IMAGE: KHABARHUB
EVERY FINANCE minister wants to inspire hope. Swarnim Wagle, Nepal’s newly appointed finance chief, is no exception. Speaking last week at the annual general meeting of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), he promised a “hopeful” national budget that would slash taxes, repeal obstructive laws and place the private sector in the driving seat of a $100bn economy. The rhetoric is seductive. Yet hope, in fiscal policy, is an outcome and not an ingredient. And the maths on which Mr Wagle’s budget must rest offers few grounds for cheer.
Consider the projections. Government officials talk of achieving 7% economic growth. The National Statistics Office, using its own model, expects GDP growth of 3.85% for this fiscal year—still short of the 4.43% recorded the previous year. The Asian Development Bank is even more cautious. In its April 2026 outlook, it cut its forecast to 2.7%. The World Bank projects just 2.3%. Neither the NSO nor the international lenders see growth approaching 7%. The gap between ambition and reality is a chasm.
That chasm has structural origins. Nepal’s economy has suffered what economists call premature deindustrialisation. Industry contributed 12.8% of GDP in 2025, down from some 22% in 1995, far below the 15–20% typical of manufacturing-led developing economies. Manufacturing alone accounts for roughly 5–6% of GDP. In its place, services—much of it low-productivity retail and real estate—command around 62% of the economy. This is not the kind of transformation that produces mass employment.
Instead jobs are sought abroad. Over 741,000 Nepalis left for foreign work last year, accelerating the exodus and in turn remittance inflows. But remittances finance consumption, and not production. They do not build a tax base.
That is the crux of the problem. Nepal’s tax-to-GDP ratio is roughly 17–18%—respectable by South Asian standards. Yet this figure is inflated by a narrow formal sector that bears the brunt of the load. The informal economy is estimated at some 51% of GDP, meaning the effective tax base is much smaller than the headline ratio suggests. Value-added tax alone contributes nearly one-third of total revenue. Personal income tax starts at a modest 1% on the first Rs500,000, but the top marginal rate reaches 36–39% on income above Rs2m. That is higher than Pakistan’s 35% or Sri Lanka’s 36%.
The salaried middle class—the people who actually pay taxes—feels the squeeze. The basic exemption threshold of Rs500,000 for individuals and Rs600,000 for couples has not kept pace with inflation. The FNCCI has explicitly warned that failing to raise it will “disappoint the middle class and dampen consumer spending”. Yet the government faces a hard trade-off: raise the threshold and lose revenue; keep it and alienate taxpayers.
Meanwhile the state struggles to spend what it already allocates. Capital expenditure, the kind that builds roads and power lines, reached just 23.58% of its annual target in the first nine months of this fiscal year. That is worse than the 29.2% spent in the same period the previous year. The government has revised its full-year capital target downwards to Rs243.30bn—just 60% of the original estimate—acknowledging that it cannot execute what it has planned.
Nor is this a new problem. Analysis of the past six years shows capital spending execution consistently lagging, with only rare exceptions. Officials cite familiar bottlenecks: inadequate project preparation, land acquisition delays, forest clearance hurdles, slow payments to contractors and political transitions. Already the budget review has cut the capital allocation, but even the reduced target may prove optimistic.
The private sector, which Mr Wagle wants to lead the charge, is not biting. Credit extended to the private sector increased by just 4.4% in the first eight months this year, striking Rs5.7bn. That is far slower than deposit growth. Excess liquidity held by banks at the central bank surged from Rs654bn in mid-July 2025 to Rs904bn by March 2026. The average lending rate has fallen to 7.06%. Yet businesses are not borrowing. The problem is a deficit of confidence. Non‑performing loans have climbed from 3.33% in 2015 to 5.42% in 2026. Banks are awash in cash but wary of lending it.
The former FNCCI president, Chandra Prasad Dhakal, put it starkly in January: business morale was at an “all‑time low”, with the private sector “unable to invest with confidence” owing to an unfavourable investment climate and weak guarantees of property security. In April the three major private‑sector federations issued a joint statement expressing “serious concern” over government actions against businesses. The private sector accounts for roughly 81% of the economy and 86% of employment. If it will not invest, the budget’s “hope” is hollow.
All this unfolds against a backdrop of soaring public debt. As of mid‑April, total public debt reached roughly Rs2.93trn, or 48.04% of GDP. That is up from 25% of GDP a decade ago. External debt accounts for about 53% of the total, and rupee depreciation alone has added an estimated Rs115.75bn to the liability. The government has already spent about 63% of its budgeted debt‑servicing allocation for the year. Nepal is not yet in a debt crisis, but the trend is heading the wrong way.
Mr Wagle has acknowledged the hard choices ahead. Recently he said that the National Resource Estimates Committee has set a budget ceiling of Rs1.89trn for the next fiscal year, a reduction of Rs76bn from the current year’s budget; and that mandatory liabilities alone will consume some Rs1.33trn, leaving little room for manoeuvre. Revenue potential is only about Rs1.18trn. Even before the government adds a single new programme, the arithmetic is tight.
The reformer’s trilemma
Mr Wagle faces an impossible trilemma: he has promised to cut taxes, increase capital investment and maintain fiscal discipline. Yet the budget envelope is shrinking; the economy is slowing; and the historical evidence suggests that even if he allocates more for development, the state will struggle to spend it. Something will have to give.
A budget can be hopeful only if it is feasible. On the evidence of Nepal’s fiscal numbers, that is a bar this one has yet to clear. ■
