NNRFC recommends borrowing limits for three tiers of govt for next FY
KATHMANDU: National Natural Resources and Fiscal Commission (NNRFC) has recommended limits on internal borrowing for the three tiers of government in the next fiscal year.
As per the recommendation, the federal government can raise internal debt amounting to 5% of the country's gross domestic product (GDP). Provincial and local governments can borrow up to 12% of their total revenue from internal resources and financial transfers.
The NNRFC stated that the federal government can raise internal debt for the fiscal year 2025/26 up to 5% of estimated GDP, based on an analysis of the macroeconomic situation, revenue and expenditure estimates, and market conditions. The commission recommended that internal borrowing should only be used for investment in capital-generating sectors.
The NNRFC advised that internal borrowing should be utilised for projects with an appropriate internal rate of return or positive net present value, supported by cost-benefit analysis based on national policies and plans. This includes projects of national importance, transformative initiatives, and those prioritised under the medium-term expenditure framework.
Provincial and local governments will be allowed to raise loans only after completing legal procedures. Previously, provincial governments included internal debt as a funding source in deficit budgets without approval from the federal government. The NNRFC now requires that internal borrowing by provincial governments must follow formal procedures.
Provincial governments will be able to borrow up to 12% of the combined total of revenue shared by the federal government and revenue generated internally. Local governments are also permitted to raise debt of up to 12% of the combined total of revenue from federal and provincial distributions and their own internal resources.
The commission emphasised that borrowing should be strictly limited to projects providing long-term benefits and contributing to capital formation. It stated that internal loans must not be used to fund current or administrative expenses.
The NNRFC recommended internal loans be allocated to profit-oriented projects with internal rates of return higher than the cost of capital. Such projects should focus on production growth, employment creation, income growth, and capital formation.
Under Clause 14 of the Intergovernmental Finance Management Act, 2074, provincial and local governments can include internal borrowing as a funding source in budgets only after receiving approval from the federal government. However, some provinces continue to list internal borrowing in their budgets without completing the required approval process.
