Chapter 7 · Week 7 — Government Finance: Revenue, Spending and Debt
Government Finance and Debt
Revenue that rides the import bill, a capital budget halved in seven years, and the debt dynamics that stabilised the ratio.
The state collects about a fifth of GDP and spends more than it collects. This week is where that money comes from, where it goes, why the capital budget is the most revealing line in Nepali public finance, and how the deficit is financed.
7.1 The shape of the public accounts
┌──────────────────────────────────────────────────────────┐ │ │ │ REVENUE │ │ tax revenue ← customs, VAT, excise, income tax │ │ non-tax ← fees, dividends, royalties │ │ + │ │ GRANTS ← foreign, cash and in-kind │ │ │ │ − │ │ │ │ EXPENDITURE │ │ recurrent ← salaries, pensions, interest, │ │ social security, grants to │ │ provinces and local bodies │ │ capital ← roads, schools, hydropower, │ │ irrigation — actual assets │ │ financing ← loan repayment, investment │ │ │ │ ═══════════════════════════ │ │ DEFICIT → financed by domestic + external borrowing │ │ │ └──────────────────────────────────────────────────────────┘
The 2025/26 position:
ELEVEN MONTHS 2025/26
Revenue growth 10.50 %
Expenditure growth 8.60 %
Outstanding domestic debt Rs 1,272.53 bn
Outstanding external debt Rs 1,382.11 bn
───────────────
Total public debt Rs 2,654.64 bn
Total debt / GDP = 2,654.64 / 6,600.10 = 40.2 %Revenue growing faster than expenditure is the good direction. It is also the first time in the recent series that has happened by a clear margin.
7.2 The debt trajectory
PUBLIC DEBT, Rs billion
year domestic external total % of GDP
─────────────────────────────────────────────────────
2016/17 283.71 413.98 697.69 22.7
2017/18 390.90 525.35 916.25 26.5
2018/19 452.97 594.93 1,047.90 27.2
2019/20 613.21 819.67 1,432.88 36.9
2020/21 800.32 934.15 1,734.47 39.9
2021/22 984.29 1,025.85 2,010.14 40.4
2022/23 1,129.10 1,170.25 2,299.35 42.8
2023/24 1,180.90 1,257.87 2,438.77 42.3
2024/25 1,268.22 1,401.42 2,669.64 43.1
2025/26 1,272.53 1,382.11 2,654.64 40.2
─────────────────────────────────────────────────────
% of GDP
45 ┤ ●───●───●
│ ● ●
40 ┤ ● ← 2025/26
│ ●
35 ┤ ●
│
30 ┤ ●
│ ●
25 ┤
└─┬────┬────┬────┬────┬────┬────┬────┬────┬────
16/17 25/26Two readings, both true:
The level nearly doubled as a share of GDP in a decade — from 22.7% to around 40%. That is a fast accumulation.
It has stabilised. Domestic debt is almost flat year on year (Rs 1,268bn to Rs 1,273bn), external debt actually fell, and the ratio dropped because nominal GDP grew faster than debt.
WHY THE RATIO FELL WITHOUT DEBT BEING REPAID debt/GDP falls if: nominal GDP growth > debt growth Nominal GDP growth 2025/26 6.50 % Total debt growth −0.56 % The ratio improved by growing the denominator, not shrinking the numerator. This is the ordinary way countries reduce debt ratios, and it works only while nominal growth holds up.
At around 40% of GDP, Nepal's public debt is moderate by international comparison. The composition matters as much as the level: roughly half is external, much of it concessional, which is cheaper and longer-dated than market borrowing — but it is denominated in foreign currency, so it is a claim on the same reserves you studied in Week 4.
7.3 The capital expenditure problem
This is the most important thing in Nepali public finance, and the release shows it plainly.
EXPENDITURE COMPOSITION, % of GDP year recurrent capital ──────────────────────────────────── 2016/17 16.85 6.78 2017/18 20.17 7.83 2018/19 18.57 6.26 2019/20 20.17 4.86 2020/21 19.44 5.26 2021/22 19.20 4.30 2022/23 18.50 4.40 2023/24 16.30 3.36 2024/25 16.10 3.60 ──────────────────────────────────── RECURRENT ████████████████ 16.1 % CAPITAL ███▌ 3.6 % Capital spending has fallen from 7.83% of GDP to 3.60% — it has been more than HALVED in seven years.
┌────────────────────────────────────────────────────────┐ │ WHY THIS IS THE NUMBER THAT MATTERS MOST │ │ │ │ Recurrent spending is consumption. It pays salaries, │ │ pensions and interest. It is necessary and it does │ │ not raise future output. │ │ │ │ Capital spending is investment. Roads, irrigation, │ │ transmission lines. It is the only part of the │ │ budget that changes what the economy can produce │ │ in ten years. │ │ │ │ A state spending 16% of GDP on itself and 3.6% on │ │ the future is not investing in growth, whatever the │ │ budget speech says. │ └────────────────────────────────────────────────────────┘
There is a second, well-documented dimension: the capital budget is not only small, it is chronically under-spent, and what is spent arrives in the final months of the fiscal year. Money allocated in Shrawan is disbursed in Ashad. That is why an eleven-month release systematically understates the annual capital figure — and why comparing eleven-month capital spending to the annual budget makes execution look even worse than it is.
7.4 Revenue: where it comes from, and the vulnerability
THE NEPALI REVENUE BASE
┌─────────────────────────────────────────────────────┐
│ CUSTOMS + IMPORT-LINKED VAT AND EXCISE │
│ ← a very large share of total revenue │
│ │
│ INCOME TAX │
│ OTHER DOMESTIC VAT AND EXCISE │
│ NON-TAX (fees, dividends, royalties) │
└─────────────────────────────────────────────────────┘
THE STRUCTURAL PROBLEM:
imports ▲ → revenue ▲ → budget comfortable
imports ▼ → revenue ▼ → budget squeezed
Nepal's fiscal health rises and falls with its trade
DEFICIT. The government collects most when the country
is buying most from abroad. THE POLICY TRAP, DRAWN
want: smaller trade deficit
│
▼
restrict / discourage imports
│
▼
customs and import VAT revenue ▼
│
▼
fiscal deficit ▲
│
▼
more government borrowing
│
▼
crowds out private credit
or forces spending cuts
This is exactly what happened in 2022/23: import
restrictions helped the balance of payments and
revenue growth turned NEGATIVE (−9.29%).That −9.29% revenue contraction in 2022/23 is the single clearest illustration in the whole dataset of how tightly Nepal's fiscal and external accounts are bound together. You cannot fix one without moving the other.
7.5 Financing the deficit
WHERE THE GAP IS FILLED ┌──────────────────┬────────────────────────────────────┐ │ DOMESTIC │ Treasury bills (91/182/364 day) │ │ borrowing │ Development bonds │ │ │ ← bought largely by BANKS │ │ │ using SLR-eligible demand │ ├──────────────────┼────────────────────────────────────┤ │ EXTERNAL │ Concessional loans from IFIs │ │ borrowing │ Bilateral loans │ │ │ ← cheap, long, FX-denominated │ └──────────────────┴────────────────────────────────────┘ THE LINK BACK TO WEEK 6: Banks must hold statutory liquid assets. Government paper qualifies. In a year of excess liquidity, banks bid aggressively for T-bills — which is why the 91-day rate is 2.94% while the deposit rate is 4.29%. The government is borrowing more cheaply than banks are funding themselves. That is a liquidity glut expressing itself through the sovereign yield curve.
7.6 Worked example — the fiscal arithmetic
Illustrative, on published ratios.
Using 2024/25 ratios (the last complete set):
Revenue / GDP 19.60 %
Recurrent expenditure / GDP 16.10 %
Capital expenditure / GDP 3.60 %
────────
Total expenditure / GDP (approx) 19.70 %
Primary balance (approx) −0.10 % of GDP
Now the debt dynamic. Debt as a share of GDP changes by:
Δ(debt/GDP) ≈ primary deficit/GDP
+ (r − g) × debt/GDP
where r = average interest rate on debt
g = nominal GDP growth
With a large concessional share, suppose r ≈ 3 % [R]
Nominal GDP growth g = 6.50 %
Debt/GDP = 43.1 %
(r − g) × debt/GDP = (0.03 − 0.065) × 0.431
= −0.0151 = −1.51 pp
Δ(debt/GDP) ≈ +0.10 − 1.51 = −1.41 pp
Predicted fall of ~1.4 points; actual 43.1 → 40.2.
THE LESSON: while nominal growth exceeds the average
interest rate, the debt ratio falls on its own even
with a small primary deficit. That is a comfortable
position — and it reverses the moment either nominal
growth slows or concessional financing dries up.Formulas from this week
Fiscal balance = revenue + grants − total expenditure
Primary balance = fiscal balance + interest payments
(the deficit before debt service)
Debt / GDP = total outstanding debt ÷ nominal GDP
Debt dynamics:
Δ(debt/GDP) ≈ primary deficit/GDP
+ (r − g) × debt/GDP
r < g → ratio falls even with a deficit
r > g → ratio rises even with a surplus
Ratio falls without repayment when:
nominal GDP growth > debt growthWhat you should be able to do now
- Lay out the revenue, expenditure and financing structure of the budget.
- Read the debt series and explain why the ratio fell while debt barely changed.
- Explain why the capital expenditure share is the most important line, and what its halving means.
- Explain why an eleven-month release understates capital spending.
- Describe the import-revenue dependency and the policy trap it creates.
- Connect government borrowing to the excess bank liquidity of Week 6.
- Use the debt-dynamics formula to say when a debt ratio falls on its own.
Next week: everything assembled — how the five families reach NEPSE, and a dashboard you can rebuild every month.
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