In the fiscal year 2024/25, while the Government of Nepal successfully met its entire target for internal debt, it significantly fell short in securing external debt, achieving only 57.79 percent of the target. According to a report published by the Public Debt Management Office (PDMO), the government fully raised Rs 330 billion in internal loans but was only able to secure Rs 125.3 billion out of a planned Rs 217 billion in external loans—a shortfall of Rs 91.6 billion.
Reasons Behind the External Debt Shortfall
PDMO Chief Gopikrishna Koirala attributed the shortfall to low capital expenditure and project delays. He explained that most foreign loans are disbursed as reimbursements after project work is completed. However, since many projects lagged behind schedule or were under-executed, the government was unable to request full reimbursement from foreign lenders.
Koirala added that domestic resources are typically used to finance projects initially, and only afterward does the government claim reimbursements from external lenders. As a result, when implementation is weak, the expected foreign aid does not materialize.
Debt Effectiveness and Macroeconomic Impacts
While external debt generally comes with lower interest rates and longer repayment periods, internal debt is often spent on recurrent expenses, such as salaries and administrative costs. In contrast, external loans are usually tied to specific development or infrastructure projects, making them more effective for capital formation.
However, the excessive mobilization of internal debt has macroeconomic side effects. When the government borrows heavily from the domestic market, it can reduce the availability of loans for the private sector, potentially distorting financial and currency markets.
Total Public Debt and Fiscal Impact
In FY 2024/25, the government had set a target of raising Rs 547 billion in public debt but managed to mobilize Rs 455.39 billion, achieving 83.25 percent of the target.
As of mid-July 2025:
- Total public debt stood at Rs 2,669 billion, up Rs 231 billion from the previous year.
- This figure represents 43.71 percent of Nepal’s GDP.
- Foreign loans account for 52.49 percent (Rs 1,401 billion) of the total debt.
- Internal loans represent 47.51 percent (Rs 1,263 billion).
- In GDP terms, external debt is 24.56 percent, and internal debt is 22.14 percent.
Debt Servicing
The government spent Rs 400 billion on debt servicing (principal and interest) in the last fiscal year:
- Rs 304 billion went toward internal debt payments.
- Rs 58.40 billion was allocated for external debt.
- This expenditure accounts for 90.01 percent of the allocated budget for debt servicing and 5.94 percent of the GDP.
The figures highlight a growing debt burden and stress the need for improved project execution and capital spending to maximize the benefits of foreign aid and maintain macroeconomic stability.
