Nepal’s Rising Public Debt: Challenges of Internal vs External Loans and the Path to Sustainable Fiscal Management

Nepal’s rising public debt has sparked renewed debate over the balance, utilization, and strategic management of internal and external borrowings. Amidst fiscal pressures and underwhelming revenue generation, the federal government continues to lean heavily on both domestic and foreign borrowing to plug its budgetary gaps. Yet, critical challenges plague the debt management landscape—ranging from policy ambiguity to poor coordination between responsible institutions.

Classification and Mechanism of Government Debt

Public debt in Nepal is classified into multiple categories:

• By duration (perpetual vs. time-bound),

• By nature (productive vs. unproductive),

• By mode (voluntary vs. compulsory),

• By tradability (marketable vs. non-marketable),

• By repayability (redeemable vs. irredeemable),

• By interest (interest-bearing vs. interest-free),

• By source (internal vs. external).

These loans are raised either through internal mechanisms—such as treasury bills, development bonds, and national savings certificates—or via external partners, including multilateral financial institutions and bilateral donors.

Internal Debt in Focus

The Government of Nepal, through the Nepal Rastra Bank (NRB), has been mobilizing internal debt since FY 2017/18 under provisions of the Public Debt Act, 2017. Instruments such as treasury bills and national savings bonds are floated regularly, primarily purchased by commercial banks and NRB itself.

However, the proportion of treasury bills in total internal debt remains disproportionately high, raising concerns about short-term rollover risks and cost inefficiencies. Furthermore, there is no clear criteria for internal debt ceilings, and the coordination between debt-issuing and spending agencies is often weak, impacting both planning and utilization.

External Debt: Growing and Complex

As of FY 2080/81, Nepal’s total public debt stood at 41.9% of GDP, up from 38.9% a year earlier. Of this, internal debt constituted 21.1% and external debt 20.8%. External borrowing has outpaced grants in recent years, with foreign aid increasingly tilting toward concessional and non-concessional loans, raising long-term repayment liabilities.

Nepal’s external debt stands at over NPR 1.25 trillion, with multilateral agencies such as the Asian Development Bank, IMF, World Bank (IDA), and Asian Infrastructure Investment Bank being key lenders. Bilateral loans from countries like Japan, India, China, South Korea, and Saudi Arabia make up about NPR 138 billion.

Despite the scale, utilization of foreign aid remains inefficient. Just 13.1% of foreign assistance in FY 2080/81 was in the form of grants, while 86.9% was loans. Moreover, only a fraction of these commitments translate into real disbursement due to bureaucratic delays, poor project readiness, and weak inter-agency coordination.

Current Utilization Trends and Gaps

As per the Economic Survey 2080/81, Nepal continues to compensate for low revenue with increased public borrowing. However, internal debt growth has slowed, rising just 1.3% in the first seven months of FY 2081/82 compared to 3.2% in the same period last year.

Meanwhile, external resource mobilization remains below expectations, averaging just 3.6% of GDP in recent years. Even within total government expenditure, only 9.8% was funded via external sources in FY 2079/80, with the rest covered by domestic borrowing and revenue.

Challenges and Structural Bottlenecks

Nepal faces a range of systemic problems in managing its debt portfolio:

• Lack of a cohesive public debt management strategy

• Heavy reliance on short-term treasury bills

• Absence of digital systems for debt recordkeeping

• Ineffective coordination among ministries and agencies

• Weak project preparation delaying external disbursements

• Foreign exchange risks associated with external debt repayments

• Diminishing share of concessional loans

Additionally, provincial and local governments lack the capacity and legal clarity to raise and manage loans as envisioned under federalism, further centralizing the debt burden at the federal level.

Policy Direction and Reform Measures

The FY 2081/82 budget has promised a new Development Assistance Policy, focusing on blended finance—combining commercial, private, non-governmental, and concessional funding. There is also mention of introducing “Project Readiness Filters” to ensure that only viable projects receive aid and that such projects incorporate detailed implementation timelines.

Planned reforms include:

• Enhancing financial literacy to attract retail investors to government bonds

• Mandating stakeholder representation in external loan negotiations

• Prioritizing productive projects with positive internal rates of return

• Increasing transparency and computerization in public debt records

• Ensuring loan-financed projects can self-sustain through returns

The upcoming 16th Periodic Plan (2081/82–2085/86) emphasizes strengthening subnational economies and improving federal fiscal discipline, with a special focus on employment generation, infrastructure, and capital formation through well-targeted debt-financed projects.

Nepal's public debt is not inherently problematic yet—but the trajectory suggests growing fiscal pressure unless borrowing is increasingly directed toward productive, high-return areas. With external and internal debt almost evenly split, strategic prioritization, institutional reform, and utilization efficiency are key to ensuring long-term debt sustainability. The government’s ability to balance fiscal stimulus with financial prudence will determine how this debt translates—into growth or into burden.