As Nepal's public debt obligations continue to rise, the government is increasingly finding itself in a position where it must borrow money to repay existing loans, with debt servicing costs now nearly matching the amount of public debt raised each year.

The trend has fuelled concerns among economists and former policymakers, who warn that growing repayment obligations are eroding fiscal space, limiting development spending and increasing the risk of long-term debt distress.

Finance Minister Swarnim Wagle has acknowledged that the mounting debt burden is making it increasingly difficult for the government to secure resources for development. He has publicly stated that the national debt has expanded largely because government revenues have been insufficient to meet even mandatory expenditure commitments.

In the budget for the upcoming fiscal year 2026-27, unveiled on May 15, the government projected revenue collection of Rs1,405.31 billion and foreign grants of Rs61.74 billion. The remaining resource gap of Rs657.29 billion is expected to be financed through borrowing.

To bridge that gap, the government plans to mobilise Rs247.28 billion in foreign loans and Rs410 billion in domestic borrowing. However, because Rs245.89 billion in domestic debt principal is due for repayment during the fiscal year, net domestic debt mobilisation will amount to only Rs164.11 billion, according to the finance minister.

The figures illustrate a growing dependence on new borrowing to meet existing debt obligations.

The pattern has already become evident in recent budgets. In the current fiscal year, the government set a target of mobilising Rs595.66 billion in public debt. Of that amount, Rs411.01 billion was allocated for debt servicing, including principal and interest payments.

Similarly, in fiscal year 2024-25, the government planned to raise Rs547 billion in debt, while earmarking Rs402.85 billion for debt servicing.

The numbers indicate that more than 73.65 percent of the debt raised last year was effectively absorbed by repayments on earlier borrowings.

Prakash Kumar Shrestha, former vice-chairperson of the National Planning Commission, said the government has increasingly become trapped in a cycle of borrowing to repay debt.

"Although the government uses around Rs100 billion from revenue to pay interest on loans, it is compelled to use borrowed money to repay principal amounts," Shrestha said. "The overall debt stock is growing every year. If economic growth and revenue collection improve, the debt burden could decline in the future. That depends entirely on how efficiently current loans are utilised and what returns they generate."

According to Shrestha, debt is likely to continue expanding in the coming years because the government has largely continued spending practices inherited from previous administrations.

He cited the allocation of around Rs35 billion to lawmakers under the local infrastructure development programme—formerly known as the Constituency Development Fund—the continuation of programmes with questionable returns, and the government's failure to review and prioritise national pride projects.

"Because of these factors, there is no assurance that borrowed resources are being channelled exclusively into productive sectors capable of generating returns," he said. "Under such circumstances, debt will continue to rise and the cycle of borrowing to repay debt will persist."

Rising repayment obligations

Data prepared by the public debt management office show that debt servicing costs are projected to remain elevated in the coming years.

The government is expected to spend Rs413 billion on debt servicing in fiscal year 2026-27, Rs424.70 billion in 2027-28, and Rs472.07 billion in 2028-29.

Of the projected debt servicing requirement for 2026-27, Rs74.19 billion will go towards external debt and Rs339.14 billion towards domestic debt.

In 2027-28, external debt servicing is expected to reach Rs80.13 billion, while domestic debt servicing will amount to Rs344.57 billion.

For 2028-29, the government is projected to spend Rs86.54 billion on foreign debt servicing and Rs385.53 billion on domestic debt repayments.

Economists attribute the growing pressure on public debt to Nepal's persistent trade deficit, slow economic growth, declining development assistance, weak foreign direct investment inflows and limited capital formation.

The government's Medium-Term Debt Management Strategy shows that total outstanding public debt increased steadily between fiscal years 2020-21 and 2024-25.

Public debt rose from Rs1,433 billion in 2020-21 to Rs2,674 billion in 2024-25.

Over the period, public debt grew at an average annual rate of 10.96 percent, while the debt-to-GDP ratio climbed from 38.05 percent to 43.79 percent.

Although debt has grown slightly faster than the economy, the government maintains that the overall debt position remains manageable.

"Although the pace of debt accumulation is slightly higher than the GDP growth rate, this growth rate remains relatively balanced," the Medium-Term Debt Management Strategy states. "This indicates that the current public debt structure is still within desirable sustainability limits."

According to the strategy, rising debt reflects persistent fiscal pressures stemming from weak revenue growth, repeated external economic shocks and growing public expenditure requirements.

The document stresses the need to improve spending efficiency, maintain a balanced debt structure and ensure long-term sustainability.

Growing reliance on foreign borrowing

The composition of Nepal's public debt has also changed over the past five years.

Outstanding domestic debt increased from Rs614 billion in 2020-21 to Rs1,268 billion in 2024-25. During the same period, external debt rose from Rs820 billion to Rs1,406 billion.

The figures show that external debt has grown faster than domestic debt in recent years, reflecting increased reliance on concessional loans from development partners and foreign financing.

"An analysis of the overall debt structure shows that Nepal has attempted to maintain a balance between internal and external sources," the strategy notes. "The expanding share of external debt underscores the importance of low-interest concessional resources for long-term development projects."

The strategy also notes that domestic borrowing has played an important role in liquidity management, treasury operations and the development of Nepal's domestic capital market.

However, policymakers face a continuing challenge in balancing the benefits of concessional foreign borrowing against exposure to exchange rate risks and debt servicing costs.

As debt liabilities expanded, the government was compelled to allocate more resources to financial management than to capital expenditure beginning in fiscal year 2023-24, although that trend has moderated somewhat over the past two years.

Fears of a debt trap

Economist Dilli Raj Khanal warns that a substantial volume of debt incurred in earlier years is now approaching maturity, creating additional pressure on public finances.

"This situation poses a major challenge for effective debt management and long-term sustainability," Khanal said. "If corrective measures are not taken, the rapid expansion of public debt presents significant risks."

He pointed to the experiences of Sri Lanka and Pakistan as cautionary examples of countries that struggled after falling into debt distress.

Khanal argued that the continuous rise in debt obligations could further weaken fiscal stability.

"Since fiscal year 2023-24, allocations under financial management have exceeded capital expenditure. There is a risk that this trend could continue in the coming years if current policies remain unchanged," he said.

According to Khanal, increasing debt repayments combined with shrinking capital spending could undermine the state's ability to invest in productive sectors and future growth.

"As the gap widens between capital expenditure and financial management allocations, the government's capacity to invest in the future is likely to be constrained," he said. "The risk of fiscal imbalance is therefore considerable."

He warned that continued fiscal indiscipline and widening budget deficits could aggravate macroeconomic vulnerabilities.

"Rising principal and interest payments will force the government to cut capital expenditure even further," Khanal said. "That means there will be inadequate resources for productive sectors, infrastructure development, poverty reduction, income generation and employment programmes."

Reducing recurrent expenditure remains one of the few available policy options, he added, but successive governments have shown little willingness to pursue meaningful spending restraint.

"This points towards a serious budgetary challenge in the years ahead," Khanal said.

Currency fluctuations add to debt burden

By mid-May, Nepal's outstanding public debt had reached Rs2,975.04 billion, up from Rs2,674.04 billion in mid-July last year.

The debt stock at that point represented 45.08 percent of gross domestic product. The government has set a target of keeping outstanding public debt within 43 percent of GDP by the end of the current fiscal year.

According to the Public Debt Management Office, public debt increased by Rs300.99 billion during the first 10 months of the fiscal year.

Officials note, however, that the increase was not driven solely by fresh borrowing.

The appreciation of major foreign currencies, particularly the US dollar, significantly increased the rupee value of Nepal's external liabilities.

External debt currently accounts for 53.57 percent of total outstanding debt, while domestic debt makes up 46.43 percent.

Gopi Krishna Koirala, head of the Public Debt Management Office, said exchange rate movements between last July and this April added approximately Rs167.75 billion to Nepal's public debt burden.

"The value of foreign currencies such as the US dollar has risen while the Nepali rupee has weakened," Koirala said. "As a result, the government's outstanding debt obligations have increased."

He maintained, however, that Nepal's overall debt position remains manageable despite the impact of exchange rate losses.

"Apart from the burden created by currency fluctuations, Nepal's public debt situation remains satisfactory," he said.

Koirala added that although public debt stood at around 45 percent of GDP by mid-May, efforts were underway to bring it closer to the government's target of roughly 43 percent by the end of the fiscal year.

Nepal benefits when the dollar weakens and incurs losses when it strengthens. According to official data, exchange rate movements generated losses in four of the last seven fiscal years, while the country either broke even or recorded gains in the remaining years.

The Public Debt Management Office reports that Nepal has incurred exchange-rate-related losses during most months of the current fiscal year.

By mid-May, the government had spent Rs292.52 billion on principal and interest payments, equivalent to 71.17 percent of its annual debt servicing target.

Total debt servicing costs up to mid-May amounted to 4.43 percent of GDP.

The government allocated Rs411.01 billion for debt servicing in the current fiscal year. Of the amount paid by mid-May, Rs302.47 billion went towards principal repayments and Rs108.53 billion towards interest payments, according to office records.

The figures underscore a growing challenge confronting Nepal's public finances: as debt obligations consume an increasing share of government resources, policymakers face mounting pressure to boost revenue, improve spending efficiency and ensure that borrowed funds generate sufficient economic returns to prevent borrowing from becoming an end in itself.