Nepal’s economy is coming under increasing strain from a widening gap between ambitious budget size, weak revenue collection and persistently low capital expenditure, with economists warning that the country’s growth prospects are deteriorating as the government struggles to spend effectively and raise enough resources.

Successive governments have announced larger budgets year after year, but the inability to mobilise resources and implement spending plans has forced repeated downward revision through midterm budget reviews. Economists say this trend has weakened development spending, slowed investment and increased dependence on public debt.

The problem has become more serious in recent years as economic growth has remained weak while the government has increasingly borrowed not only for development projects but also to meet mandatory obligations such as social security allowances, salaries and debt servicing.

According to the Finance Ministry, the federal budget allocated over the past decade averaged 33.7 percent of the gross domestic product, while actual spending averaged only 26.8 percent. The budget-to-GDP ratio peaked at 39.4 percent in the 2019-20 fiscal year but fell to 30.5 percent in 2024-25.

Although the annual budget expanded by an average of 12.3 percent over the decade, the average growth rate slowed sharply to 4.1 percent in the five years following the Covid pandemic.

Economist Dilli Raj Khanal said Nepal’s weak capital expenditure and declining quality of spending were directly hurting economic growth.

“It is not only difficult to create new investment, even the existing fixed capital base is shrinking,” said Khanal. He referred to a World Bank report published last year showing that the government’s capital stock had declined, indicating a reduction in the economy’s productive capacity.

“The government contributes around 20 percent of total investment, but its spending guides the private sector. When public investment declines, the private sector does not expand investment confidently. That is exactly what is happening now,” said Khanal. He suggested that the government should increase productive investment to encourage private sector expansion. He also criticised rising recurrent expenditure, arguing that a significant share of spending remained unproductive.

“Even though capital expenditure appears to have increased in nominal terms, its effectiveness has actually weakened,” said Khanal. “Clear standards are needed for recurrent spending as well. A large amount of public money is being wasted because spending decisions are often made without proper justification.”

Khanal also questioned the efficiency of Nepal’s public spending system. Despite paying some of the highest taxes in South Asia, citizens continue to face poor access to education, health care and other public services.

“Unless the public expenditure system is reformed from the budget allocation stage itself, future spending will become even more counterproductive,” he said. “The current structure lacks accountability.”

Over the past decade, capital expenditure accounted for only 19 percent of total federal spending, while actual spending averaged just 64.1 percent of allocated capital expenditure. Experts say this reflects both low development allocations and the government’s inability to spend even the limited budget earmarked for infrastructure and long-term transformation.

They argue that the problem is worsened by delays in project implementation, bureaucratic hurdles and poor prioritisation of projects capable of generating higher economic returns.

The federal budget increased from Rs1.47 trillion in the 2020-21 fiscal year to Rs1.96 trillion in the current fiscal year of 2025-26. However, government spending performance has not improved significantly. Total expenditure stood at Rs1.18 trillion in 2020-21, while only Rs1.24 trillion had been spent by mid-May of the current fiscal year.

A white paper released by Finance Minister Swarnim Wagle acknowledged that weak allocation, low spending and poor quality of capital expenditure had affected economic growth.

Nepal’s growth rate has remained below expectations for several years. The economy expanded by 4.49 percent in 2020-21 and 5.28 percent in 2021-22, but growth remained below 4 percent over the following three fiscal years.

The National Statistics Office projects economic growth of 3.65 percent at constant prices and 3.85 percent at current prices for the current fiscal year, well below the government’s target of 6 percent.

Former National Planning Commission vice-chair Prakash Kumar Shrestha said low and ineffective capital expenditure had prevented the economy from receiving the expected boost from public spending.

“Before the Covid pandemic, capital expenditure and economic growth were both improving, but the momentum could not be sustained,” said Shrestha. “This shows Nepal has failed to maintain coordination between investment and expenditure.”

He said political instability, policy inconsistency, governance weaknesses and Nepal’s difficult geography had all contributed to weak growth despite higher taxes and expanding budgets.

“Every year the budget size increases, but revenue does not rise accordingly,” he said. “The direct consequence is growing public debt. If the government continues borrowing to pay debt servicing and manage recurrent expenditure, the risk of Nepal falling into a debt trap will become very high.”

Government reports also show a sharp slowdown in revenue mobilisation in recent years as economic activity weakened after the pandemic. Revenue growth averaged 14.9 percent annually in the five fiscal years before 2019-20, but slowed to 8.7 percent during the following five years.

At the same time, recurrent expenditure has continued to dominate total government spending. Over the past decade, recurrent expenditure accounted for an average of 66 percent of total spending, compared to 19 percent for capital spending and 14 percent for financial management.

According to economists, Nepal needs major structural reforms to improve public finance management. They argue that unnecessary institutions and staffing should be reduced and that responsibilities among the federal, provincial and local governments should be clarified.

The challenge has become more pressing as the government’s policies and programmes aim to build a 100-billion-dollar economy by the fiscal year 2026-27. Economists say restoring private sector confidence and creating a favourable investment climate will be crucial.

According to the National Statistics Office, private sector investment, which once accounted for around 25 percent of the economy, fell to 19 percent last year. The government, meanwhile, has increasingly relied on public debt even for routine operations as revenue collection weakens.

The federal government’s treasury remained in deficit by Rs204 billion at the end of the last fiscal year. As of May 26 this year, the deficit still stood at nearly Rs199 billion, reflecting mounting pressure on public finances.

Private sector representatives have repeatedly said that unpredictable policies, delays in payments to contractors and frequent changes in taxation have discouraged new investment. Bank lending to productive sectors remains weak, while many businesses have shifted towards trade and services instead of manufacturing and industry.