Implications of NPL to the budget
Nepal’s FY 2082-83 budget outlines a theoretically-backed comprehensive growth strategy aiming for a 4.6 percent GDP expansion through substantial agricultural modernization (Rs 47.84bn), land reforms and fiscal decentralization (Rs 452.83bn). However, despite its ambitious design, the budget’s potential effectiveness is fundamentally undermined by systemic governance and government failures, and deeply rooted political constraints. While it superficially aligns with the 16th five-year plan’s objectives of institutional strengthening and structural transformation, its implementation faces critical obstacles. These include a persistent planning to implementation gap, exacerbated by the Finance Ministry’s heavily-politicized entity of fiscal authority; chronic infrastructure deficits, with irrigation coverage only at 35 percent and 30 percent of rural roads inadequate; and entrenched institutional inefficiencies reflected in low capital expenditure utilization rates (3.36 percent of GDP, Rs 192.03bn) alongside severe agricultural non-performing loans (NPLs) estimated at 20 percent.
The budget regrettably fails to confront the root causes of Nepal’s developmental stagnation particularly the deeply-embedded political patronage networks and pervasive bureaucratic corruption, as reflected in Nepal’s low ranking (108/180) on the Transparency International Corruption Perceptions Index. Instead, it offers primarily rhetorical commitments to address these chronic national challenges and to adopt international best practices. Without instituting genuine depoliticization on economic governance and addressing structural bottlenecks through governance reforms rather than pity administrative adjustments, these budgetary ambitions are likely to again add on another story of Nepal’s long history of unimplemented development plans, perpetuating a cycle of ambitious policy making followed by underwhelming execution. Ultimately, the budget represents a missed opportunity for transformative change, prioritizing political appeasement over the rigorous institutional reforms necessary to break Nepal’s persistent low-growth equilibrium.
The NPL challenge
Nepal’s aspiration to attain middle-income status by 2026 appears increasingly precarious given its deeply rooted structural imbalances not by finance or investments. The economy remains service dominated over production or processing, contributing 62.01 percent of GDP, yet its agricultural sector responsible for 61 percent of employment only accounts for 25.16 percent of GDP, reflecting low productivity and underinvestment. This skewed sectoral composition exacerbates Nepal’s external vulnerabilities, including a heavy reliance on remittances (25.82 percent of GDP, Rs 1051.77bn) and a persistent trade deficit (91.6 percent for a 11-year average) of comparable magnitude. The budget utterly failed to address this magnitude. This severity is neither properly understood by budget formulated groups nor political leaders.
Furthermore, Nepal’s growth model is fundamentally compromised by severe credit misallocation: a mere 7.7 percent of bank lending reaches on agriculture, which suffers from debilitating infrastructure gaps (35 percent irrigation coverage, 30 percent deficient rural roads) and institutional weaknesses manifesting in chronic non-performing loans (NPLs) estimated at 20 percent within the sector. These structural inefficiencies reinforce a vicious cycle reminiscent of Stiglitz-Weiss credit rationing dynamics, where productive sectors face systematic financial exclusion due to high perceived risks and weak governance, further entrenching underdevelopment. Comparative evidence from Rwanda, Vietnam and Bangladesh offers valuable insights into viable pathways for reform through targeted credit policies and institutional modernization. However, Nepal’s middle-income ambitions will remain elusive without first addressing its foundational governance pathologies and overcoming the political economic constraints that perpetuate these systemic inefficiencies.
Comparative lessons
The remarkable economic transformations of Rwanda, Vietnam and Bangladesh exemplify how resource-constrained developing countries can achieve rapid development by implementing integrated strategies combining depoliticized institutional reforms, strategic infrastructure investment and financial sector modernization.
Rwanda’s post-conflict recovery is particularly instructive. It has sustained average GDP growth rates of approximately seven percent, achieved through targeted infrastructure spending up to eight percent of GDP and successfully reduced NPLs from around 10 percent to three percent. Rwanda’s progress illustrates how coordinated government commitment to institutional credibility, anti-corruption efforts and digital financial oversight can create a virtuous cycle promoting economic growth and stability.
Vietnam’s Đổi Mới reforms represent another successful model, driving a sixfold increase in GDP per capita over three decades. Vietnam’s concerted industrialization efforts, supported by infrastructure expansion and prudent fiscal policies, saw a dramatic reduction in NPLs from 15 percent in the 1990s to about two percent today. The Vietnamese experience underscores the importance of bureaucratic streamlining and political commitment to policy consistency in sustaining long-term growth.
Bangladesh, despite geographic and infrastructural constraints, has maintained resilient economic growth averaging 6.6 percent annually. Its development trajectory features innovative financial sector reforms, including widespread microfinance integration, which helped reduce NPLs from eight percent to five percent. The construction of landmark infrastructure projects like the Padma bridge exemplifies Bangladesh’s strategic investments to improve connectivity and boost productivity, which, together with anti-corruption measures, have fortified institutional credibility.
These cases collectively reveal that successful development hinges on creating virtuous cycles that link institutional credibility manifested in robust anti-corruption policies and administrative streamlining—to productivity-enhancing infrastructure (achieving electrification and road coverage rates of 80 to 90 percent) and financial system health through digital monitoring and asset management. Most importantly, curbing political interference is essential for ensuring long-term policy consistency. While these nations now face new challenges in sustaining growth through complex environmental and social dimensions, their experiences offer critical lessons for Nepal’s development strategy.
Lessons for Nepal
Nepal’s fiscal policy for 2025-26 presents an ambitious but potentially constrained reform agenda seeking to address systemic economic challenges through multi-sectoral interventions. However, its effectiveness remains questionable given the country’s deeply embedded structural frailties. Nepal’s banking and financial institutions (BFIs) continue to exhibit fundamentally-flawed lending practices characterized by poor risk assessment, negligent due diligence and inadequate implementation of BASEL risk management frameworks. To address these deficiencies, Nepal Rastra Bank must adopt a more assertive regulatory stance, enforcing stricter supervisory frameworks and institutionalizing risk-based lending standards across the sectors. This would entail a proactive posture including regular stress testing, the establishment and robust use of credit registries, and deployment of digital compliance and monitoring tools, all essential to restoring financial discipline and reducing systemic risk. NRB could implement Likert framework to designate BFIs based on their performance especially NPLs mitigation.
A persistent problem is the systemic conflation of institutional promoters with entrepreneurs, which has fostered perverse incentives that prioritize patronage networks over genuinely creditworthy borrowers. This dynamic artificially inflates non-performing loans across the banking sector, distorting the credit allocation process. Politically-connected insiders continue to receive preferential access to credit, while legitimate entrepreneurs are marginalized. This misallocation has contributed to the dangerous accumulation of non-performing assets, threatening the stability and integrity of the financial sector. Furthermore, the absence of clear governance boundaries between BFIs’ ownership, management and entrepreneurs has institutionalized reckless lending behavior, with credit risk analysis routinely subordinated to personal and political considerations in decision-making processes.
The budget references policy initiatives inspired by international models such as Bangladesh inspired asset management firms for NPL resolution (budget point 323), Rwanda-modeled infrastructure public-private partnerships targeting 5-8 percent of GDP allocation and Vietnam-style bureaucratic streamlining aiming to boost growth via agri-forestry and tourism sectors. However, these theoretically sound measures confront Nepal’s unique implementation barriers, including chronic government instability (14 governments since 2008), a dysfunctional federal system and pervasive governance failures that have historically undermined reform efficacy.
Despite allocating Rs 57.84bn to agriculture, theoretically sound through Lewis and Ricardian frameworks that operational failures persist: 20 percent NPLs, 35 percent irrigation coverage, 30 percent poor rural roads, 20 to 30 percent subsidy leakage and understaffed extension services. This dysfunction leaves the sector underfinanced and development goals unmet. The budget ignores how unresolved NPLs deter private investment, undermining its own targets, with neither MoF nor NRB addressing this chronic flaw. While Rwanda’s digital finance, Bangladesh’s microfinance/rural finance and Vietnam’s rural electrification offer solutions, Nepal’s political economy and weak federal execution hinder these replications.
Broader reforms aimed at trade deficit reduction, FATF compliance and land digitization face similar risks of being undermined by systemic corruption (CPI rank 108/180), bureaucratic apathy (approval delays extending from 6 to 12 months) and technological underdevelopment (with only 10 percent LiDAR coverage). While the overall policy framework demonstrates adequate technical design informed by international best practices, Nepal’s aspirations for sustained growth will likely remain unrealized without first addressing fundamental governance pathologies and curtailing rampant political influence that advance the very structural constraints these reforms seek to overcome.
