Concerns Rise as Nepal’s Public Debt Approaches Half of GDP; Foreign Debt More Costly than Domestic
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Nepal’s public debt burden could soon reach nearly half of its Gross Domestic Product (GDP), raising concerns among economists about economic challenges ahead.
Officials from the Public Debt Management Office under the Ministry of Finance estimate that the debt-to-GDP ratio this fiscal year will rise to approximately 47 percent, while economists emphasize that this ratio should not increase further.
According to data up to Chaitra (mid-April), Nepal’s public debt reached NPR 2,933.3 billion, said Gopikrishna Koirala, head of the Public Debt Management Office. In Shrawan (mid-July), this amount was NPR 2,674 billion.
The revised estimate for the size of the economy in the fiscal year 2081/82 (2024/25) stands at NPR 6,199 billion, with preliminary estimates for 2082/83 (2025/26) projecting it to reach NPR 6,600 billion.
Economist Chandramani Adhikari noted that the rising debt compared to GDP presents a significant challenge.
“Though the International Monetary Fund (IMF) has not set a specific standard, countries like ours should not let their debt-to-GDP ratio exceed 50 percent. We are nearing that limit,” he stated.
Professor Ramprasad Gyawali, head of the Economics Department at Tribhuvan University, said Nepal’s debt relative to GDP has been steadily increasing.
“About a decade ago, the ratio was around 22 percent; it has now nearly doubled.”
The government has been borrowing both domestically and internationally to support economic development, infrastructure projects, and to bridge shortfalls in internal revenue.
“In developed countries, debt can exceed GDP without major issues, but our challenge is that 24 percent of federal expenditure and 35 percent of revenue go toward servicing the interest on debt,” Professor Gyawali explained.
Amid concerns from economists, Koirala from the Public Debt Management Office argued that although GDP might reach NPR 6,400 to 6,500 billion this fiscal year, the debt ratio will not exceed 47 percent.
The office is responsible for maintaining records of both Nepal’s foreign and domestic debt.
The government led by Valendra Shah recently gained attention for approving a substantial volume of concessional loans from various international donor agencies.
“It would be false to say the current government took new loans. This is a procedural matter that has passed through different stages and reached the agreement phase. The current government did not initiate it; the previous government had already progressed the process, which we acknowledge,” Koirala clarified.
Higher Proportion of Foreign Debt
According to Koirala, foreign debt constitutes a major portion of Nepal’s total debt.
“Of the total debt amounting to NPR 2,933.3 billion, over NPR 1,500 billion is foreign debt, while about NPR 1,300 billion is domestic,” he stated.
The largest share of foreign debt comes from the International Development Association (IDA) under the World Bank, according to Koirala.
“Approximately 48 to 49 percent of foreign debt comes from IDA, around 30 to 32 percent from the Asian Development Bank (ADB), with the remainder coming from various multilateral and bilateral loans.”
Loan agreements include provisions for paying interest on principal loans.
Despite taking concessional foreign loans, Koirala explained that due to depreciation of the Nepalese currency, foreign debt has become more expensive than domestic debt.
“The main reason for the rising foreign debt figures is the depreciation of our currency. About 15 months ago, the US Dollar was valued near NPR 136, but it has now reached approximately NPR 150. This currency depreciation causes the debt to increase, not because we have borrowed excessively.”
“We have taken loans at interest rates ranging from 0.25 to 2 percent, but due to foreign exchange losses, foreign debt has resulted in greater losses than domestic debt,” he added.
The Public Debt Management Office estimates foreign exchange losses have caused Nepal’s current financial situation to incur losses exceeding NPR 100 billion.
Concerns
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Economist Adhikari expressed concern that with the rising debt ratio, Nepal’s debt repayment capacity could weaken.
“Our economy does not have the resilience to bear shocks like developed countries. Domestic production is low, and although there are foreign currency reserves, their sources are not sustainable.”
“Most domestic debt is directed toward administrative expenses and paying interest on the debt, which makes the current situation particularly challenging. Therefore, limiting debt growth is advisable.”
Professor Gyawali agrees on this point.
“An excessive increase in debt is undesirable because it burdens future generations. The current generation borrows for immediate benefits, but the obligation to repay falls on the long term, impacting our children and grandchildren.”
However, Koirala from the Public Debt Management Office asserts that debt management remains feasible for now, with continuous debt deployment and repayment underway.
“What matters is how the borrowed funds are utilized. When used appropriately, there is no cause for concern, but problems arise if loans are taken and wasted.”
Some present public debt figures divided per capita, but Koirala considers this approach meaningless.
“The debt taken by the country is not the individual responsibility of any citizen. Since the state incurs the debt, it alone is responsible for repayment.”
Professor Gyawali stated that despite rising debt ratios, he has not observed Nepal falling into a “debt trap”—a situation where new loans are required to pay off existing loans.
“A debt trap means borrowing to pay back prior loans, but Nepal is not in that state. The issue has arisen mainly due to inadequate revenue collection. If revenue had been collected as expected, the public debt would not be as serious an issue as it is now.”
Recommendations
Professor Gyawali emphasized that borrowing by the government should only be acceptable under exceptional circumstances; borrowing under normal conditions should raise questions about intent.
“The cycle of borrowing and paying interest will continue, but controlling growth and the ratio of debt is essential.”
Economist Adhikari warned that conflicts in the Middle East have increased risks and called for vigilance.
“With the US Dollar’s value rising, inflation has also increased. This could slow down or stabilize economic growth, and returning migrant workers might require creating local employment.”
“The government needs to strategically address these issues during budget preparation to lay the foundation for sustainable debt management,” he added.