The construction sector in Nepal has been grappling with a myriad of challenges in recent years, directly impacting economic growth and employment opportunities. At the heart of the sector’s current slowdown lies the government’s consistent underperformance in terms of development expenditure. Over the past several years, this spending has remained significantly lower than anticipated, stifling growth in construction and associated industries. This lack of development investment, combined with substantial outstanding dues owed to contractors by government agencies, has created a cascading effect, negatively impacting not only contractors but also suppliers of construction materials and the broader workforce within the sector.
Development activities, especially civil works initiated by the government, play a vital role in redistributing revenue. These projects, being both labour- and capital-intensive, help funnel cash directly into the hands of the working class, thereby fuelling consumption. However, as wages for labourers, consultants, engineers, and contractors have declined amidst project delays and reduced payments, the ripple effect has been a sharp contraction in consumer spending. This contraction has hit Nepal’s foreign trade sector hard, especially imports, which form a substantial portion of government revenue. With import volumes dropping, the government’s revenue stream has also shrunk, leading to further financial constraints.
Outstanding dues mounting
The backlog of dues owed to contractors has reached critical levels. According to the Federation of Contractors’ Association of Nepal (FCAN), the government currently owes contractors around Rs. 45 billion, a figure that continues to grow each fiscal year, as the government struggles with revenue shortfalls. Since 2022/23, the unpaid dues have steadily increased, exacerbating the financial strain on contractors. According to officials at the Ministry of Physical Infrastructure and Transport (MoPIT), this accumulation of liabilities is partly due to a slump in revenue and the Ministry of Finance’s challenges in managing contract liabilities under its resource guarantee commitments. These financial difficulties have resulted in multiple projects stalling, leaving many contractors in financial limbo.
The government has also refused to extend deadlines for approximately 1,800 projects valued at Rs. 400 billion, a decision that further complicates the situation for contractors, many of whom are already struggling to keep their businesses afloat. Economist and former Nepal Rastra Bank Executive Director Nara Bahadur Thapa commented, “The construction sector acts as a critical propeller for economic momentum. If the government does not take steps to accelerate civil works and improve the efficiency of fiscal spending, the country will find it increasingly difficult to navigate the current economic slowdown.” To date, the government has made limited progress in settling outstanding dues, with only Rs. 6.75 billion paid to contractors in the 100 days since the new coalition government took office, as mentioned by Prime Minister KP Sharma Oli during his national address on October 23.
Monetary Policy incentives: a short-term remedy
In response to the financial hardship faced by contractors, the Monetary Policy for Fiscal Year 2024/25 has introduced several temporary incentives aimed at easing their cash flow challenges. These measures include a five-month extension for repaying principal and interest on loans, as well as protections against blacklisting due to bounced checks. FCAN President Ravi Singh acknowledged that while these measures offer contractors short-term relief, they do not address the structural issues of delayed government payments and systemic underfunding in the sector. Nepal Rastra Bank (NRB) has taken additional steps, including restructuring and rescheduling credit terms to give contractors some breathing room. The NRB’s provisions allow for deferral of interest payment for the next five months, and offer more lenient credit ratings, a move that Thapa describes as crucial, given that ‘contractor performance is closely tied to timely government payments’.
Under these revised credit provisions, contractors will be exempt from blacklisting based on bounced checks until further credit information is available. Furthermore, the NRB has taken a softer stance on credit ratings, relaxing the requirements for mandatory credit rating assessments in cases where contractors seek credit beyond their financial statement limits. If the government renews previously declined construction contracts, the associated bank guarantees will also be eligible for renewal, reducing the immediate pressure on contractors to fulfill obligations amidst uncertain funding.
In the case of joint ventures, a blacklisting affecting one partner will no longer extend to the entire venture, offering partial relief to other partners. Additionally, if a bank guarantee lapses, the policy allows it to be treated as a regular loan rather than a high-interest forced loan, thereby easing the interest burden on contractors.
Surge in loan mobilisation
Due to the NRB’s restructuring and rescheduling policies, loan disbursements within the construction sector have seen a marked increase in recent months. In the first quarter of Fiscal Year 2024/25, a total of Rs. 2.45 billion was mobilised in loans to the construction industry. According to Nepal Rastra Bank (NRB), this surge is largely attributed to the flexible loan terms and extensions granted to contractors, even though overall construction activity remains subdued. These measures, while helpful in the short term, underscore the urgent need for more sustainable solutions to address the sector’s long-term financial viability.
Persistently slow capital expenditures and reconstruction efforts
Despite the significant role that capital expenditure plays in stimulating economic growth, the government’s spending in this area has been consistently sluggish for several years. As of the first quarter of Fiscal Year 2024/25, only 8.3%, or Rs. 29.37 billion, of the total Rs. 352.35 billion capital expenditure allocation had been utilised. Capital expenditure as a proportion of the total budget stands at just 20.15%, with Rs. 229.85 billion spent to date. In previous years, particularly in 2018/19, higher development spending fueled strong economic growth, with Rs. 241 billion spent from a total allocation of Rs. 313 billion. However, this upward trend has since reversed, with development projects slowing down, job creation lagging, and economic growth stalling.
Senior Vice President of FCAN, Er. Ang Dorji Lama, emphasised the importance of the construction sector, calling it ‘the lifeline of the economy’, given its significant multiplier effects. However, in areas like Jajarkot and Rukum (West), reconstruction efforts following the devastating earthquake of November 3, 2023, have been far slower than expected. Unlike the robust reconstruction response that followed the 2015 Gorkha earthquake, the government has been unable to mobilise a similar effort for recent disaster-stricken regions, leaving communities and local economies struggling to rebuild.
The slowdown has affected key industries supplying materials for construction, particularly cement and steel rod production. According to Cement Manufacturers Association President Raghunandan Maru, cement factories are currently operating at only one-third of their total capacity, while the utilisation of iron and steel rod production facilities has also dropped sharply. This lack of demand has placed considerable financial strain on manufacturers and distributors, underscoring the broader impact of stalled construction projects.
The government has allocated around Rs. 381 billion to the National Reconstruction Authority for rebuilding infrastructure, public buildings, heritage sites, and private homes. Yet, reconstruction efforts for buildings and infrastructure damaged by the floods and landslides of September 2024 have not even begun. Those in the construction industry are now urging the government to expedite capital expenditure projects to alleviate the current economic stagnation and create new job opportunities. The construction sector’s challenges are thus not isolated; they ripple through the economy, with stalled development projects constraining growth, reducing revenue, and impacting the lives of countless workers and entrepreneurs across Nepal.
