Halfway through fiscal year 2025/26, the government has been compelled to confront an uncomfortable reality: ambitious plans announced at the beginning of the year are no longer financially or administratively feasible.
The mid-term review of the fiscal budget reflects a series of downward revisions on spending, growth projections, and revenue targets. This highlights the persistent structural weaknesses of Nepal’s public finance management.
Budget size trimmed by Rs 275bn
The finance ministry has trimmed the budget for the current fiscal year by 14.04 percent. Then Finance Minister Bishnu Prasad Paudel had brought a budget of Rs 1,964.11bn in mid-May last year. However, with revenue shortfalls and sluggish expenditure performance, the government has now slashed the allocation by Rs 275.78bn, bringing the revised budget size down to Rs 1,688.32bn.
The reduction is a tacit admission that the government overestimated both its ability to mobilize resources and its capacity to spend effectively. Despite the cut, Minister for Finance Rameshore Prasad Khanal insisted that the budget has not technically been reduced. “The budget remains Rs 1,964bn. If any government body can spend that amount, the originally estimated resources will be made available,” he argued.
He, however, pointed to the Rs 130bn deficit in the government treasury as the reason for tighter controls.
Chronic problem of slow capital spending
One of the most worrying indicators in the mid-term review is the dismal performance of capital expenditure. As of Feb 10, only 14.98 percent of the capital budget had been spent. This is an alarmingly low figure for a country desperate for infrastructure development.
The government had originally allocated Rs 407.88bn for development projects. This allocation has now been reduced by 40.35 percent to Rs 243.30bn by suspending funding for projects deemed unprepared or unproductive.
The mid-term review has identified lack of project preparedness, difficulties in land acquisition, complications related to forest clearance, and damage caused to infrastructure during the GenZ protests of Sept 8 and 9 as the reasons behind slow capital expenditure.
The cabinet had frozen most of the Rs 119.53bn allocated to projects lacking adequate groundwork, the Cabinet has frozen most of the funds. However, Rs 42.28bn has been released following justification from concerned ministries.
Growth target slashed to 3.5 percent
The government had set an ambitious six percent economic growth target for the current fiscal year.. The mid-term review has now revised that estimate sharply downward to 3.5 percent.
The downgrade reflects weak performance in agriculture and construction, sluggish real estate transactions, and disruptions caused by social unrest. According to the review report, a decline in paddy production, reduced cultivated area, and lower productivity have dragged down the agricultural sector, while construction activity has remained subdued.
Even the revised 3.5 percent target remains more optimistic than external projections. The World Bank has forecast Nepal’s growth at just 2.1 percent for this fiscal year, citing political uncertainty and economic disruptions. Economic growth in the previous fiscal year has been estimated at 4.6 percent.
Slow spending by development ministries
The very ministries entrusted with driving development have performed the worst over the first half of the current fiscal year.
According to the mid-term review report, the Ministry of Urban Development has utilized only 6.31 percent of Rs 91.35bn allocated to it. The Ministry of Physical Infrastructure and Transport fared comparatively better, spending 18.12 percent of the total allocation of Rs 153bn. The Ministry of Energy, Water Resources and Irrigation also managed to spend only 16.56 percent of the allocated Rs 42.77bn.
In contrast, non-development ministries have fared better. The Ministry of Foreign Affairs has already spent 55.8 percent of its budget, while the Ministry of Finance itself has spent 35.54 percent.
Revenue collection falls short
Revenue mobilization has also been weaker than expected. By mid-January, only 81.75 percent of the targeted revenue had been collected. The government could mobilize only Rs 581.4bn out of the targeted Rs 711.20bn in the six-month period. Although revenue is 2.47 percent higher than last year, it remains far below the required level.
Import growth of 17.36 percent has not translated into proportional customs revenue, which rose by only 8.48 percent. The finance ministry has attributed this to increased imports of low-tax goods, ineffective border control, and weak market monitoring.
Lower interest rates have reduced income tax collections, while sluggish real estate and stock market activity has hit capital gains tax. The tourism sector has also underperformed, partly due to the September unrest. Citing these reasons, the government has revised down revenue target from Rs 1,480bn to Rs 1,298bn.
