IMAGE: SETO PATI
ON MAY 29TH Nepal’s finance minister, Swarnim Wagle, stood before parliament and delivered a budget that tried to do something governments in Kathmandu rarely attempt: explain, in plain terms, what the country’s money is for and where it will come from. The speech ran long. The ambitions ran longer. Whether the two can be reconciled is the question Nepal will spend the next twelve months answering.
The headline number is Rs2.12trn ($13.9bn), which the government plans to spend in the fiscal year beginning mid-July. That is 25% more than last year’s revised spending plan. To pay for it, the government expects to collect Rs1.4trn in tax and other revenue; borrow Rs247bn from foreign lenders; and raise a further Rs410bn domestically by selling bonds. Even so, debt repayments of around Rs318bn mean the actual net addition to Nepal’s debt is smaller than the gross borrowing suggests. But the debt pile is growing. Nepal’s public debt has risen from below 30% of GDP a decade ago to above 40% today, and this budget adds to it.
The money is spread unevenly. Nearly 60% of spending goes on running costs—salaries, pensions, interest payments and social transfers—leaving only about 20%, or Rs431bn, for actual investment in roads, dams, hospitals and the like. That ratio matters because Nepal’s growth problem is not primarily a shortage of consumption: it is a shortage of productive capacity. Capital spending is where governments build things that make an economy more productive for decades. Nepal has consistently announced big capital budgets and consistently failed to spend them in full, often disbursing a third of the annual allocation in the final weeks of the fiscal year in ways that produce paperwork rather than progress. The government says it will fix this through a “mission mode” delivery model and a new sunset law for stalled projects. It has said similar things before.
The most eye-catching reforms are on taxation. The personal income tax exemption threshold doubles to one million rupees, meaning a larger share of wage earners pay nothing at all. The top marginal rate on personal income falls by ten percentage points. Customs duties, previously spread across eleven different bands, are compressed into seven, and import taxes on raw materials used in manufacturing are set below those on finished goods, so that factories in Nepal are not penalised for buying inputs from abroad. Excise duties are scrapped on 360 products, and several smaller levies collected at the border are merged into a single green tax. The overall direction is to make the tax system simpler and cheaper to comply with, in the hope that more businesses will bother to do so.
Two innovations in particular stand out. Consumers who pay by digital means and receive an invoice at the point of purchase will get a 10% rebate on the value-added tax they pay, effectively a discount for using traceable payment methods. Separately, migrant workers who send money home through official bank channels—rather than through informal networks—will be entered into a lottery. These may sound like novelties, but they address a real problem. Nepal receives around over $12bn a year in remittances from workers abroad, a sum equivalent to roughly a third of the entire economy. A significant portion of that money bypasses the banking system entirely, generating no tax record and no foreign exchange earnings for the state. Pulling even a fraction of it into formal channels would help the revenue target, which at 22% growth over last year is demanding.
For businesses considering investing in Nepal, the budget offers a list of changes. Foreign companies will no longer need prior approval from the central bank to repatriate their profits; a notification will suffice. New types of investment instruments—convertible bonds, hybrid financing tools—will be legally recognised. Disputes that have been sitting in courts for years can be settled by paying the original assessed tax plus a small surcharge, with all penalties and interest waived. A bad bank—formally, a national asset management company—will be created by the end of the year to buy troubled loans off commercial bank balance sheets, freeing those banks to lend again. The Nepal Stock Exchange will introduce intraday trading and eventually short selling and derivatives, tools that allow investors to hedge their positions and that most regional markets have offered for years.
None of these changes is radical in isolation. Together, they sketch a country trying to make itself legible to capital—to create the legal clarity and institutional predictability that investors, domestic and foreign, need before committing money for the long term. The test is not whether they are implemented consistently enough to change behaviour.
The energy sector is where the budget’s ambitions are most consequential and most uncertain. Nepal has more hydropower potential than almost any country its size: rivers fed by Himalayan snowmelt that could generate tens of thousands of megawatts. It has developed only a fraction of that. The current installed capacity is some 4,495 megawatts, and the budget targets a jump to 5,535 megawatts in a single year, with Rs.85.5bn allocated for generation, transmission and distribution. The Nepal Electricity Authority, which has long run the entire electricity chain from dam to household socket as a single organisation, will be split into three separate companies handling generation, transmission and trading. The idea is that separating these functions makes each more efficient and opens the door to private competition at every stage.
More ambitiously, private companies will be allowed to sell electricity directly to buyers in other countries, including by building their own transmission lines. Cross-border power links with India—already under construction in some cases—are to be accelerated. Nepal’s problem in the wet season is not a shortage of electricity but a surplus of it: generation outstrips domestic demand for roughly five months a year, and the excess is currently wasted because there is nowhere to sell it quickly. If private trading is liberalised and the transmission infrastructure is built, that surplus becomes an export and a source of foreign exchange. If the reforms stall in implementation, the surplus continues to be wasted and the new hydropower projects coming online over the next five years will simply add to the oversupply.
Health spending rises to Rs101bn, with the government aiming to bring 90% of Nepalis into health insurance within three years. Currently, some 37% are covered. Closing that gap in three years would be one of the faster expansions of health insurance coverage seen anywhere in Asia. It requires not just money but a functioning network of clinics and hospitals capable of providing the services the insurance is supposed to pay for. Separately, child cancer treatment in government hospitals will be free, and the night duty allowance for nurses is doubled—a small but concrete acknowledgement that the health system runs on underpaid workers.
The government’s growth forecast of 7% and its inflation target of 6% or below are optimistic but not absurd. Nepal is expected to grow at around 3.8% in the current year, and a large infrastructure programme combined with lower taxes and looser credit conditions could push that higher. Inflation is partly outside the government’s control: Nepal’s currency is pegged to the Indian rupee, so domestic monetary policy has limited reach, and food prices depend heavily on the monsoon. The Nepal Rastra Bank will set monetary policy separately, and the budget assumes it will be broadly supportive.
What ties this budget together is a theory about why Nepal has grown slowly for so long. The argument, implicit rather than stated, is that the country has had adequate natural resources, an adequate labour supply and reasonable macroeconomic stability, but has been held back by an economy that is too informal, too fragmented and too hostile to investment to make productive use of any of those things. The tax simplification, the VAT rebate, the bad bank, the energy liberalisation and the investment facilitation measures are all, in different ways, attempts to tackle that diagnosis.
The diagnosis is probably right. Whether the prescribed treatment is administered consistently enough, and for long enough, to change the underlying condition is a different question: one that quarterly spending figures and private investment data will begin to answer well before the next budget is read. ■
