The Ministry of Finance has identified five economic challenges currently confronting Nepal’s economy. A comprehensive report prepared by the ministry outlines the main economic risks and proposes future strategic directions to address them.
According to the ministry, the single largest threat to the economy remains natural disasters—especially earthquakes. Officials note that the unpredictability of such events makes them one of the most serious economic risks. The 2015 Gorkha earthquake, for instance, caused damage equivalent to 22.8% of the country’s GDP.
Other significant economic challenges highlighted include fluctuating economic growth, rising inflation, mounting public debt and liabilities, and the recurring impact of floods and landslides that hinder economic development each year.
Ministry spokesperson and Joint Secretary Shyam Prasad Bhandari stated that the report aims to inform future policies across all government bodies, ensuring economic strategies are shaped with these realities in mind. He emphasized that unstable GDP growth has made economic forecasting difficult, as shocks like earthquakes, the transition to federalism, and the COVID-19 pandemic have severely disrupted the economy—leading to declining revenues, rising fiscal deficits, and increasing debt burdens.
The ministry estimates that a major disruptive event can alter GDP growth by up to 4%. Citing IMF analysis, the report states that in the event of a moderate GDP decline, government revenue could fall by 0.7%, the fiscal deficit could rise by 0.8%, and public debt could increase by as much as 3.2%.
Inflation and interest rate volatility
Over the past 14 years, Nepal’s average inflation rate has been 6.9%, which has significantly reduced consumer purchasing power while increasing public spending on wages and pensions. Interest rate fluctuations have also driven up the cost of domestic debt. Even a 1% increase in interest rates could cost the government an additional NPR 13.15 billion, equivalent to 0.2% of GDP.
The exchange rate against the US dollar has also seen an average fluctuation of 4.3%. While most of Nepal’s debt is concessional, the report warns that rising global lending rates such as those recently announced by the World Bank and JICA could have long-term consequences.
Rising debt levels and revenue shortfalls
Although Nepal currently faces a low risk of debt distress, its total debt-to-GDP ratio has reached 42.7%, up from 22.7% just eight years ago. The government aims to cap this at 50% by fiscal year 2029/30 under its Medium-Term Debt Management Strategy.
Another concern is the large gap between projected and actual tax revenue, which has disrupted budget implementation. The government allocates a budget exceeding NPR 550 billion annually, based on these revenue forecasts.
Natural disasters, especially annual floods and landslides, continue to inflict an average GDP loss of 1% per year. The report also flags issues at the provincial and local levels, where many governments remain heavily dependent on federal grants, face revenue collection shortfalls, and struggle with unspent budgets and growing administrative costs.
State-owned enterprises and public liabilities
The report also highlights the financial strain caused by loss-making public enterprises. The government has guaranteed loans totaling NPR 51.06 billion for Nepal Airlines Corporation alone. Although the short-term impact is minimal, the long-term liabilities are concerning. The government currently pays around NPR 7 billion annually to Employee Provident Fund and Citizen Investment Trust for such guarantees.
While 44 state-owned industries hold substantial assets equal to 51% of GDP their annual income remains low, at just 11–12%. Some are profitable, but most are running at a loss, increasing the state’s financial liabilities. Over the past two years, total revenue from these enterprises was NPR 102 billion.
According to an IMF debt risk assessment, loans taken by Nepal Airlines, Nepal Electricity Authority, and the Drinking Water Corporation may prove difficult to recover, posing moderate risks to Nepal’s economy.
Concerns over Public-Private Partnerships (PPP)
While Public-Private Partnerships (PPP) are seen as a way to mobilize private sector participation in national development, the report warns of risks associated with unclear project structures, technological capabilities, and responsibility allocation. So far, no PPP project has been scrapped, but the report emphasizes the need for clearer frameworks moving forward.
