Kathmandu, October 30
Nepal’s public debt has crossed Rs 3 trillion for the first time, reaching a record Rs 3.009 trillion in the first quarter of the current fiscal year 2026/27, according to the Public Debt Management Office.
At the end of the previous fiscal year in mid-July 2026, the country’s outstanding public debt stood at Rs 2.981 trillion.
During the first three months of the current fiscal year, the government borrowed Rs 123 billion and repaid Rs 77.74 billion in principal. A foreign-exchange gain of Rs 18.16 billion also affected the overall debt balance, bringing outstanding public debt to Rs 3.009 trillion by mid-October.
Of the total, domestic debt accounts for Rs 1.410 trillion, while external debt stands at Rs 1.598 trillion. Domestic borrowing makes up 46.87 per cent of the total, compared with 53.13 per cent in external debt.
The debt burden now exceeds Rs 100,000 per person when the total is divided by Nepal’s population. Public debt has reached 45.59 per cent of gross domestic product (GDP), comprising domestic debt equivalent to 21.37 per cent of GDP and external debt equivalent to 24.22 per cent.
Government falls short of borrowing target
The government has set a public borrowing target of Rs 658.28 billion for the current fiscal year. It mobilised Rs 123.32 billion during the first quarter, achieving 18.73 per cent of its annual target.
The government aims to raise Rs 410 billion through domestic borrowing, of which Rs 100 billion had been mobilised by mid-October, representing 24.39 per cent of the target.
The external borrowing target stands at Rs 248.28 billion. Only Rs 23.32 billion had been mobilised by the end of the first quarter, equivalent to 9.39 per cent of the annual target.
Monthly borrowing amounted to Rs 23.84 billion in mid-July to mid-August, Rs 38.10 billion in mid-August to mid-September, and Rs 61.37 billion in mid-September to mid-October.
Debt servicing nears Rs 100 billion in three months
The government spent nearly Rs 100 billion on principal and interest payments during the first quarter.
According to the Public Debt Management Office, debt-servicing expenditure reached Rs 98.87 billion by mid-October. This included Rs 77.74 billion in principal repayments and Rs 21.12 billion in interest payments.
Of the principal repaid, Rs 65.10 billion went towards domestic debt and Rs 12.64 billion towards external debt. Interest payments amounted to Rs 17.63 billion on domestic borrowing and Rs 3.49 billion on external borrowing.
The government has allocated Rs 417.88 billion for debt servicing in the current fiscal year. By the end of the first quarter, it had spent 23.66 per cent of that allocation.
The scale of debt servicing is particularly notable when compared with capital expenditure. According to the Financial Comptroller General Office, the government spent only Rs 28.42 billion on capital expenditure by mid-October.
This means the government spent considerably more on servicing existing debt than on capital expenditure during the first three months of the fiscal year.
The Office of the Auditor General has raised concerns over this pattern, arguing that government resources are increasingly being absorbed by liabilities rather than investment that could expand productive capacity.
Public debt more than doubles in a decade
Public debt has grown more than twofold over the past decade. According to Ministry of Finance figures, Nepal’s outstanding debt stood at Rs 1.433 trillion in fiscal year 2019/20. It has since risen to more than Rs 3 trillion.
Public debt has also increased as a share of GDP, from 38.05 per cent in fiscal year 2019/20 to more than 45 per cent currently.
Several factors have contributed to the increase, including rising public expenditure, declining foreign grants and revenue collection falling short of expectations.
Economists argue that borrowing is not necessarily risky when the funds are invested in productive projects that generate returns sufficient to repay the debt. However, concerns are growing that Nepal has not consistently directed borrowed funds towards projects that expand production, employment and the economy’s long-term capacity.
A high-level Economic Reform Recommendation Commission formed by the government in 2024 warned that debt could become a growing burden if the economy and revenue mobilisation failed to expand in proportion to the rise in public borrowing.
“If public debt is not used properly and fails to generate returns, the likelihood of the country falling into a debt trap will increase,” the commission said in its report.
The report also warned that rising principal and interest payments could leave less money available for essential public services such as education, health and security.
Commission calls for restrictions on borrowing for recurrent expenditure
The National Natural Resources and Fiscal Commission has recommended strictly prohibiting the use of domestic borrowing for recurrent and administrative expenditure.
While setting borrowing limits for the federal, provincial and local governments for the current fiscal year, the commission reiterated its recommendation that domestic loans should be directed towards projects that create jobs, deliver long-term benefits and contribute to capital formation.
The commission has continued to recommend that federal domestic borrowing remain within a limit of 5.5 per cent of GDP.
“Domestic borrowing should be allocated to projects capable of creating employment opportunities, providing long-term benefits and contributing to capital formation. Its use for recurrent and administrative expenditure should be strictly prohibited,” the commission said.
According to the commission, net domestic borrowing in fiscal year 2024/25 amounted to only 1.41 per cent of GDP. Much of the domestic borrowing raised during that period went towards repaying existing debt because of rising debt-servicing costs.
The commission said this trend had limited the contribution of borrowing to capital formation and economic expansion. It has repeatedly urged the government to prioritise investment that creates productive assets.
However, the government has not been able to provide a clear public breakdown of the sectors in which domestic borrowing has been used. The commission has consequently noted that it has been difficult to analyse how the loans are utilised and whether its recommendations are implemented.
It has called for cost-benefit analysis, net present value calculations and internal rate of return assessments when selecting projects for domestic borrowing. Priority should go to profitable projects whose financial returns exceed the cost of capital, as well as social-sector projects with strong returns.
The commission has also recommended that the government ensure that returns generated by projects are sufficient to cover principal and interest repayments.
Borrowing should be directed towards projects that increase production, generate employment and income, develop infrastructure and build capital, with preparations completed before funds are mobilised.
It has further urged all three tiers of government to identify domestic borrowing clearly in the source-wise financing details of their budgets.
The commission has also called for an integrated electronic information, accounting and reporting system covering domestic borrowing by all three levels of government and the country’s overall public debt. It has recommended that the commission be granted access to the system.
Warning that domestic borrowing is effectively the use of future revenue in the present, it has urged governments to prepare and implement borrowing and revenue improvement plans within the prescribed limits, with the aim of eventually servicing domestic debt from domestic revenue.
Auditor General finds borrowed funds are not building enough capital
The Office of the Auditor General has also raised concerns over the use of public borrowing, stating in its 63rd annual report that debt funds have not been adequately directed towards capital formation.
According to the report, borrowed funds have also been used for recurrent expenses, including employee costs, services and consultancy, and office operations.
The Auditor General has warned that foreign-exchange movements have made the public debt structure more sensitive to external monetary factors. It has recommended using financial instruments to manage exchange-rate risks and directing borrowing towards sectors that generate productivity gains.
The report also highlights pressure on domestic resources when revenue collection falls short of targets. With debt-servicing obligations rising, the government faces a greater risk of relying on further borrowing to meet other expenditure needs.
The Auditor General has recommended keeping recurrent expenditure within desirable limits and allocating borrowed funds to projects that deliver returns.
The growing debt burden, combined with limited capital spending and rising repayment obligations, has intensified questions over whether Nepal is borrowing enough to build productive capacity—or increasingly borrowing to manage existing liabilities.
