Domestic Debt Tops Rs. 1.2 Trillion – Fiscal Sustainability Concerns

Nepal’s reliance on domestic borrowing has grown significantly in recent years, with domestic debt surpassing Rs. 1.2 trillion in FY 2082/83 (2025/26). After standing at Rs. 800 billion in FY 2020/21, it increased steadily to Rs. 984 billion in FY 2021/22, Rs. 1.13 trillion in FY 2022/23, and Rs. 1.18 trillion in FY 2023/24, before crossing Rs. 1.27 trillion by mid-August 2082/83. While this borrowing has provided the government with much-needed fiscal space to cover expenditure, it raises growing concerns about fiscal sustainability and crowding out effects.

One immediate issue is the cost of servicing debt. Even though interest rates on treasury bills and bonds have declined sharply—91-day T-bill rates now average around 2.65%—the sheer size of domestic debt increases repayment obligations. A larger share of government revenue is being diverted toward debt servicing rather than productive capital expenditure. This reinforces a fiscal imbalance where recurrent expenditure dominates while capital spending stagnates at just 3–4% of GDP.

Another concern is the crowding-out effect on private investment. When the government borrows heavily from the domestic market, banks and financial institutions often prefer the safety of government securities over riskier private sector loans. This trend has been visible in Nepal’s sluggish private credit growth—only 7.7% year-on-year by mid-August 2082/83—despite abundant liquidity. As a result, businesses and entrepreneurs face challenges in accessing financing, which could suppress long-term growth and job creation.

From a sustainability perspective, Nepal’s domestic debt-to-GDP ratio stands at 20.8% in FY 2024/25, which is not alarming compared to international standards. However, the trajectory of rising debt, coupled with falling revenue growth (down -10.8% in early 2082/83), raises red flags. If revenue mobilization does not improve, the government may increasingly rely on borrowing, creating a cycle of fiscal stress.

The challenge for Nepal is to strike a balance: domestic borrowing should be directed toward high-multiplier projectsthat expand future revenue potential, such as infrastructure, energy, and digital development. Strengthening tax collection, broadening the revenue base, and improving efficiency in expenditure are essential to avoid slipping into unsustainable debt dependence.