Will Nepal Face a Debt Crisis? A Look at Rising Public Borrowing in 2025
Nepal’s public debt has crossed NPR 2 trillion, raising concerns about sustainability, repayment capacity, and overreliance on foreign loans. This article breaks down the risk factors and economic implications of a potential debt crisis in 2025.
Will Nepal Face a Debt Crisis? A Look at Rising Public Borrowing in 2025
By Angat Sitoula |
Debt Crosses NPR 2 Trillion: Red Flag or Growth Lever?
Nepal’s public debt has officially crossed NPR 2 trillion as of Q1 2025 — nearly doubling in just five years. With a debt-to-GDP ratio now exceeding 43%, the question is no longer whether Nepal is borrowing, but whether it can sustain the repayment trajectory.
While officials defend borrowing as “development-driven,” macroeconomists are raising red flags over the government’s growing dependence on both domestic and foreign debt to meet annual budgets.
Foreign Loans Rising, But Exports Flatlining
Nepal’s debt profile is tilting toward external loans, particularly from multilateral lenders and bilateral arrangements. However, exports — which should ideally finance repayment — remain stagnant. In FY 2024/25, Nepal’s exports covered only 8% of imports, widening the current account deficit.
Without a boost in productive capacity or significant export diversification, foreign debt may become a structural burden rather than a tool for growth.
Slowing Revenue, Rising Obligations
The government’s revenue growth rate slowed to just 6.5% in 2024, while interest payments on debt surged past NPR 150 billion. A growing portion of tax revenue is now being diverted toward debt servicing, leaving less room for capital expenditure and social programs.
Experts warn this is a classic fiscal squeeze — where rising debt obligations choke long-term investments and developmental spending.
Domestic Market Saturation
The domestic bond market — once a reliable source of short-term liquidity — is showing signs of fatigue. Banks are reaching exposure limits, and institutional investors are demanding higher yields, increasing the cost of domestic borrowing.
If this trend continues, the government will be forced to borrow at unsustainable rates or rely further on external creditors.
No Clear Debt Repayment Strategy
Unlike economies with active debt restructuring plans or sovereign wealth buffers, Nepal lacks a long-term debt management roadmap. Projects funded by external loans often face delays, cost overruns, or limited returns.
The Ministry of Finance has yet to release a comprehensive public debt sustainability framework, leaving investors and citizens in the dark.
Could Nepal Tip into Crisis?
Nepal is not in immediate danger of default — but the indicators are trending in the wrong direction. Rising debt, weak revenue generation, poor project execution, and lack of transparency create a toxic mix. Without policy correction, Nepal could slide into a debt trap scenario: borrowing to repay old loans.
The IMF, World Bank, and local economists have consistently urged Nepal to enhance fiscal discipline, improve capital project governance, and reduce reliance on consumption-led borrowing.
Conclusion: A Crisis Is Avoidable — But Not Guaranteed
Nepal still has time to steer away from a debt crisis — but the window is narrowing. Structural reforms in taxation, export competitiveness, digital infrastructure, and capital project management are key.
The longer fiscal caution is delayed, the higher the cost of correction will be. What happens in the next 12–24 months will define whether Nepal walks the path of debt-fueled collapse or controlled, strategic recovery.