Fiscal Deficit Trends in Nepal: Lessons from 2020/21 to 2082/83

Nepal’s fiscal position over the past few years reflects a persistent struggle to balance revenue growth with rising expenditures. While headline indicators like domestic and external debt, revenue-to-GDP, and capital expenditure reveal structural weaknesses, the broader trend is a narrowing fiscal space that risks long-term sustainability.

In FY 2020/21, revenue and expenditure growth were fairly aligned, with revenue expanding by 16% and expenditure by 9.7%. Debt levels were moderate (domestic debt at 18.4% of GDP, external debt at 21.5%), and the revenue-to-GDP ratio stood at 22.4%, providing relatively healthy fiscal space.

By FY 2021/22, however, fiscal pressures began to mount. Revenue growth slowed to 14.1%, while expenditure rose by 9.5%, and the revenue-to-GDP ratio stagnated at 22.4%. At the same time, external shocks—including a surge in imports, high inflation, and global energy price spikes—strained fiscal balances, forcing greater reliance on borrowing.

The stress became visible in FY 2022/23, when revenue growth turned negative (-9.3%) despite expenditure growth of 8.5%. The revenue-to-GDP ratio fell sharply to 18.8%, creating a widening fiscal gap. Domestic debt climbed to 21% of GDP, and external debt rose to 21.8%, signaling growing dependence on borrowing to fill deficits.

In FY 2023/24, expenditure contracted by -2%, reflecting attempts at fiscal consolidation. But revenue recovery was modest at 7.1%, and the structural problem of low capital expenditure (just 3.4% of GDP) persisted. While this reduced headline fiscal pressure temporarily, it came at the cost of underfunding development projects.

By FY 2024/25, revenue grew by 10.5%, while expenditure rose by 9.3%, keeping the deficit in check. However, early FY 2082/83 data shows a worrying reversal: revenue contracted by -10.8% year-on-year by mid-August, while expenditure surged 15.2%. This combination threatens to significantly widen the fiscal deficit once again. With domestic and external debt already at 20.8% and 22.9% of GDP, Nepal is running out of fiscal room.

The key lesson from 2020/21 to 2082/83 is that Nepal’s fiscal deficit problem is not just about spending too much—it is about weak and volatile revenue mobilization combined with inefficient capital expenditure. Reliance on trade-based taxes makes revenue highly unstable, while recurrent expenditure dominates, crowding out development spending. To restore balance, Nepal must broaden its tax base, improve compliance, and prioritize high-return capital projects funded by debt. Otherwise, fiscal deficits will remain a recurring drag on stability.