Nepal's Rs2.12 trillion budget appeases middle class, banks on growth despite debt concerns

Nepal's government has unveiled an ambitious Rs2.12 trillion budget for the fiscal year 2026-27, signaling a focus on infrastructure expansion, structural reforms, and tax overhauls. The financial plan, which begins mid-July, aims to spur economic growth to 7 percent while capping inflation at 6 percent. However, the budget's substantial size, 8.15 percent larger than the previous year's original allocation, has raised concerns over resource constraints and debt sustainability.

The budget has been met with approval from the middle class, largely due to sweeping income tax relief and reform-oriented policies. Finance Minister Swarnim Wagle, presenting the budget, emphasized initiatives aimed at economic dynamism. The allocation earmarks 59.8 percent for recurrent expenditure, 20.3 percent for capital expenditure, and 19.9 percent for financial management.

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The National Planning Commission had set the proposed budget ceiling at Rs1.89 trillion. This is way higher than the prescribed limit.

To finance the estimated expenditure, the government plans to raise Rs1.4 trillion from revenue and Rs61.74 billion from foreign grants. A significant financing gap of Rs657.29 billion remains, to be bridged by Rs247.28 billion in foreign loans and Rs410 billion through domestic borrowing. This reliance on borrowing, particularly foreign loans, has drawn criticism from opposition parties and observers.

Lawmaker Niskal Rai of the Nepali Congress pointed out that the budget exceeds the National Planning Commission's proposed ceiling and significantly increases per capita debt. Critics also note a perceived contradiction with the Rastriya Swatantra Party's (RSP) previous pledges to limit excessive borrowing and reduce aid dependency, especially given Finance Minister Wagle's own past criticisms of accumulated debt. The budget's approach to financing and its impact on low-income groups struggling with inflation remain key points of contention.

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Looking at the sources of financing, the government aims to raise huge amounts through foreign loans. This is the highest amount of foreign borrowing ever proposed, and adding national borrowing, it would increase the per capita debt burden of a Nepali to over Rs120,000.