Nepal's debt servicing nears annual public borrowing as concerns mount

Nepal's government is increasingly borrowing money to repay existing loans, a trend that has alarmed economists and former policymakers. Debt servicing costs are now nearly matching the annual public borrowing, severely limiting the nation's fiscal space and development spending.

Finance Minister Swarnim Wagle acknowledged the mounting debt burden makes securing resources for development difficult. He stated that government revenues are insufficient to cover mandatory expenditures, necessitating borrowing. For the upcoming fiscal year 2026-27, the government projects a resource gap of Rs657.29 billion, to be financed by Rs247.28 billion in foreign loans and Rs410 billion in domestic borrowing.

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Although the government uses around Rs100 billion from revenue to pay interest on loans, it is compelled to use borrowed money to repay principal amounts. The overall debt stock is growing every year.

However, with Rs245.89 billion in domestic debt principal due for repayment, the net domestic borrowing will be only Rs164.11 billion. This highlights a cycle where new borrowing is primarily used to repay old debts. In the current fiscal year, over 73% of the debt raised was absorbed by repayments on earlier borrowings. Prakash Kumar Shrestha, former vice-chairperson of the National Planning Commission, noted that while revenue covers interest, borrowed money is needed for principal repayment, causing the overall debt stock to grow annually.

Shrestha warned that debt will likely continue expanding as the government maintains spending practices inherited from previous administrations, citing allocations like Rs35 billion for local infrastructure development programs. He suggested that improved economic growth and revenue collection could reduce the debt burden, but this depends on the efficient utilization of current loans and their generated returns.

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If economic growth and revenue collection improve, the debt burden could decline in the future. That depends entirely on how efficiently current loans are utilised and what returns they generate.