By Our Reporter
Nepal’s public debt is fast approaching to Rs 3 trillion mark. On paper, that figure alone is not alarming. Many countries carry far higher debt relative to the size of their economies. Nepal’s public debt, at around 45 percent of Gross Domestic Product, remains below levels considered risky by international standards.
The real concern lies elsewhere. Nepal is no longer borrowing primarily to build the future. It is increasingly borrowing to pay for the past.
That shift should worry policymakers far more than the headline figure itself. By the end of the first 11 months of the current fiscal year, Nepal’s public debt had climbed to Rs 2.96 trillion, up by Rs 287 billion from the start of the fiscal year. During the same period, the government borrowed Rs 418 billion but spent nearly Rs 352 billion on servicing existing debt. In other words, a large portion of fresh borrowing is simply being used to repay old loans rather than finance new economic activity.
That is a dangerous pattern. Debt is not inherently bad. Every developing country borrows. Roads, hydropower projects, transmission lines, irrigation systems and airports require large investments that governments cannot finance through taxes alone. Borrowing becomes a problem only when it stops creating new wealth.
Nepal appears to be moving in that direction. The government’s biggest challenge is simple. Revenue is no longer growing fast enough to keep pace with spending.
Tax collection has repeatedly fallen below target over the past few years. Sluggish economic growth has weakened imports, reduced business activity and slowed tax receipts. At the same time, government spending on salaries, pensions, social security allowances, subsidies and administrative costs continues to rise every year.
Unfortunately, much of that borrowing has not translated into productive assets. Development budgets remain under spent every year. Projects suffer lengthy delays because of poor planning, land acquisition problems, procurement disputes and weak contract management. As a result, borrowed money often sits idle or generates returns far later than expected.
That defeats the very purpose of public borrowing. A loan should create assets that eventually strengthen the economy. A hydropower plant generates electricity exports. Irrigation increases farm productivity. Industrial infrastructure attracts investment. Better highways reduce transport costs. These projects expand the economy, increase government revenue and make debt easier to repay.
Borrowing to finance routine government operations does none of that. Even more worrying is Nepal’s growing dependence on domestic borrowing. Of the Rs 418 billion raised this fiscal year, more than 80 percent came from the domestic market. Heavy domestic borrowing can crowd out private investment by absorbing funds that banks might otherwise lend to businesses. When the government becomes the largest borrower, private companies often struggle to access affordable credit, slowing economic growth further.
External borrowing presents a different challenge. Foreign loans are generally cheaper because they carry lower interest rates and longer repayment periods. Yet Nepal has managed to secure only about one third of its foreign borrowing target this year. Delays in project preparation, weak implementation capacity and slow negotiations with development partners continue to limit access to concessional financing.
This imbalance pushes the government even deeper into domestic borrowing. The rising cost of servicing debt also deserves attention. Debt servicing now consumes more than Rs 350 billion annually, an amount that rivals spending on several development sectors combined. Every rupee spent repaying old loans is a rupee unavailable for schools, hospitals, irrigation or infrastructure.
If this trend continues, debt repayments will gradually squeeze development spending. The solution is not simply to stop borrowing. That would be unrealistic for a developing economy like Nepal.
Instead, the government must borrow more wisely. Every loan should pass a basic test. Will this project generate economic returns that exceed its financing costs? If the answer is no, the project should be reconsidered.
The government must also improve revenue collection without placing additional burdens on already struggling businesses. Expanding the tax base through economic growth is more sustainable than repeatedly increasing tax rates. Bringing more businesses into the formal economy, improving tax administration and reducing leakages would strengthen public finances without discouraging investment.
Equally important is controlling recurrent expenditure. Successive governments have expanded administrative spending much faster than development spending. Every new allowance, committee, office and bureaucracy creates long term fiscal obligations that become increasingly difficult to sustain.
Nepal also needs to improve project execution. Delayed projects not only increase costs but also postpone the economic returns needed to repay borrowed money. Faster implementation would allow investments to begin generating income much earlier.
Public debt itself is not Nepal’s biggest problem. Weak fiscal discipline is. Borrowing can accelerate development when governments invest carefully and spend efficiently. But when new loans are used to repay old ones while development projects stall and revenue struggles to grow, debt becomes less a tool for progress and more a sign of structural weakness.
Nepal still has time to avoid a debt crisis. But doing so will require more than borrowing limits. It demands disciplined spending, stronger revenue collection and, above all, the political courage to invest borrowed money where it delivers lasting economic returns rather than short term fiscal relief.
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