Nepal's public debt tops Rs 3 trillion as repayments crowd out capital spending
Debt service of Rs 98.87bn in the first quarter of 2026/27 was about 3.5 times capital spending of Rs 28.42bn, leaving the budget and lenders to ask what the borrowing is buying.
Between mid-July and mid-October 2026, Nepal's government paid out far more to carry old loans than to build anything new. Debt service reached Rs 98.87bn in the period. Capital expenditure, the money that pays for roads, power lines and other assets, stood at Rs 28.42bn, according to the Financial Comptroller General Office.
That gap is the sharpest detail in a milestone. Nepal's outstanding public debt has crossed Rs 3 trillion for the first time, reaching Rs 3.009 trillion by mid-October 2026, according to the Public Debt Management Office. At the central bank's rate of Rs 152.72 to the dollar, that is about $19.7bn.
A record, and a changing mix
Outstanding debt was Rs 2.981 trillion in mid-July 2026. In the quarter that followed, the government borrowed Rs 123bn and repaid Rs 77.74bn of principal. A foreign-exchange gain of Rs 18.16bn also moved the balance.
Domestic debt is Rs 1.410 trillion, or 46.87% of the total. External debt is Rs 1.598 trillion, or 53.13%. Together they equal 45.59% of gross domestic product (GDP), up from 38.05% in 2019/20. In that year outstanding debt was Rs 1.433 trillion, so the stock has more than doubled. The burden now exceeds Rs 100,000 per person.
Source: Public Debt Management Office; Financial Comptroller General Office
The concern is direction and composition. Rising public spending, falling foreign grants and revenue that has fallen short of expectations have all pushed debt up. Each leaves the state leaning more heavily on loans.
Where the money goes
Of the Rs 98.87bn in debt service, Rs 77.74bn was principal and Rs 21.12bn was interest. Domestic debt took the larger share: Rs 65.10bn of principal and Rs 17.63bn of interest. External debt took Rs 12.64bn and Rs 3.49bn respectively.
The government has set aside Rs 417.88bn for debt service in 2026/27, and 23.66% of that was spent in the first quarter.
Borrowing itself is running unevenly. The annual target is Rs 658.28bn and Rs 123.32bn, or 18.73%, was raised in the quarter. Domestic borrowing is well ahead of foreign: Rs 100bn of a Rs 410bn target (24.39%), against Rs 23.32bn of a Rs 248.28bn target (9.39%).
Source: Public Debt Management Office
Monthly borrowing also accelerated, from Rs 23.84bn between mid-July and mid-August 2026 to Rs 38.10bn the following month and Rs 61.37bn in the month to mid-October 2026.
The quality question
The Office of the Auditor General has said debt funds are not being adequately channelled into capital formation. Its 63rd annual report says some borrowed money has paid for recurrent items, including employee costs, services and consultancy, and office operations.
The National Natural Resources and Fiscal Commission, which sets borrowing limits for the three tiers of government, has made a similar point. It wants domestic borrowing for recurrent and administrative spending strictly prohibited, and it keeps recommending a ceiling of 5.5% of GDP on federal domestic borrowing. In 2024/25, net domestic borrowing was only 1.41% of GDP, because much of what was raised went to repay existing debt.
The commission also says the government has not provided a clear public breakdown of where domestic borrowing is used, which makes it hard to check whether its advice is followed. It wants cost-benefit analysis, net present value and internal rate of return tests for projects, and an integrated electronic reporting system.
A high-level Economic Reform Recommendation Commission, formed in 2024, warned that debt not used productively raises the likelihood of a debt trap. It also cautioned that rising repayments could squeeze education, health and security.
What it means for the budget and lenders
When new borrowing in part pays for old obligations, the state runs to stand still. Domestic debt service, Rs 82.73bn of the Rs 98.87bn, includes interest as well as principal, so it cannot be read as pure rollover. Even so, it shows how much of the domestic borrowing programme is tied to past commitments.
For domestic investors, government securities may remain plentiful but offer less of the growth that would come from a rising capital budget. For external lenders, the slow uptake of foreign borrowing, at 9.39% of target, may reflect either project readiness or appetite. The sources do not say which, but it leaves domestic markets to fill the gap.
Contractors and construction suppliers could feel the effect. If capital spending stays low while service costs claim a large part of the budget, the pipeline of public work may thin.
What to watch
- Whether capital expenditure picks up in the second quarter of 2026/27 or stays far below debt service.
- Whether external borrowing, only 9.39% of target, accelerates or leaves domestic borrowing to carry the year.
- Whether the government publishes a sector-wise breakdown of domestic borrowing, as the fiscal commission has requested.
- Whether federal domestic borrowing stays within the 5.5% of GDP limit.
How this story was made: researched and written by The Standard’s desk with AI assistance, from the published reporting and official data credited below, and checked against those sources. Our standards.
