How Nepal can budget wisely

With just under two months remaining till the end of the current fiscal year, the Nepal government this week is set to announce its budget for the year 2025/26. 

Nepal’s budget has grown steadily over the past decade, from Rs618 billion in the fiscal year 2014/15 to Rs1.79 trillion in 2022/23. But this upward trend tells only half the story, as the total expenditure has consistently fallen short of the planned budget. 

Short of flamboyant promises and populist schemes, successive Nepali governments, regardless of party, have consistently failed to utilise the allocated budget.

This year, Nepal spent just 36% of the allocated development budget. Such recurrent underspending diminishes the government's ability to simulate the aggregate demand and slows economic growth. 

The country’s current annual average total expenditure shortfall is just over 20%, largely due to bureaucratic and institutional inefficiencies that continue to hamper budget implementation. Furthermore, poorly-made project proposals, shoddy planning, slow-moving procurement activities, quick turnover of technical staff, and inefficient inter-ministerial coordination contribute to a limited capacity to administer development across Nepal. 

This has led to a culture of frantic,  last-minute budget spending on Nepal, with 40% of the allocated development expenditure spent on the final month of the fiscal year, leading to a misuse of resources and poor project results.

These inadequacies are compounded by the lack of coordination between federal, provincial, and local governments, especially as capacity constraints at the subnational level have been a long-standing issue. Experts express particular concern over provincial and local governments, where staff are often short on technical skill and administrative know-how required for budget implementation. 

For instance, provincial governments spent just 34% and local governments spent 24.4% of its budget in the fiscal year 2022/2023, which suggests a persistent deficit in planning, implementation, and resource management.   

A breakdown of the recurrent and capital expenditures reveals even deeper dysfunctions and gaps between the allocated and actual spending of recurrent and capital expenditure. Recurrent expenses are government spending to maintain public services and administration, including interest, pensions, salaries, social security, and subsidies. Meanwhile, capital expenditure involves investing in long-term assets such as development programs, equipment, and infrastructure projects to expand the productive capacity of the economy.

As it stands, Nepal’s recurrent expenditure is staggering compared to capital spending. Studies show that the money spent on recurrent expenditure tends to have a stronger and more immediate effect on the GDP. 

In the fiscal year 2022/2023, Rs1.18 trillion was allocated for recurrent spending, while Rs380 billion was earmarked for capital expenditure. However, actual spending fell short of allocations in both expenditures, with recurrent expenditure falling short by an annual average of 14.7% and capital expenditure by a much larger average of 35.30% over the last nine years.    

This consistent underspending in capital expenditure is particularly alarming, and has direct impacts on the macroeconomy. It also plays a crucial role in creating economic momentum through the proper business investment climate and business confidence. 

When capital expenditure falls short, aggregate demand contracts result in fewer employment opportunities, reduced household consumption, and delayed infrastructure projects that discourage business investment. 

Meanwhile, the dominance of recurrent expenditure driven by rising administrative and social security expenditures continues to crowd out funds for capital investment, perpetuating a cycle where budget numbers grow, but transformative development fails to take shape.  

The core challenge in Nepal's budget execution can be explained by the principal-agent problem theory - an economic theory that explains the misalignment of conflicting incentives between two parties. In the context of Nepal, the Ministry of Finance is the principal authority that allocates the budgets and resources, while the line ministries are the agents assigned to propose and execute the budget. 

However, a disconnect in incentives between the Finance Ministry and line ministries often leads to budget misallocations, which in turn cause inefficiencies and poor budget outcomes.  

One of the key dimensions of the problem is asymmetric information. The Line ministries possess detailed information of their needs and priorities in projects that are unavailable and unverifiable to the MOF. This information gap further incentivises ministries to propose higher budgets than actually needed. 

This is common behavior and expected in budget negotiations, as ministries compete for limited funds and seek to maximise their budget. Consequently, funds may be disproportionately allocated to ministries that lobby more effectively or exaggerate needs rather than those that would deliver the greatest public benefit.   

Read also: Nepal in the red, Ramesh Kumar

This budgetary misallocation distorts not only priority projects  but also induces  inefficiencies in implementation. Where funds flow into inefficient use as a result, the government cannot deliver effective services or complete development projects within scheduled deadlines. This results in delayed spending, wastage of resources, and underperformance, which undermine economic growth and confidence in government.  

Closing the persistent gap between allocated total budgets and total expenditures and between the allocated and actual recurrent and capital expenditures requires the Finance Ministry to strengthen its monitoring and evaluation to appropriately administer resources after the budget announcement. 

For this, the Finance Ministry must ensure effective monitoring of how line ministries spend their allocated funds throughout the fiscal year, so that it can hold the other ministries accountable and identify bottlenecks or time delays in budget implementation. This can be achieved through periodic reporting of progress, linking budget release with performance, and using combined financial management information systems.

In addition, linking future budget allocations to ministries’ past performance in budget utilisation would create stronger incentives for responsible and efficient spending. When ministries know that their ability to secure funds in the next fiscal year depends on how well they manage and execute their current budget, they are more likely to submit realistic proposals and prioritise timely implementation.

Doing so would help to synchronize the incentives of the Finance Ministry and line ministries in order for Nepal to effectively execute the budget and direct resources toward projects aligned with our national priorities, ultimately minimising the country’s budget deficit.

Siddhartha Rayamajhi holds a BA in Economics from Kathmandu University.