The Rastriya Swatantra Party (RSP)-led government has presented a national budget of Rs 2.124trn for the fiscal year 2026/27. The fiscal plan allocates 51.08 percent to recurrent expenditure, 29.28 percent to capital expenditure, and 19.67 percent to financing. Compared to the previous fiscal year, the budget has increased by 7.03 percent, reflecting a blend of ambition and caution.
Prepared in line with the RSP's citizen contract, its “100 Points Governance Improvement” agenda, and the party’s position paper, the budget has drawn mixed reactions. While the position paper was widely praised for its intellectual rigor, the budget itself has received both support and criticism.
Finance Minister Swarnim Wagle’s consultations with former finance ministers appear to have encouraged several bold policy measures, which many view as an attempt to address Nepal’s deep-rooted structural weaknesses. Yet concerns have also emerged. Sapana Aryal, a development practitioner and homemaker, criticized the tax imposed on electricity consumption above 50 units, arguing that it discourages energy use, raises household bills, and undermines affordability. She noted that the Nepal Electricity Authority's service charges often finance staff allowances and facilities rather than improvements in power distribution, thereby penalizing consumers and discouraging productive energy use.
Critics have also pointed to inconsistencies in public investment priorities, noting that expected returns in the social, economic, environmental, and governance sectors have not been clearly articulated. The government's target of achieving seven percent GDP growth has been described as unrealistic. Although total expenditure has risen by 8.16 percent to Rs 1.602trn, ambitious commitments to technology and infrastructure continue to face challenges related to revenue generation, project execution, and policy credibility. Rising costs of education, healthcare, and essential consumer goods have also not been adequately addressed. While the 21 percent salary increase for government employees has been welcomed, concerns remain about its potential inflationary impact. Agricultural incentives have likewise been criticized as impractical, with stakeholders calling instead for interest subsidies and stronger financing mechanisms for small and medium enterprises.
Strong positions
The budget presents a bold vision of future-oriented reforms, signaling a shift toward a knowledge-based economy. Technology incentives include a 50 percent tax exemption on IT service exports and a full exemption on sweat equity for technology professionals, measures expected to energize Nepal’s growing IT sector. Equally forward-looking is the proposed establishment of Nepal’s first Sovereign AI Compute Center in Kathmandu, leveraging surplus hydropower to support advanced AI services.
The budget also seeks to strengthen the startup ecosystem by formalizing remote work arrangements and allowing outbound investments. On infrastructure, capital expenditure has increased by 71.5 percent to Rs 431.1bn, with Rs 70bn allocated for transmission lines and substations to support expanded electricity generation. Agriculture receives support through fertilizer subsidies and irrigation projects aimed at addressing supply-side constraints.
For the middle class, relief measures include raising the personal income tax exemption threshold to Rs 1m and granting government employees a 21 percent salary increase after a four-year freeze. These measures are expected to stimulate consumption, reduce incentives for corruption, and reinforce the government's vision of “more governance, less government.” The budget also emphasizes human capital development, allocating Rs 218bn to education and Rs 101bn to health, reaffirming social development as a national priority.
Weak positions
Despite its ambitions, the budget faces significant weaknesses. The most pressing challenge is revenue generation. Even before the budget announcement, Wagle acknowledged a gap of approximately Rs 150bn between projected revenue of Rs 1.18trn and mandatory expenditures of Rs 1.33trn. Tax reductions are likely to widen this gap further.
The budget relies heavily on borrowing, with nearly 31 percent of total resources expected to come from domestic and foreign debt, raising concerns about long-term fiscal sustainability. Equally troubling is Nepal's poor record of capital expenditure absorption.
Ambitious spending plans have frequently remained on paper because of chronic implementation failures. In the fiscal year 2025/26, for example, the capital budget was revised downward from Rs 407.88bn to Rs 243.3bn due to weak implementation. Without substantial improvements in project management, procurement, and execution capacity, the 71.5 percent increase in capital allocation may not translate into tangible infrastructure outcomes.
The budget also rests on highly optimistic growth assumptions. A seven percent GDP growth target is nearly double the estimated 3.85 percent growth rate for the current fiscal year and significantly exceeds Nepal’s decade-long average of 4.2 percent. This optimism contrasts sharply with structural weaknesses such as premature deindustrialization, heavy dependence on remittances, and a trade imbalance in which exports cover only 14.8 percent of imports. These vulnerabilities cast doubt on the country’s ability to achieve robust economic growth or graduate from Least Developed Country (LDC) status on a strong foundation.
SDG dimensions
The budget attempts to align with the Sustainable Development Goals (SDGs), allocating 8.82 percent to poverty reduction, 3.26 percent to zero hunger, 2.27 percent to health, 2.96 percent to education, 1.21 percent to clean water and sanitation, 3.3 percent to clean energy, 3.33 percent to decent work, 8.85 percent to innovation and infrastructure, 6.69 percent to sustainable cities, and only 0.51 percent to climate change adaptation.
This distribution reveals troubling inconsistencies. Despite Nepal’s acute vulnerability to floods, landslides, heat waves, and other climate-related disasters, climate adaptation receives minimal investment. Tourism, agriculture, and forestry, sectors with significant employment potential, also require greater attention, particularly as the country experiences large-scale outmigration of its workforce.
Federalism
The budget provides only limited insight into programs designed to strengthen federalism. Yet federalism is not merely a fiscal arrangement; it is a people-centered governance system that must be aligned with broader political economy dynamics. Grants and fiscal transfers alone cannot ensure effective federalism. Efficient use of public investment and the development of local economic opportunities are equally important.
The budget remains naïve in its treatment of federalism, overlooking Nepal’s inability to retreat from its federal experiment. A robust approach would analyze federalism through political economy and institutional performance. Effective federalism fosters decentralized governance, empowers citizens, promotes innovation, and circumvents bureaucratic bottlenecks. Without effective federalism, the seven percent GDP growth target is unattainable.
In this regard, the budget appears somewhat naïve, overlooking the reality that Nepal cannot retreat from its federal experiment. A stronger approach would assess federalism through the lens of political economy and institutional performance. Effective federalism can foster decentralized governance, empower citizens, encourage innovation, and reduce bureaucratic bottlenecks. Without strengthening federal institutions and local capacities, the government's seven percent GDP growth target is unlikely to be achieved.
Conclusion
This budget is best understood as a high-risk, high-reward policy document. Although opposition parties have raised objections, much of their criticism appears driven by political positioning rather than substantive policy analysis.
Overall, the budget is ambitious and reform-oriented, though not without limitations. It seeks to break from past practices through bold reforms, expanded capital spending, and transformative incentives. If the RSP-led government can effectively absorb the capital budget and successfully implement its technology agenda, Nepal could accelerate economic growth and move closer to becoming a knowledge-based economy.
However, historical weaknesses continue to outweigh the strengths. Nepal’s poor record in revenue mobilization and capital expenditure absorption, combined with highly ambitious targets, risks leaving the country caught between aspiration and reality. Wagle could have more aggressively explored financing options through strategic negotiations with bilateral and multilateral institutions, including restructuring principal and interest payment obligations over a five-year horizon. Such measures might have freed resources for urgently needed capital investments while reducing dependence on additional borrowing.
The budget is thoughtfully prepared, particularly considering the limited time available after the formation of the government. Yet its ultimate success will depend on implementation.
In sum, the fiscal year 2026/27 budget embodies ambition and reformist intent, but its credibility rests on execution. Without effective delivery, it risks becoming another well-intentioned experiment constrained by fiscal realities rather than a transformative pathway toward sustainable growth. This budget demonstrates both courage and optimism in pursuing institutional reform and long-term development. It signals the government’s willingness to confront entrenched weaknesses, but the true test lies in translating fiscal ambition into tangible outcomes.
