The government will be spending more than a quarter of its revenue on repaying domestic and external loans in the next fiscal year. In the budget for the next fiscal year 2023/24, the government has announced to spend as much as Rs 330.55bn in loan repayment which accounts for 26.47 percent of total projected revenue. The government has to repay Rs 221bn in loans in the current fiscal year, as per the revised estimate. With the massive amount allocated for repaying the internal loans, the total budget for repayment of loans has increased substantially. As large amounts of internal loans will be matured in the next fiscal year, the government had to allocate a huge amount for repaying the internal loans. Rs 275.78bn has been allocated for repaying domestic debts which accounts for the repayment of both loan principal and interest amount. The allocated amount is higher than the total internal loans planned to be raised in the next fiscal year. The government has planned to raise Rs 240bn in internal loans in the next fiscal year. According to the Ministry of Finance, the government will spend as much as Rs 93.23bn for repaying the interest on internal loans in the next fiscal year.

In the new budget, as much as Rs 182.55bn has been allocated for repaying the principal loan amounts. Because of the liquidity crunch in the banking system, the government had to pay more interest for raising internal loans in the last two years. Experts caution the government to keep the debt servicing budget under five percent of the revenue collection. “The government's ability to finance important sectors including the health, education, and infrastructure sector will be reduced for requiring a massive amount in debt servicing,” said an economist.

The government started to raise loans on a large scale from internal and external creditors for post-quake reconstruction purposes from FY 2015/16. According to the International Monetary Fund (IMF), following a gradual decline in the early 2010s, and against the background of the country’s transition to fiscal federalism and the need to rebuild after the earthquake of 2015, Nepal’s public debt has risen significantly over the last five years. The country's total debt has increased from 25 percent of GDP in FY 2015/16 to 44 percent in FY 2020/21, with the largest increase in FY 2019/20 after the start of the Covid-19 pandemic. According to the Public Debt Management Office, Nepal’s total outstanding debt as of mid-May stood at Rs 2.15trn, of which Rs 1.08trn is internal debt while Rs 1.07trn is external debt. The latest IMF Debt Sustainability Analysis shows that both external and overall debt remains at low risk of debt distress. “Despite a challenging global environment, developments since the Extended Credit Facility (ECF) request had limited effect on public debt dynamics, as the increase in the current account deficit in FY 2021/22 has been absorbed by a drawdown in reserves rather than accumulation of external debt,” reads an IMF report. IMF has projected Nepal’s debt to peak at 50 percent of GDP in FY 2025/26 and gradually subside afterward.