Economists advocate for reducing reliance on debt to fund administrative expenses. Instead, they say, funds should be funnelled into projects that stimulate economic growth, generate employment, and improve productivity.

By Laxmi Khanal

Nepal’s public debt has surged by Rs 84 billion in the first four months of the current fiscal year (2081-82 BS/2024-25), pushing the total national debt to a staggering Rs 2.518 trillion, or 44.94 per cent of the Gross Domestic Product (GDP). This alarming rise has reignited discussions about fiscal sustainability and the nation’s growing dependence on borrowing.

Experts say that Nepal’s rising public debt is a symptom of deeper fiscal and economic challenges. They say that while the government has ambitious borrowing targets to support infrastructure and other projects, its growing liabilities highlight the urgent need for fiscal discipline and strategic investment.

Now, as the debt burden approaches critical levels, a balanced approach—prioritizing sustainable growth while avoiding reckless borrowing—will be key to securing Nepal’s economic future.

Debt on the Rise

According to the Public Debt Management Office (PDMO), Nepal’s public debt stood at Rs 2.434 trillion at the start of the fiscal year. By mid-November, it had climbed to Rs 2.518 trillion, fueled by both internal and external borrowing. Of this, Rs 1.252 trillion comes from domestic loans, accounting for 21.95 per cent of GDP, while Rs 1.266 trillion is from external loans, representing 22.19 per cent of GDP.

This fiscal year, the government aims to mobilize Rs 547 billion in total loans. By mid-November, Rs 165.72 billion, or 30.30 per cent of the target, had been raised. While domestic borrowing reached Rs 144 billion, or 43.64 per cent of the target, external borrowing lagged significantly, with only Rs 21.72 billion, or 10.1 per cent, mobilized.

Rising Costs and Challenges

The government’s escalating debt burden reflects a combination of administrative inefficiencies, weak revenue collection, and external factors. In October alone, Nepal’s debt liability increased by Rs 41.11 billion, driven partly by the depreciation of the Nepali rupee against the US dollar, which added an additional Rs 16.79 billion to the burden.

By the end of FY 2023/24, public debt had already doubled over five years, from Rs 1.048 trillion in FY 2018/19 to Rs 2.434 trillion. This dramatic increase underscores Nepal’s reliance on borrowing to finance administrative and developmental expenditures.

The government spent Rs 108.14 billion on debt repayment — comprising principal and interest payments — by mid-November this year. This highlights the strain on resources for other priority sectors.

Economic Implications

The growing debt is causing concern among economists, who caution against its long-term implications. While the government maintains that the current debt level is “manageable,” experts warn of the dangers of borrowing primarily to cover routine administrative costs rather than investing in high-return infrastructure and development projects.

Speaking to the House of Representatives, Finance Minister Bishnu Prasad Paudel acknowledged the rising debt but called for prudence. “The government must ensure that borrowed funds are directed toward projects with high economic returns,” he emphasized.

Nepal’s debt-to-GDP ratio currently stands at 44.94 per cent, inching closer to the International Monetary Fund’s recommended threshold of 50 per cent for developing economies. However, projections suggest the ratio may stabilize over the next five years. According to a forecast, Nepal’s debt-to-GDP ratio could decrease to 48.44 per cent by 2029, contingent on sustained economic growth and disciplined fiscal policies.

A Broader Context

Nepal’s debt trajectory aligns with global trends among developing nations, which have seen rising public debt due to post-pandemic recovery efforts, inflationary pressures, and currency devaluations. Nepal’s external debt reached an all-time high of $10 billion in late 2023, compared to a low of $3.5 billion in 2013.

Despite this, the pace of external borrowing has slowed. Between July and mid-August 2024, the government secured Rs 43.59 billion in loans, with Rs 40 billion from domestic sources and Rs 3.59 billion from international lenders. During the same period, Rs 19.27 billion was spent on repayments, underscoring the cyclical nature of debt accumulation and settlement.

To address its mounting fiscal challenges, the government must enhance its revenue collection mechanisms while curbing non-essential expenditures say experts. The tax base remains narrow, and sluggish economic growth has exacerbated the budgetary shortfalls.

Economists advocate for reducing reliance on debt to fund administrative expenses. Instead, they say, funds should be funnelled into projects that stimulate economic growth, generate employment, and improve productivity. They warn that without such structural reforms, Nepal risks falling into a debt trap where repayments consume an ever-larger share of the national budget, leaving limited room for developmental initiatives.