KATHMANDU: With just three months remaining in the current fiscal year, Nepal’s government is yet again caught in a familiar bind — low revenue collection, underutilized expenditures, and an ambitious but underperforming budget.
As Deputy Prime Minister and Finance Minister Bishnu Paudel prepares to unveil the national budget for the upcoming fiscal year, pressure is mounting to craft a budget that is not only realistic but also reflective of the nation’s precarious economic landscape.
Despite the fiscal year drawing to a close, government data shows a disappointing implementation rate. By March end, the government had achieved only 52.62% of the estimated revenue collection and 48.1% of the planned expenditure. This sluggish performance raises concerns about the government’s ability to effectively plan and execute future budgets.
Minister Paudel has concluded ministerial-level discussions and is now set to initiate broader consultations with various sectors, committees, and experts. While the National Planning Commission (NPC) has provided the ministry-level budget ceiling and resource estimates, the actual direction of the budget remains uncertain.
Expectations vs reality
One of the biggest challenges facing the upcoming budget is a chronically underperforming revenue system. The country’s economy has been grappling with stagnation, and the government has consistently failed to meet its revenue targets.
Contributing to this challenge is the anticipated reduction in foreign aid, with donors like the United States signaling cutbacks under the new Trump administration. Moreover, Nepal’s placement on the Financial Action Task Force’s (FATF) grey list could further hinder aid and loan inflows from other nations.
The NPC’s ceiling for the upcoming fiscal budget is set at Rs 19 trillion, assuming a 12% increase in revenue compared to the current year’s estimates. However, this optimism stands in stark contrast to the government’s own mid-year budget revision, which slashed nearly Rs 2 trillion from the original budget due to revenue shortfalls.
Economist Keshav Acharya believes this trend of presenting overly ambitious budgets without implementation capacity has become institutionalized.
“Despite cuts in foreign aid, the government continues to plan big. But the time has come to bring a realistic budget,” he said.
Economist Dr. Chandramani Adhikari adds that revenue generation can be improved without increasing tax rates.
“We need to expand the tax base and ensure compliance. There is potential for growth, but we must deepen the tax net instead of increasing the burden,” he argues.
Reshaping project funding and federalism
In a bid to streamline federal-level project planning, the National Planning Commission has issued new standards for the National Project Bank. From the next fiscal year, only projects costing over Rs 30 million will be included.
This decision, which reflects earlier but unimplemented resolutions, aims to align with federal principles by discouraging micro-level project funding by the central government.
Shyam Ghimire, spokesperson for the Ministry of Finance, confirmed the new standard and said while smaller projects will be excluded from the project bank, they could still receive funds under different headings.
Still, critics argue that the federal budget continues to reflect centralized tendencies. Despite constitutional mandates, the federal government is still encroaching on provincial and local jurisdictions. Moreover, the government has been reducing fiscal equalization grants—mandatory transfers that are key to the financial autonomy of lower levels of government.
“The current administration has shown no intention of deepening fiscal federalism,” says Acharya. “The rhetoric of decentralization is strong, but the actual practice is the opposite.”
Echoing this concern, Dr. Govinda Nepal notes that cutting equalization grants after budgets have been committed at the local level leads to a mismatch between expenditure and resources, further weakening local governance.
The Achilles’ heel
Year after year, Nepal struggles to effectively utilize capital expenditure. Despite large allocations for infrastructure and development, actual spending has rarely crossed 65% of the allocated amount over the past five years.
Dr. Govinda Nepal points out that weak institutional capacity and poor project management are at the heart of this problem.
“The government must build its capacity to spend, not reduce capital expenditure. If funds are allocated but not utilized due to inefficiency, development is the casualty,” he says.
Nepal’s capital budgeting continues to be undermined by political lobbying, uneven prioritization, and bottlenecks in procurement and implementation.
Social security remains one of the government’s largest spending areas. In the last fiscal year alone, Rs 108.8 billion was spent on social security allowances. Yet, this system remains untargeted, distributing equal amounts to the rich and poor alike, based solely on age or ethnicity.
Acharya argues that this model is unsustainable and wasteful. “With a robust database and targeted distribution, the government could save Rs 30 to 40 billion. But given the political sensitivity, especially with rising royalist sentiments, the government is unlikely to take that risk,” he said.
On the other hand, Dr. Nepal believes the number of social security recipients will continue to grow, putting further pressure on the budget. “Unless we reform this system and introduce targeting, this expenditure will balloon uncontrollably,” he warns.
Pay raise for civil servants?
Public expectations around salary increases for government employees remain high, especially after a 15% hike in the 2023/24 budget. However, given current revenue constraints and high operational expenses, analysts believe a further increase is unlikely.
“The government can’t even cover existing operational expenses. Increasing salaries without reducing the number of offices and employees under federal control will only add to the burden,” says Dr. Nepal.
Acharya agrees, noting that without reforms in federal staffing and institutional overlap, the government lacks the fiscal space for a pay raise.
Health and education a priority?
Despite constitutional commitments to free education and health, both sectors remain chronically underfunded. Teachers in public schools are protesting unmet agreements. The Free Education Act has not been implemented, and health institutions are owed over Rs 12 billion under the insurance program.
Meanwhile, over 300 local hospitals remain under construction, stalled due to lack of funds. Entrepreneurs involved in hospital infrastructure projects report non-payment for completed work, raising concerns about government credibility.
Economist Govinda Nepal stresses that while increased allocations may not be possible, better utilization and prioritization are key. “We need to restructure our education system based on shifting demographics due to migration. Similarly, in health, it’s not about more funds but better management of the huge investments already made.”
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