Govt warns of mounting fiscal risks; growth shocks, forecast errors and public-enterprise losses flagged

KATHMANDU: The Ministry of Finance on Wednesday published a comprehensive Fiscal Risk Statement and Strategies that warns Nepal’s public finances remain vulnerable to shocks from volatile growth, large forecast errors, natural disasters and recurring losses in public enterprises — even as authorities roll out measures to strengthen fiscal resilience.

The 30-page report, prepared using IMF tools and domestic analysis, classifies risks by magnitude and likelihood and calls for stronger buffers, better forecasting, and improved transparency across federal and sub-national governments. It also maps out mitigation options ranging from a medium-term debt strategy to disaster financing and tighter management of contingent liabilities.

Key macro risks and exposures

The finance ministry says volatility in real GDP is a central fiscal vulnerability. Nepal’s 15-year growth series shows a mean near 4% with a standard deviation of 2.7 percentage points — meaning growth can swing widely in a typical year. An IMF sensitivity exercise cited in the report finds that a one-standard-deviation negative growth shock could cut government revenues by 0.7 percent of GDP, widen the fiscal deficit by 0.8 percent of GDP and lift public debt by about 3.2 percentage points versus baseline. The ministry rates this a medium-magnitude, “possible” risk.

Inflation, interest-rate and exchange-rate movements are also examined. Average inflation has been 6.9% (14-year average), with periodic spikes that can strain spending on wages, pensions and subsidies. Domestic borrowing costs remain moderate (average effective interest rate about 4%); a one percentage-point rise would add roughly NPR 1,315.6 crore (≈0.2% of GDP) to annual interest payments, the report estimates. Exchange-rate volatility is flagged but judged a low fiscal threat because much of Nepal’s external debt is concessional.

Debt outlook and forecast errors

Public debt has risen from about 22.7% of GDP in FY2016/17 to 42.7% in FY2023/24, driven largely by pandemic-era spending. With ongoing consolidation and the Medium-Term Debt Management Strategy, the government expects to stabilise debt near 50% of GDP by FY2028/29 — a trajectory the IMF currently judges sustainable.

But the ministry flags forecast errors as a particularly acute risk. Tax-revenue forecasts have on average missed by about NPR 550 billion annually (7.2% of GDP) in recent years, forcing mid-year cuts — especially to capital spending. The statement classifies forecast error as high-impact and probable, and urges improved data, independent review and fiscal buffers.

Natural disasters: frequent floods, rare catastrophic quakes

Nepal’s geography makes disaster risk a persistent fiscal stressor. Floods and landslides, occurring roughly every 1–2 years, have caused damages averaging around 1% of GDP in episodes such as the September 2024 floods. Major earthquakes remain low-frequency but catastrophic: the 2015 quake inflicted damage equal to about 22.8% of GDP. The report recommends early-warning systems, layered disaster financing (including insurance), contingency funds and increased budgetary provisioning.

Public enterprises, guarantees and PPPs

Forty-four public enterprises hold assets equivalent to roughly 51% of GDP and liabilities of about 33% of GDP, the report notes. While aggregate flows from PEs were net positive in recent years (NPR 102.5 billion over two years), financial stress is concentrated in a few entities — notably Nepal Airlines, Nepal Electricity Authority and NWSC — with a solvency-restoration cost estimated at roughly NPR 60 billion (0.9% of GDP). Auditing gaps and rising unfunded liabilities remain concerns.

Outstanding government guarantees stand at NPR 51.6 billion (0.9% of GDP); a potential guarantee call could cost about NPR 7 billion a year over three years, the report says, though it rates the immediate likelihood as low. Public-private partnerships are judged low-impact and remote in likelihood so far, but the document urges a central PPP registry, ceilings on aggregate commitments and risk-based guarantee fees to avoid future contingent liabilities.

Policy roadmap and next steps

To strengthen resilience, the ministry sets out a policy menu: maintain the Medium-Term Expenditure Framework and Medium-Term Debt Strategy, tighten borrowing limits, build fiscal buffers, improve forecasting capacity, expand disaster risk financing (including catastrophe bonds and insurance) and bolster sub-national PFM through standardized accounting (SuTRA) and a Sub-National Fiscal Risk Monitoring System. The report also highlights modernising revenue administration with e-assessment, mandatory e-billing and AI compliance tools.

The Fiscal Risk Statement concludes that while Nepal’s fiscal framework has strengthened, effective implementation — including better data, transparency, and coordination between levels of government — is essential to prevent volatility from translating into persistent fiscal stress.