Adhering to constitutional provisions, the government is set to unveil the budget for the Fiscal Year 2025/26 by the end of May (Jestha 15). The government’s Policies and Programmes, presented by President Ram Chandra Poudel on May 2, have indicated a proactive approach and a commitment to efficient resource allocation to invigorate the economy starting in the next fiscal year.
The government has faced criticism for distributing resources across numerous programmes instead of prioritising the allocation of limited funds to address critical infrastructure deficits, enhance production, invest in human capital, and improve service delivery. A lack of focus on priority sectors and weaknesses in budget implementation has been highlighted as significant challenges in Nepal’s fiscal governance, particularly in public finance management.
It is evident that the government’s capacity is constrained by various factors, including available resources and talent. External influences also significantly affect a geopolitically sensitive nation like Nepal. Nevertheless, Nepal possesses considerable potential for growth, progress and prosperity.
Unquestionably, the government stands as the largest procurer of goods and services within the economy, and its expenditure generates substantial multiplier effects. “It is believed that every rupee spent by the government can mobilise three times that amount from the private sector,” noted Madhu Kumar Marasini, former secretary of the Government of Nepal. “Government spending, especially on capital and development projects, acts as a significant catalyst for private sector investment.”
Considering the economic slowdown experienced over the past several years, a situation compounded by the Covid-19 pandemic and further strained by Russia-Ukraine tensions alongside other contributing factors, Nepal has been contending with increasing instability. Navigating these challenges and preserving sound macroeconomic stability are paramount, necessitating prudent and well-considered policy interventions. In this context, the government’s budget serves as a critical instrument for shaping the economy’s resilience.
In an environment of economic pessimism, the role of fiscal policy should involve increased government spending. However, the government’s limited spending capacity is contributing to the economic deceleration in the country. Economist Keshav Acharya, former advisor to the Ministry of Finance, has asserted that enhancing spending capacity requires addressing systemic challenges.
“The inefficiencies in managing public funds and the weak spending capacity are holding us back and fostering public disappointment,” he added.
“Strengthening institutional and technical capacity, improving procurement and contract management, and leveraging the digitalisation of government processes could address the current challenges and accelerate development expenditures.”
Priorities of Policies and Programmes, 2025
The Policies and Programmes for 2025, presented to Parliament on May 2, have indicated a potential shift in fiscal budget allocation, suggesting a more scientific and results-oriented approach. Compared to previous years, the government’s outlined strategies appear notably more dynamic. They underscore the persistent challenges in public spending and affirm a commitment to enhancing allocative efficiency in public expenditure, with investments strategically directed towards high-yield projects. The document explicitly states, “Unnecessary public entities will be closed, merged or restructured. While maintaining recurrent expenditures within desired limits, public sector investments will focus on complementing and promoting private sector investment.”
A strong emphasis has been placed on re-prioritising all physical infrastructure projects initiated by previous administrations and establishing clear timelines for their completion within the upcoming fiscal year. Furthermore, the government intends to classify these projects within the current parliamentary term to assess the necessary resources for all ongoing and proposed initiatives, suspend those deemed unfeasible, and terminate flawed ones. This aims to reshape the pace and culture of development by addressing existing shortcomings.
Recognising the potential of the new generation, ‘Gen Z’ (those born between the mid-to-late 1990s and the early 2010s), who are tech-savvy digital natives, entrepreneurship and employment development have been accorded due priority. Simultaneously, strengthening public service delivery, encompassing health, education, and public utility services, remains a key focus. The government has announced its intention to designate the next decade as the ‘decade of domestic employment’.
Leveraging technology, establishing robust coordination mechanisms among government agencies horizontally and vertically across all three tiers (federal, provincial, and local), and promoting faceless services from public offices are anticipated to stimulate the economy, curb corruption, and enhance the effectiveness and efficiency of services.
The implementation of a Land Bank has been prioritised for industrialisation and agricultural transformation. Additionally, the Policies and Programmes highlight efforts to minimise business risks and secure markets through protection against unforeseen losses and purchase agreements at minimum support prices for agricultural produce. Upgrading road networks and strategic roads is a priority for ensuring a smooth supply chain and reducing trade logistics costs.
Multipurpose projects integrating energy, irrigation, fish farming, tourism, and recreational activities through integrated water use have been envisioned. “Moreover, national and cross-border high-capacity transmission lines will be expanded, including with the participation of the private sector. Other necessary policy and regulatory measures, including the determination of transmission/wheeling charges, will be implemented to develop electricity transmission infrastructure,” according to the Policies and Programmes, 2025. Furthermore, high priority has been given to conservation, minimising losses from natural and climate-induced disasters, and developing resilient infrastructure as well as production and supply systems.
Resource constraints
The decline in imports and consumption, coupled with import-based revenue shocks, has presented significant obstacles in securing the necessary resources to implement the government’s policies and programmes. Compounding this issue, foreign aid – both grants and loans – has been steadily decreasing over the past several years. Given the increasing Debt-to-GDP ratio, the government faces constraints in accumulating both domestic and foreign debt. Although the country’s Debt-to-GDP ratio, currently around 45%, technically provides fiscal space for mobilising debt as needed, the lack of absorption capacity, coupled with unfavourable conditions in the global economy, diminishes the potential inflow of foreign aid. Consequently, the government is largely depending on domestic debt. However, a substantial increase in domestic borrowing could potentially lead to a crowding-out effect.
In previous years, despite facing resource limitations, the government had a tendency to present an inflated fiscal budget initially, only to downsize it midway through the fiscal year. Such practices have cast doubt on the budget’s credibility. Experts emphasise that proper attention should be given to allocation efficiency and implementation capacity.
The government has been exploring alternative avenues for resource mobilisation to achieve its development targets, including leveraging public-private partnerships, blended finance, climate finance, and other alternative development financing mechanisms.
Reportedly, the government has prioritised the mobilisation of an Alternative Development Finance Fund and has submitted the relevant bill to Parliament. This initiative aims to develop projects by utilising various alternative financing modalities beyond state resources or funds from the government treasury. “This can include public-private partnerships, sole private investment, and blended finance, among others,” according to Deputy Prime Minister and Finance Minister Bishnu Prasad Paudel.
In this regard, the government has announced plans to prepare a project bank of well-studied, bankable, and viable (in terms of returns) projects and to operate an integrated project bank to avoid project duplication at the sub-national government level. Projects that are attractive to the private sector and have the potential to become viable through viability gap funding under Public-Private Partnership and other blended finance models will be implemented using non-state resources or by mobilising funds beyond the government treasury.
Given the resource constraints, the government has envisioned a structural transformation of the tax system with the aim of promoting industrialisation, attracting investment, and enhancing the economy’s competitiveness. The Policies and Programmes state that a taxpayer-friendly revenue system will be developed through improvements in tax administration and the application of information technology.
As the government faces increasing pressure to generate resources to meet its committed liabilities, such as social security allowances, it has introduced the concept of integrated social security to strengthen the system by aligning programmes of agencies like the Employees Provident Fund and the Citizen Investment Trust, as well as with insurance schemes.
“With shrinking government resources, there are few alternatives: cutting down dispensable expenses, implementing the concept of a lean and thin government, creating a favourable investment climate for private sector investment, and allocating resources scientifically to priority sectors (mainly critical infrastructure development) that can create synergy by attracting private investments,” remarked Dr. Dilli Raj Khanal, a seasoned economist.
To reduce dispensable expenses, the government has been advised to shut down and merge various boards, committees, authorities, and restructure state-owned enterprises (SoEs). Meanwhile, the government has announced the restructuring of SoEs, including Nepal Airlines Corporation, through the recently unveiled Policies and Programmes.
Let’s shift the approach
Fiscal policy represents a critical intervention for addressing economic challenges and fostering momentum. Due to a weak production base, the country has heavily relied on imports for consumption, and a significant portion of its youth has emigrated in pursuit of employment opportunities abroad. Remittances have inadvertently facilitated increased imports, boosting both revenue and consumerism. However, instead of prioritising investments in enhancing production capacity and export competitiveness, the government has seemingly promoted patronage politics. Parliamentarians have reportedly negotiated for constituency development programmes with the government, rather than holding the executive accountable for the scientific allocation of resources and the effective implementation of the budget.
The government has been observed spending budget excessively, often without adequate parliamentary accountability. “There was a complete absence of fiscal discipline. Fund transfers were rampant, and the quality of spending was dismal,” stated Khanal.
The policymakers’ short-sightedness in setting and allocating priorities, coupled with a lack of rigorous parliamentary scrutiny and monitoring, have contributed to the country remaining in the lower middle-income trap.
Recently, in its Country Economic Memorandum, the World Bank Group outlined key elements to accelerate the country’s economic growth. As a crucial roadmap for spurring faster growth, the World Bank recommended maximising the benefits from youth emigration. “Integrating migration into national development, job creation, and poverty reduction strategies will provide a platform to work towards such a system. Policies should focus on reducing the cost and increasing the benefits and safety for current low-skilled migrants, while also eyeing longer-term skill and destination diversification,” according to the World Bank Group.
Similarly, improving export performance has been identified as another priority. Better management of inflationary pressures would address the erosion of exporters’ price competitiveness. Encouraging individuals to utilise remittances for investments and business growth could help mitigate inflation. Simplifying the process for businesses to obtain tax refunds on imported materials and reducing import taxes would facilitate increased exports. With Nepal’s impending transition from Least Developed Country status and the consequent loss of trade preferences, authorities should actively pursue additional preferential trade agreements.
Leveraging the potential of hydropower and bolstering the digital sector are two additional key areas recommended by the World Bank to stimulate economic growth and prosperity. “Developing a clear financing strategy to develop the hydropower sector will help mobilise much-needed investments. This strategy could include developing the domestic bond market and an effective framework for large-scale public-private partnerships,” stated the Country Economic Memorandum. “Strengthening the regulatory and legal frameworks by reducing bureaucratic red tape and streamlining the current licensing process would improve the structure of the electricity market and attract additional investment.”
Recognising Nepal’s significant progress in the development of the ICT sector, the World Bank has recommended further boosting the digital sector. It urges the government to update the Telecommunications Act and the digital strategy, and to expedite the adoption of key digital infrastructure. Low digital skills have been identified as significant impediments in the sector, necessitating their integration into school curricula and the implementation of training programmes for various age groups and demographics.
The government must adopt a revised approach and channel its valuable resources towards initiatives that yield substantial multiplier benefits for the economy.
Economic scenario
Whether by chance or design, the economic outlook for the current year appears promising. However, an economy lacking a robust production base and strong exports remains susceptible to various domestic and international shocks.
The projected economic growth for this fiscal year is optimistic. The National Statistics Office (NSO) has forecast that GDP growth could reach approximately 4.6% in the current fiscal year, provided there are no significant economic disruptions in the remaining period of Fiscal Year 2024/25. The agriculture sector is projected to grow by 3.28%, while the non-agriculture sector is expected to expand by 4.28%. Based on this projection, the size of the economy in the current fiscal year is anticipated to be Rs. 6,107 billion.
GDP growth
According to Finance Secretary Ghanshyam Upadhyaya, there are distinct signs of economic recovery. He stated, “Political stability, legal reforms, increased agricultural and industrial outputs, and a boost in the morale and confidence of the private sector are yielding positive results in the economy.”
All sectors, based on the industrial classification used to calculate GDP, have demonstrated positive growth.
Reforms
A well-structured budget embodies allocative efficiency, implementation capacity, and accountability. Achieving allocative efficiency necessitates thorough planning and project studies, along with precise programme costing, which demands a rigorous approach. At a minimum, the government should embark on a path towards scientific resource allocation. Furthermore, there must be a clear delineation of projects to be implemented by the federal, provincial, and local levels of government. Wasteful expenditures, such as the construction of economically unviable view towers, have drawn significant criticism as a misallocation of resources in non-tradable projects.
Announcements have been made regarding the enhancement of implementation capacity. Authorities frequently cite challenges stemming from a weak procurement process – including the timely preparation of bidding documents, contract awards, and contract enforcement; the poor performance or capacity of contractors; corruption and malpractices; obstacles in the smooth supply of raw materials; stringent provisions for contract termination (in cases of unsatisfactory work); and a lack of proper monitoring, among other issues. Numerous recommendations have been proposed in previous budgets to improve government spending. However, poor fiscal governance and bureaucratic hurdles continue to impede reform initiatives undertaken by various agencies.
Reality of implementation
A significant disparity has persisted between budget allocation and actual spending. The government often unveils an inflated budget, exceeding available resources, largely as a political manoeuvre given the country’s history of unstable governments. Frequently, the government that announces the budget barely has the opportunity to implement it, leading to a lack of accountability and the treatment of the budget as a tool to impress the public and gain political advantage. Coalition governments often present budgets as documents of political compromise, with no single entity held responsible for non-implementation. To break free from this detrimental cycle, political leaders and authorities must be held accountable for the failure to implement the budget.
Moreover, recurrent expenses have increased substantially over the years, while development/capital expenses have witnessed only steady growth. In terms of actual spending, expenditure under the capital expenditure heading is discouraging in Fiscal Year 2024/25. In fact, the government is spending more on debt servicing (payment of principal and interest on domestic and foreign loans) than on development expenditure. This increased debt liability constrains the country’s capacity to allocate funds for development initiatives.
‘Budgetary reforms are crucial’
Dr. Yubaraj Khatiwada
Economic and Development Advisor to the Prime Minister
We should initiate budget reform by focusing net borrowing on covering funding shortfalls in specific projects, moving beyond sector-specific allocations. During my time as finance minister, I aligned domestic debt with designated projects. Typically, our gross borrowing amounts to 5% of the GDP. In this context, the government might raise Rs. 300 billion through domestic debt. Beyond domestic debt, the government should also align foreign debt with thematic areas to ensure more prudent spending on development projects and enhance government accountability. The Alternative Development Finance Fund Bill and the recently unveiled Foreign Aid Policy incorporate such provisions.
If we aspire to achieve a 6-7% economic growth rate, obtaining loans is essential, as current revenue is insufficient even for recurrent expenses. Given the increasing capital intensity of our entire production system, as we discuss integrating AI and sophisticated technologies in production and services, and even agriculture becomes more capital-intensive, we should not hesitate to mobilise debt. However, we must simultaneously enhance productivity, boost exports, create employment opportunities, and ensure a multiplier benefit in the economy through the efficient and effective mobilisation of resources.
‘Government-Private Sector Collaboration for Economic Growth must’
Anjan Shrestha
Senior Vice President, Federation of Nepalese Chambers of Commerce and Industry (FNCCI)
To invigorate the economy, the government should collaborate closely with the private sector. As we actively seek foreign investment, it is imperative that we clearly articulate our model of socialism and the three-pillar economy, which are fundamental to our constitutional values. Foreign investors often associate socialism with the nationalisation of private properties, a perception we must address. Furthermore, the cooperative sector, primarily utilised as a financing model in the rural economy, is an integral part of the private sector. As political parties engage in discussions regarding constitutional amendments, this clarification should be a key subject.
The private sector in Nepal consistently advocates for a liberal and open economy that also ensures social justice. It desires to advance second-generation economic reforms, promote private sector growth, improve governance, and enhance the effectiveness of public spending.
Looking ahead, government spending must be impact-driven, particularly in areas such as infrastructure development, reducing the cost of doing business, lowering trade logistics costs, and implementing transformative multipurpose projects. A crucial issue lies in perspective. For instance, while the government’s Policies and Programmes envision the next decade as the decade of domestic jobs, the private sector suggests that the government should similarly designate it as the decade for industrial and SME development. Such a focus would generate numerous employment opportunities and empower many aspiring Nepalis to embrace entrepreneurship.
The private sector seeks to deepen its collaboration with the government in the future to propel the economy towards a higher growth trajectory through legal and procedural reforms, enhanced effectiveness of public spending, and the creation of a favourable environment for both domestic and foreign private sector investments.
