fiscal year. On an annual basis, the increase is even more striking: total public debt has grown by Rs270 billion compared to the same period last year, when liabilities stood at Rs25.36 trillion.

Public debt now accounts for 45.95 percent of Gross Domestic Product (GDP)—a level that, while not alarming by international standards, raises concern in the context of Nepal’s limited revenue base and persistent budget deficits. Domestic debt represents 21.60 percent of GDP, while external debt accounts for 24.35 percent, indicating a gradual tilt toward foreign borrowing.

External Debt and Exchange Rate Risk

As of mid-January, outstanding domestic debt stood at Rs13.19 trillion, while external debt climbed to Rs14.87 trillion. At the beginning of the fiscal year, these figures were Rs12.68 trillion and Rs14.05 trillion, respectively. External loans now make up 53 percent of total public debt, surpassing domestic borrowing for the first time in recent years.

This shift has heightened Nepal’s exposure to exchange rate volatility. Even as the government continues to service both principal and interest payments, currency depreciation has effectively offset repayment gains, keeping the overall debt stock on an upward path.

Borrowing Lags Behind Annual Targets

The government had aimed to raise Rs595 billion in public debt during the current fiscal year—Rs362 billion domestically and Rs233 billion externally. However, by mid-January, only Rs214.55 billion had been mobilized, just 36.02 percent of the annual target.

Domestic borrowing has progressed relatively well, achieving 59.8 percent of its target, while external loan mobilization remains sluggish at 15.79 percent. The government raised Rs177.76 billion in domestic debt and only Rs36.89 billion in external loans during the review period. Officials concede that slower-than-expected revenue growth has left borrowing as the primary tool for financing government operations.

Rising Cost of Debt Servicing

Debt servicing is emerging as an increasingly heavy burden on the national budget. For fiscal year 2082–83, the government allocated Rs411 billion for debt servicing. By mid-January, Rs187.12 billion—or 45.53 percent of the annual allocation—had already been spent. In GDP terms, debt servicing costs now stand at 3.06 percent, limiting fiscal space for development spending.

During the past six months, the government repaid Rs155.13 billion in domestic debt and Rs31.99 billion in external debt. Principal repayments totaled Rs152.89 billion, while Rs34.23 billion was spent on interest payments. Despite these repayments, exchange rate losses ensured that overall liabilities continued to rise.

Interpretation: A Structural Fiscal Challenge

The latest debt figures reveal a deeper issue than headline borrowing numbers suggest. Nepal’s rising public debt is increasingly shaped by currency risk, weak revenue mobilization, and high recurrent spending, rather than large-scale development borrowing. While debt levels remain within broadly manageable limits, the growing cost of servicing and the dominance of external debt point to mounting vulnerabilities.

Economists caution that without reforms to expand the tax base, improve spending efficiency, and reduce reliance on foreign currency borrowing, Nepal could face tighter fiscal constraints in the coming years. The challenge ahead is not merely to manage debt growth, but to ensure that borrowing supports productive investment rather than financing structural imbalances in the economy.