Nepal - Joint World Bank-IMF Debt Sustainability Analysis

Overview & Synopsis

Both external and overall public debt in Nepal are assessed to be at low risk of debt distress, unchanged from last year’s Debt Sustainability Analysis (DSA).1 While the present value (PV) of the external debt-to-exports ratio breaches the indicative threshold under a combined shock scenario—mechanically suggesting a moderate risk rating—staff judgment is applied, as in the previous DSA, to override the mechanical signal given Nepal’s exceptionally high remittances inflows. Remittances, which amount to more than three times the value of exports, constitute the primary source of foreign exchange earnings and render the debt-to-exports ratio a less relevant indicator of debt distress in Nepal’s case. Together with predominantly concessional external financing, they support the country to maintain an adequate level of reserves and meet its debt obligations despite a sizeable trade deficit. All other external and public debt risk indicators remain below their respective indicative thresholds across all stress-tests. Public debt stood at 48.1 percent of GDP in FY2024/25, lower than projected in last year’s DSA. This better-than-expected outcome reflects primary expenditure control, and an improvement in the negative Treasury Single Account (TSA) balance, despite an increase in the net acquisition of financial assets. Looking ahead, public debt is projected to peak at 49.6 percent of GDP in FY2025/26 before gradually declining over the medium term. This trajectory is predicated on sustained fiscal consolidation—as envisaged under the ECF-supported program and reaffirmed in the FY2025/26 budget—including reforms to mobilize domestic revenue. Structural reforms will also be essential to support debt sustainability over the medium term. These include measures to diversify exports, enhance productivity and competitiveness, and strengthen resilience to shocks, particularly those related to natural disasters..