The Government of Nepal has announced a private sector-friendly budget for the fiscal year 2025/26, starting mid-July, with a strong focus on economic reform and investment promotion.

Presented by Deputy Prime Minister and Finance Minister Bishnu Paudel before a joint session of the Federal Parliament on May 29, the Rs 1.964 trillion budget prioritizes economic revitalization through private sector participation and legal and institutional reforms.

The financial plan integrates several key recommendations from the High-Level Economic Reform Advisory Commission, chaired by former Finance Secretary Rameshore Khanal which included private sector stakeholders.

The financial plan, while refraining from populist slogans and extravagant promises, is 5.6% larger than the current fiscal year's and 18.2% higher than the revised estimate through a mid-year review in February.

Of the total allocation, Rs 1.18 trillion (60.1%) is designated for recurrent expenditure, Rs 407.89 billion (20.8%) for capital spending, and Rs 375.24 billion (19.1%) for financial management. The government plans to raise Rs 1.315 trillion in revenue, expects Rs 53.45 billion in foreign grants, and borrow Rs 233.66 billion from external sources and Rs 362 billion domestically. Compared to the current fiscal year, capital spending has increased modestly, while the share for recurrent expenses has slightly declined.

The budget has been widely welcomed by the private sector, which has long demanded reforms to ease doing business and attract investment. Chandra Dhakal, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said that the budget reflects most of the private sector’s key proposals. Nepal Chamber of Commerce President Kamlesh Kumar Agrawal also expressed support for the budget, emphasizing the need for a complementary monetary policy to align with its objectives.

Among the most groundbreaking provisions is a new policy that permits Nepali citizens to invest abroad—an unprecedented move in line with recommendations from the Khanal Commission. Additional measures include the removal of advance income tax at customs points, a pledge to enact a trade credit law, plans to establish an asset management company, streamlined access to industrial land, and reduced bureaucratic hurdles for non-customs-point goods testing. Despite these positive steps, Khanal expressed disappointment over the government’s omission of the commission’s proposal to publicly fund political parties, arguing that such a move could help curb crony capitalism and improve transparency.

The budget comes at a critical time, with Nepal placed on the Financial Action Task Force (FATF) grey list in February for the second time due to deficiencies in its anti-money laundering (AML) and counter-terrorism financing (CFT) frameworks. FATF has called on Nepal to urgently address seven key areas. The country faces risks of being blacklisted should progress stall. The classification increases the urgency for financial governance reforms and stricter oversight of financial transactions.

Despite higher capital allocations, Nepal has historically underperformed in capital expenditure execution, and private sector investment has stagnated. The Economic Survey released just before the budget noted that gross fixed capital formation has declined to 24.07% of GDP, down from 28.73% a decade ago. The private sector’s share in this investment is also projected to shrink further. In response, Finance Minister Paudel pledged to advance legal, procedural, and policy changes to position the private sector as the primary engine of economic growth.

However, the budget has drawn criticism for neglecting the salaried workforce. Many had hoped for an increase in the income tax exemption threshold, unchanged since FY 2022/23. The private sector had proposed raising the individual exemption to Rs 800,000, up from the current Rs 500,000 for individuals and Rs 600,000 for couples. The government, however, chose to maintain the existing limits.

The Khanal Commission has concluded that weak aggregate demand was a key reason for Nepal’s sluggish economic performance. Raising income tax exemption brackets would have left more disposable income in people’s hands, thereby stimulating market demand. “There was a strong case for increasing the exemption limit, but the government ignored it," said FNCCI Treasurer Bharatraj Acharya. “Fiscal constraints might have barred it from making a change.”

In another cost-containment measure, the government raised the eligibility age for the senior citizen allowance from 68 to 70 years, citing the need to manage growing fiscal obligations. However, vulnerable groups, including Dalits and seniors in remote areas, will continue to receive the elderly benefits at existing conditions. They are eligible for Rs 2,660 monthly allowance from the age of 60.

Meanwhile, civil servant salaries were left unchanged, though the monthly dearness allowance was increased by Rs 3,000 to Rs 5,000. Salaries were last increased by 15% in FY 2022/23. According to Khanal, holding off on permanent salary hikes was a prudent decision, given Nepal’s strained fiscal position.

Despite previous underperformance in revenue collection, the budget sets an ambitious target of over Rs 1.3 trillion in revenue for the upcoming fiscal year. It also expects a higher volume of foreign grants, despite global cutbacks by key donors such as the United States. Both domestic and external borrowing targets have been increased. Bharatraj Acharya noted that the government could have pursued more aggressive external borrowing to finance development spending, suggesting a more expansionary fiscal stance would have been preferable.

In a widely speculated area, the government decided not to raise customs duties on electric vehicles (EVs), despite rumors of an impending hike. The speculation had triggered a spike in EV imports in recent weeks, as importers rushed to beat possible tax increases.

The budget also introduces several policy measures, such as tax incentives for the IT sector, plans to offload additional Nepal Telecom shares to the public, and reforms in public school teacher management. Dipendra Chaulagain, Director at the Samriddhi Foundation, a think tank, welcomed these initiatives, calling them steps in the right direction.

The government has set a 6% economic growth target for FY 2025/26. Former Finance Secretary Khanal believes the goal is realistic, provided that the budget is executed effectively and the planned reforms are implemented with urgency and discipline.

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