Nepal’s Fiscal Policy 2025/26: Heavy Reliance on Development Bonds Raises Interest Costs

Nepal’s fiscal policy in 2025/26 is increasingly shaped by a heavy reliance on development bonds, a strategy that, while providing stable financing, is pushing up the government’s interest burden. According to the latest data from Nepal Rastra Bank, development bonds have climbed to Rs. 913.7 billion, now representing more than 70% of the total domestic debt portfolio.

The government’s preference for long-term instruments reflects an effort to avoid frequent refinancing pressures seen with short-term treasury bills. However, experts warn that development bonds, typically carrying higher coupon rates (7–10%), significantly increase annual debt-servicing costs for the Ministry of Finance. With total domestic debt exceeding Rs. 1.27 trillion, even a modest rise in yields could translate into billions in additional interest paymentseach year.

This shift also highlights the changing dynamics of Nepal’s fiscal management. As treasury bill holdings decline by Rs. 27 billion, the state has leaned more on commercial banks and institutional investors for long-term borrowing. While this helps stabilize liquidity in the bond market, it may tighten credit availability for the private sector, slowing investment and job creation.

Economists caution that Nepal’s growing dependence on domestic borrowing, instead of revenue growth, could undermine fiscal sustainability if spending reforms and tax efficiency are not strengthened. They suggest the government needs to diversify financing sources, improve project execution capacity, and control recurrent expenditure to maintain macroeconomic balance.