Prolonged Freeze on Development Budget Slows Capital Spending, Raises Economic Concerns

The prolonged freeze on a large portion of the government’s development budget has begun to weigh heavily on Nepal’s economic activity, with capital expenditure remaining weak even after more than half of the fiscal year has elapsed. As government agencies complete their mid-year reviews for fiscal year 2025/26, reports indicate that development spending has remained significantly below normal levels, largely due to restrictions imposed on budget execution.

By mid-January, six months of the fiscal year had passed, a period typically marked by accelerating project implementation. This year, however, development offices across ministries have reported sluggish spending, reflecting the impact of earlier decisions to withhold funds allocated for infrastructure and development programs.

Cabinet’s Austerity Move Limits Spending Space

In early October, the Cabinet approved a decision to freeze development budgets worth around NPR 125 billion, citing the need to control unproductive expenditure and maintain fiscal discipline. Following the decision, the Ministry of Finance issued a detailed circular instructing ministries to halt or slow down selected projects, particularly those considered low priority or insufficiently prepared.

Although some funds have since been partially released, officials say the amount unlocked remains far smaller than what line ministries had proposed. This has constrained the government’s ability to accelerate capital spending during a period when development expenditure traditionally plays a key role in stimulating economic activity.

Urban Development Projects Face Major Setbacks

One of the sectors most affected by the budget freeze is urban development. The Department of Urban Development and Building Construction reported that only about 14 percent of its available development budget was spent in the first six months of the fiscal year.

According to Director General Rabindra Bohora, nearly NPR 26 billion out of the department’s total allocation of NPR 57 billion has been frozen. “Out of the funds that remain accessible to us, spending has been similar to last year,” he said, “but the overall scale of the freeze is now beginning to affect implementation on the ground.”

Officials say that delays in releasing funds have slowed procurement, postponed construction schedules, and increased uncertainty for contractors and local governments.

Hundreds of Approved Projects Still Waiting

In an effort to restart stalled activities, the Ministry of Urban Development submitted a proposal in late January requesting the release of budgets for 573 development projects. However, ministry sources say only around 200 projects—mostly related to school and health facility construction—have been cleared so far.

Many other projects, including road upgrades, housing initiatives, and urban infrastructure schemes, remain on hold. Officials say that even projects with completed designs and local-level recommendations have been unable to move forward due to budget uncertainty.

Release Process Slowed by Cabinet Approval Requirement

Because the development budget freeze was imposed through a Cabinet decision, releasing the funds also requires Cabinet approval. This has added an additional administrative layer to the process, slowing the pace at which proposals move from line ministries to final authorization.

Senior officials note that while the Finance Ministry reviews proposals, the final decision rests with the Cabinet, making the process time-consuming and unpredictable for implementing agencies.

Other Infrastructure Ministries Also Affected

The impact of the freeze extends beyond urban development. The Ministry of Physical Infrastructure and Transport has seen around NPR 24 billion of its development budget frozen, with only NPR 10 billion released so far.

Similarly, projects under the ministries responsible for drinking water, energy, irrigation, and transport infrastructure have experienced delays. Contractors working on these projects report slowed payments and uncertainty over future work.

Economists Warn of Broader Economic Impact

Economists caution that prolonged restrictions on development spending could have far-reaching consequences for the economy. Historically, Nepal has struggled to utilize more than 60 to 65 percent of its development budget annually. Freezing a significant portion of the budget further reduces the scope for capital expenditure.

“Development spending is one of the main drivers of employment and domestic demand,” an economist said. “When capital expenditure slows, construction activity declines, jobs are lost, and economic growth weakens.”

Calls Grow for Timely Budget Release

Officials from affected ministries argue that the budget freeze was implemented without adequate consultation and fails to account for projects that were already well-prepared. They warn that prolonged delays could increase project costs, discourage private contractors, and leave skilled workers unemployed.

Experts and civil servants alike are urging the government to release frozen development funds in a timely manner, stressing that fiscal discipline should not come at the cost of stalled infrastructure and shrinking economic activity.

As pressure mounts from implementing agencies and economic analysts, the government now faces the challenge of balancing budget control with the urgent need to sustain development-led growth in the second half of the fiscal year.