Recurrent Expenditure Dominates Budget – Long-Term Risks Ahead

Nepal’s fiscal structure has been consistently skewed toward recurrent expenditure, leaving limited space for development-oriented capital spending. In FY 2024/25, recurrent expenditure stood at 16.1% of GDP, compared to capital expenditure of only 3.6% of GDP. This imbalance highlights a structural weakness in budgetary priorities, where resources are largely consumed by salaries, pensions, subsidies, administrative costs, and debt servicing rather than being invested in infrastructure or productive assets.

The dominance of recurrent expenditure creates several long-term risks. First, it limits the country’s ability to expand infrastructure and support industrial growth. Despite Nepal’s rising public debt—domestic debt at 20.8% of GDP and external debt at 22.9%—borrowed funds are increasingly directed toward maintaining government operations instead of generating future income streams. This undermines fiscal sustainability, as debt servicing costs will rise without corresponding improvements in productivity.

Second, the recurrent-heavy budget constrains job creation and structural transformation. Capital expenditure is critical for hydropower projects, transportation networks, digital infrastructure, and agriculture modernization—all of which have strong multiplier effects. Yet, with capital spending stuck below 4% of GDP for several years, Nepal risks falling into a cycle of weak growth, low private investment, and continued reliance on remittances as its economic lifeline.

Third, heavy recurrent commitments reduce fiscal flexibility. In times of crisis—such as natural disasters, global economic shocks, or political instability—the government has limited room to reallocate funds, as recurrent obligations are fixed and politically sensitive. This rigidity weakens Nepal’s ability to implement counter-cyclical fiscal policies or respond quickly to emerging challenges.

Finally, the imbalance raises governance and efficiency concerns. The ballooning wage and pension bill reflects inefficiencies in the public sector and poor long-term planning. Without reforms in civil service structure, pension management, and subsidy targeting, recurrent spending will continue to expand, putting more pressure on already shrinking revenues (revenue-to-GDP ratio has fallen below 20%).

For long-term stability, Nepal must reorient its fiscal priorities. This means rationalizing recurrent expenditure, reforming pension and subsidy systems, improving efficiency in public administration, and boosting revenue mobilization. At the same time, capital expenditure must be scaled up and made more effective, ensuring that debt-financed spending creates assets that expand future fiscal capacity.