Nepal’s interim government on Tuesday cut the size of the annual budget for the ongoing fiscal year after concluding that the originally allocated amount could not be fully spent.

For the current fiscal year, which ends in mid-July, then finance minister Bishnu Prasad Paudel of the CPN-UML-coalition government had unveiled a budget of Rs1.96 trillion.

Presenting the mid-term review, the Sushila Karki-led government, formed after the September Gen Z protest, said Rs275.78 billion of the allocation would remain unspent, translating into a 14.4 percent reduction.

The finance ministry said the revised budget size now stands at Rs1.68 trillion.

According to the ministry, recurrent expenditure has been cut from Rs1.18 trillion to Rs1.12 trillion.

Capital expenditure, largely meant for infrastructure development, has been sharply reduced from Rs407.88 billion to Rs243.30 billion.

Similarly, allocation under financial management has been lowered from Rs375.24 billion to Rs319.04 billion.

Despite the downward revision, the government has maintained its growth projection of 6 percent for the current fiscal year and aims to keep consumer inflation at 5.5 percent, the ministry said.

Officials at the finance ministry acknowledge that the pace of capital expenditure remains extremely weak. As of February 9, capital spending stood at just 14.98 percent of the annual allocation.

Even with sluggish capital expenditure, the government believes a 6 percent growth rate is achievable, largely driven by election-related spending, which is expected to boost consumption in Nepal’s consumption-led economy.

Interim Finance Minister Rameshore Khanal, however, insisted that the budget size itself has not been reduced. “The budget remains Rs1.96 trillion. If any government agency is able to spend that amount, the funds will be made available,” he said.

Khanal said the government’s consolidated fund is facing a deficit of Rs130 billion, making some level of fiscal control unavoidable. He said projects worth around Rs19 billion that were not ready for implementation and unlikely to generate immediate returns have been put on hold.

“Based on preliminary assessments, such projects have been suspended until they are adequately prepared,” Khanal said, adding that projects where tenders have already been floated or contractual obligations created are being gradually cleared for execution.

He also said the Ministry of Defence, in addition to the Election Commission and the Ministry of Home Affairs, has received budget allocations for election management. The government has arranged around Rs20 billion in cash for election-related expenses.

“Election-related expenditures cannot be disclosed in detail. They can only be broadly estimated,” Khanal said. He added that 650 vehicles, mostly for police units, are to be supplied by the Indian government, around half of which have already arrived, with the remainder expected at least 10 days before the election date. Equipment required for riot control is also included in election spending.

Khanal further said the Japanese government has agreed to allow Rs392.5 million from its grant assistance, already deposited in Nepal’s consolidated fund, to be used for election purposes.

According to the finance minister, projects worth Rs42 billion have been unfrozen, a figure he described as modest given the scale of capital expenditure. A total of Rs67 billion has been allocated to national pride projects, but their implementation rate so far is only slightly above 15 percent, which he said is unsatisfactory.

He attributed weak spending performance partly to the government having to devote much of its initial months to managing the political transition and preparing for elections. Time was also spent ensuring public security and fostering dialogue and trust among political parties.

“Under no circumstances should elections be disrupted due to weak security stemming from a lack of resources,” Khanal said, adding that the government’s foremost priority is to conduct elections while also strengthening good governance and controlling corruption.

As a result, Khanal said ministers, including himself, were unable to devote adequate attention to capital expenditure within their respective ministries. He noted that amendments to forest regulations have helped resolve problems affecting transmission line and road projects.

On health insurance liabilities, Khanal said the government’s position has been that liabilities must be settled once they are created. However, he said the finance ministry cannot release funds beyond budgetary limits during the fiscal year and can only reallocate resources within the approved ceiling.

Once budget authorisation is granted, ownership rests with individual ministries, he said, adding that the finance ministry cannot transfer funds from one ministry to another unless the concerned ministry formally surrenders its allocation. In this case, the Ministry of Health has not done so.

Khanal said Rs1 billion has been allocated to clear pending payments at government hospitals under the health insurance scheme. As the health ministry indicated it could save Rs720 million within its own budget and requested reallocation, the finance ministry has already approved the transfer. So far, arrangements worth Rs1.72 billion have been made.

He said the finance ministry has yet to receive verified figures from the health ministry regarding total liabilities. While media reports have cited liabilities of Rs15 billion, Khanal said such figures have never been formally presented. If Rs6–7 billion can be managed within the current budget, he said efforts would be made to clear those liabilities, provided resources needed for the elections after March 5 are not compromised.

Finance Secretary Ghanshyam Upadhyay said the early months of the fiscal year were disrupted by the monsoon in July and August, followed by instability after the Gen Z movement of September.

The movement resulted in 77 deaths—20 on September 8, 37 on September 9, and another 20 in subsequent days—while physical damage was estimated at Rs84.45 billion, according to government figures.

Upadhyay said the government is working to create a more private sector-friendly business environment through the use of technology. Over the past six months, economic growth has been stronger than in the same period last year, he said, adding that tax revenue has grown by 7 percent.

“The economy is showing positive signs, and the recovery has been relatively swift,” Upadhyay said.

The finance ministry said funds from stalled projects have been redirected towards national pride and strategically important projects. Based on internal assessments, capital expenditure is expected to reach 59.62 percent by the end of the fiscal year, higher than the average of previous years.