Mid-Term Budget Review: Government Expects to Spend Only 60% of Capital Budget

The government expects to spend only about 60 percent of the capital budget allocated for the current fiscal year (2025/26), according to the mid-year review of budget unveiled by the Ministry of Finance on Tuesday.

The ministry estimates that capital expenditure will reach just 59.65 percent of the initial allocation by the end of the fiscal year.

The government allocated Rs 407.88 billion under the capital heading for the current fiscal year. In the first six months, it spent Rs 49.42 billion. Based on current spending trends and projected disbursements for the remaining months, the ministry now expects total capital spending to reach Rs 243.30 billion.

Data from the Office of the Financial Comptroller General show that capital spending fell below 60 percent in Fiscal Year 2022/23, when the government spent only 57.6 percent of the capital budget as the economy was recovering from the Covid-19 pandemic.

Reasons Behind Low Capital Spending

Finance Minister Rameshore Prasad Khanal said the government revised the capital budget due to multiple obligations.

He said the government must mobilize resources to reconstruct physical infrastructure damaged during the Gen G protests on September 8 and 9. It also needs to arrange funding for vehicles and machinery for security agencies ahead of the House of Representatives elections, as the original budget did not allocate sufficient resources for these purposes.

Khanal said the government must release additional funds for ongoing projects based on work progress, settle payments for projects agreed to be completed this fiscal year, clear liabilities carried over from previous years, and allocate resources for reconstruction and rehabilitation of disaster-damaged infrastructure.

He acknowledged that capital expenditure remains weak.

“Rising social security spending, repayment of public debt principal and interest, and other mandatory obligations have put continuous pressure on public expenditure management,” Khanal said at a press conference on Tuesday. “Revenue collection has fallen short of the target, foreign grants have gradually declined, and we have not been able to use loans productively.”

He said the government must improve capital spending quality, maintain austerity in recurrent expenditure, increase revenue collection, and enhance foreign assistance mobilization to bring the budget within the desired limits.

The ministry allocated Rs 1,180 billion for recurrent expenditure this fiscal year. In the first six months, it spent Rs 487.14 billion. The revised estimate shows that recurrent spending will reach 95.34 percent of the allocation, or Rs 1,125 billion, by the end of the fiscal year.

Economic Growth Revised Down to 3.5 Percent

The Ministry of Finance has revised the economic growth rate for the current fiscal year downward to 3.5 percent.

The government had originally targeted six percent GDP growth through the annual budget. However, the ministry said a decline in paddy production, reduced cultivated area and productivity, sluggish construction activity, and a downturn in real estate transactions will prevent the economy from achieving the original target.

The ministry also expects growth this fiscal year to remain below last year’s estimated 4.6 percent. The World Bank has projected even lower growth of 2.1 percent for the current fiscal year.

The government had initially introduced a budget of Rs 1,964 billion for this fiscal year. Citing limited resources and weak spending capacity, it revised the budget downward to Rs 1,688 billion through the mid-year review.

Rs 119 Billion Worth of Projects Put on Hold

Minister Khanal said the government has suspended projects worth Rs 119 billion after determining that they were not ready for implementation and were unlikely to generate satisfactory returns.

He said the government will review and potentially release funds once the projects complete necessary preparations and move into the tender phase.

Khanal admitted that capital spending on national pride projects remains unsatisfactory. Of the Rs 67 billion allocated for such projects, progress stands at just over 15 percent.

He said the government focused on institutionalizing the political transition, preparing for elections, and building political consensus during its first two to three months in office, which affected capital spending. He added that ministers, including himself, were unable to closely monitor spending performance during that period.

Gen G Protests Hit Revenue and Resource Mobilization

The Ministry of Finance also analyzed the impact of the Gen G protests in its mid-year review.

The ministry said the protests affected all sectors of the economy. The government had to allocate additional resources for relief and rehabilitation of affected individuals and families, medical treatment for the injured, reconstruction and repair of public and community infrastructure, procurement and repair of vehicles, compensation and rehabilitation support to the private sector, and measures to boost private sector confidence and mitigate employment losses.

The disruption in public and private institutions also weakened revenue mobilization.

The ministry warned that allowing affected businesses to deduct losses from taxable income could reduce income tax collection. It also noted that job losses reduced wage-based income tax filings. Imports declined after the protests, while demand for consumer goods and imports of industrial raw materials and project machinery also fell.

The government granted a 50 percent exemption on customs duties and excise duties on capital goods imported for business reconstruction, which further reduced import-based revenue.

The ministry said the protests also affected expenditure management. Reconstruction, repair, and procurement of damaged infrastructure created liabilities of around Rs 37 billion. The Infrastructure Reconstruction Fund established by the government has not mobilized expected resources, making alternative funding arrangements challenging.

The ministry said the government must identify additional resources to implement sustainable social security programmes for the families of those killed and injured during the protests. As available resources will largely go toward rebuilding infrastructure and purchasing vehicles, allocations for productive investment may remain limited.

The review also noted that the protests reduced demand for foreign employment, which could lower remittance inflows in the long term. It further stated that the unrest negatively affected both domestic and foreign investment environments and weakened private sector confidence.