KATHMANDU, April 11: The National Natural Resources and Fiscal Commission (NNRFC) has recommended that internal loans be used exclusively for income-generating projects—either those with high financial returns or social sector projects that provide strong economic benefits. On Thursday, the NNRFC advised the government to limit internal borrowing to no more than 5.5 percent of the Gross Domestic Product (GDP) for the upcoming fiscal year 2025/26. Along with this, the commission provided detailed guidelines for the effective use of internal loans.
According to the NNRFC, internal loans should be allocated only to profitable projects whose financial internal rate of return (FIRR) exceeds the prevailing cost of capital, and to social sector projects with an economic internal rate of return (EIRR) higher than the FIRR. The viability of such projects must be determined through cost-benefit analysis, net present value (NPV) calculations, and internal rate of return assessments.
The commission has further emphasized that internal loans should be used solely for projects that are fully prepared and capable of contributing to production growth, employment generation, income enhancement, infrastructure development, and capital formation. It stated that when selecting and developing such projects, it is essential to ensure that the returns generated will be sufficient to repay both the loan principal and interest.
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The NNRFC has also stressed that local and provincial governments must obtain approval from the federal government before citing internal loans as a source of financing in their budgets. It added that all three tiers of government must include internal loans in the source details section of their respective budget documents.
The Nepal Rastra Bank has clarified that internal loans should also include overdue loans provided to the three levels of government that remain unsettled for over a year. These loans, even if not paid back within the fiscal year, are considered part of the internal loan ceiling.
To improve transparency and coordination, the commission has recommended establishing an integrated electronic system for managing, accounting, and reporting internal loans and overall public debt at all three levels of government. This system should be overseen by the Public Debt Management Office, with access granted to the Finance Commission.
Importantly, the commission has strongly recommended that internal loans must not be used for current or administrative expenses. It said such loans should be directed only toward projects that create employment opportunities, offer long-term economic benefits, and promote capital formation.
The NNRFC also advised the government to raise internal loans when interest rates are low. Since internal borrowing essentially represents spending future revenue in the present, it is crucial that internal revenue is sufficient to meet repayment obligations. To this end, the commission urged all levels of government to develop and implement an internal loan operation and revenue improvement action plan in line with the recommended borrowing limits.
