KATHMANDU: The recent publication of the Auditor General’s 62nd Annual Report has once again thrown Nepal’s fiscal management into the spotlight. The report reveals alarming trends of financial mismanagement, mounting government arrears, and institutional failures in oversight.

Its findings underscore the deepening fiscal crisis that Nepal faces and the urgent need for systemic reforms. This analysis explores the report’s key revelations, the broader fiscal environment, the lack of effective parliamentary scrutiny, and the implications of Nepal’s placement on the FATF grey list in early 2025.

Deteriorating financial health

The Auditor General’s report paints a grim picture of Nepal’s financial condition. It highlights an increasing fiscal deficit driven by poor revenue collection, unchecked government expenditure, and growing reliance on debt financing.

Most notably, the report emphasizes a significant rise in unpaid government arrears, which have ballooned to levels threatening the government’s liquidity and creditworthiness. These arrears reflect delayed payments to contractors, suppliers, and service providers, which have serious repercussions for public infrastructure projects and economic confidence.

The report also stresses that many arrears remain unrecorded or inadequately reported, suggesting that the government’s fiscal challenges may be even more severe than official figures indicate. This hidden accumulation undermines transparency and distorts the real fiscal picture. The Auditor General calls for immediate corrective measures to halt this growing problem, stressing that without robust fiscal discipline, Nepal’s financial health will continue to deteriorate rapidly.

Critical institutional gap

One of the most troubling findings of the Auditor General’s report is the lack of a systematic monitoring mechanism for arrears. Despite the critical importance of controlling overdue payments, the report highlights that Nepalese financial institutions and relevant government departments lack the tools, processes, and accountability structures needed to track and manage arrears effectively.

The report criticizes the absence of coordinated efforts to reconcile arrears data across ministries and agencies, leading to fragmented information and ineffective follow-up. This institutional gap allows arrears to accumulate unchecked, increasing financial risks and impairing government credibility. The Auditor General recommends establishing a centralized arrears management system with clear reporting requirements and enforcement provisions to ensure timely payment and reduce fiscal vulnerabilities.

Ritualistic parliamentary debate

The Auditor General’s report also draws attention to the role of Parliament in fiscal oversight, noting that while reports on budget performance and financial irregularities are submitted, parliamentary engagement remains superficial. Debates on these reports have become largely ritualistic, lacking in critical analysis and failing to provoke meaningful government responses or reforms.

The report suggests that this democracy deficit—where parliamentarians do not effectively scrutinize financial reports—weakens accountability and perpetuates fiscal mismanagement. Without rigorous parliamentary debate and oversight, issues such as arrears accumulation and budget slippages remain unaddressed. The Auditor General calls for strengthening parliamentary capacity, improving transparency, and fostering a culture of substantive financial oversight.

Risks to economic stability

The revelations in the Auditor General’s 62nd Annual Report have significant implications for Nepal’s fiscal environment. The unchecked growth of arrears contributes directly to liquidity crises, delays in project implementation, and disruptions in public services. Such financial mismanagement erodes public trust and deters private sector participation in government projects.

Furthermore, rising fiscal deficits and debt levels compromise Nepal’s fiscal sustainability, threatening future economic stability. Persistent arrears and inadequate fiscal discipline restrict the government’s ability to allocate resources effectively for development priorities. This, in turn, could slow economic growth, reduce job creation, and exacerbate poverty.

Compounding challenges

In February 2025, Nepal was placed on the FATF grey list for the second time, reflecting serious concerns about the country’s anti-money laundering and counter-terrorist financing regimes. This development comes at a time when Nepal’s fiscal health is already under pressure, compounding the country’s economic vulnerabilities.

The grey listing restricts Nepal’s access to international financial markets, increases transaction costs, and deters foreign investment. Financial institutions abroad impose stricter due diligence on Nepalese entities, complicating cross-border transactions and trade. This isolation makes it more difficult for Nepal to attract foreign capital needed for infrastructure and development projects, exacerbating fiscal constraints highlighted in the Auditor General’s report.

Reform prospects and economic recovery

The Auditor General’s report, coupled with Nepal’s grey listing status, signals a challenging path ahead for economic reforms. Meeting FATF requirements demands significant institutional strengthening, improved regulatory frameworks, and enhanced enforcement capabilities. However, the country’s current fiscal constraints and weak governance limit its capacity to invest in necessary reforms.

Moreover, the grey listing undermines investor confidence and international cooperation, potentially delaying or reducing financial assistance from multilateral institutions. Without urgent action to address both fiscal mismanagement and compliance gaps, Nepal risks prolonged economic stagnation and further erosion of its international financial standing.

Institutional reforms and fiscal discipline

The Auditor General’s 62nd Annual Report clearly calls for urgent reforms to restore fiscal discipline and strengthen institutional oversight. Implementing centralized arrears monitoring system, improving transparency in financial reporting, and enhancing parliamentary scrutiny are critical steps.

Equally important is the need to prioritize anti-money laundering reforms to regain international trust and financial market access. Capacity building within regulatory and enforcement agencies, coupled with political commitment to transparency and accountability, will be essential for meaningful progress.

Addressing the fiscal and institutional crisis

Nepal’s fiscal environment is at a critical crossroads, with the Auditor General’s report highlighting systemic failures in financial management and oversight. The absence of effective arrears control, superficial parliamentary debates, and the international challenge of FATF grey listing together pose severe risks to Nepal’s economic stability and development prospects.

Comprehensive reforms addressing these interlinked issues are imperative. Strengthening fiscal discipline, institutional capacity, and democratic accountability can help Nepal restore its financial health, regain international confidence, and set the foundation for sustainable growth and prosperity.