External Debt Sustainability in Nepal: A Case Study Based on Nepal Rastra Bank, IMF, and World Bank Data

External debt sustainability is a matter of great concern for many developing countries like Nepal since a part of the borrowed money is regarded as the liability that threatens to criticize the value of their local currency and increases their fiscal burden. This paper performs an analysis of the external debt indicators of Nepal and the risk of a debt distress using the information provided by Nepal Rastra Bank (NRB), International Monetary Fund (IMF) and World Bank. According to the results, the total public debt in Nepal is expected to reach about Rs 2.97 trillion (USD 19.21 billion) by the end of fiscal year 2025/26, which is equivalent to 45.07 percent of GDP, as compared to 43.79 percent in the previous year. The external debt increased to about 25.3 percent of GDP from 20.6 percent, and that of domestic one remained at about 22-23 percent. Nepal still belongs to the countries with low risk of experiencing a debt distress, according to the joint World Bank-IMF Debt Sustainability Analysis (DSA). However, the study highlights several vulnerabilities in the external debt of Nepal as the present value of the external debt-to-exports ratio exceeds the indicative threshold in the export shock scenario. The Nepali rupee has depreciated by around Rs 8 against the US dollar in the first seven months of FY2025/26, adding Rs 92.96 billion to the external debt of the country. Only around one-third of the capital budget has been spent, which implies that the borrowed money is used for sustaining the recurrent expenditure rather than capital spending. The paper concludes that Nepal’s debt is sustainable in the near term. However, the increasing vulnerabilities in the form of currency depreciation, inadequate revenue mobilization efforts and low efficiency utilization of the borrowed funds should be responded to in order to address long-term sustainability.