Nepal’s fiscal deficit has reached alarming levels, exposing serious cracks in the government’s financial governance. The latest report from the Office of the Auditor General (OAG), released on May 14, paints a troubling picture: financial irregularities across federal, provincial and local levels have now ballooned to Rs 733.19 billion. In just the fiscal year 2023/24, these irregularities increased by a staggering Rs 91.59 billion.

The OAG’s 62nd Annual Audit Report, which reviewed 3,093 federal agencies and subordinate bodies, identified Rs 47.74 billion in questionable expenditures. Provincial governments contributed an additional Rs 4.2 billion, while local governments accounted for Rs 25.32 billion in irregularities.

Financial irregularities are rising with each passing year due to utter disregard for established procedures, laws and fiscal discipline. While some discrepancies stem from documentation lapses or administrative inefficiencies, which are often correctable, many cases point to deliberate misuse of public funds. The OAG report warns that the line between procedural negligence and corruption is increasingly blurred.

According to the report, the government continues to spend public money without sufficient justification. Common malpractices include arbitrary grants, the reclassification of loans as grants without proper evaluation, irregular development projects executed by consumer committees and a lack of monitoring. These are further exacerbated by slow public procurement cycles, rushed fiscal year-end spending, and unchecked fund transfers across accounts.

According to the report, a key driver of these growing irregularities is the mismatch between budget allocations and actual spending capacity. Section 10(3) of the Financial Procedure and Fiscal Responsibility Act 2019 requires that budgets must be aligned with an institution’s capacity to spend. Yet, of the Rs 1,751.31 billion allocated in the last fiscal year, only Rs 1,393.16 billion was actually utilized. The OAG criticized the budget planning process as “neither realistic nor implementable”.

The report also revealed that all levels of government—federal, provincial and local—have engaged in unregulated fund transfers, bypassing essential checks and balances. It has called for the urgent establishment of a robust legal framework and stricter enforcement of existing laws to reduce the risks of corruption, tax evasion and financial misconduct.

Concessional Loans: A Tool Misused

A significant portion of financial irregularities also stems from the misuse of concessional loans—low-interest credit facilities intended to support economically disadvantaged groups. According to the OAG, many banks have converted regular loans into concessional ones without valid justification, undermining the intended impact of these policies.

The OAG has recommended regular monitoring and on-site verification of businesses receiving these loans to ensure they are being used as intended. This follows an investigative study by the Nepal Rastra Bank (NRB), which reviewed 18.34%, or 31,664, of the 172,654 borrowers under refinancing and concessional loan programs. Inspectors visited 1,838 projects and uncovered several alarming patterns.

Among the key findings, the report revealed that 7% of borrowers had not used loans totaling Rs 6.356 billion. Additionally, 12% of loan files, amounting to Rs 18.749 billion, lacked clear identification of intended target groups. The study also uncovered that 6% of borrowers had received duplicate loans amounting to Rs 10.491 billion. Most concerning, 11% of the loans, valued at Rs 21.254 billion, were suspected of being misused.

Introduced in 2019 under the Integrated Procedure for Interest Subsidy, the concessional loan program appears to have been rolled out without adequate preparatory research or review of previous experiences. Frequent procedures changes have further undermined policy stability, and financial institutions lack strong incentives to prioritize this segment.

By mid-July 2024, banks and financial institutions had disbursed Rs 187.7 billion in concessional loans. Of this, Rs 28.49 billion had been paid out as interest subsidies—Rs 24.89 billion of it disbursed by July as a 5% subsidized rate. However, the outstanding concessional loan balance has since dropped from Rs 126.82 billion to Rs 91.32 billion. Despite these figures, the OAG flagged banks for failing to maintain proper records of disbursed loans, subsidies and associated costs.

Revenue Arrears and Foreign Assistance: A Mounting Burden

The report also highlights troubling arrears in government revenue collection. Of the total irregularities, revenue arrears alone account for Rs 472.35 billion. In addition, unreimbursed foreign assistance amounts to Rs 20.58 billion—comprising Rs 6.25 billion in grants and Rs 14.33 billion in loans. Further compounding the problem are outstanding loans worth Rs 49.37 billion that exceed collateral limits, along with audit arrears totaling Rs 8.71 billion.

Rampant Customs Exemptions

The government granted nearly Rs 80 billion in customs exemptions to businesses in a single fiscal year. According to the report, customs revenue exemptions totaled Rs 79.87 billion in 2023/24 under the provisions of the Economic Act. The OAG has expressed serious concern over the scale of these exemptions and questioned the government’s transparency in implementing them.

Notably, the report found that the government has failed to maintain proper records of internal revenue exemptions granted under the Economic Act. Although this information should have been documented by the Ministry of Finance or the Inland Revenue Department, no such records were found.

In addition, customs duty and value-added tax (VAT) exemptions amounting to Rs 4.87 billion and Rs 8.8 million, respectively, were granted on imports under the South Asian Free Trade Area (SAFTA). The OAG has reminded the government of existing provisions that require an approved master list before inviting bids for projects. It also emphasized that goods imported under such exemptions must be closely monitored to ensure they are used solely for their intended purposes.

As the scope and volume of revenue exemptions continue to expand, the OAG has urged the government to conduct a thorough evaluation of these policies and submit consolidated data to Parliament for greater accountability.

Stalled Infrastructure: Delays and Deadlines Missed

Beyond financial mismanagement, persistent delays continue to hinder the completion of public infrastructure projects. The report reveals that 416 government projects remain incomplete, despite having their deadlines extended—some up to three times beyond the original contract period. These stalled projects fall under the jurisdictions of the Ministry of Physical Infrastructure and Transport; Ministry of Energy, Water Resources and Irrigation; Ministry of Urban Development; and Ministry Communications and Information Technology, with contracts collectively worth Rs 4.44 billion.

While partial payments have already been made, work remains incomplete. The report attributes the delays to repeated deadline extensions, failure to initiate construction, insufficient progress, and in many cases, outright project abandonment by contractors. The number, duration and financial scope of these incomplete contracts are growing steadily. “Construction projects must be completed in compliance with prevailing laws and procurement agreements,” the OAG said in its report.

The scale of inefficiency is perhaps most evident in the Department of Roads (DoR). In fiscal year 2023/24 alone, 364 of its contracts were labeled “ailing”—a designation for projects that are severely delayed or facing critical issues. These contracts are worth a total of Rs 81.58 billion. Of the DoR’s 2,106 ongoing projects, 355 contracts—valued at Rs 30.11 billion—were found to be in poor condition.

Foreign-funded projects have also suffered similar setbacks. Among 26 large-scale projects supported by external aid, nine contracts worth Rs 51.43 billion were categorized as “ailing”. Taken together, the report identifies 364 troubled contracts as symptomatic of deep-rooted issues in project execution and oversight.

Conclusion: A System Under Strain

The rising tide of financial irregularities—spread across unspent budgets, misused subsidies, incomplete projects and weak institutional controls—signals a broader failure in fiscal governance. While the figures are deeply concerning, the real danger lies in the erosion of accountability and the slow decay of administrative discipline. The OAG’s annual report is not just a financial audit; it is a stark warning. Without urgent and comprehensive reforms in planning, execution and oversight, Nepal risks deepening its fiscal vulnerabilities and further undermining public trust in state institutions.

(This report was originally published in  June 2025 issue  of New Business Age Magazine.)