Broken budgets

As of 27th May, Nepal’s capital expenditure stands at nearly 37% with one and a half months remaining in the fiscal year and two days before the release of the upcoming budget—a problem that has besieged the country for long. 

However, the problem is multifold: not only is capital spending slow, but the budget itself allocates relatively little to it compared to soaring recurrent expenditures. On top of that, our last 10 year budget analysis shows budget allocation for recurrent expenditures is 2.5 times higher than capital spendings.

Graph 1: Recurrent versus capital budget (In NRs billion) (2015/16-2024/25)

While the recurrent budget has more than doubled over the ten years (by 135%), the capital budget remained dismal growing at a rate less than half the recurrent expenditure (68.7%).

Budget skewed towards recurrent expenditure

Both recurrent and capital expenditure have increased by 12% and 8% on average in the period of last ten years respectively. The gap between the two has widened significantly reaching NRs 788 billion the last fiscal year from NRs 275.4 billion in 2015/16.

In earlier years, the situation was different with capital spending being larger than recurrent expenditure, which changed since the 1990s. Today’s recurrent budget highlights the government's increasing commitments to its growing population—where it also reveals efficiencies, including bloated administrative size and expenditures and extended scope of social welfare programs. These developments indicate that the government may have undertaken a larger economic and social role than it can realistically sustain.

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For instance, the social security category, which has observed the highest allocation growth rate, 30% since 2014/15. Over the decade, allocation in the category rose significantly from NRs 162.7 billion (1% of the budget) in the first five years to NRs 781.9 billion (6%) in the latter half. Social security’s budget share also increased sharply from 7% in 2020/21 to 12% in 2021/22, with elderly citizens’ allowances raised from NRs 3,000 to NRs 4,000 during this period.

Furthermore, it is concerning that the majority of the budget for development projects in economic sectors like agriculture goes towards operations. Sectors like defence and health which require a balanced approach to capital and recurrent expenditure also have a huge misalignment.

For instance, the Prime Minister Agriculture Modernization Project (PMAMP) slated to conclude in 2025/26 had utilised only 25% of its Rs 130 billion allocation as of 2023/24, with a large share spent on administrative and operational costs. In 2022/23, 91% of its Rs 2.6 billion expenditure was recurrent, covering staff, allowances, consultancy, maintenance and subsidies. Only 9% was capital investment, raising questions about the alignment of spending. 

A while ago, the Ministry of Agriculture and Livestock Development (MoALD) shared that the ministry has spent NRs 107 billion in a period of five fiscal years (FY 2019/20 to 2023/24) as direct and indirect subsidies. The ministry further acknowledged irregularities in its subsidy distribution and announced it had formed an internal team to investigate the misuse.

Similarly, our analysis shows that the ten-year total recurrent budget for defence is five times higher than its capital budget—NRs 380.9 and 72.3 billion respectively. It shows much goes towards staff payments and operations including maintenance of existing military inventory and equipment, suggesting that the country is not spending enough in modernising the army.

Capital spending: too little, too late, subpar work

The country allocates dismally to the capital budget—only 17% and its actual utilisation is often low, unpredictable.

Capital expenditures means government investments in infrastructure, development projects, and asset acquisition which directly and indirectly generate returns in different forms for the government and the public. 

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Infrastructure spending links markets, creates employment opportunities raising household incomes, stimulates sectoral demand, and enhances productivity. These dynamics, at least theoretically, result in economic growth.

Yet just as higher recurrent spending hasn’t necessarily led to better government performance, simply increasing capital expenditure doesn’t guarantee growth or returns either. The impact depends on whether funds are invested in well-planned, productive projects—or wasted on low-quality, uncertain initiatives that stall before completion.

A telling example is the Pokhara International Airport. Built with loans from China amounting to $216 million [around NRs 25.5 billion] and completed in 2023, it has failed to generate expected results two years after its inauguration. Its poorly made runway, inadequate weight/carriage standards and entanglement into India-China geopolitics have prevented it from hosting regular flights. And now it’s embroiled into a massive and high profile corruption scandal. 

A significant capital expenditure as such resulting in underperformance can create a massive debt problem for the country.

Another big project, a $3.5 billion Nijgadh International Airport project, also lies in a limbo. While the Supreme Court directed to explore alternative sites for the construction of the proposed airport in 2022, the budget has continued to pour in, or at least be allocated.

Transport infrastructure projects face a similar fate due to Nepal’s procurement policy that is based on the lowest bid approach over quality. This usually ends up in subpar quality or delayed construction. Take for instance, Kathmandu's Gwarko Flyover Project. In 2022, the Public Procurement Monitoring Office (PPMO) blacklisted 12 construction companies for delays and contract breaches.

Another issue with the country’s capital expenditure is its timing. Throughout the year capital spending remains relatively low often leading to large cuts during revisions as the government fails to meet expected targets. But as the end of the fiscal year looms, the spending spikes with fears of the budget freeze.

Nepal’s budget system freezes the funds of a programme if they are not utilised within the allocated year. The next year’s budget depends on financial progress i.e, spending made on the previous year—meaning failure to spend means a lesser budget for the next fiscal cycle.

Such expenditure is supposed to be planned with short-term and long-term economic benefits in mind rather than the fear of budget freeze. The priority must be to generate employment and inject money into the economy in the short-term, and to generate returns in the long term. The last minute rush spending does neither.

This points to a misplaced priority in the government as large infrastructure projects either stall for a long time or have subpar quality which eventually ends up costing more than it should. Problems like delay in transfer of funds to ministries and provinces, a corrupt bureaucracy, procurement system that favours low cost above efficiency and quality are a few reasons behind the delay in capital spendings along with a misaligned priority amongst government bodies.