Understanding Nepal's underspending

It is the same every year. Just as the finance minister prepares to deliver his budget, there is a last minute spending spree across the country to disburse as much money as possible before the fiscal year ends in July.

The habit even has a pejorative Nepali phrase: असारे विकास, the frantic last-minute resource execution. But every year, even after all that eleventh-hour expenditure, the budget remains woefully underspent.  

Nepal’s budget is classified into three parts: current expenditure for administrative spending, capital expenditure for long-term development and infrastructure, and debt servicing.

Current expenditure and debt servicing account for a significant portion of government spending, leaving little money to improve roads, build facilities and buy equipment. But every year for the last nine years, the government underspent by an average of 35.3%.     

Till Wednesday, the three layers of government had spent only 66% of the total budget of Rs1.8 trillion, and 37% of its Rs352 billion development budget. Where does all that unspent money go? 

Unused funds from some ministries go back to the national treasury. But Nepal has a revenue shortfall, and there is a tendency to allocate funds without ensuring resource availability. 

“The main reason Nepal is unable to spend even the money allocated for development is because projects are not prioritised properly,” explains economist Kalpana Khanal. 

The National Planning Commission’s (NPC’s) Project Bank is tasked with selecting national projects for public-private partnership investments and ranking them into three tiers based on priority.  

Per the classification, the standards for Priority 1 projects include a completed Detailed Project Report and Environmental Impact Assessment report, as well as land acquisition guarantees. But these are just on paper, which means resources are diverted to politically expedient projects or those not fully developed.   

Furthermore, Nepal’s procurement mechanism involves choosing the lowest bidder, which presents domestic barriers since contracts are stretched beyond capacity and expertise. This is compounded by the quick turnover of skilled administrative and technical staff, and project managers. 

Then there is over-regulation. Budget expense categories are rigid, which limits the ability to reallocate funds where they are needed. 

In October 2024, a High-Level Commission on Economic Reform, was formed to assess the country’s overall economic situation and provide recommendations. Khanal was a member of the commission, and says it remains to be seen whether their suggestions are implemented in the budget. 

“We must first properly identify national priority projects, strengthen our internal capacity and human resources, diversify our procurement process, and ensure oversight agencies focus on monitoring and evaluation without over-regulating,” says Khanal. “For this, we need both political and bureaucratic integrity.”

That is a polite way to say that there is too much corruption and cronyism. Case in point: discussions surrounding the new budget took a backseat this week as Home Minister Ramesh Lekhak was embroiled in a scandal involving payoffs for Nepalis leaving on visit visas. 

Opposition parties including the Maoist-Centre and the RSP obstructed Parliament and demanded Lekhak’s resignation. The scandal has already led to the removal of and an investigation into Chief Immigration Officer Tirtharaj Bhattarai. 

This is reminiscent of last year’s budget presentation by Prime Minister Puspha Kamal Dahal’s government. The Nepali Congress, which was then in opposition, similarly obstructed Parliament and demanded the resignation of Home Minister Rabi Lamichhane citing his involvement in a cooperatives fraud. 

Home Minister Lekhak, who was not able to explain himself in Parliament, held a press conference to deny any wrongdoing. Despite obstruction, opposition parties said they would allow the budget to be presented, and the Finance Minister is presenting the budget in Parliament on Thursday.

29 May was also Republic Day, and marked symbolically by the monarchist RPP to launch a campaign of pro-royal rallies in the capital.

The budget comes as the government faces a revenue crunch, as well as the loss of funding for the social sector because of the USAID cutoff and shrinking donor aid. Rights-based programs related to gender, health, and education will suffer. Common sense would dictate that the unspent funds in the next budget be quickly reallocated to health and education.   

Says Khanal: “Once the budget is allocated, the budget cycle must be improved— the tendency to overspend towards the end of the fiscal year must be minimised.” 

Read also: How Nepal can budget wisely, Siddhartha Rayamajhi