Nepal Spending Majority of Interest Payments on Domestic Borrowing: IMF Report

While discussions often focus on the risks of foreign debt, a recent report has highlighted the growing burden of domestic debt in Nepal as a significant concern. The Debt Sustainability Analysis Report prepared jointly by the International Monetary Fund (IMF) and the World Bank describes Nepal’s internal debt as showing early signs of risk.

According to the IMF’s latest country report, Nepal may not face an immediate crisis in foreign debt, but the weight of domestic borrowing has risen sharply. Heavy reliance on short term treasury bills, declining revenue, and shrinking foreign grants have forced Nepal to spend a large share of its national revenue on servicing domestic debt compared to regional peers with similar economic status. The report warns this trend poses serious questions for long term stability.

In fiscal year FY 2015/16, domestic debt stood at just 10.1 percent of GDP. By 2024/25, it had surged to 24.4 percent. The doubling of debt over a decade is attributed to post COVID economic recovery measures, weak revenue collection, and borrowing to sustain capital expenditure.

“As a result, domestic liabilities have accumulated rapidly within the banking system, often unnoticed,” the report stated.

Former Finance Secretary Arjun Prasad Pokharel noted that the rising debt burden is concerning, but its use is critical.

“If debt—whether internal or external—is invested in capital formation, it enhances production capacity, builds infrastructure, increases revenue, and strengthens the economy. But if a large share is spent on administrative and recurrent expenses, the burden keeps growing,” he said. He stressed the need for deeper scrutiny of how borrowed resources are deployed.

Revenue Pressure from Interest Payments

The report identified high interest costs and short repayment periods as the main problems with domestic debt. Unlike concessional foreign loans from institutions such as the World Bank and Asian Development Bank, domestic borrowing comes at market rates. In fiscal year 2024/25, 85 percent of Nepal’s total interest payments were for domestic debt alone—equivalent to nearly 1 percent of GDP.

The report noted that taxpayers’ money, which should fund roads, hospitals, and schools, is instead being spent largely on interest to domestic lenders. Although current interest rates range between 3 and 5 percent, the sheer size of borrowing has created repayment pressures.

The government has announced plans to mobilize Rs 410 billion in domestic debt in fiscal year 2026/27, with Rs 245.89 billion earmarked for repayment of principal, leaving only Rs 164.11 billion for net mobilization.

The IMF report further warned that treasury bills, intended for short term financing, have become a long term burden. As of December 2025, treasury bills accounted for 22.5 percent of Nepal’s total domestic debt. Because these instruments mature quickly, the government is compelled to issue new debt to repay old obligations, creating a cycle of borrowing and renewal.

Government’s Position

Mohan Singh Basnet, Under Secretary at the Public Debt Management Office, said domestic debt is currently being raised at relatively low interest rates. “In the past, rates reached 7 to 9 percent. Now, the government is borrowing at around 3 to 4 percent on average. From a debt servicing perspective, the situation is cheaper than before,” he explained. He added that securing long term loans at low rates could benefit the government, as future rate hikes would not affect existing commitments.

However, the report pointed out that while Nepal borrows expensively from domestic banks, billions of rupees in concessional foreign loans and grants remain underutilized due to administrative delays and slow project implementation.

The IMF has advised Nepal to immediately implement a Medium Term Debt Strategy (MTDS), replacing short term treasury bills with long term development bonds of 3 to 11 years. It also stressed that greater use of concessional foreign loans is essential to ease the current debt burden.