The hidden cost of Nepal’s rising public debt

The World Bank’s International Debt Report 2026 highlights a global paradox where developing nations find it easier to borrow but increasingly difficult to afford the associated costs. For Nepal, this reality manifests as a hidden cost trap, where headline debt-to-GDP ratios may mask underlying fiscal vulnerabilities. While the country’s external debt is largely concessional, the rapid accumulation of domestic obligations is tightening the government's fiscal space.

By mid-October 2026, Nepal’s total public debt reached Rs 3,009.11 billion, representing 45.59 percent of GDP—a figure more than four times higher than in the 2016/17 fiscal year. Although external debt remains structured favorably with over 90 percent owed to multilateral lenders like the IDA and the Asian Development Bank, the domestic portion of the debt is growing. In the 2025/26 fiscal year, approximately four-fifths of the Rs 386.22 billion spent on debt service was directed toward domestic loans.

Managing the fiscal burden

Experts and officials offer differing perspectives on the situation. PDMO chief Gopi Krishna Koirala describes the debt position as satisfactory, provided currency fluctuations are managed. Conversely, economist Dilli Raj Khanal warns that the rising volume of repayments may force the government to implement deeper cuts to capital expenditure. This concern is compounded by weak budget execution, as the Nepal Rastra Bank reported that only about one-third of the capital budget was utilized in the first 11 months of FY2025/26.

Nepal’s public debt has quadrupled in nine years, leaving less fiscal room than headline ratios suggest.

Currency volatility remains a critical factor. Because Nepal services external debt in foreign currencies while budgeting in rupees, exchange-rate movements have added an estimated Rs 167.75 billion to the debt burden. Furthermore, while the country maintains low risk regarding external debt sustainability due to record-high remittances—which reached Rs 2.36 trillion in FY2025/26—the economy remains heavily dependent on imports, particularly from India, which supplied Rs 1,210.6 billion of the nation's import bill.

Why it matters

Nepal is not currently in a debt crisis, but the shift toward financing recurrent spending through domestic borrowing limits the capacity for growth-oriented investment. For the broader South Asian region, these trends underscore the risks of relying on remittances to sustain consumption while export capacity remains stagnant. As Nepal approaches its graduation from least developed country status, the need for transparent, growth-focused financing becomes essential to avoid long-term fiscal strain.