Capital spending continues to challenge government

Gen Z protest, petroleum price hike blamed

 

Kathmandu, July 4

The current Fiscal Year 2025/26 witnessed disastrous moments with demonstrators burning down national heritages and private sector establishments during the Gen Z movement in September last year. Death of 76 people and political confusion caused a panic among the public while investors postponed or cancelled their business ventures. Economic prospects plummeted. Hopes for prosperity vanished.

However, despite doubts, fears and conspiracy theories, the country successfully held the general elections within the announced time and people felt the country has now been brought on track. Public opinion changed, so did the government.

The year saw three finance ministers – Bishnu Prasad Paudel, Rameshore Prasad Khanal and Dr. Swarnim Wagle. Paudel was the political architect of the CPN-UML, albeit without any experience or expertise in the sector, while Khanal was a technocrat with an expertise in economic affairs, and Dr. Wagle is an internationally known economist who had worked with the World Bank, UNDP and National Planning Commission of Nepal, among others.

Although Paudel was ousted by the movement within two months of this fiscal and the economy was managed by two senior economists – Khanal and Dr. Wagle, budget mobilization remained pathetic with capital spending remaining the lowest in the recent times.

According to the statistics from the Financial Comptroller General Office (FCGO), the government could mobilise only Rs. 146.7 billion of the Rs. 407.88 billion capital allocation by Thursday, July 2. This is just 35.97 per cent of the total allocation.

Economist Dr. Dilli Raj Khanal said that this is collective failure of the government and leaders. "It is disheartening to see the government fail to bring about programmes and measures to boost economic activities and morale of the investors and consumers," he said.

Dr. Khanal maintained that the aftermath of economic crisis demands both short-term and long-term measures to revitalise the economic and business activities which both the transition and current majority government failed to implement.

However, spending has significantly gone up recently, with the government mobilising Rs. 19.7 billion on Thursday and Rs. 8.7 billion on Wednesday. Even if the government continued this spending spree for the remaining days of the fiscal year, total spending is likely to remain around 80 per cent while the development expenditure could be lower than 45 per cent.

However, the Ministry of Finance (MoF) maintained that a few large payments to the contractors and other liabilities could increase this spending up to 50 per cent. For instance, development expenditure on Wednesday was Rs. 1.15 billion and on Thursday Rs. 1.48 billion.

Although, two weeks remain before the conclusion of this year, the government could disburse the payments only up to July 9, as provisioned by the Economic Procedures and Fiscal Accountability Act and bylaws. After that the payment systems like Financial Treasury Controllers Offices and online payment channels freeze.

 

A trend in failure

While the MoF officials cited Gen Z movement for the disturbances in budget mobilisation, statistics show that it is not the one-time failure but has become a trend. During the same period, with two weeks of the year remaining, in FY 2024/25, about 75 per cent budget was mobilised while the capital expenditure stood at 46.6 per cent (Rs. 164.15 billion of Rs. 352.35 billion).

But total capital expenditure reached 81 per cent by the end of the FY 2024/25 which supports the claims of the Finance Ministry that such spending can reach 50 per cent.

In 2023/24, Rs. 146.7 billion (48.57 per cent) of Rs. 302 billion could be mobilised during the corresponding period while such expenditure was 44.82 per cent (Rs. 170.5 billion of Rs. 380.38 billion). In 2020/21, the year when the COVID-19 hit hard the lives and economy, capital expenditure remained around 46 per cent during the same period.

Meanwhile, recurrent expenditures have remained identical (70 to 74 per cent) in the past five fiscal years.

Likewise, budget revision has also become a trend in the past several years with every finance minister downsizing their budget during the mid-term review. Finance Minister Khanal couldn't remain exception. He slashed the annual budget target to 85.96 per cent or Rs. 1688.3 billion from Rs. 1964.1 billion.

Minister Khanal had presented the unusual situation created by the Gen Z movement, and the Cabinet's decision to reprioritise projects, as well as austerity measures to reduce expenditures as the reasons for budget downsizing. The government also said that it had to manage funds for the general elections and relief to the families of those injured and killed in the protests from the existing framework. 

By mid-January this year, only 12 per cent of the budget earmarked for development works was utilised.

 

Reforms impact spending

The transitional government led by Prime Minister Sushila Karki suspended small projects worth Rs. 119.5 billion because they were unprepared and unproductive.

Then Energy Minister Kulman Ghishing scrapped 58 non-performing and sick construction contracts from 312 such projects.

FM Khanal said then that the government's priority was to enhance 'expenditure efficiency' and 'execution efficiency' in public finance management so the government wanted to reallocate resources to transformative and strategic projects. This reform move reduced the mobilisation of the fund and caused a brief panic in the construction industry.

Meanwhile, the soaring prices of petroleum products including diesel and bitumen, and steel forced the contractors to pause the construction of the public projects. According to the Federation of Contractors Association of Nepal (FCAN), petroleum products' price increase pushed the project cost by 30 to 40 per cent, making it impossible for the contractors to continue with the previously agreed amount.

Spokesperson of the MoF Amrit Lamsal said that the surging price of the petroleum products significantly impacted the development projects. "Several government offices including that of the local governments were damaged during the Gen Z movement which obstructed or delayed the implementation of development works," he said.

Similarly, during the period of the transition government, the focus of the entire government and its agencies was on holding the elections successfully, according to Lamsal. But he maintained that the authority given to the line ministries for budget transfer without coming to the Finance Ministry for approval couldn't prove effective due to the obstacles created by the soaring fuel prices.

Economists say that the entire mechanism for budget mobilisation needs an overhaul. Responding to this recommendation, FM Dr. Wagle had further simplified the budget disbursement process and said that from the first day of the FY 2026/27, line ministries can initiate the development works and they don't need additional approval from the Finance Ministry for it.

Revenue collection on track

The government revenue collection has hovered around 75-76 per cent, until July 2, this year and previous year. Targets for this is Rs. 1480 billion while it was Rs. 1419.3 billion for last year.

So far, Rs. 1128.2 billion revenue is collected which includes Rs. 1024.4 billion tax revenue and Rs. 103.8 billion non-tax revenue.

While revenue collection remained somewhat satisfactory, government could never meet the targets set for the grants. This year the achievement has remained at 11.87 per cent of Rs. 53 billion while it was 38.11 per cent (highest in the past five years) of Rs. 52.3 billion. In 2022 and 2023, realisation of the targets for grants remained below 10 per cent.

Meanwhile, the provincial governments have also failed to meet their revenue and expenditure targets. By mid-May 2026, seven provincial governments could spend Rs. 88.53 billion and mobilised revenue of Rs. 163.74 billion.

According to the statistics published by the Nepal Rastra Bank, the total resource mobilisation of provincial governments, by mid-May, including grants and revenue transferred from the federal government, amounted to Rs. 122.25 billlion, and province revenue and other receipts amounted to Rs. 41.42 billion.

The seven provinces' cumulative budget for this fiscal is Rs. 287 billion. 

Published in The Rising Nepal daily on 5 July 2026.