Image: Bikram Rai
Nepal’s finance ministry, never short of optimism, has something to crow about. Its revenue collection hit NPR 1.03 trillion in the first eleven months of this fiscal year (2024-25), up 9.2% from the previous year. That would appear to signal a recovering economy and a government regaining fiscal control. Appearances deceive.
The surface gloss is hard to ignore. Tax revenue rose by 10.5%, outpacing inflation. Excise duties ballooned by nearly a fifth, and customs duties by more than 14%. Value-added tax (VAT) now accounts for nearly a third of all receipts. Even the marginal but telling educational service tax, extracted from the sprawling network of private schools, grew by 25%. The taxman seems to be doing his job at first glance.
Yet the structure of revenue tells a more worrying story. Nearly half of the government revenue still comes from VAT and customs, both reliant on imports and household spending. This suggests not so much economic deepening as more smartphones, scooters and Scotch whisky crossing the border. Income tax, the best proxy for formal economic growth, expanded by a tiny 4%, down sharply from last year’s 13%. That reflects stagnant wages; tepid business profits; and a large informal sector that remains stubbornly untaxed.
Excise duties recovered stunningly from last year’s slump. Levies on alcohol, tobacco, vehicles and luxury goods now form 15.8% of the tax pie. But this is no structural shift—more a post-pandemic splurge. Policymakers would be unwise to bank on it lasting.
The weakness of the country’s fiscal foundation becomes starker when examining non-tax revenues and “other receipts”: a category that includes dividends from state-owned enterprises (SOEs), royalties and one-off grants. These amounted to only 1.1% of total revenue. Worse, they fell by nearly 48% year on year. That underlines the failure of asset monetisation plans and points to chronic inefficiencies in SOEs. State-run entities remain bloated as well as unprofitable and in some cases bankrupt in all but name.
Budgetary operations provide further evidence of the imbalance. Government expenditure climbed to NPR 1.25 trillion, up from NPR 1.12 trillion the year before. Capital expenditure, however—the money spent on infrastructure and development—has actually fallen. Meanwhile financial expenditure including interest payments and repayments soared by nearly NPR 76 billion. That makes for a curious fiscal recipe: less investment, more debt service.
The deficit, although narrower than two years ago, still looms big at NPR 329.15 billion. To plug the gap the government turned increasingly to domestic borrowing. Treasury bills were pared back but development bonds surged by NPR 121.81 billion. These now account for 70% of all domestic debt. Banks remain the government’s largest lenders, holding over 81% of all debt. This growing reliance exposes the banking system to sovereign risk: hardly ideal in a country still healing from a credit crunch.
Some diversification is underway. Public and institutional investors, lumped into a mysterious “Others” category, have quadrupled their holdings in domestic debt. Retail investors too are showing interest in Citizen Saving Bonds. But this fledgling investor base lacks the clout and coordination to stabilise public borrowing in a downturn.
Foreign borrowing remains small, though steady. Loans from abroad helped fund NPR 92.81 billion of the deficit. Grants, however, are fickle and increasingly scarce. Their modest bump this year did little to offset falling capital transfers. The days of aid-financed development are behind Nepal; revenue self-sufficiency is now imperative, rather than optional.
The federal government is not the only entity stockpiling funds. Provincial governments, despite receiving NPR 139.86 billion in grants, spent only NPR 124.9 billion. Local governments also sat on NPR 94.51 billion in balances. This might appear fiscally prudent but more likely reflects under-capacity, delayed procurement or an unwillingness to execute projects. Either way, it highlights a gaping hole in the federal structure: fiscal decentralisation without administrative follow-through.
There are flickers of prudence. The central bank has sharply trimmed its direct lending to the government, signalling a welcome separation between monetary and fiscal policy. The pivot from short-term treasury bills to long-term bonds indicates a modicum of planning. But such gestures mean little without meaningful reforms.
The revenue base remains narrow, volatile and, worse, heavily trade-dependent. Imports of luxury goods prop up the treasury while the real economy—dominated by remittance-fuelled consumption and informal labour—remains largely outside the tax net. SOEs are liabilities rather than assets. Public investment lags far behind planning, and fiscal coordination across tiers of government is still disjointed.
The solution therefore is broadening the tax base; enforcing compliance; and reforming public enterprises. Digital tax systems can help. So can formalisation of small businesses. Educational and health taxes, though politically sensitive, offer avenues for incremental gains. Asset monetisation—if it ever moves beyond talking points—could inject new life into state finances.
Nepal’s books may be growing but they are not yet balanced. Without reform the government risks taxing its citizens while bankrupting its future. ■
