IMAGE: WORLD BANK PHOTO COLLECTION
A USEFUL WAY to understand a government budget is to ask what it cannot do before it spends a single rupee on anything the country actually needs. In Nepal’s case, the answer has become ugly. In fiscal year 2024-25, the federal government paid out 24% or so of its total spending, or 35% of its total revenue, in principal and interest payments on public debt. That left 65 rupees in every hundred collected from taxes and other sources to pay every civil servant, maintain every road, fund every school and hospital, and finance whatever investment the government had promised. The situation has not improved in the year since.
Nepal’s total public debt reached Rs2.8trn ($18.54bn) as of March, according to the Public Debt Management Office. The debt-to-GDP ratio stood at 47% or so, up from 43% at the end of the previous fiscal year and nearly double the ratio of 2019-20. The pace of accumulation is the most striking number: the Public Debt Management Office, the government body responsible for managing the country’s public debt, calculates that public debt has grown at an average annual rate of 17.6% over the past six and a half years. Nepal’s economy has not grown anything close to that fast in the same period.
The process compounding the problem is the exchange rate. Nepal’s rupee has been depreciating against the dollar at a compound annual rate of 3.07%, following the Indian rupee, to which it is pegged at a fixed 1.6 ratio. Over the first eight months of fiscal year 2025-26, the rupee weakened from Rs137.88 per dollar to Rs150.67—the weakest level in Nepal’s currency history. The World Bank notes that this currency move alone added some Rs98bn to Nepal’s outstanding public debt during this period, without the government borrowing a single additional dollar. When external creditors lend in dollars and Nepal repays in rupees that are worth less each year, the debt in domestic-currency terms rises automatically, regardless of fiscal discipline.
External debt makes up 53% of Nepal’s total public obligations, much of it owed to the World Bank’s concessional arm, the Asian Development Bank, India as well as China. The concessional terms (low interest rates, long maturities) mean Nepal is not in immediate danger of the kind of liquidity crisis that brought Sri Lanka to default in 2022. The Public Debt Management Office puts the weighted average interest rate on Nepal’s debt at 3.4% and the average maturity at eight years. By formal debt sustainability measures, Nepal remains in the low-risk category. That reassurance is, however, about solvency. The real problem is what the debt service is displacing.
The World Bank’s April 2026 Nepal Development Update put the displacement like this: “Capital expenditure continues to lag behind debt servicing since H1 FY22, with the gap widening to 2.2 percent of GDP in H1 FY26, primarily due to amortization of domestic debt.” Translated into plain language: for the past four years, Nepal has been paying more to service old debt than it has been spending on new physical infrastructure. In the first half of this fiscal year, the government executed only 12.1% of its budgeted capital spending, in part because of disruptions from the September 2025 unrest.
Meanwhile the interest arrears, dearness allowances and fiscal transfers that count as recurrent costs kept arriving on schedule, because the civil service and the creditors do not share the delays that afflict road-builders and irrigation engineers.
Finance minister Swarnim Wagle’s budget for the coming year allocates Rs431bn, about 20% of the total, for capital expenditure and earmarks some 21% for debt repayment. Those two allocations are nearly identical in size. But capital expenditure in Nepal historically executes at 55-60% of its budgeted amount; debt service is non-discretionary. The actual outcome—barring a significant improvement in implementation capacity that nothing in recent history predicts—will be a year in which Nepal pays out more to creditors than it invests in its own productive capacity. This is the third consecutive year in which that will be true.
The specific loans now entering repayment illuminate the problem. The $215.96m Chinese Export-Import Bank loan for Pokhara International Airport began generating principal repayments in 2026. The airport has no scheduled regular international flights. The government is, this year, making payments on a debt for an airport that earns essentially no revenue, while simultaneously underfunding the roads, irrigation schemes, hospitals and power transmission lines that could generate the economic activity that would improve the tax base that would ease future debt service. The sequencing could hardly be worse.
Economists warn that without shifting borrowing towards productive investments, Nepal risks a prolonged period in which debt service crowds out both public investment and social spending. Wagle himself acknowledged in his pre-budget white paper that “weak allocation, low spending and poor quality of capital expenditure had affected economic growth”. The budget he then presented borrows a net Rs524bn—Nepal’s largest single-year domestic and external borrowing programme—to fund a spending plan whose debt service component will, if history holds, surpass its capital execution. The country is borrowing more to invest less in real terms, and paying an increasing share of each rupee it collects to service the cost of having borrowed before.
None of this constitutes a crisis in the conventional sense. The IMF and World Bank both classify Nepal as low risk of debt distress. The foreign exchange reserves stand at $24bn, providing a 22-month import cushion. The concessional interest rates mean the annual carrying cost is manageable.
Yet the shadow the debt casts is on space rather than solvency. Every rupee committed to debt service is a rupee unavailable for the roads, schools and grid connections that Nepal’s 7% growth target implicitly requires. That target was set for an economy with a clean balance sheet. Nepal is running it with a debt that has nearly doubled in six years and a capital execution rate that has halved. ■
