Structural change in economy
Historically, Nepal’s economy was based on the agriculture sector. Nowadays, the contribution of the sector is decreasing and accounts for 24 percent of the GDP while more than 60 percent of the population is involved in this sector. The service sector is in increasing order and the industrial sector is not satisfactory. The contribution of the service sector is increasing after implementation of liberalization policy. Banking sector, foreign employment, hydro sector, civil aviation, and health sectors are the most linearized sectors after restoration of democracy in Nepal after the 1990 movement.
The banking sector is one of the most outstanding developments in Nepal. After the 7th periodic plan only a limited number of financial institutions (FS) were existing and functioning. Deposit and landing from FIs was limited and difficult to exceed for the general public. After 1992 the scenario changed. Nowadays, access to the public is getting easy. The deposit and lending both are increasing with competitive costs.
Around 3m Nepalis are working abroad as foreign employment, of whom around 1.9m are working in the Gulf countries. The contribution of remittance with GDP was around 25 percent in previous years and it is found that the ratio and amount both are increasing.
However, around 40 percent of remittances come from Gulf countries and it may be adversely affected by the West Asia war. The remittance ultimately helped in reducing poverty and increasing consumption. The Balance of Payments (BoP) and liquidity position in the financial system are currently comfortable and remain supportive of overall economic stability.
Hydropower is another liberalized sector after restoration of democracy. Many private investors are investing in this sector because of the government’s liberal policy in investment and tax schemes. Generation of hydroelectricity (4105 MW) has increased by nearly 15 times. Following the adoption of the liberalization policy, the Civil Aviation Authority of Nepal (CAAN) was established in 1998 to regulate and develop the civil aviation sector. The implementation of the open-sky policy encouraged private airlines to operate both domestic and international flights. As a result, the quality and quantity of air services increased significantly, leading to greater competition in airfares, improved connectivity, higher revenue generation, and increased employment opportunities in the aviation industry.
Education and health are among the sectors that have benefited significantly from the liberalization policy. Although some challenges still exist, these sectors have experienced substantial growth and improvement. Every year, nearly 4,000 Nepali students receive scholarships in medical, nursing, and engineering programs. These scholarships provide valuable opportunities for talented and economically disadvantaged students to pursue higher education. The expansion of educational institutions and medical colleges has contributed to improving both the quality and quantity of healthcare and educational services.
Furthermore, the education and health sectors have created significant employment opportunities and have become important sources of revenue generation for the country.
Nepal’s economy has gradually shifted from an agriculture-based structure to a more service-oriented and liberalized system after the restoration of democracy in 1990. Although agriculture still employs more than 60 percent of the population, its contribution to GDP has declined to around 24 percent, while the service sector has grown significantly. Key sectors such as banking, foreign employment, hydropower, civil aviation, education, and health have expanded due to liberalization policies, improving access, efficiency, and overall economic performance. Foreign employment and remittance inflows have become major sources of income, contributing around one-third of GDP and supporting poverty reduction, consumption, and macroeconomic stability.
Hydropower development, civil aviation expansion, and improvements in education and health sectors have created employment opportunities and enhanced service delivery. Electricity generation has increased significantly, while air connectivity has improved through private sector participation and open-sky policies. The education and health sectors have also benefited through scholarship programs and institutional growth, providing opportunities for thousands of students. Despite these achievements, the industrial sector remains weak, indicating the need for more balanced and sustainable economic development in the future.
Fiscal trends and challenges in Nepal
The budget is the financial statement of the government and called a fiscal roadmap. It consists of two parts: revenue and expenditure. Revenue has two parts: tax and non-tax. The share of tax revenue and non-tax revenue is around 89 percent and 11 percent in Nepal. The ratio of revenue to GDP has stood at 19 percent (approx) for a decade. Revenue growth trend is decreasing since 2022-23 while the expectations of citizens are mounting. So the government is under pressure to mobilize more revenue to fulfill these expectations. The expenditure side of the budget has three components: recurrent expenditure, capital expenditure and financial provision.
The government is formulating a deficit budget to fulfill the public expectations through external and domestic loans. The share of both types of loan is also in increasing order and exceeds 47 percent of GDP. The ratio of external and domestic loans is 53 and 47 percent respectively. Internal loan has certain restrictions with higher interest rate and short repayment period while external loan (a soft loan of sorts) has a longer repayment period, but it comes with exchange risk attached.
Trends in Nepal
Revenue is the backbone of every government and is collected by means of tax. In Nepal, tax revenue is largely based on imports, with around 45 percent of total government revenue coming from import taxes. The external sectors of Nepal are vulnerable as the post-quake economic blockade of 2015 also shows. The revenue ratio with GDP was 21.5 percent in 2021-22, which has decreased further to 19 percent (approx). Around 40 percent of the national economy is informal.
Around 23 percent of people are registered in the tax system but 60 percent of the taxpayers are not submitting their returns. The border with India is almost open, making it very difficult to curb smuggling. In the last 10 years, revenue growth rate stood at 12.9 percent on an average. What’s worrying is that during the last five years, revenue growth rate decreased to 8.7 percent, due to a weak demand in the economy.
Meanwhile, the expenditure side of the government is increasing. The expectations of the people are increasing. To fulfill these expectations, the government is formulating a large deficit budget with around seven percent of the GDP. The expenditure of the budget has mainly three components: recurrent expenditure, capital expenditure and financial provision. In the last 10 years, the ratio of these components was 66.8 percent, 19 percent and 14.2 percent, respectively. In the previous FY (2025-26), the ratios of recurrent expenditure, capital expenditure and financial provision was 63.2 percent, 19 percent and 22 percent. These data indicate that the ratios of financial provision as well as recurrent expenditure are increasing while the capital expenditure, which is directly related to the general public, marginal people in particular, is decreasing.
Debt management is emerging as a critical concern. A decade ago, the ratio of public debt with GDP was 22 percent; now it’s around 47 percent. In the previous fiscal year, 35 percent of total revenue collection and 24 percent of budget expedite have been used for debt servicing. For the current fiscal year, 21 percent of the budget is allocated to it. The ratio of capital budget is decreasing per year. Some amount of fiscal transfer provided by the federal government for provincial and local governments under recurrent expenditure is capital in nature.
All this shows that the burden of public debt in Nepal is growing at an alarming rate. Social security expenses, which fall under recurrent expenditure, are also increasing the burden on the government. Over the last 10 years, the proportion of people covered by government social security schemes has increased from 7.8 percent to 12.4 percent, while government expenditure on social security has risen from 8.7 percent to 16.2 percent of the total budget.
Trends in neighboring countries
The Indian budget consists of two parts: Revenue budget and capital budget. Revenue budget comprises revenue receipts and revenue expenditure. Revenue receipts, which consists of income that is not payable, comes under two heads: tax and non-tax revenue. The ratio of revenue to GDP is around 12 percent. Day to day current expenditure comes in revenue expenditure head. Salaries, interest payments on debt, and grants to the states are included under revenue expenditure. The other parts of the Indian budget is the Capital budget also divided in two parts: Capital recipients and Capital expenditure.
Capital receipts create liabilities such as borrowing. Revenue expenditure creates assets and reduces liabilities. Investment in infrastructure like roads, railways, hospitals are allocated in these heads. The ratio of Revenue expenditure was 2.9 percent with GDP in 2021-22 found 3.1 percent in 2025-26 allocated amount being around double within five years. The public debt ratio was 61 percent in improving order and in 2025-26 reached 56.1 percent and targeted to reduce it by around 50 percent up to 2030. The ratio of revenue deficit was 6.7 percent reduced to 4.4 percent in 2025-26.
The government policy focuses on reducing the fiscal deficit, maintaining debt sustainability, and increasing productive infrastructure expenditure for the smooth functioning of social activities. Bangladesh is one of the countries in the world with the lowest revenue-to-GDP ratio, which is below 10 percent. However, the public debt-to-GDP ratio in Bangladesh is around 32 percent, which was 28 percent in 2020. Capital expenditure accounts for around 42 percent of the national budget and about six percent of GDP. Due to a narrow tax base, a large informal economy, tax evasion, weak enforcement, administrative inefficiency, and extensive tax exemptions, revenue mobilization in Bangladesh remains weak.
Pakistan is also a low-revenue country, with a revenue-to-GDP ratio of around 11 percent. It is a heavily indebted country. During the Covid-19 period (2020–21), the debt-to-GDP ratio reached about 87 percent, and it has remained around 80 percent in the post-covid period. The Pakistani economy faces similar challenges to Bangladesh. Around 50–60 percent of government revenue is used for debt servicing. In Pakistan, only about 1–2 percent of GDP and nearly seven percent of the total budget is allocated to capital expenditure
Way forward
Revenue collection in Nepal is higher than the world standard threshold of 15 percent of GDP. However, with around 40 percent of the economy being informal and nearly 60 percent of taxpayers being non-filers, there is significant potential to mobilize additional revenue by improving the efficiency and competency of revenue administration. A decreasing proportion of capital expenditure and an increasing burden of debt servicing is a serious concern. Similarly, government expenditure on social security is also increasing rapidly, creating a significant burden on the government. Public debt is in an alarming condition, having more than doubled within the last 10 years.
As public expectations continue to rise, the government’s fiscal space is narrowing and becoming more constrained. Therefore, the only viable option is to improve administrative efficiency by increasing taxpayer compliance and gradually formalizing the informal economy. As Nepal is graduating from LDC status after November this year, the cost of external borrowing will surge. Therefore, external assistance should be used only in productive sectors based on proper cost-benefit analysis. Fiscal discipline must be maintained by reducing recurrent expenditure, properly managing social security costs, and lowering the fiscal deficit while increasing capital expenditure. Both internal and external borrowing should be limited to feasible and productive projects only.
