Soaring Debt

Nepal’s public debt quadrupled in the last eight years, growing from Rs540 billion after the earthquake in 2015 to Rs2.38 trillion this month, half of it external debt. It now makes up over 44% of the country’s GDP. 

The revenue growth rate fell in the last fiscal year, reducing capacity to cover expenditure. The government is attempting to compensate by borrowing from within and outside the country.
Officials have attributed Nepal’s debt load to post-earthquake reconstruction, a bloated federal machinery, and the pandemic.

This year, the government earmarked Rs330 billion to pay back domestic and external loans and interest, which is more than 18% of the budget. Another Rs302 billion is for capital expenditure.

Nepal has reached a point where it is now borrowing more money to pay back its debt. Of the Rs162 billion borrowed internally and externally since last July, Rs116 billion was spent on loan repayment. 

While Nepal’s debt burden is still significantly less than India or Japan, for instance, the difference is that debt-financed projects in Nepal have not yielded tangible returns.  

The $120 million Prime Minister's Employment Program funded by the World Bank was declared ‘unproductive’ by the Auditor General. The Bank itself found that funds had been misused in the Project for Agriculture Commercialisation and Trade (PACT). The Rs1.5 billion Chobhar Dry Port is in limbo.  

Agriculture imports continue to grow despite loans from the World Bank and the IFAD. The Rs22 billion Pokhara International Airport funded by China’s Exim Bank, and Bhairawa Airport built with an ADB loan have no international flights.  

Another ADB scheme, the Melamchi Water Supply Project cost more than Rs35 billion, but supply is still cut after a flood destroyed its headworks in 2021. The proposed Rs25 billion dam on the Nagmati also financed by the ADB has been called extravagant and risky by critics.

“Loans are currently being wasted on unproductive projects,” says economist Nara Bahadur Thapa. “As debt increases, the government's spending on citizens decreases, leading to more public disillusionment.” 

Nepal’s governments have not just poured borrowed money into high-risk, low-reward projects, but unnecessary ones like view towers, city halls and minister’s villas.

 Meanwhile, health, education, agriculture, drinking water, and roads remain in a state of permanent neglect. 

“Nepalis are not aware of the country’s debt burden, but are concerned about the government’s mishandling and wastage of loans,” says former Finance Ministry Secretary Rameshore Khanal.

The debt burden reduces the government’s ability to spend on development, and passes on the debt to future generations. “Domestic debt is similar to a tax that we are forcing on our grandchildren,” says Khanal.

Some economists say a debt of up to 50% of GDP is normal for a country like Nepal. Finance Ministry spokesperson Dhani Ram Sharma says most foreign loans are low-interest and subsidised, but concedes that the government has wasted funds on projects that did not guarantee returns.

“The ministry has become more sensitive to risks associated with securing internal as well as foreign loans without designating the funds to a particular project and ensuring maximum returns,” says Sharma. 

Economist Biswo Poudel says that although Nepal’s public debt is not yet unmanageable, planners must exercise caution while borrowing, control wasteful expenses and take initiatives to increase revenue and prevent revenue leakage. 

Poudel says the priority should be a debt cap, more care should be given to what loans are for, not to borrow indiscriminately and be profligate.   

“If the debt continues to grow without increase in revenue, the economy will be unsustainable,” he adds, “it will be like a Ponzi scheme where we take new loans to pay off old ones.”