Nepal is registered by the UN as one of the world’s least developed countries, and Nepal’s economy is heavily reliant on factors such as remittances and donor funding. While the country has made substantial progress with reducing poverty, wealth inequality is a growing problem, and according to a newly released Living Standards Survey for Nepal, approximately 20 per cent of the population is still living in poverty.
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Nepal’s external public debt remained quite stable in absolute terms from 2000 up to 2016, meaning that, with economic growth, the debt to GDP ratio decreased substantially from over 50 per cent in 2003 to 25 per cent in 2016. However, since 2016, the country has seen a steep increase in external debt, mainly debt to multilateral institutions. The debt to GDP ratio again hit a historic high at 41.38 per cent of GDP in 2020 (of which 21.64% was external debt). In 2023, public debt to GDP was at 47 per cent and IMF projections indicate that it will remain above that threshold at least for the next three fiscal years. This is an increase of around 25 points in the less than 10 years that have passed since the destructive 7.8 magnitude earthquake in 2015.
The 2015 earthquake in Nepal left almost 9,000 people dead, destroyed 800,000 homes and cost an estimated US$10 billion. More than 1,000 health facilities and 5,000 schools were turned to rubble. At the time, Nepal’s foreign debt stood at US$3.65 billion. Civil society organisations in Asia and globally called for the cancellation of Nepal’s debt. However, the IMF refused to even extend debt relief because Nepal did not meet the criteria that at least one-third of the country’s population and 25 per cent of productive capacity had been impacted. The country’s reconstruction was financed through more loans, not just in the public sphere but also in the private. In Nepal’s worst affected areas, up to 75 per cent of the citizens who rebuilt their homes without public support relied on private or informal loans, in some cases being charged up to 43 per cent interest.
The growing external debt in Nepal increased even more in the wake of the 2020 Covid-19 pandemic, as a result of the country’s dependence on tourism and workers’ remittances from abroad. Both sectors represented 26.8 per cent of the country’s GDP in 2020 and the IMF estimated at the time that both sources of hard currency would be likely to decline by an equivalent of 7.2 per cent of GDP. As a consequence, the domestic economy and public finances were seriously damaged. The increase in Nepal’s debt has been through both external and domestic borrowing, but increasingly it is relying on domestic financing, which tends to be more expensive. In the fiscal year 2022-2023, domestic debt was 52 per cent of total public debt. The IMF projections situate domestic debt at 60 per cent of total public debt already by 2025/2026.
Against this backdrop, the multilateral response has been insufficient. Nepal participated in the G20 DSSI, allowing the country to defer only US$12.6 million in bilateral debt payments in 2020. This was less than five per cent of the country’s external debt payments that year and only one-third of bilateral debt payments. Furthermore, with multilateral institutions holding the majority of debt from Nepal, and multilateral development banks and the IMF not being required to participate in the DSSI, the Common Framework or other debt relief initiatives, Nepal has come up against brick walls in relation to most of its debt, so the multilateral response has been inadequate.
In the fiscal year 2020-2021, the tax revenue of Nepal amounted to around 20 per cent of GDP, which was an increase compared to previous years.
A VAT was introduced in 1997. In 2007, it was increased from 10 to 13 per cent, and it has since remained at that level. During the last few years, this tax has, according to the Ministry of Finance, accounted for roughly 24 per cent of the total tax and non-tax revenue of Nepal (and around 26 to 27% of the total tax revenue).
Nepal has not joined the OECD’s Inclusive Framework, including the negotiations around taxation and the digitalised economy (Pillar 1). This also means that Nepal has not endorsed the OECD rules that ban digital services taxes. Instead, Nepal is one of 12 countries worldwide that has an active implemented DST. Since the tax was introduced in July 2022, there is not yet any official revenue data available.
In the report State of Tax Justice 2023, Tax Justice Network has estimated that cross-border tax abuse is costing Nepal a total of US$8.8 million annually, corresponding to over 1.8 per cent of the country’s health expenditures. Of this loss, it is estimated that US$0.4 million stems from corporate tax abuse and the remaining US$8.4 million from offshore wealth.
