Revenue to GDP Ratio Below 20% – Challenges for Fiscal Space

Nepal’s fiscal position is increasingly constrained as the revenue-to-GDP ratio has fallen below 20% in FY 2024/25, reaching just 19.6%, compared to 22.4% in both FY 2020/21 and 2021/22. The ratio had already dipped to 18.8% in FY 2022/23, reflecting persistent weaknesses in revenue mobilization. A revenue-to-GDP ratio below 20% is considered low for a developing economy like Nepal, where fiscal needs are high due to demands for infrastructure, public services, and social protection.

The decline underscores Nepal’s overdependence on trade-related taxes. Customs duties, VAT, and excise from imports continue to form the bulk of government revenue, leaving the fiscal system vulnerable to fluctuations in import demand. As imports contracted in FY 2022/23 and grew only modestly afterward, revenue collection weakened. Domestic sources of taxation, such as income tax, property tax, and compliance-driven broadening of the tax net, remain underdeveloped, making revenue growth volatile.

Falling revenue relative to GDP directly constrains fiscal space—the government’s ability to fund capital projects, respond to economic shocks, and manage debt without compromising stability. This is particularly concerning as Nepal’s capital expenditure remains stuck at just 3–4% of GDP, far below what is needed to support growth and employment. Meanwhile, recurrent expenditure, such as salaries, pensions, and interest payments, consumes most of the budget, leaving little flexibility for development priorities.

The imbalance is further stressed by rising public debt. With domestic debt at 20.8% of GDP and external debt at 22.9%, Nepal is borrowing heavily to cover fiscal gaps. But unless revenue collection improves, reliance on debt will continue to grow, risking sustainability and crowding out private sector financing.

Strengthening fiscal space requires urgent reforms: broadening the tax base, improving compliance, enhancing efficiency in tax administration, and diversifying beyond trade-based taxation. In the long term, linking fiscal policy with structural economic reforms—such as industrial growth, formalization of the labor market, and expansion of service sectors—will be critical to stabilizing the revenue-to-GDP ratio above 20%.