Slow capital spending and project delays hinder Nepal’s external loan collection—only 57pc target met in last FY

KATHMANDU: The Government of Nepal has struggled to mobilize external loans in the fiscal year 2081/82 (2024/25), raising just 57.79% of its annual target. This shortfall is primarily attributed to sluggish capital expenditure and failure to complete development projects on time, officials confirmed.

According to the latest Government Debt Report published by the Public Debt Management Office (PDMO), while the internal borrowing target of Rs. 330 billion was fully met, the government managed to raise only Rs. 125.39 billion in external loans against a target of Rs. 217 billion, leaving a gap of Rs. 91.60 billion uncollected.

Capital Spending Inefficiency Blamed
Gopi Krishna Koirala, head of the PDMO, pointed out that the low absorption of capital budgets and underperformance in project execution directly hampered the disbursement of foreign loans.

“Since capital expenditure was inadequate and most development projects couldn’t meet their deadlines, we failed to reach the external loan target,” he explained. “Government projects are initially funded through domestic resources and reimbursed later by development partners. But without completion, reimbursement claims couldn’t be submitted.”

External Loans Are Cheaper but Underutilized
Comparatively, external loans are cheaper and have longer repayment terms than domestic borrowings. However, their disbursement is often linked to the performance of capital projects, with stringent monitoring by international lenders. On the contrary, domestic loans are frequently used for recurrent expenditure, making them more attractive for the government despite their higher cost and shorter tenures.

The government’s heavy reliance on domestic borrowing also affects the private sector’s access to credit, as funds from banks and financial institutions are diverted toward financing public spending.

Overall Public Debt Performance
For FY 2081/82, the government had aimed to mobilize Rs. 547 billion in total public debt. However, only Rs. 455.39 billion was raised—an overall realization of 83.25% of the target. The government added Rs. 231.08 billion in new loans in the fiscal year, pushing the country’s total outstanding public debt to Rs. 2.67 trillion, which now accounts for 43.71% of Nepal’s GDP.

Composition of Public Debt
As of the end of Asar (mid-July 2025), the composition of Nepal’s public debt is as follows:

External Debt: Rs. 1.401 trillion (52.49%)

Internal Debt: Rs. 1.263 trillion (47.51%)

In terms of GDP, external debt constitutes 24.56%, while internal debt stands at 22.14%.

Soaring Debt Servicing Costs
The government spent over Rs. 402.85 billion in debt servicing (principal and interest payments) in the fiscal year. According to the PDMO report, by the end of the year, Rs. 362.59 billion had already been paid—90.01% of the allocated budget under this heading. This amounts to 5.94% of GDP, a sharp reminder of the growing burden of debt repayment on Nepal’s economy.

Of this amount:

Internal Debt Servicing: Rs. 304.19 billion

External Debt Servicing: Rs. 58.40 billion

Policy Implications and Economic Concerns
Economists warn that the underutilization of external loans could negatively impact infrastructure development and long-term economic growth. “Nepal’s over-reliance on internal debt not only burdens the domestic financial system but also limits the scope of concessional financing from international lenders,” said a senior economist at a Kathmandu-based think tank.

Additionally, slow capital spending raises concerns about public financial management, fiscal discipline, and development outcomes, especially when Nepal is already battling low revenue collection and increasing social expenditure.

Need for Reform and Efficient Implementation
Experts call for urgent reform in project planning, procurement, and execution to maximize the benefits of concessional external loans. Timely and quality completion of development projects is seen as essential to unlock disbursement commitments from international lenders and reduce dependency on expensive internal loans.

As Nepal plans its budget for the upcoming fiscal years, policymakers are expected to face increasing pressure to align capital expenditure with national priorities, improve project governance, and ensure a balanced debt portfolio that supports sustainable development without compromising macroeconomic stability.